HSBC USA Inc Form 10-Q - Part 2

RNS Number : 7692I

HSBC Holdings PLC

30 July 2012

21. Litigation and Regulatory Matters

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

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

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

Litigation

Credit Card Litigation Since June 2005, HSBC Bank USA, HSBC Finance Corporation, HSBC North America and HSBC, as well as other banks and Visa Inc. and MasterCard Incorporated, have been named as defendants in four class actions filed in Connecticut and the Eastern District of New York: Photos Etc. Corp. et al v. Visa U.S.A., Inc., et al. (D. Conn. No. 3:05-CV-01007 (WWE)); National Association of Convenience Stores, et al. v. Visa U.S.A., Inc., et al. (E.D.N.Y. No. 05-CV 4520 (JG)); Jethro Holdings, Inc., et al. v. Visa U.S.A., Inc. et al. (E.D.N.Y. No. 05-CV-4521(JG)); and American Booksellers Asps' v. Visa U.S.A., Inc. et al. (E.D.N.Y. No. 05-CV-5391 (JG)). Numerous other complaints containing similar allegations (in which no HSBC entity is named) were filed across the country against Visa Inc., MasterCard Incorporated and other banks. These actions principally allege that the imposition of a no-surcharge rule by the associations and/or the establishment of the interchange fee charged for credit card transactions causes the merchant discount fee paid by retailers to be set at supracompetitive levels in violation of the Federal antitrust laws. These suits have been consolidated and transferred to the Eastern District of New York. The consolidated case is: In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, MDL 1720, E.D.N.Y. ("MDL 1720"). A consolidated, amended complaint was filed by the plaintiffs on April 24, 2006 and a second consolidated amended complaint was filed on January 29, 2009. On February 7, 2011, MasterCard Incorporated, Visa Inc., the other defendants, including HSBC Bank USA, and certain affiliates of the defendants entered into settlement and judgment sharing agreements (the "Agreements") that provide for the apportionment of certain defined costs and liabilities that the defendants, including HSBC Bank USA and our affiliates, may incur, jointly and/or severally, in the event of an adverse judgment or global settlement of one or all of these actions. The Agreements also cover any other potential or future actions that are transferred for coordinated pre-trial proceedings with MDL 1720.

The parties engaged in a mediation process at the direction of the District Court. On July 13, 2012, MasterCard Incorporated, Visa Inc. and the other defendants, including the HSBC defendants, entered into a Memorandum of Understanding ("MOU") to settle the class litigations consolidated into MDL 1720. Separately, the same defendants continue to negotiate an agreement to settle all claims brought by individual merchant plaintiffs consolidated into MDL 1720. The MOU for the class litigations sets out a binding obligation to enter into a settlement agreement in the form attached to the MOU. The settlement is subject to: (i) the successful completion of certain appendices regarding class notice, claims, and other procedures, (ii) the successful negotiation of a settlement agreement with the individual merchant plaintiffs, (iii) final court approval of the class settlement and (iv) any necessary internal approvals for the parties. In the fourth quarter of 2011, we increased our litigation reserves to an amount equal to our estimated portion of a potential settlement of this matter. In connection with the execution of the MOU, we increased our litigation reserves by an immaterial amount in anticipation of a related short-term reduction in interchange fees.

Account Overdraft Litigation In February 2011, an action captioned Ofra Levin et al v. HSBC Bank USA, N.A. et al (E.D.N.Y. 11-CV-0701) was filed in the Eastern District of New York against HSBC Bank USA, HSBC USA and HSBC North America on behalf of a putative nationwide class and New York sub-class of customers who allegedly incurred overdraft fees due to the posting of debit card transactions to deposit accounts in high-to-low order. Levin asserts claims for breach of contract and the implied covenant of good faith and fair dealing, conversion, unjust enrichment, and violation of the New York deceptive acts and practices statute. The plaintiffs dismissed the Federal court action after the case was transferred to the multi-district litigation pending in Miami, Florida, and re-filed the case in New York state court on March 1, 2011. The action, captioned Ofra Levin et al v. HSBC Bank USA, N.A. et al. (N.Y. Sup. Ct. 650562/11), alleges a variety of common law claims and violations on behalf of a New York class, including breach of contract and implied covenant of good faith and fair dealing, conversion, unjust enrichment and a violation of the New York deceptive acts and practices statute. We filed a motion to dismiss the complaint in May 2011. In June 2012, the court denied in part and granted in part the motion to dismiss, granting plaintiffs leave to amend their complaint with regard to plaintiffs' claims for conversion and unjust enrichment. At this time we are unable to reasonably estimate the liability, if any, that might arise as a result of this action and we will defend the claims vigorously.

Lender-Placed Insurance Matters Lender-placed insurance involves a lender obtaining a hazard insurance policy on a mortgaged property when the borrower fails to maintain their own policy. The cost of the lender-placed insurance is then passed on to the borrower. Industry practices with respect to lender-placed insurance are receiving heightened regulatory scrutiny. The Consumer Financial Protection Bureau recently announced that lender-placed insurance is an important issue and is expected to publish related regulations sometime in 2012. In October 2011, a number of mortgage servicers and insurers, including our affiliate, HSBC Insurance (USA) Inc., received subpoenas from the New York Department of Financial Services (the "NYDFS") with respect to lender-placed insurance activities dating back to September 2005. We have and will continue to provide documentation and information to the NYDFS that is responsive to the subpoena.

Between June 2011 and March 2012, several putative class actions related to lender-placed insurance were filed against various HSBC U.S. entities, including actions against us and our subsidiaries captioned Montanez et al v. HSBC Mortgage Corporation (USA) et al. (E.D. Pa. No. 11-CV-4074); Maxwell et al v. HSBC Mortgage Corporation (USA) et al. (S.D.N.Y. No. 12-CV-1699); West et al. v. HSBC Mortgage Corporation (USA) et al. (South Carolina Court of Common Pleas, 14th Circuit No. 12-CP-00687). These actions relate primarily to industry-wide regulatory concerns, and include allegations regarding the relationships and potential conflicts of interest between the various entities that place the insurance, the value and cost of the insurance that is placed, back-dating policies to the date the borrower allowed it to lapse, self-dealing and insufficient disclosure.

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

In November 2011, the District Court judge overseeing three related putative class actions in the Southern District of New York, captioned In re Herald, Primeo and Thema Funds Securities Litigation (S.D.N.Y. Nos. 09-CV-0289 (RMB), 09-CV-2558 (RMB)), dismissed all claims against the HSBC defendants on forum non conveniens grounds, but temporarily stayed this ruling as to one of the actions against the HSBC defendants - the claims of investors in Thema International Fund plc - in light of a proposed amended settlement agreement between the lead plaintiff in that action and the relevant HSBC defendants (including, subject to the granting of leave to effect a proposed pleading amendment, HSBC Bank USA). In December 2011, the District Court lifted this temporary stay and dismissed all remaining claims against the HSBC defendants, and declined to consider preliminary approval of the settlement. In light of the District Court's decisions, HSBC has terminated the settlement agreement. The Thema plaintiff contests HSBC's right to terminate. Plaintiffs in all three actions filed notices of appeal to the U.S. Circuit Court of Appeals for the Second Circuit, where the actions are captioned In re Herald, Primeo and Thema Funds Securities Litigation (2nd Cir, Nos. 12-156, 12-184, 12-162). Plaintiffs' opening briefs were filed in April 2012 and HSBC filed responses in July 2012.

HSBC USA Inc.

In December 2010, the Madoff Securities trustee commenced suits against various HSBC companies in the U.S. Bankruptcy Court and in the English High Court. The U.S. action, captioned Picard v. HSBC et al (Bankr. S.D.N.Y. No. 09-01364), which also names certain funds, investment managers, and other entities and individuals, sought $9 billion in damages and additional recoveries from HSBC Bank USA, certain of our foreign affiliates and the various other codefendants. It sought damages against the HSBC defendants for allegedly aiding and abetting Madoff's fraud and breach of fiduciary duty. In July 2011, after withdrawing the case from the Bankruptcy Court in order to decide certain threshold issues, the District Court dismissed the trustee's various common law claims on the grounds that the trustee lacks standing to assert them. In December 2011, the trustee filed a notice of appeal to the U.S. Court of Appeals for the Second Circuit, where the action is captioned Picard v. HSBC Bank plc et al. (2nd Cir., No. 11-5207). Briefing in that appeal was completed in April 2012, and oral argument is expected later this year. The District Court returned the remaining claims to the Bankruptcy Court for further proceedings. Those claims seek, pursuant to U.S. bankruptcy law, recovery of unspecified amounts received by the HSBC defendants from funds invested with Madoff, including amounts that the HSBC defendants received when they redeemed units held in the various funds. The HSBC defendants acquired those fund units in connection with financing transactions the HSBC defendants had entered into with various clients. The trustee's U.S. bankruptcy law claims also seek recovery of fees earned by the HSBC defendants for providing custodial, administration and similar services to the funds. Between September 2011 and April 2012, the HSBC defendants and certain other defendants moved again to withdraw the case from the Bankruptcy Court. The District Court granted those withdrawal motions as to certain issues and is considering the motions as to other issues. Briefing on the merits of the withdrawn issues is ongoing. The trustee's English action, which names HSBC Bank USA and other HSBC entities as defendants, seeks recovery of unspecified transfers of money from Madoff Securities to or through HSBC on the ground that the HSBC defendants actually or constructively knew of Madoff's fraud. HSBC has not been served with the trustee's English action.

Between October 2009 and April 2012, Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited ("Fairfield"), funds whose assets were directly or indirectly invested with Madoff Securities, commenced multiple suits in the British Virgin Islands and the United States against numerous fund shareholders, including various HSBC companies that acted as nominees for clients of HSBC's private banking business and other clients who invested in the Fairfield funds. The Fairfield actions, including an action captioned Fairfield Sentry Ltd. v. Zurich Capital Markets et al. (Bankr. S.D.N.Y. No. 10-03634), in which HSBC Bank USA is a defendant, seek restitution of amounts paid to the defendants in connection with share redemptions, on the ground that such payments were made by mistake, based on inflated values resulting from Madoff's fraud. Some of these actions also seek recovery of the share redemptions under British Virgin Islands insolvency law. The British Virgin Islands actions have been dismissed, and those dismissals affirmed on appeal. The U.S. actions are stayed pending developments in related appellate litigation in the British Virgin Islands.

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

Greenwich Sentry LP v. HSBC USA Inc. (Del. Ch. No. 6829) was filed in September 2011 in the Delaware Court of Chancery. The complaint seeks the return of specified redemption payments made to HSBC USA as a limited partner in Greenwich Sentry LP, a fund whose assets were invested with Madoff Securities, and asserts claims of unjust enrichment, mistaken payment, and constructive trust. HSBC USA was served with a copy of the complaint in December 2011. In May 2012, the Court of Chancery granted an unopposed motion by the Madoff Securities trustee to substitute itself for Greenwich Sentry LP as plaintiff in this action. HSBC USA filed a motion to dismiss the complaint in June 2012.

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

Knox Family Trust Litigation. HSBC Bank USA, N.A. is the defendant in seven separate proceedings collectively described as Matter of Knox (N.Y. Surrogate's Court, Erie County, File Nos. DO-0659, DO-0663, DO-0664, DO-0665, DO-0666, 1996-2486/B, and 1996-2486/D), concerning seven trusts for which HSBC Bank USA served as trustee that were established by Seymour Knox II and his descendants for various members of the Knox family. In these proceedings, the beneficiaries of the various trusts objected to HSBC Bank USA's final accountings and claimed that HSBC Bank USA mismanaged certain assets and investments. In November 2010, the court awarded the plaintiffs in the seven proceedings damages totaling approximately $26 million plus interest and attorneys' fees to be determined. In May 2011, the court entered final judgments totaling approximately $25 million in two of the seven proceedings (DO-0659 and 1996-2486/B). HSBC Bank USA appealed the judgments and secured the judgments in order to suspend execution of the judgments while the appeals are ongoing by depositing cash in the amount of the judgments in an interest-bearing escrow account. In May 2011, HSBC Bank USA agreed to settle three of the other proceedings (DO-0664, DO-0665 and DO-0666) for an immaterial amount. HSBC Bank USA also filed appeals of the two other proceedings. In August 2011, HSBC Bank USA agreed in principle to settle one proceeding on appeal (1996-2486/B) for an immaterial amount. On June 19, 2012 the N.Y. Appellate Division, 4th Department issued rulings on HSBC Bank USA's three pending appeals modifying the Surrogate Court's decisions by vacating all its determinations of liability (except for an appellate finding in DO-0659 to the extent that HSBC Bank USA held certain stock in F.W. Woolworth Co. after March 1, 1995, which leaves potential liability in an immaterial amount), and as modified, affirming them. The Appellate Division then remitted the three matters to the Surrogate Court for further proceedings. Plaintiffs have thirty days within which to seek permission to appeal. Prior to the Appellate Division's decision, the parties largely had agreed in principle to a consensual resolution of the remaining issues in DO-0659, and the details of that resolution are presently being discussed.

Governmental and Regulatory Matters

Foreclosure Practices In April 2011, HSBC Bank USA entered into a consent cease and desist order with the OCC (the "OCC Servicing Consent Order") and our affiliate, HSBC Finance Corporation, and our common indirect parent, HSBC North America, entered into a similar consent order with the Federal Reserve (together with the OCC Servicing Consent Order, the "Servicing Consent Orders") following completion of a broad horizontal review of industry foreclosure practices. The OCC Servicing Consent Order requires HSBC Bank USA to take prescribed actions to address the deficiencies noted in the joint examination and described in the consent order. We are committed to full compliance with the terms of the Servicing Consent Orders, as described in our Form 10-Q for the quarter ended March 31, 2011. We continue to work with the OCC and the Federal Reserve to align our processes with the requirements of the Servicing Consent Orders and are implementing operational changes as required.

The Servicing Consent Orders require an independent review of foreclosures (the "Foreclosure Review") pending or completed between January 2009 and December 2010 (the "Foreclosure Review Period") to determine if any borrower was financially injured as a result of an error in the foreclosure process. Consistent with the industry, and as required by the Servicing Consent Orders, an independent consultant has been retained to conduct that review, and remediation, including restitution, may be required if a borrower is found to have been financially injured as a result of servicer errors. In conjunction with the foreclosure review, a communication and outreach plan has been developed and implemented to contact borrowers with foreclosures pending or completed during the Foreclosure Review Period. We will conduct the outreach efforts in collaboration with other mortgage loan servicers and independent consultants in order to present a uniform, coherent and user-friendly complaint process. Written communications have been sent to borrowers who were subject to foreclosure proceedings during the Foreclosure Review Period notifying them of the foreclosure complaint review process and providing them with forms that can be used to request a review of their foreclosure proceeding. The outreach plan currently includes a staggered mailing to borrowers, which began on November 1, industry media advertising, which began in January 2012 and a website at which a borrower can request a review. In June 2012, the Federal Reserve and the OCC released a financial remediation framework for use by the independent consultants to recommend remediation for financial injury identified during the Foreclosure Review. Pursuant to this framework, remediation available to a borrower who is found to have been financially injured as a result of servicer errors could include suspension of a pending foreclosure, loan modification, or a lump sum payment ranging from $500 to $125,000 plus equity in the most egregious cases. Any borrower who receives remediation will not be precluded from pursuing litigation concerning foreclosure or other mortgage servicing practices. We expect the costs associated with the Servicing Consent Orders, including the Foreclosure Review, customer outreach plan and complaint process will continue to result in significant increases in our operating expenses in future periods. Any resulting remediation could result in further increased costs.

The Servicing Consent Orders do not preclude additional enforcement actions against HSBC Bank USA or our affiliates by bank regulatory, governmental or law enforcement agencies, such as the Department of Justice and State Attorneys General, which could include the imposition of civil money penalties and other sanctions relating to the activities that are the subject of the Servicing Consent Orders. The Federal Reserve has indicated in a press release that it believes monetary penalties are appropriate for the enforcement actions and that it plans to announce such penalties. We may also see an increase in private litigation concerning foreclosure and other mortgage servicing practices.

On February 9, 2012, the U.S. Department of Justice, the U.S. Department of Housing and Urban Development and State Attorneys General of 49 states announced a settlement with the five largest U.S. mortgage servicers with respect to foreclosure and other mortgage servicing practices. HSBC North America, HSBC Finance Corporation and HSBC Bank USA have had preliminary discussions with U.S. bank regulators and other governmental agencies regarding a potential resolution, although the timing of any settlement is not presently known. Based on discussions to date, an accrual was determined based on the total projected impact at HSBC North America associated with a proposed settlement of this matter. We recorded an accrual of $38 million in the fourth quarter of 2011 which reflects the portion of the HSBC North America accrual that we currently believe is allocable to HSBC Bank USA. As this matter progresses and more information becomes available, we will continue to evaluate our portion of the HSBC North America liability which may result in a change to our current estimate. Any such settlement, however, may not completely preclude other enforcement actions by state or federal agencies, regulators or law enforcement agencies related to foreclosure and other mortgage servicing practices, including, but not limited to, matters relating to the securitization of mortgages for investors, including the imposition of civil money penalties, criminal fines or other sanctions. In addition, such a settlement would not preclude private litigation concerning these practices.

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

HSBC USA Inc.

The AML/BSA Consent Orders do not preclude additional enforcement actions against HSBC Bank USA or HSBC North America by U.S. bank regulatory or law enforcement agencies, including the imposition of civil money penalties, criminal fines and other sanctions relating to activities that are the subject of the AML/BSA Consent Orders. We continue to cooperate in ongoing investigations by the U.S. Department of Justice, the Federal Reserve, the OCC and the U.S. Department of Treasury's Financial Crimes Enforcement Network in connection with AML/BSA compliance, including cross-border transactions involving our cash handling business in Mexico and banknotes business in the U.S.

We continue to cooperate in ongoing investigations by the U.S. Department of Justice, the New York County District Attorney's Office, the Office of Foreign Assets Control ("OFAC"), the Federal Reserve and the OCC regarding historical transactions involving Iranian parties and other parties subject to OFAC economic sanctions.

In July 2012, the U.S. Senate Permanent Subcommittee on Investigations held a hearing and released a report that was critical of, among other things, HSBC's AML/BSA compliance and compliance with OFAC sanctions.

In each of these regulatory and law enforcement matters, we have received Grand Jury subpoenas or other requests for information from U.S. Government or other agencies, and are cooperating fully and engaging in efforts to resolve matters, including through preliminary discussions with relevant authorities. The resolution of at least some of these matters is likely to involve the filing of corporate criminal as well as civil charges and the imposition of significant fines and penalties. The prosecution of corporate criminal charges in these types of cases has most often been is deferred through an agreement with the relevant authorities; however, the U.S. authorities have substantial discretion, and prior settlements can provide no assurance as to how the U.S. authorities will proceed in these matters. It is not practicable at this time for us to know the terms on which a resolution of the ongoing investigations could be achieved or the form or timing of any such resolution. Based on the facts currently known, we have recorded an accrual of $700 million. There is a high degree of uncertainty in making this estimate, and it is reasonably possible that the amounts when finally determined could be higher, possibly significantly higher.

Other Regulatory and Law Enforcement Investigations. In April 2011, HSBC Bank USA received a "John Doe" summons from the Internal Revenue Service (the "IRS") directing us to produce records with respect to U.S.-based clients of an HSBC Group company in India. While the summons was voluntarily withdrawn in August 2011, we have cooperated fully by providing responsive documents in our possession in the U.S. to the IRS, and engaging in efforts to resolve these matters.

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

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

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

Mortgage Securitization Activity In addition to the repurchase risk described in Note 20, "Guarantee Arrangements and Pledged Assets," we have also been involved as a sponsor/seller of loans used to facilitate whole loan securitizations underwritten by our affiliate, HSBC Securities (USA) Inc. ("HSI"). In this regard, beginning in 2005 we began acquiring residential mortgage loans, substantially all of which were originated by non-HSBC entities, that were warehoused on our balance sheet with the intent of selling them to HSI to facilitate HSI's whole loan securitization program which was discontinued in the second half of 2007. During 2005-2007, we purchased and sold $24 billion of such loans to HSI which were subsequently securitized and sold by HSI to third parties. The outstanding principal balance on these loans was approximately $7.8 billion and $8.5 billion at June 30, 2012 and December 31, 2011, respectively. Based on the specifics of these transactions, the obligation to repurchase loans in the event of a breach of loan level representations and warranties resides predominantly with the organization that originated the loan. Certain of these originators, however, are or may become financially impaired and, therefore, unable to fulfill their repurchase obligations.

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

HSBC Bank USA and certain of our affiliates have been named as defendants in a number of actions in connection with residential mortgage-backed securities ("RMBS") offerings, which generally allege that the offering documents for securities issued by securitization trusts contained material misstatements and omissions, including statements regarding the underwriting standards governing the underlying mortgage loans. In September 2011, the Federal Housing Finance Agency (the "FHFA"), acting in its capacity as conservator for the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), filed an action in the U.S. District Court for the Southern District of New York against HSBC Bank USA, HSBC USA, HSBC North America, HSI, HSI Asset Securitization Corporation ("HASCO") and five former and current officers and directors of HASCO seeking damages or rescission of mortgage-backed securities purchased by Fannie Mae and Freddie Mac that were either underwritten or sponsored by HSBC entities. The aggregate unpaid principal balance of the securities was approximately $1.8 billion at June 30, 2012. This action, captioned Federal Housing Finance Agency, as Conservator for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation v. HSBC North America Holdings Inc. et al. (S.D.N.Y. No. CV 11-6189-LAK), is one of a series of similar actions filed against 17 financial institutions alleging violations of federal securities laws and state statutory and common law in connection with the sale of private-label RMBS purchased by Fannie Mae and Freddie Mac, primarily from 2005 to 2008. This action, along with all of the similar FHFA RMBS actions that were filed in the U.S. District Court for the Southern District of New York, were transferred to a single judge, who directed the defendant in the first-filed matter, UBS, to file a motion to dismiss. In May 2012, the District Court filed its decision on UBS' motion denying the motion to dismiss FHFA's securities law claims and granting the motion to dismiss FHFA's negligent misrepresentation claims. The District Court's ruling will form the basis for rulings on the other matters, including the action filed against HSBC Bank USA and our affiliates. This action is at a very early stage. At this time we are unable to reasonably estimate the liability, if any, that might arise as a result of this action.

In January 2012, Deutsche Zentral-Genossenschaftsbank ("DZ Bank") filed a summons with notice in New York County Supreme Court, State of New York, naming as defendants HSBC North America, HSBC USA, HSBC Bank USA, HSBC Markets (USA) Inc., HASCO and HSI. The summons alleges that DZ Bank purchased $122.4 million in RMBS from the HSBC defendants and has sustained unspecified damages as a result of material misrepresentations and omissions contained in the offering documents. In February 2012, HSH Nordbank AG ("HSH") filed a summons with notice in New York County Supreme Court, State of New York, naming as defendants HSBC Holdings plc, HSBC North America Holdings Inc., HSBC USA, HSBC Bank USA, HSBC Markets (USA) Inc., HASCO, and two Blaylock entities. The summons alleges that HSH purchased $41.3 million in RMBS from the HSBC and Blaylock defendants and has sustained damages as a result of material misrepresentations and omissions contained in the offering documents. In May 2012, HSBC removed both the DZ Bank and HSH cases to the United States District Court for the Southern District of New York. The cases were consolidated in an action captioned Deutsche Zentral-Genossenschaftsbank AG, New York Branch v. HSBC North America Holdings Inc. et al (S.D.N.Y. No. 12-CV-4025) following removal. In February 2012, Sealink Funding Ltd. ("Sealink") filed a summons with notice in New York County Supreme Court, State of New York, naming as defendants 49 entities, including HSBC North America, HSBC USA, HSBC Markets (USA) Inc. and HSI. The summons alleges that Sealink purchased $948.8 million in RMBS from the defendants and has sustained unspecified damages as a result of material misrepresentations and omissions contained in the offering documents. The claims against the HSBC entities, who are named as underwriters of the related RMBS, are for (i) aiding and abetting fraud, (ii) negligent misrepresentation; (iii) breach of contract; and (iv) mutual mistake. Sealink has 120 days to serve the defendants with a complaint. In May 2012, Sealink filed a notice of discontinuance as to 43 of the defendants, including the HSBC entities.

In December 2010 and February 2011, we received subpoenas from the SEC seeking production of documents and information relating to our involvement, and the involvement of our affiliates, in specified private-label RMBS transactions as an issuer, sponsor, underwriter, depositor, trustee or custodian as well as our involvement as a servicer. We have also had preliminary contacts with other governmental authorities exploring the role of trustees in private-label RMBS transactions. In February 2011, we also received a subpoena from the U.S. Department of Justice (U.S. Attorney's Office, Southern District of New York) seeking production of documents and information relating to loss mitigation efforts with respect to HUD-insured mortgages on residential properties located in the State of New York. In January 2012, our affiliate, HSI, was served with a Civil Investigative Demand by the Massachusetts State Attorney General seeking documents, information and testimony related to the sale of RMBS to public and private customers in the State of Massachusetts from January 2005 to the present. We expect this level of focus will continue and, potentially, intensify, so long as the U.S. real estate markets continue to be distressed. As a result, we may be subject to additional claims, litigation and governmental and regulatory scrutiny related to our participation in the U.S. mortgage securitization market, either individually or as a member of a group. We are unable to reasonably estimate the financial effect of any action or litigation relating to these matters. As situations develop, it is possible that any related claims could be significant.

22. Fair Value Measurements

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

HSBC USA Inc.

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

Credit risk adjustment - The credit risk adjustment is an adjustment to a group of financial assets and financial liabilities, predominantly derivative assets and derivative liabilities, to reflect the credit quality of the parties to the transaction in arriving at fair value. A credit valuation adjustment to a financial asset is required to reflect the default risk of the counterparty. A debit valuation adjustment to a financial liability is recorded to reflect the default risk of HUSI. Where applicable, we take into consideration the credit risk mitigating arrangements including collateral agreements and master netting arrangements in estimating the credit risk adjustments.

Liquidity risk adjustment- The liquidity risk adjustment reflects, among other things, (a) the cost that would be incurred to close out the market risks by hedging, disposing or unwinding the actual position (i.e., a bid-offer adjustment), and (b) the illiquid nature, other than the size of the risk position, of a financial instrument.

Input valuation adjustment - Where fair value measurements are determined using internal valuation model based on unobservable inputs, certain valuation inputs may be less readily determinable. There may be a range of possible valuation input that market participants may assume in determining the fair value measurement. The resultant fair value measurement has inherent measurement risk if one or more significant parameters are unobservable and must be estimated. An input valuation adjustment is necessary to reflect the likelihood that market participants may use different input parameters, and to mitigate the possibility of measurement error.

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

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

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

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

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

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

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

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

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

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

• consistency among different pricing sources;

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

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

• the source of the fair value information.

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

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

HSBC USA Inc.

The following table summarizes the carrying value and estimated fair value of our financial instruments at June 30, 2012 and December 31, 2011.


	June 30, 2012					December 31, 2011
	Carrying Value	Fair Value	Level 1	Level 2	Level 3	Carrying Value	Fair Value
	(in millions)
Financial assets:
Short-term financial assets................................................................................................................................................................................	$ 20,740	$ 20,740	$ 1,528	$ 18,809	$ 403	$ 27,534	$ 27,534
Federal funds sold and securities purchased under resale agreements....................................................................................................	13,666	13,666	-	13,666	-	3,109	3,104
Non-derivative trading assets..........................................................................................................................................................................	25,968	25,968	1,931	21,080	2,957	30,028	30,028
Derivatives..........................................................................................................................................................................................................	11,255	11,255	25	11,001	229	9,826	9,826
Securities.............................................................................................................................................................................................................	62,347	62,583	35,383	27,200	-	55,316	55,579
Commercial loans, net of allowance for credit losses...................................................................................................................................	37,078	37,583	-	-	37,583	33,207	33,535
Commercial loans designated under fair value option and held for sale...................................................................................................	411	411	-	411	-	378	378
Commercial loans held for sale.........................................................................................................................................................................	464	464	-	-	464	587	587
Consumer loans, net of allowance for credit losses......................................................................................................................................	18,367	15,057	-	-	15,057	17,917	14,301
Consumer loans held for sale:
Residential mortgages..................................................................................................................................................................................	903	918	-	-	918	2,058	2,071
Credit cards....................................................................................................................................................................................................	94	94	-	-	94	416	416
Other consumer.............................................................................................................................................................................................	110	110	-	-	110	231	231
Financial liabilities:
Short-term financial liabilities...........................................................................................................................................................................	$ 11,167	$ 11,167	$ -	$ 11,167	$ -	$ 18,497	$ 18,497
Deposits:
Without fixed maturities...............................................................................................................................................................................	108,115	108,115	-	108,115	-	123,720	122,710
Fixed maturities..............................................................................................................................................................................................	5,215	5,228	-	5,228	-	6,210	6,232
Deposits designated under fair value option.................................................................................................................................................	9,897	9,897	-	6,989	2,908	9,799	9,799
Non-derivative trading liabilities......................................................................................................................................................................	7,274	7,274	316	6,958	-	7,342	7,342
Derivatives..........................................................................................................................................................................................................	14,556	14,556	18	14,367	171	8,440	8,440
Long-term debt...................................................................................................................................................................................................	13,244	13,310	-	13,310	-	11,666	11,653
Long-term debt designated under fair value option.....................................................................................................................................	6,770	6,770	-	6,483	287	5,043	5,043

Loan values presented in the table above were determined using the Fair Value Framework for measuring fair value, which is based on our best estimate of the amount within a range of value we believe would be received in a sale as of the balance sheet date (i.e. exit price). The secondary market demand and estimated value for our loans has been heavily influenced by the prevailing economic conditions during the past few years, including house price depreciation, rising unemployment, changes in consumer behavior, and changes in discount rates. Many investors are non-bank financial institutions or hedge funds with high equity levels and a high cost of debt. For certain consumer loans, investors incorporate numerous assumptions in predicting cash flows, such as higher charge-off levels and/or slower voluntary prepayment speeds than we, as the servicer of these loans, believe will ultimately be the case. The investor discount rates reflect this difference in overall cost of capital as well as the potential volatility in the underlying cash flow assumptions, the combination of which may yield a significant pricing discount from our intrinsic value. The estimated fair values at June 30, 2012 and December 31, 2011 reflect these market conditions.

HSBC USA Inc.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis The following table presents information about our assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.


	Fair Value Measurements on a Recurring Basis
	Level 1	Level 2	Level 3	Gross Balance	Netting⁽¹⁾	Net Balance
	(in millions)
June 30, 2012:
Assets:
Trading securities, excluding derivatives:
U.S. Treasury, U.S. Government agencies and sponsored enterprises...........................................................................................................................................	$ 1,931	$ 216	$ -	$ 2,147	$ -	$ 2,147
Collateralized debt obligations..............................................................................................................................................................................................	-	95	658	753	-	753
Asset-backed securities:
Residential mortgages....................................................................................................................................................................................................	-	274	-	274	-	274
Corporate and other domestic debt securities............................................................................................................................................................................	-	950	1,599	2,549	-	2,549
Debt securities issued by foreign entities:
Corporate.....................................................................................................................................................................................................................	-	637	688	1,325	-	1,325
Government.................................................................................................................................................................................................................	-	4,425	-	4,425	-	4,425
Equity securities.................................................................................................................................................................................................................	-	24	12	36	-	36
Precious metals trading........................................................................................................................................................................................................	-	14,459	-	14,459	-	14,459
Derivatives⁽²⁾:
Interest rate contracts......................................................................................................................................................................................................	145	71,454	12	71,611	-	71,611
Foreign exchange contracts..............................................................................................................................................................................................	16	15,096	214	15,326	-	15,326
Equity contracts............................................................................................................................................................................................................	-	1,035	181	1,216	-	1,216
Precious metals contracts................................................................................................................................................................................................	58	899	8	965	-	965
Credit contracts.............................................................................................................................................................................................................	-	9,124	1,616	10,740	-	10,740
Other contracts..............................................................................................................................................................................................................	-	1	-	1	-	1
Derivatives netting........................................................................................................................................................................................................	-	-	-	-	(88,604 )	(88,604 )

Total derivatives................................................................................................................................................................................................................	219	97,609	2,031	99,859	(88,604 )	11,255
Securities available-for-sale:
U.S. Treasury, U.S. Government agencies and sponsored enterprises...........................................................................................................................................	35,342	16,760	-	52,102	-	52,102
Obligations of U.S. states and political subdivisions.................................................................................................................................................................	-	681	-	681	-	681
Asset-backed securities:
Residential mortgages....................................................................................................................................................................................................	-	5	-	5	-	5
Commercial mortgages...................................................................................................................................................................................................	-	305	-	305	-	305
Home equity................................................................................................................................................................................................................	-	251	-	251	-	251
Student loans...............................................................................................................................................................................................................	-	9	-	9	-	9
Other..........................................................................................................................................................................................................................	-	85	-	85	-	85
Corporate and other domestic debt securities............................................................................................................................................................................	-	42	-	42	-	42
Debt securities issued by foreign entities:
Corporate.....................................................................................................................................................................................................................	-	1,374	-	1,374	-	1,374
Government.................................................................................................................................................................................................................	41	5,415	-	5,456	-	5,456
Equity securities.................................................................................................................................................................................................................	-	193	-	193	-	193
Loans⁽³⁾.............................................................................................................................................................................................................................	-	446	-	446	-	446
Intangible⁽⁴⁾.......................................................................................................................................................................................................................	-	-	187	187	-	187

Total assets..................................................................................................................................................................................................................	$ 37,533	$ 144,255	$ 5,175	$ 186,963	$ (88,604 )	$ 98,359

Liabilities:
Deposits in domestic offices⁽⁵⁾...............................................................................................................................................................................................	$ -	$ 6,989	$ 2,908	$ 9,897	$ -	$ 9,897
Trading liabilities, excluding derivatives................................................................................................................................................................................	316	6,958	-	7,274	-	7,274
Derivatives⁽²⁾:
Interest rate contracts......................................................................................................................................................................................................	81	71,914	-	71,995	-	71,995
Foreign exchange contracts..............................................................................................................................................................................................	4	14,363	239	14,606	-	14,606
Equity contracts............................................................................................................................................................................................................	-	835	227	1,062	-	1,062
Precious metals contracts................................................................................................................................................................................................	37	802	8	847	-	847
Credit contracts.............................................................................................................................................................................................................	-	10,259	695	10,954	-	10,954
Other..........................................................................................................................................................................................................................	-	5	-	5	-	5
Derivatives netting........................................................................................................................................................................................................	-	-	-	-	(84,913 )	(84,913 )

Total derivatives................................................................................................................................................................................................................	122	98,178	1,169	99,469	(84,913 )	14,556
Long-term debt⁽⁶⁾................................................................................................................................................................................................................	-	6,483	287	6,770	-	6,770

Total liabilities.............................................................................................................................................................................................................	$ 438	$ 118,608	$ 4,364	$ 123,410	$ (84,913 )	$ 38,497

HSBC USA Inc.


	Fair Value Measurements on a Recurring Basis
	Level 1	Level 2	Level 3	Gross Balance	Netting⁽¹⁾	Net Balance
	(in millions)
December 31, 2011:
Assets:
Trading securities, excluding derivatives:
U.S. Treasury, U.S. Government agencies and sponsored enterprises...........................................................................................................................................	$ 259	$ 38	$ -	$ 297	$ -	$ 297
Collateralized debt obligations..............................................................................................................................................................................................	-	52	703	755	-	755
Asset-backed securities:
Residential mortgages....................................................................................................................................................................................................	-	274	-	274	-	274
Home equity................................................................................................................................................................................................................	-	1	-	1	-	1
Student loans...............................................................................................................................................................................................................	-	2	-	2	-	2
Corporate and other domestic debt securities............................................................................................................................................................................	-	226	1,679	1,905	-	1,905
Debt securities issued by foreign entities:
Corporate.....................................................................................................................................................................................................................	-	1,958	253	2,211	-	2,211
Government.................................................................................................................................................................................................................	-	7,461	-	7,461	-	7,461
Equity securities.................................................................................................................................................................................................................	-	27	13	40	-	40
Precious metals trading........................................................................................................................................................................................................	-	17,082	-	17,082	-	17,082
Derivatives⁽²⁾:
Interest rate contracts......................................................................................................................................................................................................	135	61,565	9	61,709	-	61,709
Foreign exchange contracts..............................................................................................................................................................................................	4	15,440	221	15,665	-	15,665
Equity contracts............................................................................................................................................................................................................	-	1,047	169	1,216	-	1,216
Precious metals contracts................................................................................................................................................................................................	171	1,641	30	1,842	-	1,842
Credit contracts.............................................................................................................................................................................................................	-	12,297	2,093	14,390	-	14,390
Derivatives netting........................................................................................................................................................................................................	-	-	-	-	(84,996 )	(84,996 )

Total derivatives................................................................................................................................................................................................................	310	91,990	2,522	94,822	(84,996 )	9,826
Securities available-for-sale:
U.S. Treasury, U.S. Government agencies and sponsored enterprises...........................................................................................................................................	22,467	22,142	-	44,609	-	44,609
Obligations of U.S. states and political subdivisions.................................................................................................................................................................	-	600	-	600	-	600
Asset-backed securities:
Residential mortgages....................................................................................................................................................................................................	-	5	-	5	-	5
Commercial mortgages...................................................................................................................................................................................................	-	451	-	451	-	451
Home equity................................................................................................................................................................................................................	-	270	-	270	-	270
Student loans...............................................................................................................................................................................................................	-	12	-	12	-	12
Other..........................................................................................................................................................................................................................	-	80	-	80	-	80
Corporate and other domestic debt securities............................................................................................................................................................................	-	544	-	544	-	544
Debt securities issued by foreign entities:
Corporate.....................................................................................................................................................................................................................	-	1,235	-	1,235	-	1,235
Government.................................................................................................................................................................................................................	40	5,295	-	5,335	-	5,335
Equity securities.................................................................................................................................................................................................................	-	140	-	140	-	140
Loans⁽³⁾.............................................................................................................................................................................................................................	-	367	11	378	-	378
Intangible⁽⁴⁾.......................................................................................................................................................................................................................	-	-	220	220	-	220

Total assets..................................................................................................................................................................................................................	$ 23,076	$ 150,252	$ 5,401	$ 178,729	$ (84,996 )	$ 93,733

Liabilities:
Deposits in domestic offices⁽⁵⁾...............................................................................................................................................................................................	$ -	$ 6,932	$ 2,867	$ 9,799	$ -	$ 9,799
Trading liabilities, excluding derivatives................................................................................................................................................................................	321	7,021	-	7,342	-	7,342
Derivatives⁽²⁾:
Interest rate contracts......................................................................................................................................................................................................	66	62,702	-	62,768	-	62,768
Foreign exchange contracts..............................................................................................................................................................................................	13	15,191	222	15,426	-	15,426
Equity contracts............................................................................................................................................................................................................	-	999	252	1,251	-	1,251
Precious metals contracts................................................................................................................................................................................................	32	1,186	30	1,248	-	1,248
Credit contracts.............................................................................................................................................................................................................	-	13,553	740	14,293	-	14,293
Derivatives netting........................................................................................................................................................................................................	-	-	-	-	(86,546 )	(86,546 )

Total derivatives................................................................................................................................................................................................................	111	93,631	1,244	94,986	(86,546 )	8,440
Long-term debt⁽⁶⁾................................................................................................................................................................................................................	-	4,957	86	5,043	-	5,043

Total liabilities.......................................................................................................................................................................................................	$ 432	$ 112,541	$ 4,197	$ 117,170	$ (86,546 )	$ 30,624

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

⁽²⁾ Includes trading derivative assets of $9.8 billion and $8.8 billion and trading derivative liabilities of $12.9 billion and $6.8 billion as of June 30, 2012 and December 31, 2011, respectively, as well as derivatives held for hedging and commitments accounted for as derivatives.

⁽³⁾ Includes leveraged acquisition finance and other commercial loans held for sale or risk-managed on a fair value basis for which we have elected to apply the fair value option. See Note 8, "Loans Held for Sale," for further information.

⁽⁴⁾ Represents residential mortgage servicing rights. See Note 9, "Intangible Assets," for further information on residential mortgage servicing rights.

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

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

HSBC USA Inc.

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

Transfers into/out of Levels 1 and 2 During the three and six months ended June 30, 2012 and 2011, there were no transfers between Level 1 and Level 2 measurements.

Information on Level 3 assets and liabilities The following table summarizes additional information about changes in the fair value of Level 3 assets and liabilities during three and six months ended June 30, 2012 and 2011. As a risk management practice, we may risk manage the Level 3 assets and liabilities, in whole or in part, using securities and derivative positions that are classified as Level 1 or Level 2 measurements within the fair value hierarchy. Since those Level 1 and Level 2 risk management positions are not included in the table below, the information provided does not reflect the effect of such risk management activities related to the Level 3 assets and liabilities.


	Apr. 1, 2012	Total Gains and (Losses) Included in⁽¹⁾			Purch- ases	Issua- nces	Settle- ments	Transfers Into Level 3	Transfers Out of Level 3	Jun. 30, 2012	Current Period Unrealized Gains (Losses)
	Apr. 1, 2012	Trading Revenue (Loss)	Other Revenue	Other Comprehensive Income	Purch- ases	Issua- nces	Settle- ments	Transfers Into Level 3	Transfers Out of Level 3	Jun. 30, 2012	Current Period Unrealized Gains (Losses)
	(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations	$ 661	$ 18	$ -	$ -	$ 24	$ -	$ (45 )	$ -	$ -	$ 658	$ 16
Corporate and other domestic debt securities	1,753	(2 )	-	-	19	-	(171 )	-	-	1,599	(6 )
Corporate debt securities issued by foreign entities	294	25	-	-	389	-	(20 )	-	-	688	25
Equity securities	13	(1 )	-	-	-	-	-	-	-	12	(1 )
Derivatives⁽²⁾:
Interest rate contracts	9	-	3	-	-	-	-	-	-	12	3
Foreign exchange contracts	(5 )	(18 )	-	-	-	(5 )	2	-	1	(25 )	(17 )
Equity contracts	(53 )	13	-	-	-	-	(10 )	(1 )	5	(46 )	(1 )
Credit contracts	984	(13 )	-	-	-	-	(50 )	-	-	921	(22 )
Loans⁽³⁾	-	-	-	-	-	-	-	-	-	-	-
Mortgage servicing rights⁽⁴⁾	228	-	(47 )	-	-	(8 )	14	-	-	187	(46 )

Total assets	$ 3,884	$ 22	$ (44 )	$ -	$ 432	$ (13 )	$ (280 )	$ (1 )	$ 6	$ 4,006	$ (49 )

Liabilities:
Deposits in domestic offices	$ (2,964 )	$ (21 )	$ -	$ -	$ -	$ (269 )	$ 79	$ (46 )	$ 313	$ (2,908 )	$ (14 )
Long-term debt	(160 )	10	-	-	-	(132 )	1	(7 )	1	(287 )	5

Total liabilities	$ (3,124 )	$ (11 )	$ -	$ -	$ -	$ (401 )	$ 80	$ (53 )	$ 314	$ (3,195 )	$ (9 )

HSBC USA Inc.


	Jan. 1, 2012	Total Gains and (Losses) Included in⁽¹⁾			Purch- ases	Issua- nces	Settle- ments	Transfers Into Level 3	Transfers Out of Level 3	Jun. 30, 2012	Current Period Unrealized Gains (Losses)
	Jan. 1, 2012	Trading Revenue (Loss)	Other Revenue	Other Comprehensive Income	Purch- ases	Issua- nces	Settle- ments	Transfers Into Level 3	Transfers Out of Level 3	Jun. 30, 2012	Current Period Unrealized Gains (Losses)
	(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations	$ 703	$ 57	$ -	$ -	$ 25	$ -	$ (127 )	$	$	$ 658	$ 49
Corporate and other domestic debt securities	1,679	18	-	-	101	-	(199 )	-	-	1,599	8
Corporate debt securities issued by foreign entities	253	66	-	-	389	-	(20 )	-	-	688	66
Equity securities	13	(1 )	-	-	-	-	-	-	-	12	(1 )
Derivatives⁽²⁾:
Interest rate contracts	9	-	3	-	-	-	-	-	-	12	3
Foreign exchange contracts	(1 )	(19 )	-	-	-	(5 )	2	(3 )	1	(25 )	(19 )
Equity contracts	(83 )	63	-	-	-	-	(29 )	(1 )	4	(46 )	22
Credit contracts	1,353	(388 )	-	-	-	-	(44 )	-	-	921	(355 )
Loans⁽³⁾	11	-	-	-	-	-	-	-	(11 )	-	(12 )
Mortgage servicing rights⁽⁴⁾	220	-	(47 )	-	-	-	14	-	-	187	(47 )

Total assets	$ 4,157	$ (204 )	$ (44 )	$ -	$ 515	$ (5 )	$ (403 )	$ (4 )	$ (6 )	$ 4,006	$ (286 )

Liabilities:
Deposits in domestic offices	$ (2,867 )	$ (77 )	$ -	$ -	$ -	$ (556 )	$ 160	$ (43 )	$ 475	$ (2,908 )	$ (50 )
Long-term debt	(86 )	9	-	-	-	(221 )	5	(7 )	13	(287 )	4

Total liabilities	$ (2,953 )	$ (68 )	$ -	$ -	$ -	$ (777 )	$ 165	$ (50 )	$ 488	$ (3,195 )	$ (46 )

HSBC USA Inc.


	Apr. 1, 2011	Total Gains and (Losses) Included in⁽¹⁾			Purc- hases	Issua- nces	Settle- ments	Transfers Into Level 3	Transfers Out of Level 3	Jun. 30, 2011	Current Period Unrealized Gains (Losses)
	Apr. 1, 2011	Trading Revenue (Loss)	Other Revenue	Other Comprehensive Income	Purc- hases	Issua- nces	Settle- ments	Transfers Into Level 3	Transfers Out of Level 3	Jun. 30, 2011	Current Period Unrealized Gains (Losses)
	(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations	$ 800	$ 17	$ -	$ -	$ 93	$ -	$ (140 )	$ -	$ -	$ 770	$ 13
Corporate and other domestic debt securities	866	(16 )	-	-	771	-	(6 )	-	-	1,615	(16 )
Corporate debt securities issued by foreign entities	269	1	-	-	-	-	1	-	-	271	1
Equity securities	16	1	-	-	-	-	(1 )	-	-	16	1
Derivatives⁽²⁾:
Interest rate contracts	4	-	(1 )	-	-	-	1	-	-	4	(1 )
Foreign exchange contracts	(3 )	4	-	-	-	-	-	-	-	1	4
Equity contracts	(45 )	72	-	-	-	-	(86 )	35	(5 )	(29 )	(12 )
Credit contracts	1,077	108	-	-	-	-	(116 )	-	-	1,069	6
Loans⁽³⁾	12	-	-	-	-	-	(1 )	-	-	11	-
Mortgage servicing rights⁽⁴⁾	396	-	(42 )	-	-	9	-	-	-	363	(42 )

Total assets	$ 3,392	$ 187	$ (43 )	$ -	$ 864	$ 9	$ (348 )	$ 35	$ (5 )	$ 4,091	$ (46 )

Liabilities:
Deposits in domestic offices	$ (4,078 )	$ (81 )	$ -	$ -	$ -	$ (724 )	$ 151	$ (17 )	$ 30	(4,719 )	$ (30 )
Long-term debt	(196 )	(3 )	-	-	-	(524 )	28	(3 )	13	(685 )	(1 )

Total liabilities	$ (4,274 )	$ (84 )	$ -	$ -	$ -	$ (1,248 )	$ 179	$ (20 )	$ 43	$ (5,404 )	$ (31 )

HSBC USA Inc.

	Jan. 1, 2011	Total Gains and (Losses) Included in⁽¹⁾			Purch- ases	Issua- nces	Settle- ments	Transfers Into Level 3	Transfers Out of Level 3	Jun. 30, 2011	Current Period Unrealized Gains (Losses)
	Jan. 1, 2011	Trading Revenue (Loss)	Other Revenue	Other Comprehensive Income	Purch- ases	Issua- nces	Settle- ments	Transfers Into Level 3	Transfers Out of Level 3	Jun. 30, 2011	Current Period Unrealized Gains (Losses)
	(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations	$ 793	$ 28	$ -	$ -	$ 93	$ -	$ (144 )	$ -	$ -	$ 770	$ 17
Corporate and other domestic debt securities	833	(4 )	-	-	792	-	(6 )	-	-	1,615	(4 )
Corporate debt securities issued by foreign entities	243	27	-	-	-	-	1	-	-	271	27
Equity securities	17	-	-	-	-	-	(1 )	-	-	16	-
Derivatives⁽²⁾:
Interest rate contracts	(1 )	-	4	-	-	-	1	-	-	4	4
Foreign exchange contracts	(4 )	5	-	-	-	-	-	-	-	1	5
Equity contracts	12	96	-	-	-	-	(156 )	33	(14 )	(29 )	(52 )
Credit contracts	1,202	(51 )	-	-	-	-	(144 )	-	62	1,069	(159 )
Loans⁽³⁾	11	-	-	-	-	-	-	-	-	11	-
Mortgage servicing rights⁽⁴⁾	394	-	(56 )	-	-	25	-	-	-	363	(56 )

Total assets	$ 3,500	$ 101	$ (52 )	$ -	$ 885	$ 25	$ (449 )	$ 33	$ 48	$ 4,091	$ (218 )

Liabilities:
Deposits in domestic offices	$ (3,612 )	$ (98 )	$ -	$ -	$ -	$ (1,277 )	$ 249	$ (25 )	$ 44	(4,719 )	$ (17 )
Long-term debt	(301 )	(12 )	-	-	-	(599 )	144	(3 )	86	(685 )	(2 )

Total liabilities	$ (3,913 )	$ (110 )	$ -	$ -	$ -	$ (1,876 )	$ 393	$ (28 )	$ 130	$ (5,404 )	$ (19 )

⁽¹⁾ Includes realized and unrealized gains and losses.

⁽²⁾ Level 3 net derivatives included derivative assets of $2.4 billion and $2.2 billion and derivative liabilities of $1.5 billion and $1.1 billion as of June 30, 2012 and 2011, respectively.

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

⁽⁴⁾ See Note 9, "Intangible Assets," for additional information.

HSBC USA Inc.

The following table presents quantitative information about recurring fair value measurement of assets and liabilities classified as Level 3 fair value measurements as of June 30, 2012.


Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs

Collateralized debt obligations.....................................................................................................................................................................		$ 658	Broker quotes or consensus pricing and, where applicable, discounted cash flows	Prepayment rates	0% - 35%
				Constant default rates	4% - 14%
				Loss severity rates	50% - 100%
Corporate and other domestic debt securities..................................................................................................................................................		1,599	Option adjusted discounted cash flows	Option adjusted spread	446 basis points
			Discounted cash flows	Spread volatility on collateral assets	1.7% - 4.2%
				Correlation between insurance claim shortfall and collateral value	80%
Corporate debt securities issued by foreign entities..........................................................................................................................................		688	Discounted cash flows	Correlations of default among a portfolio of credit names of embedded credit derivatives	61% - 73%
Equity securities (investments in hedge funds)................................................................................................................................................		12	Net asset value of hedge funds	Range of fair value adjustments to reflect restrictions on timing and amount of redemption and realization risks	0% - 90%
Interest rate derivative contracts....................................................................................................................................................................		12	Market comparable adjusted for probability to fund	Probability to fund for rate lock commitments	NM⁽¹⁾
Foreign exchange derivative contracts⁽⁴⁾.........................................................................................................................................................		(25 )	Option pricing model	Foreign exchange volatility and correlation of a basket of currencies	NM^{(2) (3)}
Equity derivative contracts..........................................................................................................................................................................		(46 )	Option pricing model	Price volatility of underlying equity and correlations of equities with a basket or index	NM⁽²⁾ ⁽³⁾
Credit derivative contracts⁽⁴⁾........................................................................................................................................................................		921	Option pricing model	Correlation of defaults of a portfolio of reference credit names	12% - 33%
				Industry by industry correlation of defaults	40% - 76%
Mortgage servicing right.............................................................................................................................................................................		187	Option adjusted discounted cash flow	Constant prepayment rates	8.1% - 34.8%
				Option adjusted spread	8.1% - 19.1%
				Estimated annualized costs to service	$98 - $263 per account
Deposits in domestic offices (Structured deposits)............................................................................................................................................		(2,908 )	Option adjusted discounted cash flows	Foreign exchange volatility and correlations of a currency basket within the embedded derivative feature	NM⁽³⁾
				Equity price volatility and correlations of equity baskets or index within the embedded derivative feature
Long-term debt (Structured notes)................................................................................................................................................................		(287 )	Option adjusted discounted cash flows	Foreign exchange volatility and correlations of a currency basket within the embedded derivative feature	NM⁽³⁾
				Equity price volatility and correlations of equity baskets or index within the embedded derivative feature

⁽¹⁾ Insignificant Level 3 measurement. Disclosure is not meaningful to users.

⁽²⁾ We are the client-facing entity and we enter into identical but opposite derivatives to transfer the resultant risks to our affiliates. With the exception of counterparty credit risks, we are market neutral. As a result, the range of significant unobservable inputs is not meaningful as the net risk positions are not significant.

⁽³⁾ The structured notes and structured deposits contain embedded equity or foreign currency derivatives. For financial reporting purposes, we measure the financial instruments at fair value in entirety with changes in fair value recorded in the income statement. For the presentation of this table, we have separated the embedded derivatives from the financial instruments and included them in the equity derivative and foreign currency derivative categories to reflect the underlying risks are managed through identical but offsetting derivatives with affiliates (also see note (2) above).

⁽⁴⁾ Excludes Level 3 inputs for a partially funded total return swap with a third party investor for which we fully hedge the market risks by holding the underlying foreign currency denominated security.

Sensitivity of Level 3 Inputs to Fair Value Measurements

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

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

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

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

Material Additions to and Transfers Into (Out of) Level 3 Measurements During the three and six months ended June 30, 2012, we transferred $313 million and $475 million, respectively, of deposits in domestic offices, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer to maturity and there is more observability in short term volatility.

During the six months ended June 30, 2011, we transferred $62 million of credit derivatives from Level 3 to Level 2 as a result of a qualitative analysis of the foreign exchange and credit correlation attributes of our model used for certain credit default swaps. There were no significant transfers of derivatives during the three months ended June 30, 2011. In addition, during the six months ended June 30, 2011, we transferred $86 million of long-term debt from Level 3 to Level 2. The long-term debt relates to medium term debt issuances where the embedded derivative is no longer unobservable as the derivative option is closer in maturity and there is more observability in short term volatility.

Assets and Liabilities Recorded at Fair Value on a Non-recurring Basis Certain financial and non-financial assets are measured at fair value on a non-recurring basis and therefore, are not included in the tables above. These assets include (a) mortgage and consumer loans classified as held for sale reported at the lower of amortized cost or fair value and (b) impaired loans or assets that are written down to fair value based on the valuation of underlying collateral during the period. These instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustment in certain circumstances (e.g., impairment). The following table presents the fair value hierarchy level within which the fair value of the financial and non-financial assets has been recorded as of June 30, 2012 and 2011. The gains (losses) during the three and six months ended June 30, 2012 and 2011 are also included.


	Non-Recurring Fair Value Measurements as of June 30, 2012				Total Gains (Losses) For the Three Months Ended June 30, 2012	Total Gains (Losses) For the Six Months Ended June 30, 2012
	Level 1	Level 2	Level 3	Total
	(in millions)
Residential mortgage loans held for sale⁽¹⁾.........................................................................................................................................	$ -	$ 4	$ 188	$ 192	$ (4 )	$ (6 )
Other consumer loans held for sale⁽¹⁾..................................................................................................................................................	-	-	67	67	-	-
Impaired loans⁽²⁾......................................................................................................................................................................................	-	-	289	289	(12 )	(23 )
Real estate owned⁽³⁾................................................................................................................................................................................	-	19	-	19	-	2
Commercial loans held for sale.............................................................................................................................................................	-	349	-	349	-	-

Total assets at fair value on a non-recurring basis...........................................................................................................................	$ -	$ 372	$ 544	$ 916	$ (16 )	$ (27 )


	Non-Recurring Fair Value Measurements as of June 30, 2011				Total Gains (Losses) For the Three Months Ended June 30, 2011	Total Gains (Losses) For the Six Months Ended June 30, 2011
	Level 1	Level 2	Level 3	Total
	(in millions)
Residential mortgage loans held for sale⁽¹⁾.........................................................................................................................................	$ -	$ 38	$ 248	$ 286	$ (7 )	$ (6 )
Other consumer loans held for sale⁽¹⁾..................................................................................................................................................	-	-	74	74	-	-
Impaired loans⁽²⁾......................................................................................................................................................................................	-	-	440	440	7	8
Real estate owned⁽³⁾................................................................................................................................................................................	-	42	-	42	1	(3 )
Commercial loans held for sale.............................................................................................................................................................	-	13	-	13	-	-
Impairment of certain previously capitalized software development costs⁽⁴⁾................................................................................	-	-	-	-	(16 )	(94 )
Building held for sale.............................................................................................................................................................................	-	-	8	8	(5 )	(5 )

Total assets at fair value on a non-recurring basis...........................................................................................................................	$ -	$ 93	$ 770	$ 863	$ (20 )	$ (100 )

⁽¹⁾ As of June 30, 2012 and 2011, the fair value of the loans held for sale was below cost. Certain residential mortgage loans held for sale have been classified as a Level 3 fair value measurement within the fair value hierarchy as the underlying real estate properties which determine fair value are illiquid assets as a result of market conditions and significant inputs in estimating fair value were unobservable. Additionally, the fair value of these properties is affected by, among other things, the location, the payment history and the completeness of the loan documentation.

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

⁽³⁾ Real estate owned are required to be reported on the balance sheet net of transactions costs. The real estate owned amounts in the table above reflect the fair value unadjusted for transaction costs.

⁽⁴⁾ In the first quarter of 2011 it was determined that certain previously capitalized software development costs were no longer realizable as a result of the decision to cancel certain projects and, therefore, we recorded an impairment charge of $78 million representing the full amount of the developed software capitalized associated with these projects. The impairment charge was recorded in other expenses in our consolidated statement of income and is included in the results of our RBWM and CMB segment. During the second quarter of 2011, HSBC completed a comprehensive review of all platforms currently under development which resulted in additional projects being cancelled. As a result, we recorded an additional charge of $16 million relating to the impairment of certain previously capitalized software development costs relating to these projects which were determined to be no longer realizable. The impairment charges were recorded in other expenses in our consolidated statement of income and are included in the results of our segments principally in RBWM and CMB.

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


Financial Instrument Type	Fair Value (in millions)	Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Residential mortgage loans held for sale..............................................................................................................................................	$ 188	Valuation of third party appraisal on underlying collateral	Loss severity rates	30% - 70%
Impaired loans...........................................................................................................................................................................................	289	Valuation by third party appraisal on underlying collateral	Loss severity rates	3% - 100%

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

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

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

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

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

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

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

• Commercial impaired loans - Fair value is determined primarily by an analysis of discounted expected cash flows with a reference to independent valuations of underlying loan collateral and considering secondary market prices for distressed debt, where applicable.

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

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

Lending-related commitments - The fair value of commitments to extend credit, standby letters of credit and financial guarantees are not included in the table. The majority of the lending related commitments are not carried at fair value on a recurring basis nor are they actively traded. These instruments generate fees, which approximate those currently charged to originate similar commitments, which are recognized over the term of the commitment period. Deferred fees on commitments and standby letters of credit totaled $52 million and $44 million at June 30, 2012 and December 31, 2011, respectively.

HSBC USA Inc.

Precious metals trading - Precious metals trading primarily include physical inventory which are valued using spot prices.

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

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

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

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

Additional information relating to asset-backed securities and collateralized debt obligations is presented in the following tables:

Trading asset-backed securities and related collateral:


		Prime		Alt-A		Sub-prime
Rating of Securities:	Collateral Type:	Level 2	Level 3	Level 2	Level 3	Level 2	Level 3	Total
		(in millions)
AAA -A..................................................................................................................................................................................................................	Residential mortgages	$ -	$ -	$ 71	$ -	$ 198	$ -	$ 269
	Home equity	-	-	-	-	-	-	-
	Student loans	-	-	-	-	-	-	-
	Other	-	-	-	-	-	-	-

	Total AAA -A	-	-	71	-	198	-	269

BBB -B.....................................................................................................................................................................................................................	Residential mortgages	-	-	1	-	-	-	1
	Home equity	-	-	-	-	-	-	-

	Total BBB -B	-	-	1	-	-	-	1

CCC -Unrated.........................................................................................................................................................................................................	Residential mortgages	-	-	-	-	4	-	4
	Home equity	-	-	-	-	-	-	-
	Other	-	-	-	-	-	-	-

	Total CCC -Unrated	-	-	-	-	4	-	4

		$ -	$ -	$ 72	$ -	$ 202	$ -	$ 274

HSBC USA Inc.

Trading collateralized debt obligations and related collateral:


Rating of Securities:	Collateral Type:	Level 2	Level 3
	(in millions)
AAA -A..................................................................................................................................................................................................................	Commercial mortgages	$ -	$ -
	Residential mortgages	-	-
	Student loans	55	-
	Other	-	-

	Total AAA -A	55	-

BBB -B.....................................................................................................................................................................................................................	Commercial mortgages	-	163
	Corporate loans	-	331
	Other	-	141

	Total BBB -B	-	635

CCC -Unrated.........................................................................................................................................................................................................	Commercial mortgages	-	64
	Corporate loans	-	-
	Other	-	-

	Total CCC -Unrated	-	64

		$ 55	$ 699

Available-for-sale securities backed by collateral:


		Commercial Mortgages		Prime		Alt-A		Sub-prime
Rating of Securities:	Collateral Type:	Level 2	Level 3	Level 2	Level 3	Level 2	Level 3	Level 2	Level 3	Total
		(in millions)
AAA -A..................................................................................................................................................................................................................	Residential mortgages	$ -	$ -	$ -	$ -	$ 3	$ -	$ -	$ -	$ 3
	Commercial mortgages	305	-	-	-	-	-	-	-	305
	Home equity	-	-	-	-	108	-	-	-	108
	Student loans	-	-	-	-	9	-	-	-	9
	Other	-	-	-	-	85	-	-	-	85

	Total AAA -A	305	-	-	-	205	-	-	-	510

BBB -B.....................................................................................................................................................................................................................	Residential mortgages	-	-	-	-	-	-	-	-	-
	Home equity	-	-	-	-	79	-	1	-	80

	Total BBB -B	-	-	-	-	79	-	1	-	80

CCC -Unrated.........................................................................................................................................................................................................	Residential mortgages	-	-	-	-	2	-	-	-	2
	Home equity	-	-	-	-	63	-	-	-	63

	Total CCC -Unrated	-	-	-	-	65	-	-	-	65

		$ 305	$ -	$ -	$ -	$ 349	$ -	$ 1	$ -	$ 655

• Other domestic debt and foreign debt securities (corporate and government) - Except for certain structured securities, substantially all of the domestic and foreign securities are classified as Level 3 measurements. For non-callable corporate securities, a credit spread scale is created for each issuer. These spreads are then added to the equivalent maturity U.S. Treasury yield to determine current pricing. Credit spreads are obtained from the new market, secondary trading levels and dealer quotes. For securities with early redemption features, an option adjusted spread ("OAS") model is incorporated to adjust the spreads determined above. Additionally, we survey the broker/dealer community to obtain relevant trade data including benchmark quotes and updated spreads.

HSBC USA Inc.

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

Derivatives - Derivatives are recorded at fair value. Asset and liability positions in individual derivatives that are covered by legally enforceable master netting agreements, including cash collateral are offset and presented net in accordance with accounting principles which allow the offsetting of amounts relating to certain contracts.

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

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

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

• Interest Rate Derivatives - Swaps use interest rate curves based on currency that are actively quoted by brokers and other pricing services. Options will also use volatility inputs which are also quoted in the broker market. We use the Overnight Indexed Swap (OIS) curves as inputs to measure the fair value of certain collateralized interest rate derivatives.

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

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

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

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

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

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

Structured notes - Certain structured notes were elected to be measured at fair value in their entirety under fair value option accounting principles. As a result, derivative features embedded in the structured notes are included in the valuation of fair value. The valuation of embedded derivatives may include significant unobservable inputs such as correlation of the referenced credit names or volatility of the embedded option. Other significant inputs include interest rates (yield curve), time to maturity, expected loss and loss severity.

Cash flows of the funded notes are discounted at the appropriate rate for the applicable duration of the instrument adjusted for our own credit spreads. The credit spreads applied to these instruments are derived from the spreads at which institutions of similar credit standing would offer for issuing similar structured instruments as of the measurement date. The market spreads for structured notes are generally lower than the credit spreads observed for plain vanilla debt or in the credit default swap market.

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

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

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

23. New Accounting Pronouncements

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts In October 2010, the FASB issued guidance which amends the accounting rules that define which costs associated with acquiring or renewing insurance contracts qualify as deferrable acquisition costs by insurance entities. We adopted the new guidance effective January 1, 2012. The adoption of this guidance did not have a material impact on our financial position or results of operations.

Repurchase Agreements In April 2011, the FASB issued a new Accounting Standards Update related to repurchase agreements. This new guidance removes the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and the related collateral maintenance guidance from the assessment of effective control. As a result, an entity is no longer required to consider the sufficiency of the collateral exchanged but will evaluate the transferor's contractual rights and obligations to determine whether it maintains effective control over the transferred assets. The new guidance is required to be applied prospectively for all transactions that occur on or after January 1, 2012. Adoption did not have a material impact on our financial position or results of operations.

HSBC USA Inc.

Fair Value Measurements and Disclosures In May 2011, the FASB issued an Accounting Standards Update to converge with newly issued IFRS 13, Fair Value Measurement. The new guidance clarifies that the application of the highest and best use and valuation premise concepts are not relevant when measuring the fair value of financial assets or liabilities. This Accounting Standards Update also requires new and enhanced disclosures on the quantification and valuation processes for significant unobservable inputs, transfers between Levels 1 and 2, and the categorization of all fair value measurements into the fair value hierarchy, even where those measurements are only for disclosure purposes. We adopted the new disclosure requirements effective January 1, 2012. See Note 22, "Fair Value Measurement," in these consolidated financial statements.

Presentation of Comprehensive Income In June 2011, the FASB issued a new Accounting Standards Update on the presentation of other comprehensive income. This Update requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The option to present items of other comprehensive income in the statement of changes in equity is eliminated. We adopted the new guidance effective January 1, 2012. See the Consolidated Statement of Comprehensive Income and Note 14, "Accumulated Other Comprehensive Income," in these consolidated financial statements.

Goodwill In September 2011, the FASB issued an Accounting Standards Update which simplifies goodwill impairment testing. The new guidance provides entities with the option to first assess goodwill qualitatively to determine whether it is necessary to perform the required two-step quantitative goodwill impairment test. If it is determined that it is not more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, then the two-step quantitative impairment test would not be required. An entity may, however, choose to bypass the qualitative assessment for any reporting unit in any period and move directly to the two-step impairment test. The guidance is effective for annual and interim goodwill impairment tests performed after January 1, 2012. Adoption of this guidance did not have a significant impact on our process for determining goodwill impairment.

Balance Sheet Offsetting In December 2011, the FASB issued an Accounting Standards Update that requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities will be required to disclose both gross information and net information about instruments and transactions eligible for offset in the statement of financial position and those which are subject to an agreement similar to master netting arrangement. The new guidance is effective for all annual and interim periods beginning January 1, 2013. Additionally, entities will be required to provide the disclosures required by the new guidance retrospectively for all comparative periods. The adoption of this guidance will not have an impact on our financial position or results of operations.

HSBC USA Inc.

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

Forward-Looking Statements

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report and with our Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 Form 10-K"). MD&A may contain certain statements that may be forward-looking in nature within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make or approve certain statements in future filings with the SEC, in press releases, or oral or written presentations by representatives of HSBC USA Inc. ("HSBC USA") that are not statements of historical fact and may also constitute forward-looking statements. Words such as "may," "will," "should," "would," "could," "appears," "believe," "intends," "expects," "estimates," "targeted," "plans," "anticipates," "goal" and similar expressions are intended to identify forward-looking statements but should not be considered as the only means through which these statements may be made. These matters or statements will relate to our future financial condition, economic forecast, results of operations, plans, objectives, performance or business developments and will involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from that which were expressed or implied by such forward-looking statements. Forward-looking statements are based on our current views and assumptions and speak only as of the date they are made. HSBC USA Inc. undertakes no obligation to update any forward-looking statement to reflect subsequent circumstances or events.

Executive Overview

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

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

Current Environment The U.S. economy continued its overall weak recovery during the first half of 2012. During the second quarter, first quarter GDP was revised down to 1.9% and uncertainty remains an issue as businesses and markets look for clarity on Europe, the health of the U.S. economy and fiscal policy. For the second year in a row, consumer confidence has been on the decline during the second quarter as sovereign debt fears in Europe and domestic fiscal uncertainties are again playing a role in diminishing sentiment and continued to impact interest rates and spreads. Serious threats to economic growth remain, including high energy costs, continued pressure and uncertainty in the housing market and elevated unemployment levels. Businesses continue to be cautious about the underlying strength of demand over the remainder of 2012 and are hesitant about ramping up their hiring activity. Federal Reserve policy makers currently anticipate that economic conditions are likely to warrant exceptionally low levels for the Federal funds rate at least through late 2014 and recent worries about the spillover effects of the deepening fiscal crisis in Europe have once again raised the possibility that the Federal Reserve may initiate new action to stimulate economic activity. The prolonged period of low Federal funds rates continues to put pressure on spreads earned on our deposit base. While home sales have improved since the end of 2011 and the oversupply of homes for sale has been shrinking, in part due to industry-wide foreclosure issues, housing prices continue to remain under pressure in many markets due to elevated foreclosure levels and further declines may be necessary before substantial progress in reducing the inventory of homes occurs.

HSBC USA Inc.

While the economy continued to add jobs in the first half of 2012, the pace of new job creation continues to be slower than needed to meaningfully reduce unemployment. As a result, there continues to be uncertainty as to how pronounced the economic recovery will be and whether it can be sustained. U.S. unemployment rates, which have been a major factor in the deterioration of credit quality in the U.S., remained high at 8.2 percent in June 2012. Also, a significant number of U.S. residents are no longer looking for work and, therefore, 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, volatility in energy prices, credit market volatility, including the ability to permanently resolve the European sovereign debt crisis and trends in corporate earnings will continue to influence the U.S. economic recovery and the capital markets. In particular, continued improvement in unemployment rates, a sustained recovery of the housing markets and stabilization in energy prices remain critical components of a broader U.S. economic recovery. Further weakening in any of these components as well as in consumer confidence may result in additional deterioration in consumer payment patterns and credit quality. Weak consumer fundamentals including declines in wage income and a difficult job market continue to influence consumer confidence. Additionally, there is continued uncertainty as to the future course of monetary policy and as to the impact on the economy and consumer confidence as the actions previously taken by the government to restore faith in the capital markets and stimulate consumer spending end. These conditions in combination with the impact of recent regulatory changes, including the continued implementation of the "Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010" ("Dodd-Frank"), will continue to impact our results in 2012 and beyond, the degree of which is largely dependent upon the pace and extent of the economic recovery.

Due to the significant slow-down in foreclosure processing which began in the second half of 2008, and in some instances the prior cessation of all foreclosure processing by numerous loan servicers in late 2010, there has been a reduction in the number of properties being marketed following foreclosure. This reduction may increase demand for properties currently on the market resulting in a stabilization of home prices but may also result in a larger number of vacant properties still pending foreclosure in certain communities creating downward pressure on general property values. Moreover, as servicers begin to increase foreclosure activities and market properties in large numbers, a significant over-supply of housing inventory is likely to occur. This could lead to an increase in loss severity, which would adversely impact our provision for credit losses in future periods.

In addition, certain courts and state legislatures have issued new rules or statutes relating to foreclosures. Scrutiny of foreclosure documentation has increased in some courts. Also, in some areas, officials are requiring additional verification of information filed prior to the foreclosure proceeding. The combination of these factors has led to a significant backlog of foreclosures which will take time to resolve. If these trends continue, there could be additional delays in the processing of foreclosures, which could have an adverse impact upon housing prices that is likely to result in higher loss severities while foreclosures are delayed.

Growing government indebtedness and a large budget deficit have resulted in a downgrade in the U.S. sovereign debt rating by one major rating agency and two major rating agencies having U.S. sovereign debt on a negative watch. There is an underlying risk that lower growth, fiscal challenges and a general lack of political consensus will result in continued scrutiny of the U.S. credit standing over the longer term. While the potential effects of the U.S. downgrade are broad and impossible to accurately predict, they could over time include a widening of sovereign and corporate credit spreads, devaluation of the U.S. dollar and a general market move away from riskier assets.

Performance, Developments and Trends Loss from continuing operations was $593 million and $513 million during the three and six months ended June 30, 2012, respectively, compared to a loss of $44 million and income of $261 million during the three and six months ended June 30, 2011, respectively. Loss from continuing operations before income tax expense was $242 million and $144 million during the three and six months ended June 30, 2012, respectively, compared to income of $90 million and $382 million during the three and six months ended June 30, 2011, respectively. Income (loss) from continuing operations before income tax expense decreased during the three and six months ended June 30, 2012 as compared to the prior year periods driven by higher operating expenses and lower net interest margin, partially offset by higher other revenue and lower provision for credit losses. Other revenues in both 2012 periods includes a $330 million pre-tax gain ($71 million after-tax) from the sale of certain branches to First Niagara and operating expenses in both 2012 periods includes a $700 million expense accrual related to certain regulatory matters. In addition, our results in all periods were also impacted by the change in the fair value of our own debt and the related derivatives for which we have elected fair value option and in 2011, a non-recurring impairment of software development costs, all of which distorts the ability of investors to compare the underlying performance trends of our business. In order to better understand the underlying performance of our business, the following table summarizes the collective impact of these items on our income from continuing operations before income tax for all periods presented:


	Three Months Ended June 30,		Six Months Ended June 30,
	2012	2011	2012	2011
	(in millions)
Income (loss) from continuing operations before income tax, as reported....................................................................	$ (242 )	$ 90	$ (144 )	$ 382
Change in value of our own fair value option debt and related derivatives..................................................................	(165 )	(54 )	72	(39 )
Gain on sale of branches.......................................................................................................................................................	(330 )	-	(330 )	-
Expense accrual related to certain regulatory matters⁽¹⁾....................................................................................................	700	-	700	-
Impairment of software development costs .......................................................................................................................	-	16	-	94

Income (loss) from continuing operations before income tax, excluding above items⁽²⁾..............................................	$ (37 )	$ 52	$ 298	$ 437

⁽¹⁾ For additional discussion regarding expense accrual related to certain regulatory matters, see Note 21, "Litigation and Regulatory Matters," in the accompanying consolidated financial statements.

⁽²⁾ Represents a non-U.S. GAAP financial measure.

Excluding the collective impact of the items in the table above, our income from continuing operations before tax for the three and six months ended June 30, 2012 remained lower compared to the prior year periods as lower other revenues and lower net interest income were partially offset by lower provision for credit losses and lower operating expenses.

During the six months ended June 30, 2012, we continued to reduce certain risk positions as opportunities arose. Improved market conditions and reduced outstanding exposure have resulted in a stabilization of valuation adjustments recorded, although we did see volatility once again during the second quarter of 2012 for some positions which affected the performance of our legacy Global Banking and Markets assets. A summary of the significant valuation adjustments that impacted revenue for the three and six months ended June 30, 2012 and 2011 are presented in the following table.

HSBC USA Inc.


	Three Months Ended June 30,		Six Months Ended June 30,
	2012	2011	2012	2011
	(in millions)
Gains (Losses)
Insurance monoline structured credit products⁽¹⁾.......................................................................................................................	$ (18 )	$ 16	$ (10 )	$ 32
Other structured credit products⁽¹⁾................................................................................................................................................	33	45	74	126
Mortgage whole loans held for sale, including whole loan purchase settlement (predominantly subprime)⁽²⁾................	(2 )	(9 )	(3 )	(14 )
Leverage acquisition finance loans held for sale⁽⁴⁾.....................................................................................................................	4	(17 )	34	17

Total gains (losses).........................................................................................................................................................................	$ 17	$ 35	$ 95	$ 161

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

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

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

As discussed above, other revenues in the three and six months ended June 30, 2012 includes a gain from the sale of certain retail branches to First Niagara and in all periods reflects the impact of changes in value of our own debt and related derivatives for which we elected fair value option. Excluding the impact of these items, other revenue decreased $110 million and $112 million during the three and six months ended June 30, 2012, respectively, due primarily to lower trading revenue, lower other fees and commissions, lower credit card fees, lower other income and in the three month period, lower mortgage banking revenue, partially offset by higher securities gains. The lower trading revenue was driven by lower revenues in our legacy global markets businesses, as well as a decline in deal activity from weaker market conditions, partially offset by higher income from payments and cash management and, in the six month period, higher foreign exchange revenue which benefited from greater activity. Lower other fees and commissions were driven by lower debit card fees, while the lower credit card fees reflect lower outstanding balances driven by the sale of a portion of the portfolio to First Niagara in May. The lower other income was driven by lower earnings from equity investments and lower miscellaneous income. The lower mortgage banking revenue in the three month period was largely due to a higher provision for repurchase obligations and lower net MSR performance. Securities gains were higher due to increased sales associated with a re-balancing of the portfolio for risk management purposes based on the current interest rate environment. See "Results of Operations" for a more detailed discussion of other revenues.

Net interest income was $535 million and $1.1 billion during the three and six months ended June 30, 2012 compared to $543 million and $1.2 billion during the year-ago periods. The decrease in both periods reflects the impact of lower interest income on securities due to lower interest rates, partially offset by higher interest income on loans, driven by higher average balances on commercial loans due to new business volume. Also partially offsetting the decrease was lower interest expense driven largely by lower interest charges related to tax exposures as the prior year periods reflect an increase to interest expense of $84 million relating to both changes in estimated tax exposure as well as changes to the rate used to calculate interest on certain tax exposures. See "Results of Operations" for a more detailed discussion of net interest income.

Our provision for credit losses was $89 million during both the three and six months ended June 30, 2012, compared to $95 million and $93 million during the three and six months ended June 30, 2011, respectively. In our consumer loan portfolio, the provision for credit losses increased in both periods primarily due to higher provisions in our residential mortgage loan portfolio driven by higher loss estimates on troubled debt restructures and, as it relates to our home equity mortgage portfolio, higher charge-offs due to an increased volume of loans where we have decided not to pursue foreclosure. These increases were partially offset by continued improvements in economic and credit conditions, including lower dollars of delinquency and improvements in loan delinquency roll rates. In our commercial portfolio, the provision for credit losses was lower in both periods as the prior year periods include a specific provision associated with the downgrade of an individual commercial real estate loan. Excluding the specific provision, our commercial loan provision increased in both periods driven largely by increased levels of reserves for risk factors associated with expansion activities in the U.S and Latin America as well as the impact of higher reserve releases in the prior year. See "Results of Operations" for a more detailed discussion of our provision for credit losses.

Operating expenses totaled $1.6 billion and $2.4 billion during the three and six months ended June 30, 2012, respectively, an increase of 74 percent and 32 percent, respectively, compared to the year-ago periods. Operating expenses in both 2012 periods reflects a $700 million expense accrual in the second quarter of 2012 related to certain regulatory matters and in 2011, an impairment of certain previously capitalized software development costs which totaled $16 million and $94 million in the three and six months ended June 30, 2011, respectively. Excluding the impact of these items, operating expenses decreased 3 percent and 1 percent, respectively, compared to the year-ago periods as lower salaries and benefits, lower occupancy costs as well as lower marketing and FDIC assessment fees were partially offset by higher compliance costs. Compliance costs were a significant component of our cost base in the first half of 2012, totaling $111 million and $208 million in the three and six months ended June 30, 2012, respectively, compared to $70 million and $95 million in the year-ago periods, largely attributable to investment in BSA/AML process enhancements and infrastructure. While we continue to focus attention on cost mitigation efforts in order to continue realization of optimal cost efficiencies, we expect compliance remediation related costs will remain elevated in 2012 as we continue to address the requirements of the regulatory consent agreements. See "Results of Operations" for a more detailed discussion of our operating expenses.

Our efficiency ratio from continuing operations was 110.94 percent during the three months ended June 30, 2012 compared to 82.79 percent during the year-ago quarter. Our efficiency ratio from continuing operations was 102.34 percent during the six months ended June 30, 2012 compared to 79.31 percent during the year-ago period. Our efficiency ratio was impacted in all periods by the change in the fair value of our own debt and related derivatives for which we have elected fair value option accounting. Also impacting the efficiency ratio in both 2012 periods was the gain from the sale of certain non-strategic retail branches to First Niagara as well as a $700 million expense accrual related to certain regulatory matters and, in both prior year periods, the impairment of certain software development costs discussed above. Excluding the impact of these items, our efficiency ratio was 94.24 percent and 81.52 percent in the three and six months ended June 30, 2012, respectively, compared to 85.60 percent and 76.48 percent in the corresponding three and six months ended June 30, 2011. The increase in the efficiency ratio was a result of a decline in net interest income and other revenues as discussed above, partially offset by lower operating expenses. While operating expenses declined in both periods, driven by the impact of our retail branch divestitures and cost mitigation efforts, they continue to reflect elevated levels of compliance costs.

We continue to focus on cost optimization efforts to ensure realization of cost efficiencies. In an effort to create a more sustainable cost structure, a formal review was initiated in 2011 to identify areas where we may be able to streamline or redesign operations within certain functions to reduce or eliminate costs. To date, we have identified various opportunities to reduce costs through organizational structure redesign, vendor spending, discretionary spending and other general efficiency initiatives. Workforce reductions, some of which relate to organizational structure redesign, have resulted in total legal entity full-time equivalent employees being reduced by 20 percent since June 30, 2011. Workforce reductions are also occurring in certain non-compliance shared services functions, which we expect will result in additional reductions to future allocated costs for these functions. The review is continuing 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.

Our effective tax rate was 146.2 percent for the three months ended June 30, 2012 compared to 148.9 percent in the prior year quarter. Our effective tax rate was 257.9 percent for the six months ended June 30, 2012 compared to 31.7 percent in the prior year period. The effective tax rate for the three and six months ended June 30, 2012 reflects non-deductible goodwill related to the branches sold to First Niagara, a non-deductible expense accrual related to certain regulatory matters, the establishment of a tax reserve against the current liability account, foreign tax expense, an increase in the state uncertain tax reserve accrual, the utilization of low income housing credits and the impact of state taxes. The effective tax rate for the six months ended June 30, 2012 also reflects the effect of a change in state rates used to value deferred taxes. The effective tax rate for the three and six months ended June 30, 2011 primarily reflects an adjustment in uncertain tax positions, the utilization of low income housing tax credits, a change in state tax rates used to value deferred taxes, the impact of state taxes and the release of valuation allowance previously established on foreign tax credits. See Note 13, "Income Taxes," in the accompanying consolidated financial statements for further discussion.

On May 1, 2012, HSBC, through its wholly-owned subsidiaries HSBC Finance Corporation, HSBC USA Inc. and other wholly-owned affiliates, completed the sale of its Card and Retail Services business to Capital One Financial Corporation ("Capital One"). The sale included our GM and UP credit card receivables as well as our private label credit card and closed-end receivables, all of which were purchased from HSBC Finance. We recorded lower of amortized cost or fair value adjustments totaling $1.0 billion on these receivables since being classified as held for sale as a component of Assets of discontinued operations on our balance sheet during the third quarter of 2011, of which $107 million and $440 million was recorded in the three and six months ended June 30, 2012, respectively. This fair value adjustment was largely offset by held for sale accounting adjustments in which loan impairment charges and premium amortization are no longer recorded. The total final cash consideration allocated to us based upon April 30, 2012 balances was approximately $19.2 billion, which did not result in the recognition of a gain or loss upon completion of the sale as the receivables were recorded at fair value.

On May 18, 2012, we completed the sale of 138 branches to First Niagara and recognized an after-tax gain, net of allocated non-deductible goodwill, of $71 million. Since the premium received of $886 million was calculated based on the total amount of outstanding deposit balances for all branches being sold, a pro-rata portion of the premium related to the deposit balances associated with the branches that were not sold in the amount of $209 million was deferred as unearned revenue and will be recognized in future periods as the remaining branches and related deposit amounts are sold. Included in the sale of the 138 non-strategic retail branches were approximately $10.3 billion in deposits and $1.6 billion in loans. Branch premises were sold for fair value and loans and other transferred assets were sold at their book values. We subsequently completed the sale of an additional 53 branches during July 2012 and expect to recognize an additional after-tax gain, net of allocated non-deductible goodwill, of approximately $26 million in the third quarter. We currently anticipate we will complete the sale of the remaining 4 non-strategic retail branches during August 2012 which will not have a significant financial impact on our operations.

In April 2012, we completed the de-recognition of our 452 Fifth Avenue headquarters building which was sold in April 2010. The building was not able to be de-recognized at the time of sale due to a profit sharing arrangement with the purchaser relating to any future sale of the building which expired in April. The deferred gain of $117 million will be amortized over the remaining life of the lease which is eight years.

We previously announced to employees that we are considering strategic options for our mortgage operations, with the objective of recommending the future course of our prime mortgage lending and mortgage servicing platforms. On May 7, 2012, we announced that we have entered into a strategic relationship with PHH Mortgage to manage our mortgage processing and servicing operations. The conversion of these operations is expected to be completed in the first quarter of 2013. Under the terms of the agreement, PHH Mortgage will provide us with mortgage origination processing services as well as sub-servicing of our portfolio of owned and serviced mortgages totaling $52.2 billion as of June 30, 2012. We will continue to own both the mortgages on our balance sheet and the mortgage servicing rights associated with these loans. We will sell our agency eligible originations to PHH Mortgage on a servicing released basis which will result in no additional mortgage servicing rights being recognized going forward. As a result of this agreement, many of our mortgage servicing employees will be given the opportunity to transfer to PHH Mortgage. No significant one-time restructuring costs have been or are expected to be incurred as a result of this transaction. We plan to continue originating mortgages for our customers with particular emphasis on Premier relationships.

HSBC USA Inc.

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.

The financial information set forth below summarizes selected financial highlights of HSBC USA Inc. as of June 30, 2012 and December 31, 2011 and for the three and six months ended June 30, 2012 and 2011.


	Three Months Ended June 30,		Six Months Ended June 30,
	2012	2011	2012	2011
	(dollars are in millions)
Income (loss) from continuing operations.....................................................................................................................................................	$ (593 )	$ (44 )	$ (513 )	$ 261

Rate of return on average :
Total assets...................................................................................................................................................................................................	(1.22 )%	(.10 )%	(.54 )%	.30 %
Total common shareholder's equity..........................................................................................................................................................	(14.60 )	(2.02 )	(6.42 )	2.91
Net interest margin to average earning assets..............................................................................................................................................	1.29	1.29	1.35	1.45
Efficiency ratio⁽²⁾.................................................................................................................................................................................................	110.94	82.79	102.34	79.31
Commercial loan net charge-off ratio⁽¹⁾............................................................................................................................................................	.09	.70	.49	.42
Consumer loan net charge-off ratio⁽¹⁾..............................................................................................................................................................	1.41	1.32	1.39	1.38


	June 30, 2012	December 31, 2011
	(dollars are in millions)
Loans:
Commercial loans......................................................................................................................................................................................	$ 37,417	$ 33,649
Consumer loans.........................................................................................................................................................................................	18,647	18,218

Total loans.......................................................................................................................................................................................................	$ 56,064	$ 51,867

Loans held for sale.........................................................................................................................................................................................	$ 1,982	$ 3,670

Allowance for credit losses as a percent of loans⁽¹⁾..................................................................................................................................	1.10 %	1.43 %
Consumer two-months-and-over contractual delinquency.....................................................................................................................	6.18	6.01
Loan-to-deposits ratio⁽³⁾.................................................................................................................................................................................	60.98	53.33
Total shareholders' equity to total assets..................................................................................................................................................	9.12	9.80
Total capital to risk weighted assets...........................................................................................................................................................	20.61	18.39
Tier 1 capital to risk weighted assets..........................................................................................................................................................	14.34	12.74
Tier 1 common equity to risk weighted assets...........................................................................................................................................	11.97	10.72

⁽¹⁾ Excludes loans held for sale.

⁽²⁾ Total operating expenses, reduced by minority interests, expressed as a percentage of the sum of net interest income and other revenues.

⁽³⁾ Represents period end loans, net of loss reserves, as a percentage of domestic deposits less certificate of deposits equal to or less than $100 thousand. Excluding the deposits and loans held for sale to First Niagara, the ratio was 62.82 and 59.60 percent at June 30, 2012 and December 31, 2011.

Loans Loans, excluding loans held for sale, were $56.1 billion at June 30, 2012 compared to $51.9 billion at December 31, 2011. The increase in loans as compared to December 31, 2011 was driven by an increase in commercial loans of $3.8 billion due to new business activity, particularly in global banking as well as in business banking and middle market enterprises, while consumer loans increased modestly, driven by higher levels of residential mortgage loans largely associated with originations targeted at our Premier customer relationships. The commercial loan increases were partially offset by paydowns and managed reductions in certain exposures. We continue to sell a substantial portion of new mortgage loan originations to government sponsored enterprises. See "Balance Sheet Review" for a more detailed discussion of the changes in loan balances.

HSBC USA Inc.

Credit Performance Our allowance for credit losses as a percentage of total loans decreased to 1.10 percent at June 30, 2012 as compared to 1.43 percent at December 31, 2011. The decrease in our allowance ratio reflects a lower allowance for credit losses in substantially all of our loan portfolios due to improved credit quality, including lower dollars of delinquency, reductions in certain commercial loan exposures including the charge-off of three specific global banking client relationships and continuing improvements in economic conditions.

Our consumer two-months-and-over contractual delinquency as a percentage of loans and loans held for sale ("delinquency ratio") increased to 6.18 percent at June 30, 2012 as compared to 6.01 percent at December 31, 2011 driven largely by lower overall receivable balances in our residential mortgage loan portfolio due to lower loan levels of residential mortgages loans held for sale, a substantial majority of which were less than 60 days contractually delinquent, partially offset by improved delinquency levels. See "Credit Quality" for a more detailed discussion of the increase in our delinquency ratios.

Net charge-offs as a percentage of average loans ("net charge-off ratio") for the three months ended June 30, 2012 decreased 52 basis points compared to the quarter ended March 31, 2012 due to higher commercial loan charge-offs in the prior quarter driven by three specific global banking client relationships. Compared to the prior year quarter, our net charge-off ratio decreased 41 basis points driven by lower levels of commercial loan charge-offs. See "Credit Quality" for a more detailed discussion of our trends in net charge-off.

Funding and Capital Capital amounts and ratios are calculated in accordance with current banking regulations. Our Tier 1 capital ratio was 14.34 percent and 12.74 percent at June 30, 2012 and December 31, 2011, respectively. Our capital levels remain well above levels established by current banking regulations as "well capitalized". We did not receive any cash capital contributions from our immediate parent, HSBC North America Inc. ("HNAI") during the first half of 2012.

As part of the regulatory approvals with respect to the affiliate receivable purchases completed in January 2009, HSBC Bank USA and HSBC made certain additional capital commitments to ensure that HSBC Bank USA holds sufficient capital with respect to the purchased receivables that are or may become "low-quality assets," as defined by the Federal Reserve Act. These capital requirements, which require a risk-based capital charge of 100 percent for each "low-quality asset" transferred or arising in the purchased portfolios rather than a typical eight percent capital charge applied to similar assets that are not part of the transferred portfolios, are applied both for purposes of satisfying the terms of the commitments and for purposes of measuring and reporting HSBC Bank USA's risk-based capital and related ratios. This treatment applies as long as the low-quality assets are owned by HSBC Bank USA. In 2011, HSBC Bank USA sold low-quality credit card receivables with a net book value of approximately $266 million to a non-bank subsidiary of HSBC USA Inc. to reduce the capital requirement associated with these assets. The remaining purchased receivables subject to this requirement have been sold to Capital One as part of the previously discussed sale which was completed on May 1, 2012. We exceeded the minimum capital ratios required at June 30, 2012 and December 31, 2011.

As discussed in previous filings, HSBC North America is required to implement Basel II provisions in accordance with current regulatory timelines. While HSBC USA will not report separately under the new rules, HSBC Bank USA will report under the new rules on a stand-alone basis. Adoption of Basel II requires the approval of U.S. regulators and encompasses enhancements to a number of risk policies, processes and systems to align HSBC Bank USA with the Basel II final rule requirements. We are uncertain as to when we will receive approval to adopt Basel II from the Federal Reserve Board, our primary regulator. We have integrated Basel II metrics into our management reporting and decision making process. As a result of Dodd-Frank, a banking organization that has formally implemented Basel II must calculate its capital requirements under Basel I and Basel II, compare the two results, and then use the lower of such ratios for purposes of determining compliance with its minimum Tier 1 capital and total risk-based capital requirements.

HSBC USA Inc.

Income Before Income Tax Expense - Significant Trends Income from continuing operations before income tax expense, and various trends and activity affecting operations, are summarized in the following table.


	Three Months Ended June 30,		Six Months Ended June 30
	2012	2011	2012	2011
	(in millions)
Income from continuing operations before income tax from prior year........................................................................................................	$ 90	$ 315	$ 382	$ 902
Increase (decrease) in income from continuing operations before income tax attributable to:
Balance sheet management activities excluding gains (losses) on security sales⁽¹⁾..............................................................................	(3 )	(18 )	9	1
Trading revenue⁽²⁾............................................................................................................................................................................................	(45 )	70	(80 )	115
Gains (losses) on security sales....................................................................................................................................................................	53	11	39	34
Loans held for sale⁽³⁾........................................................................................................................................................................................	12	2	16	(80 )
Residential mortgage banking related revenue (loss)⁽⁴⁾.............................................................................................................................	(47 )	129	13	131
Gain on the sale of branches.........................................................................................................................................................................	330	-	330	-
Gain (loss) on own debt designated at fair value and related derivatives⁽⁵⁾...........................................................................................	111	(151 )	(111 )	(199 )
Gain (loss) on instruments at fair value and related derivatives, excluding own debt⁽⁵⁾...................................................................................................................................................................................................	(10 )	9	(21 )	32
Provision for credit losses⁽⁶⁾...........................................................................................................................................................................	6	(35 )	4	(110 )
Expense accrual related to certain regulatory matters⁽⁷⁾.............................................................................................................................	(700 )	-	(700 )	-
Interest expense on certain tax exposures...................................................................................................................................................	82	(83 )	71	(84 )
Impairment of software development costs................................................................................................................................................	16	(16 )	94	(94 )
All other activity⁽⁸⁾...........................................................................................................................................................................................	(137 )	(143 )	(190 )	(266 )

Income (loss) from continuing operations before income tax for current period........................................................................................	$ (242 )	$ 90	$ (144 )	$ 382

⁽¹⁾ Balance sheet management activities are comprised primarily of net interest income and, to a lesser extent, gains or losses on sales of investments, resulting from management of interest rate risk associated with the repricing characteristics of balance sheet assets and liabilities. For additional discussion regarding Global Banking and Markets net interest income, trading revenues, and the Global Banking and Markets business segment see the caption "Business Segments" section in this MD&A.

⁽²⁾ For additional discussion regarding trading revenue, see the caption "Results of Operations" in this MD&A.

⁽³⁾ For additional discussion regarding loans held for sale, see the caption "Balance Sheet Revenue" in this MD&A.

⁽⁴⁾ For additional discussion regarding residential mortgage banking revenue, see the caption "Results of Operations" in this MD&A.

⁽⁵⁾ For additional discussion regarding fair value option and fair value measurement, see Note 12, "Fair Value Option," in the accompanying consolidated financial statements.

⁽⁶⁾ For additional discussion regarding provision for credit losses, see the caption "Results of Operations" in this MD&A.

⁽⁷⁾ For additional discussion regarding expense accrual related to certain regulatory matters, see Note 21, "Litigation and Regulatory Matters," in the accompanying consolidated financial statements.

⁽⁸⁾ Represents other banking activities, including revenue and expense items not specifically identified above.

HSBC USA Inc.

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 results in accordance with IFRSs and IFRSs 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,
	2012	2011	2012	2011
	(in millions)
Net income (loss) - U.S. GAAP basis...................................................................................................................................................................	$ (545 )	$ 82	$ (310 )	$ 561
Adjustments, net of tax:
Reclassification of financial assets..................................................................................................................................................................	(11 )	6	(42 )	(25 )
Securities..............................................................................................................................................................................................................	-	(1 )	(1 )	10
Derivatives...........................................................................................................................................................................................................	(2 )	2	(2 )	4
Loan impairment..................................................................................................................................................................................................	10	1	10	3
Property................................................................................................................................................................................................................	(6 )	(14 )	(9 )	(16 )
Pension costs......................................................................................................................................................................................................	3	(7 )	8	(1 )
Purchased loan portfolios..................................................................................................................................................................................	-	(6 )	-	(21 )
Transfer of credit card receivables to held for sale and subsequent sale..................................................................................................	(41 )	-	(31 )	-
Servicing assets..................................................................................................................................................................................................	-	(2 )	-	(2 )
Gain on the sale of branches.............................................................................................................................................................................	70	-	70	-
Tax valuation allowances...................................................................................................................................................................................	-	(13 )	-	26
Uncertain tax positions......................................................................................................................................................................................	-	160	-	-
Other.....................................................................................................................................................................................................................	7	(2 )	11	2

Net profit (loss) - IFRSs basis...............................................................................................................................................................................	(515 )	206	(296 )	541
Tax provision - IFRSs basis...................................................................................................................................................................................	(346 )	(149 )	(424 )	(269 )

Profit (loss) before tax - IFRSs basis....................................................................................................................................................................	$ (169 )	$ 355	$ 128	$ 810

A summary of the significant differences between U.S. GAAP and IFRSs as they impact our results are presented below:

Reclassification of financial assets - Certain securities were reclassified from "trading assets" to "loans and receivables" under IFRSs as of July 1, 2008 pursuant to an amendment to IAS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"), and are no longer marked to market under IFRSs. In November 2008, additional securities were similarly transferred to loans and receivables. These securities continue to be classified as "trading assets" under U.S. GAAP.

HSBC USA Inc.

Additionally, certain Leverage Acquisition Finance ("LAF") loans were classified as "Trading Assets" for IFRSs and to be consistent, an irrevocable fair value option was elected on these loans under U.S. GAAP on January 1, 2008. These loans were reclassified to "loans and advances" as of July 1, 2008 pursuant to the IAS 39 amendment discussed above. Under U.S. GAAP, these loans are classified as "held for sale" and carried at fair value due to the irrevocable nature of the fair value option.

Securities - Under U.S. GAAP, the credit loss component of an other-than-temporary impairment of a debt security is recognized in earnings while the remaining portion of the impairment loss is recognized in accumulated other comprehensive income (loss) provided we have concluded we do not intend to sell the security and it is more-likely-than-not that we will not have to sell the security prior to recovery. Under IFRSs, there is no bifurcation of other-than-temporary impairment and the entire amount is recognized in earnings. Also under IFRSs, recoveries in other-than-temporary impairment related to improvement in the underlying credit characteristics of the investment are recognized immediately in earnings while under U.S. GAAP, they are amortized to income over the remaining life of the security. There are also less significant differences in measuring other-than-temporary impairment under IFRSs versus U.S. GAAP.

Under IFRSs, securities include HSBC shares held for stock plans at fair value. These shares held for stock plans are recorded at fair value through other comprehensive income. If it is determined these shares have become impaired, the fair value loss is recognized in profit and loss and any fair value loss recorded in other comprehensive income is reversed. There is no similar requirement under U.S. GAAP. During 2009 under IFRSs, we recorded income for the value of additional shares attributed to HSBC shares held for stock plans as a result of HSBC's rights offering. The additional shares are not recorded under U.S. GAAP.

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

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

Property - The sale of our 452 Fifth Avenue property, including the 1 W. 39th Street building in April 2010, resulted in the recognition of a gain under IFRSs while under U.S. GAAP, such gain is deferred and recognized over eight years due to our continuing involvement.

Pension costs - Net income under U.S. GAAP is lower than under IFRSs as a result of the amortization of the amount by which actuarial losses exceeded the higher of 10 percent of the projected benefit obligation or fair value of plan assets (the "corridor"). In 2011, amounts reflect a pension curtailment gain relating to the branch sales as under IFRSs recognition occurs when "demonstrably committed to the transaction" as compared to U.S. GAAP when recognition occurs when the transaction is completed. Furthermore, in 2010, changes to future accruals for legacy participants under the HSBC North America Pension Plan were accounted for as a plan curtailment under IFRSs, which resulted in immediate income recognition. Under U.S. GAAP, these changes were considered to be a negative plan amendment which resulted in no immediate income recognition.

Purchased loan portfolios - Under U.S. GAAP, purchased loans for which there has been evidence of credit deterioration at the time of acquisition are recorded at an amount based on the net cash flows expected to be collected. This generally results in only a portion of the loans in the acquired portfolio being recorded at fair value. Under IFRSs, the entire purchased portfolio is recorded at fair value. When recording purchased loans at fair value, the difference between all estimated future cash collections and the purchase price paid is recognized into income using the effective interest method. An allowance for loan loss is not established unless the original estimate of expected future cash collections declines.

Transfer of credit card receivables to held for sale and subsequent sale - For receivables transferred to held for sale subsequent to origination, IFRSs requires these receivables to be reported separately on the balance sheet but does not change the recognition and measurement criteria. Accordingly for IFRSs purposes, such loans continue to be accounted for in accordance with IAS 39, with any gain or loss recognized at the time of sale. U.S. GAAP requires loans that meet the held for sale classification requirements be transferred to a held for sale category at the lower of amortized cost or fair value. As a result, any loss is recorded prior to sale.

Servicing Assets - Under IAS 38, servicing assets are initially recorded on the balance sheet at cost and amortized over the projected life of the assets. Servicing assets are periodically tested for impairment with impairment adjustments charged against current earnings. Under U.S. GAAP, we generally record servicing assets on the balance sheet at fair value. Subsequent adjustments to fair value are generally reflected in current period earnings.

Gain on sale of branches - Under U.S. GAAP, the amount of goodwill allocated to the retail branch disposal group is higher as goodwill amortization ceased under U.S. GAAP in 2002 while under IFRS, goodwill was amortized until 2005. This resulted in a lower gain under U.S. GAAP.

Tax valuation allowances - Reflects differences in the timing of amounts of deferred tax assets that can be realized between U.S. GAAP and IFRSs.

Uncertain tax positions - Under U.S. GAAP, developments regarding uncertain tax positions that occur after the balance sheet date but before issuance of the financial statements are considered to be an unrecognized subsequent event for which no impact is recorded in the current period. Under IFRSs, financial statements are adjusted to reflect a material event that occurs after the end of the reporting period but before the financial statements are authorized for issuance if the event provides additional evidences relating to conditions that existed at the end of the reporting period.

Other - Other includes the net impact of certain adjustments which represent differences between U.S. GAAP and IFRSs that were not individually material, including deferred loan origination costs and fees, restructuring costs, legal accruals, depreciation expense, share based payments and loans held for sale.

HSBC USA Inc.

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. Balance sheet totals at June 30, 2012 and increases (decreases) over prior periods, including continuing and discontinuing operations, are summarized in the table below.


	June 30, 2012	Increase (Decrease) from
		March 31, 2012		December 31, 2011
		Amount	%	Amount	%
	(dollars are in millions)
Period end assets:
Short-term investments....................................................................................................................................................................................	$ 34,003	$ 953	2.9 %	$ 3,824	12.7 %
Loans, net...........................................................................................................................................................................................................	55,445	2,179	4.1	4,321	8.5
Loans held for sale............................................................................................................................................................................................	1,982	(1,411 )	(41.6 )	(1,688 )	(46.0 )
Trading assets...................................................................................................................................................................................................	35,778	(275 )	(.8 )	(3,022 )	(7.8 )
Securities............................................................................................................................................................................................................	62,347	6,889	12.4	7,031	12.7
Other assets.......................................................................................................................................................................................................	10,872	(18,883 )	(63.5 )	(20,319 )	(65.1 )

	$ 200,427	$ (10,548 )	(5.0 )%	$ (9,853 )	(4.7 )%

Funding sources:
Total deposits....................................................................................................................................................................................................	$ 123,227	$ (14,300 )	(10.4 )%	$ (16,502 )	(11.8 )%
Trading liabilities...............................................................................................................................................................................................	20,220	2,110	11.7	6,034	42.5
Short-term borrowings.....................................................................................................................................................................................	10,731	(1,260 )	(10.5 )	(5,278 )	(33.0 )
All other liabilities.............................................................................................................................................................................................	7,982	2,932	58.1	2,837	55.1
Long-term debt..................................................................................................................................................................................................	20,014	345	1.8	3,305	19.8
Shareholders' equity........................................................................................................................................................................................	18,253	(375 )	(2.0 )	(249 )	(1.3 )

	$ 200,427	$ (10,548 )	(5.0 )%	$ (9,853 )	(4.7 )%

Short-Term Investments Short-term investments include cash and due from banks, interest bearing deposits with banks, federal funds sold and securities purchased under agreements to resell. Balances will fluctuate between periods depending upon our liquidity position at the time.

HSBC USA Inc.

Loans, Net Loan balances at June 30, 2012 and increases (decreases) from prior periods are summarized in the table below:


	June 30, 2012	Increase (Decrease) from
		March 31, 2012		December 31, 2011
		Amount	%	Amount	%
	(dollars are in millions)
Commercial loans:
Construction and other real estate..............................................................................................................................................................	$ 7,977	$ 200	2.6 %	$ 117	1.5 %
Business banking and middle market enterprises.....................................................................................................................................	11,256	367	3.4	1,031	10.1
Global banking⁽¹⁾..............................................................................................................................................................................................	15,042	1,190	8.6	2,384	18.8
Other commercial loans.................................................................................................................................................................................	3,142	91	3.0	236	8.1

Total commercial loans..................................................................................................................................................................................	37,417	1,848	5.2	3,768	11.2

Consumer loans:
Residential mortgages, excluding home equity mortgages......................................................................................................................	14,758	414	2.9	645	4.6
Home equity mortgages................................................................................................................................................................................	2,455	(36 )	(1.4 )	(108 )	(4.2 )

Total residential mortgages.....................................................................................................................................................................	17,213	378	2.2	537	3.2
Credit Card.......................................................................................................................................................................................................	783	(3 )	(.4 )	(45 )	(5.4 )
Other consumer..............................................................................................................................................................................................	651	(28 )	(4.1 )	(63 )	(8.8 )

Total consumer loans....................................................................................................................................................................................	18,647	347	1.9	429	2.4

Total loans............................................................................................................................................................................................................	56,064	2,195	4.1	4,197	8.1
Allowance for credit losses................................................................................................................................................................................	619	16	2.7	(124 )	(16.7 )

Loans, net.............................................................................................................................................................................................................	$ 55,445	$ 2,179	4.1 %	$ 4,321	8.5 %

⁽¹⁾ Represents large multinational firms including globally focused U.S. corporate and financial institutions and USD lending to selected high quality Latin American and other multinational customers managed by HSBC on a global basis.

Commercial loan balances increased compared to both March 31, 2012 and December 31, 2011, driven by new business activity, particularly in global banking as well as in business banking and middle market enterprises. These increases were partially offset by paydowns and managed reductions in certain exposures.

Residential mortgage loans increased since March 31, 2012 and December 31, 2011. As a result of balance sheet initiatives to manage interest rate risk and improve the structural liquidity of HSBC Bank USA, we continue to sell a substantial portion of our new residential loan originations through the secondary markets. The balances reflect increases to the portfolio associated with originations targeted at our Premier customer relationships and compared with December 31, 2011, the transfer in the first quarter of 2012 of $140 million of FHA/VA loans from held for sale that were not part of the loan sale to First Niagara.

Real estate markets in a large portion of the United States have been and continue to be affected by stagnation or declines in property values. As such, the loan-to-value ("LTV") ratios for our mortgage loan portfolio have generally deteriorated since origination. Refreshed loan-to-value ratios for our mortgage loan portfolio, excluding subprime residential mortgage loans held for sale, are presented in the table below.


	Refreshed LTVs⁽¹⁾⁽²⁾ at June 30, 2012		Refreshed LTVs⁽¹⁾⁽²⁾ at December 31, 2011
	First Lien	Second Lien	First Lien	Second Lien
LTV < 80%.......................................................................................................................................................................................................	76.4 %	60.2 %	75.4 %	62.2 %
80% < LTV < 90%...........................................................................................................................................................................................	10.0	13.5	11.0	13.7
90% < LTV < 100%.........................................................................................................................................................................................	6.3	10.8	6.5	10.2
LTV > 100%.....................................................................................................................................................................................................	7.3	15.5	7.2	13.8
Average LTV for portfolio.............................................................................................................................................................................	67.9 %	72.1 %	67.7 %	71.2 %

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

⁽²⁾ Current property values are calculated using the most current HPI's available and applied on an individual loan basis, which results in an approximately 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, 2012 and September 30, 2011, respectively.

Credit card receivable balances which represents our legacy HSBC Bank USA credit card portfolio, decreased compared to both December 31, 2011 and March 31, 2012 driven by a continued focus by customers to reduce outstanding credit card debt and as compared with December 31, 2011, seasonal improvements in our collection activities during the first quarter of the year as some customers use their tax refunds to make payments.

Other consumer loans have decreased primarily due to the discontinuation of originations of student loans and run-off of our installment loan portfolio.

Loans Held for Sale Loans held for sale at June 30, 2012 and decreases since from prior periods are summarized in the table below.


	June 30, 2012	Increase (Decrease) from
		March 31, 2012		December 31, 2011
		Amount	%	Amount	%
	(dollars are in millions)
Total commercial loans...............................................................................................................................................................................	$ 875	$ (85 )	(8.9 )%	$ (90 )	(9.3 )%
Consumer loans:
Residential mortgages...........................................................................................................................................................................	903	(930 )	(50.7 )	(1,155 )	(56.1 )
Credit card receivables..........................................................................................................................................................................	94	(294 )	(75.8 )	(322 )	(77.4 )
Other consumer......................................................................................................................................................................................	110	(102 )	(48.1 )	(121 )	(52.4 )

Total consumer loans............................................................................................................................................................................	1,107	(1,326 )	(54.5 )	(1,598 )	(59.1 )

Total loans held for sale.............................................................................................................................................................................	$ 1,982	$ (1,411 )	(41.6 )%	$ (1,688 )	(46.0 )%

Included in loans held for sale at June 30, 2012 are $531 million of loans that are being sold as part of our agreement to sell certain branches to First Niagara, including $115 million of commercial loans, $279 million of residential mortgages, $94 million of credit card receivables and $43 million of other consumer loans. Included in loans held for sale at March 31, 2012 are $2.4 billion of loans that are being sold as part of our agreement to sell certain branches, including $497 million of commercial loans, $1.3 billion of residential mortgages, $388 million of credit card receivables and $144 million of other consumer loans. Included in loans held for sale at December 31, 2011 are $2.5 billion on loans that are being sold as part of our agreement to sell certain branches, including $521 million of commercial loans, $1.4 billion of residential mortgages, $416 million of credit card receivables and $161 million of other consumer loans. The decrease in these balances from both March 31, 2012 and December 31, 2011 was driven primarily by the completion of the sale of 138 of the 195 branches being sold to First Niagara. The sale of the remaining branches is expected to be completed in the third quarter of 2012.

We originate commercial loans in connection with our participation in a number of leveraged acquisition finance syndicates. A substantial majority of these loans were originated with the intent of selling them to unaffiliated third parties and are classified as commercial loans held for sale. Commercial loans held for sale under this program were $411 million, $410 million and $377 million at June 30, 2012, March 31, 2012 and December 31, 2011, respectively, all of which are recorded at fair value as we have elected to designate these loans under fair value option. In addition beginning in 2010, we provided loans to third parties which are classified as commercial loans held for sale and for which we also elected to apply fair value option. See Note 12, "Fair Value Option," in the accompanying consolidated financial statements for further information.

Commercial loans held for sale also includes commercial real estate loans of $313 million and $55 million at June 30, 2012 and December 31, 2011, respectively, which are originated with the intent to sell to government sponsored enterprises.

In addition to the $279 million, $1.3 billion and $1.4 billion of residential mortgage loans held for sale to First Niagara at June 30, 2012, March 31, 2012 and December 31, 2011, respectively, discussed above, residential mortgage loans held for sale include subprime residential mortgage loans of $164 million, $170 million and $181 million at June 30, 2012, March 31, 2012 and December 31, 2011, respectively, which were acquired from unaffiliated third parties and from HSBC Finance with the intent of securitizing or selling the loans to third parties. Also included in residential mortgage loans held for sale are first mortgage loans originated and held for sale primarily to various government sponsored enterprises. We retained the servicing rights in relation to the mortgages upon sale. Balances have declined since December 31, 2011 largely due to the transfer of $140 million of FHA/VA loans previously held for sale to First Niagara back to loans held for investment and, to a lesser extent, subprime residential mortgage loan sales. We sold subprime residential mortgage loans with a carrying amount of $4 million in 2012.

In addition to closed-end private label loans with a balance of $43 million, $144 million and $161 million at June 30, 2012, March 31, 2012 and December 31, 2011, respectively, other consumer loans held for sale in all periods also include certain student loans which we no longer originate.

Consumer loans held for sale are recorded at the lower of cost or fair value. The valuation adjustment on loans held for sale was $228 million and $251 million at June 30, 2012 and December 31, 2011, respectively.

Trading Assets and Liabilities Trading assets and liabilities balances at June 30, 2012 and increases (decreases) over prior periods, are summarized in the table below.


	June 30, 2012	Increase (Decrease) from
		March 31, 2012		December 31, 2011
		Amount	%	Amount	%
	(dollars are in millions)
Trading assets:
Securities⁽¹⁾.......................................................................................................................................................................................................	$ 11,509	$ (33 )	(.3 )%	$ (1,437 )	(11.1 )%
Precious metals...............................................................................................................................................................................................	14,459	(1,790 )	(11.0 )	(2,623 )	(15.4 )
Derivatives⁽²⁾....................................................................................................................................................................................................	9,810	1,548	18.8	1,038	11.8

	$ 35,778	$ (275 )	(.8 )%	$ (3,022 )	(7.8 )%

Trading liabilities:
Securities sold, not yet purchased...............................................................................................................................................................	$ 316	$ (147 )	(31.7 )%	$ (27 )	(7.9 )%
Payable for precious metals..........................................................................................................................................................................	6,958	(1,015 )	(12.7 )	(41 )	(.6 )
Derivatives⁽³⁾....................................................................................................................................................................................................	12,946	3,272	33.8	6,102	89.2

	$ 20,220	$ 2,110	11.7 %	$ 6,034	42.5 %

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

⁽²⁾ At June 30, 2012, March 31, 2012 and December 31, 2011, the fair value of derivatives included in trading assets has been reduced by $6.2 billion, $4.4 billion and $4.8 billion, respectively, relating to amounts recognized for the obligation to return cash collateral received under master netting agreements with derivative counterparties.

⁽³⁾ At June 30, 2012, March 31, 2012 and December 31, 2011, the fair value of derivatives included in trading liabilities has been reduced by $2.5 billion, $3.3 billion and $6.3 billion, respectively, relating to amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative.

HSBC USA Inc.

Securities balances decreased since March 31, 2012 and December 31, 2011 due to a decrease in U.S. Treasury, corporate and foreign sovereign positions related to hedges for derivative positions in both the interest rate and emerging market trading portfolios. Balances of securities sold, not yet purchased decreased since year-end due to a decrease in short U.S. Treasury positions related to hedges of derivatives in the interest rate trading portfolio.

Precious metals trading assets decreased at June 30, 2012 compared to both March 31, 2012 and December 31, 2011. The decrease from March 31, 2012 was primarily from a reduction in unallocated metal balances held for customers and lower metal prices while the decrease from December 31, 2011 was due to a reduction in gold trading inventory. The lower payable for precious metals compared to March 31, 2012 and December 31, 2011 was primarily due to a decrease in unallocated metal balances held for customers.

Derivative assets and liabilities balances as compared to March 31, 2012 and December 31, 2011 increased mainly from market movements as valuations of interest rate derivatives increased offsetting decreases in value of foreign exchange and credit derivatives. The balances also reflect the continued decrease in credit derivative positions as a number of transaction unwinds and commutations reduced the outstanding market value as management continues to actively reduce exposure. The derivative liability balance increased in both periods due to the increase in cash collateral held as well as the increase in interest rate derivative valuations.

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. See Note 5, "Securities," in the accompanying consolidated financial statements for additional information.

Deposits Deposit balances by major depositor categories at June 30, 2012 and increases (decreases) over prior periods, are summarized in the table below.


	June 30, 2012	Increase (Decrease) from
		March 31, 2012		December 31, 2011
		Amount	%	Amount	%
	(dollars are in millions)
Individuals, partnerships and corporations.........................................................................................................................................	$ 100,991	$ 468	.5 %	$ (678 )	(.7 )%
Domestic and foreign banks...................................................................................................................................................................	17,255	(3,254 )	(15.9 )	(3,371 )	(16.3 )
U.S. Government, states and political subdivisions............................................................................................................................	777	1	.1	(58 )	(6.9 )
Foreign governments and official institutions.....................................................................................................................................	571	129	29.2	(884 )	(60.8 )
Deposits held for sale⁽¹⁾............................................................................................................................................................................	3,633	(11,644 )	(76.2 )	(11,511 )	(76.0 )

Total deposits...........................................................................................................................................................................................	$ 123,227	$ (14,300 )	(10.4 )%	$ (16,502 )	(11.8 )%

Total core deposits⁽²⁾................................................................................................................................................................................	$ 95,191	$ (8,286 )	(8.0 )%	$ (8,948 )	(8.6 )%

⁽¹⁾ Represents deposits we have agreed to sell to First Niagara.

⁽²⁾ We monitor "core deposits" as a key measure for assessing results of our core banking network. Core deposits generally include all domestic demand, money market and other savings accounts, as well as time deposits with balances not exceeding $100,000. Balances at June 30, 2012, March 31, 2012 and December 31, 2011 include deposits held for sale.

Deposits continued to be a significant source of funding during the first half of 2012. Deposits at June 30, 2012 decreased compared to March 31, 2012 and December 31, 2011 as increases in interest bearing domestic branch deposits primarily driven by our Premier strategy were more than offset by the impact associated with the completion of the sale of 138 of a total 195 retail branches to First Niagara in May 2012, which reduced outstanding deposit levels by $10.3 billion. The sale of the remaining branches is expected to be completed in the third quarter of 2012. Additionally, there were decreases in interest bearing deposits in foreign offices and non-interest bearing deposits. Core domestic deposits, which are a substantial source of our core liquidity, decreased during the second quarter and first half of 2012 driven by the sale of branches as well as a decrease in institutional transaction account balances.

HSBC USA Inc.

Our strategy for our core retail banking business is to grow our market share and deepen relationships with existing customers in key internationally connected urban markets with a focus on needs based, relationship led wealth and banking services. This strategy includes various initiatives, such as:

• HSBC Premier, HSBC's global banking service that offers internationally-minded, mass affluent customers unique international services seamlessly delivered through HSBC's global network coupled with a premium local service with a dedicated premier relationship manager. Total Premier deposits have decreased to $25.4 billion at June 30, 2012 as compared to $30.5 billion and $29.9 billion at March 31, 2012 and December 31, 2011, respectively, primarily as a result of the sale of branches to First Niagara and;

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

Short-Term Borrowings Balances at June 30, 2012 decreased as compared to March 31, 2012 and December 31, 2011 as a result of decreased levels of securities sold under agreements to repurchase.

Long-Term Debt Long-term debt at June 30, 2012 increased as compared to March 31, 2012 and December 31, 2011 due to long-term debt issuances totaling $1.2 billion and $4.7 billion in the second quarter and first half of 2012, respectively, partially offset by maturities.

Incremental issuances from the $40 billion HSBC Bank USA Global Bank Note Program totaled $55 million and $202 million during the three and six months ended June 30, 2012, respectively, compared to $89 million and $324 million during the year-ago periods. Total debt outstanding under this program was $4.8 billion at June 30, 2012 and $4.9 billion at December 31, 2011.

Incremental long-term debt issuances from our shelf registration statement with the Securities and Exchange Commission totaled $1.2 billion and $4.5 billion during the three and six months ended June 30, 2012, respectively, compared to $605 million and $1.1 billion during the year-ago periods. Total long-term debt outstanding under this shelf was $7.4 billion and $3.8 billion at June 30, 2012 and December 31, 2011, respectively.

Borrowings from the Federal Home Loan Bank of New York ("FHLB") totaled $1.0 billion at both June 30, 2012 and December 31, 2011. At June 30, 2012, we had the ability to access further borrowings of up to $4.3 billion based on the amount pledged as collateral with the FHLB.

We have entered into transactions with variable interest entities ("VIEs") organized by HSBC affiliates and unrelated third parties. We are the primary beneficiary of certain of these VIEs under the applicable accounting literature and, accordingly, we have consolidated the assets and the debt of these VIEs. Debt obligations of VIEs totaling $55 million were included in long-term debt at both June 30, 2012 and December 31, 2011. See Note 19, "Variable Interest Entities," in the accompanying consolidated financial statements for additional information regarding VIE arrangements.

HSBC USA Inc.

Residential Real Estate Owned

We obtain real estate by taking possession of the collateral pledged as security for residential mortgage loans. REO properties are made available for sale in an orderly fashion with the proceeds used to reduce or repay the outstanding receivable balance. The following table provides quarterly information regarding our REO properties:


	Three Months Ended
	June 30, 2012	March 31, 2012	December 31, 2011	September 30, 2011	June 30, 2011
Number of REO properties at end of period...........................................................................................	188	201	206	275	436
Number of properties added to REO inventory in the period.............................................................	88	106	63	57	122
Average loss on sale of REO properties⁽¹⁾..............................................................................................	5.9 %	.7 %	3.8 %	2.3 %	1.5 %
Average total loss on foreclosed properties⁽²⁾.......................................................................................	48.7 %	55.7 %	50.7 %	57.5 %	41.7 %
Average time to sell REO properties (in days)......................................................................................	284	378	340	276	233

⁽¹⁾ Property acquired through foreclosure is initially recognized at the lower of amortized cost or its fair value less estimated costs to sell ("Initial REO Carrying Amount"). The average loss on sale of REO properties is calculated as cash proceeds less the Initial REO Carrying Amount divided by the unpaid loan principal balance prior to write-down (excluding any accrued finance income) plus certain other ancillary disbursements that, by law, are reimburseable from the cash proceeds (e.g., real estate tax advances) and were incurred prior to our taking title to the property. This ratio represents the portion of our total loss on foreclosed properties that occurred after we took title to the property.

⁽²⁾ The average total loss on foreclosed properties sold each quarter includes both the loss on sale of the REO property as discussed above and the cumulative write-downs recognized on the loans up to the time we took title to the property. This calculation of the average total loss on foreclosed properties uses the unpaid loan principal balance prior to write-down (excluding any accrued finance income) plus certain other ancillary disbursements that, by law, are reimburseable from the cash proceeds (e.g., real estate tax advances) and were incurred prior to our taking title to the property.

Our methodology for determining the fair values of the underlying collateral as described in Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements" in our 2011 Form 10-K is continuously validated by comparing our net investment in the loan subsequent to charging the loan down to the lower of amortized cost or fair value less cost to sell, or our net investment in the property upon completing the foreclosure process, to the updated broker's price opinion and once the collateral has been obtained, any adjustments that have been made to lower the expected selling price, which may be lower than the broker's price opinion. Adjustments in our expectation of the ultimate proceeds that will be collected are recognized as they occur based on market information at that time and consultation with our listing agents for the properties.

As previously reported, beginning in late 2010 we temporarily suspended all new foreclosure proceedings and in early 2011 temporarily suspended foreclosures in process where judgment had not yet been entered while we enhanced foreclosure documentation and processes for foreclosures and re-filed affidavits where necessary. During the first and second quarters of 2012, we added 106 properties and 88 properties to REO inventory which primarily reflects loans for which we had either accepted the deed to the property in lieu of payment or for which we had received a foreclosure judgment prior to the suspension of foreclosures. We expect the number of REO properties added to inventory will increase during the remainder of 2012 although the number of new REO properties added to inventory will continue to be impacted by our ongoing refinements to our foreclosure processes as well as the extended foreclosure timelines in all states as discussed below.

The number of REO properties at June 30, 2012 decreased as compared to March 31, 2012 and December 31, 2011 as the volume of properties added to REO inventory continues to be slow as a result of the backlog in foreclosure activities driven by the temporary suspension of foreclosures as discussed above, as well as continuing sales of REO properties during the first half of 2012. We have resumed processing suspended foreclosure activities where judgment had not yet been entered in substantially all states. We have also begun initiating new foreclosure activities in substantially all states, although we are currently focusing our new foreclosure activities only in certain states. It will take time to work through the backlog of loans in each state that have not yet been referred to foreclosure.

In addition, certain courts and state legislatures have issued new rules or statutes relating to foreclosures. Scrutiny of foreclosure documentation has increased in some courts. Also, in some areas, officials are requiring additional verification of information filed prior to the foreclosure proceeding. The combination of these factors has led to a significant backlog of foreclosures which will take time to resolve. If these trends continue, there could be additional delays in the processing of foreclosures, which could have an adverse impact upon housing prices which is likely to result in higher loss severities while foreclosures are delayed.

Results of Operations

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

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 - Continuing Operations".

In the following table which summarizes the significant components of net interest income according to "volume" and "rate" includes $10 million and $50 million for the three and six months ended June 30, 2012, respectively, and $56 million and $116 million for the three and six months ended June 30, 2011, respectively, that has been allocated to our discontinued operations in accordance with our existing internal transfer pricing policies as external interest expense is unaffected by the transfer of businesses to discontinued operations.


	Three Months Ended June 30,		Six Months Ended June 30,
	2012	2011	2012	2011
Yield on total earning assets..........................................................................................................................................................	1.98 %	2.24 %	2.07 %	2.33 %
Rate paid on interest bearing liabilities.........................................................................................................................................	.83	1.04	.81	.95

Interest rate spread..........................................................................................................................................................................	1.15	1.20	1.26	1.38
Benefit from net non-interest earning or paying funds..............................................................................................................	.14	.09	.09	.07

Net interest margin to earning assets⁽¹⁾.........................................................................................................................................	1.29 %	1.29 %	1.35 %	1.45 %

HSBC USA Inc.

Significant trends affecting the comparability of net interest income and interest rate spread for the three and six months ended June 30, 2012 are summarized in the following table. Net interest income in the table is presented on a taxable equivalent basis.


	Three Months Ended June 30, 2012		Six Months Ended June 30, 2012
	Amount	Interest Rate Spread	Amount	Interest Rate Spread
	(dollars are in millions)
Net interest income/interest rate spread from prior year...................................................................................................................................	$ 494	1.20 %	$ 1,070	1.38 %
Increase (decrease) in net interest income associated with:
Trading related activities...................................................................................................................................................................................	(41 )		(56 )
Balance sheet management activities⁽¹⁾...........................................................................................................................................................	10		8
Commercial loans................................................................................................................................................................................................	-		(48 )
Deposits...............................................................................................................................................................................................................	(18 )		(21 )
Residential mortgage banking..........................................................................................................................................................................	(6 )		(15 )
Interest on estimated tax exposures................................................................................................................................................................	82		71
Other activity......................................................................................................................................................................................................	9		75

Net interest income/interest rate spread for current year..................................................................................................................................	$ 530	1.15 %	$ 1,084	1.26 %

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

Trading related activities Net interest income for trading related activities decreased during the three and six months ended June 30, 2012 primarily due to lower rates earned on interest earning trading assets as well as lower average balances on these assets.

Balance sheet management activities Higher net interest income from balance sheet management activities during the second quarter and first half of 2012 reflects the impact of lower allocated funding costs partially offset by the sale of certain securities for risk management purposes in the second quarter of 2012 as well as the lower interest rate environment.

Commercial loans Net interest income on commercial loans decreased during the six months ended June 30, 2012 primarily due to higher funding costs and a lower yield which was partially offset by higher average loan balances due to new business activity as well as lower levels of nonperforming loans. Net interest income was flat in the three month period as the higher funding costs were offset by higher average loan balances and higher yields.

Deposits Lower net interest income during the year to date period reflects the impact of higher average balances on interest bearing deposits partially offset by improved spreads in the Retail Banking and Wealth Management ("RBWM") and Commercial Banking ("CMB") business segments as deposit pricing has been adjusted to reflect the on-going low interest rate environment. Both segments continue to be impacted however, relative to historical trends, by the current low rate environment. In the three month period, average balances on interest bearing deposits declined which resulted in a lower overall reduction to net interest income.

Residential mortgage banking Lower net interest income during the three and six months ended June 30, 2012 reflects narrower spreads on slightly higher outstanding balances as well as increased deferred cost amortization in 2012 as a result of higher prepayments.

Interest on estimated tax exposures Higher net interest income during the three and six months ended June 30, 2012 resulted from higher interest expense in the prior year periods associated with tax reserves on estimated exposures.

Other activity Net interest income on other activity was higher during the second quarter and first half of 2012, largely driven by lower unallocated funding costs.

HSBC USA Inc.

Provision for Credit Losses The provision for credit losses associated with various loan portfolios is summarized in the following table. Amounts in brackets represent recoveries.


			Increase (Decrease)
Three Months Ended June 30,	2012	2011	Amount	%
	(dollars are in millions)
Commercial:
Construction and other real estate........................................................................................................................................................	$ (5 )	$ 49	$ (54 )	(100+ )%
Business banking and middle market enterprises...............................................................................................................................	15	(8 )	23	100+
Global banking.........................................................................................................................................................................................	19	(1 )	20	100+
Other commercial.....................................................................................................................................................................................	(7 )	-	(7 )	(100+ )

Total commercial......................................................................................................................................................................................	22	40	(18 )	(45.0 )

Consumer:
Residential mortgages, excluding home equity mortgages...............................................................................................................	24	27	(3 )	(11.1 )
Home equity mortgages..........................................................................................................................................................................	34	12	22	100+
Credit card receivables⁽¹⁾.........................................................................................................................................................................	9	12	(3 )	(25.0 )
Other consumer........................................................................................................................................................................................	-	4	(4 )	(100+ )

Total consumer........................................................................................................................................................................................	67	55	12	21.8

Total provision for credit losses.................................................................................................................................................................	$ 89	$ 95	$ (6 )	(6.3 )%


			Increase (Decrease)
Six Months Ended June 30,	2012	2011	Amount	%
	(dollars are in millions)
Commercial:
Construction and other real estate........................................................................................................................................................	$ (25 )	$ 21	$ (46 )	(100+ )%
Business banking and middle market enterprises...............................................................................................................................	21	(9 )	30	100+
Global banking.........................................................................................................................................................................................	(3 )	(6 )	3	50.0
Other commercial.....................................................................................................................................................................................	(9 )	(10 )	1	10.0

Total commercial......................................................................................................................................................................................	(16 )	(4 )	(12 )	(100+ )

Consumer:
Residential mortgages, excluding home equity mortgages...............................................................................................................	39	46	(7 )	(15.2 )
Home equity mortgages..........................................................................................................................................................................	42	23	19	82.6
Credit card receivables⁽¹⁾.........................................................................................................................................................................	20	20	-	-
Other consumer........................................................................................................................................................................................	4	8	(4 )	(50.0 )

Total consumer........................................................................................................................................................................................	105	97	8	8.3

Total provision for credit losses.................................................................................................................................................................	$ 89	$ 93	$ (4 )	(4.3 )%

⁽¹⁾ Related to credit card receivables associated with HSBC Bank USA's legacy credit card program which were not sold to Capital One.

During the three months ended June 30, 2012, we increased our credit loss reserves as the provision for credit losses was $16 million higher than net charge-offs largely reflecting higher loss estimates in our commercial loan and residential mortgage loan portfolios as discussed below. During the six months ended June 30, 2012, we decreased our credit loss reserves as the provision for credit losses was $124 million lower than net charge-offs largely reflecting lower loss estimates in our commercial loan and residential mortgage loan portfolios

In our commercial portfolio, the provision for credit losses was lower in both periods as the prior year periods include a specific provision of $45 million associated with the downgrade of an individual commercial real estate loan. Excluding the specific provision, our commercial loan provision increased in both periods driven largely by increased levels of reserves for risk factors associated with expansion activities in the U.S and Latin America. In addition, while we experienced continued improvements in economic and credit conditions including lower nonperforming loans and criticized asset levels, in 2012, reductions in higher risk rated loan balances and stabilization in credit downgrades, including managed reductions in certain exposures and improvements in the financial circumstances of certain customer relationships in both years resulted in a higher overall release in loss reserves during the year-ago periods. Given the nature of the factors driving the reduction in commercial loan provision during 2012, provision levels recognized in the second quarter and first half of 2012 should not be considered indicative of provision levels in the future.

The provision for credit losses on residential mortgages including home equity mortgages increased during the three and six months ended June 30, 2012 as compared to the year-ago periods, driven by higher loss estimates on troubled debt restructures and, as it relates to our home equity mortgage portfolio, higher charge-offs and loss estimates due to an increased volume of loans where we have decided not to pursue foreclosure. These increases were partially offset by continued improvements in economic and credit conditions, including lower dollars of delinquency and charge-off.

Our methodology and accounting policies related to the allowance for credit losses are presented in "Critical Accounting Policies and Estimates" in MD&A and in Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements" in our 2011 Form 10-K. See "Credit Quality" in this MD&A for additional discussion on the allowance for credit losses associated with our various loan portfolios.

Other Revenues The components of other revenues are summarized in the following table.


			Increase (Decrease)
Three Months Ended June 30,	2012	2011	Amount	%
	(dollars are in millions)
Credit card fees.......................................................................................................................................................................................................	$ 22	$ 32	$ (10 )	(31.3 )%
Other fees and commissions................................................................................................................................................................................	169	183	(14 )	(7.7 )
Trust income...........................................................................................................................................................................................................	25	29	(4 )	(13.8 )
Trading revenue.....................................................................................................................................................................................................	84	126	(42 )	(33.3 )
Other securities gains, net....................................................................................................................................................................................	65	12	53	100+
HSBC affiliate income:
Fees and commissions.....................................................................................................................................................................................	21	30	(9 )	(30.0 )
Other affiliate income.......................................................................................................................................................................................	25	26	(1 )	(3.8 )

Total HSBC affiliate income............................................................................................................................................................................	46	56	(10 )	(17.9 )
Residential mortgage banking revenue⁽¹⁾............................................................................................................................................................	2	49	(47 )	(95.9 )
Gain (loss) on instruments at fair value and related derivatives.....................................................................................................................	141	40	101	100+
Gain on sale of branches.......................................................................................................................................................................................	330	-	330	100+
Other income:
Valuation of loans held for sale......................................................................................................................................................................	(2 )	(14 )	12	85.7
Insurance...........................................................................................................................................................................................................	2	5	(3 )	(60.0 )
Earnings from equity investments.................................................................................................................................................................	(3 )	9	(12 )	(100+ )
Miscellaneous income.....................................................................................................................................................................................	(18 )	5	(23 )	(100+ )

Total other income............................................................................................................................................................................................	(21 )	5	(26 )	(100+ )

Total other revenues.............................................................................................................................................................................................	$ 863	$ 532	$ 331	62.2 %

HSBC USA Inc.


			Increase (Decrease)
Six Months Ended June 30,	2012	2011	Amount	%
	(dollars are in millions)
Credit card fees.......................................................................................................................................................................................................	$ 52	$ 64	$ (12 )	(18.8 )%
Other fees and commissions................................................................................................................................................................................	363	383	(20 )	(5.2 )
Trust income...........................................................................................................................................................................................................	50	57	(7 )	(12.3 )
Trading revenue.....................................................................................................................................................................................................	282	350	(68 )	(19.4 )
Other securities gains, net....................................................................................................................................................................................	95	56	39	69.6
HSBC affiliate income:
Fees and commissions.....................................................................................................................................................................................	54	54	-	-
Other affiliate income.......................................................................................................................................................................................	48	48	-	-

Total HSBC affiliate income............................................................................................................................................................................	102	102	-	-
Residential mortgage banking revenue⁽¹⁾............................................................................................................................................................	27	14	13	92.9
Gain (loss) on instruments at fair value and related derivatives.....................................................................................................................	(71 )	61	(132 )	(100+ )
Gain on sale of branches.......................................................................................................................................................................................	330	-	330	100+
Other income:
Valuation of loans held for sale......................................................................................................................................................................	(3 )	(19 )	16	84.2
Insurance...........................................................................................................................................................................................................	4	8	(4 )	(50.0 )
Earnings from equity investments.................................................................................................................................................................	(1 )	19	(20 )	(100+ )
Miscellaneous income.....................................................................................................................................................................................	-	28	(28 )	(100.0 )

Total other income............................................................................................................................................................................................	-	36	(36 )	(100.0 )

Total other revenues.............................................................................................................................................................................................	$ 1,230	$ 1,123	$ 107	9.5 %

⁽¹⁾ Includes servicing fees received from HSBC Finance of $1 million and $3 million during the three and six months ended June 30, 2012 and $2 million and $4 million during the three and six months ended June 30, 2011.

Credit Card Fees Credit card fees declined in both periods largely due to lower outstanding balances driven by the sale of a portion of the portfolio to First Niagara in May 2012, a trend towards lower late fees due to improved delinquency levels and lower enhancement services revenue.

Other fees and commissions Other fee-based income decreased during the three and six month period ended June 30, 2012 largely due to the implementation of new legislation in late 2011 which limits fees paid by retailers to banks on debit card purchases.

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

HSBC USA Inc.

Trading revenue Trading revenue is generated by participation in the foreign exchange, rates, credit and precious metals markets. The following table presents trading related revenue by business. The data in the table 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,	2012	2011	Amount	%
	(dollars are in millions)
Trading revenue................................................................................................................................................................................................	$ 84	$ 126	$ (42 )	(33.3 )%
Net interest income...........................................................................................................................................................................................	(11 )	32	(43 )	(100+ )

Trading related revenue...................................................................................................................................................................................	$ 73	$ 158	$ (85 )	(53.8 )%

Business:
Derivatives⁽¹⁾.................................................................................................................................................................................................	$ 25	$ 107	$ (82 )	(76.6 )%
Balance sheet management........................................................................................................................................................................	(14 )	(18 )	4	22.2
Foreign exchange.........................................................................................................................................................................................	51	52	(1 )	(1.9 )
Precious metals............................................................................................................................................................................................	9	24	(15 )	(62.5 )
Global banking.............................................................................................................................................................................................	(1 )	-	(1 )	(100+ )
Other trading................................................................................................................................................................................................	3	(7 )	10	100+

Trading related revenue...................................................................................................................................................................................	$ 73	$ 158	$ (85 )	(53.8 )%


			Increase (Decrease)
Six Months Ended June 30,	2012	2011	Amount	%
	(dollars are in millions)
Trading revenue................................................................................................................................................................................................	$ 282	$ 350	$ (68 )	(19.4 )%
Net interest income...........................................................................................................................................................................................	(17 )	43	(60 )	(100+ )

Trading related revenue...................................................................................................................................................................................	$ 265	$ 393	$ (128 )	(32.6 )%

Business:
Derivatives⁽¹⁾.................................................................................................................................................................................................	$ 89	$ 271	$ (182 )	(67.2 )%
Balance sheet management........................................................................................................................................................................	(3 )	(11 )	8	(72.7 )
Foreign exchange.........................................................................................................................................................................................	122	95	27	28.4
Precious metals............................................................................................................................................................................................	41	44	(3 )	(6.8 )
Global banking.............................................................................................................................................................................................	2	-	2	100+
Other trading................................................................................................................................................................................................	14	(6 )	20	100+

Trading related revenue...................................................................................................................................................................................	$ 265	$ 393	$ (128 )	(32.6 )%

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

Trading revenue declined during the three and six months ended June 30, 2012 as a result of lower credit spread volatility which adversely affected the performance of our derivative trading revenues, especially structured credit products as well as lower precious metals revenue. The decrease in derivative related revenue was partly offset by improvements in balance sheet management and other trading revenue during both periods and in the six month period, higher foreign exchange revenues.

Trading revenue related to derivatives products declined in both periods as the year ago periods benefitted from significant reserve releases related to counterparty exposures on structured credit products. Lower deal activity and less favorable price variation in rates and other credit derivative products also led to lower revenue in both periods. Additionally, in the six month period ended June 30, 2012 results included losses associated with the termination of certain structured credit exposures in advance of their scheduled maturity dates.

Trading revenue related to balance sheet management activities increased during the three and six months ended June 30, 2012 primarily as economic hedge positions improved due to changes in rates.

Foreign exchange trading revenue increased during the six months ended June 30, 2012 from increased trading volumes.

Precious metals trading revenues decreased during the three and six months ended June 30, 2012 as a result of a decline in trading volumes as customer demand slowed.

Global banking trading revenue increased during the six months ended June 30, 2012 mainly from the change in the valuation of credit default swaps.

Other trading revenue increased in both periods from movements in interest rate curves used to value certain instruments and valuation reserve releases.

Other Securities Gains, Net We maintain various securities portfolios as part of our balance sheet diversification and risk management strategies. During the second quarter and first half of 2012, we sold $3.0 billion and $7.4 billion, respectively, of U.S. Treasury, mortgage-backed and other asset-backed securities as part of a strategy to re-balance the securities portfolio for risk management purposes based on the current interest rate environment and recognized gains of $132 million and $201 million and losses of $67 million and $106 million, respectively, which is included as a component of other security gains, net above. During the second quarter and first six months of 2011, we sold $5.2 billion and $13.7 billion, respectively, of U.S. Treasury, mortgage-backed and other asset-backed securities as part of a strategy to adjust portfolio risk duration as well as to reduce risk-weighted asset levels and recognized gains of $57 million and $139 million and losses of $45 million and $83 million, respectively. Gross realized gains and losses from sales of securities are summarized in Note 5, "Securities," in the accompanying consolidated financial statements.

Servicing and other fees from HSBC affiliates decreased during the three month period ended June 30, 2012 due to lower fees and commissions while in the year-to-date period HSBC affiliates income remained flat.

HSBC USA Inc.

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,	2012	2011	Amount	%
	(dollars are in millions)
Net interest income.............................................................................................................................................................................	$ 51	$ 57	$ (6 )	(10.5 )%

Servicing related income:
Servicing fee income.....................................................................................................................................................................	22	28	(6 )	(21.4 )
Changes in fair value of MSRs due to:
Changes in valuation inputs or assumptions used in valuation model...........................................................................	(31 )	(27 )	(4 )	(14.8 )
Realization of cash flows.........................................................................................................................................................	(16 )	(15 )	(1 )	(6.7 )
Trading - Derivative instruments used to offset changes in value of MSRs.................................................................	38	41	(3 )	(7.3 )

Total servicing related income.....................................................................................................................................................	13	27	(14 )	(51.9 )

Originations and sales related income (loss):
Gains on sales of residential mortgages.....................................................................................................................................	15	7	8	100+
Provision for repurchase obligations.........................................................................................................................................	(32 )	4	(36 )	(100+ )
Trading and hedging activity......................................................................................................................................................	(3 )	1	(4 )	(100+ )

Total originations and sales related income (loss)...................................................................................................................	(20 )	12	(32 )	(100+ )

Other mortgage income......................................................................................................................................................................	9	10	(1 )	(10.0 )

Total residential mortgage banking revenue included in other revenues..................................................................................	2	49	(47 )	(95.9 )

Total residential mortgage banking related revenue.....................................................................................................................	$ 53	$ 106	$ (53 )	(50.0 )%


			Increase (Decrease)
Six Months Ended June 30,	2012	2011	Amount	%
	(dollars are in millions)
Net interest income.............................................................................................................................................................................	$ 102	$ 117	$ (15 )	(12.8 )%

Servicing related income:
Servicing fee income.....................................................................................................................................................................	47	56	(9 )	(16.1 )
Changes in fair value of MSRs due to:
Changes in valuation inputs or assumptions used in valuation model...........................................................................	(15 )	(22 )	7	31.8
Realization of cash flows.........................................................................................................................................................	(32 )	(34 )	2	5.9
Trading - Derivative instruments used to offset changes in value of MSRs.................................................................	26	25	1	4.0

Total servicing related income.....................................................................................................................................................	26	25	1	4.0

Originations and sales related income (loss):
Gains on sales of residential mortgages.....................................................................................................................................	33	23	10	43.5
Provision for repurchase obligations.........................................................................................................................................	(53 )	(40 )	(13 )	(32.5 )
Trading and hedging activity......................................................................................................................................................	4	(11 )	15	136.4

Total originations and sales related income (loss)...................................................................................................................	(16 )	(28 )	12	42.9

Other mortgage income......................................................................................................................................................................	17	17	-	-

Total residential mortgage banking revenue included in other revenues..................................................................................	27	14	13	92.9

Total residential mortgage banking related revenue.....................................................................................................................	$ 129	$ 131	$ (3 )	(2.2 )%

HSBC USA Inc.

Lower net interest income in both periods reflects narrower spreads on slightly higher average outstanding balances as well as increased deferred cost amortization in 2012 as a result of higher prepayments. Consistent with our Premier strategy, additions to the portfolio are comprised largely of Premier relationship products.

Total servicing related income decreased in the three month period ending June 30, 2012 as net hedged MSR performance declined along with lower servicing fee income as the average serviced loan portfolio declined. Total servicing related income increased slightly in the six month period due to improvements in the net hedged MSR performance, partially offset by lower servicing fee income as the average serviced loan portfolio declined with the additions of new originations sold being more than offset by prepayments.

Originations and sales related income (loss) declined in the three month period ending June 30, 2012 driven by higher loss provisions for loan repurchase obligations associated with loans previously sold partially offset by increased gains on individual loan sales. For the six month period ending June 30, 2012, originations and sales related income increased as higher provisions for loan repurchase obligations were more than offset by increased gains on individual loan sales. During the three and six months ended June 30, 2012, we recorded a charge of $32 million and $53 million, respectively, due to an increase in our estimated exposure associated with repurchase obligations on loans previously sold compared to a recovery of $4 million and a charge of $40 million recorded in the year-ago periods for such exposure.

Gain (loss) on instruments designated at fair value and related derivatives We have elected to apply fair value option accounting to commercial leveraged acquisition finance loans, unfunded commitments, certain own fixed-rate debt issuances and all structured notes and structured deposits issued after January 1, 2006 that contain embedded derivatives. We also use derivatives to economically hedge the interest rate risk associated with certain financial instruments for which fair value has been elected. See Note 12, "Fair Value Option," in the accompanying consolidated financial statements for additional information including a breakout of these amounts by individual component.

Gain on sale of branches As discussed above, on May 18, 2012, we completed the sale of 138 non-strategic retail branches to First Niagara and recognized a pre-tax gain, net of allocated non-deductible goodwill, of $330 million. We expect to complete the sale of the remaining 57 branches in the third quarter.

Valuation of loans held for sale Valuation adjustments on loans held for sale improved in 2012 due to lower average balances and reduced volatility. Valuations on loans held for sale relate primarily to residential mortgage loans purchased from third parties and HSBC affiliates with the intent of securitization or sale. Included in this portfolio are subprime residential mortgage loans with a fair value of $164 million and $181 million as of June 30, 2012 and December 31, 2011, 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 Excluding the valuation of loans held for sale as discussed above, other income decreased during the three and six months ended June 30, 2012 due to lower miscellaneous income driven by lower income associated with fair value hedge ineffectiveness as well as lower earnings from equity investments driven by the sale in the fourth quarter of 2011 of our equity investment in a joint venture.

HSBC USA Inc.

Operating Expenses The components of operating expenses are summarized in the following tables.


			Increase (Decrease)
Three Months Ended June 30,	2012	2011	Amount	%
	(dollars are in millions)
Salaries and employee benefits:
Salaries...................................................................................................................................................................................................................	$ 157	$ 164	$ (7 )	(4.3 )%
Employee benefits................................................................................................................................................................................................	89	129	(40 )	(31.0 )

Total salaries and employee benefits................................................................................................................................................................	246	293	(47 )	(16.0 )

Occupancy expense, net...........................................................................................................................................................................................	57	68	(11 )	(16.2 )

Support services from HSBC affiliates:
Fees paid to HSBC Finance for loan servicing and other administrative support..............................................................................................................................................................................................................	7	10	(3 )	(30.0 )
Fees paid to HMUS..............................................................................................................................................................................................	74	67	7	10.4
Fees paid to HTSU...............................................................................................................................................................................................	240	240	-	-
Fees paid to other HSBC affiliates.....................................................................................................................................................................	49	47	2	4.3

Total support services from HSBC affiliates....................................................................................................................................................	370	364	6	1.6

Expense accrual related to certain regulatory matters..........................................................................................................................................	700	-	700	100+

Other expenses:
Equipment and software......................................................................................................................................................................................	11	29	(18 )	(62.1 )
Marketing...............................................................................................................................................................................................................	11	19	(8 )	(42.1 )
Outside services...................................................................................................................................................................................................	27	15	12	80.0
Professional fees...................................................................................................................................................................................................	31	25	6	24.0
Postage, printing and office supplies................................................................................................................................................................	3	4	(1 )	(25.0 )
Off-balance sheet credit reserves.......................................................................................................................................................................	(4 )	(13 )	9	69.2
FDIC assessment fee............................................................................................................................................................................................	26	36	(10 )	(27.8 )
Insurance business..............................................................................................................................................................................................	2	1	1	100.0
Miscellaneous.......................................................................................................................................................................................................	71	49	22	44.9

Total other expenses............................................................................................................................................................................................	178	165	13	7.9

Total operating expenses..........................................................................................................................................................................................	$ 1,551	$ 890	$ 661	74.3 %

Personnel - average number....................................................................................................................................................................................	8,717	9,948
Efficiency ratio............................................................................................................................................................................................................	110.94 %	82.79 %

HSBC USA Inc.


			Increase (Decrease)
Six Months Ended June 30,	2012	2011	Amount	%
	(dollars are in millions)
Salaries and employee benefits:
Salaries...................................................................................................................................................................................................................	$ 314	$ 326	$ (12 )	(3.7 )%
Employee benefits................................................................................................................................................................................................	212	260	(48 )	(18.5 )

Total salaries and employee benefits................................................................................................................................................................	526	586	(60 )	(10.2 )

Occupancy expense, net...........................................................................................................................................................................................	116	136	(20 )	(14.7 )

Support services from HSBC affiliates:
Fees paid to HSBC Finance for loan servicing and other administrative support......................................................................................	17	19	(2 )	(10.5 )
Fees paid to HMUS..............................................................................................................................................................................................	146	122	24	19.7
Fees paid to HTSU...............................................................................................................................................................................................	474	446	28	6.3
Fees paid to other HSBC affiliates.....................................................................................................................................................................	101	93	8	8.6

Total support services from HSBC affiliates....................................................................................................................................................	738	680	58	8.5

Expense accrual related to certain regulatory matters..........................................................................................................................................	700	-	700	100+

Other expenses:
Equipment and software......................................................................................................................................................................................	22	119	(97 )	(81.5 )
Marketing...............................................................................................................................................................................................................	25	37	(12 )	(32.4 )
Outside services...................................................................................................................................................................................................	47	30	17	56.7
Professional fees...................................................................................................................................................................................................	61	63	(2 )	(3.2 )
Postage, printing and office supplies................................................................................................................................................................	8	8	-	-
Off-balance sheet credit reserves.......................................................................................................................................................................	(12 )	(25 )	13	52.0
FDIC assessment fee............................................................................................................................................................................................	54	71	(17 )	(23.9 )
Insurance business..............................................................................................................................................................................................	2	-	2	100+
Miscellaneous.......................................................................................................................................................................................................	120	116	4	3.4

Total other expenses............................................................................................................................................................................................	327	419	(92 )	(22.0 )

Total operating expenses..........................................................................................................................................................................................	$ 2,407	$ 1,821	$ 586	32.2 %

Personnel - average number....................................................................................................................................................................................	8,945	9,901
Efficiency ratio............................................................................................................................................................................................................	102.34 %	79.31 %

Salaries and employee benefits Salaries and employee benefits expense decreased during both periods driven by the impact of the sale of 138 non-strategic retail branches in May 2012 and continued cost management efforts, partially offset by higher salaries expense relating to expansion activities associated with certain businesses.

Occupancy expense, net Occupancy expense decreased in both periods reflecting lower rent and lower utilities costs, including the impact of the sale of 138 non-strategic retail branches as discussed above, as well as the commencement of the recognition of a deferred gain on the sale of our 452 Fifth Avenue headquarters building which began in April 2012. The deferred gain of $117 million is being recognized over the eight year remaining life of our lease.

Support services from HSBC affiliates includes technology and certain centralized support services, including human resources, corporate affairs and other shared services, legal, compliance, tax and finance charged to us by HTSU. Support services from HSBC affiliates also includes services charged to us by an HSBC affiliate located outside of the United States which provides operational support to our businesses, including among other areas, customer service, systems, risk management, collection and accounting functions as well as servicing fees paid to HSBC Finance for servicing nonconforming residential mortgage loans and credit card receivables. Higher support services from HSBC affiliates in both periods reflects higher fees paid to HMUS primarily related to compliance costs and, in the year-to-date period, higher fees paid to HTSU largely as a result of higher compliance costs, including costs associated with our AML/BSA and foreclosure remediation activities. Compliance costs reflected in support services from affiliates totaled $85 million and $164 million in the three and six months ended June 30, 2012 compared to $52 million and $77 million in the year-ago periods. These higher compliance costs in the three month period were offset by lower HTSU charges for other shared services reflecting the impact of continued cost management efforts.

Expense accrual related to certain regulatory matters Included in the three and six months ended June 30, 2012 is an expense accrual of $700 million related to certain regulatory matters. See Note 21, "Litigation and Regulatory Matters" for additional information.

Marketing expenses Lower marketing and promotional expenses in both periods resulted from continued optimization of marketing spend as a result of general cost saving initiatives.

Other expenses Other expenses (excluding marketing expenses) in both 2012 periods includes a reduction of $12 million in estimated costs associated with penalties related to foreclosure delays involving loans serviced for government sponsored enterprises ("GSEs") and other third parties previously accrued and, for the three and six month periods in 2011, charges of $16 million and $94 million, respectively, included within equipment and software relating to the impairment of certain previously capitalized software development costs. Excluding these amounts, other expenses remained higher in both periods, largely due to higher outside services fees and lower reserve releases for off-balance sheet exposures, partially offset by lower FDIC assessment fees.

Efficiency ratio Our efficiency ratio from continuing operations was 110.94 percent and 102.34 percent during the three and six months ended June 30, 2012, respectively, compared to 82.79 percent 79.31 percent during the year-ago periods. Our efficiency ratio was impacted in each period by the change in the fair value of our own debt and related derivatives for which we have elected fair value option accounting. Also impacting the efficiency ratio in both 2012 periods was the gain from the sale of certain non-strategic retail branches to First Niagara as well as a $700 million expense accrual related to certain regulatory matters and, in the prior year periods, the impairment of certain software development costs discussed above. Excluding the impact of these items, our efficiency ratio for the three and six months ended June 30, 2012 was 94.24 percent and 81.52 percent, respectively, compared to 85.60 percent and 76.48 percent in the year-ago periods as net interest income and other revenues declined, partially offset by lower operating expenses. While operating expenses declined in both periods, driven by the impact of our retail branch divestiture and cost mitigation efforts, they continue to reflect elevated levels of compliance costs.

Segment Results - IFRSs Basis

We have four distinct segments that are utilized for management reporting and analysis purposes. The segments, which are generally based upon customer groupings and global businesses, are described under Item 1, "Business" in our 2011 Form 10-K.

Our segment results are reported on a continuing operations basis. As previously discussed, in the second quarter of 2012 we sold our GM and UP credit card receivables as well as our private label credit card and closed-end receivables to Capital One. Because the credit card and private label receivables sold were classified as held for sale prior to disposition and the operations and cash flows from these receivables will be eliminated from our ongoing operations post-disposition without any significant continuing involvement, we have determined we have met the requirements to report the results of these credit card and private label card and closed-end receivables being sold, as discontinued operations for all periods presented. Prior to being reported as discontinued operations beginning in the third quarter of 2011, these receivables were previously included in our Retail Banking and Wealth Management segment. As discussed in Note 2, "Discontinued Operations," our wholesale banknotes business ("Banknotes Business"), which was previously reported in our Global Banking and Markets segment, is also reported as discontinued operations and is not included in our segment presentation.

HSBC USA Inc.

We report to our parent, HSBC, in accordance with its reporting basis, 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 18, "Business Segments," in the accompanying consolidated financial statements and under the caption "Basis of Reporting" in the MD&A.

Retail Banking and Wealth Management ("RBWM") Our RBWM segment provides retail banking and wealth products and services, including personal loans, credit cards, deposits, branch services, financial planning products and asset management services such as mutual funds, investments and insurance.

During the first half of 2012, we continued to direct resources towards the growth of wealth services and HSBC Premier, HSBC's global banking service that offers customers a seamless international service. We remain focused on providing differentiated premium services to internationally-minded, mass affluent and upwardly mobile customers. In order to align our retail network to increase focus on our strategy of internationally minded markets and customers, we announced in August of 2011 the sale of 195 retail branches in our non-strategic upstate New York region, of which 138 were sold in May, 2012 with the remainder to be sold in the third quarter of 2012.

Consistent with our strategy, additions to our residential mortgage portfolio primarily consist of Premier relationship products, while sales of loans consist primarily of conforming loans sold to GSEs. In addition to normal sales activity, at times we have historically sold prime adjustable and fixed rate mortgage loan portfolios to third parties. We retained the servicing rights in relation to the mortgages upon sale.

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


			Increase (Decrease)
Three Months Ended June 30,	2012	2011	Amount	%
	(dollars are in millions)
Net interest income..........................................................................................................................................................................	$ 197	$ 249	$ (52 )	(20.9 )%
Other operating income...................................................................................................................................................................	262	130	132	100+

Total operating income...................................................................................................................................................................	459	379	80	21.1
Loan impairment charges................................................................................................................................................................	61	58	3	5.2

	398	321	77	24.0
Operating expenses.........................................................................................................................................................................	321	369	(48 )	(13.0 )

Profit (loss) before tax.....................................................................................................................................................................	$ 77	$ (48 )	$ 125	100+ %


			Increase (Decrease)
Six Months Ended June 30,	2012	2011	Amount	%
	(dollars are in millions)
Net interest income..........................................................................................................................................................................	$ 444	$ 497	$ (53 )	(10.7 )%
Other operating income...................................................................................................................................................................	359	189	170	89.9

Total operating income...................................................................................................................................................................	803	686	117	17.1
Loan impairment charges................................................................................................................................................................	102	90	12	13.3

	701	596	105	17.6
Operating expenses.........................................................................................................................................................................	642	819	(177 )	(21.6 )

Profit (loss) before tax.....................................................................................................................................................................	$ 59	$ (223 )	$ 282	100+ %

HSBC USA Inc.

Our RBWM segment reported a higher profit before tax during the three and six months ended June 30, 2012, reflecting higher other operating income and lower operating expenses, partially offset by lower net interest income and higher loan impairment charges.

Net interest income was lower during the three and six months ended June 30, 2012 driven by lower deposit margins primarily as a result of the short term value of funds received on the deposits held for sale to First Niagara as well as a continued low interest rate environment. In addition, there were narrower spreads on slightly higher residential mortgage average balances as well as increased deferred cost amortization in 2012 as a result of higher prepayments.

Other operating income increased during both periods primarily due to a $180 million gain in both periods from the partial completion of the sale of certain branches to First Niagara, as well as improved gains on sales of loans sold to GSEs and higher net MSR hedging results. Partially offsetting these improvements were higher provisions for mortgage loan repurchase obligations associated with previously sold loans and a reduction in debit card fee income as a result of the implementation of new legislation which caps fees paid by retailers to banks for debit card purchases.

Loan impairment charges increased in both periods, driven by increased mortgage reserves as a result of increasing foreclosure time frames and higher charge-offs on home equity loans.

Operating expenses in the six month period ended June 30, 2011 included the impairment of previously capitalized software development costs, which resulted in a charge of $73 million. The three and six month periods ended June 30, 2012 included a $12 million reduction in estimated cost associated with penalties related to foreclosure delays involving loans serviced for GSEs. Excluding these amounts, operating expenses remained lower in both periods primarily due to a decrease in expenses in our retail banking business driven by several cost reduction initiatives primarily optimizing staffing in the branch network and administrative areas as well as reduced marketing spend. In addition, there were lower FDIC assessments beginning in the second quarter of 2011 as assessments are now based on assets rather than deposits. Partially offsetting these improvements in operating expense were costs associated with our announced branch sale as well as increased compliance costs.

Commercial Banking ("CMB") Our Commercial Banking segment serves three client groups, notably Middle Market Enterprises, Business Banking and Commercial Real Estate. CMB's business strategy is to be the leader in international banking in target markets. In the U.S., CMB strives to execute on that vision and strategy by proactively targeting the growing number of U.S. companies that are increasingly in need of international banking, financial products and services as well as foreign companies in need of U.S. products and services. The products and services provided to these client groups are offered through multiple delivery systems including the branch banking network as well as through cross-selling products of our Global Banking and Markets segment, consistent with our global strategy of cross-sale to other customer groups. In 2012, we continued to focus on expanding our core proposition and proactively target companies with international banking requirements which increased the number of relationship managers in areas with strong international connectivity including the west coast, Texas and Florida.

During the first half of 2012, interest rate spreads continued to be pressured from a low interest rate environment while loan impairment charges improved. Both an increase in demand for loans as well as new loan originations have resulted in an 8 percent increase in loans outstanding to middle-market customers since December 31, 2011. The business banking loan portfolio has seen a 21 percent decrease in loans outstanding since December 31, 2011 resulting from the sale of 138 branches in the non-strategic upstate New York region. The commercial real estate group is focusing on selective business opportunities and portfolio management, which resulted in a 2 percent increase in outstanding loans for this portfolio since December 31, 2011. Average customer deposit balances across all CMB business lines during the six months ended June 30, 2012 increased 1 percent compared to the year-ago period with underlying growth partially offset by the impact of the branch sale. Average loans increased 17 percent as compared to the year-ago period.

HSBC USA Inc.

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


			Increase (Decrease)
Three Months Ended June 30,	2012	2011	Amount	%
	(dollars are in millions)
Net interest income................................................................................................................................................................................	$ 156	$ 172	$ (16 )	(9.3 )%
Other operating income.........................................................................................................................................................................	301	106	195	100+

Total operating income..........................................................................................................................................................................	457	278	179	64.4
Loan impairment charges......................................................................................................................................................................	8	42	(34 )	(81.0 )

	449	236	213	90.3
Operating expenses................................................................................................................................................................................	190	200	(10 )	(5.0 )

Profit before tax.......................................................................................................................................................................................	$ 259	$ 36	$ 223	100+ %


			Increase (Decrease)
Six Months Ended June 30,	2012	2011	Amount	%
	(dollars are in millions)
Net interest income................................................................................................................................................................................	$ 322	$ 347	$ (25 )	(7.2 )%
Other operating income.........................................................................................................................................................................	405	211	194	91.9

Total operating income..........................................................................................................................................................................	727	558	169	30.3
Loan impairment charges (recoveries)................................................................................................................................................	(9 )	12	(21 )	(100+ )

	736	546	190	34.8
Operating expenses................................................................................................................................................................................	375	376	(1 )	(.3 )

Profit before tax.......................................................................................................................................................................................	$ 361	$ 170	$ 191	(100+ )%

Our CMB segment reported higher profit before tax during the three and six months ended June 30, 2012 as higher other operating income, lower loan impairment charges and lower operating expenses were partially offset by lower net interest income.

Net interest income in both periods was lower reflecting higher funding costs, partially offset by the favorable impact of higher loans.

Other operating income in both periods reflects a $213 million gain from the partial completion of the sale of certain branches to First Niagara as well as lower interchange and deposit service fees in both periods.

Loan impairment charges decreased in both periods largely due to a specific provision on an individual commercial real estate loan in 2011, partially offset by lower level of recoveries compared to the first half of 2011 on troubled debt restructures in commercial real estate and middle market enterprises.

Operating expense decreased during the three and six months ended June 30, 2012 as higher expenses relating to staffing increases to support growth as well as infrastructure costs such as compliance and higher technology costs were more than offset by lower branch network charges. The prior periods also reflect a $19 million impairment charge associated with previously capitalized software development costs.

Global Banking and Markets ("GBM") Our Global Banking and Markets business segment supports HSBC's global strategy to become the leading international bank for cross-border business. By leveraging HSBC's international network, driving connectivity between emerging and developed markets and utilizing the strength of our product expertise, we deliver wholesale banking solutions to major corporations and financial institutions.

HSBC USA Inc.

There are three major lines of business within GBM: Global Banking, Global Markets and Balance Sheet Management. The Global Banking business provides corporate lending and investment banking services and also offers transaction services such as payments and cash management, securities services, trade finance and fund administration and custody services. This unit also manages client relationships across all GBM products. The Global Markets business services the requirements of central banks and financial institutions, corporate and middle market clients and institutional and Private Banking investors through our global trading platforms and distribution capabilities. Balance Sheet Management carries out our treasury functions, including management of liquidity and interest rate risk, funding for business operations and stewardship over surplus funds held in the investment portfolio.

We continue to proactively target U.S. companies with international banking requirements and foreign companies with banking needs in the Americas. Furthermore, we have seen higher average loan balances as well as growth in revenue from the cross-sale of our products to CMB and RBWM customers consistent with our global strategy of cross-sale to other customer groups. Global Banking and Markets segment results during the first half of 2012 were adversely affected by weaker U.S. credit market conditions, which led to reduced income from structured credit products which we no longer offer. Our risk management efforts to improve the credit quality of our corporate lending relationships, as well as increased liquidity costs on unused commitments, has resulted in a tightening of average spreads, that was more than offset by higher revenue from growth in loan balances. Revenue improvements in the first half of 2012 in payments and cash management and foreign exchange as well as higher gains on sales of investment portfolio securities were partially offset by a decline in revenue from rates and credit derivatives. Additionally, other global markets revenue declined due to fair value adjustments on structure note debt issuances.

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


			Increase (Decrease)
Three Months Ended June 30,	2012	2011	Amount	%
	(dollars are in millions)
Net interest income................................................................................................................................................................................	$ 167	$ 130	$ 37	28.5 %
Other operating income.........................................................................................................................................................................	165	272	(107 )	(39.3 )

Total operating income..........................................................................................................................................................................	332	402	(70 )	(17.4 )
Loan impairment charges (recoveries)................................................................................................................................................	23	(10 )	33	100+

	309	412	(103 )	(25.0 )
Operating expenses................................................................................................................................................................................	236	239	(3 )	(1.3 )

Profit before tax.......................................................................................................................................................................................	$ 73	$ 173	$ (100 )	(57.8 )%


			Increase (Decrease)
Six Months Ended June 30,	2012	2011	Amount	%
	(dollars are in millions)
Net interest income................................................................................................................................................................................	$ 310	$ 262	$ 48	18.3 %
Other operating income.........................................................................................................................................................................	491	689	(198 )	(28.7 )

Total operating income..........................................................................................................................................................................	801	951	(150 )	(15.8 )
Loan impairment charges (recoveries)................................................................................................................................................	(8 )	(27 )	19	70.4

	809	978	(169 )	(17.3 )
Operating expenses................................................................................................................................................................................	495	465	30	6.5

Profit before tax.......................................................................................................................................................................................	$ 314	$ 513	$ (199 )	(38.8 )%

HSBC USA Inc.

Our GBM segment reported a lower profit before tax during the three and six months ended June 30, 2012 driven by lower other operating income and higher loan impairment charges (in the six month period lower recoveries), partially offset by higher net interest income. The year-to-date period was also impacted by higher operating expenses.

Net interest income increased during both periods due to higher corporate loan and investment balances, partially offset by lower credit spreads on corporate loans as the business continues to manage down high risk credit exposures and increased cost related to liquidity facilities.

Other operating income decreased in the three and six months ended June 30, 2012 due to a decline in the value of certain structured credit exposures as well as a decline in deal activity and less favorable price movements relative to our exposures in rates and credit derivatives. Partially offsetting these declines were gains from the sale of investment portfolio securities and increased income from payments and cash management generated from the billing of services to affiliates.

Other operating income reflected losses on structured credit products of $6 million and gains of $25 million during the three and six months ended June 30, 2012 compared to gains of $64 million and $143 million during the year-ago periods. Included in structured credit products were exposures to monoline insurance companies that resulted in losses of $18 million and $10 million during the three and six months ended June 30, 2012, respectively, compared to gains of $16 million and $32 million during the year-ago periods. Valuation losses of $2 million and $4 million during the three and six months ended June 30, 2012, respectively, were recorded against the fair values of sub-prime residential mortgage loans held for sale compared to valuation losses of $10 million and $13 million in year-ago periods.

Loan impairment charges increased compared to the year ago quarter. The increase in the second quarter was primarily due to an impairment of a credit facility as the year ago quarter benefited from recoveries associated with credit improvements. Loan impairment recoveries decreased during the six month period as the benefit of reductions in higher risk rated loan balances and the stabilization of credit downgrades was partially offset by an impairment of a credit facility in the second quarter of 2012.

Operating expenses increased during the six month period driven by higher compliance costs associated with our AML/BSA remediation activities and higher technology expenses. Partially offsetting these increases in the six month period and driving a decrease in the three month period were decreased staff costs as a result of lower headcount and reduced performance based costs.

HSBC USA Inc.

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


Three Months Ended June 30,	2012	2011
	(in millions)
Foreign exchange and metals..............................................................................................................................................................................	$ 80	$ 109
Credit⁽¹⁾.....................................................................................................................................................................................................................	(13 )	66
Rates........................................................................................................................................................................................................................	54	45
Equities...................................................................................................................................................................................................................	3	3
Other Global Markets............................................................................................................................................................................................	(51 )	(13 )

Total Global Markets..................................................................................................................................................................................................	73	210

Financing................................................................................................................................................................................................................	46	26
Payments and cash management........................................................................................................................................................................	87	76
Other transaction services...................................................................................................................................................................................	22	29

Total Global Banking..................................................................................................................................................................................................	155	131

Balance sheet management.......................................................................................................................................................................................	110	62

Other.............................................................................................................................................................................................................................	(6 )	(1 )

Total operating income..............................................................................................................................................................................................	$ 332	$ 402


Six Months Ended June 30,	2012	2011
	(in millions)
Foreign exchange and metals..............................................................................................................................................................................	$ 206	$ 200
Credit⁽¹⁾.....................................................................................................................................................................................................................	10	153
Rates........................................................................................................................................................................................................................	97	128
Equities...................................................................................................................................................................................................................	8	6
Other Global Markets............................................................................................................................................................................................	(42 )	(19 )

Total Global Markets..................................................................................................................................................................................................	279	468

Financing................................................................................................................................................................................................................	78	71
Payments and cash management........................................................................................................................................................................	170	148
Other transaction services...................................................................................................................................................................................	51	58

Total Global Banking..................................................................................................................................................................................................	299	277

Balance sheet management.......................................................................................................................................................................................	228	195

Other.............................................................................................................................................................................................................................	(5 )	11

Total operating income..............................................................................................................................................................................................	$ 801	$ 951

⁽¹⁾ Credit includes a loss of $11 million and a gain of $13 million in the three and six months ended June 30, 2012, respectively, and gains of $64 million and $143 million in the three and six months ended June 30, 2011, respectively, of structured credit products which we no longer offer.

Private Banking ("PB") As part of HSBC's global network, the PB segment offers integrated domestic and international services to high net worth individuals, their families and their businesses. These services address both resident and non-resident financial needs. During the first half of 2012, we continued to dedicate resources to strengthen product and service leadership in the wealth management market. Areas of focus are banking and cash management, investment advice including discretionary portfolio management, investment and structured products, residential mortgages, as well as wealth planning for trusts and estates.

HSBC USA Inc.

Average client deposit levels increased $1.2 billion or 11 percent compared to the prior year quarter due to temporary to medium term large deposits from domestic and European market customers. Total average loans increased 16 percent compared to the prior year quarter from growth in both commercial lending and tailored mortgage products. Overall period end client assets were higher by $900 million compared to the prior year quarter mainly due to increases in deposits and various PB wealth management products.

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


			Increase (Decrease)
Three Months Ended June 30,	2012	2011	Amount	%
	(dollars are in millions)
Net interest income................................................................................................................................................................................	$ 47	$ 44	$ 3	6.8 %
Other operating income.........................................................................................................................................................................	28	34	(6 )	(17.6 )

Total operating income..........................................................................................................................................................................	75	78	(3 )	(3.8 )
Loan impairment charges (recoveries)................................................................................................................................................	(3 )	(1 )	(2 )	(100+ )

	78	79	(1 )	(1.3 )
Operating expenses................................................................................................................................................................................	63	65	(2 )	(3.1 )

Profit before tax.......................................................................................................................................................................................	$ 15	$ 14	$ 1	7.1 %


			Increase (Decrease)
Six Months Ended June 30,	2012	2011	Amount	%
	(dollars are in millions)
Net interest income................................................................................................................................................................................	$ 92	$ 90	$ 2	2.2 %
Other operating income.........................................................................................................................................................................	57	70	(13 )	(18.6 )

Total operating income..........................................................................................................................................................................	149	160	(11 )	(6.9 )
Loan impairment charges (recoveries)................................................................................................................................................	(5 )	(10 )	5	50.0

	154	170	(16 )	(9.4 )
Operating expenses................................................................................................................................................................................	121	129	(8 )	(6.2 )

Profit before tax.......................................................................................................................................................................................	$ 33	$ 41	$ (8 )	(19.5 )%

Our PB segment reported slightly higher profit before tax during the three months ended June 30, 2012 driven by higher net interest income, higher recoveries of loan impairment charges and lower operating expenses, partially offset by lower other operating income. Our PB segment reported lower profit before tax during the six months ended June 30, 2012 driven by lower other operating income and lower recoveries of loan impairment charges partially offset by higher net interest income and lower operating expenses.

Net interest income was slightly higher during both periods due to improvements of lending and banking spreads and higher income driven by the increase in loan and deposit balances partially offset by lower funding.

Other operating income was lower in both periods reflecting lower fees on managed and structured investment products, funds fees, custody fees and the loss of income due to the sale of our equity interest in Guernsey investments.

Recoveries on loan impairment charges were higher during the three months ended June 30, 2012 as continued improved credit conditions and client credit ratings resulted in overall higher net recoveries. These factors were more pronounced however in the prior year to date period leading to an overall reduction in recoveries on a year to date basis in 2012.

HSBC USA Inc.

Operating expenses decreased during both periods due to lower costs for staff and shared services.

Other The other segment primarily includes adjustments made at the corporate level for fair value option accounting related to certain debt issued, the offset to funding credits provided to CMB for holding certain investments, 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.

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


			Increase (Decrease)
Three Months Ended June 30,	2012	2011	Amount	%
	(dollars are in millions)
Net interest income..........................................................................................................................................................................	$ (3 )	$ (3 )	$ -	- %
Gain on own debt designated at fair value and related derivatives.........................................................................................	149	39	110	100+
Other operating loss........................................................................................................................................................................	(18 )	(20 )	2	10.0

Total operating loss.........................................................................................................................................................................	128	16	112	100+
Loan impairment charges................................................................................................................................................................	-	-	-	-

	128	16	112	100+
Operating expenses.........................................................................................................................................................................	723	20	703	100+

Profit (loss) before tax.....................................................................................................................................................................	$ (595 )	$ (4 )	$ (591 )	(100+ )%


			Increase (Decrease)
Six Months Ended June 30,	2012	2011	Amount	%
	(dollars are in millions)
Net interest income.................................................................................................................................................................................	$ (10 )	$ (67 )	$ 57	85.1 %
Gain (loss) on own debt designated at fair value and related derivatives......................................................................................	(103 )	7	(110 )	(100+ )
Other operating loss...............................................................................................................................................................................	(37 )	(24 )	(13 )	(54.2 )

Total operating loss................................................................................................................................................................................	(150 )	(84 )	(66 )	(78.6 )
Loan impairment charges.......................................................................................................................................................................	-	-	-	-

	(150 )	(84 )	(66 )	(78.6 )
Operating expenses.................................................................................................................................................................................	742	37	705	100+

Loss before tax.........................................................................................................................................................................................	$ (892 )	$ (121 )	$ (771 )	(100+ )%

Profit (loss) before tax decreased $591 million in the three months ended June 30, 2012 driven largely by an expense accrual related to certain regulatory matters totaling $700 million partially offset by credit and interest rate related changes in the fair value of certain of our own debt for which fair value option was elected. Loss before tax increased $771 million in the six months ended June 30, 2012 driven largely by an expense accrual related to certain regulatory matters totaling $700 million as well as credit and interest rate related changes in the fair value of certain of our own debt for which fair value option was elected, partially offset by higher net interest income due to a reduction in interest expense associated with changes in estimated tax exposures.

Reconciliation of Segment Results As previously discussed, segment results are reported on an IFRS Basis. See Note 18, "Business Segments," in the accompanying consolidated financial statements for a discussion of the differences between IFRSs and U.S. GAAP. For segment reporting purposes, intersegment transactions have not been eliminated. We generally account for transactions between segments as if they were with third parties. Also see Note 18, "Business Segments," in the accompanying consolidated financial statements for a reconciliation of our IFRS Basis segment results to U.S. GAAP consolidated totals.

HSBC USA Inc.

Credit Quality

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

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

Our credit grades align with U.S. regulatory risk ratings and are mapped to our probability of default master scale. These probability of default estimates are validated on an annual basis using back-testing of actual default rates and benchmarking of the internal ratings with external rating agency data like Standard and Poor's ratings and default rates. Substantially all appraisals in connection with commercial real estate loans are ordered by the independent real estate appraisal unit at HSBC. The appraisal must be reviewed and accepted by this unit. For loans greater than $250,000, 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 is 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 the underlying collateral of impaired loans, current information such as rent rolls and operating statements of the subject property are reviewed and presented in a standardized format. Operating results such as net operating income and cash flows before and after debt service are established and reported with relevant ratios. Third-party market data is gathered and reviewed for relevance to the subject collateral. Data is also collected from similar properties within the portfolio. Actual sales levels of condominiums, operating income and expense figures and rental data on a square foot basis are derived from existing loans and, when appropriate, used as comparables for the subject property. Property specific data, augmented by market data research, is used to project a stabilized year of income and expense to create a 10-year cash flow model to be discounted at appropriate rates into 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.

Probable losses for pools of homogeneous consumer loans are generally 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. This analysis considers delinquency status, loss experience and severity and takes into account whether loans have filed for bankruptcy, have been re-aged or are subject to forbearance, an external debt management plan, hardship, modification, extension or deferment. The allowance for credit losses on consumer receivables also takes into consideration the loss severity expected based on the underlying collateral, if any, for the loan in the event of default based on historical and recent trends.

HSBC USA Inc.

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

Our allowance for credit losses methodology and our accounting policies related to the allowance for credit losses are presented in further detail under the caption "Critical Accounting Policies and Estimates" and in Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," in our 2011 Form 10-K. Our approach toward credit risk management is summarized under the caption "Risk Management" in our 2011 Form 10-K. There have been no material revisions to our policies or methodologies during the first half of 2012, although we continue to monitor current market conditions and will adjust credit policies as deemed necessary.

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


	June 30, 2012	March 31, 2012	December 31, 2011
	(dollars are in millions)
Allowance for credit losses....................................................................................................................................................................................	$ 619	$ 603	$ 743

Ratio of Allowance for credit losses to:
Loans:⁽¹⁾
Commercial.................................................................................................................................................................................................................	.91 %	.92 %	1.31 %
Consumer:
Residential mortgages, excluding home equity mortgages...........................................................................................................................	1.27	1.27	1.36
Home equity mortgages......................................................................................................................................................................................	1.91	1.73	2.03
Credit card receivables........................................................................................................................................................................................	3.96	4.45	4.71
Other consumer loans.........................................................................................................................................................................................	2.00	2.50	2.52

Total consumer loans..........................................................................................................................................................................................	1.50	1.51	1.65

Total............................................................................................................................................................................................................................	1.10 %	1.12 %	1.43 %

Net charge-offs⁽¹⁾⁽²⁾:
Commercial............................................................................................................................................................................................................	196.53 %	103.82 %	669.70 %
Consumer..............................................................................................................................................................................................................	109.41	111.24	118.04

Total............................................................................................................................................................................................................................	144.63 %	107.10 %	231.46 %

Nonperforming loans⁽¹⁾:
Commercial............................................................................................................................................................................................................	51.75 %	49.10 %	52.68 %
Consumer..............................................................................................................................................................................................................	28.79	29.34 %	31.39

Total............................................................................................................................................................................................................................	38.07 %	37.50 %	41.32 %

⁽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.

HSBC USA Inc.

Changes in the allowance for credit losses by general loan categories for the three and six months ended June 30, 2012 and 2011 are summarized in the following table:


	Commercial				Consumer
	Construction and Other Real Estate	Business Banking and Middle Market Enterprises	Global banking	Other Comm'l	Residential Mortgage, Excl Home Equity Mortgages	Home Equity Mortgages	Credit Card	Other Consumer	Total
	(in millions)
Three Months Ended June 30, 2012:
Allowance for credit losses - beginning of period....................................................................................................................................................................	$ 205	$ 76	$ 25	$ 20	$ 182	$ 43	$ 35	$ 17	$ 603
Provision charged to income...............................................................................................................................................................................................	(5 )	15	19	(7 )	24	34	9	-	89
Charge offs..................................................................................................................................................................................................................	(2 )	(13 )	-	-	(23 )	(30 )	(16 )	(7 )	(91 )
Recoveries..................................................................................................................................................................................................................	-	2	-	5	5	-	3	3	18

Net charge offs..................................................................................................................................................................................................................	(2 )	(11 )	-	5	(18 )	(30 )	(13 )	(4 )	(73 )

Allowance for credit losses - end of period.............................................................................................................................................................................	$ 198	$ 80	$ 44	$ 18	$ 188	$ 47	$ 31	$ 13	$ 619

Three Months Ended June 30, 2011:
Allowance for credit losses - beginning of period....................................................................................................................................................................	$ 217	$ 119	$ 111	$ 23	$ 161	$ 68	$ 48	$ 24	$ 771
Provision charged to income...............................................................................................................................................................................................	49	(8 )	(1 )	-	27	12	12	4	95
Charge offs..................................................................................................................................................................................................................	(39 )	(19 )	-	(2 )	(28 )	(18 )	(19 )	(8 )	(133 )
Recoveries..................................................................................................................................................................................................................	2	4	-	-	2	-	3	3	14

Net charge offs..................................................................................................................................................................................................................	(37 )	(15 )	-	(2 )	(26 )	(18 )	(16 )	(5 )	(119 )

Allowance for credit losses - end of period.............................................................................................................................................................................	$ 229	$ 96	$ 110	$ 21	$ 162	$ 62	$ 44	$ 23	$ 747

Six Months Ended June 30, 2012:
Allowance for credit losses - beginning of period....................................................................................................................................................................	$ 212	$ 78	$ 131	$ 21	$ 192	$ 52	$ 39	$ 18	$ 743
Provision charged to income...............................................................................................................................................................................................	(25 )	21	(3 )	(9 )	39	42	20	4	89
Charge offs..................................................................................................................................................................................................................	(3 )	(23 )	(84 )	-	(49 )	(47 )	(33 )	(14 )	(253 )
Recoveries..................................................................................................................................................................................................................	14	4	0	6	6	-	5	5	40

Net charge offs..................................................................................................................................................................................................................	11	(19 )	(84 )	6	(43 )	(47 )	(28 )	(9 )	(213 )

Allowance for credit losses - end of period.............................................................................................................................................................................	$ 198	$ 80	$ 44	$ 18	$ 188	$ 47	$ 31	$ 13	$ 619

Six Months Ended June 30, 2011:
Allowance for credit losses - beginning of period....................................................................................................................................................................	$ 243	$ 132	$ 116	$ 32	$ 167	$ 77	$ 58	$ 27	$ 852
Provision charged to income...............................................................................................................................................................................................	21	(9 )	(6 )	(10 )	46	23	20	8	93
Charge offs..................................................................................................................................................................................................................	(43 )	(33 )	-	(2 )	(54 )	(38 )	(40 )	(15 )	(225 )
Recoveries..................................................................................................................................................................................................................	8	6	-	1	3	-	6	3	27

Net charge offs..................................................................................................................................................................................................................	(35 )	(27 )	-	(1 )	(51 )	(38 )	(34 )	(12 )	(198 )

Allowance for credit losses - end of period.............................................................................................................................................................................	$ 229	$ 96	$ 110	$ 21	$ 162	$ 62	$ 44	$ 23	$ 747

The allowance for credit losses at June 30, 2012 increased $16 million, or 3 percent as compared to March 31, 2012 and decreased $124 million, or 17 percent as compared to December 31, 2011. The increase since March 31, 2012 was driven by increased levels of reserves on commercial loans for risk factors associated with expansion activities in the U.S. and Latin America as well as higher loss estimates on residential mortgage loan troubled debt restructures and home equity loan exposures. The decrease from December 31, 2011 was driven by lower loss estimates in our commercial loan and residential mortgage loan portfolios. Reserve requirements in our commercial loan portfolio have declined since December 31, 2011 due to reductions in certain global banking exposures and improvements in the financial circumstances of several customer relationships which led to credit upgrades on certain problem credits and lower levels of nonperforming loans and criticized assets. Our allowance for our residential mortgage loan portfolio decreased largely due to continued improvements in credit quality including lower delinquency and charge-off levels. Reserve levels for all consumer loan categories however continue to be impacted by the slow pace of economic recovery in the U.S. economy, including elevated unemployment rates and as it relates to residential mortgage loans, ongoing weakness in the housing market.

The allowance for credit losses as a percentage of total loans at June 30, 2012 decreased as compared to December 31, 2011 for the reasons discussed above.

The allowance for credit losses as a percentage of net charge-offs increased as compared to March 31, 2012, driven largely by lower dollars of commercial loan net charge-offs as the prior quarter reflected higher commercial loan net charge-offs driven by three specific client relationships. The increase was partially offset by higher home equity mortgage charge-offs due to an increased volume of loans where we have decided not to pursue foreclosure. Overall consumer loan dollars of net charge-off levels remained largely stable in the first half of 2012 reflecting continuation of improved economic conditions as the decline in overall delinquency levels experienced in prior periods is reflected in charge-off.

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


	June 30, 2012		March 31, 2012		December 31, 2011
	Amount	% of Loans to Total Loans⁽¹⁾	Amount	% of Loans to Total Loans⁽¹⁾	Amount	% of Loans to Total Loans⁽¹⁾
	(dollars are in millions)
Commercial⁽²⁾...............................................................................................................................................................................................................	$ 340	66.74 %	$ 326	66.06 %	$ 442	64.88 %
Consumer:
Residential mortgages, excluding home equity mortgages...........................................................................................................................	188	26.32	182	26.63	192	27.21
Home equity mortgages......................................................................................................................................................................................	47	4.38	43	4.62	52	4.94
Credit card receivables........................................................................................................................................................................................	31	1.40	35	1.46	39	1.60
Other consumer....................................................................................................................................................................................................	13	1.16	17	1.26	18	1.37

Total consumer....................................................................................................................................................................................................	279	33.26	277	33.97	301	35.12

Total............................................................................................................................................................................................................................	$ 619	100.00 %	$ 603	100.00 %	$ 743	100.00 %

⁽¹⁾ Excludes loans held for sale.

⁽²⁾ Components of the commercial allowance for credit losses, including exposure relating to off-balance sheet credit risk, and the increases (decreases) since December 31, 2011, are summarized in the following table:


	June 30, 2012	March 31, 2012	December 31, 2011
	(in millions)
On-balance sheet allowance:
Specific...................................................................................................................................................................................................................	$ 131	$ 120	$ 213
Collective...............................................................................................................................................................................................................	168	181	207
Unallocated...........................................................................................................................................................................................................	41	25	22

Total on-balance sheet allowance.....................................................................................................................................................................	340	326	442

Off-balance sheet allowance...............................................................................................................................................................................	151	143	155

Total commercial allowances..............................................................................................................................................................................	$ 491	$ 469	$ 597

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 losses.

HSBC USA Inc.

Reserves for Off-Balance Sheet Credit Risk We also maintain a separate reserve for credit risk associated with certain off-balance sheet exposures, including letters of credit, unused commitments to extend credit and financial guarantees. This reserve, included in other liabilities, was $151 million, $143 million and $155 million at June 30, 2012, March 31, 2012 and December 31, 2011, respectively. The related provision is recorded as a component of other expense within operating expenses. Off-balance sheet exposures are summarized under the caption "Off-Balance Sheet Arrangements" 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, 2012	March 31, 2012	December 31, 2011
	(dollars are in millions)
Dollars of Delinquency:
Commercial.................................................................................................................................................................................................................	$ 226	$ 298	$ 460
Consumer:
Residential mortgage, excluding home equity mortgages⁽¹⁾...........................................................................................................................	1,107	1,063	1,101
Home equity mortgages......................................................................................................................................................................................	62	94	99

Total residential mortgages⁽²⁾.............................................................................................................................................................................	1,169	1,157	1,200
Credit card receivables........................................................................................................................................................................................	23	25	28
Other consumer....................................................................................................................................................................................................	28	26	30

Total consumer....................................................................................................................................................................................................	1,220	1,208	1,258

Total............................................................................................................................................................................................................................	$ 1,446	$ 1,506	$ 1,718

Delinquency Ratio:
Commercial.................................................................................................................................................................................................................	.59 %	.82 %	1.33 %
Consumer:
Residential mortgage, excluding home equity mortgages.............................................................................................................................	7.16	6.94	7.19
Home equity mortgages......................................................................................................................................................................................	2.33	2.81	2.89

Total residential mortgages⁽²⁾.............................................................................................................................................................................	6.45	6.20	6.41
Credit card receivables........................................................................................................................................................................................	2.62	2.13	2.25
Other consumer....................................................................................................................................................................................................	3.68	2.92	3.17

Total consumer....................................................................................................................................................................................................	6.18	5.83	6.01

Total............................................................................................................................................................................................................................	2.49 %	2.63 %	3.09 %

⁽¹⁾ At June 30, 2012, March 31, 2012 and December 31, 2011, residential mortgage loan delinquency includes $938 million, $836 million and $803 million, respectively, of loans that are carried at the lower of cost or net realizable value.

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


	June 30, 2012	March 31, 2012	December 31, 2011
	(dollars are in millions)
Dollars of Delinquency:
Interest-only loans......................................................................................................................................................................................................	$ 120	$ 124	$ 133
ARM loans...............................................................................................................................................................................................................	423	428	452
Delinquency Ratio:
Interest-only loans......................................................................................................................................................................................................	3.03 %	3.09 %	3.37 %
ARM loans...............................................................................................................................................................................................................	4.16	4.27	4.53

HSBC USA Inc.

Our total two-months-and-over contractual delinquency ratio decreased 14 basis points compared to the prior quarter. Our two-months-and-over contractual delinquency ratio for consumer loans on a continuing operations basis increased 35 basis points to 6.18 percent at June 20, 2012 as compared to 5.83 percent at March 31, 2012, due to lower receivable levels driven by a $930 million decline in residential mortgage loans held for sale during the quarter all of which were less than 60 days delinquent as well as an overall increase in residential mortgage dollars in delinquency reflecting the continued impact of our decision in late 2010 to suspend new foreclosure proceedings which has resulted in loans which would otherwise have been foreclosed and transferred to REO remaining in loan account. Overall delinquency levels also continue to be impacted by elevated unemployment levels and, as it relates to residential mortgages, continued weakness in the housing market.

Our commercial two-months-and-over contractual delinquency ratio decreased 23 basis points since March 31, 2012 driven by lower dollars of commercial loan delinquency due to improved credit quality and higher overall outstanding loan balances.

Compared to December 31, 2011, our two-months-and-over contractual delinquency ratio decreased 60 basis points largely due to lower dollars of contractual delinquency and improved credit conditions, including seasonal improvements in collection activities and higher overall outstanding loan balances.

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 percent of average loans, excluding loans held for sale, ("net charge-off ratio"):


	June 30, 2012	March 31, 2012	June 30, 2011
	(dollars are in millions)
Net Charge-off Dollars:
Commercial:
Construction and other real estate.....................................................................................................................................................................................	$ 2	$ (13 )	$ 37
Business banking and middle market enterprises.................................................................................................................................................................	11	8	15
Global banking.............................................................................................................................................................................................................	-	84	-
Other commercial..........................................................................................................................................................................................................	(5 )	(1 )	2

Total commercial..........................................................................................................................................................................................................	8	78	54

Consumer:
Residential mortgage, excluding home equity mortgages......................................................................................................................................................	18	25	26
Home equity mortgages..................................................................................................................................................................................................	30	17	18

Total residential mortgages.............................................................................................................................................................................................	48	42	44
Credit card receivables....................................................................................................................................................................................................	13	15	16
Other consumer.............................................................................................................................................................................................................	4	5	5

Total consumer.............................................................................................................................................................................................................	65	62	65

Total................................................................................................................................................................................................................................	$ 73	$ 140	$ 119

Net Charge-off Ratio:
Commercial:
Construction and other real estate.....................................................................................................................................................................................	.10 %	(.67 )%	1.81 %
Business banking and middle market enterprises.................................................................................................................................................................	.39	.30	.71
Global banking.............................................................................................................................................................................................................	-	2.49	-
Other commercial..........................................................................................................................................................................................................	(.65 )	(.13 )	.29

Total commercial..........................................................................................................................................................................................................	.09	.90	.70

Consumer:
Residential mortgage, excluding home equity mortgages......................................................................................................................................................	.50	.71	.74
Home equity mortgages..................................................................................................................................................................................................	4.87	2.69	1.98

Total residential mortgages.............................................................................................................................................................................................	1.14	1.01	1.00
Credit card receivables....................................................................................................................................................................................................	6.55	7.47	5.42
Other consumer.............................................................................................................................................................................................................	2.41	2.81	2.08

Total consumer.............................................................................................................................................................................................................	1.41	1.36	1.32

Total................................................................................................................................................................................................................................	.54 %	1.06 %	.95 %

HSBC USA Inc.

Our net charge-off ratio as a percentage of average loans decreased 52 basis points for the quarter ended June 30, 2012 compared to the quarter ended March 31, 2012 primarily due to lower commercial charge-offs, partially offset by higher consumer charge-offs driven by higher home equity mortgage charge-offs.

Commercial charge-off dollars and ratios decreased significantly during the quarter ended June 30, 2012 as compared to the quarter ended March 31, 2012 driven by lower charge-offs in global banking as the prior quarter reflects increased charge-off levels involving three specific client relationships as previously discussed.

Charge-off dollars and ratios in our home equity mortgage portfolio during the quarter reflects an increased volume of loans where we have decided not to pursue foreclosure. Charge-off dollars and ratios in the residential mortgage loan portfolio improved compared to the prior quarter reflecting continued improvements in economic and credit conditions, including the impact of the trend to lower delinquency levels we have experienced over the last several quarters., Charge-off dollars and ratios for credit card receivables decreased compared to the prior quarter due to lower dollars of charge-off while average receivables declined.

Compared to the year-ago quarter, our charge-off ratio decreased 41 basis points, driven by lower charge-offs in our commercial portfolio, partially offset by higher consumer loan charge-offs driven by home equity mortgage loans as discussed above.

HSBC USA Inc.

Nonperforming Assets Nonperforming assets are summarized in the following table.


	June 30, 2012	March 31, 2012	December 31, 2011
	(dollars are in millions)
Nonaccrual loans:
Commercial:
Real Estate:
Construction and land loans...........................................................................................................................................................................	$ 101	$ 102	$ 103
Other real estate................................................................................................................................................................................................	374	427	512
Business banking and middle market enterprises.............................................................................................................................................	46	66	58
Global banking........................................................................................................................................................................................................	114	18	137
Other commercial....................................................................................................................................................................................................	19	19	15

Total commercial.....................................................................................................................................................................................................	654	632	825

Consumer:
Residential mortgages, excluding home equity mortgages..............................................................................................................................	844	810	815
Home equity mortgages........................................................................................................................................................................................	77	87	89

Total residential mortgages⁽²⁾⁽³⁾........................................................................................................................................................................	921	897	904
Credit card receivables..........................................................................................................................................................................................	-	-	-
Others.......................................................................................................................................................................................................................	5	5	8

Total consumer loans............................................................................................................................................................................................	926	902	912

Nonaccrual loans held for sale..................................................................................................................................................................................	65	114	91

Total nonaccruing loans............................................................................................................................................................................................	$ 1,645	$ 1,648	$ 1,828

Accruing loans contractually past due 90 days or more:
Commercial:
Real Estate:
Construction and land loans...........................................................................................................................................................................	$ -	$ -	$ -
Other real estate................................................................................................................................................................................................	-	14	1
Business banking and middle market enterprises.............................................................................................................................................	2	17	11
Global banking........................................................................................................................................................................................................	-	-	-
Other commercial....................................................................................................................................................................................................	1	1	2

Total commercial.....................................................................................................................................................................................................	3	32	14

Consumer:
Credit card receivables..........................................................................................................................................................................................	17	18	20
Other consumer......................................................................................................................................................................................................	26	24	27

Total consumer loans............................................................................................................................................................................................	43	42	47

Total accruing loans contractually past due 90 days or more............................................................................................................................	46	74	61

Total nonperforming loans........................................................................................................................................................................................	1,691	1,722	1,889
Other real estate owned..............................................................................................................................................................................................	99	105	81

Total nonperforming assets......................................................................................................................................................................................	$ 1,790	$ 1,827	$ 1,970

Allowance for credit losses as a percent of nonperforming loans⁽¹⁾:
Commercial..............................................................................................................................................................................................................	51.75 %	49.10 %	55.68 %
Consumer.................................................................................................................................................................................................................	28.79	29.34	31.39

⁽¹⁾ Represents our commercial or consumer allowance for credit losses, as appropriate divided by the corresponding outstanding balance of total nonperforming loans held for investment. Nonperforming loans include accruing loans contractually past due 90 days or more. Ratio excludes nonperforming loans associated with loan portfolios which are considered held for sale as these loans are carried at the lower of amortized cost or market.

⁽²⁾ At June 30, 2012, March 31, 2012 and December 31, 2011, residential mortgage loan nonaccrual balances include $901 million, $803 million and $774 million, respectively, of loans that are carried at the lower of cost or fair value of collateral less cost to sell.

⁽³⁾ Nonaccrual residential mortgages includes all receivables which are 90 or more days contractually delinquent as well as second lien loans where the first lien loan that we own or service is 90 or more days contractually delinquent.

Nonaccrual loans at June 30, 2012 remained flat as compared to March 31, 2012, but decreased as compared to December 31, 2011, driven largely by lower levels of commercial non-accrual loans, partially offset by a modest increase in residential mortgage non-accrual loans. The increase in nonaccrual residential mortgage loans reflects our earlier decision to temporarily suspend foreclosure activity, which results in loans which would otherwise have been transferred into REO remaining in loan account. Commercial non-accrual loans decreased in 2012 due to credit risk rating upgrades outpacing credit risk rating downgrades, managed reductions in certain exposures, payments and charge-offs within our global banking portfolio as discussed above. Decreases in accruing loans past due 90 days or more since March 31, 2012 and December 31, 2011 were driven mainly by commercial loan receivables.

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 2011 Form 10-K.

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

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


	June 30, 2012	March 31, 2012	December 31, 2011
	(in millions)
Impaired commercial loans:
Balance at end of period..................................................................................................................................................................	$ 907	$ 901	$ 1,087
Amount with impairment reserve...................................................................................................................................................	421	403	597
Impairment reserve...........................................................................................................................................................................	132	122	216

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

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

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

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

Criticized loans are summarized in the following table.


		Increase (Decrease) from March 31, 2012		Increase (Decrease) from December 31, 2011
	June 30, 2012	Amount	%	Amount	%
	(dollars are in millions)
Special mention:
Commercial loans.................................................................................................................................................................................................	$ 1,362	$ (290 )	(17.6 )%	$ (236 )	(14.8 )%
Substandard:
Commercial loans.................................................................................................................................................................................................	1,295	(51 )	(3.8 )	(464 )	(26.4 )
Consumer loans...................................................................................................................................................................................................	974	(325 )	(25.0 )	(382 )	(28.2 )

Total substandard...............................................................................................................................................................................................	2,269	(376 )	(14.2 )	(846 )	(27.2 )
Doubtful:
Commercial loans.................................................................................................................................................................................................	237	104	78.2	(70 )	(22.8 )

Total............................................................................................................................................................................................................................	$ 3,868	$ (562 )	(12.7 )	$ (1,152 )	(22.9 )

The overall decreases in criticized commercial loans in the first half of 2012 resulted primarily from changes in the financial condition of certain customers, some of which were upgraded during the period as well as paydowns, note sales and charge-offs related to certain exposures as well as general improvement in market conditions.

Geographic Concentrations Regional exposure at June 30, 2012 for certain loan portfolios is summarized in the following table.


	Commercial Construction and Other Real Estate Loans	Residential Mortgage Loans	Credit Card Receivables
New York State..........................................................................................................................................................................................................	43.7 %	35.0 %	61.0 %
North Central United States....................................................................................................................................................................................	5.0	7.0	3.5
North Eastern United States....................................................................................................................................................................................	10.0	9.3	11.1
Southern United States............................................................................................................................................................................................	20.7	16.8	12.6
Western United States.............................................................................................................................................................................................	20.6	31.9	9.8
Other...........................................................................................................................................................................................................................	-	-	2.0

Total............................................................................................................................................................................................................................	100.0 %	100.0 %	100.00 %

Exposures to Certain Countries in the Eurozone There has been no significant changes to our exposures to the countries of Greece, Ireland, Italy, Portugal and Spain form the amounts disclosed in our 2011 Form 10-K under caption "Credit Quality".

Liquidity and Capital Resources

Effective liquidity management is defined as making sure 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 2012, marketplace liquidity continued to remain available for most sources of funding except mortgage securitization and companies in the financial sector continue to be able to issue debt although credit spreads continue to be impacted by the European sovereign debt crisis and concerns regarding government spending and the budget deficit continue to impact interest rates. The prolonged period of low Federal funds rates continues to put pressure on spreads earned on our deposit base.

Interest Bearing Deposits with Banks totaled $18.8 billion and $25.5 billion at June 30, 2012 and December 31, 2011, respectively. Balances will fluctuate from period to period depending upon our liquidity position at the time and our strategy for deploying such liquidity. The balances decreased during the first half of 2012 as we redeployed surplus liquidity, including the payment to First Niagara relating to the sale of 138 retail branches in May 2012.

Securities Purchased under Agreements to Resell totaled $13.7 billion and $3.1 billion at June 30, 2012 and December 31, 2011, respectively. Balances will fluctuate from period to period depending upon our liquidity position at the time and our strategy for deploying such liquidity.

Short-Term Borrowings totaled $10.7 billion and $16.0 billion at June 30, 2012 and December 31, 2011, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on short-term borrowing trends.

At June 30, 2012 and December 31, 2011, we had a $2.5 billion unused line of credit with HSBC France to support issuances of commercial paper. In April 2012, we established a third party back-up line of credit totaling $1.9 billion to replace the unused line of credit with HSBC France and support issuances of commercial paper. The line of credit with HSBC France has been terminated effective July 30, 2012.

Deposits totaled $123.2 billion and $139.7 billion at June 30, 2012 and December 31, 2011, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on deposit trends.

Long-Term Debt increased to $20.0 billion at June 30, 2012 from $16.7 billion at December 31, 2011. The following table summarizes issuances and retirements of long-term debt during the six months ended June 30, 2012 and 2011:


Six Months Ended June 30,	2012	2011
	(in millions)
Long-term debt issued...............................................................................................................................................................	$ 4,739	$ 4,469
Long-term debt retired...............................................................................................................................................................	(1,465 )	(2,282 )

Net long-term debt retired.........................................................................................................................................................	$ 3,274	$ 2,187

Issuances of long-term debt during the first half of 2012 included $2.5 billion of medium term notes, of which $202 million was issued by HSBC Bank USA.

Under our shelf registration statement on file with the Securities and Exchange Commission, we may issue debt securities or preferred stock. The shelf has no dollar limit, but the ability to issue debt is limited by the issuance authority granted by the Board of Directors. At June 30, 2012, we were authorized to issue up to $21 billion, of which $1.9 billion was available. HSBC Bank USA also has a $40 billion Global Bank Note Program of which $17.1 billion was available at June 30, 2012.

HSBC USA Inc.

As a member of the New York Federal Home Loan Bank ("FHLB"), we have a secured borrowing facility which is collateralized by real estate loans and investment securities. At June 30, 2012 and December 31, 2011, long-term debt included $1.0 billion, under this facility. The facility also allows access to further borrowings of up to $4.3 billion based upon the amount pledged as collateral with the FHLB.

During the third quarter of 2011, we notified the holders of our outstanding Putable Capital Notes with an aggregate principal amount of $129 million (the "Notes") that, pursuant to the terms of the Notes, we had elected to revoke the obligation to exchange capital securities for the Notes and would redeem the Notes in full. The Notes were redeemed in January 2012.

Preferred Equity See Note 20, "Preferred Stock," in our 2011 Form 10-K for information regarding all outstanding preferred share issues.

Common Equity During the first half 2012, we did not receive any cash capital contributions from HNAI. During the first half of 2012, we contributed $2 million of capital to our subsidiary, HSBC Bank USA.

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


	June 30, 2012	December 31, 2011
Tier 1 capital to risk weighted assets...............................................................................................................................	14.34 %	12.74 %
Tier 1 common equity to risk weighted assets...............................................................................................................	11.97	10.72
Total capital to risk weighted assets...............................................................................................................................	20.61	18.39
Tier 1 capital to average assets........................................................................................................................................	7.45	7.43
Total equity to total assets...............................................................................................................................................	9.12	9.80

HSBC USA manages capital in accordance with the HSBC Group policy. HSBC North America and HSBC USA have each approved an Internal Capital Adequacy Assessment Process ("ICAAP") that works in conjunction with the HSBC Group's ICAAP. The ICAAP evaluates regulatory capital adequacy, economic capital adequacy, rating agency requirements 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.

HSBC North America is required to implement Basel II provisions in accordance with current regulatory timelines. While HSBC USA will not report separately under the new rules, HSBC Bank USA will report under the new rules on a stand-alone basis. Adoption of Basel II requires the approval of U.S. regulators and encompasses enhancements to a number of risk policies, processes and systems to align HSBC Bank USA with the Basel II final rule requirements. We are uncertain as to when we will receive approval to adopt Basel II from the Federal Reserve Board, our primary regulator. We have integrated Basel II metrics into our management reporting and decision making process. As a result of Dodd-Frank, a banking organization that has formally implemented Basel II must calculate its capital requirements under Basel I and Basel II, compare the two results, and then use the lower of such ratios for purposes of determining compliance with its minimum Tier 1 capital and total risk-based capital requirements.

HSBC USA Inc.

In June 2011, U.S. regulators published a Final Rule in the Federal Register (known in the industry as Basel 2.5), that would change the US regulatory market risk capital rules to better capture positions for which the market risk capital rules are appropriate, reduce procyclicality, enhance the sensitivity to risks that are not adequately captured under current methodologies and increase transparency through enhanced disclosures. This final rule is effective January 1, 2013. We estimate that this rule will add up to 10% to our December 31, 2011 Basel I risk-weighted asset levels.

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

HSBC Bank USA is subject to restrictions that limit the transfer of funds to its affiliates, including HSBC USA, and its nonbank subsidiaries in so-called "covered transactions," In general, covered transactions include loans and other extensions of credit, investments and asset purchases, as well as certain other transactions involving the transfer of value from a subsidiary bank to an affiliate or for the benefit of an affiliate. Unless an exemption applies, covered transactions by a subsidiary bank with a single affiliate are limited to 10 percent of the subsidiary bank's capital and surplus and, with respect to all covered transactions with affiliates in the aggregate, to 20 percent of the subsidiary bank's capital and surplus. Also, loans and extensions of credit and certain other exposures to affiliates generally are required to be secured in specified amounts. Where cash collateral is provided for an extension of credit to an affiliate, that loan is excluded from the 10 and 20 percent limitations. A bank's transactions with its nonbank affiliates are also required to be on arm's length terms.

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 17, "Regulatory Capital," in the accompanying consolidated financial statements.

2012 Funding Strategy Our current range of estimates for funding needs and sources for 2012 are summarized in the following table.


	Actual January 1 through June 30, 2012	Estimated July 1 through December 31, 2012	Estimated Full Year 2012
	(in billions)
Funding needs:
Deposits assumed in branch sale, net........................................................................................................................................................	$ 11	$ 4	$ 15
Reduction in deposits...................................................................................................................................................................................	5	1	6
Long-term debt maturities............................................................................................................................................................................	1	1	2
Net change in short term investments........................................................................................................................................................	13	(4 )	9
Funding advances to HSBC Finance..........................................................................................................................................................	-	2	2

Total funding needs...........................................................................................................................................................................................	$ 30	$ 4	$ 34

Funding sources:
Asset sales.....................................................................................................................................................................................................	$ 22	$ 1	$ 23
Net change in loans.......................................................................................................................................................................................	4	(2 )	2
Long-term debt issuances............................................................................................................................................................................	4	5	9

Total funding sources........................................................................................................................................................................................	$ 30	$ 4	$ 34

HSBC USA Inc.

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 are dependent upon our ability to attract and retain deposits and, to a lesser extent, access to the global capital markets. We remain confident in our ability to access the market for long-term debt funding needs in the current market environment. We continue to seek well-priced and stable customer deposits as customers move funds to larger, well-capitalized institutions.

We will continue to sell a substantial portion of new mortgage loan originations to government sponsored enterprises and private investors.

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

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

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. Descriptions of these arrangements are found in our 2011 Form 10-K under the caption "Off-Balance Sheet Arrangements and Contractual Obligations".


	Balance at June 30, 2012
	One Year or Less	Over One through Five Years	Over Five Years	Total	Balance at December 31, 2011
	(in billions)
Standby letters of credit, net of participations⁽¹⁾...................................................................................................................................................	$ 5.1	$ 2.7	$ .1	$ 7.9	$ 7.8
Commercial letters of credit.....................................................................................................................................................................................	1.0	-	-	1.0	1.3
Credit derivatives⁽²⁾....................................................................................................................................................................................................	95.9	173.7	20.8	290.4	330.4
Other commitments to extend credit:
Commercial............................................................................................................................................................................................................	13.5	39.3	3.9	56.7	54.7
Consumer..............................................................................................................................................................................................................	7.9	-	-	7.9	9.3

Total............................................................................................................................................................................................................................	$ 123.4	$ 215.7	$ 24.8	$ 363.9	$ 403.5

⁽¹⁾ Includes $652 million and $707 million issued for the benefit of HSBC affiliates at June 30, 2012 and December 31, 2011, respectively.

⁽²⁾ Includes $48.0 billion and $45.1 billion issued for the benefit of HSBC affiliates at June 30, 2012 and December 31, 2011, respectively.

HSBC USA Inc.

We provide liquidity support to a number of multi-seller and single seller asset-backed commercial paper conduits ("ABCP conduits"). The tables below present information on our liquidity facilities with ABCP conduits at June 30, 2012. The maximum exposure to loss presented in the first table represents the maximum contractual amount of loans and asset purchases we could be required to make under the liquidity agreements. This amount does not reflect the funding limits discussed above and also assumes that we suffer a total loss on all amounts advanced and all assets purchased from the ABCP conduits. As such, we believe that this measure significantly overstates our expected loss exposure. See our 2011 Form 10-K under the caption "Off-Balance Sheet Arrangements and Contractual Obligations" in MD&A for additional information on these ABCP conduits.


		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)..................................................................................................................................................................	$ 722	$ 688	21	$ 689	25
Third-party sponsored:
Single-seller..........................................................................................................................................................................................................	454	5,963	43	5,643	60

Total............................................................................................................................................................................................................................	$ 1,176	$ 6,651		$ 6,332

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


	Average Asset Mix	Average Credit Quality⁽¹⁾
Asset Class	Average Asset Mix	AAA	AA+/AA	A	A-	BB/BB-

Multi-seller conduits
Debt securities backed by:
Trade receivables......................................................................	19 %	- %	100 %	- %	- %	- %
Credit card receivables.............................................................	10	-	-	100	-	-
Equipment loans........................................................................	71	100	-	-	-	-

	100 %	100 %	100 %	100 %	- %	- %

Single-seller conduits
Debt securities backed by:
Auto loans and leases..............................................................	100 %	94 %	6 %	- %	- %	- %

⁽¹⁾ Credit quality is based on Standard and Poor's ratings at June 30, 2012 except for loans and trade receivables held by single-seller conduits, which are based on our internal ratings. For the single-seller conduits, external ratings are not available; however, our internal credit ratings were developed using similar methodologies and rating scales equivalent to the external credit ratings.

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

During the first half of 2012, U.S. asset-backed commercial paper volumes continued to be stable as most major bank conduit sponsors continue to extend new financing to clients but at a slow pace. Credit spreads in the multi-seller conduit market generally trended lower in the first half of 2012 following a pattern that was prevalent across the U.S. credit markets. The low supply of ABCP has led to continued investor demand for the ABCP issued by large bank-sponsored ABCP programs. The improved demand for higher quality ABCP programs has led to less volatility in issuance spreads.

The preceding tables do not include information on liquidity facilities that we previously provided to certain Canadian multi-seller ABCP conduits that have been subject to restructuring agreements. As a result of specific difficulties in the Canadian asset backed commercial paper markets, we entered into various agreements during 2007 modifying obligations with respect to these facilities. Under one of these agreements, known as the Montreal Accord, a restructuring proposal to convert outstanding commercial paper into longer term securities was approved by ABCP noteholders and endorsed by the Canadian justice system in 2008. The restructuring plan was formally executed during the first quarter of 2009. As part of the enhanced collateral pool established for the restructuring, we have provided a $390 million Margin Funding Facility to new Master Conduit Vehicles, which is currently undrawn. HSBC Bank USA derivatives transactions with the previous conduit vehicles have been restructured and assigned to the new Master Conduit Vehicles. Under the restructuring, additional collateral was provided to us to mitigate our derivatives exposures. All of our derivative positions with the Master Conduit Vehicles have subsequently been terminated.

Also in Canada but separately from the Montreal Accord, as part of an ABCP conduit restructuring executed in 2008, we agreed to hold long-term securities of CAD $300 million and provide a CAD $100 million credit facility. As of June 30, 2012 this credit facility was undrawn and approximately $293 million of long-term securities were held. As of December 31, 2011 this credit facility was undrawn and approximately $294 million of long-term securities were held.

As of June 30, 2012 and December 31, 2011, other than the facilities referred to above, we no longer have outstanding liquidity facilities to Canadian ABCP conduits subject to the Montreal Accord or other agreements. However, we hold $10 million of long-term securities that were converted from a liquidity drawing which fell under the Montreal Accord restructuring agreement.

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 as they are not VIEs and we do not hold a majority voting interest.

Fair Value

Fair value measurement accounting principles require a reporting entity to take into consideration its own credit risk in determining the fair value of financial liabilities. The incorporation of our own credit risk accounted for a decrease of $75 million and an increase of $113 million in the fair value of financial liabilities during the three and six months ended June 30, 2012 compared to a decrease of $59 million and $45 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, 2012 should not be considered indicative of the results for any future period.

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

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

• the level of bid-ask spreads;

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

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

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

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

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

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

Level 2 inputs are inputs that are observable either directly or indirectly but do not qualify as Level 1 inputs. We classify mortgage pass-through securities, agency and certain non-agency mortgage collateralized obligations, certain derivative contracts, asset-backed securities, corporate debt, preferred securities and leveraged loans as Level 2 measurements. Where possible, at least two quotations from independent sources are obtained based on transactions involving comparable assets and liabilities to validate the fair value of these instruments. 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.

HSBC USA Inc.

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, 2012 and December 31, 2011, our Level 3 instruments included the following: collateralized debt obligations ("CDOs") and collateralized loan obligations ("CLOs") for which there is a lack of pricing transparency due to market illiquidity, certain structured deposits as well as certain structured credit and structured equity derivatives where significant inputs (e.g., volatility or default correlations) are not observable, credit default swaps with certain monoline insurers where the deterioration in the creditworthiness of the counterparty has resulted in significant adjustments to fair value, U.S. subprime mortgage loans and subprime related asset-backed securities, mortgage servicing rights, and derivatives referenced to illiquid assets of less desirable credit quality.

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

Transfers Between Level 1 and Level 2 Measurements During the three and six months ended June 30, 2012 and 2011, 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, 2012 and December 31, 2011.


	June 30, 2012	December 31, 2011
	(dollars are in millions)
Level 3 assets⁽¹⁾⁽²⁾....................................................................................................................................................................................	$ 5,719	$ 6,071
Total assets measured at fair value⁽³⁾..................................................................................................................................................	187,879	179,497
Level 3 liabilities....................................................................................................................................................................................	4,364	4,197
Total liabilities measured at fair value⁽¹⁾.............................................................................................................................................	123,410	117,170
Level 3 assets as a percent of total assets measured at fair value................................................................................................	3.0 %	3.4 %
Level 3 liabilities as a percent of total liabilities measured at fair value........................................................................................	3.5 %	3.6 %

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

⁽²⁾ Includes $5.2 billion of recurring Level 3 assets and $544 million of non-recurring Level 3 assets at June 30, 2012 and $5.4 billion of recurring Level 3 assets and $670 million of non-recurring Level 3 assets at December 31, 2011.

⁽³⁾ Includes $187.0 billion of assets measured on a recurring basis and $916 million of assets measured on a non-recurring basis at June 30, 2012. Includes $178.7 billion of assets measured on a recurring basis and $768 million of assets measured on a non-recurring basis at December 31, 2011.

Material Changes in Fair Value for Level 3 Assets and Liabilities

Derivative Assets and Counterparty Credit Risk We made $10 million negative and $32 million positive credit risk adjustments to the fair value of our credit default swap contracts during the six months ended June 30, 2012 and 2011, respectively, which is reflected in trading revenue. We have recorded a cumulative credit adjustment reserve of $173 million and $163 million against our monoline exposure at June 30, 2012 and December 31, 2011, respectively. The fair value of our monoline exposure net of cumulative credit adjustment reserves equaled $608 million and $708 million at June 30, 2012 and December 31, 2011, respectively. The decrease in the first half of 2012 reflects both reductions in our outstanding positions and improvements in exposure estimates.

Loans As of June 30, 2012 and December 31, 2011, we have classified $164 million and $181 million, respectively, of mortgage whole loans held for sale as a non-recurring Level 3 financial asset. These mortgage loans are accounted for on a lower of cost or fair value basis. Based on our assessment, we recorded a loss of $2 million and $3 million for such mortgage loans during the three and six months ended June 30, 2012 compared to a loss of $9 million and $14 million during the prior year periods. The changes in fair value are recorded as other revenues in the consolidated statement of income.

HSBC USA Inc.

Material Additions to and Transfers Into (Out of) Level 3 Measurements During the three and six months ended June 30, 2012, we transferred $313 million and $475 million, respectively, of deposits in domestic offices, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of 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 six months ended June 30, 2011, we transferred $62 million of credit derivatives from Level 3 to Level 2 as a result of a qualitative analysis of the foreign exchange and credit correlation attributes of our model used for certain credit default swaps. There were no significant transfers of derivatives during the three months ended June 30, 2012. In addition, we transferred $86 million of long-term debt from Level 3 to Level 2. The long-term debt relates to medium term debt issuances where the embedded derivative is no longer unobservable as the derivative option is closer in maturity and there is more observability in short-term volatility.

See Note 22, "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, 2012 and 2011 as well as for further details including the classification hierarchy associated with assets and liabilities measured at fair value.

HSBC USA Inc.

Credit Quality of Assets Underlying Asset-backed Securities The following tables summarize the types and credit quality of the assets underlying our asset-backed securities as well as certain collateralized debt obligations and collateralized loan obligations held as of June 30, 2012:

Asset-backed securities backed by consumer finance collateral:

Credit Quality of Collateral:


			Commercial Mortgages		Prime		Alt-A		Subprime
Year of Issuance:		Total	Prior to 2006	2006 to Present	Prior to 2006	2006 to Present	Prior to 2006	2006 to Present	Prior to 2006	2006 to Present
		(in millions)
Rating of securities:	Collateral type:
AAA	Home equity loans	$ -	$ -	$ -	$ -	$ -	$ -	$ -	$ -	$ -
	Student loans	-	-	-	-	-	-	-	-	-
	Residential mortgages	323	-	-	-	-	191	-	132	-
	Commercial mortgages	305	52	253	-	-	-	-	-	-
	Other	-	-	-	-	-	-	-	-	-

	Total AAA	628	52	253	-	-	191	-	132	-

AA	Home equity loans	108	-	-	-	-	-	108	-	-
	Residential mortgages	1	-	1	-	-	-	-	-	-
	Student loans	-	-	-	-	-	-	-	-	-
	Other	38	-	-	-	-	38	-	-	-

	Total AA	147	-	1	-	-	38	108	-	-

A	Home equity loans	-	-	-	-	-	-	-	-	-
	Residential mortgages	67	-	-	-	-	1	-	66	-
	Commercial mortgages	-	-	-	-	-	-	-	-	-
	Student loans	9	-	-	-	-	9	-	-	-
	Other	47	-	-	-	-	47	-	-	-

	Total A	123	-	-	-	-	57	-	66	-

BBB	Home equity loans	79	-	-	-	-	-	79	-	-
	Residential mortgages	22	-	-	-	-	22	-	-	-
	Other	-	-	-	-	-	-	-	-	-

	Total BBB	101	-	-	-	-	22	79	-	-

BB	Home equity loans	-	-	-	-	-	-	-	-	-
	Residential mortgages	1	-	-	-	-	1	-	-	-

	Total BB	1	-	-	-	-	1	-	-	-

B	Home equity loans	1	-	-	-	-	-	-	1	-
	Auto loans	-	-	-	-	-	-	-	-	-
	Residential mortgages	4	-	-	-	-	4	-	-	-

	Total B	5	-	-	-	-	4	-	1	-

CCC	Home equity loans	63	-	-	-	-	-	63	-	-
	Residential mortgages	4	-	-	-	-	-	-	-	4

	Total CCC	67	-	-	-	-	-	63	-	4

CC	Residential mortgages	-	-	-	-	-	-	-	-	-

D	Home equity loans	-	-	-	-	-	-	-	-	-
	Residential mortgages	-	-	-	-	-	-	-	-	-

	Total D	-	-	-	-	-	-	-	-	-

Unrated	Home equity loans	-	-	-	-	-	-	-	-	-
	Residential mortgages	12	-	-	-	-	12	-	-	-
	Other	-	-	-	-	-	-	-	-	-

	Total Unrated	12	-	-	-	-	12	-	-	-

		$ 1,084	$ 52	$ 254	$ -	$ -	$ 325	$ 250	$ 199	$ 4

HSBC USA Inc.

Collateralized debt obligations (CDO) and collateralized loan obligations (CLO):


Credit quality of collateral:		Total	A or Higher	BBB	BB/B	CCC	Unrated
		(in millions)
Rating of securities:	Collateral type:
	Corporate loans	$ 331	$ -	$ -	$ 331	$ -	$ -
	Residential mortgages	-	-	-	-	-	-
	Commercial mortgages	227	-	-	163	64	-
	Trust preferred	141	-	141	-	-	-
	Aircraft leasing	-	-	-	-	-
	Others	55	-	-	-	-	55

		754	$ -	$ 141	$ 494	$ 64	$ 55

	Total asset-backed securities	$ 1,838

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 $125 million or a decrease of the overall fair value measurement of approximately $115 million as of June 30, 2012. The effect of changes in significant unobservable input parameters are primarily driven by mortgage whole loans held for sale or securitization, 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 potential for losses in daily mark-to-market positions (mostly trading) due to adverse movements in money, foreign exchange, equity or other markets and includes both interest rate risk and trading risk;

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

• Compliance risk is the risk arising from failure to comply with relevant laws, regulations and regulatory requirements governing the conduct of specific businesses;

• 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, including Regulation 12 CFR 9, Fiduciary Activity of National Banks;

• 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; and

• 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.

See "Risk Management" in MD&A in our 2011 Form 10-K for a more complete discussion of the objectives of our risk management system as well as our risk management policies and practices. Our risk management process involves the use of various simulation models. We believe that the assumptions used in these models are reasonable, but actual events may unfold differently than what is assumed in the models. Consequently, model results may be considered reasonable estimates, with the understanding that actual results may vary significantly from model projections.

Credit Risk Management Credit risk is the potential that a borrower or counterparty will default on a credit obligation, as well as the impact on the value of credit instruments due to changes in the probability of borrower default. Credit risk includes risk associated with cross-border exposures. There have been no material changes to our approach towards credit risk management since December 31, 2011. See "Risk Management" in MD&A in our 2011 Form 10-K for a more complete discussion of our approach to credit risk.

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

• loan portfolios;

• investment portfolios;

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

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

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

HSBC USA Inc.

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

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

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

• current market events or trends;

• country risk;

• maturity and liquidity of contracts;

• credit worthiness of the counterparties in the transaction;

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

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

The 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, 2012	December 31, 2011
	(in millions)
Risk associated with derivative contracts:
Total credit risk exposure........................................................................................................................................................	$ 43,913	$ 43,923
Less: collateral held against exposure...................................................................................................................................	9,190	6,459

Net credit risk exposure...........................................................................................................................................................	$ 34,723	$ 37,464

HSBC USA Inc.

Liquidity Risk Management There have been no material changes to our approach towards liquidity risk management since December 31, 2011. See "Risk Management" in MD&A in our 2011 Form 10-K for a more complete discussion of our approach to liquidity risk. Although our overall approach to liquidity management has not changed, we continue to enhance our implementation of that approach to reflect best practices. The past few years have suggested that in a market crisis, traditional sources of crisis liquidity such as secured lending and deposits with other banks may not be available. Similarly, the current regulatory initiatives are suggesting banks need to retain a portfolio of extremely high quality liquid assets. Consistent with these items, we are expanding our portfolio of high quality sovereign and sovereign guaranteed securities.

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

Our liquidity management approach includes increased deposits and potential sales (e.g. residential mortgage loans) in liquidity contingency plans. As previously discussed, HSBC Finance currently plans to wind down its commercial paper program during 2012 and instead will rely on its affiliates, including HSBC USA Inc. to satisfy its short-term funding needs.

Our ability to regularly attract wholesale funds at a competitive cost is enhanced by strong ratings from the major credit ratings agencies. At June 30, 2012, we and HSBC Bank USA maintained the following long and short-term debt ratings:


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

⁽¹⁾ Dominion Bond Rating Service.

In December 2011, Fitch finalized a revised global criteria for assessing the credit ratings of non-common equity securities which qualify for treatment as bank regulatory capital. In March 2012, Fitch placed the outlook for HSBC and related entities to negative.

In June 2012, Moody's announced rating actions affecting 114 financial institutions in 16 European countries, including the ratings of HSBC. The rating action follows Moody's publications on January 19, 2012 where Moody's announced that they expect to place a number of bank ratings under review for downgrade during the first quarter of 2012 in order to assess the overall negative impact of the adverse trends affecting banks in advanced countries and notably in Europe. On February 22, 2012, Moody's had placed HSBC USA's long-term and short-term ratings and HSBC Bank USA's long-term rating on negative credit watch. In the June action, they downgraded the long term ratings of HSBC USA and HSBC Bank USA but reaffirmed the short term ratings at P-1. Any further downgrade of the HSBC USA's and HSBC Bank USA's long-term rating would likely result in a 1 notch downgrade of the respective short-term rating.

On July 20, 2012, DBRS changed its outlook for HSBC USA Inc. and HSBC Bank USA from "stable" to "rating under review." The outlook change reflects the concerns of DBRS regarding the recent hearing by the U.S. Senate Permanent Subcommittee on investigations, the challenges associated with changing the compliance culture and the risk that regulators will impose additional restrictions on financial institutions in reaction to banking industry issues in general.

As of June 30, 2012, there were no other pending actions in terms of changes to ratings on the debt of HSBC USA Inc. 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 2011 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, 2011.

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, 2012 and December 31, 2011.


	June 30, 2012	December 31, 2011
	(in millions)
Institutional PVBP movement limit................................................................................................................................	$ 8.0	$ 8.0
PVBP position at period end...........................................................................................................................................	3.6	4.8

Economic value of equity is the change in value of the assets and liabilities (excluding capital and goodwill) for either a 200 basis point immediate rate increase or decrease. The following table reflects the economic value of equity position at June 30, 2012 and December 31, 2011.


	June 30, 2012	December 31, 2011
	(values as a percentage)
Institutional economic value of equity limit................................................................................................................	+/-15	+/-15
Projected change in value (reflects projected rate movements on January 1):
Change resulting from an immediate 200 basis point increase in interest rates...............................................	3	3
Change resulting from an immediate 200 basis point decrease in interest rates..............................................	(11 )	(11 )

The gain or loss in value for a 200 basis point increase or decrease in rates is a result of the negative convexity of the residential whole loan and mortgage backed securities portfolios. If rates decrease, the projected prepayments related to these portfolios will accelerate, causing less appreciation than a comparable term, non-convex instrument. If rates increase, projected prepayments will slow, which will cause the average lives of these positions to extend and result in a greater loss in market value.

HSBC USA Inc.

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


	June 30, 2012		December 31, 2011
	Amount	%	Amount	%
	(dollars are in millions)
Projected change in net interest income (reflects projected rate movements on January 1):
Institutional base earnings movement limit.........................................................................................		(10 )		(10 )
Change resulting from a gradual 100 basis point increase in the yield curve................................	$ 157	8	$ 46	2
Change resulting from a gradual 100 basis point decrease in the yield curve...............................	(159 )	(8 )	(103 )	(3 )
Change resulting from a gradual 200 basis point increase in the yield curve................................	219	11	28	1
Change resulting from a gradual 200 basis point decrease in the yield curve...............................	(207 )	(11 )	(175 )	(6 )
Other significant scenarios monitored (reflects projected rate movements on January 1):
Change resulting from an immediate 100 basis point increase in the yield curve.........................	254	13	31	1
Change resulting from an immediate 100 basis point decrease in the yield curve........................	(205 )	(11 )	(409 )	(14 )
Change resulting from an immediate 200 basis point increase in the yield curve.........................	263	14	10	-
Change resulting from an immediate 200 basis point decrease in the yield curve........................	(241 )	(13 )	(565 )	(19 )

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

HSBC USA Inc.

Capital Risk/Sensitivity of Other Comprehensive Income Large movements of interest rates could directly affect some reported capital balances and ratios. The mark-to-market valuation of available-for-sale securities is credited on a tax effective basis to accumulated other comprehensive income. Although this valuation mark is excluded from Tier 1 and Tier 2 capital ratios, it is included in two important accounting based capital ratios: the tangible common equity to tangible assets and the tangible common equity to risk weighted assets. As of June 30, 2012, we had an available-for-sale securities portfolio of approximately $60.5 billion with a positive mark-to-market of $1.7 billion included in tangible common equity of $14.0 billion. An increase of 25 basis points in interest rates of all maturities would lower the mark-to-market by approximately $200 million to a net gain of $1.5 billion with the following results on our tangible capital ratios. As of December 31, 2011, we had an available-for-sale securities portfolio of approximately $53.2 billion with a positive mark-to-market of $1.5 billion included in tangible common equity of $14.0 billion. An increase of 25 basis points in interest rates of all maturities would lower the mark-to-market by approximately $173 million to a net gain of $1.3 billion with the following results on our tangible capital ratios.


	June 30, 2012		December 31, 2011
	Actual	Proforma⁽¹⁾	Actual	Proforma⁽¹⁾
Tangible common equity to tangible assets......................................................................................	6.87 %	6.82 %	6.75 %	6.70 %
Tangible common equity to risk weighted assets.............................................................................	13.38	13.27	11.79	11.69

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

Market Risk Management There have been no material changes to our approach towards market risk management since December 31, 2011. See "Risk Management" in MD&A in our 2011 Form 10-K for a more complete discussion of our approach to market risk.

During the second half of 2012, market risk management is being enhanced to incorporate the qualitative and quantitative requirements of Basel 2.5 to incorporate the concepts of stressed VaR, Incremental Risk Charge and Comprehensive Risk Measure into our market risk management process, subject to regulatory approval. We will also be updating our policies regarding the definition of covered positions under these requirements, which are effective January 1, 2013.

Value at Risk ("VAR") analysis is used to estimate the maximum potential loss 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 interest rate risk inherent in non-trading activities. VAR is calculated daily for a one-day holding period to a 99 percent confidence level.

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

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

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

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

The following table summarizes trading VAR for the six months ended June 30, 2012:


	June 30, 2012	Six Months Ended June 30, 2012			December 31, 2011
	June 30, 2012	Minimum	Maximum	Average	December 31, 2011
		(in millions)
Total trading.........................................................................................................................................................................................................	$ 9	$ 7	$ 12	$ 10	$ 8
Equities..................................................................................................................................................................................................................	-	-	1	-	1
Foreign exchange.................................................................................................................................................................................................	5	1	5	3	1
Interest rate directional and credit spread........................................................................................................................................................	7	6	11	8	6

The following table summarizes the frequency distribution of daily market risk-related revenues for trading activities during the six months ended June 30, 2012. Market risk-related trading revenues include realized and unrealized gains (losses) related to trading activities, but exclude the related net interest income. Analysis of the gain (loss) data for the six months ended June 30, 2012 shows that the largest daily gain was $10 million and the largest daily loss was $22 million.


Ranges of daily treasury trading revenue earned from market risk-related activities	Below $(5)	$(5) to $0	$0 to $5	$5 to $10	Over $10
	(dollars are in millions)
Number of trading days market risk-related revenue was within the stated range	3	31	76	15	1

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

The following table summarizes non-trading VAR for the six months ended June 30, 2012, assuming a 99% confidence level for a two-year observation period and a one-day "holding period".


	June 30, 2012	Six Months Ended June 30, 2012			December 31, 2011
	June 30, 2012	Minimum	Maximum	Average	December 31, 2011
	(in millions)
Interest rate....................................................................................................................................................................................................	$ 87	$ 82	$ 107	$ 94	$ 96

HSBC USA Inc.

Trading Activities - Trading occurs in mortgage banking operations as a result of an economic hedging program intended to offset changes in value of mortgage servicing rights and the salable loan pipeline. 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.

Modeling techniques, primarily rate shock analyses, are used to monitor certain interest rate scenarios for their impact on the economic value of net hedged MSRs, as reflected in the following table.


	June 30, 2012	December 31, 2011
	(in millions)
Projected change in net market value of hedged MSRs portfolio (reflects projected rate movements on July 1 and January 1, respectively):
Value of hedged MSRs portfolio........................................................................................................................................	$ 187	$ 220
Change resulting from an immediate 50 basis point decrease in the yield curve:
Change limit (no worse than).........................................................................................................................................	(20 )	(20 )
Calculated change in net market value.........................................................................................................................	4	5
Change resulting from an immediate 50 basis point increase in the yield curve:
Change limit (no worse than).........................................................................................................................................	(8 )	(8 )
Calculated change in net market value.........................................................................................................................	6	4
Change resulting from an immediate 100 basis point increase in the yield curve:
Change limit (no worse than).........................................................................................................................................	(12 )	(12 )
Calculated change in net market value.........................................................................................................................	19	12

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

The following table summarized the frequency distribution of the weekly economic value of the MSR asset during the six months ended June 30, 2012. 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)	$(2) to $0	$0 to $2	$2 to $4	Over $4
	(dollars are in millions)
Number of trading weeks market risk-related revenue was within the stated range................	-	7	21	-	-

HSBC USA Inc.

Operational Risk There have been no material changes to our approach toward operational risk since December 31, 2011.

Compliance Risk There have been no material changes to our approach toward compliance risk since December 31, 2011.

Fiduciary Risk There have been no material changes to our approach toward fiduciary risk since December 31, 2011.

Reputational Risk There have been no material changes to our approach toward reputational risk since December 31, 2011.

Strategic Risk There have been no material changes to our approach toward strategic risk since December 31, 2011.

HSBC USA Inc.

Consolidated Average Balances and Interest Rates

The following table shows the quarter-to-date average 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. The calculation of net interest margin includes interest expense of $10 million and $56 million for the three months ended June 30, 2012 and 2011, respectively, which has been allocated to our discontinued operations. This allocation of interest expense to our discontinued operations was in accordance with our existing internal transfer pricing policies as external interest expense is unaffected by these transactions.


	2012			2011
Three Months Ended June 30,	Balance	Interest	Rate⁽¹⁾	Balance	Interest	Rate⁽¹⁾
	(dollars are in millions)
Assets
Interest bearing deposits with banks.........................................................................................................................................................................................	$ 25,198	$ 17	.28 %	$ 30,428	$ 22	.29 %
Federal funds sold and securities purchased under resale agreements................................................................................................................................................	10,315	15	.59	4,960	15	1.22
Trading securities.................................................................................................................................................................................................................	10,786	26	.97	12,595	53	1.69
Securities............................................................................................................................................................................................................................	58,074	285	1.97	47,259	311	2.64
Loans:
Commercial....................................................................................................................................................................................................................	36,182	254	2.83	31,172	217	2.79
Consumer:
Residential mortgages.................................................................................................................................................................................................	15,442	148	3.87	14,549	158	4.35
HELOCs and home equity mortgages............................................................................................................................................................................	3,017	25	3.37	3,640	31	3.39
Credit cards...............................................................................................................................................................................................................	1,045	17	5.99	1,181	19	6.44
Other consumer..........................................................................................................................................................................................................	827	12	5.67	1,039	16	6.11

Total consumer...............................................................................................................................................................................................................	20,331	202	3.98	20,409	224	4.39

Total loans.....................................................................................................................................................................................................................	56,513	456	3.24	51,581	441	3.42

Other..................................................................................................................................................................................................................................	3,677	11	1.26	6,035	11	.74

Total earning assets...............................................................................................................................................................................................................	164,563	$ 810	1.98 %	152,858	$ 853	2.24 %

Allowance for credit losses......................................................................................................................................................................................................	(604 )			(760 )
Cash and due from banks........................................................................................................................................................................................................	1,595			1,721
Other assets.........................................................................................................................................................................................................................	28,641			24,883
Assets of discontinued operations.............................................................................................................................................................................................	7,494			21,266

Total assets.........................................................................................................................................................................................................................	$ 201,689			$ 199,968

Liabilities and Shareholders' Equity
Deposits in domestic offices:
Savings deposits.............................................................................................................................................................................................................	$ 54,539	$ 50	.37 %	$ 58,717	$ 73	.50 %
Other time deposits..........................................................................................................................................................................................................	15,109	32	.84	16,916	31	.74
Deposits in foreign offices:
Foreign banks deposits.....................................................................................................................................................................................................	9,437	-	.01	6,712	1	.05
Other interest bearing deposits...........................................................................................................................................................................................	13,960	3	.08	20,753	4	.07
Deposits held for sale.............................................................................................................................................................................................................	9,745	7	.26	-	-	-

Total interest bearing deposits.................................................................................................................................................................................................	102,790	92	.36	103,098	109	.43

Short-term borrowings...........................................................................................................................................................................................................	12,841	7	.21	15,826	9	.22
Long-term debt.....................................................................................................................................................................................................................	19,757	179	3.65	19,244	158	3.29

Total interest bearing deposits and debt....................................................................................................................................................................................	135,388	278	.83	138,168	276	.80
Other..................................................................................................................................................................................................................................	422	2	1.84	281	83	100+

Total interest bearing liabilities...............................................................................................................................................................................................	135,810	280	.83	138,449	359	1.04

Net interest income/Interest rate spread......................................................................................................................................................................................		$ 530	1.15 %		$ 494	1.20 %

Noninterest bearing deposits...................................................................................................................................................................................................	25,485			25,125
Other liabilities....................................................................................................................................................................................................................	20,513			17,588
Liabilities of discontinued operations........................................................................................................................................................................................	1,052			1,396
Total shareholders' equity......................................................................................................................................................................................................	18,829			17,410

Total liabilities and shareholders' equity................................................................................................................................................................................	$ 201,689			$ 199,968

Net interest margin on average earning assets.............................................................................................................................................................................			1.29 %			1.29 %
Net interest margin on average total assets.................................................................................................................................................................................			1.10			1.10

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

HSBC USA Inc.

Total weighted average rate earned on earning assets is interest and fee earnings divided by daily average amounts of total interest earning assets, including the daily average amount on nonperforming loans. Loan interest for the three months ended June 30, 2012 and 2011 included fees of $19 million and $17 million, respectively.

The following table shows the year-to-date average 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. The calculation of net interest margin includes interest expense of $50 million and $116 million for the six months ended June 30, 2012 and 2011, respectively, which has been allocated to our discontinued operations. This allocation of interest expense to our discontinued operations was in accordance with our existing internal transfer pricing policies as external interest expense is unaffected by these transactions.


	2012			2011
Six Months Ended June 30,	Balance	Interest	Rate⁽¹⁾	Balance	Interest	Rate⁽¹⁾
	(dollars are in millions)
Assets
Interest bearing deposits with banks.........................................................................................................................................................................................	$ 24,001	$ 34	.28 %	$ 25,414	$ 38	.30 %
Federal funds sold and securities purchased under resale agreements................................................................................................................................................	6,801	25	.74	5,813	31	1.06
Trading securities.................................................................................................................................................................................................................	12,087	59	.98	12,678	104	1.65
Securities............................................................................................................................................................................................................................	57,318	594	2.08	46,850	634	2.73
Loans:
Commercial....................................................................................................................................................................................................................	36,085	497	2.77	31,279	437	2.82
Consumer:
Residential mortgages.................................................................................................................................................................................................	15,392	298	3.90	14,629	320	4.41
HELOCs and home equity mortgages............................................................................................................................................................................	3,199	54	3.42	3,691	60	3.26
Credit cards...............................................................................................................................................................................................................	1,123	42	7.34	1,192	38	6.45
Other consumer..........................................................................................................................................................................................................	881	27	6.18	1,067	35	6.58

Total consumer...............................................................................................................................................................................................................	20,595	421	4.11	20,579	453	4.43

Total loans.....................................................................................................................................................................................................................	56,680	918	3.26	51,858	890	3.46

Other..................................................................................................................................................................................................................................	3,781	23	1.21	6,065	23	.76

Total earning assets...............................................................................................................................................................................................................	160,668	$ 1,653	2.07 %	148,678	$ 1,720	2.33 %

Allowance for credit losses......................................................................................................................................................................................................	(666 )			(912 )
Cash and due from banks........................................................................................................................................................................................................	1,595			1,677
Other assets.........................................................................................................................................................................................................................	29,264			24,406
Assets of discontinued operations.............................................................................................................................................................................................	13,952			21,871

Total assets.........................................................................................................................................................................................................................	$ 204,813			$ 195,720

Liabilities and Shareholders' Equity
Deposits in domestic offices:
Savings deposits.............................................................................................................................................................................................................	$ 56,561	$ 103	.37 %	$ 57,994	$ 150	.52 %
Other time deposits..........................................................................................................................................................................................................	14,994	73	.98	16,884	65	.77
Deposits in foreign offices:
Foreign banks deposits.....................................................................................................................................................................................................	8,801	1	.01	6,626	2	.08
Other interest bearing deposits...........................................................................................................................................................................................	14,810	6	.08	18,877	8	.09
Deposits held for sale.............................................................................................................................................................................................................	12,418	16	.26	-	-	-

Total interest bearing deposits.................................................................................................................................................................................................	107,584	199	.38	100,381	225	.45

Short-term borrowings...........................................................................................................................................................................................................	15,283	15	.20	18,898	21	.23
Long-term debt.....................................................................................................................................................................................................................	18,923	341	3.62	18,191	319	3.54

Total interest bearing deposits and debt....................................................................................................................................................................................	141,790	555	.79	137,470	565	.83
Other..................................................................................................................................................................................................................................	422	14	6.49	260	85	65.63

Total interest bearing liabilities...............................................................................................................................................................................................	142,212	569	.81	137,730	650	.95

Net interest income/Interest rate spread......................................................................................................................................................................................		$ 1,084	1.26 %		$ 1,070	1.38 %

Noninterest bearing deposits...................................................................................................................................................................................................	22,899			24,683
Other liabilities....................................................................................................................................................................................................................	19,970			14,731
Liabilities of discontinued operations........................................................................................................................................................................................	994			1,396
Total shareholders' equity......................................................................................................................................................................................................	18,738			17,180

Total liabilities and shareholders' equity................................................................................................................................................................................	$ 204,813			$ 195,720

Net interest margin on average earning assets.............................................................................................................................................................................			1.35 %			1.45 %
Net interest margin on average total assets.................................................................................................................................................................................			1.14			1.24

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

HSBC USA Inc.

Total weighted average rate earned on earning assets is interest and fee earnings divided by daily average amounts of total interest earning assets, including the daily average amount on nonperforming loans. Loan interest for the six months ended June 30, 2012 and 2011 included fees of $34 million and $38 million, respectively.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Refer to Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, under the captions "Interest Rate Risk Management" and "Trading Activities" of this Form 10-Q.

Item 4. Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting There has been no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 21, "Litigation and Regulatory Matters," in the accompanying consolidated financial statements beginning on page for our legal proceedings disclosure, which is incorporated herein by reference.

Item 1A. Risk Factors

The following discussion supplements the discussion of risk factors affecting us as set forth in Part I, Item 1A: Risk Factors, on pages 17-27 of our 2011 Annual Report on Form 10-K. The discussion of risk factors, as so supplemented, provides a description of some of the important risk factors that could affect our actual results and could cause our results to vary materially from those expressed in public statements or documents. However, other factors besides those included in the discussion of risk factors, as so supplemented, or discussed elsewhere in other of our reports filed with or furnished to the SEC could affect our business or results. The readers should not consider any description of such factors to be a complete set of all potential risks that we may face.

Regulatory investigations, fines, sanctions and requirements relating to conduct of business and financial crime negatively affecting our results and brand. Financial service providers are at risk of regulatory sanctions or fines related to conduct of business and financial crime. The incidence of regulatory proceedings and other adversarial proceedings against financial service firms is increasing. HSBC Holdings plc and certain of its affiliates, including HSBC Bank USA, are the subject of ongoing investigations by bank regulatory and law enforcement agencies in the United States relating to their compliance with anti-money laundering laws and regulations, the U.S. Bank Secrecy Act and sanctions programs administered by the U.S. Office of Foreign Assets Control. In each of these U.S. regulatory and law enforcement matters, HSBC Group companies, including HSBC Bank USA, have received Grand Jury subpoenas or other requests for information from U.S. Government or other agencies, and HSBC is cooperating fully and engaging in efforts to resolve matters. The resolution of at least some of these matters is likely to involve the filing of corporate criminal as well as civil charges and the imposition of significant fines and penalties. The prosecution of corporate criminal charges in these types of cases has most often been deferred through an agreement with the relevant authorities; however, U.S. authorities have substantial discretion, and prior settlements can provide no assurance as to how the U.S. authorities will proceed in these matters. In the event of a filing of criminal charges the prosecution of which is not deferred, there could be significant consequences to HSBC and its affiliates, including loss of business, withdrawal of funding and harm to our reputation, all of which would have a material adverse effect on our business, liquidity, financial condition, results of operations and prospects.

Item 6. Exhibits

Exhibits included in this Report:


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

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

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

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

101.SCH	XBRL Taxonomy Extension Schema Document^(1,2)

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document^(1,2)

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document^(1,2)

101.LAB	XBRL Taxonomy Extension Label Linkbase Document^(1,2)

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document^(1,2)

⁽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, 2012, 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, 2012 and 2011, (ii) the Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2012 and 2011, (iii) the Consolidated Balance Sheet as of June 30, 2012 and December 31. 2011, (iv) the Consolidated Statement of Changes in Shareholders' Equity for the three and six months ended June 30, 2012 and 2011, (v) the Consolidated Statement of Cash Flows for the three and six months ended June 30, 2012 and 2011, and (vi) the Notes to Consolidated Financial Statements.

⁽²⁾ As provided in Rule 406T of Regulation S-T, this information shall be not be deemed "filed" for purposes of Section 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

HSBC USA Inc.

Index


Assets:	Equity:
by business segment	consolidated statement of changes
consolidated average balances	ratios
fair value measurements	Equity securities available-for-sale
nonperforming	Estimates and assumptions
trading	Executive overview
Asset-backed commercial paper conduits	Fair value measurements:
Asset-backed securities	assets and liabilities recorded at fair value on a
Balance sheet:	recurring basis
consolidated	assets and liabilities recorded at fair value on a
consolidated average balances	non-recurring basis
review	control over valuation process fair value adjustments
Basel II	financial instruments
Basis of reporting	hierarchy
Business:	transfers into/out of level one and
consolidated performance review	two
Capital:	transfers into/out of level two and
2012 funding strategy	three
common equity movements	valuation control framework
consolidated statement of changes	valuation techniques
regulatory capital	Fiduciary risk
selected capital ratios	Financial assets:
Cash flow (consolidated)	designated at fair value
Cautionary statement regarding forward-looking	Financial highlights metrics
statements	Financial liabilities:
Collateral - pledged assets	designated at fair value
Collateralized debt obligations	fair value of financial liabilities
Commercial banking segment results	Forward looking statements
(IFRSs)	Funding
Compliance risk	Gain (loss) on instruments designated at fair value and
Controls and procedures	related derivatives
Credit card fees	Gains less losses from securities
Credit quality	Geographic concentration of receivables
Credit risk:	Global Banking and Markets:
adjustment	balance sheet data (IFRSs)
component of fair value option	segment results (IFRSs)
concentration	Goodwill
exposure	Guarantee arrangements
management	Impairment:
related contingent features	available-for-sale securities
related arrangements	credit losses
Current environment	nonperforming loans
Deferred tax assets	impaired loans
Deposits	Income tax expense
Derivatives:	Intangible assets
cash flow hedges	Interest rate risk
fair value hedges	Internal control
notional value	Key performance indicators
trading and other	Legal proceedings
Discontinued operations	Leveraged finance transactions

HSBC USA Inc.


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

HSBC USA Inc.

Signature

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

Date: July 30, 2012

HSBC USA Inc.

(Registrant)

/s/ JOHN T. MCGINNIS

John T. McGinnis

Senior Executive Vice President and

Chief Financial Officer

Exhibit Index


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

EXHIBIT 12

HSBC USA INC.

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO

COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS


	Six Months Ended June 30,
	2012	2011
	(dollars are in millions)
Ratios excluding interest on deposits:
Income (loss) from continuing operations.....................................................................................................................................................	$ (513 )	$ 261
Income tax expense (benefit)............................................................................................................................................................................	369	121
Less: Undistributed equity earnings..............................................................................................................................................................	-	-
Fixed charges:
Interest on:
Borrowed funds.......................................................................................................................................................................................	15	21
Long-term debt........................................................................................................................................................................................	332	297
Others.......................................................................................................................................................................................................	13	85
One third of rents, net of income from subleases....................................................................................................................................	15	15

Total fixed charges, excluding interest on deposits.....................................................................................................................................	375	418

Income from continuing operations before taxes and fixed charges, net of undistributed equity earnings.......................................	$ 231	$ 800

Ratio of earnings from continuing operations to fixed charges.................................................................................................................	.62	1.91

Total preferred stock dividend factor⁽¹⁾...........................................................................................................................................................	$ 51	$ 51

Fixed charges, including the preferred stock dividend factor.....................................................................................................................	$ 426	$ 469

Ratio of earnings from continuing operations to combined fixed charges and preferred stock dividends.........................................	.54	1.71

Ratios including interest on deposits:
Total fixed charges, excluding interest on deposits.....................................................................................................................................	$ 375	$ 418
Add: Interest on deposits................................................................................................................................................................................	161	132

Total fixed charges, including interest on deposits.....................................................................................................................................	$ 536	$ 550

Earnings from continuing operations before taxes and fixed charges, net of undistributed equity earnings...............................	$ 231	$ 800
Add: Interest on deposits................................................................................................................................................................................	161	132

Total.....................................................................................................................................................................................................................	$ 392	$ 932

Ratio of earnings from continuing operations to fixed charges.................................................................................................................	.73	1.69

Fixed charges, including the preferred stock dividend factor.....................................................................................................................	$ 426	$ 469
Add: Interest on deposits................................................................................................................................................................................	161	132

Fixed charges, including the preferred stock dividend factor and interest on deposits.........................................................................	$ 587	$ 601

Ratio of earnings from continuing operations to combined fixed charges and preferred stock dividends.........................................	.67	1.55

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

EXHIBIT 31

Certification of Chief Executive Officer and Chief Financial Officer

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

Certification of Chief Executive Officer

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

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

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

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

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

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

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

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

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

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

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

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

Date: July 30, 2012


/s/ IRENE M. DORNER
Irene M. Dorner President, Chief Executive Officer and Chairman of the Board

Certification of Chief Financial Officer

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

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

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

Date: July 30, 2012

/s/ JOHN T. MCGINNIS

John T. McGinnis

Senior Executive Vice President and

Chief Financial Officer

EXHIBIT 32

Certification of Chief Executive Officer and Chief Financial Officer

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

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

Section 906 of the Sarbanes-Oxley Act of 2002

The certification set forth below is being submitted in connection with the HSBC USA Inc. (the "Company") quarterly report on Form 10-Q for the period ending June 30, 2012 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: July 30, 2012

/s/ IRENE M. DORNER

Irene M. Dorner

President, Chief Executive Officer and

Chairman of the Board

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

Section 906 of the Sarbanes-Oxley Act of 2002

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

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

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

Date: July 30, 2012

/s/ JOHN T. MCGINNIS

John T. McGinnis

Senior Executive Vice President and

Chief Financial Officer

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

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

This information is provided by RNS

The company news service from the London Stock Exchange

END

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