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

RNS Number : 1253O

HSBC Holdings PLC

04 August 2014

19. Litigation and Regulatory Matters

The following supplements, and should be read together with, the disclosure in Note 28, "Litigation and Regulatory Matters," in our 2013 Form 10-K and our Form 10-Q for the three month period ended March 31, 2014 (the "2014 First Quarter 10-Q"). Only those matters with significant updates and new matters since our disclosure in our 2013 Form 10-K and our 2014 First Quarter Form 10-Q are reported herein.

In addition to the matters described below, and in our 2013 Form 10-K and our 2014 First Quarter Form 10-Q, in the ordinary course of business, we are routinely named as defendants in, or as parties to, various legal actions and proceedings relating to activities of our current and/or former operations. These legal actions and proceedings may include claims for substantial or indeterminate compensatory or punitive damages, or for injunctive relief. In the ordinary course of business, we also are subject to governmental and regulatory examinations, information-gathering requests, investigations and proceedings (both formal and informal), certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. In connection with formal and informal inquiries by these regulators, we receive numerous requests, subpoenas and orders seeking documents, testimony and other information in connection with various aspects of our regulated activities.

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

For the litigation and governmental and regulatory matters disclosed below and in Note 28, "Litigation and Regulatory Matters," in our 2013 Form 10-K and in Note 19 "Litigation and Regulatory Matters" in our 2014 First Quarter Form 10-Q as to which a loss in excess of accrued liability is reasonably possible in future periods and for which there is sufficient currently available information on the basis of which management believes it can make a reliable estimate, we believe a reasonable estimate could be as much as $1.2 billion for HUSI and its U.S. affiliates. The litigation and governmental and regulatory matters underlying this estimate of possible loss will change from time to time and actual results may differ significantly from this current estimate.

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

Litigation

Salveson v. JPMorgan Chase et al.(N.D.Cal. No. 13-CV-5816) On May 8, 2014, after being served with the complaint, HSBC filed a separate motion to dismiss, and both it and HNAH joined the joint motion to dismiss. On June 4, 2014, the Judicial Panel on Multidistrict Litigation transferred the case to the Eastern District of New York for consolidation with MDL 1720.

Credit Default Swap Litigation On May 23, 2014, defendants filed motions to dismiss plaintiffs' second amended, consolidated complaint. The motion is fully briefed and pending.

Gold and Silver Fix Litigation

Since March 2014, numerous putative class actions have been filed in the US District Courts for the Southern District of New York, the District of New Jersey and the Northern District of California naming HSBC and a number of other members of The London Gold Market Fixing Ltd as defendants. The complaints allege that, from January 2004 to the present, defendants conspired to manipulate the price of gold and gold derivatives during the afternoon London gold fix in order to reap profits on proprietary trades. Plaintiffs have filed a motion for transfer with the Judicial Panel on Multi-District Litigation requesting assignment to and consolidation in the New York District Court. That motion is pending.

In July 2014, putative class actions were filed in the US District Court for the Southern and Eastern Districts of New York naming HSBC, HSBC Bank plc, HSBC Bank USA and the other members of The London Silver Market Fixing Ltd as defendants. The complaints allege that, from January 2007 to the present, defendants conspired to manipulate the price of physical silver and silver derivatives for their collective benefit in violation of the US Commodity Exchange Act and US antitrust laws. These actions are at a very early stage.

Based on the facts currently known, it is not practicable at this time for us to predict the resolution of these private lawsuits, including the timing and potential impact on us.

Madoff Litigation

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

In re Herald, Primeo and Thema Funds Securities Litigation On May 28, 2014, after the United States Supreme Court decidedChadbourne & Park LLP v. Troice, 134 S. Ct. 1058 (2014), the Second Circuit denied Thema International Fund plc's petition for panel rehearing following its affirmance of the district court's dismissal of all U.S. class action claims against the HSBC defendants on forum non conveniens grounds. The petition for rehearing en banc remains pending.

The Madoff Securities trustee filed a suit in the U.S. captioned Picard v. HSBC et al (Bankr S.D.N.Y. No. 09-01364), which also names certain funds, investment managers, and other non-HSBC entities and individuals, seeking $9 billion in damages and additional recoveries from HSBC Bank USA, certain of our foreign affiliates and the various other non-HSBC co-defendants. In July 2011, the district court dismissed the trustee's various common law claims, which in total account for approximately $6.6 billion of the potential exposure in the action, on the grounds that the trustee lacked standing to assert them, and the Court of Appeals affirmed that decision in June 2013. On June 30, 2014, the Supreme Court denied the trustee's petition for a writ of certiorari of the Court of Appeal's decision. The dismissal of the trustee's common law claims is now final.

The district court previously returned the trustee's bankruptcy claims to the bankruptcy court for further proceedings, but retained certain issues for further consideration. These claims seek the return of the transfers of funds from Bernard L. Madoff Investment Securities LLC ("Madoff Securities") to the feeder fund defendants as well as subsequent transfers of those assets from the feeder funds to other defendants, including the HSBC defendants, as preferential and fraudulent transfers under U.S. bankruptcy law. As to the HSBC defendants, which include HSBC Bank USA, the claims seek recovery of unspecified amounts that the HSBC defendants received from funds invested with Madoff, including amounts that the HSBC defendants received when they redeemed units held in the various funds. On July 7, 2014, the district court ruled that the U.S. bankruptcy code does not provide the trustee the right to recover money that was transferred between foreign entities, even if that money ultimately is traceable to Madoff Securities. This decision is subject to appeal and has not been applied to the facts of the trustee's case against the HSBC defendants, so its impact on the trustee's remaining claims is uncertain.

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

Benchmark Rate Litigation In May 2014 HSBC, HSBC Bank plc, HSBC USA and HSBC Finance, along with the other U.S. dollar Libor panel banks, were named as defendants in a lawsuit filed by two mutual funds managed by Prudential Investment Portfolios seeking unspecified damages as a result of alleged artificial suppression of U.S. dollar Libor rates which plaintiffs allege resulted in plaintiffs receiving substantially less interest payments in connection with certain transactions entered into with the defendants. Additionally, the Federal Deposit Insurance Corporation, in its role as receiver for several failed banks, filed a complaint against the British Bankers Association and the U.S. dollar Libor panel banks, including HSBC, HSBC Bank USA, and The Hongkong and Shanghai Banking Corporation, seeking unspecified damages as a result of fraudulent artificial suppression of U.S. dollar Libor rates. These actions have been transferred and/or consolidated with a U.S. dollar Libor Multi-District Litigation proceeding in the U.S. District Court for the Southern District of New York. HSBC and HSBC Bank plc are defendants in that proceeding as well. These actions are subject to a stay imposed by the court.

Mortgage Securitization Activity and Litigation

In addition to the repurchase risk described in Note 17, "Guarantee Arrangements and Pledged Assets," HSBC Bank USA has also been involved as a sponsor/seller of loans used to facilitate whole loan securitizations underwritten by HSI. During 2005-2007, HSBC Bank USA purchased and sold $24 billion of whole loans to HSI which were subsequently securitized and sold by HSI to third parties. The outstanding principal balance on these loans was approximately $6.1 billion and $6.5 billion at June 30, 2014 and December 31, 2013, respectively.

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

Federal Housing Finance Agency, as Conservator for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation v. HSBC North America Holdings Inc. et al. (S.D.N.Y. No. CV 11-6189-LAK) Various defendants' motions for summary judgment and other applications have been fully briefed and are currently pending before the court. Expert discovery is scheduled to continue through August 2014. The aggregate unpaid principal balance of the securities was approximately $1.5 billion and $1.6 billion at June 30, 2014 and December 30, 2013, respectively.

In June 2014, the Deutsche Zentral-Genossenschaftsbank AG, New York Branch v. HSBC North America Holdings Inc., et al (S.D.N.Y. No. 12-CV-4025) and Bayerische Landesbank v HSBC Holdings plc, et al. (Index No. 65481/12) matters each were resolved by a confidential settlement among the parties. The settlements did not have a material impact on our results.

In May 2014 Commerzbank AG London Branch filed a complaint against nearly 70 different financial institutions, including HSBC, HSI and HSI Asset Securitization Corporation, seeking unspecified damages as a result of alleged fraud and fraudulent concealment committed by the defendants in the securitization of residential mortgages and the sale of those securities to the plaintiff. Commerzbank had previously filed a summons with notice against the same defendants in December 2013. This action is at an early stage.

In June 2014, a lawsuit was filed in New York State court against HSBC Bank USA, as trustee of approximately 264 identified trusts (the "Trusts"). Similar lawsuits were filed simultaneously against other non-HSBC financial institutions that served as mortgage securitization pool trustees. The plaintiffs are investors in the Trusts and include, among others, BlackRock and PIMCO funds. The lawsuits were brought derivatively on behalf of the Trusts. The complaint against HSBC Bank USA alleges that the Trusts have sustained losses in collateral value of over $32 billion. The lawsuit seeks unspecified damages resulting from an alleged breach of the Trust Indenture Act, breach of fiduciary duties, and negligence. This action is at an early stage.

Shareholder Derivative Action On May 7, 2014 a shareholder of HSBC (who is not a shareholder of HSBC Bank USA, HNAH or HSBC USA) filed a shareholder derivative action, captioned Michael Mason-Mahon v. Douglas J. Flint, et al. (New York State Supreme Court, Nassau County, Index No. 602052/2014), purportedly on behalf of HSBC, HSBC Bank USA, HNAH and HSBC USA in New York State Supreme Court against the directors, certain officers and certain former directors of those HSBC companies alleging that those directors and officers breached their fiduciary duties to the companies and caused a waste of corporate assets by allegedly permitting and/or causing the conduct underlying the DPA. This action is at a very early stage, but the ultimate outcome of the action is not expected to have a material impact on HUSI.

20. New Accounting Pronouncements

Unrecognized Tax Benefits In July 2013, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update ("ASU") that provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss ("NOL") carryforward, a similar tax loss, or a tax credit carryforward exists in the same tax jurisdiction. The ASU requires an entity to present the unrecognized tax benefit as a reduction of the deferred tax asset for an NOL or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. However, the ASU requires an entity to present an unrecognized tax benefit on the balance sheet as a liability if certain conditions are met. The new guidance is effective for all annual and interim periods beginning January 1, 2014. The adoption of this guidance did not have an impact on our unrecognized tax benefit liability.

Accounting for Investments in Qualified Housing Projects In January 2014, the FASB issued an ASU which permits, but does not require, an investor to amortize its Low Income Housing Tax Credit ("LIHTC") investments in proportion to the allocated Low Income Housing Federal tax benefits and present such tax benefits net of investment amortization in the income tax line. The ASU is effective for fiscal years beginning after December 15, 2014 to be applied retrospectively with early adoption permitted. We elected to early adopt the ASU on January 1, 2014 due to its improvement in the presentation of the economic benefits of this investment class. The early adoption of the ASU required the previous period to also be restated and resulted in a reduction to operating expenses of $21 million and $42 million in both of the three and six months ended June 30, 2014 and 2013, respectively, with a corresponding increase to income tax expense. There was no overall impact to net income.

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity In April 2014, the FASB issued an ASU which changes the criteria for determining whether a disposition qualifies for discontinued operations presentation and requires enhanced disclosures about discontinued operations and significant dispositions that do not qualify for discontinued operations reporting. Under the ASU, only disposals representing a strategic shift in operations, such as a disposal of a major geographic area, a major line of business, a major equity method investment or other major parts of an entity, are required to be presented as discontinued operations. The ASU will be effective prospectively for all disposals (or classifications as held for sale) of components of an entity that occur within annual and interim periods beginning January 1, 2015. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The adoption of this guidance is not expected to have a significant impact on our financial position or results of operations.

Recognition of Revenue from Contracts with Customers In May 2014, the FASB issued an ASU which provides a principles-based framework for revenue recognition that supersedes virtually all previously issued revenue recognition guidance. Additionally, the ASU requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The core principle of the five-step revenue recognition framework is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU will be effective for all annual and interim periods beginning January 1, 2017. The amendments in the ASU should be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. We are currently evaluating the potential impact of adopting this ASU, including determining which transition method to apply.

Repurchase to Maturity Transactions, Repurchase Financings, and Disclosures In June 2014, the FASB issued an ASU which changes the accounting for repurchase-to-maturity transactions to secured borrowing accounting and requires secured borrowing accounting for the repurchase agreement in a contemporaneous repurchase financing arrangement. The accounting changes in the ASU will be effective for all annual and interim periods beginning January 1, 2015 and will require the changes in accounting for transactions outstanding on the effective date to be presented as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The ASU also requires new disclosure about certain transactions accounted for as a sale to be presented for interim and annual periods beginning January 1, 2015, and new disclosure about repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings to be presented for annual periods beginning January 1, 2015, and for interim periods beginning April 1, 2015. We are currently evaluating the potential impact the adoption of this ASU may have on our financial position and results of operations.

There were no additional accounting pronouncements issued that are expected to have a significant impact on our financial position or results of operations.

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

Forward-Looking Statements

Certain matters discussed throughout this Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make or approve certain statements in future filings with the United States Securities and Exchange Commission ("SEC"), in press releases, or oral or written presentations by representatives of HSBC USA Inc. ("HSBC USA" and together with its subsidiaries, "HUSI") that are not statements of historical fact and may also constitute forward-looking statements. Words such as "may", "will", "should", "would", "could", "appears", "believe", "intends", "expects", "estimates", "targeted", "plans", "anticipates", "goal", and similar expressions are intended to identify forward-looking statements but should not be considered as the only means through which these statements may be made. These matters or statements will relate to our future financial condition, economic forecast, results of operations, plans, objectives, performance or business developments and will not involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from that which was expressed or implied by such forward-looking statements.

All forward-looking statements are, by their nature, subject to risks and uncertainties, many of which are beyond our control. Our actual future results may differ materially from those set forth in our forward-looking statements. While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those in the forward-looking statements:

• uncertain market and economic conditions, uncertainty relating to the U.S. debt and budget matters, the potential for future downgrading of U.S. debt ratings, a decline in housing prices, high unemployment, tighter credit conditions, changes in interest rates, the availability of liquidity, unexpected geopolitical events, heightened market concerns over sovereign creditworthiness in over-indebted countries, changes in consumer confidence and consumer spending, and consumer perception as to the continuing availability of credit and price competition in the market segments we serve;

• changes in laws and regulatory requirements;

• extraordinary government actions as a result of market turmoil;

• capital and liquidity requirements under Basel III, the Federal Reserve Board's ("FRB") Comprehensive Capital Analysis and Review ("CCAR"), and the Dodd-Frank Act stress testing ("DFAST");

• changes in central banks' policies with respect to the provision of liquidity support to financial markets;

• the ability of HSBC Holdings plc ("HSBC" and, together with its subsidiaries, "HSBC Group") and HSBC Bank USA, National Association ("HSBC Bank USA") to fulfill the requirements imposed by the deferred prosecution agreements with the U.S. Department of Justice, the U.S. Attorney's Office for the Eastern District of New York, and the U.S. Attorney's Office for the Northern District of West Virginia, our agreement with the Office of the Comptroller of the Currency, our other consent agreements as well as guidance from regulators generally;

• damage to our reputation;

• the ability to attract and retain customers and to retain key employees;

• the effects of competition in the markets where we operate including increased competition for non-bank financial services companies, including securities firms;

• a failure in or a breach of our operation or security systems or infrastructure, or those of third party servicers or vendors;

• third party suppliers' and outsourcing vendors' ability to provide adequate services;

• our ability to meet our funding requirements;

• our ability to cross-sell our products to existing customers;

• increases in our allowance for credit losses and changes in our assessment of our loan portfolios;

• changes in Financial Accounting Standards Board ("FASB") and International Accounting Standards Board ("IASB") accounting standards;

• continued heightened regulatory scrutiny with respect to residential mortgage servicing practices, with particular focus on loss mitigation, foreclosure prevention and outsourcing;

• changes to our mortgage servicing and foreclosure practices;

• changes in the methodology for determining benchmark rates;

• heightened regulatory and government enforcement scrutiny of financial markets, with a particular focus on foreign exchange;

• the possibility of incorrect assumptions or estimates in our financial statements, including reserves related to litigation, deferred tax assets and the fair value of certain assets and liabilities;

• changes in bankruptcy laws to allow for principal reductions or other modifications to mortgage loan terms;

• additional financial contribution requirements to the HSBC North America Holdings Inc. ("HSBC North America") pension plan;

• unexpected and/or increased expenses relating to, among other things, litigation and regulatory matters; and

• the other risk factors and uncertainties described under Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2013 ("2013 Form 10-K").

Forward-looking statements are based on our current views and assumptions and speak only as of the date they are made.We undertake no obligation to update any forward-looking statement to reflect subsequent circumstances or events. You should, however, consider any additional disclosures of a forward-looking nature that arise after the date hereof as may be discussed in any of our subsequent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q or Current Reports on Form 8-K.

Executive Overview

HSBC USA is an indirect wholly-owned subsidiary of HSBC North America, which is an indirect wholly-owned subsidiary of HSBC. HUSI may also be referred to in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") as "we", "us" or "our".

Current Environment The U.S. economy continued its gradual recovery during the first half of 2014. While consumer confidence, buoyed by healthy job growth, began to increase during the second quarter of 2014 and recover from the impact of the severe winter weather experienced across many parts of the United States during the first quarter, it remained flat compared with December 31, 2013 as wage growth prospects and prolonged high gasoline prices continued to impact consumer sentiment. During the first half of 2014, the Federal Reserve Board announced further reductions in its bond buying stimulus program and updated its guidance on short-term interest rates, putting less weight on the unemployment rate and indicating that it would look at 'a broad range of economic indicators' in deciding when to start raising short-term interest rates. The prolonged period of low interest rates continues to put pressure on spreads earned on our deposit base.

While the economy continued to add jobs in the first half of 2014, the pace of new job creation continued to be slower than needed to significantly reduce the number of long-term unemployed. While the unemployment rate in the U.S. fell 60 basis points since year-end to 6.1 percent at June 30, 2014 as more people began to find work, there are a significant number of U.S. residents who are no longer looking for work and are not reflected in the U.S. unemployment rates. Unemployment has continued to have an impact on the provision for credit losses in our loan portfolio and in loan portfolios across the industry. Concerns about the future of the U.S. economy, including the pace and magnitude of recovery from the recent economic recession, consumer confidence, fiscal policy, volatility in energy prices, credit market volatility including the ability to resolve various global financial issues and trends in corporate earnings will continue to influence the U.S. economic recovery and the capital markets. In particular, continued improvement in unemployment rates, a sustained recovery of the housing markets and stabilization in energy prices remain critical components of a broader U.S. economic recovery. These conditions in combination with the impact of recent regulatory changes, including the on-going implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act" or "Dodd-Frank"), will continue to impact our results in 2014 and beyond.

While the housing market in the U.S. continues to recover, the strength of recovery varies by market. The listing of foreclosed properties for sale has slowed price gains in 2014. In addition, certain courts and state legislatures have issued rules or statutes relating to foreclosures and scrutiny of foreclosure documentation has increased in some courts. Also, in some areas, officials are requiring additional verification of information filed prior to the foreclosure proceeding. The combination of these factors has led to a significant backlog of foreclosures in several jurisdictions which will take time to resolve.

Performance, Developments and Trends The following table sets forth selected financial highlights of HSBC USA for the three and six months ended June 30, 2014 and 2013 and as of June 30, 2014 and December 31, 2013.

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(dollars are in millions)
Net Income............................................................................................................................	$	179		$	180		$	283		$	363
Rate of return on average:
Total assets.........................................................................................................................	.4		%	.4		%	.3		%	.4		%
Total common shareholder's equity................................................................................	4.2			4.0			3.3			4.1
Net interest margin...............................................................................................................	1.66			1.30			1.48			1.30
Efficiency ratio......................................................................................................................	93.8			70.7			83.3			70.3
Commercial net charge-off ratio⁽¹⁾......................................................................................	.05			(.04		)	.13			.25
Consumer net charge-off ratio⁽¹⁾........................................................................................	.59			.70			.56			.80

⁽¹⁾Excludes loans held for sale.

	June 30, 2014			December 31, 2013
	(dollars are in millions)
Additional Select Ratios:
Allowance as a percent of loans⁽¹⁾...................................................................................................................	.86		%	.90		%
Commercial allowance as a percent of loans⁽¹⁾...............................................................................................	.72			.64
Consumer allowance as a percent of loans⁽¹⁾.................................................................................................	1.26			1.55
Consumer two-months-and-over contractual delinquency.........................................................................	6.10			6.80
Loans to deposits ratio⁽²⁾..................................................................................................................................	83.02			79.16
Tier 1 capital to risk weighted assets..............................................................................................................	11.56			11.65
Common equity Tier 1 ratio⁽³⁾...........................................................................................................................	10.42			9.94
Total capital to risk weighted assets...............................................................................................................	16.01			16.36
Total shareholders' equity to total assets......................................................................................................	9.32			8.88

Select Balance Sheet Data:
Cash and interest bearing deposits with banks.............................................................................................	$	26,271		$	20,575
Trading assets....................................................................................................................................................	25,156			28,894
Securities available-for-sale..............................................................................................................................	44,778			54,906
Loans:
Commercial loans.............................................................................................................................................	53,033			48,494
Consumer loans...............................................................................................................................................	19,165			19,201
Total loans...........................................................................................................................................................	72,198			67,695
Deposits...............................................................................................................................................................	115,521			112,608

⁽¹⁾Excludes loans held for sale.

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

⁽³⁾Basel III introduces the common equity Tier 1 ratio. For December 31, 2013, the ratio presented is the Tier 1 common ratio calculated under Basel I.

Net income was $179 million and $283 million during the three and six months ended June 30, 2014, respectively, compared with net income of $180 million and $363 million during the three and six months ended June 30, 2013, respectively. Net income during the three and six months ended June 30, 2014 was significantly impacted by a tax reserve release as a result of the settlement of certain state and local tax audits which resulted in an income tax benefit of $183 million. Income (loss) before income tax was a loss of $27 million in the three months ended June 30, 2014 and a gain of $226 million in the six months ended June 30, 2014 compared with income before income tax of $251 million and $559 million during the three and six months ended June 30, 2013, respectively. The decrease in income (loss) before income tax was driven by lower other revenues driven by lower trading revenue as well as lower gains on security sales, higher operating expenses driven by higher litigation expenses and a higher provision for credit losses, partially offset by higher net interest income. Our results in all periods were impacted by the change in the fair value of our own debt attributable to credit spread for which we have elected fair value option which distorts comparability of the underlying performance trends of our business. The following table summarizes the impact of this item on our income (loss) before income taxes for all periods presented:

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014		2013
	(in millions)
Income (loss) before income tax, as reported...................................................................	$	(27	)	$	251		$	226	$	559
Fair value movement on own fair value option debt attributable to credit spread.....	46			(53		)	27		(11		)
Underlying income before income tax⁽¹⁾............................................................................	$	19		$	198		$	253	$	548

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

Excluding the impact of the change in the fair value of our own debt attributable to credit spread for which we have elected fair value option accounting in the table above, our underlying income before income tax for the three and six months ended June 30, 2014 decreased $179 million and $295 million, respectively, compared with the prior year periods as lower other revenues, higher operating expenses and a higher provision for credit losses were partially offset by higher net interest income.

During the six months ended June 30, 2014, we continued to reduce legacy and other risk positions as opportunities arose. The following table provides a summary of the significant valuation adjustments associated with these legacy positions that impacted revenue for 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)
Insurance monoline structured credit products⁽¹⁾..............................................................	$	(4	)	$	21	$	12	$	41
Other structured credit products⁽¹⁾.......................................................................................	(15		)	2		2		38
Total gains (loss).....................................................................................................................	$	(19	)	$	23	$	14	$	79

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

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

During the first half of 2014, we revised certain estimates used in our commercial loan collective impairment calculation to better reflect inherent losses in a growing loan portfolio. This resulted in an increase to our allowance for credit losses of approximately $93 million ($68 million of which was recorded in the second quarter) for these loans. We are continuing to refine aspects of our commercial loan allowance calculation and, as a result, there could be further adjustments to our credit loss estimates for commercial loans in future periods. While we have seen significant loan growth in our target markets, our commercial loan risk appetite and business model remain unchanged.

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

In October 2013, our Board of Directors approved a sale of our London Branch precious metals custody and clearing business to HSBC Bank plc. As the sale of this business is between affiliates under common control, we expect the consideration received in excess of our carrying value will result in an increase to additional paid-in-capital, net of tax, of approximately $50 million upon close. The cash sale is currently expected to be completed in the second half of 2014. At June 30, 2014, assets and liabilities related to this business totaled approximately $10.5 billion each, while revenue associated with this business was approximately $18 million and $26 million during the six months ended June 30, 2014 and 2013, respectively. We will continue to operate our metals trading business which is unaffected by this decision.

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

Basis of Reporting

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

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

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(in millions)
Net income - U.S. GAAP basis..........................................................................................	$	179		$	180		$	283		$	363
Adjustments, net of tax:
IFRSs reclassification of fair value measured financial assets during 2008..............	-			(7		)	(1		)	(17		)
Securities.............................................................................................................................	-			(1		)	(2		)	(4		)
Loan impairment.................................................................................................................	(19		)	18			4			11
Property...............................................................................................................................	(2		)	(2		)	(2		)	(4		)
Pension costs.....................................................................................................................	3			3			11			7
Litigation accrual................................................................................................................	49			(7		)	52			(7		)
Other....................................................................................................................................	(6		)	(9		)	(15		)	(22		)
Net income - IFRSs basis....................................................................................................	204			175			330			327
Tax expense (benefit) - IFRSs basis..................................................................................	(185		)	77			(43		)	201
Profit before tax - IFRSs basis............................................................................................	$	19		$	252		$	287		$	528

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

Balance Sheet Review

We utilize deposits and borrowings from various sources to provide liquidity, fund balance sheet growth, meet cash and capital needs, and fund investments in subsidiaries. The following table provides balance sheet totals at June 30, 2014 and increases (decreases) since December 31, 2013:

			Increase (Decrease) From
			December 31, 2013
	June 30, 2014		Amount			%
	(dollars are in millions)
Period end assets:
Short-term investments...............................................................................................	$	28,582	$	5,888		25.9	%
Loans, net......................................................................................................................	71,574		4,485			6.7
Loans held for sale.......................................................................................................	500		270			*
Trading assets..............................................................................................................	25,156		(3,738		)	(12.9	)
Securities.......................................................................................................................	45,983		(10,281		)	(18.3	)
Other assets..................................................................................................................	10,423		107			1.0
	$	182,218	$	(3,269	)	(1.8	)%
Funding sources:
Total deposits...............................................................................................................	$	115,521	$	2,913		2.6	%
Trading liabilities..........................................................................................................	8,815		(2,060		)	(18.9	)
Short-term borrowings.................................................................................................	12,906		(6,229		)	(32.6	)
Long-term debt.............................................................................................................	24,604		1,757			7.7
All other liabilities........................................................................................................	3,388		(170		)	(4.8	)
Shareholders' equity....................................................................................................	16,984		520			3.2
	$	182,218	$	(3,269	)	(1.8	)%

* Not meaningful.

Short-Term Investments Short-term investments include cash and due from banks, interest bearing deposits with banks, federal funds sold and securities purchased under resale agreements. Balances will fluctuate from period to period depending upon our liquidity position at the time. Overall balances increased since December 31, 2013 as we managed our short-term investments to maximize earnings while retaining liquidity.

Loans, Net The following summarizes our loan balances at June 30, 2014 and increases (decreases) since December 31, 2013:

			Increase (Decrease) From
			December 31, 2013
	June 30, 2014		Amount			%
	(dollars are in millions)
Commercial loans:
Construction and other real estate.....................................................................................	$	9,682	$	648		7.2	%
Business and corporate banking........................................................................................	15,956		1,510			10.5
Global banking⁽¹⁾....................................................................................................................	24,268		2,643			12.2
Other commercial loans........................................................................................................	3,127		(262		)	(7.7	)
Total commercial loans.........................................................................................................	53,033		4,539			9.4
Consumer loans:
Residential mortgages.......................................................................................................	16,097		271			1.7
Home equity mortgages....................................................................................................	1,914		(97		)	(4.8	)
Total residential mortgages.................................................................................................	18,011		174			1.0
Credit cards............................................................................................................................	681		(173		)	(20.3	)
Other consumer.....................................................................................................................	473		(37		)	(7.3	)
Total consumer loans...........................................................................................................	19,165		(36		)	(.2	)
Total loans................................................................................................................................	72,198		4,503			6.7
Allowance for credit losses....................................................................................................	624		18			3.0
Loans, net.................................................................................................................................	$	71,574	$	4,485		6.7	%

⁽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.

Commercial loan balances increased compared with December 31, 2013 due to new business activity, largely in global banking and business and corporate banking, which reflects our continued focus on expanding our core offerings and proactively targeting companies with international banking requirements in key growth markets. These increases were partially offset by pay downs and managed reductions in certain exposures.

Total residential mortgage loans increased modestly compared with December 31, 2013 as an increase in residential mortgages was partially offset by a decrease in home equity mortgages. We continue to sell newly originated conforming loans to PHH Mortgage and target new residential mortgage loan originations towards our Premier and Advance customer relationships.

Prior to 2013, real estate markets in a large portion of the United States were affected by stagnation or declines in property values for a number of years. As a result, while the loan-to-value ("LTV") ratios for our mortgage loan portfolio have deteriorated since origination, we have recently seen a general improvement in the LTVs for our loan portfolio. The following table presents LTVs for our mortgage loan portfolio, excluding subprime residential mortgage loans held for sale.

	LTVs at June 30, 2014⁽¹⁾⁽²⁾				LTVs at December 31, 2013⁽¹⁾⁽²⁾
	First Lien		Second Lien		First Lien		Second Lien
LTV < 80%........................................................................................	89.4	%	69.9	%	87.4	%	65.0	%
80% < LTV < 90%............................................................................	5.4		13.2		6.0		14.1
90% < LTV < 100%...........................................................................	3.1		8.2		3.8		9.5
LTV > 100%.......................................................................................	2.1		8.6		2.9		11.3
Average LTV for portfolio..............................................................	59.6		64.3		61.4		67.3

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

⁽²⁾Current property values are calculated using the most current HPIs available and applied on an individual loan basis, which results in an approximate three month delay in the production of reportable statistics. Therefore, the information in the table above reflects current estimated property values using HPIs as of March 31, 2014 and September 30, 2013, respectively.

Credit card receivable balances decreased compared with December 31, 2013 reflecting seasonal paydowns.

Other consumer loans decreased since December 31, 2013, reflecting the discontinuation of student loan originations and the run-off of our installment loan and auto finance portfolios.

Loans Held for Sale The following table summarizes loans held for sale at June 30, 2014 and increases (decreases) since December 31, 2013:

			Increase (Decrease) From
			December 31, 2013
	June 30, 2014		Amount			%
	(dollars are in millions)
Total commercial loans.................................................................................................	$	396	$	320		*
Consumer loans:
Residential mortgages..........................................................................................	38		(53		)	(58.2	)%
Other consumer.....................................................................................................	66		3			4.8
Total consumer loans..............................................................................................	104		(50		)	(32.5	)%
Total loans held for sale...............................................................................................	$	500	$	270		*

* Not meaningful.

Commercial loans held for sale increased compared with December 31, 2013. Commercial syndicated loans that are originated with the intent of selling them to unaffiliated third parties are classified as commercial loans held for sale and are recorded at fair value as we have elected to designate these loans under fair value option. 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.

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 of $194 million and $18 million at June 30, 2014 and December 31, 2013, respectively.

Residential mortgage loans held for sale decreased compared with December 31, 2013. We sell all our agency eligible loan originations servicing released directly to PHH Mortgage. Also included in residential mortgage loans held for sale are subprime residential mortgage loans 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.

Other consumer loans held for sale includes certain student loans which we no longer originate. The increase since December 31, 2013 was due to an increase in the fair value of the loans attributable to improved economic conditions as well as increased investor demand for student loans.

Excluding the commercial loans designated under fair value option discussed above, loans held for sale are recorded at the lower of amortized cost or fair value. The 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.

Trading Assets and Liabilities The following table summarizes trading assets and liabilities balances at June 30, 2014 and increases (decreases) since December 31, 2013:

			Increase (Decrease) From
			December 31, 2013
	June 30, 2014		Amount			%
	(dollars are in millions)
Trading assets:
Securities⁽¹⁾....................................................................................................................	$	10,325	$	(827	)	(7.4	)%
Precious metals.............................................................................................................	10,477		(1,274		)	(10.8	)
Derivatives⁽²⁾.................................................................................................................	4,354		(1,637		)	(27.3	)
	$	25,156	$	(3,738	)	(12.9	)%
Trading liabilities:
Securities sold, not yet purchased............................................................................	771		463			*
Payables for precious metals......................................................................................	3,037		(789		)	(20.6	)
Derivatives⁽³⁾.................................................................................................................	5,007		(1,734		)	(25.7	)
	$	8,815	$	(2,060	)	(18.9	)%

* Not meaningful.

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

⁽²⁾At 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.

⁽³⁾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.

Securities balances decreased since December 31, 2013 largely due to decreases in foreign sovereign guaranteed positions, partially offset by increases in U.S. Treasury and corporate bond positions. Securities positions are held to mitigate the risks of interest rate products issued to customers of domestic and emerging markets. Balances of securities sold, not yet purchased increased since December 31, 2013 due to an increase in short U.S. Treasury positions related to hedges of derivatives in the interest rate trading portfolio.

Precious metals trading assets decreased since December 31, 2013 due primarily to a decrease in unallocated metal inventory that resulted from client activity. The lower payable for precious metals compared with December 31, 2013 was primarily due to a decrease in unallocated metal balances held on behalf of clients. Both of the decreases in precious metals trading assets and precious metals trading liabilities were partially offset by an increase in spot rates during the first half of the year.

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

Derivative asset and liability balances decreased since December 31, 2013 mainly from market movements as valuations of foreign exchange, interest rate, credit and commodity derivatives all declined.

Securities Securities include securities available-for-sale and securities held-to-maturity. Balances will fluctuate between periods depending upon our liquidity position at the time. The decline in balances since December 31, 2013 largely reflects the sales of U.S. Treasury, government agency mortgage-backed and other asset-backed securities as part of a continuing strategy to re-balance the securities portfolio for risk management purposes based on the current interest rate environment.

Other Assets Other assets includes intangibles and goodwill. Other assets increased modestly since December 31, 2013 as higher outstanding balances related to the settlement of precious metal stock positions were largely offset by a decline in net deferred tax assets and lower derivative balances associated with hedging activities.

Deposits The following summarizes deposit balances by major depositor categories at June 30, 2014 and increases (decreases) since December 31, 2013:

			Increase (Decrease) From
			December 31, 2013
	June 30, 2014		Amount			%
	(dollars are in millions)
Individuals, partnerships and corporations................................................................	$	93,791	$	2,562		2.8	%
Domestic and foreign banks..........................................................................................	$	20,764	339			1.7
U.S. government and states and political subdivisions............................................	711		39			5.8
Foreign governments and official institutions...........................................................	255		(27		)	(9.6	)
Total deposits..................................................................................................................	$	115,521	$	2,913		2.6	%
Total core deposits⁽¹⁾......................................................................................................	$	87,564	1,755			2.0	%

⁽¹⁾Core deposits, as calculated in accordance with Federal Financial Institutions Examination Council ("FFIEC") guidelines, generally include all domestic demand, money market and other savings accounts, as well as time deposits with balances not exceeding $100,000.

Deposit balances at June 30, 2014 increased since December 31, 2013 as increased wholesale time deposits driven by an increase in affiliate deposits and new issuances from the launch of a wholesale term certificate of deposit issuance program, was partially offset by a decrease in deposits from individuals, primarily reflected in on-line savings accounts. Total deposits from HSBC affiliates increased $1,740 million since December 31, 2013. The strategy for our core retail banking business includes building relationship deposits and wealth management across multiple markets, channels and segments. This strategy involves various initiatives, such as:

• HSBC Premier, a premium service wealth and relationship banking proposition designed for the internationally-minded client with a dedicated premier relationship manager. Total Premier deposits increased slightly to $20,930 million at June 30, 2014 as compared with $20,877 million at December 31, 2013; and

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

We continue to actively manage our balance sheet to increase profitability while maintaining adequate liquidity.

Short-Term Borrowings Short-term borrowings decreased since December 31, 2013 primarily due to the management of our short-term liquidity positions which resulted in decreased levels of securities sold under agreements to repurchase. Partially offsetting the decreases was an increase in commercial paper outstanding.

Long-Term Debt Long-term debt increased compared with December 31, 2013 due primarily to the impact of debt issuances, partially offset by long-term debt retirements. Debt issuances during the six months ended June 30, 2014 included $2,250 million of senior debt, which was issued by HSBC USA in June 2014, and $1,650 million of structured medium-term notes, of which $28 million was issued by HSBC Bank USA.

Incremental issuances from the $40 billion HSBC Bank USA Global Bank Note Program totaled $28 million during the six months ended June 30, 2014. Total debt outstanding under this program was $4,525 million and $4,535 million at June 30, 2014 and December 31, 2013, respectively. Given the adequate liquidity of HSBC Bank USA, we do not anticipate the Global Bank Note Program being heavily used in the future as, among diverse funding sources designed to minimize overall costs, deposits will continue to be a primary funding source for HSBC Bank USA.

Incremental long-term debt issuances from our shelf registration statement with the Securities and Exchange Commission ("SEC") totaled $3,873 million during the six months ended June 30, 2014. Total long-term debt outstanding under this shelf was $14,248 million and $11,738 million at June 30, 2014 and December 31, 2013, respectively.

Borrowings from the Federal Home Loan Bank of New York ("FHLB") totaled $1,000 million at both June 30, 2014 and December 31, 2013. At June 30, 2014, we had the ability to access further borrowings of up to $5,077 million based on the amount pledged as collateral with the FHLB.

All Other Liabilities All other liabilities decreased slightly compared with December 31, 2013 due primarily to the release of tax reserves and associated accrued interest related to the conclusion of certain state and local tax audits during the second quarter of 2014, as discussed further under the heading "Income Taxes" in "Results of Operations." These decreases were largely offset by increased litigation accruals and higher derivative balances associated with hedging activities.

Results of Operations

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

The significant components of net interest margin are summarized in the following table:

				2014 Compared to 2013 Increase (Decrease)
Three Months Ended June 30,	2014			Volume			Rate			2013
	(dollars are in millions)
Interest income:
Short-term investments.........................................................................................................	$	20		$	3		$	1		$	16
Trading assets........................................................................................................................	65			4			34			27
Securities.................................................................................................................................	198			(39		)	7			230
Commercial loans....................................................................................................................	295			41			(41		)	295
Consumer loans......................................................................................................................	176			(6		)	(1		)	183
Other.........................................................................................................................................	12			2			(1		)	11
Total interest income..............................................................................................................	766			5			(1		)	762
Interest expense:
Deposits...................................................................................................................................	36			4			(24		)	56
Short-term borrowings...........................................................................................................	14			5			1			8
Long-term debt.......................................................................................................................	152			3			(17		)	166
Tax liabilities............................................................................................................................	(113		)	(2		)	(120		)	9
Total interest expense............................................................................................................	89			10			(160		)	239
Net interest income - taxable equivalent basis..................................................................	677			$	(5	)	$	159		523
Less: tax equivalent adjustment...........................................................................................	4									5
Net interest income - non taxable equivalent basis..........................................................	$	673								$	518

Yield on total interest earning assets..................................................................................	1.88		%							1.89		%
Cost of total interest bearing liabilities...............................................................................	.28									.81
Interest rate spread................................................................................................................	1.60									1.08
Benefit from net non-interest paying funds⁽¹⁾....................................................................	.06									.22
Net interest margin on average earning assets..................................................................	1.66		%							1.30		%

				2014 Compared to 2013 Increase (Decrease)
Six Months Ended June 30,	2014			Volume			Rate			2013
	(dollars are in millions)
Interest income:
Short-term investments.........................................................................................................	$	36		$	4		$	2		$	30
Trading assets........................................................................................................................	113			7			55			51
Securities.................................................................................................................................	409			(62		)	8			463
Commercial loans...................................................................................................................	582			77			(63		)	568
Consumer loans.....................................................................................................................	353			(10		)	(11		)	374
Other........................................................................................................................................	22			3			(2		)	21
Total interest income.............................................................................................................	1,515			19			(11		)	1,507
Interest expense:
Deposits..................................................................................................................................	71			-			(28		)	99
Short-term borrowings..........................................................................................................	23			9			(3		)	17
Long-term debt.......................................................................................................................	322			9			(20		)	333
Tax liabilities...........................................................................................................................	(101		)	(5		)	(121		)	25
Total interest expense...........................................................................................................	315			13			(172		)	474
Net interest income - taxable equivalent basis.................................................................	1,200			$	6		$	161		1,033
Less: tax equivalent adjustment..........................................................................................	8									10
Net interest income - non taxable equivalent basis.........................................................	$	1,192								$	1,023

Yield on total interest earning assets..................................................................................	1.87		%							1.90		%
Cost of total interest bearing liabilities...............................................................................	.50									.81
Interest rate spread................................................................................................................	1.37									1.09
Benefit from net non-interest paying funds⁽¹⁾...................................................................	.11									.21
Net interest margin on average earning assets.................................................................	1.48		%							1.30		%

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

Net interest income in the second quarter of 2014 reflects a $120 million benefit to tax liabilities interest expense related to the conclusion of certain state and local tax audits, as discussed further below under the heading "Income Taxes." Excluding the impact of this item, net interest income increased $35 million and $49 million, respectively, during the three and six months ended June 30, 2014 as compared with the corresponding prior year periods. Compared with the prior year periods, interest income increased modestly as higher income from trading assets, short-term investments and, in the year-to-date period, commercial loans was largely offset by lower income from securities and consumer loans, while interest expense decreased reflecting lower expense from deposits, long-term debt and tax liabilities partially offset by higher expense from short-term borrowings.

Short-term investments Higher interest income during the three and six months ended June 30, 2014 was primarily due to higher average balances.

Trading Assets The increase in interest income during the three and six months ended June 30, 2014 reflects the result of rising market interest rates since the prior year periods and a shift in asset mix to longer term, higher yielding securities. Securities in the trading portfolio are managed as hedges against the derivative activity of our customers, which, in response to the current interest rate environment, has shifted towards longer term, higher yielding returns.

Securities Interest income decreased during the three and six months ended June 30, 2014 due primarily to sales of U.S. Treasury and government agency mortgage-backed securities which resulted in lower outstanding balances compared with the prior year periods.

Commercial Loans Interest income was flat during the three months ended June 30, 2014 and was slightly higher during the six months ended June 30, 2014, as loan growth was largely offset by lower yields on newly originated loans and, to a lesser extent, loan repricing. Lower yields reflect a continued focus on higher quality lending to reduce credit risk exposure in our loan portfolios.

Consumer Loans Interest income decreased during the three and six months ended June 30, 2014 due primarily to slightly lower outstanding balances and, in the year-to-date period, lower yields on newly originated loans. Lower yields reflect a continued focus on higher quality lending to reduce credit risk exposure in our loan portfolios.

Short-term borrowings The increase in interest expense during the three and six months ended June 30, 2014 was due to higher average outstanding borrowings primarily in securities sold under repurchase agreements and federal funds purchased, which continue to be preferred sources of funding given the current interest rate environment.

Deposits Lower interest expense during the three and six months ended June 30, 2014 reflects the impact of lower rates paid on interest-bearing deposits.

Long-term debt Interest expense was lower during the three and six months ended June 30, 2014 due to a shift in mix towards lower yielding non-subordinated debt partially offset by higher outstanding borrowings.

Tax liabilities Excluding the one-time benefit related to the conclusion of certain state and local tax audits discussed above, interest expense decreased during the three and six months ended June 30, 2014 as the conclusion of these audits resulted in lower interest-bearing tax liability balances.

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

							Increase (Decrease)
Three Months Ended June 30,	2014			2013			Amount			%
	(dollars are in millions)
Commercial:
Construction and other real estate...........................................................................	$	6		$	(14	)	$	20		*
Business and corporate banking..............................................................................	56			15			41			*
Global banking.............................................................................................................	29			29			-			-
Other commercial.........................................................................................................	(9		)	(4		)	(5		)	*
Total commercial..........................................................................................................	$	82		$	26		$	56		*
Consumer:
Residential mortgages................................................................................................	7			14			(7		)	(50.0	)%
Home equity mortgages.............................................................................................	(8		)	13			(21		)	*
Credit card receivables...............................................................................................	4			13			(9		)	(69.2	)
Other consumer...........................................................................................................	-			1			(1		)	(100.0	)
Total consumer............................................................................................................	3			41			(38		)	(92.7	)
Total provision for credit losses..................................................................................	$	85		$	67		$	18		26.9	%
Provision as a percentage of average loans, annualized.........................................	0.5		%	0.4		%

							Increase (Decrease)
Six Months Ended June 30,	2014			2013			Amount			%
	(dollars are in millions)
Commercial:
Construction and other real estate...........................................................................	$	8		$	(5	)	$	13		*
Business and corporate banking..............................................................................	75			17			58			*
Global banking.............................................................................................................	36			28			8			28.6
Other commercial.........................................................................................................	(13		)	(4		)	(9		)	*
Total commercial..........................................................................................................	$	106		$	36		$	70		*
Consumer:
Residential mortgages................................................................................................	(9		)	11			(20		)	*
Home equity mortgages.............................................................................................	(6		)	30			(36		)	*
Credit card receivables...............................................................................................	9			11			(2		)	(18.2	)
Other consumer...........................................................................................................	1			-			1			*
Total consumer............................................................................................................	(5		)	52			(57		)	*
Total provision for credit losses..................................................................................	$	101		$	88		$	13		14.8	%
Provision as a percentage of average loans, annualized.........................................	0.3		%	0.3		%

* Not meaningful.

Our provision for credit losses increased $18 million and $13 million during the three and six months ended June 30, 2014, respectively, driven by higher provisions for credit losses in our commercial loan portfolio, partially offset by a lower provisions for credit losses in our consumer loan portfolio. During the three and six months ended June 30, 2014, we increased our credit loss reserves as the provision for credit losses was higher than net charge-offs by $50 million and $18 million, respectively.

In our commercial portfolio, the provision for credit losses increased $56 million and $70 million during the three and six months ended June 30, 2014, respectively. During the first half of 2014, we revised certain estimates used in our commercial loan impairment calculation resulting in an incremental provision for credit losses of approximately $93 million ($68 million of which was recorded in the second quarter) for these loans. Excluding the impact of this item, our commercial provision for credit losses decreased $12 million and $23 million during the three and six months ended June 30, 2014, respectively. The decrease in both periods reflects lower provisions for risk factors primarily associated with global banking large loan exposures and, in the year-to-date period emerging markets loan exposures, as well as continued improvements in economic and credit conditions which led to lower nonperforming loans and criticized asset levels, partially offset by loan growth, largely in global banking and business and corporate banking.

The provision for credit losses on residential mortgages including home equity mortgages decreased $28 million and $56 million during the three and six months ended June 30, 2014, respectively. The decrease was driven by an improvement in home prices as well as continued improvements in economic and credit conditions including lower dollars of delinquency on accounts less than 180 days contractually delinquent and improvements in loan delinquency roll rates. These improvements were partially offset in the three month period by increased loss estimates associated with the remediation of certain mortgage servicing activities and higher losses associated with advances made on behalf of borrowers.

The provision for credit losses associated with credit card receivables decreased $9 million and $2 million during the three and six months ended June 30, 2014, respectively, reflecting improved economic conditions, including lower dollars of delinquency, improvements in delinquency roll rates and lower receivable levels.

Our methodology and accounting policies related to the allowance for credit losses are presented in our 2013 Form 10-K under the caption "Critical Accounting Policies and Estimates" and in Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements." See "Credit Quality" in this MD&A for additional discussion on the allowance for credit losses associated with our various loan portfolios.

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

						Increase (Decrease)
Three Months Ended June 30,	2014......			2013.......		Amount			%.........
	(dollars are in millions)................
Credit card fees...............................................................................................................	$	13		$	21	$	(8	)	(38.1	)%
Other fees and commissions.........................................................................................	182			176		6			3.4
Trust income...................................................................................................................	32			31		1			3.2
Trading revenue.............................................................................................................	15			127		(112		)	(88.2	)
Net other-than-temporary impairment losses.............................................................	(5		)	-		(5		)	*
Other securities gains (losses), net.............................................................................	(7		)	23		(30		)	*
HSBC affiliate income:
Fees and commissions.............................................................................................	36			44		(8		)	(18.2	)
Other affiliate income................................................................................................	15			15		-			-
Total HSBC affiliate income.....................................................................................	51			59		(8		)	(13.6	)
Residential mortgage banking revenue.......................................................................	22			9		13			*
Gain (loss) on instruments designated at fair value and related derivatives........	(44		)	95		(139		)	*
Other income:
Valuation of loans held for sale...............................................................................	(1		)	6		(7		)	*
Insurance....................................................................................................................	5			3		2			66.7
Miscellaneous income..............................................................................................	(2		)	16		(18		)	*
Total other income....................................................................................................	2			25		(23		)	(92.0	)
Total other revenues......................................................................................................	$	261		$	566	$	(305	)	(53.9	)%

						Increase (Decrease)
Six Months Ended June 30,	2014......			2013.......		Amount			%.........
	(dollars are in millions)................
Credit card fees...............................................................................................................	$	27		$	34	$	(7	)	(20.6	)%
Other fees and commissions.........................................................................................	355			346		9			2.6
Trust income...................................................................................................................	63			63		-			-
Trading revenue.............................................................................................................	148			271		(123		)	(45.4	)
Net other-than-temporary impairment losses.............................................................	(7		)	-		(7		)	*
Other securities gains (losses), net.............................................................................	15			154		(139		)	(90.3	)
HSBC affiliate income:
Fees and commissions.............................................................................................	74			86		(12		)	(14.0	)
Other affiliate income................................................................................................	24			27		(3		)	(11.1	)
Total HSBC affiliate income.....................................................................................	98			113		(15		)	(13.3	)
Residential mortgage banking revenue.......................................................................	70			55		15			27.3
Gain (loss) on instruments designated at fair value and related derivatives........	(16		)	88		(104		)	*
Other income:
Valuation of loans held for sale...............................................................................	-			9		(9		)	(100.0	)
Insurance....................................................................................................................	8			4		4			100.0
Miscellaneous income..............................................................................................	-			21		(21		)	(100.0	)
Total other income....................................................................................................	8			34		(26		)	(76.5	)
Total other revenues......................................................................................................	$	761		$	1,158	$	(397	)	(34.3	)%

* Not meaningful.

Credit card fees Credit card fees decreased in the three and six months ended June 30, 2014 driven by lower outstanding balances as well as lower late fees due to improved customer behavior.

Other fees and commissions Other fees and commissions increased in the three and six months ended June 30, 2014 due to higher fee based income resulting from increased levels of commercial lending activity, partially offset by lower custodial fees due to a decrease in precious metals average inventory held under custody as well as lower average metals prices. The following table summarizes the components of other fees and commissions:

					Increase (Decrease)
Three Months Ended June 30,	2014		2013		Amount			%
	(dollars are in millions)
Account services......................................................................................................	$	78	$	71	7			9.9
Credit facilities...........................................................................................................	53		52		1			1.9
Custodial fees............................................................................................................	10		14		(4		)	(28.6	)
Other fees...................................................................................................................	41		39		2			5.1
Total other fees and commissions................................................................................	$	182	$	176	$	6		3.4	%

					Increase (Decrease)
Six Months Ended June 30,	2014		2013		Amount			%
	(dollars are in millions)
Account services......................................................................................................	$	148	$	140	$	8		5.7	%
Credit facilities...........................................................................................................	105		104		1			1.0
Custodial fees............................................................................................................	21		32		(11		)	(34.4	)
Other fees...................................................................................................................	81		70		11			15.7
Total other fees and commissions................................................................................	$	355	$	346	$	9		2.6	%

Trust income Trust income was relatively flat in the three and six months ended June 30, 2014.

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

							Increase (Decrease)
Three Months Ended June 30,	2014			2013			Amount			%
	(dollars are in millions)
Trading revenue..............................................................................................................	$	15		$	127		$	(112	)	(88.2	)%
Net interest income.........................................................................................................	46			(5		)	51			*..........
Trading related revenue.................................................................................................	$	61		$	122		$	(61	)	(50.0	)%
Business:
Derivatives⁽¹⁾..............................................................................................................	$	12		$	26		$	(14	)	(53.8	)%
Balance sheet management......................................................................................	(6		)	7			(13		)	*..........
Foreign exchange......................................................................................................	53			63			(10		)	(15.9	)
Precious metals..........................................................................................................	3			22			(19		)	(86.4	)
Global banking...........................................................................................................	-			1			(1		)	(100.0	)
Other trading..............................................................................................................	(1		)	3			(4		)	*
Trading related revenue.................................................................................................	$	61		$	122		$	(61	)	(50.0	)%

							Increase (Decrease)
Six Months Ended June 30,	2014			2013			Amount			%
	(dollars are in millions)
Trading revenue..............................................................................................................	$	148		$	271		$	(123	)	(45.4	)%
Net interest income.........................................................................................................	49			(15		)	64			*
Trading related revenue.................................................................................................	$	197		$	256		$	(59	)	(23.0	)%
Business Activities:
Derivatives⁽¹⁾..............................................................................................................	$	72		$	95		$	(23	)	(24.2	)%
Balance sheet management......................................................................................	(3		)	4			(7		)	*
Foreign exchange......................................................................................................	110			108			2			1.9
Precious metals..........................................................................................................	21			48			(27		)	(56.3	)
Global Banking...........................................................................................................	-			1			(1		)	(100.0	)
Other trading..............................................................................................................	(3		)	-			(3		)	*
Trading related revenue.................................................................................................	$	197		$	256		$	(59	)	(23.0	)%

* Not meaningful.

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

Trading related revenue decreased during the three and six months ended June 30, 2014 due to lower revenue from derivatives, balance sheet management, precious metals and, in the three month period, lower revenue from foreign exchange.

Trading revenue from derivative products decreased during the three and six months ended June 30, 2014 due to lower valuation gains related to structured credit products, reduced debit valuation adjustments, as our own credit spreads tightened compared with the widening that occurred in the year ago periods, and lower new deal activity on domestic interest rate products. Partially offsetting these declines was an increase in emerging markets related revenue from higher new deal activity and higher interest income on securities positions.

Trading revenue related to balance sheet management activities decreased during the three and six months ended June 30, 2014 primarily due to the performance of economic hedge positions used to manage interest rate risk.

Foreign exchange trading revenue decreased during the three months ended June 30, 2014 due to lower trading volumes. This decrease was more than offset in the in the year-to-date period due primarily to lower interest expense.

Precious metals revenue decreased during the three and six months ended June 30, 2014 from reduced trade volumes as investor demand shifted in favor of other assets.

Net other-than-temporary impairment losses During the three and six months ended June 30, 2014, the debt securities held by a consolidated variable interest entity ("VIE") were determined to have changes to their previous other-than-temporary impairment estimates with only the credit component of such other-than-temporary impairments recognized in earnings. During the three and six months ended June 30, 2013, there were no other-than-temporary impairment losses recognized.

Other securities gains (losses), net We maintain various securities portfolios as part of our balance sheet diversification and risk management strategies. During the three and six months ended June 30, 2014, we sold $9,144 million and $15,999 million, respectively, of U.S. Treasury, government agency mortgage-backed and other asset-backed securities as part of a continuing strategy to re-balance the securities portfolio for risk management purposes based on the current interest rate environment. In the three and six months ended June 30, 2013, we sold $9,838 million and $22,295 million, respectively, of U.S. Treasury, government agency mortgage-backed and other asset-backed securities as part of a continuing strategy to re-balance the securities portfolio for risk management purposes based on the current interest rate environment. The gross realized gains and losses from sales of securities in both years, which is included as a component of other securities gains (losses), net above, are summarized in Note 3, "Securities," in the accompanying consolidated financial statements.

HSBC affiliate income Affiliate income decreased in the three and six months ended June 30, 2014 due to lower fees associated with residential mortgage loan servicing activities performed on behalf of HSBC Finance, lower fees related to lending arrangements extended to other HSBC affiliates and lower income related to certain performance based activity.

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

							Increase (Decrease)
Three Months Ended June 30,	2014			2013			Amount			%
	(dollars are in millions)
Net interest income..........................................................................................................	$	46		$	44		$	2		4.5	%
Servicing related income:
Servicing fee income..................................................................................................	17			21			(4		)	(19.0	)
Changes in fair value of Mortgage Servicing Rights ("MSRs") due to:
Changes in valuation model inputs or assumptions........................................	(12		)	42			(54		)	*
Customer payments..............................................................................................	(7		)	(13		)	6			46.2
Trading - Derivative instruments used to offset changes in value of MSRs.......................................................................................................................	22			(34		)	56			*
Total servicing related income..................................................................................	20			16			4			25.0
Originations and sales related income:
Gains on sales of residential mortgages..................................................................	-			8			(8		)	(100.0	)
Recovery (provision) for repurchase obligations..................................................	-			(23		)	23			100.0
Trading and hedging activity...................................................................................	-			4			(4		)	(100.0)
Total originations and sales related income...........................................................	-			(11		)	11			100.0
Other mortgage income...................................................................................................	2			4			(2		)	(50.0)
Total residential mortgage banking revenue included in other revenues...............	22			9			13			*
Total residential mortgage banking related revenue...................................................	$	68		$	53		$	15		28.3	%

							Increase (Decrease)
Six Months Ended June 30,	2014			2013			Amount			%
	(dollars are in millions)
Net interest income..........................................................................................................	$	91		$	95		$	(4	)	(4.2	)%
Servicing related income:
Servicing fee income..................................................................................................	35			42			(7		)	(16.7	)
Changes in fair value of MSRs due to:
Changes in valuation model inputs or assumptions........................................	(24		)	68			(92		)	*
Customer payments..............................................................................................	(17		)	(23		)	6			26.1
Trading - Derivative instruments used to offset changes in value of MSRs.......................................................................................................................	37			(41		)	78			*
Total servicing related income..................................................................................	31			46			(15		)	(32.6	)
Originations and sales related income:
Gains on sales of residential mortgages..................................................................	-			32			(32		)	(100.0	)
Recovery (provision) for repurchase obligations..................................................	34			(36		)	70			*
Trading and hedging activity...................................................................................	-			4			(4		)	(100.0	)
Total originations and sales related income...........................................................	34			-			34			*
Other mortgage income...................................................................................................	5			9			(4		)	(44.4	)
Total residential mortgage banking revenue included in other revenues...............	70			55			15			27.3
Total residential mortgage banking related revenue...................................................	$	161		$	150		$	11		7.3	%

* Not meaningful.

Net interest income was relatively flat in the three and six months ended June 30, 2014 reflecting lower amortization of deferred origination costs as a result of lower portfolio prepayments due to higher mortgage rates during the second quarter of 2014 compared with the prior year period. Lower amortization offset the lower net interest income resulting from lower spreads on newly originated loans. Consistent with our strategy, additions to our residential mortgage portfolio are primarily mortgages to our Premier and Advance customers, while sales of newly originated conforming loans are sold to PHH Mortgage as discussed further below.

Total servicing related income increased during the three months ended June 30, 2014 due to improved net hedged MSR performance, partially offset by lower servicing fees while in the year-to-date period, total servicing related income declined as servicing fees remained lower and net hedged MSR performance declined. Servicing fees declined in both periods due to a lower average serviced loan portfolio. As a result of our strategic relationship with PHH Mortgage, beginning with May 2013 applications, we no longer add new volume to our serviced portfolio as all agency eligible loans are now sold on a servicing released basis. Changes in net hedged MSR performance is driven by changes in the MSR valuations due to updated market based assumptions such as interest rates, expected prepayments, primary-secondary spreads and cost of servicing which differ from period to period along with changes in the value of the underlying instruments used to hedge changes in the fair value of the MSRs. Consequently, primarily as a result of declining mortgage rates, our MSR fair value decreased during the three and six months ended June 30, 2014, which was offset by gains on instruments used to hedge changes in the fair value of the MSR.

Originations and sales related income improved in the three and six months ended June 30, 2014 largely due to lower loss provisions for loan repurchase obligations associated with loans previously sold partially offset by lower gains on sales of residential mortgage loans. During the three months ended June 30, 2014, we recorded no provision compared with a provision of $23 million in the year ago period. During the six months ended June 30, 2014, we recorded a recovery of $34 million compared with a provision of $36 million in the year ago period. Both periods reflects reduction in our estimated exposure associated with repurchase obligations on loans previously sold. During the first quarter of 2014, we entered into a settlement with the Federal Home Loan Mortgage Corporation ("FHLMC") for $25 million which settled our liability for substantially all loans sold to FHLMC from January 1, 2000 through 2013. The settlement and a re-assessment of the residual exposure resulted in a release of reserves. A similar settlement was entered into with the Federal National Mortgage Association ("FNMA") in the fourth quarter of 2013. We continue to maintain repurchase reserves for FNMA and FHLMC exposure associated with residual risks not covered under these settlement agreements. The lower gains on sales of residential mortgage loans reflects the impact of our agreement with PHH Mortgage as well as lower levels of saleable loan volume due in part to higher interest rates compared with the prior year periods.

Gain (loss) on instruments designated at fair value and related derivatives We have elected to apply fair value option accounting to commercial syndicated loans held for sale, certain own fixed-rate debt issuances and all of our hybrid instruments issued, inclusive of structured notes and structured deposits. We also use derivatives to economically hedge the interest rate risk associated with certain financial instruments for which fair value option has been elected. See Note 10, "Fair Value Option," in the accompanying consolidated financial statements for additional information including a breakout of these amounts by individual component.

Valuation of loans held for sale Valuation gains on loans held for sale decreased in the three and six months ended June 30, 2014 due primarily to valuation write-downs on certain commercial loans held for sale, recorded in the second quarter of 2014, as well as lower valuation gains on residential mortgage loans held for sale due mostly to lower average balances in the current year periods. Partially offsetting these decreases were higher valuation gains on certain student loans held for sale attributable to improved economic and regulatory conditions as well as increased investor demand. Residential mortgage loans held for sale, which were purchased from third parties and HSBC affiliates with the intent of securitization or sale, includes subprime residential mortgage loans with a fair value of $23 million and $54 million as of June 30, 2014 and 2013, respectively. Loans held for sale are recorded at the lower of their aggregate cost or fair value, with adjustments to fair value being recorded as a valuation allowance. Valuations on residential mortgage loans held for sale that we originate are recorded as a component of residential mortgage banking revenue in the consolidated statement of income.

Other income Other income, excluding the valuation of loans held for sale as discussed above, decreased during the three and six months ended June 30, 2014 driven primarily by lower income associated with fair value hedge ineffectiveness related to securities available-for-sale as well as lower income associated with credit default swap protection on certain commercial loans. Partially offsetting these decreases was higher income associated with bank owned life insurance.

Operating Expenses Compliance costs, which remained a significant component of our cost base, totaled $71 million and $145 million in the three and six months ended June 30, 2014, respectively, compared with $73 million and $149 million in the prior year periods. While we continue to focus attention on cost mitigation efforts in order to continue realization of optimal cost efficiencies, compliance related costs remain elevated due to the remediation required by regulatory consent agreements.

The following table summarizes the components of operating expenses:

							Increase (Decrease)
Three Months Ended June 30,	2014			2013			Amount			%
	(dollars are in millions)
Salary and employee benefits...................................................................................	$	223		$	247		$	(24	)	(9.7	)%
Occupancy expense, net............................................................................................	$	52		$	57		(5		)	(8.8	)
Support services from HSBC affiliates:
Fees paid to HSBC Finance..................................................................................	3			5			(2		)	(40.0	)
Fees paid to HSBC Markets (USA) Inc. ("HMUS").........................................	51			54			(3		)	(5.6	)
Fees paid to HSBC Technology and Services (USA) ("HTSU")....................	271			242			29			12.0
Fees paid to other HSBC affiliates......................................................................	60			61			(1		)	(1.6	)
Total support services from HSBC affiliates......................................................	385			362			23			6.4
Other expenses:
Equipment and software.......................................................................................	13			13			-			-
Marketing................................................................................................................	21			8			13			*
Outside services....................................................................................................	13			39			(26		)	(66.7	)
Professional fees....................................................................................................	29			29			-			-
Postage, printing and office supplies.................................................................	-			2			(2		)	(100.0	)
Off-balance sheet credit reserves........................................................................	3			(22		)	25			*
FDIC assessment fee.............................................................................................	26			20			6			30.0
Miscellaneous........................................................................................................	111			11			100			*
Total other expenses.............................................................................................	216			100			116			*
Total operating expenses...........................................................................................	$	876		$	766		$	110		14.4	%
Personnel - average number......................................................................................	6,197			6,589
Efficiency ratio.............................................................................................................	93.8		%	70.7		%

							Increase (Decrease)
Six Months Ended June 30,	2014			2013			Amount			%
	(dollars are in millions)
Salary and employee benefits...................................................................................	$	438		$	499		$	(61	)	(12.2	)%
Occupancy expense, net............................................................................................	109			116			(7		)	(6.0	)
Support services from HSBC affiliates:
Fees paid to HSBC Finance..................................................................................	6			9			(3		)	(33.3	)
Fees paid to HMUS...............................................................................................	104			106			(2		)	(1.9	)
Fees paid to HTSU................................................................................................	524			475			49			10.3
Fees paid to other HSBC affiliates......................................................................	105			96			9			9.4
Total support services from HSBC affiliates......................................................	739			686			53			7.7
Other expenses:
Equipment and software.......................................................................................	27			28			(1		)	(3.6	)
Marketing................................................................................................................	30			18			12			66.7
Outside services....................................................................................................	26			65			(39		)	(60.0	)
Professional fees....................................................................................................	51			54			(3		)	(5.6	)
Postage, printing and office supplies.................................................................	2			4			(2		)	(50.0	)
Off-balance sheet credit reserves........................................................................	9			(16		)	25			*
FDIC assessment fee.............................................................................................	57			42			15			35.7
Miscellaneous........................................................................................................	138			38			100			*
Total other expenses.............................................................................................	340			233			107			45.9
Total operating expenses...........................................................................................	$	1,626		$	1,534		$	92		6.0	%
Personnel - average number......................................................................................	6,184			6,707
Efficiency ratio.............................................................................................................	83.3		%	70.3		%

* Not meaningful.

Salaries and employee benefits Total salaries and employee benefits expense decreased during the three and six months ended June 30, 2014 primarily due to lower average personnel in addition to lower incentive compensation expense, partially offset in the three month period by increased staffing associated with capital planning and reporting activities.

Occupancy expense, net Occupancy expense decreased in the three and six months ended June 30, 2014 due largely to lower rental expense, including the consolidation of office space in Buffalo, NY which was completed in the fourth quarter of 2013.

Support services from HSBC affiliates Support services from HSBC affiliates increased in the three and six months ended June 30, 2014 due, in part, to changing the billing process for certain third-party loan servicing costs from a direct expense in the prior year to support services from HTSU in 2014. Also contributing to higher support services from HSBC affiliates were higher cost allocations from various corporate functions as well as increased costs associated with our investment in process enhancements and infrastructure to improve and modernize our legacy business systems. Compliance costs reflected in support services from affiliates totaled $68 million and $139 million during the three and six months ended June 30, 2014, respectively, compared with $70 million and $143 million in the year-ago periods. A summary of the activities charged to us from various HSBC affiliates is included in Note 13, "Related Party Transactions," in the accompanying consolidated financial statements.

Marketing Marketing expenses increased in the three and six months ended June 30, 2014 driven largely by marketing campaigns to support the re-launch of HSBC Premier in the second quarter of 2014.

Other expenses Other expenses increased in the three and six months ended June 30, 2014 due primarily to higher miscellaneous expense related to certain litigation matters as well as higher FDIC assessment fees, higher loss estimates associated with off-balance sheet credit exposures as the prior year periods reflect a reserve release due to an upgrade of an individual monoline and, in the year-to-date period, higher expense related to an increase in our expectation of compensatory fees payable to GSEs due, in part, to the exclusion of these exposures from the FHLMC settlement discussed above. Partially offsetting these increases was a decline in outside services expense due to moving the billing of certain third-party loan servicing costs from a direct expense in the prior year to support services from HTSU in 2014.

Efficiency ratio Our efficiency ratio was 93.8 percent and 83.3 percent during the three and six months ended June 30, 2014, respectively, compared with 70.7 percent and 70.3 percent during the year-ago periods. Our efficiency ratio was impacted in both periods by the change in the fair value of our own debt attributable to credit spread for which we have elected fair value option accounting. Excluding the impact of this item, our efficiency ratio for the three and six months ended June 30, 2014, respectively, increased to 89.4 percent and 82.1 percent compared with 74.3 percent and 70.7 percent in the year-ago periods due to a decrease in other revenues driven by lower trading revenue as well as lower gains on security sales and higher operating expenses driven by higher litigation expenses, partially offset by an increase in net interest income. In addition, operating expenses continue to reflect elevated levels of compliance costs.

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

Three Months Ended June 30,	2014					2013
	(dollars are in millions)
Tax expense (benefit) at the U.S. federal statutory income tax rate........................	$	(9	)	(35.0	)%	$	88		35.0	%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit..........................................................	3			11.1		13			5.2
Adjustment of tax rate used to value deferred taxes...........................................	(1		)	(3.7	)	-			-
Other non-deductible / non-taxable items⁽²⁾.........................................................	(3		)	(11.1	)	(12		)	(4.8	)
Items affecting prior periods⁽³⁾...............................................................................	(7		)	(25.9	)	(12		)	(4.8	)
Uncertain tax positions⁽⁴⁾........................................................................................	(178		)	(657.7	)	4			1.6
Impact of foreign operations⁽⁵⁾...............................................................................	(2		)	(7.4	)	1			0.4
Low income housing tax credit investments⁽⁶⁾.....................................................	(7		)	(25.9	)	(8		)	(3.2	)
Change in valuation allowance reserves⁽⁷⁾...........................................................	(1		)	(3.7	)	-			-
Other...........................................................................................................................	(1		)	(3.7	)	(3		)	(1.1	)
Total income tax expense (benefit)..............................................................................	$	(206	)	(763.0	)%	$	71		28.3	%

Six Months Ended June 30,	2014					2013
	(dollars are in millions)
Tax expense at the U.S. federal statutory income tax rate........................................	$	79		35.0	%	$	196		35.0	%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit..........................................................	13			5.8		30			5.4
Adjustment of tax rate used to value deferred taxes⁽¹⁾.......................................	60			26.5		-			-
Other non-deductible / non-taxable items⁽²⁾.........................................................	(4		)	(1.8	)	(9		)	(1.6	)
Items affecting prior periods⁽³⁾...............................................................................	(24		)	(10.6	)	(22		)	(3.9	)
Uncertain tax positions⁽⁴⁾........................................................................................	(181		)	(80.1	)	18			3.2
Impact of foreign operations⁽⁵⁾...............................................................................	1			.4		4			0.8
Low income housing tax credits investments⁽⁶⁾...................................................	(14		)	(6.2	)	(15		)	(2.7	)
Change in valuation allowance reserves⁽⁷⁾...........................................................	13			5.8		-			-
Other...........................................................................................................................	-			-		(6		)	(1.1	)
Total income tax expense (benefit)..............................................................................	$	(57	)	(25.2	)%	$	196		35.1	%

⁽¹⁾For 2014, the amount relates to the effects of revaluing our deferred tax assets for New York State Tax Reform that was enacted on March 31, 2014.

⁽²⁾For 2014 and 2013, the amounts mainly relate to tax exempt interest income.

⁽³⁾For 2014, the amount relates to changes in estimates in the amount of state income taxes deductible on the federal income tax return. For 2013, the amount relates to corrections to current and deferred tax balance sheet accounts and changes in estimates as a result of filing the federal and state income tax returns.

⁽⁴⁾For 2014, the amount mainly reflects the resolution and settlement with taxation authorities of certain significant state and local tax audits during the second quarter of 2014 which is discussed further below. For 2013, the amount relates to changes in state uncertain tax positions which no longer meet the more likely than not requirement for recognition.

⁽⁵⁾For 2013, the amounts relate to foreign (United Kingdom) tax expense for which no foreign tax credits are allowed.

⁽⁶⁾For 2014 and 2013, reflects early adoption of ASU 2014-01 which permits an investor to amortize its Low Income Housing Tax Credit investments in proportion to the Low Income Housing tax benefits and present such benefits net of investment amortization in the tax line.

⁽⁷⁾For 2014, the amount relates to the establishment of a valuation allowance against our deferred tax assets due to New York State Tax Reform that was enacted on March 31, 2014.

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. The total amount of our unrecognized tax benefits related to uncertain tax positions was $27 million at June 30, 2014 compared with $540 million at December 31, 2013. 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. At June 30, 2014 our accrued liability for the payment of interest associated with uncertain tax positions was $3 million compared with $208 million at December 31, 2013.

A reconciliation of the beginning and ending amount of unrecognized tax benefits related to uncertain tax positions is as follows:

	(in millions)
Balance at January 1, 2014......................................................................................................................................................	$	540
Additions based on tax positions related to the current year...........................................................................................	16
Reductions based on tax positions related to the current year.........................................................................................	(10		)
Additions for tax positions of prior years............................................................................................................................	5
Reductions for tax positions of prior years..........................................................................................................................	(322		)
Reductions related to settlements with taxing authorities.................................................................................................	(202		)
Balance at June 30, 2014..........................................................................................................................................................	$	27

The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate was $22 million and $334 million at June 30, 2014 and December 31, 2013, respectively. Included in the unrecognized tax benefits are some items the recognition of which would not affect the effective tax rate, such as the tax effect of temporary differences and the amount of state taxes that would be deductible for U.S. federal purposes.

On March 31, 2014, New York Governor Cuomo signed legislation overhauling New York's corporate tax regime as well as other significant tax changes. Most of these changes take effect for tax years beginning on or after January 1, 2015 and will have a significant and positive future economic impact on HSBC entities with activity taxed in New York State, including us. The changes resulted in a decrease to our net deferred tax asset of approximately $75 million in the first quarter of 2014.

Segment Results - IFRSs Basis

We have four distinct business segments that are utilized for management reporting and analysis purposes which are aligned with HSBC's global businesses and business strategy. The segments, which are generally based upon customer groupings and global businesses, are described under Item 1, "Business," in our 2013 Form 10-K. 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.

We report financial information to our parent, HSBC, in accordance with IFRSs. As a result, our segment results are presented on an IFRSs basis (a non-U.S. GAAP financial measure) as operating results are monitored and reviewed, trends are evaluated and decisions about allocating resources such as employees are made almost exclusively on an IFRSs basis. However, we continue to monitor capital adequacy, establish dividend policy and report to regulatory agencies on a U.S. GAAP basis. The significant differences between U.S. GAAP and IFRSs as they impact our results are summarized in Note 23, "Business Segments," in our 2013 Form 10-K.

Retail Banking and Wealth Management ("RBWM") Our RBWM segment provides a full range of banking and wealth products and services through our branches and direct channels to individuals. These services include asset-driven services such as credit and lending, liability-driven services such as deposit taking and account services and fee-driven services such as advisory and wealth management. During the first half of 2014, we continued to direct resources towards the development and delivery of premium service, client needs based wealth and banking services with particular focus on HSBC Premier, HSBC's global banking service that was re-launched in 2014 and offers customers a seamless international service, as well as HSBC Advance, a proposition directed towards the emerging affluent client in the initial stages of wealth accumulation.

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

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

							Increase (Decrease)
Three Months Ended June 30,	2014			2013			Amount			%
	(dollars are in millions)
Net interest income........................................................................................................	$	212		$	206		$	6		2.9	%
Other operating income................................................................................................	104			82			22			26.8
Total operating income.................................................................................................	316			288			28			9.7
Loan impairment charges..............................................................................................	21			21			-			-
Net operating income....................................................................................................	295			267			28			10.5
Operating expenses.......................................................................................................	298			300			(2		)	(.7	)
Loss before tax...............................................................................................................	$	(3	)	$	(33	)	$	30		90.9	%

							Increase (Decrease)
Six Months Ended June 30,	2014			2013			Amount			%
	(dollars are in millions)
Net interest income........................................................................................................	$	410		$	421		$	(11	)	(2.6	)%
Other operating income................................................................................................	217			189			28			14.8
Total operating income.................................................................................................	627			610			17			2.8
Loan impairment charges..............................................................................................	23			53			(30		)	(56.6	)
Net operating income....................................................................................................	604			557			47			8.4
Operating expenses.......................................................................................................	577			591			(14		)	(2.4	)
Profit (loss) before tax...................................................................................................	$	27		$	(34	)	$	61		*

* Not meaningful.

Our RBWM segment reported improved results during the three and six months ended June 30, 2014. Profit (loss) before tax improved $30 million during the three months ended June 30, 2014, driven by higher interest income and higher other operating income. Profit before tax improved $61 million during the six months ended June 30, 2014, driven by higher other operating income, lower loan impairment charges and lower operating expenses, partially offset by lower net interest income.

Net interest income reflects an $11 million release of accrued interest related to uncertain tax positions which were settled with the taxing authorities in the second quarter of 2014. Excluding this item, net interest income was lower during the three and six months ended June 30, 2014 due to lower deposit levels partially offset by margin improvements due to active repricing of the deposit base especially in the non-premier segments which reduced our funding costs. Residential mortgage average balances were slightly lower resulting from higher portfolio prepayments in the prior year. Also impacting net interest income in the current year are lower spreads on newly originated loans which reflects competitive pressures and the lower risk profile of our Premier customers.

Other operating income increased in the three and six months ended June 30, 2014 driven by lower provisions for mortgage loan repurchase obligations associated with previously sold loans due to a release of reserves in the first quarter of 2014 due primarily to a settlement with FHLMC which settled our liability for substantially all loans sold to FHLMC compared with increases to the repurchase liability in the prior year periods. This was partially offset by lower gains on sales of mortgage loans and, in the year-to-date period, lower net hedged mortgage servicing rights results.

In the second quarter of 2013, we recorded an incremental loan impairment charge of $15 million to reflect an update to the period of time after a loss event a real estate loan remains current before delinquency is observed. Excluding this item, loan impairment charges were higher during the three months ended June 30, 2014 driven primarily by increased loss estimates associated with the remediation of certain mortgage servicing activities and higher losses associated with advances made on behalf of borrowers. In the year-to-date period, the increased charges during the quarter were more than offset by continued improvements in economic and credit conditions including lower delinquency levels on accounts less than 180 days contractually delinquent, improvements in delinquency roll rates and lower charge-offs, including improvements in market value adjustments on loan collateral due to improvements in home prices.

Operating expenses were lower in the three and six months ended June 30, 2014 primarily due to decreases in expenses driven by several cost reduction initiatives relating to our retail branch network, primarily optimizing staffing and administrative areas. Partially offsetting these improvements were higher risk and compliance costs, and, in the year-to-date period, an increase in our estimate of compensatory fees payable to GSEs due, in part, to the exclusion of these exposures from the FHLMC settlement discussed above.

Commercial Banking ("CMB") CMB's goal is to be the leading international trade and business bank in the U.S. CMB strives to execute this vision and strategy by focusing on key markets with high concentration of internationally minded customers. Our CMB segment serves the markets through three client groups, notably Corporate Banking, Business Banking and Commercial Real Estate which allows us to align our resources in order to efficiently deliver suitable products and services based on our client's needs. Whether it is through commercial centers, the retail branch network, or via HSBCnet, CMB provides customers with products and services needed to grow their businesses internationally and delivers those products and services through its relationship managers who operate within a robust, customer focused compliance and risk culture and collaborate across HSBC to capture a larger percentage of a relationship. An increase in the number of relationship managers and product partners is enabling us to gain a larger presence in key growth markets, including the West Coast, Southeast and Midwest. This strategy has also led to a reduction in certain Business Banking customers who do not have significant international needs.

New loan originations have resulted in a 31 percent increase in quarter-to-date average loans outstanding to Corporate Banking customers since the second quarter of 2013. The Commercial Real Estate group is focusing on selective business opportunities in markets where we have strong portfolio expertise, which reflects in a 16 percent increase in quarter-to-date average outstanding loans for this portfolio since the second quarter of 2013. Total quarter-to-date average loans increased 22 percent across all CMB business lines as compared with the second quarter of 2013.

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

					Increase (Decrease)
Three Months Ended June 30,	2014		2013		Amount			%
	(dollars are in millions)
Net interest income........................................................................................................	$	202	$	172	$	30		17.4	%
Other operating income................................................................................................	64		77		(13		)	(16.9	)
Total operating income.................................................................................................	266		249		17			6.8
Loan impairment charges..............................................................................................	83		1		82			*
Net operating income....................................................................................................	183		248		(65		)	(26.2	)
Operating expenses.......................................................................................................	174		171		3			1.8
Profit before tax..............................................................................................................	$	9	$	77	$	(68	)	(88.3	)%

					Increase (Decrease)
Six Months Ended June 30,	2014		2013		Amount			%
	(dollars are in millions)
Net interest income........................................................................................................	$	389	$	342	$	47		13.7	%
Other operating income................................................................................................	132		142		(10		)	(7.0	)
Total operating income.................................................................................................	521		484		37			7.6
Loan impairment charges..............................................................................................	90		15		75			*
Net operating income....................................................................................................	431		469		(38		)	(8.1	)
Operating expenses.......................................................................................................	332		333		(1		)	(.3	)
Profit before tax..............................................................................................................	$	99	$	136	$	(37	)	(27.2	)%

* Not meaningful.

Our CMB segment reported a lower profit before tax during the three and six months ended June 30, 2014, driven by lower other operating income and higher loan impairment charges, partially offset by higher net interest income.

Net interest income increased in the three and six months ended June 30, 2014 due to the favorable impact of higher loan balances, primarily in key growth markets, as well as a release of accrued interest related to uncertain tax positions which were settled with the taxing authorities during the second quarter. These increases were partially offset by lower yields on newly originated loans and, to a lesser extent, loan repricing.

Other operating income was lower during the three and six months ended June 30, 2014 due to the non-recurrence of asset sales in commercial real estate in the prior year period and lower trade revenues from managing risk with trading counterparties. Partially offsetting were higher fees generated from an increase in credit commitments and higher Global Banking and Markets ("GB&M") collaboration income due to an increase in debt and leverage acquisition financing activity.

Loan impairment charges were higher during the three and six months ended June 30, 2014 largely due to a revision to certain estimates used in our commercial loan impairment calculation which resulted in a loan impairment charge of approximately $72 million during the second quarter of 2014, as well as higher charges due to loan growth and, in the three month period, increased levels of reserves for risk factors associated with emerging markets loan exposures.

Operating expenses increased during the three months ended June 30, 2014, driven by higher expense associated with variable compensation accruals and higher corporate function cost allocations, while operating expenses were flat in the year-to-date period.

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

Within client-focused business lines, GB&M offers a full range of capabilities, including:

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

• A markets business with 24-hour coverage and knowledge of world-wide local markets which provides services in credit and rates, foreign exchange, precious metals trading, equities and securities services.

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

We continue to target U.S. companies with international banking requirements and foreign companies with banking needs in the Americas. Consistent with our global strategy, we are also focused on identifying opportunities to cross-sell our products to CMB and RBWM customers. Furthermore, we have seen higher corporate loan balances compared with the prior year. During the six months ended June 30, 2014 U.S. financial market conditions reflected continued low interest rates and generally less volatile credit spreads and foreign exchange prices, however average precious metals prices fell compared with the prior year periods.

The following table summarizes IFRSs results for the GB&M segment:

						Increase (Decrease)
Three Months Ended June 30,	2014			2013		Amount			%
	(dollars are in millions)
Net interest income........................................................................................................	$	109		$	125	$	(16	)	(12.8	)%
Other operating income................................................................................................	151			295		(144		)	(48.8	)
Total operating income⁽¹⁾..............................................................................................	260			420		(160		)	(38.1	)
Loan impairment charges..............................................................................................	40			6		34			*
Net operating income....................................................................................................	220			414		(194		)	(46.9	)
Operating expenses.......................................................................................................	239			250		(11		)	(4.4	)
Profit (loss) before tax...................................................................................................	$	(19	)	$	164	$	(183	)	*

						Increase (Decrease)
Six Months Ended June 30,	2014			2013		Amount			%
	(dollars are in millions)
Net interest income........................................................................................................	$	206		$	234	$	(28	)	(12.0	)%
Other operating income................................................................................................	445			677		(232		)	(34.3	)
Total operating income⁽¹⁾..............................................................................................	651			911		(260		)	(28.5	)
Loan impairment charges..............................................................................................	55			9		46			*
Net operating income....................................................................................................	596			902		(306		)	(33.9	)
Operating expenses.......................................................................................................	478			480		(2		)	(.4	)
Profit before tax..............................................................................................................	$	118		$	422	$	(304	)	(72.0	)%

* Not meaningful.

⁽¹⁾The following table summarizes the impact of key activities on the total operating income of the GB&M segment:

							Increase (Decrease)
Three Months Ended June 30,	2014			2013			Amount			%
	(in millions)
Credit⁽²⁾...........................................................................................................	$	(10	)	$	34		$	(44	)	*
Rates...............................................................................................................	34			34			-			-
Foreign Exchange and Metals..........................................................................	66			98			(32		)	(32.7	)
Equities...........................................................................................................	(11		)	20			(31		)	*
Total Global Markets.........................................................................................	79			186			(107		)	(57.5	)
Capital Financing...............................................................................................	55			61			(6		)	(9.8	)
Payments and Cash Management.......................................................................	87			84			3			3.6
Securities Services..............................................................................................	3			3			-			-
Global Trade and Receivables Finance................................................................	12			9			3			33.3
Balance Sheet Management⁽³⁾.............................................................................	33			83			(50		)	(60.2	)
Debit Valuation Adjustment................................................................................	(13		)	(14		)	1			7.1
Other⁽⁴⁾..............................................................................................................	4			8			(4		)	(50.0	)
Total operating income.....................................................................................	$	260		$	420		$	(160	)	(38.1	)%

							Increase (Decrease)
Six Months Ended June 30,	2014			2013			Amount			%
	(dollars are in millions)
Credit⁽²⁾...........................................................................................................	$	26		$	59		$	(33	)	(55.9	)%
Rates...............................................................................................................	92			83			9			10.8
Foreign Exchange and Metals..........................................................................	143			191			(48		)	(25.1	)
Equities...........................................................................................................	(10		)	15			(25		)	*
Total Global Markets.........................................................................................	251			348			(97		)	(27.9	)
Capital Financing...............................................................................................	117			114			3			2.6
Payments and Cash Management.......................................................................	172			162			10			6.2
Securities Services..............................................................................................	6			7			(1		)	(14.3	)
Global Trade and Receivables Finance................................................................	23			22			1			4.5
Balance Sheet Management⁽³⁾.............................................................................	97			245			(148		)	(60.4	)
Debit Valuation Adjustment................................................................................	(13		)	7			(20		)	*
Other⁽⁴⁾..............................................................................................................	(2		)	6			(8		)	*
Total operating income.....................................................................................	$	651		$	911		$	(260	)	(28.5	)%

* Not meaningful.

⁽²⁾ Credit includes losses of $9 million and gains of $26 million in the three and six months ended June 30, 2014, respectively, compared with gains of $35 million and $66 million in the three and six months ended June 30, 2013, respectively, of operating income related to structured credit products and mortgage loans held for sale which we no longer offer.

⁽³⁾Includes losses on the sale of securities of $7 million and gains of $16 million in the three and six months ended June 30, 2014, respectively, compared with gains on the sale of securities of $23 million and $154 million in the three and six months ended June 30, 2013, respectively.

⁽⁴⁾ Other includes corporate funding charges and earnings on capital.

Our GB&M segment reported a lower profit before tax during the three and six months ended June 30, 2014, driven primarily by lower trading revenue and lower gains on security sales within other operating income, as well as, lower net interest income and higher loan impairment charges, partially offset by lower operating expenses.

Credit revenue decreased during the three and six months ended June 30, 2014 from the performance of legacy credit products. Changes in the fair value of legacy structured credit products resulted in losses of $6 million and gains of $24 million during the three and six months ended June 30, 2014, respectively, compared with gains of $28 million and $55 million during the three and six months ended June 30, 2013, respectively. Included in the changes in fair value from structured credit products were decreases in fair value of $4 million and increases in fair value of $12 million during the three and six months ended June 30, 2014, respectively, related to exposures to monoline insurance companies, compared with increases of $21 million and $41 million during the three and six months ended June 30, 2013, respectively. Credit revenue also included valuation losses of $2 million and less than $1 million during the three and six months ended June 30, 2014, respectively, related to the fair value of sub-prime residential mortgage loans held for sale compared with valuation gains of $6 million and $8 million during the three and six months ended June 30, 2013, respectively. Revenue from Rates increased during the year-to-date period due primarily to higher deal activity in emerging markets related derivatives. Foreign Exchange and Metals revenue declined during the three and six months ended June 30, 2014 from a decline in metals related client trading and lower fees. The decrease in Equities during the three and six months ended June 30, 2014 was driven by the impact of fair value adjustments on certain equity linked structured note liabilities, which were related to movements in our own credit spreads.

Capital Financing revenues benefited from increased corporate and asset backed lending during the three and six months ended June 30, 2014. These increased revenues were more than offset by increased hedging costs during the three month period. Payments and Cash Management revenue increased due to higher average deposit balances and higher income from transaction related services.

Balance Sheet Management reflected lower gains from the sales of securities during the three and six months ended June 30, 2014, partially offset by higher net interest income resulting from higher average investment balances.

Debit valuation adjustments on derivative liabilities decreased during the six months ended June 30, 2014, which reflected a tightening of our spreads relative to 2013.

Loan impairment charges were higher during the three and six months ended June 30, 2014 due to a revision to certain estimates used in our commercial loan impairment calculation which resulted in a loan impairment charge of approximately $20 million during the second quarter of 2014, as well as higher expected loss on a single name exposure and, to a lesser extent, the revaluation of a loan held for sale.

Operating expenses decreased during the three and six months ended June 30, 2014 due primarily due to lower performance based compensation accruals which is correlated to the reduction in operating income.

Private Banking PB provides wealth management, business and family succession solutions to high net worth individuals and families with local and international needs. Accessing the most suitable products from the marketplace, PB works with its clients to offer tailored, coordinated and innovative ways to manage and preserve wealth while optimizing returns. PB, as a global business, offers a wide range of products and services, including banking, liquidity management, investment services, custody, tailored lending, trust and fiduciary services, family wealth and philanthropy advisory services. PB also works to ensure that its clients have access to other products and services available throughout the HSBC Group, such as credit cards and investment banking, to deliver total solutions for their financial and banking needs.

PB strategy is concentrated on three main areas: growth, streamlining and global standard. Areas of focus are banking and cash management, investment advice including discretionary portfolio management, investment and structured products, residential mortgages, as well as wealth planning and trusts services.

Client deposit levels decreased $300 million or 3 percent compared with June 30, 2013 mainly from international market customers. Total loans increased $250 million or 4 percent compared with the prior year from commercial and industrial, and residential mortgage portfolios. Overall period end client assets were lower than June 30, 2013 by $600 million and $440 million lower than December 31, 2013 primarily due to reductions in highly active institutional custody customer balances and deposits, partially offset by higher PB wealth management and investment products.

The following table provides additional information regarding client assets during the six months ended June 30, 2014 and 2013:

	2014			2013
	(in millions)
Client assets at beginning of the period.........................................................................................................	$	44,661		$	46,461
Net new money................................................................................................................................................	(1,454		)	(1,672		)
Value change....................................................................................................................................................	1,008			16
Client assets at end of period...........................................................................................................................	$	44,215		$	44,805

The following table summarizes IFRSs results for the PB segment.

						Increase (Decrease)
Three Months Ended June 30,	2014			2013		Amount			%
	(dollars are in millions)
Net interest income........................................................................................................	$	56		$	49	$	7		14.3	%
Other operating income................................................................................................	25			30		(5		)	(16.7	)
Total operating income.................................................................................................	81			79		2			2.5
Loan impairment charges (recoveries)........................................................................	-			-		-			-
Net operating income....................................................................................................	81			79		2			2.5
Operating expenses.......................................................................................................	61			67		(6		)	(9.0	)
Profit before tax..............................................................................................................	$	20		$	12	$	8		66.7	%

						Increase (Decrease)
Six Months Ended June 30,	2014			2013		Amount			%
	(dollars are in millions)
Net interest income........................................................................................................	$	105		$	94	$	11		11.7	%
Other operating income................................................................................................	50			58		(8		)	(13.8	)
Total operating income.................................................................................................	155			152		3			2.0
Loan impairment charges (recoveries)........................................................................	(5		)	1		(6		)	*
Net operating income....................................................................................................	160			151		9			6.0
Operating expenses.......................................................................................................	116			127		(11		)	(8.7	)
Profit before tax..............................................................................................................	$	44		$	24	$	20		83.3	%

* Not meaningful.

Our PB segment reported higher profit before tax during the three and six months ended June 30, 2014 driven by higher net interest income, lower loan impairment charges and lower operating expenses, partially offset by lower other operating income.

Net interest income was higher in the three and six months ended June 30, 2014 due to improved volumes in lending and liquidity premiums on deposits, partially offset by lower net interest from reduced demand deposit and time deposit balances.

Other operating income was lower during the three and six months ended June 30, 2014 mainly due to reductions in other income from affiliates and custody product fees.

Loan impairment charges were flat during the three months ended June 30, 2014 and decreased during the year-to-date period due to releases of reserves due to loan pay downs and, in the year-to-date period, a recovery related to the payoff of a troubled debt restructuring loan.

Operating expenses decreased during the three and six months ended June 30, 2014 primarily due to lower incentive compensation expense as well as reduced indirect and intercompany costs.

Other The other segment primarily includes adjustments made at the corporate level for fair value option accounting related to credit risk on certain debt issued, income and expense associated with certain affiliate transactions, adjustments to the fair value on HSBC shares held for stock plans, interest expense associated with certain tax exposures and, prior to 2014, the economic benefits from investing in low income housing tax credit investments.

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

							Increase (Decrease)
Three Months Ended June 30,	2014			2013			Amount			%
	(dollars are in millions)
Net interest income (expense)......................................................................................	$	78		$	(14	)	$	92		*
Gain (loss) on own fair value option debt attributable to credit spread................	(46		)	53			(99		)	*
Other operating income................................................................................................	8			15			(7		)	(46.7	)
Total operating income.................................................................................................	40			54			(14		)	(25.9	)
Loan impairment charges..............................................................................................	-			-			-			-
Net operating income....................................................................................................	40			54			(14		)	(25.9	)
Operating expenses.......................................................................................................	28			22			6			27.3
Profit before tax..............................................................................................................	$	12		$	32		$	(20	)	(62.5	)%

							Increase (Decrease)
Six Months Ended June 30,	2014			2013			Amount			%
	(dollars are in millions)
Net interest income (expense)......................................................................................	$	65		$	(28	)	$	93		*
Gain (loss) on own fair value option debt attributable to credit spread................	(27		)	11			(38		)	*
Other operating income................................................................................................	14			40			(26		)	(65.0	)
Total operating income.................................................................................................	52			23			29			*
Loan impairment charges..............................................................................................	-			-			-			-
Net operating income	52			23			29			*
Operating expenses.......................................................................................................	53			43			10			23.3
Loss before tax...............................................................................................................	$	(1	)	$	(20	)	$	19		95.0	%

* Not meaningful.

Net interest income reflects an $87 million release of accrued interest related to uncertain tax positions which were settled with the taxing authorities in the second quarter of 2014. Excluding this item, profit (loss) before tax decreased during the three and six months ended June 30, 2014 primarily due to losses associated with changes in the fair value of our own debt for which fair value option was elected and related derivatives and increased operating expenses which reflects a favorable fringe rate adjustment in the prior year. The current year periods also reflect lower net revenues from low income housing tax credit investments as, due to the significant involvement required by the business to manage the investments, a fee arrangement is in place in 2014 to share the net revenue of the investments with CMB and GB&M.

Reconciliation of Segment Results As previously discussed, segment results are reported on an IFRSs basis. For segment reporting purposes, intersegment transactions have not been eliminated, and we generally account for transactions between segments as if they were with third parties. Also see Note 14, "Business Segments," in the accompanying consolidated financial statements for a reconciliation of our IFRSs segment results to U.S. GAAP consolidated totals.

Credit Quality

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

Allowance for Credit Losses Commercial loans are monitored on a continuous basis with a formal assessment completed, at a minimum, annually. As part of this process, a credit grade and Loss Given Default are assigned and an allowance is established for these loans based on a probability of default estimate associated with each credit grade under the allowance for credit losses methodology. Credit Review, an independent second line of defense function, provides an ongoing assessment of lending activities that includes independently assessing credit grades and Loss Given Default estimates. When it is deemed probable based upon known facts and circumstances that full interest and principal on an individual loan will not be collected in accordance with its contractual terms, the loan is considered impaired. An impairment reserve is then established based on the present value of expected future cash flows, discounted at the loan's original effective interest rate, or as a practical expedient, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Updated appraisals for collateral dependent loans are generally obtained only when such loans are considered troubled and the frequency of such updates are generally based on management judgment under the specific circumstances on a case-by-case basis. In addition, loss reserves on commercial loans are maintained to reflect our judgment of portfolio risk factors which may not be fully reflected in the reserve calculations.

Our credit grades for commercial loans align with U.S. regulatory risk ratings and are mapped to our probability of default master scale. These probability of default estimates are validated on an annual basis using back-testing of actual default rates and benchmarking of the internal ratings with external rating agency data like Standard and Poor's ratings and default rates. Substantially all appraisals in connection with commercial real estate loans are ordered by the independent real estate appraisal review unit at HSBC. The appraisal must be reviewed and accepted by this unit. For loans greater than $250,000, an appraisal is generally ordered when the loan is classified as Substandard as defined by the Office of the Comptroller of the Currency (the "OCC"). On average, it takes approximately four weeks from the time the appraisal is ordered until it is completed and the values accepted by HSBC's independent appraisal review unit. Subsequent provisions or charge-offs are completed shortly thereafter, generally within the quarter in which the appraisal is received.

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

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

For pools of homogeneous consumer receivables and certain small business loans which do not qualify as troubled debt restructures, probable losses are estimated using a roll rate migration analysis that estimates the likelihood that a loan will progress through the various stages of delinquency, or buckets, and ultimately charge-off based upon recent historical performance experience of other loans in our portfolio. This migration analysis incorporates estimates of the period of time between a loss occurring and the confirming event of its charge-off. This analysis considers delinquency status, loss experience and severity and takes into account whether loans are in bankruptcy or have been subject to account management actions, such as the re-age of accounts or modification arrangements. The allowance for credit losses on consumer receivables also takes into consideration the loss severity expected based on the underlying collateral, if any, for the loan in the event of default based on historical and recent trends which are updated monthly based on a rolling average of several months' data using the most recently available information and is typically in the range of 30-55 percent for first lien mortgage loans and 95-100 percent for second lien home equity loans. At June 30, 2014, approximately 1 percent of our second lien mortgages where the first lien mortgage is held or serviced by us and has a delinquency status of 90 days or more delinquent, were less than 90 days delinquent and not considered to be a troubled debt restructure or already recorded at fair value less costs to sell.

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

Our allowance for credit losses methodology and our accounting policies related to the allowance for credit losses are presented in further detail under the caption "Critical Accounting Policies and Estimates" and in Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," in our 2013 Form 10-K. Our approach toward credit risk management is summarized under the caption "Risk Management" in our 2013 Form 10-K. There have been no significant revisions to our policies or methodologies during the first half of 2014.

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

	June 30, 2014			March 31, 2014			December 31, 2013
	(dollars are in millions)
Allowance for credit losses........................................................................................................	$	624		$	574		$	606
Ratio of Allowance for credit losses to:
Loans:⁽¹⁾
Commercial.....................................................................................................................................	.7		%	.6		%	.6		%
Consumer:
Residential mortgages.............................................................................................................	0.9			1.0			1.2
Home equity mortgages..........................................................................................................	2.2			2.7			2.4
Credit card receivables............................................................................................................	5.7			6.6			5.9
Other consumer loans.............................................................................................................	2.3			2.7			2.5
Total consumer loans..............................................................................................................	1.3			1.4			1.6
Total................................................................................................................................................	.9		%	.8		%	.9		%
Net charge-offs⁽¹⁾⁽²⁾:
Commercial................................................................................................................................	1,367.9%			317.5		%	513.3		%
Consumer..................................................................................................................................	215.2			274.2			301.0
Total................................................................................................................................................	445.7		%	295.9		%	381.1		%
Nonperforming loans⁽¹⁾:
Commercial................................................................................................................................	375.5		%	246.4		%	118.5		%
Consumer..................................................................................................................................	24.8			26.3			28.3
Total................................................................................................................................................	58.2		%	50.6		%	46.1		%

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

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

See Note 5, "Allowance for Credit Losses," in the accompanying consolidated financial statements for a rollforward of credit losses by general loan categories for the three and six months ended June 30, 2014 and 2013.

The allowance for credit losses at June 30, 2014 increased $50 million or 9 percent as compared with March 31, 2014 and increased $18 million or 3 percent as compared with December 31, 2013, due to higher loss estimates in our commercial loan portfolio partially offset by lower loss estimates in our consumer loan portfolio.

Our commercial allowance for credit losses increased $75 million or 24 percent as compared with both March 31, 2014 and December 31, 2013 primarily due to a revision to certain estimates used in our commercial loan impairment calculation as discussed above. Excluding this item, our commercial allowance for credit losses remained higher due to increased levels of reserves for risk factors not fully reflected in the statistical reserve calculation, including emerging markets loan exposure, as well as higher allowances associated with loan growth. Partially offsetting these increases were continued improvements in economic and credit conditions which led to lower nonperforming loans and criticized asset levels and, in the year-to-date period, managed reductions in certain loan exposures and improvements in the circumstances of certain customer relationships.

Our consumer allowance for credit losses decreased $25 million or 9 percent as compared with March 31, 2014 and decreased $57 million or 19 percent as compared with December 31, 2013. The decreases in both periods were driven primarily by lower loss estimates in our residential mortgage loan portfolio due to an improvement in home prices and continued improvements in credit quality including lower delinquency levels and improvements in loan delinquency roll rates. These improvements were partially offset in the three month period by increased loss estimates associated with the remediation of certain mortgage servicing activities. Our residential mortgage loan allowance for credit losses in both periods reflects consideration of certain risk factors relating to trends such as recent portfolio performance as compared with average roll rates and economic uncertainty, including housing market trends and foreclosure timeframes. Also contributing to the decrease was a lower allowance for credit losses for our credit card portfolio due to improved economic conditions, including lower dollars of delinquency, improvements in delinquency roll rates and lower receivable levels. Reserve levels for all consumer loan categories however continue to be impacted by the slow pace of the economic recovery in the U.S. economy, including elevated unemployment rates and, as it relates to residential mortgage loans, a housing market which is in the early stages of recovery.

The allowance for credit losses as a percentage of total loans at June 30, 2014 increased as compared with March 31, 2014 and was flat as compared with December 31, 2013 for the reasons discussed above.

The allowance for credit losses as a percentage of net charge-offs increased as compared with March 31, 2014 largely due to lower dollars of commercial loan net charge-offs, while the overall allowance for credit losses increased. The allowance for credit losses as a percentage of net charge-offs increased as compared with December 31, 2013 driven by lower dollars of commercial loan net charge-offs which outpaced the increase in total allowance levels.

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

	Amount		% of Loans to Total Loans⁽¹⁾		Amount		% of Loans to Total Loans⁽¹⁾		Amount		% of Loans to Total Loans⁽¹⁾
	June 30, 2014				March 31, 2014				December 31, 2013
	(dollars are in millions)
Commercial⁽²⁾............................................................................................	$	383	73.5	%	$	308	72.4	%	$	308	71.6	%
Consumer:
Residential mortgages.......................................................................	149		22.3		156		23.1		186		23.4
Home equity mortgages....................................................................	42		2.7		52		2.8		49		3.0
Credit card receivables......................................................................	39		.9		45		1.0		50		1.3
Other consumer..................................................................................	11		.6		13		.7		13		.7
Total consumer...................................................................................	241		26.5		266		27.6		298		28.4
Total...........................................................................................................	$	624	100.0	%	$	574	100.0	%	$	606	100.0	%

⁽¹⁾Excluding loans held for sale.

⁽²⁾See Note 5, "Allowance for Credit Losses," in the accompanying consolidated financial statements for components of the commercial allowance for credit losses.

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

Reserves for Off-Balance Sheet Credit Risk We also maintain a separate reserve for credit risk associated with certain commercial off-balance sheet exposures, including letters of credit, unused commitments to extend credit and financial guarantees. The following table summarizes this reserve, which is included in other liabilities on the consolidated balance sheet. The related provision is recorded as a component of other expense within operating expenses.

	June 30, 2014		March 31, 2014	December 31, 2013

Off-balance sheet credit risk reserve............................................................................................	$	68	66	$	60

The increase in off-balance sheet reserves at June 30, 2014 as compared with both March 31, 2014 and December 31, 2013 largely reflects new customer activity and higher estimated exposures on certain facilities. Off-balance sheet exposures are summarized under the caption "Off-Balance Sheet Arrangements, Credit Derivatives and Other Contractual Obligations" in this MD&A.

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

	June 30, 2014			March 31, 2014			December 31, 2013
	(dollars are in millions)
Delinquent loans:
Commercial......................................................................................................................................	$	101		$	120		$	135
Consumer:
Residential mortgages...........................................................................................................	1,086			1,132			1,208
Home equity mortgages........................................................................................................	59			59			68
Total residential mortgages⁽¹⁾⁽²⁾...............................................................................................	1,145			1,191			1,276
Credit card receivables.............................................................................................................	15			19			21
Other consumer.........................................................................................................................	15			17			19
Total consumer..........................................................................................................................	1,175			1,227			1,316
Total..................................................................................................................................................	$	1,276		$	1,347		$	1,451
Delinquency ratio:
Commercial......................................................................................................................................	.19		%	.24		%	.28		%
Consumer:
Residential mortgages...........................................................................................................	6.73			7.10			7.59
Home equity mortgages........................................................................................................	3.08			3.04			3.38
Total residential mortgages⁽²⁾..................................................................................................	6.34			6.66			7.11
Credit card receivables.............................................................................................................	2.20			2.78			2.46
Other consumer.........................................................................................................................	2.78			3.11			3.32
Total consumer..........................................................................................................................	6.10			6.42			6.80
Total..................................................................................................................................................	1.76		%	1.93		%	2.14		%

⁽¹⁾At June 30, 2014, March 31, 2014 and December 31, 2013, residential mortgage loan delinquency includes $983 million, $1,041 million and $1,074 million, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less costs to sell, including $18 million, $22 million and $27 million, respectively, relating to loans held for sale.

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

	June 30, 2014			March 31, 2014			December 31, 2013
	(dollars are in millions)
Dollars of delinquent loans:
Interest-only loans.................................................................................................................	$	66		$	77		$	58
ARM loans.............................................................................................................................	302			323			304
Delinquency ratio:
Interest-only loans.................................................................................................................	1.81		%	2.09		%	1.59		%
ARM loans.............................................................................................................................	2.72			2.97			2.85

Compared with March 31, 2014, our two-months-and-over contractual delinquency ratio decreased 17 basis points driven by lower dollars of two-months-and-over contractual delinquency in both our commercial and consumer loan portfolios and higher outstanding loan balances primarily in our commercial loan portfolio. Our consumer loan two-month-and-over contractual delinquency ratio at June 30, 2014 decreased 32 basis points from March 31, 2014 primarily due to lower levels of residential mortgage loan delinquency and, to a lesser extent, credit card loan delinquency, driven by continued improvements in economic conditions, while total outstanding loan balances remained relatively flat. Residential mortgage loan delinquency levels however continue to be impacted by an elongated foreclosure process which has resulted in loans which would otherwise have been foreclosed and transferred to REO remaining in loan account and, consequently, in delinquency. Compared with March 31, 2014, our commercial two-months-and-over contractual delinquency ratio decreased 5 basis points due to continued improvements in the credit quality of the portfolio and higher outstanding loan balances.

Compared with December 31, 2013, our two-months-and-over contractual delinquency ratio declined 38 basis points driven by lower dollars of two-months-and-over contractual delinquency in both our commercial and consumer loan portfolios and higher outstanding loan balances primarily in our commercial loan portfolio. Our consumer loan two-month-and-over contractual delinquency ratio at June 30, 2014 decreased 70 basis points from December 31, 2013 primarily due to lower levels of residential mortgage loan delinquency and, to a lesser extent, credit card loan delinquency, driven by continued improvements in economic conditions, while total outstanding loan balances remained relatively flat. Compared with December 31, 2013, our commercial two-months-and-over contractual delinquency ratio decreased 9 basis points due to continued improvements in the credit quality of the portfolio, higher outstanding loan balances and reductions in certain loan exposures including the charge-off of certain client relationships.

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

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

	June 30, 2014			March 31, 2014			June 30, 2013
	(dollars are in millions)
Net Charge-off Dollars:
Commercial:
Construction and other real estate........................................................................................................	$	5		$	17		$	(8	)
Business and corporate banking.............................................................................................................	5			2			8
Global banking......................................................................................................................................	-			8			-
Other commercial.................................................................................................................................	(3		)	(3		)	(4		)
Total commercial....................................................................................................................................	7			24			(4		)
Consumer:
Residential mortgages.........................................................................................................................	14			14			10
Home equity mortgages......................................................................................................................	2			(1		)	11
Total residential mortgages...................................................................................................................	16			13			21
Credit card receivables..........................................................................................................................	10			10			10
Other consumer....................................................................................................................................	2			1			3
Total consumer.......................................................................................................................................	28			24			34
Total.......................................................................................................................................................	$	35		$	48		$	30
Net Charge-off Ratio:..........................................................................................................................
Commercial:
Construction and other real estate........................................................................................................	.21		%	.75		%	(.38		)%
Business and corporate banking.............................................................................................................	.12			.05			.26
Global banking......................................................................................................................................	-			.15			-
Other commercial.................................................................................................................................	(.41		)	(.40		)	(.52		)
Total commercial....................................................................................................................................	.05			.20			(.04		)
Consumer:
Residential mortgages.........................................................................................................................	.35			.36			.25
Home equity mortgages......................................................................................................................	.42			(.20		)	2.00
Total residential mortgages...................................................................................................................	.36			.30			.47
Credit card receivables..........................................................................................................................	5.91			5.87			4.90
Other consumer....................................................................................................................................	1.65			.81			2.05
Total consumer.......................................................................................................................................	.59			.51			.70
Total.......................................................................................................................................................	.20		%	.29		%	.19		%

Our net charge-off ratio as a percentage of average loans decreased 9 basis points for the quarter ended June 30, 2014 compared with the quarter ended March 31, 2014, due primarily to the sale or payoff of certain commercial exposures, largely in construction and other real estate and global banking, which resulted in higher commercial loan charge-offs in the prior quarter. This decrease was partially offset by an increase in consumer loan net charge-offs due primarily to the recovery of one large home equity mortgage loan exposure recorded in the prior quarter. Residential mortgage loan net charge-offs were flat as higher charge-offs associated with corporate advances were offset by lower charge-offs due to continued improvements in economic conditions.

Compared with the year-ago quarter, our net charge-off ratio as a percentage of average loans remained relatively flat as higher commercial loan charge-offs due to a higher level of recoveries reflected in the prior year were offset by lower charge-offs in consumer loans, driven by lower home equity mortgage charge-offs, reflecting the impact of improved credit quality, including lower delinquency levels experienced in prior quarters.

Nonperforming Assets Nonperforming assets consisted of the following:

	June 30, 2014			March 31, 2014			December 31, 2013
	(dollars are in millions)
Nonaccrual loans:
Commercial:
Real Estate:
Construction and land loans................................................................................................	$	17		$	32		$	44
Other real estate......................................................................................................................	47			62			122
Business and corporate banking...............................................................................................	28			21			21
Global banking.............................................................................................................................	-			-			65
Other commercial.........................................................................................................................	2			3			2
Total commercial..........................................................................................................................	94			118			254
Consumer:
Residential mortgages..............................................................................................................	879			912			949
Home equity mortgages...........................................................................................................	69			71			77
Total residential mortgages^(1)(2)(3)..............................................................................................	948			983			1,026
Total consumer loans..................................................................................................................	948			983			1,026
Nonaccrual loans held for sale.....................................................................................................	65			79			25
Total nonaccruing loans...............................................................................................................	$	1,107		1,180			$	1,305
Accruing loans contractually past due 90 days or more:
Commercial:
Business and corporate banking...............................................................................................	7			6			5
Other commercial.........................................................................................................................	1			1			1
Total commercial..........................................................................................................................	8			7			6
Consumer:
Credit card receivables................................................................................................................	11			14			14
Other consumer............................................................................................................................	11			13			14
Total consumer loans..................................................................................................................	22			27			28
Total accruing loans contractually past due 90 days or more...............................................	30			34			34
Total nonperforming loans...........................................................................................................	1,137			1,214			1,339
Other real estate owned.................................................................................................................	47			47			47
Total nonperforming assets.........................................................................................................	$	1,184		$	1,261		$	1,386
Allowance for credit losses as a percent of nonperforming loans⁽⁴⁾:
Commercial....................................................................................................................................	375.5		%	246.4		%	118.5		%
Consumer......................................................................................................................................	24.8			26.3			28.3

⁽¹⁾At June 30, 2014, March 31, 2014 and December 31, 2013, residential mortgage loan nonaccrual balances include $849 million, $853 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.

⁽⁴⁾Represents our commercial and consumer allowance for credit losses, as appropriate, divided by the corresponding outstanding balance of total nonperforming loans held for investment. Nonperforming loans include accruing loans contractually past due 90 days or more. Ratio excludes nonperforming loans associated with loan portfolios which are considered held for sale as these loans are carried at the lower of amortized cost or fair value.

Nonaccrual loans at June 30, 2014 decreased as compared with March 31, 2014 and December 31, 2013 due to lower levels of both commercial and consumer nonaccrual loans. Commercial nonaccrual loans decreased due primarily to the sale or payoff of certain commercial exposures as well as customer upgrades out of default outpacing new defaults. Our consumer nonaccrual loans also decreased compared with March 31, 2014 and December 31, 2013 driven by lower nonaccrual residential mortgage loans due to improved credit quality. Residential mortgage loan nonaccrual levels however continue to be impacted by an elongated foreclosure process as previously discussed. Accruing loans past due 90 days or more were relatively flat compared with March 31, 2014 and December 31, 2013.

Our policies and practices for problem loan management and placing loans on nonaccrual status are summarized in Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," in our 2013 Form 10-K.

See Note 4, "Loans," in the accompanying consolidated financial statements for information regarding impaired loans, including TDR Loans, as well as certain other commercial and consumer loan credit quality indicators.

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

Our loan portfolio includes the following types of loans:

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

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

The following table summarizes the balances of interest-only and ARM loans in our loan portfolios, including certain loans held for sale, at June 30, 2014 and December 31, 2013, respectively. Each category is not mutually exclusive and loans may appear in more than one category below.

	June 30, 2014		December 31, 2013
	(in millions)
Interest-only residential mortgage loans	$	3,645	$	3,643
ARM loans⁽¹⁾	11,101		10,684

⁽¹⁾ARM loan balances above exclude $4 million and $11 million of subprime residential mortgage loans held for sale at June 30, 2014 and December 31, 2013, respectively. During the remainder of 2014 and during 2015, approximately $143 million and $188 million, respectively, of the ARM loans will experience their first interest rate reset.

The following table summarizes the concentrations of first and second liens within the outstanding residential mortgage loan portfolio. Amounts in the table exclude residential mortgage loans held for sale of $38 million and $91 million at June 30, 2014 and December 31, 2013, respectively.

	June 30, 2014		December 31, 2013
	(in millions)
Closed end:
First lien..........................................................................................................................................................	$	16,097	$	15,826
Second lien.....................................................................................................................................................	123		137
Revolving:
Second lien.....................................................................................................................................................	1,790		1,874
Total......................................................................................................................................................................	$	18,010	$	17,837

Geographic Concentrations The following table reflects regional exposure at June 30, 2014 for certain loan portfolios:

	Commercial Construction and Other Real Estate Loans		Residential Mortgages and Home Equity Mortgages		Credit Card Receivables
New York State......................................................................................................	38.8	%	33.7	%	56.2	%
California................................................................................................................	18.3		32.6		9.0
North Central United States................................................................................	3.4		5.5		3.5
North Eastern United States, excluding New York State................................	13.0		9.4		12.4
Southern United States.......................................................................................	20.6		14.4		13.8
Western United States, excluding California....................................................	5.9		4.4		2.7
Others.....................................................................................................................	-		-		2.4
Total........................................................................................................................	100.0	%	100.0	%	100.0	%

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

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

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

• current market events or trends;

• country risk;

• maturity and liquidity of contracts;

• credit worthiness of the counterparties in the transaction;

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

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

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

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

	June 30, 2014		December 31, 2013
	(in millions)
Risk associated with derivative contracts:
Total credit risk exposure..................................................................................................................................	$	41,369	$	44,209
Less: collateral held against exposure.............................................................................................................	5,112		6,064
Net credit risk exposure.....................................................................................................................................	$	36,257	$	38,145

Liquidity and Capital Resources

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

During the first half of 2014, marketplace liquidity continued to remain available for most sources of funding. The prolonged period of low interest rates continues to put pressure on spreads earned on our deposit base.

On June 26, 2014, HSBC and HSBC Bank USA submitted is annual resolution plan jointly to the FRB and the Federal Deposit Insurance Corporation ("FDIC") as required under Dodd-Frank and a rule issued by those bank regulators relating to the resolution of bank holding companies with assets of $50 billion or more and a FDIC rule relating to the resolution of insured depository institutions with assets of $50 billion or more.

Interest Bearing Deposits with Banks totaled $23,946 million and $19,614 million at June 30, 2014 and December 31, 2013, respectively, which includes $22,240 million and $18,520 million, respectively, held with the Federal Reserve Bank. Balances will fluctuate from year to year depending upon our liquidity position at the time and our strategy for deploying such liquidity.

Federal Funds Sold and Securities Purchased under Agreements to Resell totaled $2,311 million and $2,119 million at June 30, 2014 and December 31, 2013, respectively. Balances will fluctuate from year to year depending upon our liquidity position at the time and our strategy for deploying such liquidity.

Short-Term Borrowings totaled $12,906 million and $19,135 million at June 30, 2014 and December 31, 2013, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on short-term borrowing trends.

Deposits totaled $115,521 million and $112,608 million at June 30, 2014 and December 31, 2013, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on deposit trends.

Long-Term Debt increased to $24,604 million at June 30, 2014 from $22,847 million at December 31, 2013. The following table presents the maturities of long-term debt at June 30, 2014, including secured financings and conduit facility renewals:

	(in millions)
2014.................................................................................................................................................................................................	$	1,846
2015.................................................................................................................................................................................................	4,812
2016.................................................................................................................................................................................................	1,591
2017.................................................................................................................................................................................................	2,722
2018.................................................................................................................................................................................................	3,069
Thereafter.......................................................................................................................................................................................	10,564
Total................................................................................................................................................................................................	$	24,604

The following table summarizes issuances and retirements of long-term debt during the six months ended June 30, 2014 and 2013:

Six Months Ended June 30,	2014			2013
	(in millions)
Long-term debt issued..............................................................................................................................................	$	3,887		$	2,875
Long-term debt repaid..............................................................................................................................................	(2,392		)	(3,289		)
Net long-term debt issued........................................................................................................................................	$	1,495		$	(414	)

See "Balance Sheet Review" in this MD&A for further analysis and discussion on long-term debt trends, including additional information on debt issued during the six months ended June 30, 2014.

Under our shelf registration statement on file with the SEC, we may issue debt securities or preferred stock. The shelf has no dollar limit, but the amount of debt outstanding is limited by the authority granted by the Board of Directors. At June 30, 2014, we were authorized to issue up to $21,000 million, of which $5,187 million was available. HSBC Bank USA also has a $40 billion Global Bank Note Program of which $15,805 million was available at June 30, 2014.

As a member of the FHLB, we have a secured borrowing facility which is collateralized by real estate loans and investment securities. At June 30, 2014 and December 31, 2013, long-term debt included $1,000 million under this facility. The facility also allows access to further borrowings of up to $5,077 million based upon the amount pledged as collateral with the FHLB.

Preferred Equity See Note 18, "Preferred Stock," in our 2013 Form 10-K for information regarding all outstanding preferred share issues.

Common Equity During the first half of 2014, we did not receive any cash capital contributions from HSBC North America Inc. ("HNAI") and we did not make any capital contributions to our subsidiary, HSBC Bank USA.

Selected Capital Ratios Capital amounts and ratios are calculated in accordance with banking regulations in effect as of June 30, 2014 and December 31, 2013. In managing capital, we develop targets for common equity Tier 1 capital to risk weighted assets, Tier 1 capital to risk weighted assets, Total capital to risk weighted assets and Tier 1 capital to average assets (this latter ratio, also known as the "leverage ratio"). Our targets may change from time to time to accommodate changes in the operating environment, regulatory requirements or other considerations such as those listed above.

The following table summarizes selected capital ratios for HSBC USA with detailed explanation below:

	June 30, 2014		December 31, 2013
Common equity Tier 1 capital to risk weighted assets⁽¹⁾.............................................................................	10.42	%	9.94	%
Tier 1 capital to risk weighted assets.............................................................................................................	11.56		11.65
Total capital to risk weighted assets..............................................................................................................	16.01		16.36
Tier 1 capital to average assets (leverage ratio)...........................................................................................	8.28		7.90
Total equity to total assets..............................................................................................................................	9.32		8.88

⁽¹⁾For December 31, 2013, the ratio presented is the Tier 1 common ratio calculated under Basel I.

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

Regulatory capital requirements are based on the amount of capital required to be held, as defined by regulations, and the amount of risk weighted assets, also calculated based on regulatory definitions. Economic Capital is a proprietary measure to estimate unexpected loss at the 99.95 percent confidence level over a 1-year time horizon. Economic Capital is compared to a calculation of available capital resources to assess capital adequacy as part of the ICAAP. In addition, Risk Adjusted Return On Economic Capital (RAROC) is computed for our businesses to allow for a comparison of return on risk.

As previously disclosed in our 2013 Form 10-K, 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 from 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 in the final rule. 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).

The Basel III final rule established an integrated regulatory capital framework to improve the quality and quantity of regulatory capital and introduced the "Standardized Approach" for risk weighted assets, which will replace the Basel 1 risk-based guidance for determining risk-weighted assets as of January 1, 2015. In addition to phasing in a complete replacement to the Basel I general risk-based capital rules, the Basel III final rule also builds on the "Advanced Approach" introduced by Basel II, incorporates certain changes to Basel 2.5 and implements certain other requirements of the Dodd-Frank Act.

The Advanced Approach introduced by Basel II includes an internal ratings based approach for credit risk and an advanced measurement approach for operational risk and is applicable for banking organizations with $250 billion or more in total consolidated assets or $10 billion or more of foreign exposures (referred to as "Advanced Approach" banking organizations, which includes banking organizations such as HSBC North America and HSBC Bank USA). Adoption of the Advanced Approach requires the approval of U.S. regulators. Advanced Approach banking organizations, including HSBC North America and HSBC Bank USA, are required to operate initially in a "parallel run" wherein they must report their risk-based capital ratios using risk-weighted assets under both Basel I (and in 2015, the Standardized Approach) as well as the Advanced Approach to their primary federal regulator, but publicly disclose only their capital ratios calculated using Basel I (or in 2015, the Standardized Approach) risk-weighted assets. Upon receiving approval to exit parallel run, Advanced Approach banking organizations would then publicly disclose their capital ratios calculated using Basel I (or in 2015, their Standardized Approach) and Advanced Approach risk weighted assets. Although we began a parallel run period in January 2010, it is unclear as to when approval from the appropriate regulators will be received in order to exit parallel run.

With regard to the elements of capital, the application of the Basel III final rule requires HSBC USA to phase trust preferred securities issued prior to May 19, 2010 out of Tier 1 capital by January 1, 2016, with 50 percent of these capital instruments includable in Tier 1 capital in 2014 and 25 percent includable in 2015. The trust preferred securities excluded from Tier 1 capital may be included fully in Tier 2 capital during those two years, but must be phased out of Tier 2 capital by January 1, 2022. We continue to consider options for redeeming our outstanding trust preferred securities which total $550 million at June 30, 2014. In addition, any nonconforming Tier 2 subordinated debt issued prior to May 19, 2010 is required to be phased out by January 1, 2016. As a result, approximately $200 million of our currently outstanding Tier 2 qualifying subordinated debt will be phased out of capital under the final rule. Also under the final rule, Tier 1 capital generally includes only noncumulative perpetual preferred stock, in addition to common stock, and the final rule removes the limitation on the amount of Tier 2 capital that may be recognized relative to Tier 1 capital.

In February 2014, the FRB adopted a final rule requiring enhanced supervision of the U.S. operations of non-U.S. banks such as HSBC. The rule requires certain large non-U.S. banks with significant operations in the United States, such as HSBC, to establish a single intermediate holding company ("IHC") to hold all of their U.S. bank and non-bank subsidiaries. The HSBC Group currently operates in the United States through such an IHC structure (i.e., HSBC North America), therefore, we do not expect this requirement will have a significant impact on our U.S. operations. HSBC North America is developing its IHC implementation plan to be submitted, as required, to the FRB by January 1, 2015. Under the final rule, IHCs, including HSBC North America and HSBC USA, will be subject to the Standardized Approach unless they apply to be subject to the Advanced Approach. IHCs will be subject to all other risk-based capital requirements, stress testing requirements, enhanced risk management standards and enhanced governance and stress testing requirements for liquidity management, as well as other prudential standards. Under the final rule, most of these requirements will become effective on July 1, 2016. The impact of the final rule is being reviewed.

As previously disclosed, U.S. bank holding companies with $50 billion or more in total consolidated assets, including HSBC North America, are required to submit annual capital plans for review. Under the capital plan rules, the FRB will evaluate bank holding companies annually on their capital adequacy, internal capital adequacy assessment process and plans for capital distributions, and will approve capital distributions only for companies that are able to demonstrate sufficient capital strength after making the capital distribution.

In addition, U.S. bank holding companies with $50 billion or more in total consolidated assets, including HSBC North America, are required to comply with the FRB's CCAR program, which includes annual supervisory DFAST conducted by the FRB, as well as semi-annual bank holding company-run DFAST. HSBC North America submitted its first CCAR capital plan and its annual company-run DFAST results in January 2014. In July 2014, HSBC North America submitted its mid-year company-run DFAST results. HSBC Bank USA is subject to the OCC's DFAST requirements, which require certain banks to conduct annual bank-run DFAST, and submitted its first DFAST results in January 2014. The company-run stress tests are forward looking exercises to assess the impact of hypothetical macroeconomic baseline, adverse and severely adverse scenarios provided by the FRB and the OCC for the annual exercise, and internally developed scenarios for both the annual and mid-cycle exercises, on the financial condition and capital adequacy of a bank-holding company or bank over a nine quarter planning horizon.

HSBC North America and HSBC Bank USA are required to disclose the results of their annual DFAST under the FRB and OCC's severely adverse stress scenario. HSBC North America is required to disclose the results of its mid-cycle DFAST under its internally developed severely adverse stress scenario. HSBC North America and HSBC Bank USA publicly disclosed their DFAST results, as required, in March 2014. The FRB also publicly disclosed its own DFAST and CCAR results in March 2014. HSBC North America will disclose its mid-cycle DFAST results in September 2014.

On March 26, 2014, the FRB informed HSBC North America, our indirect parent company, that it did not object to HSBC North America's capital actions, including payment of dividends on outstanding preferred stock and trust preferred securities of HSBC North America and its subsidiaries. The FRB informed HSBC North America that it did object to its capital plan submitted for the 2014 CCAR submission due to weaknesses in its capital planning processes. The FRB does not permit bank holding companies to disclose confidential supervisory information including the reason for an objection to a capital plan submitted for CCAR. HSBC North America is required to resubmit its capital plan, incorporating enhancements to its processes, by January 5, 2015, the due date for the next annual CCAR submission. Stress testing results are based solely on hypothetical adverse scenarios and should not be viewed or interpreted as forecasts of expected outcomes or capital adequacy or of the actual financial condition of HSBC North America. Capital planning and stress testing for HSBC North America may impact our future capital and liquidity.

In June 2014, U.S. regulators issued a proposal that would amend the CCAR capital planning and DFAST supervisory stress testing rules. This proposal would shift the start date of the annual capital plan and supervisory and company-run stress test cycles back by one calendar quarter beginning with the 2015-2016 capital plan and stress test cycles. The proposal would make certain other substantive changes to the capital plan and stress test regulations, including limiting a bank holding company's ability to make capital distributions if its actual capital issuances in that quarter were less than the amount indicated in the capital plan. We are reviewing the potential impact of the proposal on our capital planning and stress testing processes.

We and HSBC Bank USA are required to meet minimum capital requirements by our principal regulators. Risk-based capital amounts and ratios are presented in Note 15 , "Retained Earnings and Regulatory Capital Requirements," in the accompanying consolidated financial statements.

2014 Funding Strategy Our current estimate for funding needs and sources for 2014 are summarized in the following table.

	Actual January 1 through June 30, 2014		Estimated July 1 through December 31, 2014		Estimated Full Year 2014
	(in billions)
Funding needs:
Net loan growth......................................................................................................................	$	6	$	3	$	9
Long-term debt maturities.....................................................................................................	2		1		3
Total funding needs..................................................................................................................	$	8	$	4	$	12
Funding sources:
Liquidation of short-term investments................................................................................	$	4	$	4	$	8
Long-term debt issuance.......................................................................................................	4		-		4
Total funding sources...............................................................................................................	$	8	$	4	$	12

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

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

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

HSBC Bank USA is subject to significant restrictions imposed by federal law on extensions of credit to, and certain other "covered transactions" with HSBC USA and other affiliates. Covered transactions include loans and other extensions of credit, investments and asset purchases, and certain other transactions involving the transfer of value from a subsidiary bank to an affiliate or for the benefit of an affiliate. A bank's credit exposure to an affiliate as a result of a derivative, securities lending/borrowing or repurchase transaction is also subject to these restrictions. A bank's transactions with its non-bank affiliates are also required to be on arm's length terms. Certain Edge Act subsidiaries of HSBC Bank USA are limited in the amount of funds they can provide to other affiliates including their parent. Amounts above their level of invested capital have to be secured with U.S. government securities.

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

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

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

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

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

	Balance at June 30, 2014
	One Year or Less		Over One through Five Years		Over Five Years		Total		Balance at December 31, 2013
	(in millions)
Standby letters of credit, net of participations⁽¹⁾..........................	$	6,013	$	2,370	$	12	$	8,395	$	8,409
Commercial letters of credit.............................................................	421		176		-		597		528
Credit derivatives⁽²⁾...........................................................................	37,527		106,023		5,990		149,540		180,380
Other commitments to extend credit:
Commercial⁽³⁾...................................................................................	15,077		53,452		5,292		73,821		66,328
Consumer.........................................................................................	6,755		-		-		6,755		6,714
Total....................................................................................................	$	65,793	$	162,021	$	11,294	$	239,108	$	262,359

⁽¹⁾Includes $842 million and $865 million issued for the benefit of HSBC affiliates at June 30, 2014 and December 31, 2013, respectively.

⁽²⁾Includes $36,920 million and $34,856 million issued for the benefit of HSBC affiliates at June 30, 2014 and December 31, 2013, respectively.

⁽³⁾Includes $3,774 million and $3,763 million issued for the benefit of HSBC affiliates at June 30, 2014 and December 31, 2013, respectively.

Other Commitments to Extend Credit Other commitments to extend credit include arrangements whereby we are contractually obligated to extend credit in the form of loans, participations in loans, lease financing receivables, or similar transactions. Consumer commitments are comprised of certain unused MasterCard/Visa credit card lines, where we have the right to change terms or conditions upon notification to the customer, and commitments to extend credit secured by residential properties, where we have the right to change terms or conditions, for cause, upon notification to the customer. Commercial commitments comprise primarily those related to secured and unsecured loans and lines of credit and certain asset purchase commitments. In connection with our commercial lending activities, we provide liquidity support to Regency, a multi-seller asset backed commercial paper ("ABCP") conduit consolidated by our affiliate. See Note 16, "Variable Interest Entities," in the accompanying consolidated financial statements for additional information regarding ABCP conduits and our variable interests in them.

We provide liquidity support to Regency in the form of lines of credit or asset purchase agreements. Under the terms of these liquidity agreements, Regency may call upon us to lend money or to purchase certain assets in the event the conduit is unable or unwilling to issue or rollover maturing commercial paper. The maximum amount that we could be required to advance is generally limited to the lesser of the amount of outstanding commercial paper related to the supported transaction and the balance of the assets underlying that transaction adjusted by a funding formula that excludes defaulted and impaired assets. As a result, the maximum amount that we would be required to fund may be significantly less than the maximum contractual amount specified by the liquidity agreement.

The following tables present information on our liquidity facilities with Regency at June 30, 2014. The maximum exposure to loss presented in the first table represents the maximum contractual amount of loans and asset purchases we could be required to make under the liquidity agreements. This amount does not reflect the funding limits discussed above and also assumes that we suffer a total loss on all amounts advanced and all assets purchased from Regency. As such, we believe that this measure significantly overstates our expected loss exposure.

			Conduit Assets⁽¹⁾			Conduit Funding⁽¹⁾
Conduit Type	Maximum Exposure to Loss		Total Assets		Weighted Average Life (Months)	Commercial Paper		Weighted Average Life (Days)
	(dollars are in millions)
HSBC affiliate sponsored (multi-seller)....................................	$	2,354	$	1,459	16	$	1,460	12

⁽¹⁾The amounts presented represent only the specific assets and related funding supported by our liquidity facilities.

	Average Asset Mix		Average Credit Quality⁽¹⁾
Asset Class	Average Asset Mix		AAA		AA+/AA		A		A-		BB/BB-
Multi-seller conduit
Debt securities backed by:
Auto loans and leases...............................................	45	%	69	%	-	%	-	%	-	%	-	%
Trade receivables.......................................................	35		-		100		100		-		-
Credit card receivables..............................................	-		-		-		-		-		-
Equipment loans.........................................................	20		31		-		-		-		-
	100	%	100	%	100	%	100	%	-	%	-	%

⁽¹⁾Credit quality is based on Standard and Poor's ratings at June 30, 2014.

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

During the six months ended June 30, 2014, U.S. asset-backed commercial paper volumes continued to be stable as most major bank conduit sponsors continue to extend new financing to clients. Credit spreads in the multi-seller conduit market have also remained stable during the six months ended June 30, 2014 following a pattern that was prevalent across the U.S. credit markets.

The preceding tables do not include information on credit facilities that we previously provided to certain Canadian multi-seller ABCP conduits that have been subject to restructuring agreements as part of the Montreal Accord. As part of the enhanced collateral pool established for the restructuring, at December 31, 2013, we had provided a CAD $307 million Margin Funding Facility to a Master Asset Vehicle, which was undrawn and expires in July 2017. At June 30, 2014, the undrawn facility was reduced to CAD $127 million.

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

Fair Value

Fair value measurement accounting principles require a reporting entity to take into consideration its own credit risk in determining the fair value of financial liabilities. The incorporation of our own credit risk accounted for an increase of $39 million and a decrease of $6 million in the fair value of financial liabilities during the three and six months ended June 30, 2014, respectively, compared with decreases of $107 million and $98 million during the prior year periods.

Net income volatility arising from changes in either interest rate or credit components of the mark-to-market on debt designated at fair value and related derivatives affects the comparability of reported results between periods. Accordingly, the gain (loss) on debt designated at fair value and related derivatives during the six months ended June 30, 2014 should not be considered indicative of the results for any future period.

Control Over Valuation Process and Procedures We have established a control framework which is designed to ensure that fair values are either determined or validated by a function independent of the risk-taker. See Note 18, "Fair Value Measurements" in the accompanying consolidated financial statements for further details on our valuation control framework.

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

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

• the level of bid-ask spreads;

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

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

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

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

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

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

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

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

Level 3 inputs are unobservable estimates that management expects market participants would use to determine the fair value of the asset or liability. That is, Level 3 inputs incorporate market participants' assumptions about risk and the risk premium required by market participants in order to bear that risk. We develop Level 3 inputs based on the best information available in the circumstances. As of June 30, 2014 and December 31, 2013, our Level 3 instruments included the following: collateralized debt obligations ("CDOs") for which there is a lack of pricing transparency due to market illiquidity, certain structured deposits as well as certain structured credit and structured equity derivatives where significant inputs (e.g., volatility or default correlations) are not observable, credit default swaps with certain monoline insurers where the deterioration in the creditworthiness of the counterparty has resulted in significant adjustments to fair value, U.S. subprime mortgage loans and subprime related asset-backed securities, impaired commercial loans, mortgage servicing rights, and derivatives referenced to illiquid assets of less desirable credit quality. See Note 18, "Fair Value Measurements" in the accompanying consolidated financial statements for additional information on Level 3 inputs.

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

We value uncollateralized derivatives by discounting expected future cash flows at a benchmark interest rate, typically Libor or its equivalent. This approach has historically been adopted across the industry, and has therefore been an appropriate basis for fair value. As previously disclosed in our 2013 Form 10-K, we and other industry participants are currently considering whether this approach appropriately reflects the manner in which the derivatives are funded, which may occur at rates other than interbank offer rates. No consensus has yet emerged on how such funding should be reflected in the fair value measurement for uncollateralized derivatives. In the future, and possibly in the second half of 2014, we may adopt a "funding fair value adjustment" to reflect funding of uncollateralized derivatives at rates other than interbank offer rates.

Transfers Between Level 1 and Level 2 Measurements During the three and six months ended June 30, 2014 and 2013, there were no transfers between Level 1 and Level 2 measurements.

Level 3 Measurements The following table provides information about Level 3 assets/liabilities in relation to total assets/liabilities measured at fair value as of June 30, 2014 and December 31, 2013.

	June 30, 2014			December 31, 2013
	(dollars are in millions)
Level 3 assets⁽¹⁾⁽²⁾...............................................................................................................................................	$	3,851		$	3,831
Total assets measured at fair value⁽³⁾..............................................................................................................	138,678			158,834
Level 3 liabilities.................................................................................................................................................	3,217			3,751
Total liabilities measured at fair value⁽¹⁾..........................................................................................................	91,331			97,540
Level 3 assets as a percent of total assets measured at fair value.............................................................	2.8		%	2.4		%
Level 3 liabilities as a percent of total liabilities measured at fair value.....................................................	3.5		%	3.8		%

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

⁽²⁾Includes $3,803 million of recurring Level 3 assets and $48 million of non-recurring Level 3 assets at June 30, 2014. Includes $3,667 million of recurring Level 3 assets and $164 million of non-recurring Level 3 assets at December 31, 2013.

⁽³⁾Includes $138,457 million of assets measured on a recurring basis and $221 million of assets measured on a non-recurring basis at June 30, 2014. Includes $158,149 million of assets measured on a recurring basis and $685 million of assets measured on a non-recurring basis at December 31, 2013.

Significant Changes in Fair Value for Level 3 Assets and Liabilities

Derivative Assets and Counterparty Credit Risk We have entered into credit default swaps with monoline insurers to hedge our credit exposure in certain asset-backed securities and synthetic CDOs. We made $4 million negative and $12 million positive credit risk adjustments to the fair value of our credit default swap contracts during the three and six months ended June 30, 2014, respectively, compared with positive adjustments of $21 million and $41 million during the three and six months ended June 30, 2013, respectively. These adjustments to fair value are recorded in trading revenue in the consolidated statement of income. We have recorded a cumulative credit adjustment reserve of $52 million and $64 million against our monoline exposure at June 30, 2014 and December 31, 2013, respectively. The fair value of our monoline exposure net of cumulative credit adjustment reserves equaled $233 million and $273 million at June 30, 2014 and December 31, 2013, respectively.

Loans As of June 30, 2014 and December 31, 2013, we have classified $23 million and $46 million, respectively, of subprime residential mortgage loans held for sale as a non-recurring Level 3 financial asset. These mortgage loans are accounted for on a lower of amortized cost or fair value basis. Based on our assessment, we recorded gains of less than a million during the three and six months ended June 30, 2014, respectively, compared with gains of $5 million and $7 million during the three and six months ended June 30, 2013, respectively. The changes in fair value are recorded in other revenues in the consolidated statement of income.

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.

See Note 18, "Fair Value Measurements," in the accompanying consolidated financial statements for information on additions to and transfers into (out of) Level 3 measurements during the three and six months ended June 30, 2014 and 2013 as well as for further details including the classification hierarchy associated with assets and liabilities measured at fair value.

Assets Underlying Asset-backed Securities The following tables summarize the types of assets underlying our asset-backed securities as well as certain collateralized debt obligations held as of June 30, 2014:

		Total
		(in millions)
Rating of securities:⁽¹⁾	Collateral type:
AAA..................................................	Commercial mortgages.........................................................................................	$	86
	Residential mortgages - Alt A.............................................................................	89
	Residential mortgages - Subprime.....................................................................	1
	Total AAA.............................................................................................................	176
AA.....................................................	Other.......................................................................................................................	42
A.........................................................	Residential mortgages - Alt A.............................................................................	11
	Residential mortgages - Subprime.....................................................................	58
	Home equity - Alt A.............................................................................................	94
	Student loans........................................................................................................	81
	Other.......................................................................................................................	52
	Total A....................................................................................................................	296
BBB....................................................	Residential mortgages - Alt A.............................................................................	8
	Collateralized debt obligations...........................................................................	260
	Total BBB...............................................................................................................	268
CCC....................................................	Residential mortgages - Subprime.....................................................................	5
Unrated..............................................	Residential mortgages - Alt A.............................................................................	1
		$	788

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

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

The unobservable input parameters selected are subject to the internal valuation control processes and procedures. When we perform a test of all the significant input parameters to the extreme values within the range at the same time, it could result in an increase of the overall fair value measurement of approximately $35 million or a decrease of the overall fair value measurement of approximately $44 million as of June 30, 2014. The effect of changes in significant unobservable input parameters are primarily driven by mortgage servicing rights, certain asset-backed securities including CDOs, and the uncertainty in determining the fair value of credit derivatives executed against monoline insurers.

Risk Management

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

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

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

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

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

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

• Compliance risk is the risk that we fail to observe the letter and spirit of all relevant laws, codes, rules, regulations and standards of good market practice causing us to incur fines, penalties and damage to our business and reputation;

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

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

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

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

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

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

See "Risk Management" in MD&A in our 2013 Form 10-K for a more complete discussion of the objectives of our risk management system as well as our risk management policies and practices. Our risk management process involves the use of various simulation models. We believe that the assumptions used in these models are reasonable, but actual events may unfold differently than what is assumed in the models. Consequently, model results may be considered reasonable estimates, with the understanding that actual results may differ significantly from model projections.

Credit Risk Management Credit risk is the potential that a borrower or counterparty will default on a credit obligation, as well as the impact on the value of credit instruments due to changes in the probability of borrower default. Credit risk includes risk associated with cross-border exposures. There have been no material changes to our approach towards credit risk management since December 31, 2013. See "Risk Management" in MD&A in our 2013 Form 10-K for a more complete discussion of our approach to credit risk.

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

• loan portfolios;

• investment portfolios;

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

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

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

Liquidity Risk Management There have been no material changes to our approach towards liquidity risk management since December 31, 2013. See "Risk Management" in MD&A in our 2013 Form 10-K for a more complete discussion of our approach to liquidity risk. Although our overall approach to liquidity management has not changed, we continuously monitor the impact of market events on our liquidity positions and continue to adapt our liquidity framework to reflect market events and the evolving regulatory landscape and view as to best practices. Current regulatory initiatives encourage banks to retain a portfolio of extremely high quality liquid assets. As such, we are maintaining a large portfolio of high quality sovereign and sovereign guaranteed securities.

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

In 2009, the Basel Committee proposed two minimum liquidity metrics for limiting risk: the liquidity coverage ratio ("LCR"), designed to be a short-term measure to ensure banks have sufficient high-quality liquid assets to cover net stressed cash outflows over the next 30 days, and the net stable funding ratio ("NSFR"), which is a longer term measure with a 12-month time horizon to ensure a sustainable maturity structure of assets and liabilities. The ratios are subject to an observation period and are expected to become established standards, subject to phase-in periods, by 2015 and 2018, respectively.

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

In the first quarter of 2014, the FRB issued rules pursuant to section 165 of the Dodd-Frank Act, which established enhanced prudential standards for U.S. bank holding companies and foreign banking organizations with total global consolidated assets of $50 billion or more. The rules complement the capital planning, resolution planning, and stress testing requirements that have been previously finalized. The rules require bank holding companies, such as HSBC North America, to comply with various liquidity risk management standards and to maintain a liquidity buffer of unencumbered highly liquid assets based on the results of internal liquidity stress testing. Bank holding companies are also required to meet heightened liquidity requirements, which include qualitative liquidity standards, cash flow projections, internal liquidity stress tests, and liquidity buffer requirements by January 1, 2015. HSBC North America is developing plans to meet the standard and we do not expect a significant impact to our business model. From July 1, 2016, HSBC North America will be treated as an IHC owned by a foreign banking organization. This transition is not expected to have a significant impact on our U.S. operations or change our liquidity management policies. HSBC North America is required to submit its IHC implementation plan to the FRB by January 1, 2015.

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

Our ability to regularly attract wholesale funds at a competitive cost is enhanced by strong ratings from the major credit ratings agencies. The following table reflects the long and short-term debt ratings we and HSBC Bank USA maintained at June 30, 2014:

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

(1) Dominion Bond Rating Service.

On February 6, 2014, Standard and Poor's published a request for comment regarding proposed revisions to their treatment of Bank and Prudentially Regulated Finance Company Hybrid Capital Instruments. The adoption of any such revisions may unfavorably impact the ratings of our preferred stock, trust preferred securities and subordinated debt.

As of June 30, 2014, there were no pending actions in terms of changes to ratings on the debt of HSBC USA or HSBC Bank USA from any of the rating agencies.

Interest Rate Risk Management Various techniques are utilized to quantify and monitor risks associated with the repricing characteristics of our assets, liabilities and derivative contracts. Our approach to managing interest rate risk is summarized in MD&A in our 2013 Form 10-K under the caption "Risk Management". There have been no material changes to our approach towards interest rate risk management since December 31, 2013.

Present value of a basis point ("PVBP) is the change in value of the balance sheet for a one basis point upward movement in all interest rates. The following table reflects the PVBP position at June 30, 2014 and December 31, 2013:

	June 30, 2014		December 31, 2013
	(in millions)
Institutional PVBP movement limit..................................................................................................................	$	8.0	$	8.0
PVBP position at period end.............................................................................................................................	2.1		6.8

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

	June 30, 2014					December 31, 2013
	Amount			%		Amount			%
	(dollars are in millions)
Projected change in net interest income (reflects projected rate movements on July 1 and January 1):
Change resulting from a gradual 100 basis point increase in the yield curve................	$	39		2		$	(5	)	-
Change resulting from a gradual 100 basis point decrease in the yield curve...............	(94		)	(4	)	(68		)	(3	)
Change resulting from a gradual 200 basis point increase in the yield curve................	46			2		(43		)	(2	)
Change resulting from a gradual 200 basis point decrease in the yield curve...............	(188		)	(9	)	(137		)	(6	)
Other significant scenarios monitored (reflects projected rate movements on July 1 and January 1):
Change resulting from an immediate 100 basis point increase in the yield curve..........	75			3		(7		)	-
Change resulting from an immediate 100 basis point decrease in the yield curve.........	(175		)	(8	)	(109		)	(5	)
Change resulting from an immediate 200 basis point increase in the yield curve..........	128			6		(39		)	(2	)
Change resulting from an immediate 200 basis point decrease in the yield curve.........	(310		)	(14	)	(257		)	(12	)

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

Capital Risk/Sensitivity of Other Comprehensive Income Large movements of interest rates could directly affect some reported capital balances and ratios. The mark-to-market valuation of available-for-sale securities is credited on a tax effected basis to accumulated other comprehensive income (loss). This valuation mark is included in two important accounting based capital ratios: tangible common equity to tangible assets and tangible common equity to risk weighted assets. Under the final rule adopting the Basel III regulatory capital reforms, the valuation mark will be included in common equity Tier 1 capital and the impact of this change for HSBC USA is being assessed along with the other Basel III changes being introduced. As of June 30, 2014, we had an available-for-sale securities portfolio of approximately $44,778 million with a positive mark-to-market of $471 million included in tangible common equity of $13,641 million. An increase of 25 basis points in interest rates of all maturities would lower the mark-to-market by approximately $219 million to a net gain of $252 million with the following results on our tangible capital ratios.

	June 30, 2014				December 31, 2013
	Actual		Proforma⁽¹⁾		Actual		Proforma⁽¹⁾
Tangible common equity to tangible assets...................................................	7.56	%	7.49	%	7.28	%	7.20	%
Tangible common equity to risk weighted assets.........................................	10.39		10.29		10.82		10.69

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

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

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

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

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

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

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

The following table summarizes trading VAR for the six months ended June 30, 2014:

	June 30, 2014		Six Months Ended June 30, 2014						December 31, 2013
	June 30, 2014		Minimum		Maximum		Average		December 31, 2013
	(in millions)
Total trading........................................................................	$	8	$	6	$	12	$	8	$	9
Foreign exchange................................................................	5		4		8		6		7
Interest rate directional and credit spread......................	7		7		14		9		10

The following table summarizes the frequency distribution of daily market risk-related revenues for trading activities during the six months ended June 30, 2014. Market risk-related trading revenue excludes certain items such as fees, commissions, fair value adjustments, net interest income and intra-day trading revenues. Analysis of the gain (loss) data for the six months ended June 30, 2014 shows that the largest daily gain was $6 million and the largest daily loss was $4 million.

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

Below

$(5)

to $0

to $5

to $10

Over

$10

(dollars are in millions)

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

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

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

The following table summarizes non-trading VAR for the six months ended June 30, 2014, assuming a 99 percent confidence level for a two-year observation period and a one-day "holding period":

	June 30, 2014		Six Months Ended June 30, 2014						December 31, 2013
	June 30, 2014		Minimum		Maximum		Average		December 31, 2013
	(in millions)
Total Accrual VAR..............................................................	$	56	$	56	$	100	$	64	$	104

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

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

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

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

	June 30, 2014			December 31, 2013
	(in millions)
Projected change in net market value of hedged MSRs portfolio (reflects projected rate movements on July 1 and January 1):
Value of hedged MSRs portfolio..................................................................................................................	$	186		$	227
Change resulting from an immediate 50 basis point decrease in the yield curve:
Change limit (no worse than)...................................................................................................................	(10		)	(20		)
Calculated change in net market value...................................................................................................	(1		)	(2		)
Change resulting from an immediate 50 basis point increase in the yield curve:
Change limit (no worse than)...................................................................................................................	(4		)	(8		)
Calculated change in net market value...................................................................................................	1			3
Change resulting from an immediate 100 basis point increase in the yield curve:
Change limit (no worse than)...................................................................................................................	(6		)	(12		)
Calculated change in net market value...................................................................................................	3			6

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

The following table summarizes the frequency distribution of the weekly economic value of the MSR asset during the six months ended June 30, 2014. This includes the change in the market value of the MSR asset net of changes in the market value of the underlying hedging positions used to hedge the asset. The changes in economic value are adjusted for changes in MSR valuation assumptions that were made during the course of the year.

Ranges of mortgage economic value from market risk-related activities

Below

$(2)

to $0

to $2

to $4

Over

(dollars are in millions)

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

Model Risk Management In order to manage the risks arising out of the use of incorrect or misused model output or reports, a comprehensive Model Governance framework has been established that provides oversight and challenge to all models across HSBC North America. This framework includes a HSBC North America Model Standards Policy that was enhanced during the second quarter of 2014 and aligns with model risk management regulations. Model governance is managed through HSBC's global Model Oversight Committee ("MOC") structure, with business and functional MOCs in HSBC North America reporting into corresponding global MOCs. Materiality levels of models are maintained through the HSBC North America Model Standards Policy. A complete inventory of all HSBC North America models is maintained and is being updated in line with recent policy enhancements.

There has been no other significant changes in our approach to model risk management since December 31, 2013.

Operational Risk There have been no material changes to our approach toward operational risk since December 31, 2013.

Compliance Risk There have been no material changes to our approach toward compliance risk since December 31, 2013.

Fiduciary Risk There have been no material changes to our approach toward fiduciary risk since December 31, 2013.

Reputational Risk There have been no material changes to our approach toward reputational risk since December 31, 2013.

Strategic Risk There have been no material changes to our approach toward strategic risk since December 31, 2013.

Security and Fraud Risk There have been no material changes to our approach toward security and fraud risk since December 31, 2013.

Model Risk There have been no material changes to our approach toward model risk since December 31, 2013.

Pension Risk There have been no material changes to our approach toward pension risk since December 31, 2013.

CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES

The following tables summarize the quarter-to-date average daily balances of the principal components of assets, liabilities and shareholders' equity together with their respective interest amounts and rates earned or paid, presented on a taxable equivalent basis. Net interest margin is calculated by dividing annualized net interest income by the average interest earning assets from which interest income is earned. Loan interest for the three and six months ended June 30, 2014 included fees of $15 million and $34 million, respectively, compared with fees of $19 million and $43 million during the three and six months ended June 30, 2013, respectively.

Three Months Ended June 30,	2014								2013
	Average Balance			Interest			Rate⁽¹⁾		Average Balance			Interest		Rate⁽¹⁾
	(dollars are in millions)
Assets
Interest bearing deposits with banks...................................................	$	27,229		$	17		.26	%	$	23,168		$	14	.26	%
Federal funds sold and securities purchased under resale agreements....	1,525			3			.69		1,862			2		.37	%
Trading assets....................................................................................	12,060			65			2.14		10,524			27		1.04
Securities...........................................................................................	48,183			198			1.65		57,794			230		1.60
Loans:
Commercial....................................................................................	52,156			295			2.27		45,421			295		2.60
Consumer:
Residential mortgages................................................................	16,019			136			3.43		16,031			140		3.49
Home equity mortgages.............................................................	1,928			16			3.35		2,197			18		3.27
Credit cards................................................................................	677			17			10.07		817			17		8.45
Other consumer.........................................................................	545			7			5.30		649			8		4.67
Total consumer...............................................................................	19,169			176			3.71		19,694			183		3.72
Total loans......................................................................................	71,325			471			2.65		65,115			478		2.94
Other.................................................................................................	3,314			12			1.29		2,847			11		1.49
Total interest earning assets...............................................................	163,636			$	766		1.88	%	161,310			$	762	1.89	%
Allowance for credit losses.................................................................	(559		)						(573		)
Cash and due from banks....................................................................	938								1,133
Other assets.......................................................................................	21,173								22,032
Total assets........................................................................................	$	185,188							$	183,902
Liabilities and Shareholders' Equity
Deposits in domestic offices:
Savings deposits..............................................................................	$	43,049		$	13		.12	%	$	43,964		$	18	.16	%
Other time deposits.........................................................................	22,476			21			.38		19,942			36		.71
Deposits in foreign offices:
Foreign banks deposits....................................................................	6,760			1			.07		7,183			1		.07
Other interest bearing deposits........................................................	5,894			1			.07		7,432			1		.08
Total interest bearing deposits...........................................................	78,179			36			.19		78,521			56		.28
Short-term borrowings.......................................................................	25,306			14			.22		16,688			8		.20
Long-term debt..................................................................................	22,426			152			2.72		21,997			166		3.01
Total interest bearing deposits and debt..............................................	125,911			202			.64		117,206			230		.78
Tax liabilities.....................................................................................	264			(113		)	(172.05	)	504			9		7.76
Total interest bearing liabilities..........................................................	126,175			89			.28		117,710			239		.81
Net interest income/Interest rate spread				$	677		1.60	%				$	523	1.08	%
Noninterest bearing deposits..............................................................	29,728								30,853
Other liabilities..................................................................................	12,440								17,554
Total shareholders' equity..................................................................	16,845								17,785
Total liabilities and shareholders' equity............................................	$	185,188							$	183,902
Net interest margin on average earning assets....................................							1.66	%						1.30	%
Net interest income to average total assets........................................							1.46	%						1.14	%

Six Months Ended June 30,	2014								2013
	Average Balance			Interest			Rate⁽¹⁾		Average Balance			Interest		Rate⁽¹⁾
	(dollars are in millions)
Assets
Interest bearing deposits with banks...................................................	$	24,446		$	31		.26	%	$	20,292		$	26	.26	%
Federal funds sold and securities purchased under resale agreements....	1,387			5			.65		1,886			4		.43
Trading assets....................................................................................	12,319			113			1.84		10,991			51		.93
Securities...........................................................................................	52,124			409			1.58		60,107			463		1.55
Loans:
Commercial....................................................................................	50,819			582			2.31		44,375			568		2.58
Consumer:
Residential mortgages................................................................	15,988			272			3.43		15,895			286		3.62
Home equity mortgages.............................................................	1,949			33			3.40		2,237			37		3.30
Credit cards................................................................................	687			34			10.08		794			35		8.84
Other consumer.........................................................................	551			14			5.21		648			16		5.06
Total consumer...............................................................................	19,175			353			3.72		19,574			374		3.85
Total loans......................................................................................	69,994			935			2.70		63,949			942		2.97
Other.................................................................................................	3,436			22			1.24		3,034			21		1.43
Total interest earning assets...............................................................	163,706			$	1,515		1.87	%	160,259			$	1,507	1.90	%
Allowance for credit losses.................................................................	(575		)						(603		)
Cash and due from banks....................................................................	949								1,130
Other assets.......................................................................................	21,207								23,494
Total assets........................................................................................	$	185,287							$	184,280
Liabilities and Shareholders' Equity
Deposits in domestic offices:
Savings deposits..............................................................................	$	43,025		$	26		.12	%	$	44,262		$	37	.17	%
Other time deposits.........................................................................	20,761			41			.40		20,492			56		.55
Deposits in foreign offices:
Foreign banks deposits....................................................................	7,431			2			.06		7,433			3		.07
Other interest bearing deposits........................................................	5,667			2			.08		6,759			3		.09
Total interest bearing deposits...........................................................	76,884			71			.19		78,946			99		.25
Short-term borrowings.......................................................................	26,082			23			.18		16,442			17		.21
Long-term debt..................................................................................	22,620			322			2.87		22,036			333		3.04
Total interest bearing deposits and debt..............................................	125,586			416			.67		117,424			449		.77
Tax liabilities.....................................................................................	347			(101		)	(58.68	)	495			25		10.26
Total interest bearing liabilities..........................................................	125,933			315			.50		117,919			474		.81
Net interest income/Interest rate spread				$	1,200		1.37	%				$	1,033	1.09	%
Noninterest bearing deposits..............................................................	29,952								30,983
Other liabilities..................................................................................	12,630								17,577
Total shareholders' equity..................................................................	16,772								17,801
Total liabilities and shareholders' equity............................................	$	185,287							$	184,280
Net interest margin on average earning assets....................................							1.48	%						1.30	%
Net interest income to average total assets........................................							1.31	%						1.13	%

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting There has been no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

See "Litigation and Regulatory Matters" in Note 19, "Litigation and Regulatory Matters," in the accompanying consolidated financial statements beginning on page 79 for our legal proceedings disclosure, which is incorporated herein by reference.

Item 5. Other Information

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

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

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

The HSBC Group has 11 loans outstanding to an Iranian petrochemical and energy company. These loans are supported by the official Export Credit Agencies of the following countries: the United Kingdom, France, Germany, Spain, The Netherlands, South Korea and Japan. The HSBC Group continues to seek repayments from the company under the existing loans in accordance with the original maturity profiles. All repayments made by the Iranian company have received a license or an authorization from relevant authorities. Repayments have been received under a number of the loans in the second quarter of 2014.

Bank Melli and Bank Saderat acted as sub-participants in two of the aforementioned loans. The repayments due to these banks under the loan agreements were paid into frozen accounts under licenses or authorizations from relevant European governments, although no such payments were made in the second quarter of 2014.

In 2002, the HSBC Group provided a loan to Bank Tejarat with a guarantee from the Government of Iran to fund the construction of a petrochemical plant undertaken by a U.K. contractor. This loan was supported by the U.K. Export Credit Agency and is administered under license from the relevant European Government. This loan has now matured, but claims for non-payment are still being processed with the UK Export Credit Agency.

The HSBC Group also maintains sub-participations in loans provided by other international banks to Bank Tejarat and Bank Mellat with guarantees from the Government of Iran. In relation to Bank Mellat, the HSBC Group has two sub-participations, which were supported by the Export Credit Agencies of the Netherlands and Spain. Both of the facilities have matured. In relation to Bank Tejarat, the HSBC Group has one sub-participation supported by the Export Credit Agency of Italy, which has also has matured. The payments due under the sub-participations have not been received from Bank Mellat or Bank Tejarat and claims are being processed with the relevant European Export Credit Agencies. Licenses and relevant authorizations have been obtained from the competent authorities of the European Union in respect of the transactions.

Estimated gross revenue to the HSBC Group generated by these loans in repayment for the second quarter of 2014, which includes interest and fees, was approximately $640,000. Estimated net profit for the HSBC Group during the second quarter of 2014 was approximately $388,000. While the HSBC Group intends to continue to seek repayment under the existing loans, it does not intend to extend any new loans.

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

The HSBC Group has worked with relevant regulatory authorities to obtain licenses where required and ensure compliance with laws and regulations while seeking to cancel the guarantees and counter indemnities. None were canceled during the second quarter of 2014 and approximately 20 remain outstanding.

There was no measurable gross revenue to the HSBC Group for the second quarter of 2014. The HSBC Group does not allocate direct costs to fees and commissions and, therefore, has not disclosed a separate profits measure. The HSBC Group is seeking to cancel all relevant guarantees and does not intend to provide any new guarantees involving Iran.

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

Ÿ The HSBC Group maintains a frozen account in the U.K. for an Iranian-owned, U.K.-regulated financial institution. In April 2007, the U.K. government issued a license to allow the HSBC Group to handle certain transactions (operational payments and settlement of pre-sanction transactions) for this institution. In December 2013, the U.K. government issued a new license to allow the HSBC Group to deposit certain check payments. There was some licensed activity in the second quarter of 2014.

Ÿ The HSBC Group has acted during the second quarter of 2014 as the trustee and administrator for a pension scheme involving four employees of a U.S.-sanctioned Iranian bank in Hong Kong. Under the rules of these schemes, the HSBC Group accepts contributions from the Iranian bank each month and allocates the funds into the pension accounts of the four Iranian bank employees. The HSBC Group runs and operates the pension scheme in accordance with Hong Kong laws and regulations. During the second quarter of 2014, notices of resignation were received for two of the employees.

• In 2010, the HSBC Group closed its representative office in Iran. The HSBC Group maintains a local account with an Iranian bank in Tehran in order to facilitate residual activity related to the closure. The HSBC Group has been authorized by the U.S. Government (and by relevant non-U.S. regulators) to make these types of payments in connection with the liquidation and deregistration of the representative office in Tehran. In the second quarter of 2014, the HSBC Group initiated payments of approximately $22,000 from this account to pay legal and administrative related expenses associated with the closure.

Estimated gross revenue to the HSBC Group in the second quarter of 2014 for all Iranian bank-related activity described in this section, which includes fees and/or commissions, was approximately $109,000. The HSBC Group does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profits measure. The HSBC Group intends to continue to wind down this Iranian bank-related activity and not enter into any new such activity.

Activity related to U.S. Executive Order 13224 The HSBC Group maintains a frozen personal account for an individual sanctioned under Executive Order 13224, and by the U.K. and the U.N. Security Council. Activity on this account in the second quarter of 2014 was permitted by a license issued by the U.K. There was no measurable gross revenue or net profits generated to the HSBC Group in the second quarter of 2014.

Activity related to U.S. Executive Order 13382 The HSBC Group held an account for a customer in the Middle East who was sanctioned under Executive Order 13382 in the first quarter of 2014. The HSBC Group closed the account in the second quarter. There was no measurable gross revenue or net profits generated to the HSBC Group in the first and second quarters of 2014.

Other activity The HSBC Group holds a lease of branch premises in London which it entered into in 2005 and is due to expire in 2020. The landlord of the premises is owned by the Iranian government and is a specially designated national under U.S. sanctions programs. The HSBC Group has exercised a break clause in the lease and is in the process of exiting the property. The HSBC Group made no payments in the second quarter of 2014. There was no gross revenue or net profit to the HSBC Group.

Frozen accounts and transactions The HSBC Group and HSBC Bank USA maintain several accounts that are frozen under relevant sanctions programs and on which no activity, except as licensed or otherwise authorized, took place during the second quarter of 2014. In the second quarter of 2014, the HSBC Group and HSBC Bank USA also froze payments where required under relevant sanctions programs. There was no gross revenue or net profit to the HSBC Group or HSBC Bank USA.

Item 6. Exhibits

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

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

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

101.INS	XBRL Instance Document^(1,2)

101.SCH	XBRL Taxonomy Extension Schema Document⁽¹⁾

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document⁽¹⁾

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document⁽¹⁾

101.LAB	XBRL Taxonomy Extension Label Linkbase Document⁽¹⁾

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document⁽¹⁾

^1.Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in HSBC USA Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014,

formatted in eXentsible Business Reporting Language ("XBRL") interactive data files: (i) the Consolidated Statement of Income for the three and six months ended June 30, 2014 and 2013, (ii) the Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2014 and 2013, (iii) the Consolidated Balance Sheet as of June 30, 2014 and December 31. 2013, (iv) the Consolidated Statement of Changes in Shareholders' Equity for the six months ended June 30, 2014 and 2013, (v) the Consolidated Statement of Cash Flows for the six months ended June 30, 2014 and 2013, and (vi) the Notes to Consolidated Financial Statements.

Index

Assets:	Equity securities available-for-sale
by business segment	Estimates and assumptions
consolidated average balances	Executive overview
fair value measurements	Fair value measurements:
nonperforming	assets and liabilities recorded at fair value on a recurring basis
trading	assets and liabilities recorded at fair value on a non-recurring basis
Asset-backed commercial paper conduits	control over valuation process
Asset-backed securities	financial instruments
Balance sheet:	hierarchy
consolidated	transfers into/out of level one and two
consolidated average balances	transfers into/out of level two and three
review	valuation techniques
Basel II	Fiduciary risk
Basel III	Financial assets:
Basis of reporting	designated at fair value
Business:	reclassification under IFRSs
consolidated performance review	Financial highlights metrics
Capital:	Financial liabilities:
2014 funding strategy	designated at fair value
common equity movements	fair value of financial liabilities
consolidated statement of changes	Forward looking statements
regulatory capital	Funding
selected capital ratios	Gain on instruments designated at fair value and related derivatives
Cash flow (consolidated) 8	Gains (losses) from securities
Cautionary statement regarding forward-looking statements	Global Banking and Markets
Collateral - pledged assets	Geographic concentration of receivables
Collateralized debt obligations	Goodwill
Commercial banking segment results (IFRSs)	Guarantee arrangements
Compliance risk	Impairment:
Controls and procedures	available-for-sale securities
Credit card fees	credit losses
Credit quality	nonperforming loans
Credit risk:	impaired loans
adjustment	Income (loss) from financial instruments designated at fair value, net
component of fair value option	Income tax expenses
concentration	Intangible assets
exposure	Interest rate risk
management	Internal control
related contingent features	Key performance indicators
related arrangements	Legal proceedings
Current environment	Liabilities:
Deferred tax assets	commitments, lines of credit
Deposits	deposits
Derivatives:	financial liabilities designated at fair value
cash flow hedges	trading
fair value hedges	long-term debt
notional value	short-term borrowings
trading and other	Liquidity and capital resources
Equity:	Liquidity risk
consolidated statement of changes	Litigation and regulatory matters
ratio

Loans:	Reputational risk
by category	Results of operations
by charge-off (net)	Retail banking and wealth management segment results (IFRSs)
by delinquency	Risk elements in the loan portfolio
criticized assets	Risk management:
geographic concentration	credit
held for sale	compliance
impaired	fiduciary
nonperforming	interest rate
overall review	liquidity
risk concentration	market
troubled debt restructures	operational
Loan impairment charges - see Provision for credit losses	reputational
Loan-to-deposits ratio	strategic
Market risk	Securities:
Market turmoil:	fair value
exposures	impairment
impact on liquidity risk	maturity analysis
Monoline insurers	Segment results - IFRSs basis:
Mortgage lending products	retail banking and wealth management
Mortgage servicing rights	commercial banking
Net interest income	global banking and markets
New accounting pronouncements	private banking
Off balance sheet arrangements	other
Operating expenses	overall summary
Operational risk	Selected financial data
Other revenue	Sensitivity:
Other segment results (IFRSs)	projected net interest income
Pension and other postretirement benefits	Statement of changes in shareholders' equity
Performance, developments and trends	Statement of changes in comprehensive income
Pledged assets	Statement of income
Private banking segment results (IFRSs)	Strategic risk
Profit (loss) before tax:	Stress testing
by segment - IFRSs	Table of contents
consolidated	Tax expense
Provision for credit losses	Trading:
Ratios:	assets
capital	derivatives
charge-off (net)	liabilities
credit loss reserve related	portfolios
delinquency	Trading revenue (net)
earnings to fixed charges - Exhibit 12	Troubled debt restructures
efficiency	Value at risk
Reconciliation of U.S. GAAP results to IFRSs	Variable interest entities
Refreshed loan-to-value
Regulation
Related party transactions

Signatures

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

Date: August 4, 2014

HSBC USA INC.

By:		/s/ GERARD MATTIA
		Gerard Mattia
		Senior Executive Vice President and
		Chief Financial Officer

Exhibit Index

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

1. Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in HSBC USA Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in eXentsible Business Reporting Language ("XBRL") interactive data files: (i) the Consolidated Statement of Income for the three and six months ended June 30,, 2014 and 2013, (ii) the Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2014 and 2013, (iii) the Consolidated Balance Sheet as of June 30, 2014 and December 31. 2013, (iv) the Consolidated Statement of Changes in Shareholders' Equity for the six months ended June 30, 2014 and 2013, (v) the Consolidated Statement of Cash Flows for the six months ended June 30, 2014 and 2013, and (vi) the Notes to Consolidated Financial Statements.

EXHIBIT 12

HSBC USA INC.

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND

EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

	Six Months Ended June 30,
	2014			2013
	(dollars are in millions)
Ratios excluding interest on deposits:
Income (loss) from continuing operations..........................................................................................................	$	283		$	363
Income tax expense (benefit)..............................................................................................................................	(57		)	196
Less: Undistributed equity earnings.................................................................................................................	-			-
Fixed charges:
Interest on:
Borrowed funds.........................................................................................................................................	23			17
Long-term debt..........................................................................................................................................	322			333
Others⁽²⁾......................................................................................................................................................	(101		)	25
One third of rents, net of income from subleases......................................................................................	14			17
Total fixed charges, excluding interest on deposits........................................................................................	258			392
Earnings from continuing operations before taxes and fixed charges, net of undistributed equity earnings.................................................................................................................................................................	484			951
Ratio of earnings to fixed charges.....................................................................................................................	1.88			2.43
Total preferred stock dividend factor⁽¹⁾............................................................................................................	$	59		$	61
Fixed charges, including the preferred stock dividend factor.......................................................................	$	317		$	453
Ratio of earnings from continuing operations to combined fixed charges and preferred stock dividends...............................................................................................................................................................	1.53			2.10
Ratios including interest on deposits:
Total fixed charges, excluding interest on deposits........................................................................................	$	258		$	392
Add: Interest on deposits...................................................................................................................................	71			99
Total fixed charges, including interest on deposits........................................................................................	$	329		$	491
Earnings from continuing operations before taxes and fixed charges, net of undistributed equity earnings............................................................................................................................................................	$	484		$	951
Add: Interest on deposits...................................................................................................................................	71			99
Total.......................................................................................................................................................................	$	555		$	1,050
Ratio of earnings to fixed charges.....................................................................................................................	1.69			2.14
Fixed charges, including the preferred stock dividend factor.......................................................................	$	317		$	453
Add: Interest on deposits...................................................................................................................................	71			99
Fixed charges, including the preferred stock dividend factor and interest on deposits...........................	$	388		$	552
Ratio of earnings from continuing operations to combined fixed charges and preferred stock dividends...............................................................................................................................................................	1.43			1.90

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

⁽²⁾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. In addition, we released our accrued interest associated with the tax reserves released which resulted in a $120 million benefit to interest expense in 2014.

EXHIBIT 31

Certification of Chief Executive Officer and Chief Financial Officer

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

Certification of Chief Executive Officer

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

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

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

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

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

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

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

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

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

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

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

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

Date: August 4, 2014

/s/ IRENE M. DORNER

Irene M. Dorner

President, Chief Executive

Officer and Chairman of the Board

Certification of Chief Financial Officer

I, Gerard Mattia, Executive Vice President and Chief Financial Officer of HSBC USA Inc., certify that:

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

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

Date: August 4, 2014

/s/ GERARD MATTIA

Gerard Mattia

Senior Executive Vice President and

Chief Financial Officer

EXHIBIT 32

Certification of Chief Executive Officer and Chief Financial Officer

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

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

Section 906 of the Sarbanes-Oxley Act of 2002

The certification set forth below is being submitted in connection with the HSBC USA Inc. (the "Company") quarterly report on Form 10-Q for the period ending June 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the "Report") for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States Code.

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

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

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

Date: August 4, 2014

/s/ IRENE M. DORNER

Irene M. Dorner

President, Chief Executive

Officer and Chairman of the Board

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

Section 906 of the Sarbanes-Oxley Act of 2002

I, Gerard Mattia, Executive Vice President and Chief Financial Officer of the Company, certify that:

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

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

Date: August 4, 2014

/s/ GERARD MATTIA

Gerard Mattia

Senior Executive Vice President and

Chief Financial Officer

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

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

This information is provided by RNS

The company news service from the London Stock Exchange

END

IR GBGDISBGBGSS

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HSBC Holdings (HSBA)

Thursday, 23rd May 2024

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