HSBC USA Inc FY2013 Form 10-K - Part 1

RNS Number : 7362A

HSBC Holdings PLC

24 February 2014

UNITED STATES SECURITIES AND

EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2013

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

For the transition period from to

Commission file number 1-7436

HSBC USA Inc.

(Exact name of registrant as specified in its charter)

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

(212) 525-5000

Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Depositary Shares (each representing a one-fourth share of Adjustable Rate Cumulative Preferred Stock, Series D)		New York Stock Exchange
$2.8575 Cumulative Preferred Stock		New York Stock Exchange
Floating Rate Non-Cumulative Preferred Stock, Series F		New York Stock Exchange
Depositary Shares (each representing a one-fortieth share of Floating Rate Non-Cumulative Preferred Stock, Series G)		New York Stock Exchange
Depositary Shares (each representing a one-fortieth share of 6.5% Non-Cumulative Preferred Stock, Series H)		New York Stock Exchange
$100,000,000 Zero Coupon Callable Accreting Notes due January 15, 2043		New York Stock Exchange
$50,000,000 Zero Coupon Callable Accreting Notes due January 29, 2043		New York Stock Exchange
$50,000,000 Zero Coupon Callable Accreting Notes due May 7, 2043		New York Stock Exchange
$50,000,000 Zero Coupon Callable Accreting Notes due June 17, 2043		New York Stock Exchange
ELEMENTS Linked to the S&P Commodity Trends Indicator - Total Return due June 16, 2023		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý

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

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

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

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

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

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

As of February 21, 2014, there were 713 shares of the registrant's common stock outstanding, all of which are owned by HSBC North America Inc.

DOCUMENTS INCORPORATED BY REFERENCE

None.

TABLE OF CONTENTS

Part/Item No.
Part I		Page
Item 1.	Business:
	Organization History and Acquisition by HSBC...................................................................................................
	HSBC North America Operations.............................................................................................................................
	HSBC USA Inc. Operations......................................................................................................................................
	Funding........................................................................................................................................................................
	Employees and Customers........................................................................................................................................
	Regulation and Competition.....................................................................................................................................
	Corporate Governance and Controls.......................................................................................................................
Item 1A.	Risk Factors..................................................................................................................................................................
Item 1B.	Unresolved Staff Comments......................................................................................................................................
Item 2.	Properties......................................................................................................................................................................
Item 3.	Legal Proceedings.......................................................................................................................................................
Item 4.	Submission of Matters to a Vote of Security Holders............................................................................................
Part II
Item 5.	Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities.......................................................................................................................................................................
Item 6.	Selected Financial Data...............................................................................................................................................
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations:
	Forward-Looking Statements...................................................................................................................................
	Executive Overview....................................................................................................................................................
	Basis of Reporting......................................................................................................................................................
	Critical Accounting Policies and Estimates............................................................................................................
	Balance Sheet Review................................................................................................................................................
	Results of Operations................................................................................................................................................
	Segment Results - IFRSs Basis................................................................................................................................
	Credit Quality..............................................................................................................................................................
	Liquidity and Capital Resources..............................................................................................................................
	Off-Balance Sheet Arrangements, Credit Derivatives and Other Contractual Obligations.............................
	Fair Value.....................................................................................................................................................................
	Risk Management.......................................................................................................................................................
	New Accounting Pronouncement to be Adopted in Future Periods..................................................................
	Glossary of Terms.......................................................................................................................................................
	Consolidated Average Balances and Interest Rates.............................................................................................
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk..............................................................................
Item 8.	Financial Statements and Supplementary Data.......................................................................................................
	Selected Quarterly Financial Data (Unaudited).......................................................................................................
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................
Item 9A.	Controls and Procedures............................................................................................................................................
Item 9B.	Other Information........................................................................................................................................................
Part III
Item 10.	Directors, Executive Officers and Corporate Governance.....................................................................................
Item 11.	Executive Compensation............................................................................................................................................
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters......
Item 13.	Certain Relationships and Related Transactions, and Director Independence.................................................
Item 14.	Principal Accounting Fees and Services..................................................................................................................
Part IV
Item 15.	Exhibits and Financial Statement Schedules...........................................................................................................
Index.........................................................................................................................................................................................................
Signatures...............................................................................................................................................................................................

PART I

Item 1. Business

Organization History and Acquisition by HSBC

HSBC USA Inc. ("HSBC USA"), incorporated under the laws of the State of Maryland in 1973 as Republic New York Corporation, was acquired through a series of transactions by HSBC Holdings plc. ("HSBC" and, together with its subsidiaries, "HSBC Group") and changed its name to "HSBC USA Inc." in December 1999. HSBC USA is an indirect wholly-owned subsidiary of HSBC North America Holdings Inc. ("HSBC North America"), which is an indirect wholly-owned subsidiary of HSBC. HSBC USA's principal business is to act as a holding company for its subsidiaries. In this Form 10-K, HSBC USA and its subsidiaries are referred to as "HUSI," "we," "us" and "our."

HSBC North America Operations

HSBC North America is the holding company for HSBC's operations in the United States. The principal subsidiaries of HSBC North America at December 31, 2013 were HSBC USA, HSBC Markets (USA) Inc. ("HMUS"), a holding company for certain global banking and markets subsidiaries, HSBC Finance Corporation ("HSBC Finance"), a holding company for certain run-off consumer finance businesses, and HSBC Technology & Services (USA) Inc. ("HTSU"), a provider of information technology and centralized operational and support services including human resources, tax, finance, compliance, legal, corporate affairs and other services shared among the subsidiaries of HSBC North America and the HSBC Group. HSBC USA's principal U.S. banking subsidiary is HSBC Bank USA, National Association (together with its subsidiaries, "HSBC Bank USA"). Under the oversight of HSBC North America, HUSI works with its affiliates to maximize opportunities and efficiencies in HSBC's operations in the United States. These affiliates do so by providing each other with, among other things, alternative sources of liquidity to fund operations and expertise in specialized corporate functions and services. This has historically been demonstrated by purchases and sales of receivables between HSBC Bank USA and HSBC Finance and a pooling of resources within HTSU to provide shared, allocated support functions to all HSBC North America subsidiaries. In addition, clients of HSBC Bank USA and other affiliates are investors in debt and preferred securities issued by HSBC USA and/or HSBC Bank USA, providing significant sources of liquidity and capital to both entities. HSBC Securities (USA) Inc. ("HSI"), a registered broker dealer and a subsidiary of "HMUS", generally leads or participates as underwriter of all HUSI domestic issuances of term debt and, historically, HSBC Finance issuances of term debt and asset-backed securities. While neither HSBC USA nor HSBC Bank USA has received advantaged pricing, the underwriting fees and commissions paid to HSI historically have benefited the HSBC Group.

HSBC USA Inc. Operations

HSBC Bank USA, HSBC USA's principal U.S. banking subsidiary, is a national banking association with its main office in McLean, Virginia, and its principal executive offices at 452 Fifth Avenue, New York, New York. In support of HSBC's strategy to be the world's leading international bank, our operations are being reshaped to focus on core activities and the repositioning of our activities towards international businesses.

Ÿ Our Commercial Banking business is focused on five hubs which contribute over 50 percent of U.S. corporate imports and exports, namely California, Florida, Illinois, New York and Texas.

Ÿ Our Global Banking businesses serve top-tier multinationals and Global Markets provides a hub for international clients across the Americas and globally, providing U.S. dollar funding.

Ÿ Retail Banking and Wealth Management and Private Banking target internationally mobile clients in large metropolitan centers on the West and East coasts.

Through HSBC Bank USA, we offer our customers a full range of commercial and consumer banking products and related financial services. Our customers include individuals, including high net worth individuals, small businesses, corporations, institutions and governments. HSBC Bank USA is also an international dealer in derivative instruments denominated in U.S. dollars and other currencies, focusing on structuring transactions to meet clients' needs.

In 2005, HSBC USA incorporated a nationally chartered limited purpose bank subsidiary, HSBC Trust Company (Delaware), National Association ("HTCD"), the primary activities of which are serving as custodian of investment securities for other HSBC affiliates and providing personal trust services. The impact of HTCD's operations on HSBC USA's consolidated balance sheets and results of operations for the years ended December 31, 2013, 2012 and 2011 was not material.

As discussed more fully under "Discontinued Operations" below and in Note 3, "Discontinued Operations," in the accompanying consolidated financial statements, certain credit card receivables and our former banknotes business are reported as discontinued operations and, because we report segments on a continuing operations basis, are no longer included in our segment presentation.

We report financial information to our ultimate parent, HSBC, in accordance with International Financial Reporting Standards ("IFRSs"). As a result, our segment results are presented on an IFRSs basis (a non-U.S. GAAP financial measure) as operating results are monitored and reviewed, trends are evaluated and decisions about allocating resources such as employees, are made almost exclusively on an IFRSs basis. However, we continue to monitor capital adequacy, establish dividend policy and report to regulatory agencies on a U.S. GAAP basis. For additional financial information relating to our business and operating segments as well as a summary of the significant differences between U.S. GAAP and IFRSs as they impact our results, see Note 23, "Business Segments," in the accompanying consolidated financial statements.

Continuing Operations

Retail Banking and Wealth Management Segment ("RBWM") RBWM is focused on growing its wealth and banking business in key urban centers with strong international connectivity across the U.S. including New York City, Los Angeles, San Francisco, Miami and Washington DC. Our lead customer proposition, HSBC Premier, is a premium service wealth and relationship banking proposition designed for the internationally minded client. HSBC Premier provides clients access to a broad selection of local and international banking and wealth products and services that have been tailored to the needs of our HSBC Premier clients. HSBC Premier enables customers to access their eligible accounts from a single on-line view and includes international funds transfers between eligible HSBC accounts, with no transfer fees. With our affiliate, HSI, HSBC Premier provides access to a range of wealth management solutions. The Premier Service is delivered by a personal Premier relationship manager, supported by a 24-hour priority telephone and internet service. Our other main customer proposition, HSBC Advance, is a digitally-enabled proposition directed towards the emerging affluent client in the initial stages of wealth accumulation. HSBC Advance provides everyday banking solutions, alongside a range of lending and wealth products. Advance customers are serviced primarily through digital channels, including secure internet banking and mobile and tablet applications. RBWM also offers a broad range of financial products and services to all of its retail banking customers, including residential mortgages, home equity lines of credit, deposits and branch services.

Commercial Banking Segment ("CMB") CMB's goal is to be the leading international trade and business bank in the U.S. CMB strives to execute this vision and strategy in the U.S. by focusing on key markets with high concentration of international connectivity. Our CMB segment serves the markets through three client groups, notably Corporate Banking, Business Banking and Commercial Real Estate which allows us to align our resources in order to efficiently deliver suitable products and services based on our client's needs and abilities. Through its commercial centers and our retail branch network, CMB provides customers with the products and services needed to grow their businesses internationally, and delivers those products and services through our relationship managers who operate within a robust customer focused compliance and risk culture, and collaborate across HSBC to capture a larger percentage of a relationship, as well as through our on-line banking channel HSBCnet. Since 2012, our continued focus on expanding our core proposition and proactively targeting companies with international banking requirements led to an increase in our relationship managers and product partners enabling us to gain a larger presence in key growth markets, including the West Coast, Southeast and Midwest. This strategy has also lead to a reduction in certain Business Banking customers who do not have significant international needs.

CMB has been repositioning its business to focus on international clients. In doing so, CMB exited a significant number of non-strategic relationships in its Business Banking portfolio and launched a $1.0 billion International Loan Program to support small and medium sized companies to fund global growth opportunities to accelerate cross-border trade. CMB announced in January 2014, that it added an additional $1.0 billion to this program because CMB had already reached its initial $1.0 billion target since the program's launch in July 2013.

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

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

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

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

Also included in our GB&M segment is Balance Sheet Management, which is responsible for managing liquidity and funding under the supervision of our Asset and Liability Management Committee. Balance Sheet Management also manages our structural interest rate position within a limit structure. Balance Sheet Management reinvests excess liquidity into highly rated liquid assets. The majority of the liquidity is invested in interest bearing deposits with banks and U.S. government and other high quality securities. Balance Sheet Management is permitted to use derivatives as part of its mandate to manage interest rate risk. Derivative activity is predominantly comprised of the use of traditional interest rate swaps which are part of cash flow hedging relationships. Credit risk in Balance Sheet Management is predominantly limited to short-term exposure created by exposure to banks as well as high quality sovereigns or agencies which constitute the majority of Balance Sheet Management's liquidity portfolio. Balance Sheet Management does not and is not mandated to manage the structural credit risk of our balance sheet. Balance Sheet Management only manages interest rate risk.

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

Discontinued Operations

Sale of Certain Credit Card Operations to Capital One On May 1, 2012, HSBC, through its wholly-owned subsidiaries HSBC Finance, HSBC USA 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 General Motors and Union Plus credit card receivables as well as our private label credit card and closed-end receivables, all of which were purchased from HSBC Finance. The sale to Capital One did not include credit card receivables associated with HSBC Bank USA's legacy credit card program, however a portion of these receivables were sold to First Niagara Bank, N.A. ("First Niagara") and HSBC Bank USA continues to offer credit cards to its customers. No significant one-time closure costs were incurred as a result of exiting these portfolios. In connection with the sale of our credit card portfolio to Capital One, we entered into an outsourcing arrangement with Capital One with respect to the servicing of our remaining credit card portfolio. In September 2013, the outsourcing arrangement with Capital One ended and we resumed the servicing of our remaining credit card portfolio. See Note 3, "Discontinued Operations" of the consolidated financial statements for additional discussion regarding this transaction.

Banknotes Business In June 2010, we decided that the wholesale banknotes business ("Banknotes Business") within our GB&M segment did not fit with our core strategy in the U.S. and, therefore, made the decision to exit this business. This business, which was managed out of the United States with operations in key locations worldwide, arranged for the physical distribution of banknotes globally to central banks, large commercial banks and currency exchanges. As part of the decision to exit the Banknotes Business, in October 2010 we sold the assets of our Asian banknotes operations ("Asian Banknotes Operations") to an unaffiliated third party. The exit of our Banknotes Business was substantially completed in the fourth quarter of 2010 with the sale of our Asian Banknotes Operations and was fully completed with the sale of our European Banknotes Business to HSBC Bank plc in April 2011.

Funding

We fund our operations using a diversified deposit base, supplemented by issuing short-term and long-term debt, borrowing under unsecured and secured financing facilities, issuing preferred equity, selling liquid assets and, as necessary, receiving capital contributions from our immediate parent, HSBC North America Inc. ("HNAI"). Our prospects for growth continue to be dependent upon our ability to attract and retain deposits. Emphasis is placed on maintaining stability in core deposit balances. Numerous factors, both internal and external, may impact our access to, and the costs associated with, both retail and wholesale sources of funding. These factors may include our debt ratings, overall economic conditions, overall capital markets volatility, the counterparty credit limits of investors to the HSBC Group and the effectiveness of our compliance remediation efforts and our management of the credit risks inherent in our business and customer base.

In 2013, our primary source of funds continued to be deposits, augmented by issuances of commercial paper and term debt. We focus on relationship deposits where clients have purchased multiple products from us such as HSBC Premier for individuals, as those balances will tend to be significantly more stable than non-relationship deposits. We issued a total of $5,547 million of long-term debt at various points in 2013, including $750 million of 2.625 percent Senior Notes and $250 million of Floating Rate Senior Notes in September 2013 due in 2018. We also repaid long-term debt of $4,370 million in 2013. As a result of the adoption effective January 1, 2014 of the final rules issued by the U.S. banking regulators implementing the Basel III regulatory capital and liquidity reforms from the Basel Committee on Banking Supervision, together with the impact of similar implementation by U.K. banking regulators, we are reviewing the composition of our capital structure. We would anticipate replacing instruments whose treatment is less favorable under the rules with new Basel III compliant instruments.

A detailed description of our sources and availability of funding are set forth in the "Liquidity and Capital Resources" and "Off Balance Sheet Arrangements" sections of the MD&A.

We use the cash generated by these funding sources to service our debt obligations, originate new loans, purchase investment securities and pay dividends to our preferred shareholders and, as available and appropriate, to our parent.

Employees and Customers

At December 31, 2013, we had approximately 6,500 employees.

At December 31, 2013, we had approximately 2.3 million customers, some of which are customers of more than one of our businesses. Customers residing in the state of New York and California accounted for 36 percent and 26 percent, respectively, of our total outstanding commercial real estate loans, residential mortgage loans and credit card receivables on a continuing operations basis.

Regulation and Competition

Regulation We are subject to, among other things, an extensive statutory and regulatory framework applicable to bank holding companies, financial holding companies and banks. U.S. regulation of banks, bank holding companies and financial holding companies is intended primarily for safety and soundness of banks, and the protection of the interests of depositors, the Federal Deposit Insurance Fund and the banking system as a whole rather than the protection of security holders and creditors. Events since early 2008 affecting the financial services industry and, more generally, the financial markets and the economy have led to a significant number of initiatives regarding reform of the financial services industry and the regulation governing the industry. The following discussion describes the current regulatory framework in which HSBC USA operates and anticipated changes to that framework.

Bank Holding Company Supervision As a bank holding company, we are subject to regulation under the Bank Holding Company Act of 1956, as amended ("BHC Act"), and to inspection, examination and supervision by our primary regulator, the Federal Reserve Board ("FRB"). We are also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the Securities and Exchange Commission (the "SEC").

HSBC USA and its parent bank holding companies qualified as financial holding companies pursuant to the amendments to the BHC Act effected by the Gramm-Leach-Bliley Act of 1999 ("GLB Act"). Financial holding companies may engage in a broader range of activities than bank holding companies. Under regulations implemented by the FRB, if any financial holding company, or any depository institution controlled by a financial holding company, ceases to meet certain capital or management standards, the FRB may impose corrective capital and/or managerial requirements on the financial holding company and place limitations on its ability to conduct the broader financial activities permissible for financial holding companies. In addition, the FRB may require divestiture of the holding company's depository institutions or its affiliates engaged in broader financial activities in reliance on the GLB Act if the deficiencies persist. The regulations also provide that if any depository institution controlled by a financial holding company fails to maintain a satisfactory rating under the Community Reinvestment Act of 1977, as amended ("CRA"), the FRB must prohibit the financial holding company and its subsidiaries from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies. As reflected in the agreement entered into with the Office of the Comptroller of the Currency ("OCC") on December 11, 2012 (the "GLBA Agreement"), the OCC has determined that HSBC Bank USA is not in compliance with the requirements set forth in 12 U.S.C. § 24a(a)(2)(c) and 12 C.F.R. § 5.39(g)(1), which provide that a national bank and each depository institution affiliate of the national bank must be both well capitalized and well managed in order to own or control a "financial subsidiary", a subsidiary of a bank that also may engage in broader activities than subsidiaries of non-qualified banks. As a result, HSBC USA and its parent bank holding companies no longer meet the qualification requirements for financial holding company status, and may not engage in any new types of financial activities without the prior approval of the FRB, and HSBC Bank USA may not directly or indirectly acquire control of, or hold an interest in, any new financial subsidiary, nor commence a new activity in its existing financial subsidiary, unless it receives prior approval from the OCC. If all of our affiliate depositary institutions are not in compliance with these requirements within the time periods specified in the GLBA Agreement, as they may be extended, HSBC USA could be required either to divest HSBC Bank USA or to divest or terminate any financial activities conducted in reliance on financial holding company status under the GLB Act. Similar consequences could result for financial subsidiaries of HSBC Bank USA that engage in activities in reliance on expanded powers provided for in the GLB Act. The GLBA Agreement requires HSBC Bank USA to take all steps necessary to correct the circumstances and conditions resulting in HSBC Bank USA's noncompliance with the requirements referred to above. We continue to take steps to satisfy the requirements of the GLBA Agreement.

We are generally prohibited under the BHC Act from acquiring, directly or indirectly, ownership or control of more than five percent of any class of voting shares of, or substantially all the assets of, or exercising control over, any U.S. bank, bank holding company or many other types of depository institutions and/or their holding companies without the prior approval of the FRB and, potentially, other U.S. banking regulatory agencies.

The GLB Act and the regulations issued thereunder contain a number of other provisions that affect our operations and those of our subsidiary banks, including regulations and restrictions on the activities we may conduct and the types of businesses and entities we may acquire. Furthermore, other provisions contain detailed requirements relating to the financial privacy of consumers. In addition, the so-called 'push-out' provisions of the GLB Act removed the blanket exemption from registration for securities and brokerage activities conducted in banks (including HSBC Bank USA) under the Exchange Act of 1934, as amended. Applicable regulations allow banks to continue to avoid registration as a broker or dealer only if they conduct securities activities that fall within a set of defined exceptions.

Consumer Regulation Our consumer lending businesses operate in a highly regulated environment. In addition to the establishment of the Consumer Financial Protection Bureau (the "CFPB") and the other consumer-related provisions of the "Dodd-Frank Wall Street Reform and Consumer Protection Act" (the "Dodd-Frank Act" or "Dodd-Frank") described below, these businesses are subject to laws relating to consumer protection including, without limitation, fair lending, fair debt collection practices, use of credit reports, privacy matters, and disclosure of credit terms and correction of billing errors. Local, state and national regulatory and enforcement agencies continue efforts to address perceived problems within the mortgage lending and credit card industries through broad or targeted legislative or regulatory initiatives aimed at lenders' operations in consumer lending markets. There continues to be a significant amount of legislative and regulatory activity, nationally, locally and at the state level, designed to limit certain lending practices while mandating servicing activities. Federal bankruptcy and state debtor relief and collection laws affect the ability of banks, including HSBC Bank USA, to collect outstanding balances.

On May 22, 2009, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the "CARD Act") was signed into law and we have implemented all applicable provisions. The CARD Act required us to make changes to our business practices and required us and our competitors to manage credit card risks differently than was historically the case. Pricing, underwriting and product changes have been implemented. The implementation of the rules did not have a material adverse impact on us as any impact was limited to a portion of the existing credit card loan portfolio as, historically, the purchase price on credit card sales volume paid to HSBC Finance was adjusted to reflect the requirements and their impact on future cash flows. Following the sale of HSBC's Card and Retail Services business to Capital One, as discussed above, we no longer purchase credit card receivables from HSBC Finance, which further limits the impact of these new rules.

Due to the turmoil in the mortgage lending markets, there has also been a significant amount of federal and state legislative and regulatory focus on this industry. Increased regulatory oversight over residential mortgage lenders has occurred, including through state and federal examinations and periodic inquiries from state Attorneys General for information. Several regulators, legislators and other governmental bodies have promoted particular views of appropriate or "model" loan modification programs, suitable loan products and foreclosure and loss mitigation practices. We have developed a modification program that employs procedures which we believe are most responsive to our customers' needs and we continue to enhance and refine these practices as other programs are announced, and we evaluate the results of our customer assistance efforts. We continue to be active in various home preservation initiatives through participation at local events sponsored by public officials, community leaders and consumer advocates.

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, and our common indirect parent, HSBC North America entered into a similar consent order with the FRB (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 foreclosure practice deficiencies described in the consent order. We continue to work with our regulators to align our processes with the requirements of the Servicing Consent Orders and implement operational changes as required. The Servicing Consent Orders required an independent review of foreclosures (the "Independent Foreclosure Review") pending or completed between January 2009 and December 2010 to determine if any borrower was financially injured as a result of an error in the foreclosure process. On February 28, 2013, HSBC Bank USA entered into an agreement with the OCC, and HSBC Finance and HSBC North America entered into an agreement with the FRB (together the "IFR Settlement Agreements"), pursuant to which the Independent Foreclosure Review ceased and HSBC North America made a cash payment of $96 million into a fund used to make payments to borrowers that were in active foreclosure during 2009 and 2010 and, in addition, is providing other assistance (e.g., loan modifications) to help eligible borrowers. As a result, in 2012, we recorded expenses of $19 million which reflects the portion of HSBC North America's total expense of $104 million that we believe is allocable to us. As of December 31, 2013, Rust Consulting, Inc., the paying agent, has issued almost all checks to eligible borrowers. See Note 28, "Litigation and Regulatory Matters," in the accompanying consolidated financial statements for further discussion.

Supervision of Bank Subsidiaries Our subsidiary national banks, HSBC Bank USA and HTCD, are subject to regulation and examination primarily by the OCC. These subsidiary banks are subject to additional regulation and supervision by the Federal Deposit Insurance Corporation ("FDIC"), the FRB and the CFPB. HSBC Bank USA and HTCD are subject to banking laws and regulations that place various restrictions on and requirements regarding their activities, investments, operations and administration, including the establishment and maintenance of branch offices, capital and reserve requirements, deposits and borrowings, investment and lending activities, payment of dividends, transactions with affiliates, overall compliance and risk management and numerous other matters.

Federal law imposes limitations on the payment of dividends by national banks. Dividends payable by HSBC Bank USA and HTCD are limited to the lesser of the amounts calculated under a "recent earnings" test and an "undivided profits" test. Under the recent earnings test, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current year's net income combined with the retained net income of the two preceding years, unless the national bank obtains the approval of the OCC. Under the undivided profits test, a dividend may not be paid in excess of a bank's undivided profits account. HSBC Bank USA is also required to maintain reserves in the form of vault cash and deposits with the Federal Reserve Bank, as well as maintain appropriate amounts of capital against its assets as discussed further in this Annual Report on Form 10-K.

HSBC Bank USA and HTCD are subject to significant restrictions imposed by federal law on extensions of credit to, and certain other "covered transactions" with HSBC USA or other affiliates. Covered transactions include loans and other extensions of credit, investments and asset purchases, and certain other transactions involving the transfer of value from a subsidiary bank to an affiliate or for the benefit of an affiliate. Unless an exemption applies, or a specific waiver is granted by the FRB, covered transactions by a bank with a single affiliate are limited to 10 percent of the bank's capital and surplus, and all covered transactions with affiliates in the aggregate are limited to 20 percent of a bank's capital and surplus. Loans and extensions of credit to affiliates by a bank generally are to be secured in specified amounts with specific types of collateral. A bank's credit exposure to an affiliate as a result of derivative, securities borrowing/lending or repurchase transactions is also subject to these restrictions. A bank's transactions with its non-bank affiliates are also generally required to be on arm's length terms.

The types of activities in which the non-U.S. branches of HSBC Bank USA may engage are subject to various restrictions imposed by the FRB in addition to those generally applicable to HSBC Bank USA under OCC rules. These branches are also subject to the laws and regulatory authorities of the countries in which they operate.

Under longstanding FRB policy, which Dodd-Frank codified as a statutory requirement, HSBC USA is expected to act as a source of strength to its subsidiary banks and, under appropriate circumstances, to commit resources to support each such subsidiary bank in circumstances where it might not do so absent such policy.

Regulatory Capital and Liquidity Requirements As a bank holding company, we are subject to regulatory capital requirements and guidelines imposed by the FRB, which are substantially similar to those imposed by the OCC and the FDIC on banks such as HSBC Bank USA and HTCD. A bank or bank holding company's failure to meet minimum capital requirements can result in certain mandatory actions and possibly additional discretionary actions by its regulators. Generally bank holding company regulatory capital compliance is performed at a consolidated level within the U.S. at HSBC North America, our indirect parent, and also separately for HSBC Bank USA. However, we do present HSBC USA's capital ratios, together with HSBC Bank USA's, below in "Liquidity and Capital Resources" in our MD&A, as well as in Note 24 to the Consolidated Financial Statements, "Retained Earnings and Regulatory Capital Requirements". Our ultimate parent, HSBC, is also subject to regulatory capital requirements under U.K. law.

Basel I. The U.S.'s general risk-based capital guidelines, as still in effect as of December 31, 2013, are based on the 1988 Capital Accord ("Basel I") of the Basel Committee on Banking Supervision (the "Basel Committee"). Under such capital guidelines, a bank or a bank holding company's assets and certain specified off-balance sheet commitments and obligations are assigned to various risk categories. A bank or bank holding company's capital, in turn, is classified into one of three tiers. Tier 1 capital includes common equity, noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock and trust preferred securities at the holding company level, and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other deductions. Tier 2 capital includes, among other things, cumulative perpetual preferred stock and trust preferred securities not qualified as Tier 1 capital, subordinated debt, and allowances for loan and lease losses, subject to certain limitations. Tier 3 capital includes qualifying unsecured subordinated debt. At least one-half of a bank's total capital must qualify as Tier 1 capital.

Under rules still applicable as of December 31, 2013, to be categorized as "well capitalized," a banking institution must have the minimum ratios reflected in the table included in Note 24, "Retained Earnings and Regulatory Capital Requirements" of the consolidated financial statements and must not be subject to a directive, order or written agreement to meet and maintain specific capital levels. The federal bank regulatory agencies may, however, set higher capital requirements for an individual bank or bank holding company when particular circumstances warrant.

Basel II. In December 2007, the U.S. federal banking regulators implemented the Basel Committee's so-called Basel II capital reforms, which included an advanced internal ratings based approach for credit risk and an advanced measurement approach for operational risk (taken together, the "Advanced Approach"), for banking organizations having $250 billion or more in total consolidated assets or $10 billion or more of foreign exposures (referred to as "Advanced Approach" banking organizations, which includes banking organizations such as HSBC North America and HSBC USA). Adoption of the Advanced Approach 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 requirements. We are uncertain as to when we will receive approval to adopt fully the Advanced Approach and exit "parallel run" (described further below) from our primary regulator. We have integrated Basel II metrics into our management reporting and decision making process and we will further revise these processes to incorporate Basel III metrics.

Basel 2.5. In June 2012, U.S. regulators issued a final rule, 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 became effective January 1, 2013, and its implementation is reflected in our December 31, 2013 Basel I capital ratios and risk-weighted asset levels. In December 2013, the FRB adopted changes to the Basel 2.5 rule that would conform to changes in the Basel III Final Rule (described below).

Basel III. In December 2010, the Basel Committee issued "A global regulatory framework for more resilient banks and banking systems," commonly referred to as Basel III, which presents details of a bank capital and liquidity reform program to address both firm-specific and broader, systemic risks to the banking sector. In October 2013, the U.S. banking regulators published a final rule in the Federal Register implementing the Basel III capital framework in the U.S (the "Basel III Final Rule"). The Basel III Final Rule phases in a complete replacement to the Basel I general risk-based capital rules, builds on the Advanced Approach of Basel II, incorporates certain changes to Basel 2.5, and implements certain other requirements of the Dodd-Frank Act. HSBC North America and HSBC Bank USA, as banking organizations subject to the Advanced Approach, became subject to the Basel III Final Rule as of January 1, 2014. Several of the provisions of the Basel III Final Rule will be phased in through 2019. The Basel III Final Rule will materially increase our regulatory capital requirements over the next several years.

The Basel III Final Rule establishes an integrated regulatory capital framework to improve the quality and quantity of regulatory capital and introduces the "Standardized Approach" for risk weighted assets, which will replace the Basel I risk-based guidance for determining risk-weighted assets as of January 1, 2015. For Advanced Approach banking organizations, the Basel II framework has been enhanced generally consistently with the Basel Committee's Basel III framework. However, pursuant to Section 171 of the Dodd-Frank Act, as implemented through the Basel III Final Rule, an Advanced Approach banking organization will be required to calculate its risk-based capital ratios using risk-weighted assets under both the Basel I risk-based capital rules (or the Standardized Approach, after January 1, 2015) and the Basel III Final Rule, and (if it has exited parallel run, as described below) will be tested for compliance with the regulatory capital minimums based on the lower of the two calculations for each risk-based capital ratio. Under these requirements, the Basel I (or, after January 1, 2015, the Standardized Approach) risk-weighted asset calculations will serve as a "floor" for Advanced Approach banking organizations' compliance with the minimum requirements.

Advanced Approach banking organizations, such as HSBC North America and HSBC Bank USA, currently operate in a "parallel run" wherein they must report their risk-based capital ratios using risk-weighted assets under both Basel I (and after January 1, 2015, their Standardized Approach) as well as the Advanced Approach to their primary federal regulator, but publicly disclose only their capital ratios calculated using Basel I (or after January 1, 2015, their Standardized Approach) risk-weighted assets. Upon receiving approval to exit parallel run, Advanced Approach banking organizations would then publicly disclose their capital ratios calculated using both Basel I (or after January 1, 2015, their Standardized Approach) and Advanced Approach risk-weighted assets, and as noted above, be tested for compliance based on the lower of the two calculations for each risk-based capital ratio. Although HSBC North America and HSBC Bank USA began a parallel run period in January 2010, it is unclear when they will receive approval from the appropriate regulators to exit parallel run.

In February 2014, the FRB adopted a final rule requiring certain large non-U.S. banks, such as HSBC, with significant operations in the United States to establish a single intermediate holding company ("IHC") to hold all of their U.S. bank and non-bank subsidiaries by June 1, 2016. This IHC may calculate its risk-based and leverage capital requirements solely under the U.S. Standardized Approach, even if the IHC meets the asset thresholds that would require a bank holding company to use the Advanced Approach. IHCs meeting these thresholds, however, will still be subject to other capital requirements applicable to bank holding companies that meet these thresholds, including the supplementary leverage ratio and the countercyclical buffer, when in effect. As described above, the HSBC Group currently operates in the United States through such an IHC structure (i.e., HSBC North America), and we do not expect the FRB's final rule to have a significant impact on our U.S. operations. We are currently analyzing the final rule to determine the impact on our business of using only the Standardized Approach to determine our risk-based and leverage capital requirements.

The Basel III Final Rule requires banks to phase in requirements for more capital and a higher quality of capital over a period from 2014 to 2019. When fully phased in on January 1, 2019, HSBC North America and HSBC Bank USA will be required to maintain minimum risk-based capital ratios (exclusive of any capital surcharge for large, global systemically important banks ("G-SIBs"), domestic systemically important banks ("D-SIBs") or the countercyclical capital buffer) as follows:

	Common Equity Tier 1		Tier 1 Capital		Total Capital
Stated minimum ratio........................................................................................	4.5	%	6.0	%	8.0	%
Plus: Capital conservation buffer requirement.............................................	2.5	%	2.5	%	2.5	%
Effective minimum ratio....................................................................................	7.0	%	8.5	%	10.5	%

We anticipate HSBC North America and HSBC Bank USA will meet these requirements well in advance of the ultimate full phase-in date. However, it is possible that further increases in regulatory capital may be required in response to the implementation of the Basel III Final Rule. The exact amount, however, will depend upon our prevailing risk profile and that of our North America affiliates under various stress scenarios.

In addition, and subject to discretion by the respective regulatory authorities, a countercyclical capital buffer of up to 2.5 percent (to be phased in, if applicable, beginning January 1, 2016), consisting of common equity, could also be required to be built up by banking organizations in periods of excess credit growth in the economy.

Under the Basel III Final Rule, all banking organizations will continue to be subject to the U.S. regulators' existing minimum leverage ratio of 4.0 percent (calculated as the ratio of Tier 1 Capital to average consolidated assets as reflected on the banking organization's consolidated financial statements, net of amounts deducted from capital). Additionally, Advanced Approach banking organizations, such as HSBC North America and HSBC Bank USA, will be subject to a supplementary leverage ratio, with reporting to U.S. regulators commencing January 1, 2015 and full implementation and compliance by January 1, 2018. The supplementary leverage ratio would have a minimum of 3 percent (calculated as the ratio of Tier 1 Capital to average balance sheet exposures plus certain average off-balance sheet exposures). The U.S. regulators are expected to propose revisions to the supplementary leverage ratio to implement changes to the Basel III leverage ratio adopted by the Basel Committee in January 2014 that would incorporate additional off-balance sheet exposures, including securities financing transactions and derivatives. For the largest U.S. banks and bank holding companies, which do not include HSBC North America or HSBC Bank USA, the U.S. regulators have proposed to increase the supplementary leverage ratio to 6 percent and 5 percent, respectively, effective January 1, 2018.

Under the Basel III Final Rule, beginning as of January 1, 2015, in order to be considered "well-capitalized", a depository institution, such as HSBC Bank USA, would be required to maintain a leverage ratio of 5 percent, a common equity Tier 1 risk-based capital ratio of 6.5 percent, a Tier 1 risk-based capital ratio of 8 percent and a total risk-based capital ratio of 10 percent. Beginning in 2018, an Advanced Approach depository institution would also have to meet the supplementary leverage ratio of 3 percent.

With regard to the elements of capital, the application of the Basel III Final Rule will require HSBC USA to phase trust preferred securities issued prior to May 19, 2010 out of Tier 1 Capital by January 1, 2016, with 50 percent of these capital instruments includable in Tier 1 Capital in 2014 and 25 percent includable in 2015. The trust preferred securities excluded from Tier 1 Capital may be included fully in Tier 2 Capital during those two years, but must be phased out of Tier 2 Capital by January 1, 2022. We exercised our option to call and redeem the trust preferred securities issued by HSBC USA Capital Trust VII. We continue to consider options for redeeming other trust preferred securities issued which totaled $550 million at December 31, 2013. Also under the Basel III Final Rule, Tier 1 capital generally includes only noncumulative perpetual preferred stock, in addition to common stock, and the Basel III Final Rule removes the limitation on the amount of Tier 2 capital that may be recognized relative to Tier 1 capital.

Capital Planning. In November 2011, the FRB issued a final rule (the "Capital Plan Rule") requiring U.S. bank holding companies with total consolidated assets of $50 billion or more, including HSBC North America, to submit annual capital plans for review. Under the Capital Plan Rule, the FRB will evaluate bank holding companies annually for their capital adequacy, internal capital adequacy assessment processes, and plans for capital distributions, and will approve capital distributions only for companies whose capital plans have not received an objection and that are able to demonstrate that they would maintain sufficient financial strength after making the capital distributions.

In addition, the FRB stated in its capital plan guidance that it expects bank holding companies subject to the Capital Plan Rule (including HSBC North America) to achieve, readily and without difficulty, over the capital planning horizon, the ratios required by the Basel III Final Rule. The FRB stated that bank holding companies that meet the minimum capital ratio requirements during the Basel III phase-in period but remain below the 7 percent common equity Tier 1 target (minimum plus capital conservation buffer) will be expected to maintain prudent earnings retention policies with a view to meeting the conservation buffer under the timeframe described in the Basel III Final Rule.

Stress Testing. In October 2012, the FRB published a final rule setting out stress testing requirements for bank holding companies with $50 billion or more in total consolidated assets. HSBC North America became subject to the rule from October 2013 and was required to comply with the FRB's Comprehensive Capital Analysis and Review ("CCAR") program for its capital plan submission in January 2014.

Under the CCAR process, the FRB will consider a bank holding company's overall financial condition, risk profile and capital adequacy over a nine-quarter forward-looking planning horizon. The FRB will assess a bank holding company's ability to meet qualitative aspects of capital planning and risk management, as well as minimum regulatory ratios including a 5 percent Tier 1 common ratio, for each quarter of the planning horizon under baseline, adverse and severely adverse economic scenarios. The FRB will also take into account a bank holding company's planned capital actions (such as dividends or share repurchases) over the planning horizon when assessing capital adequacy. If, based on such assessment, the FRB were to issue an objection to a bank holding company's capital plan or planned capital actions, the bank holding company would be required to submit a revised capital plan, and generally would not be able to undertake planned capital actions until approved by the FRB. The FRB will publicly release a summary of its CCAR assessments in March of each year and bank holding companies are also required to publicly release a summary of their stress test results under the supervisory severely adverse scenario. Bank holding companies subject to these stress test rules are also required to conduct a mid-year company-run stress test, submit the results to the FRB and publicly disclose a summary of these mid-year stress test results in September of each year. Meeting the CCAR requirements could also require increased capital to withstand the application of the stress scenarios over the planning horizon.

Depository institutions with assets of $50 billion or more are required under the Dodd-Frank Act to submit an annual company-run stress test (the "DFAST") that runs concurrently with, and is submitted at the same time as, the CCAR. The DFAST is based on the OCC's stress scenario assumptions that are appropriate for the economic conditions assumed in each scenario. HSBC Bank USA submitted its stress test in accordance with regulatory requirements in January 2014, and is required to publish the results of this stress test no later than March 31, 2014.

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

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

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

Federal Reserve Structural Rule and Proposals for Foreign Banking Organizations. In February 2014, the FRB adopted a final rule requiring enhanced supervision of the U.S. operations of non-U.S. banks such as HSBC. The rule requires certain large non-U.S. banks, such as HSBC, with significant operations in the United States to establish a single intermediate holding company to hold all of their U.S. bank and non-bank subsidiaries. The intermediate holding company will be subject to risk-based capital requirements, stress testing requirements, enhanced risk management standards and enhanced governance and stress testing requirements for liquidity management, as well as other prudential standards. Under the final rule, most of these requirements would become effective on July 1, 2016. As described above, the HSBC Group currently operates in the United States through such an intermediate holding company structure (i.e., HSBC North America), and we do not expect the FRB's final rule to have a significant impact on our U.S. operations. The FRB has also proposed to subject intermediate holding companies to caps on single-counterparty exposures and an early remediation regime with corrective measures of increasing severity triggered by weaknesses in compliance with the capital, leverage, stress tests, liquidity and risk management requirements, and potentially certain market indicators, but these aspects of the original proposal have not yet been finalized.

Non-U.S. Regulatory Capital Requirements. HSBC North America and HSBC USA also continue to support HSBC's implementation of the Basel III framework, as adopted by the U.K. Prudential Regulation Authority ("PRA"). We supply data regarding credit risk, operational risk and market risk to support HSBC's regulatory capital and risk weighted asset calculations.

General. Our capital resources are summarized under "Liquidity and Capital Resources" in MD&A. Capital amounts and ratios for HSBC USA and HSBC Bank USA are summarized in Note 26, "Retained Earnings and Regulatory Capital Requirements" of the consolidated financial statements. From time to time, bank regulators propose amendments to or issue interpretations of risk-based capital guidelines. Such proposals or interpretations could, upon implementation, affect reported capital ratios and net risk weighted assets.

Deposit Insurance Deposits placed at HSBC Bank USA and HTCD are insured by the FDIC, subject to the limitations and conditions of applicable law and the FDIC's regulations. The FDIC insurance coverage limits are $250,000 per depositor. HSBC Bank USA and HTCD are subject to risk-based assessments from the FDIC. Currently, depository institutions subject to assessment are categorized based on supervisory ratings, financial ratios and, in the case of larger institutions, long-term debt issuer ratings, with those in the highest rated categories paying lower assessments. While the assessments are generally payable quarterly, the FDIC also has the authority to impose special assessments to prevent the deposit insurance fund from declining to an unacceptable level. Pursuant to this authority, the FDIC imposed a 5 basis point special assessment on June 30, 2009. In November 2009, the FDIC amended its regulations to require depository institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012 on or before December 30, 2009. Excess FDIC insurance was repaid in June 2013. The assessment methodology was revised to a methodology based on assets rather than insured deposits beginning with the second quarter 2011 assessment and pricing is now based on a FDIC methodology to measure the risk of banks.

Bank Secrecy Act/Anti-Money Laundering The USA Patriot Act (the "Patriot Act") of 2001, contains significant record keeping and customer identity requirements, expands the government's powers to freeze or confiscate assets and increases the available penalties that may be assessed against financial institutions for violation of the requirements of the Patriot Act intended to detect and deter money laundering. The U.S. Treasury Secretary developed and implemented final regulations with regard to the anti-money laundering ("AML") compliance obligations of financial institutions (a term which includes insured U.S. depository institutions, U.S. branches and agencies of foreign banks, U.S. broker-dealers and numerous other entities). The U.S. Treasury Secretary delegated certain authority to a bureau of the U.S. Treasury Department known as the Financial Crimes Enforcement Network ("FinCEN").

Many of the anti-money laundering compliance requirements of the Patriot Act, as implemented by FinCEN, are generally consistent with the anti-money laundering compliance obligations that applied to HSBC Bank USA under the Bank Secrecy Act ("BSA") and applicable FRB regulations before the Patriot Act was adopted. These include requirements to adopt and implement an anti-money laundering program, report suspicious transactions and implement due diligence procedures for certain correspondent and private banking accounts. Certain other specific requirements under the Patriot Act involve compliance obligations. The Patriot Act has improved communication between law enforcement agencies and financial institutions. The Patriot Act and other recent events have also resulted in heightened scrutiny of the Bank Secrecy Act and anti-money laundering compliance programs by bank regulators.

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 FRB. These actions required improvements to establish an effective compliance risk management program across our U.S. businesses, including various issues relating to BSA and AML compliance. Steps continue to be taken to address the requirements of the consent order to ensure compliance, and that effective policies and procedures are maintained.

In December 2012, HSBC, HSBC North America and HSBC Bank USA entered into agreements to achieve a resolution with U.S. and United Kingdom government agencies regarding past inadequate compliance with AML/BSA and sanctions laws, including the previously reported investigations by the U.S. Department of Justice, the FRB, the OCC and FinCEN in connection with AML/BSA compliance, including cross-border transactions involving our cash handling business in Mexico and banknotes business in the U.S., and historical transactions involving parties subject to the Office of Foreign Assets Control ("OFAC") economic sanctions. As part of the resolution, HSBC and HSBC Bank USA entered into a five-year deferred prosecution agreement with the U.S. Department of Justice, the U.S. Attorney's Office for the Eastern District of New York, and the U.S. Attorney's Office for the Northern District of West Virginia (the "U.S. DPA"), and HSBC entered into a two-year deferred prosecution agreement with the New York County District Attorney ("DANY DPA"), and HSBC consented to a cease and desist order and a monetary penalty order with the FRB. In addition, HSBC Bank USA entered into a monetary penalty consent order with FinCEN and a separate monetary penalty order with the OCC. HSBC also entered into an undertaking with the U.K. Financial Services Authority, now a Financial Conduct Authority ("FCA") Direction, to comply with certain forward-looking obligations with respect to AML and sanctions requirements over a five-year term.

Under these agreements, HSBC and HSBC Bank USA made payments totaling $1.921 billion to U.S. authorities, of which $1.381 billion was attributed to and paid by HSBC Bank USA, and are continuing to comply with ongoing obligations. Over the five-year term of the agreements with the U.S. Department of Justice and the FCA, an independent monitor (who also will be, for FCA purposes, a "skilled person" under Section 166 of the Financial Services and Markets Act) will evaluate HSBC's progress in fully implementing its obligations, and will produce regular assessments of the effectiveness of HSBC's compliance function. Michael Cherkasky was selected as the independent monitor and his monitorship is proceeding as anticipated and consistent with the timelines and requirements set forth in the relevant agreements. In July 2013, the United States District Court for the Eastern District of New York entered an order approving the U.S. DPA pursuant to the court's supervisory power and granting the parties' application to place the case in abeyance for five years. The court will maintain supervisory power over the implementation of the U.S. DPA while the case is in abeyance.

If HSBC and HSBC Bank USA fulfill all of the requirements imposed by the U.S. DPA, the U.S. Department of Justice's charges against those entities will be dismissed at the end of the five-year period of that agreement. Similarly, if HSBC fulfills all of the requirements imposed by the DANY DPA, DANY's charges against it will be dismissed at the end of the two-year period of that agreement. The U.S. Department of Justice may prosecute HSBC or HSBC Bank USA in relation to the matters that are subject of the U.S. DPA if HSBC or HSBC Bank USA breaches the terms of the U.S. DPA, and DANY may prosecute HSBC in relation to the matters which are the subject of the DANY DPA if HSBC violates the terms of the DANY DPA. See Note 28, "Litigation and Regulatory Matters," for additional discussion.

HSBC Bank USA also entered into a separate consent order with the OCC requiring it to correct the circumstances and conditions as noted in the OCC's then most recent report of examination, imposing certain restrictions on HSBC Bank USA directly or indirectly acquiring control of, or holding an interest in, any new financial subsidiary, or commencing a new activity in its existing financial subsidiary, unless it receives prior approval from the OCC. HSBC Bank USA also entered into a separate consent order with the OCC requiring it to adopt an enterprise-wide compliance program.

The settlement with the U.S. and U.K. government agencies does not preclude private litigation relating to, among other things, the HSBC Group's compliance with applicable AML/BSA and sanctions laws or other regulatory or law enforcement action for AML/BSA or sanctions matters not covered by the various agreements.

Financial Regulatory Reform On July 21, 2010, the Dodd-Frank Act was signed into law. This legislation is a sweeping overhaul of the U.S. financial regulatory system. The new law is comprehensive and includes many provisions specifically relevant to our businesses and the businesses of our affiliates as follows.

Oversight In order to promote financial stability in the U.S. financial system, the Dodd-Frank Act created a framework for the enhanced prudential regulation and supervision of financial institutions that are deemed to be "systemically important" to the U.S. financial system, including U.S. bank holding companies with consolidated assets of $50 billion or more, such as HSBC North America. This framework is subject to the general oversight of the Financial Stability Oversight Council ("FSOC"), an interagency coordinating body that has authority, among other things, to recommend stricter regulatory and supervisory requirements for large bank holding companies and to designate bank and non-bank financial companies that pose a risk to financial stability. In turn, the FRB has authority, in consultation with the FSOC, to take certain actions, including to preclude mergers, restrict financial products offered, restrict, terminate or impose conditions on activities or require the sale or transfer of assets against any systemically important bank holding company with assets greater than $50 billion, such as HSBC North America, that is found to pose a grave threat to financial stability. The FSOC is supported by the Office of Financial Research ("OFR"), which will impose data reporting requirements on financial institutions. The cost of operating both the FSOC and OFR is paid for through an assessment on large bank holding companies, which began in July 2012.

Increased Prudential Standards In addition to the increased capital, liquidity, stress testing and other enhanced prudential and structural requirements described above, large international banks, such as HSBC (generally with regard to its U.S. operations), and large insured depository institutions, such as HSBC Bank USA, are required to file resolution plans identifying material subsidiaries and core business lines and describing what strategy would be followed to resolve the institution in the event of significant financial distress, including identifying how insured bank subsidiaries would be adequately protected from risk created by other affiliates. The failure to cure deficiencies in a resolution plan would enable the FRB and the FDIC, acting jointly, to impose more stringent capital, leverage or liquidity requirements, or restrictions on growth, activities or operations and, if such failure persists, require the divestiture of assets or operations. Dodd-Frank also requires that single counterparty lending limits applicable to HSBC Bank USA take into account credit exposure arising from derivative transactions, securities borrowing and lending transactions and repurchase and reverse repurchase agreements with counterparties. There are also provisions in Dodd-Frank that relate to governance of executive compensation, including disclosures evidencing the relationship between compensation and performance and a requirement that some executive incentive compensation is forfeitable in the event of an accounting restatement.

Affiliate Transaction Limits In relation to requirements for bank transactions with affiliates, beginning in July 2012 the current quantitative and qualitative limits on bank credit transactions with affiliates also include credit exposure related to repurchase agreements, derivatives and securities lending/borrowing transactions. This provision may limit the use of intercompany transactions between us and our affiliates, which may impact our current funding, hedging and overall internal risk management strategies.

Derivatives Regulation The Dodd-Frank Act has numerous provisions addressing derivatives. Title VII of Dodd-Frank imposes a comprehensive regulation of over-the-counter ("OTC") derivatives markets, including credit default, equity, foreign exchanges and interest rate swaps. Many of the most significant provisions have been recently implemented or are expected to come into effect during 2014. We also remain subject to the SEC's Security Based Swaps and Swap dealer rules and regulations, which are still in proposed form. In addition, certain derivatives dealers, including HSBC Bank USA, have registered with the Commodity Futures Trading Commission and become members of the National Futures Association. As a registered swap dealer, HSBC Bank USA is subject to an extensive array of corporate governance requirements, business conduct standards, capital and margin requirements (once effective), reporting requirements, mandatory clearing of certain swaps and other regulatory standards affecting its derivatives business. These requirements will significantly increase the costs associated with HSBC Bank USA's derivatives business. Furthermore, Section 716 of Dodd-Frank limits an FDIC-insured banks' overall OTC derivatives activities, including the activities of HSBC Bank USA. In June 2013, HSBC Bank USA received a two-year transition period to implement the restrictions of Section 716. At the end of such two-year transition period, in July 2015, HSBC Bank USA would be expected to curtail future derivative activities in equities, non-precious metal commodities and uncleared credit default swaps, unless the transition period were further extended.

The "Volcker Rule" On December 10, 2013, U.S. regulators finalized the so-called "Volcker Rule", which limits the ability of banking entities to sponsor or invest in certain private equity or hedge funds or to engage in certain types of proprietary trading in the U.S. The final Volcker Rule extended the end of the rule's conformance period until July 21, 2015, (with the possibility of two one-year extensions under certain circumstances), by which time financial institutions subject to the rule must bring their activities and investments into compliance.

The final Volcker Rule restricts proprietary trading as principal within a "trading account" in "financial instruments", each as defined in the final Volcker Rule, subject to various exemptions. Certain exemptions apply to the types of financial instruments that are covered by the final Volcker Rule. Generally, securities, derivatives, futures and options on all such instruments are covered, while loans, currencies and commodities are not covered. In addition, there are exemptions for activities, among others, that constitute market making, underwriting, hedging, and trading of U.S. government, agency or municipal securities and certain foreign sovereign debt securities. Each of these exemptions, however, is generally subject to its own set of compliance requirements and conditions. Several activities engaged in by HSBC USA will be subject to restrictions designed to ensure compliance with the final Volcker Rule and subject to the development of extensive compliance policies and procedures.

The final Volcker Rule also restricts acquiring or retaining an ownership interest in, or sponsoring or having certain relationships with, "covered funds". Covered funds generally include entities that would be an investment company under the Investment Company Act of 1940 (the "1940 Act"), but for the exemptions provided in Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, as well as certain commodity pools. The final Volcker Rule includes exemptions, among others, for certain limited investments in conjunction with asset management activities for customers, for loan securitizations, for asset-backed commercial paper conduits, and for underwriting and market making in covered funds. As with the proprietary trading restrictions, the exemptions are generally subject to a variety of compliance requirements and conditions. Any limited, yet permissible, investments in covered funds are required to be deducted from the Tier 1 capital of banking entities.

The final Volcker Rule also requires an extensive array of compliance policies, procedures and quantitative metrics reporting to ensure that activities remain within one or more of the exemptions described in the final Volcker Rule. During the conformance period, we will analyze the final rule, assess how it will affect our businesses and devise an appropriate compliance strategy.

FDIC Assessment The Dodd-Frank Act also provided for a reapportionment in FDIC insurance assessments on FDIC-insured banks, such as HSBC Bank USA. The minimum reserve ratio for the Deposit Insurance Fund has been increased from 1.15 to 1.35, with the target of 1.35 to be reached by 2020 and with the incremental cost charged to banks with more than $10 billion in assets. The assessment methodology was revised to a methodology based on assets rather than insured deposits beginning with second quarter 2011 assessment and pricing is now based on a FDIC methodology to measure the risk of the banks. This shift has had financial implications for all FDIC-insured banks, including HSBC Bank USA. In addition, the FDIC has set the designated reserve ratio at two percent as a long-term goal.

Consumer Regulation The Dodd-Frank Act created the CFPB, which has a broad range of powers to administer and enforce a new federal regulatory framework of consumer financial regulation, including the authority to regulate credit, savings, payment and other consumer financial products and services and providers of those products and services. The CFPB has the authority to issue regulations to prevent unfair, deceptive or abusive practices in connection with consumer financial products or services and to ensure features of any consumer financial products or services are fully, accurately and effectively disclosed to consumers. The CFPB also has authority to examine large banks, including HSBC Bank USA, and their affiliates for compliance with those regulations.

With respect to certain state laws governing the provision of consumer financial products by national banks such as HSBC Bank USA, the Dodd-Frank Act codified the current judicial standard of federal preemption with respect to national banks, but added procedural steps to be followed by the OCC when considering preemption determinations after July 21, 2011. Furthermore, the Dodd-Frank Act removed the ability of subsidiaries or agents of a national bank to claim federal preemption of consumer financial laws after July 21, 2011, although the legislation did not purport to affect existing contracts. These limitations on federal preemption may elevate our costs of compliance, while increasing litigation expenses as a result of potential state Attorney General or plaintiff challenges and the risk of courts not giving deference to the OCC, as well as increasing complexity due to the lack of uniformity in state law. At this time, we are unable to determine the extent to which the limitations on federal preemption will impact our businesses and those of our competitors.

The Dodd-Frank Act contains many other consumer-related provisions, including provisions addressing mortgage reform. In the area of mortgage origination, there is a requirement to apply a net tangible benefit test for all refinancing transactions. There are also numerous revised servicing requirements for mortgage loans.

Debit Interchange The Dodd-Frank Act authorized the FRB to implement standards for assessing debit interchange fees that are reasonable and proportionate to the actual processing costs of the issuer. The FRB promulgated regulations effective October 1, 2011 that limit interchange fees in most cases to no more than the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction, plus the ability to charge an additional 1 cent per transaction if the issuer meets certain fraud-prevention standards. As a result of these limits, our revenues were reduced by approximately $23 million and $11 million in 2012 and 2011, respectively, compared to what they otherwise would have been without such limits. In July 2013, the U.S. District Court for the District of Columbia overturned the FRB's regulations on debit interchange and required that the FRB recraft the rule with a lower maximum fee. The FRB filed an appeal of the decision in October 2013 and oral arguments were heard on January 17, 2014. The outcome of the appeal, or any future revisions to the rules, are not currently known. The FRB limits from October 2011 remain in effect during the appeal process.

The Dodd-Frank Act will have a significant impact on the operations of many financial institutions in the United States, including HSBC USA, HSBC Bank USA and our affiliates. As the legislation calls for extensive regulations to be promulgated to interpret and implement the legislation, we are unable to determine precisely the impact that Dodd-Frank and related regulations will have on financial results at this time.

Competition The GLB Act eliminated many of the regulatory restrictions on providing financial services in the United States. The GLB Act allows for financial institutions and other providers of financial products to enter into combinations that permit a single organization to offer a complete line of financial products and services. In addition, the final Volcker Rule will place new restrictions on bank-affiliated financial companies' trading activities and private equity and hedge fund investments, which may provide a competitive advantage to financial companies that do not have U.S. banking operations. Therefore, we face intense competition in all of the markets we serve, competing with banks and other financial institutions such as insurance companies, commercial finance providers, brokerage firms and investment companies. The financial services industry has experienced consolidation in recent years as financial institutions involved in a broad range of products and services have merged, been acquired or dispersed. This trend is expected to continue and has resulted in, among other things, greater concentrations of deposits and other resources. Competition is expected to continue to be intense given the multiple banks and other financial services companies which offer products and services in our markets, noting that we compete with different banks and financial services companies in different markets, given our internationally focused strategy.

Corporate Governance and Controls

We maintain a website at www.us.hsbc.com on which we make available, as soon as reasonably practicable after filing with or furnishing to the SEC, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports. We have included our website address only as an inactive textual reference and do not intend it to be an active link to our website. Our website also contains our Corporate Governance Standards and committee charters for the Audit Committee, the Compliance Committee, the Risk Committee and the Fiduciary Committee of our Board of Directors. We have a Statement of Business Principles and Code of Ethics that expresses the principles upon which we operate our businesses. Integrity is the foundation of all our business endeavors and is the result of continued dedication and commitment to the highest ethical standards in our relationships with each other, with other organizations and individuals who are our customers. Our Statement of Business Principles and Code of Ethics can be found on our corporate website. We also have a Code of Ethics for Senior Financial Officers that applies to our finance and accounting professionals that supplements the Statement of Business Principles. That Code of Ethics is incorporated by reference in Exhibit 14 to this Annual Report on Form 10-K. Printed copies of this information can be requested at no charge. Requests should be made to HSBC USA Inc., 26525 North Riverwoods Boulevard, Suite 100, Mettawa, Illinois 60045, Attention: Corporate Secretary.

Certifications In addition to certifications from our Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 (attached to this report on Form 10-K as Exhibits 31 and 32), we also file a written affirmation of an authorized officer with the New York Stock Exchange (the "NYSE") certifying that such officer is not aware of any violation by HSBC USA of the applicable NYSE corporate governance listing standards in effect as of February 24, 2014.

Item 1A. Risk Factors

The following discussion provides a description of some of the important risk factors that could affect our actual results and could cause our results to differ materially from those expressed in public statements or documents. However, other factors besides those discussed below or elsewhere in other of our reports filed with or furnished to the SEC could affect our business or results. Therefore, the risk factors below should not be considered a complete list of all potential risks that we may face.

The current uncertain market and economic conditions may continue to affect our business, results of operations and financial condition. Our business and earnings are affected by general business, economic and market conditions in the United States and abroad. Given our concentration of business activities in the United States, we are particularly exposed to any additional turmoil in the economy, housing downturns, high unemployment, tighter credit conditions and reduced economic growth. While the U.S. economy continued to slowly improve during 2013, growth has remained muted. We also have a significant number of customers in Latin America, which continues to experience inflation and other economic challenges. General business, economic and market conditions that could continue to affect us include:

• pressure on consumer confidence and consumer spending from other economic and market conditions;

• slow economic growth and the pace and magnitude of the recovery;

• fiscal policy;

• unemployment levels;

• volatility in energy prices;

• wage income levels and declines in wealth;

• market value of residential and commercial real estate throughout the United States;

• inflation;

• monetary supply and monetary policy, including an exit from quantitative easing;

• fluctuations in both debt and equity capital markets in which we fund our operations;

• unexpected geopolitical events;

• fluctuations in the value of the U.S. dollar;

• short-term and long-term interest rates;

• availability of liquidity;

• tight consumer credit conditions;

• higher bankruptcy filings; and

• new laws, regulations or regulatory and law enforcement initiatives.

In a challenging economic environment, more of our customers are likely to, or have in fact, become delinquent on their loans or other obligations as compared with historical periods as many of our customers experience reductions in cash flow available to service their debt. These delinquencies, in turn, have adversely affected our earnings. The problems in the housing markets in the United States in the last six years have been exacerbated by continued high unemployment rates. If businesses remain cautious to hire, additional losses could be significant in all types of our consumer loans, including credit cards, due to decreased consumer income. While the U.S. economy continued to slowly improve in 2013, gross domestic product continued at a level well below the economy's potential growth rate. Concerns about the future of the U.S. economy, including the pace and magnitude of recovery from the recent economic recession, consumer confidence, fiscal policy, volatility in energy prices, credit market volatility including the ability to resolve various global financial issues and trends in corporate earnings will continue to influence the U.S. economic recovery and the capital markets. In the event economic conditions stop improving or become depressed and lead to a recession, there would be a significant negative impact on delinquencies, charge-offs and losses in all loan portfolios with a corresponding impact on our results of operations. While the recovery may be positive in the United States, it can have a simultaneous negative effect on currencies and stock markets in emerging economies such as those in Latin America, which could have a negative impact on our loan portfolio for our Latin American clients, with a corresponding impact on our results of operations.

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

Mortgage lenders have substantially tightened lending standards since 2007. Furthermore, our loan portfolio was impacted by the declining home values and erosion of homeowner's equity and the resulting difficulty some borrowers had refinancing their mortgages, particularly in cases where government programs for high loan to value refinancing were not available. This, in turn, impacted both credit performance and run-off rates and has resulted in elevated delinquency rates for real estate secured loans in our portfolio. Additionally, depressed property values in many markets have resulted in higher loss severities on homes that are foreclosed and remarketed.

A deterioration in business and economic conditions, which may erode consumer and investor confidence levels or increased volatility of financial markets, also could adversely affect financial results for our fee-based businesses, including our financial planning products and services.

Federal, state and other similar international measures to regulate the financial industry may significantly impact our operations. We operate in a highly regulated environment. Changes in federal, state and local laws and regulations affecting banking, derivatives, capital, liquidity, consumer credit, bankruptcy, privacy, consumer protection or other matters, including changes in tax rates, could materially impact our operations and performance.

Attempts by local, state and national regulatory agencies to address perceived problems with the mortgage lending and credit card industries and, more recently, to address additional perceived problems in the financial services industry generally through broad or targeted legislative or regulatory initiatives aimed at lenders' operations in consumer lending markets, could affect us in substantial and unpredictable ways, including limiting the types of products we can offer, how these products may be originated, the fees and charges that may be applied to accounts and how accounts may be collected or security interests enforced. Any one or more of these effects could negatively impact our results. There is also significant focus on loss mitigation and foreclosure activity for real estate loans. We cannot fully anticipate the response by national regulatory agencies, state Attorneys General, or certain legislators, or if significant changes to our operations and practices will be required as a result.

The Dodd-Frank Act established the CFPB which has broad authority to regulate providers of credit, payment and other consumer financial products and services. In addition, provisions of the Dodd-Frank Act may also narrow the scope of federal preemption of state consumer laws and expand the authority of state Attorneys General to bring actions to enforce federal consumer protection legislation. As a result of the Dodd-Frank Act's potential expansion of the authority of state Attorneys General to bring actions to enforce federal consumer protection legislation, we could potentially be subject to additional state lawsuits and enforcement actions, thereby further increasing our legal and compliance costs. Although we are unable to predict what specific measures the CFPB may take in applying its regulatory mandate, any new regulatory requirements or changes to existing requirements that the CFPB may promulgate could require changes in our consumer businesses, result in increased compliance costs and impair the profitability of such businesses.

Under the Dodd-Frank Act, certain of our affiliates and subsidiaries, including HSBC Bank USA, have registered as swap dealers and are now subject to extensive oversight by the CFTC. Regulation of swap dealers by the CFTC imposes numerous corporate governance, business conduct, capital, margin, reporting, clearing, execution and other regulatory requirements on HSBC Bank USA which may adversely affect our derivatives business and make us less competitive or make certain derivative products less profitable to undertake. Although many significant regulations applicable to swap dealers are already in effect, we are unable at this time to determine the full impact of these requirements.

The Dodd Frank Act also required the U.S regulatory agencies to adopt rules to implement the Volcker Rule, which is intended in part to prohibit institutions such as HSBC USA from engaging in proprietary trading or from acquiring or retaining an ownership interest in, or sponsoring or having certain relationships with, a hedge fund or private equity fund subject to certain exemptions. A final rule implementing the Volcker Rule was finalized on December 10, 2013 although the rule's conformance period has been extended to July 2015. The final rule will require extensive regulatory interpretation and supervisory oversight, including coordination of this interpretive guidance and oversight among the U.S. regulatory agencies implementing the rules. While the final Volcker Rule contains exceptions for market-making, underwriting, risk-mitigating hedging, and certain transactions on behalf of customers and activities in certain asset classes, the parameters of these exceptions and requirements are unclear. Trading activities engaged in by HSBC USA will be subject to restrictions designed to ensure compliance with the final Volcker Rule and subject to the development of extensive compliance policies and procedures. The final Volcker Rule also restricts acquiring or retaining an ownership interest in, or sponsoring or having certain relationships with, "covered funds", which generally include entities that would be an investment company under the Investment Company Act of 1940, but for the exemptions provided in Section 3(c)(1) or Section 3(c)(7) of such Act, as well as certain commodity pools. The final Volcker Rule includes exemptions, among others, for certain limited investments in conjunction with asset management activities for customers, for loan securitizations, for asset-backed commercial paper conduits, and for underwriting and market making in covered funds. As with the proprietary trading restrictions, the exemptions are generally subject to a variety of compliance requirements and conditions. Any limited, yet permissible, investments in covered funds are required to be deducted from the Tier 1 capital of banking entities. The final Volcker Rule also requires an extensive array of compliance policies, procedures and quantitative metrics reporting to ensure that activities remain within one or more of the exemptions described in the final Volcker Rule. Compliance with the Volcker Rule could increase our operational and compliance costs, reduce our trading revenues, and adversely affect our results of operations.

The FRB has also issued proposed rules to implement enhanced supervisory and prudential requirements and the early remediation requirements established under the Dodd-Frank Act. The enhanced standards include risk-based capital and leverage requirements, liquidity standards, requirements for overall risk management, single-counterparty credit limits, and stress test requirements. The FRB has issued final rules requiring covered entities to undergo annual stress tests conducted by the FRB and conduct their own "company-run" stress tests twice a year in conjunction with the CCAR program. Final regulations addressing the remaining items have not yet been adopted, and are likely to impose additional operational and compliance costs on us once they are finalized.

Our indirect parent, HSBC North America, is subject to assessment by the FRB as part of the CCAR program. CCAR is an annual exercise by the FRB to ensure that institutions have forward-looking capital planning processes that account for their risks and sufficient capital to continue operations throughout times of economic and financial stress. We cannot be certain that the FRB will have no objections to our future capital plans submitted through the CCAR program. If we do not pass the CCAR review it could adversely affect our ability to make distributions, including dividends on our preferred stock and trust preferred securities, or to enter into acquisitions.

HSBC Bank USA is also required under the Dodd Frank Act to undergo the "DFAST," an annual company-run stress test that runs concurrently with, and is submitted at the same time as, CCAR. The DFAST is based on the OCC's stress scenario assumptions that are appropriate for the economic conditions assumed in each scenario. HSBC Bank USA is required to publish the results of the DFAST. If our stress testing projections differ significantly from our peers or the FRB objects to HSBC North America's capital plan, this could have a material adverse effect on our reputation since CCAR and DFAST results are made public. See also "Our reputation has a direct impact on our financial results and ongoing operations" below.

The total impact of the Dodd-Frank Act cannot be fully assessed without taking into consideration how non-U.S. policymakers and regulators will respond to the Dodd-Frank Act and the implementing regulations under the legislation, and how the cumulative effects of both U.S. and non-U.S. laws and regulations will affect our businesses and operations. Additional legislative or regulatory actions in the U.S., the European Union ("EU") or in other countries could result in a significant loss of revenue, limit our ability to pursue business opportunities in which we might otherwise consider engaging, affect the value of assets that we hold, require us to increase our prices and therefore reduce demand for our products, impose additional costs on us, or otherwise adversely affect our businesses. Accordingly, any such new or additional legislation or regulations could have an adverse effect on our business, results of operations or financial condition. Regulators in the EU and in the United Kingdom ("U.K.") are in the midst of proposing far-reaching programs of financial regulatory reform. These proposals include enhanced capital, leverage, and liquidity requirements, changes in compensation practices (including tax levies), separation of retail and wholesale banking, the recovery and resolution of EU financial institutions, amendments to the Markets in Financial Instruments Directive and the Market Abuse Directive, and measures to address systemic risk. Furthermore, certain large global systemically important banks ("G-SIBs"), including HSBC, will be subject to capital surcharges and other enhanced prudential requirements. While the Financial Stability Board has identified HSBC as one of the two G-SIBs that would be subject to a 2.5 percent surcharge, the G-SIB surcharge has not yet been formally implemented in the U.S. or the U.K.

The implementation of regulations and rules promulgated by these bodies could result in additional costs or limit or restrict the way HSBC conducts its business in the EU and, in particular, in the U.K. Furthermore, the potentially far-reaching effects of future changes in laws, rules or regulations, or in their interpretation or enforcement as a result of EU or U.K. legislation and regulation are difficult to predict and could adversely affect HSBC USA's operations.

The transition to the new requirements under Basel III will continue to put significant pressure on regulatory capital and liquidity. HSBC North America is required to meet consolidated regulatory capital and liquidity requirements, including new or modified regulations and related regulatory guidance, in accordance with current regulatory timelines. In December 2010, the Basel Committee issued "Basel III: A global regulatory framework for more resilient banks and banking systems" (the "Basel III Capital Framework") and "International framework for liquidity risk measurement, standards and monitoring" (the "Basel III Liquidity Framework") (together, Basel III). In October 2013, the U.S. banking regulators published a final rule in the Federal Register implementing the Basel III Capital Framework and the Dodd-Frank Act's phase-out of trust preferred securities from Tier 1 capital, which we refer to as the "Basel III Final Rule". The Basel III Final Rule establishes new minimum capital and buffer requirements to be phased in by 2019 and also requires the deduction of certain assets from capital, within prescribed limitations, and the inclusion of accumulated other comprehensive income or "OCI" in capital. The Basel III Final Rule also increases capital requirements for counterparty credit risk. As of January 1, 2014, HSBC North America and HSBC Bank USA are required to begin complying with the effective portions of the Basel III Final Rule. The Basel III Final Rule will materially increase our regulatory capital requirements over the next several years.

In addition to the Basel III Final Rule, there continue to be numerous proposals or potential proposals that could significantly impact the regulatory capital standards and requirements applicable to financial institutions such as HSBC North America, as well as our ability to meet these requirements. The Basel Committee has finalized a framework for domestic systemically important banks ("D-SIBs") which is intended to supplement the G-SIB framework by imposing a capital buffer on certain banks that have an important impact on their domestic economies. While, the Basel III Final Rule did not address the adoption of a surcharge on D-SIBs, federal banking regulators noted that they are considering a capital surcharge for institutions with $50 billion or more in total consolidated assets, or some subset of such institutions, consistent with the Basel Committee's surcharge proposals. In addition, the Basel Committee has proposed revisions to the Basel III Leverage ratio (known in the U.S. as the "supplementary leverage ratio" or "SLR") that, if adopted as proposed, would substantially increase the denominator of the Basel III Leverage ratio, primarily with regard to exposures for derivatives and securities financing transactions ("SFTs"), and could further increase the capital requirements applicable to HSBC North America and HSBC Bank USA. The FRB has also indicated it is considering proposals relating to the use of short-term wholesale funding by financial institutions, particularly SFTs, which could include a capital surcharge based on the institution's reliance on such funding, and/or increased capital requirements applicable to SFT matched books. Accordingly, there continues to be significant uncertainty regarding significant portions of the capital regime that will apply to HSBC North America and, as a result, the ultimate impact of these capital requirements will have on our long term capital planning and the results of our operations.

Further increases in regulatory capital may also be required in response to other U.S. supervisory requirements relating to capital. The exact amount, however, will depend upon our prevailing risk profile and that of our North America affiliates under various stress scenarios. Participation by HSBC North America in the Federal Reserve's CCAR stress test process will also require that HSBC North America maintain sufficient capital to meet minimum regulatory ratios including a 5 percent Tier 1 common ratio (as defined by the Federal Reserve) over a nine-quarter forward-looking planning horizon, which could also require increased capital to withstand the application of the stress scenarios over the planning horizon. HSBC Bank USA is also required to participate in the OCC's DFAST, that runs concurrently with, and is submitted at the same time as, the CCAR. These stress testing requirements are likely to influence our regulatory capital and liquidity planning process, and may impose additional operational and compliance costs on us.

HSBC North America is also in the process of evaluating the Basel III Liquidity Framework and the U.S. proposed rules for liquidity risk management. The Basel Committee has proposed two minimum liquidity risk measures. The liquidity coverage ratio ("LCR") measures the amount of a financial institution's unencumbered, high-quality, liquid assets relative to the net cash outflows the institution could encounter under a significant 30-day stress scenario. The net stable funding ratio ("NSFR") measures the amount of longer-term, stable sources of funding employed by a financial institution relative to the liquidity profiles of the assets funded and the potential for contingent calls on funding liquidity arising from off-balance sheet commitments and obligations over a one-year period. The Federal Reserve and the OCC have proposed rules to implement the LCR with stricter requirements and a faster implementation timeline than the Basel Committee has established. The U.S. regulators have not yet issued a proposal to implement the NSFR for U.S. banking organizations. HSBC USA may need to increase its liquidity profile to support HSBC North America's compliance with these future rules.

Preparation for Basel III has influenced and is likely to continue to influence our regulatory capital and liquidity planning process, and is expected to impose additional operational and compliance costs on us. We are unable at this time to determine the extent of changes HSBC USA will need to make to its liquidity or capital position, if any, and what effect, if any, such changes will have on our results of operations or financial condition. New regulatory capital and liquidity requirements may limit or otherwise restrict how we utilize our capital and may require us to increase our capital or liquidity. Any requirement that we increase our regulatory capital, regulatory capital ratios or liquidity could require us to liquidate assets or otherwise change our business and/or investment plans, which may negatively affect our financial results.

Regulatory investigations, fines, sanctions and requirements relating to conduct of business and financial crime could negatively affect 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.

In December 2012, HSBC, HSBC North America and HSBC Bank USA entered into agreements to achieve a resolution with U.S. and U.K. government agencies regarding past inadequate compliance with AML/BSA and sanctions laws, including the previously reported investigations by the U.S. Department of Justice, the FRB, the OCC and FinCEN in connection with AML/BSA compliance, including cross-border transactions involving our cash handling business in Mexico and banknotes business in the U.S., and historical transactions involving parties subject to OFAC economic sanctions. As part of the resolution, HSBC and HSBC Bank USA entered into the five-year U.S. DPA with the U.S. Department of Justice, the United States Attorney's Office for the Eastern District of New York, and the United States Attorney's Office for the Northern District of West Virginia, and HSBC entered into the two-year DANY DPA with the New York County District Attorney, and HSBC consented to a cease and desist order and a monetary penalty order with the FRB. In addition, HSBC Bank USA entered into a monetary penalty consent order with FinCEN and a separate monetary penalty order with the OCC. HSBC also entered into an undertaking with the U.K. Financial Services Authority, now a FCA Direction, to comply with certain forward-looking obligations with respect to AML and sanctions requirements over a five-year term.

HSBC Bank USA, as dollar clearer for all U.S. dollar transactions for HSBC globally, manages a significant AML risk in the global correspondent banking area because of the breadth and scale of that area, especially as it relates to transactions involving affiliates and global correspondent banks in high risk AML jurisdictions. A significant AML violation in this area or the utilization of the global affiliate and correspondent banking network by terrorists or other perpetrators of financial crimes could have materially adverse consequences under the US DPA, the DANY DPA or our other consent agreements. The remediation of our AML risk is a key priority, however the design and execution of remediation plants is complex, requiring major investment in people, systems and other infrastructure. This complexity creates risk that the timeline for execution of some of our remediation activities could be delayed, which could impact our ability to satisfy our regulators on our progress regarding meeting certain of our obligations under the US DPA, the DANY DPA and our other consent agreements.

In the event of the prosecution of criminal charges, there could be significant collateral consequences to HSBC and its affiliates, including potential restrictions on our ability to operate in the U.S., loss of business or licenses, 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. In addition, the settlement with regulators does not preclude private litigation relating to, among other things, HSBC's compliance with applicable anti-money laundering, BSA and sanctions laws, which, if determined adversely, may result in judgments, settlements or other results that could materially adversely affect our business, financial condition or results of operations, or cause serious reputational harm.

Failure to comply with certain regulatory requirements would have an adverse material effect on our results and operations. As reflected in the GLBA Agreement entered into with the OCC on December 11, 2012, the OCC has determined that HSBC Bank USA is not in compliance with the requirements set forth in 12 U.S.C. § 24a(a)(2)(c) and 12 C.F.R. § 5.39(g)(1), which provide that a national bank and each depository institution affiliate of the national bank must be both well capitalized and well managed in order to own or control a financial subsidiary. As a result, HSBC USA and its parent bank holding companies no longer meet the qualification requirements for financial holding company status and may not engage in any new types of financial activities without the prior approval of the FRB. In addition, HSBC Bank USA may not directly or indirectly acquire control of, or hold an interest in, any new financial subsidiary, nor commence a new activity in its existing financial subsidiary, unless it receives prior approval from the OCC. If all of our affiliate depositary institutions are not in compliance with these requirements within the time periods specified in the GLBA Agreement, as they may be extended, HSBC USA could be required either to divest HSBC Bank USA or to divest or terminate any financial activities conducted in reliance on the GLB Act. Similar consequences could result for subsidiaries of HSBC Bank USA that engage in financial activities in reliance on expanded powers provided for in the GLB Act. Any such divestiture or termination of activities would have an adverse material effect on the consolidated results and operation of HSBC USA.

We may incur additional costs and expenses in ensuring that we satisfy requirements relating to our mortgage foreclosure processes and the industry-wide delay in processing foreclosures may have a significant impact upon loss severity. As previously reported, HSBC Bank USA entered into the OCC Servicing Consent Order with the OCC and our affiliate, HSBC Finance Corporation, and our common indirect parent, HSBC North America entered into a similar consent order with the FRB 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 foreclosure practice deficiencies described in the consent order. We continue to work with our regulators to align our processes with the requirements of the Servicing Consent Orders and implement operational changes as required. The Servicing Consent Orders required an independent review of foreclosures pending or completed between January 2009 and December 2010 to determine if any borrower was financially injured as a result of an error in the foreclosure process. We refer to this as the Independent Foreclosure Review. On February 28, 2013, HSBC Bank USA entered into an agreement with the OCC, and HSBC Finance Corporation and HSBC North America entered into an agreement with the FRB, which we refer to as the "IFR Settlement Agreements, pursuant to which the Independent Foreclosure Review ceased and HSBC North America made a cash payment of $96 million into a fund used to make payments to borrowers that were in active foreclosure during 2009 and 2010 and, in addition, is providing other assistance (e.g., loan modifications) to help eligible borrowers. As a result, in 2012, we recorded expenses of $19 million which reflects the portion of HSBC North America's total expense of $104 million that we believe is allocable to us. As of December 31, 2013, Rust Consulting, Inc., the paying agent, has issued almost all checks to eligible borrowers. See Note 28, "Litigation and Regulatory Matters," in the accompanying consolidated financial statements for further discussion.

While we believe compliance related costs have permanently increased to higher levels due to the remediation requirements of the Servicing Consent Orders, this settlement will positively impact compliance expenses in future periods as the significant resources working on the Independent Foreclosure Review are no longer required. In addition, 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 or 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. In addition, the settlement related to the Independent Foreclosure Review does not preclude future private litigation concerning these practices. Separate from the Servicing Consent Orders and the settlement related to the Independent Foreclosure Review discussed above, in February 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 Bank USA, together with our affiliate HSBC Finance, have had discussions with U.S. bank regulators and other governmental agencies regarding a potential resolution, although the timing of any settlement is not presently known. We recorded an accrual of $38 million in the fourth quarter of 2011 (which was reduced by $6 million in the second quarter of 2013) reflecting 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 relating to foreclosure and other mortgage services 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, these practices have in the past resulted in private litigation and such a settlement would not preclude private litigation concerning foreclosure and other mortgage servicing practices.

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. We have resumed processing suspended foreclosure activities in substantially all states and have now referred the majority of the backlog of loans for foreclosure. We have also begun initiating new foreclosure activities in substantially all states. The number of new real estate owned ("REO") properties added to inventory will continue to be impacted due to certain states having foreclosure timelines that have extended.

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.

Our reputation has a direct impact on our financial results and ongoing operations. Our ability to attract and retain customers and conduct business transactions with our counterparties could be adversely affected to the extent our reputation, or the reputation of affiliates operating under the HSBC brand, is damaged. Our failure to address, or to appear to fail to address, various issues that could give rise to reputational risk could cause harm to us and our business prospects. Reputational issues include, but are not limited to:

• negative news about us, HSBC or the financial services industry generally;

• appropriately addressing potential conflicts of interest;

• legal and regulatory requirements;

• ethical issues, including alleged deceptive or unfair lending or pricing practices;

• anti-money laundering and economic sanctions programs;

• privacy issues;

• fraud issues;

• data security issues related to our customers or employees;

• cybersecurity issues and cyber incidents, whether actual, threatened, or perceived;

• recordkeeping;

• sales and trading practices;

• customer service;

• the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our businesses;

• a downgrade of or negative watch warning on any of our credit ratings; and

• general company performance.

The proliferation of social media websites as well as the personal use of social media by our employees and others, including personal blogs and social network profiles, also may increase the risk that negative, inappropriate or unauthorized information may be posted or released publicly that could harm our reputation or have other negative consequences, including as a result of our employees interacting with our customers in an unauthorized manner in various social media outlets.

The failure to address, or the perception that we have failed to address any of these issues appropriately could make our customers unwilling to do business with us or give rise to increased regulatory action, which could adversely affect our results of operations.

Operational risks, such as systems disruptions or failures, data quality, breaches of security, cyberattacks, human error, the outsourcing of certain operations, changes in operational practices or inadequate controls may adversely impact our business and reputation. Operational risk is inherent in virtually all of our activities. While we have established and maintain an overall risk framework that is designed to balance strong corporate oversight with well-defined independent risk management, we continue to be subject to some degree of operational risk. For example, data quality is critical for our risk and compliance functions as well as for decision making and operational processes. Our businesses are dependent on our ability to process a large number of complex transactions, most of which involve, in some fashion, electronic devices or electronic networks. Lack of high quality data and effective reporting systems can impact all levels of management decision making, enterprise risk management, governance and our ability to meet our regulatory requirements. If any of our financial, accounting, or other data processing and other recordkeeping systems and management controls fail, are subject to cyberattack that compromises electronic devices or networks, or have other significant shortcomings, we could be materially adversely affected. Also, in order to react quickly to or meet newly-implemented regulatory requirements, we may need to change or enhance systems within very tight time frames, which would increase operational risk.

We may also be subject to disruptions of our operating systems infrastructure arising from events that are wholly or partially beyond our control, which may include:

• computer viruses, electrical, telecommunications, or other essential utility outages;

• cyberattacks, which are deliberate attempts to gain unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or impairing operational performance;

• natural disasters, such as hurricanes and earthquakes;

• events arising from local, regional or international politics, including terrorist acts;

• unforeseen problems encountered while implementing major new computer systems or upgrades to existing systems; or

• absence of operating systems personnel due to global pandemics or otherwise, which could have a significant effect on our business operations as well as on HSBC affiliates world-wide.

Such disruptions may give rise to losses in service to customers, an inability to collect our receivables in affected areas and other loss or liability to us.

We are similarly dependent on our employees. We could be materially adversely affected if an employee or employees, acting alone or in concert with non-affiliated third parties, causes a significant operational break-down or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems, including, without limitation, by means of cyberattack or denial-of-service attack. Third parties with which we do business could also be sources of operational risk to us, including risks relating to break-downs or failures of such parties' own systems or employees. Any of these occurrences could diminish our ability to operate one or more of our businesses, potential liability to clients, reputational damage and regulatory intervention, all of which could materially adversely affect us.

In recent years, internet and other cyberattacks, identity theft and fraudulent attempts to obtain personal and financial information from individuals and from companies that maintain such information pertaining to their customers have become more prevalent. Such acts can affect our business by:

• threatening the assets of our customers, potentially impacting our customer's ability to repay loan balances and negatively impacting their credit ratings;

• causing us to incur remediation and other costs related to liability for customer or third parties for losses, repairs to remedy systems flaws, or incentives to customers and business partners to maintain and rebuild business relationships after the attack;

• increasing our costs to respond to such threats and to enhance our processes and systems to ensure security of data; or

• damaging our reputation from public knowledge of intrusion into our systems and databases.

The threat from cyberattacks is a concern for our organization and failure to protect our operations from internet crime or cyberattacks may result in financial loss and loss of customer data or other sensitive information which could undermine our reputation and our ability to attract and keep customers. We face various cyber risks in line with other multinational organizations. During 2013, HSBC was subjected to several 'denial of service' attacks on our external facing websites across Europe, Latin America, Asia and North America. A denial of service attack is the attempt to intentionally paralyze a computer network by flooding it with data sent simultaneously from many individual computers. We experienced one significant global attack during which we were attacked by numerous individuals over a three hour period. Each attack lasted 15 to 20 minutes and used a different attack profile. During active attacks, customers were intermittently unable to access our websites. Although we received few complaints, there were three instances when access to HSBC websites was unavailable. While there was limited effect from all other attacks with services maintained and no data losses, there can be no assurance that future attacks will not result in service outages and the loss of data.

In addition, there is the risk that our operating system controls as well as business continuity and data security systems could prove to be inadequate. Any such failure could affect our operations and could have a material adverse effect on our results of operations by requiring us to expend significant resources to correct the defect, as well as by exposing us to litigation or losses not covered by insurance.

Changes to operational practices from time to time could materially positively or negatively impact our performance and results. Such changes may include:

• our raising the minimum payment or fees to be charged on credit card accounts;

• the decision to sell credit card receivables or our determining to acquire or sell residential mortgage loans and other loans;

• changes to our customer account management and risk management/collection policies and practices;

• our ability to attract and retain key employees;

• our increasing investment in technology, business infrastructure and specialized personnel;

• changes to our AML and sanctions policies and the related operations practices; or

• our outsourcing of various operations.

We depend on third-party suppliers, outsource providers and our affiliates for a variety of services. The OCC requires financial institutions to maintain a third party risk management program, which includes due diligence requirements for third parties as well as for our affiliates who may perform services for us. If our third party risk management and due diligence program is not sufficiently robust this could lead to regulatory intervention. If outsourcing services are interrupted or not performed or the performance is poor this could damage our reputation and our client relationships and adversely affect our operations and our business.

The Sarbanes-Oxley Act of 2002 requires our management to evaluate our disclosure controls and procedures and internal control over financial reporting. We are required to disclose, in our annual report on Form 10-K, the existence of any "material weaknesses" in our internal control. In a company as large and complex as ours, lapses or deficiencies in internal control over financial reporting may occur from time to time and we cannot assure you that we will not find one or more material weaknesses as of the end of any given year.

Continued economic uncertainty related to U.S. markets could negatively impact our business operations and our access to capital markets. Concerns regarding U.S. debt and budget matters have also caused uncertainty in financial markets. Although the U.S. debt limit was increased, a failure to raise the U.S. debt limit and the downgrading of U.S. debt ratings in the future could, in addition to causing economic and financial market disruptions, materially adversely affect our ability to access capital markets on favorable terms, as well as have other material adverse effects on the operations of our business and our financial results and condition. Additionally, macroeconomic or market concerns related to the lack of confidence in the U.S. credit and debt ratings may prompt outflows from our funds or accounts. The subsequent deterioration of consumer confidence may diminish the demand for the products and services of our consumer business, or increase the cost to provide such products and services.

Federal Reserve Board policies can significantly affect business and economic conditions and our financial results and condition. The FRB regulates the supply of money and credit in the United States. Its policies determine in large part our cost of funds for lending and investing and the return we earn on those loans and investments, both of which affect our net interest margin. They also can materially affect the value of financial instruments we hold, such as debt securities and mortgage servicing rights ("MSRs"). Its policies also can affect our borrowers, potentially increasing the risk that they may fail to repay their loans. Expectations that the scale of government repurchase schemes and quantitative easing measures may be reduced have resulted in more volatile market conditions. Changes in FRB policies are beyond our control and can be hard to predict.

Our inability to meet funding requirements due to deposit attrition or credit ratings could impact operations. Our primary source of funding is deposits, augmented by issuance of commercial paper and term debt. Adequate liquidity is critical to our ability to operate our businesses. Despite the apparent improvements in overall market liquidity and our liquidity position, future conditions that could negatively affect our liquidity include:

• an inability to attract or retain deposits;

• diminished access to capital markets;

• an increased interest rate environment for our commercial paper, deposits or term debt;

• unforeseen cash or capital requirements;

• an inability to sell assets; and

• an inability to obtain expected funding from HSBC subsidiaries and clients.

These conditions could be caused by a number of factors, including internal and external factors, such as, among others:

• financial and credit market disruption;

• volatility or lack of market or customer confidence in financial markets;

• lack of market or customer confidence in HSBC or negative news about us or the financial services industry generally; and

• other conditions and factors over which we have little or no control including economic conditions in the U.S. and abroad and concerns over potential government defaults and related policy initiatives, the potential failure of the U.S. to raise the debt limit and the ongoing European debt crisis.

HSBC has provided capital support in the past and has indicated its commitment and capacity to fund the needs of the business in the future.

Our credit ratings are an important part of maintaining our liquidity. Any downgrade in our credit ratings could potentially increase our borrowing costs, impact our ability to issue commercial paper and, depending on the severity of the downgrade, substantially limit our access to capital markets, require us to make cash payments or post collateral and permit termination by counterparties of certain significant contracts. Downgrades in our credit ratings also may trigger additional collateral or funding obligations which could negatively affect our liquidity, including as a result of credit-related contingent features in certain of our derivative contracts. On February 6, 2014, Standard and Poor's published a request for comment regarding proposed revisions to their treatment of Bank and Prudentially Regulated Finance Company Hybrid Capital Instruments. The adoption of any such revisions may unfavorably impact the ratings of our Preferred Stock, Trust Preferred securities and Subordinated Debt.

Our "cross-selling" efforts to increase the number of products our customers buy from us and offer them all of the financial products that fulfill their needs is a key part of our growth strategy, and our failure to execute this strategy effectively could have a material adverse effect on our revenue growth and financial results. Selling more products to our customers - "cross-selling" - is very important to our business model and key to our ability to grow revenue and earnings especially during the current environment of slow economic growth and regulatory reform initiatives. Key among these cross-sell opportunities is the collaboration between CMB and GB&M, which is an area where many of our competitors also focus. In RBWM many of our competitors also focus on cross-selling, especially in retail banking and mortgage lending. In both instances, this can limit our ability to sell more products to our customers or influence us to sell our products at lower prices, reducing our net interest income and revenue from our fee-based products. It could also affect our ability to keep existing customers. New technologies could require us to spend more to modify or adapt our products to attract and retain customers. Our cross-sell strategy also is dependent on earning more business from our HSBC customers, and increasing our cross-sell ratio - or the average number of products sold to existing customers - may become more challenging.

Changes in interest rates could reduce the value of our mortgage servicing rights and result in a significant reduction in earnings. As a residential mortgage servicer in the U.S., we have a portfolio of MSRs, which is in run-off. An MSR is the right to service a mortgage loan - collect principal, interest and escrow amounts - for a fee, which prior to the conversion of our mortgage processing and servicing operations to PHH Mortgage, we retained when we sold originated mortgage loans. Beginning with May 2013 applications, we now sell our agency eligible mortgage originations to PHH Mortgage on a servicing released basis which results in no new servicing rights being recognized. Prior to our strategic relationship with PHH Mortgage, MSRs were recognized as a separate and distinct asset at the time loans were sold. We initially valued MSRs at fair value at the time the related loans were sold and subsequently measure MSRs at fair value at each reporting date with changes in fair value reflected in earnings in the period that the changes occur. Fair value is the present value of estimated future net servicing income, calculated based on a number of variables, including assumptions about the likelihood of prepayment by borrowers. MSRs are subject to interest rate risk in that their fair value will fluctuate as a result of changes in the interest rate environment. When interest rates fall, borrowers are usually more likely to prepay their mortgage loans by refinancing them at a lower rate. As the likelihood of prepayment increases, the fair value of our MSRs can decrease. Any decrease in the fair value of our MSRs will reduce earnings in the period in which the decrease occurs, which can result in earnings volatility. While interest rate risk is mitigated through an active hedging program, hedging instruments and models that we use may not perfectly correlate with the value or income being hedged and, as a result, a reduction in the fair value of our MSRs could have a significant adverse impact on our earnings in a given period.

Increased credit risk, including as a result of a deterioration in economic conditions, could require us to increase our provision for credit losses and allowance for credit losses and could have a material adverse effect on our results of operations and financial condition. When we loan money or commit to loan money we incur credit risk, or the risk of losses if our borrowers do not repay their loans. The credit performance of our loan portfolios significantly affects our financial results and condition. If the current economic environment were to deteriorate, more of our customers may have difficulty in repaying their loans or other obligations which could result in a higher level of credit losses and provision for credit losses. We reserve for credit losses by establishing an allowance through a charge to earnings. The amount of this allowance is based on our assessment of credit losses inherent in our loan portfolio (including unfunded credit commitments). The process for determining the amount of the allowance is critical to our financial results and condition. It requires difficult, subjective and complex judgments about the future, including forecasts of economic or market conditions that might impair the ability of our borrowers to repay their loans. We might increase the allowance because of changing economic conditions, including falling home prices and higher unemployment, or other factors. For example, changes in borrower behavior or the regulatory environment also could influence recognition of credit losses in the portfolio and our allowance for credit losses.

While we believe that our allowance for credit losses was appropriate at December 31, 2013, there is no assurance that it will be sufficient to cover future credit losses, especially if housing and employment conditions worsen. In the event of significant deterioration in economic conditions, we may be required to build reserves in future periods, which would reduce our earnings.

Financial difficulties or credit downgrades of mortgage and bond insurers may negatively affect our servicing and investment portfolios. Our servicing portfolio includes certain mortgage loans that carry some level of insurance from one or more mortgage insurance companies. To the extent that any of these companies experience financial difficulties or credit downgrades, we may be required, as servicer of the insured loan on behalf of the investor, to obtain replacement coverage with another provider, possibly at a higher cost than the coverage we would replace. We may be responsible for some or all of the incremental cost of the new coverage for certain loans depending on the terms of our servicing agreement with the investor and other circumstances, although we do not have an additional risk of repurchase loss associated with claim amounts for loans sold to third-party investors. Similarly, some of the mortgage loans we hold for investment or for sale carry mortgage insurance. If a mortgage insurer is unable to meet its credit obligations with respect to an insured loan, we might incur higher credit losses if replacement coverage is not obtained. We also have investments in municipal bonds that are guaranteed against loss by bond insurers. The value of these bonds and the payment of principal and interest on them may be negatively affected by financial difficulties or credit downgrades experienced by the bond insurers.

The financial condition of our clients and counterparties, including other financial institutions, could adversely affect us. A significant deterioration in the credit quality of one of our counterparties could lead to concerns in the market about the credit quality of other counterparties in the same industry, thereby exacerbating our credit risk exposure, and increasing the losses (including mark-to-market losses) that we could incur in our market-making and clearing businesses.

Financial services institutions are interrelated as a result of market-making, trading, clearing, counterparty, or other relationships. HSBC routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by the counterparty or client. When such a client becomes bankrupt or insolvent, we may become entangled in significant disputes and litigation with the client's bankruptcy estate and other creditors or involved in regulatory investigations, all of which can increase our operational and litigation costs.

During periods of market stress or illiquidity, our credit risk also may be further increased when it cannot realize the fair value of the collateral held by it or when collateral is liquidated at prices that are not sufficient to recover the full amount of the loan, derivative or other exposure due to us. Further, disputes with counterparties as to the valuation of collateral significantly increase in times of market stress and illiquidity.

We may incur additional costs and expenses relating to mortgage loan repurchases and other mortgage loan securitization-related activities. In connection with our loan sale and securitization activities with Fannie Mae and Freddie Mac (the "Government Sponsored Entities" or "GSEs") and loan sale and private-label securitization transactions, HUSI has made representations and warranties that the loans sold meet certain requirements. For transactions with the GSEs, these representations include type of collateral, underwriting standards, validity of certain borrower representations in connection with the loan, that primary mortgage insurance is in force for any mortgage loan with a loan-to-value ratio ("LTV") greater than 80 percent, and the use of the GSEs' standard legal documentation. We may be, and have been, required to repurchase loans and/or indemnify the GSEs and other private investors for losses due to breaches of these representations and warranties.

In estimating our repurchase liability arising from breaches of representations and warranties, we consider several factors, including the level of outstanding repurchase demands in inventory and our historical defense rate, the level of outstanding requests for loan files and the related historical repurchase request conversion rate and defense rate, the level of potential future demands based on historical conversion rates of loans for which we have not received a loan file request but are two or more payments delinquent or expected to become delinquent at an estimated conversion rate and any settlements reached with our counterparties. While we believe that our current repurchase liability reserves are adequate, the factors referred to above are dependent on economic factors, investor demand strategies, housing market trends and other circumstances, which are beyond our control and, accordingly, there can be no assurance that such reserves will not need to be increased in the future.

We have also been involved as a sponsor/seller of loans used to facilitate whole loan securitizations underwritten by our affiliate, HSI, and serve as trustee of various securitization trusts. 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 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 obligations 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." 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 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.

Lawsuits and regulatory investigations and proceedings may continue and increase in the current economic and regulatory environment. In the ordinary course of business, HSBC USA and its affiliates are routinely named as defendants in, or as parties to, various legal actions and proceedings relating to our current and/or former operations and are subject to governmental and regulatory examinations, information-gathering requests, investigations and formal and informal proceedings, as described in Note 28, "Litigation and Regulatory Matters," certain of which may result in adverse judgments, settlements, fines, penalties, injunctions and other relief. There is no certainty that the litigation will decrease in the near future, especially in the event of continued high unemployment rates, a resurgent recession or additional regulatory and law enforcement investigations and proceedings by federal and state governmental agencies. Further, in the current environment of heightened regulatory scrutiny, particularly in the financial services industry, there may be additional regulatory investigations and reviews conducted by banking and other regulators, including the CFPB, state Attorneys General or state regulatory and law enforcement agencies that, if determined adversely, may result in judgments, settlements, fines, penalties or other results, including additional compliance requirements, which could materially adversely affect our business, financial condition or results of operations, or cause serious reputational harm. See "Regulatory investigations, fines, sanctions and requirements relating to conduct of business and financial crime could negatively affect our results and brand" and "We may incur additional costs and expenses in ensuring that we satisfy requirements relating to our mortgage foreclosure processes and the industry-wide delay in processing foreclosures may have a significant impact upon loss severity" above.

We establish reserves for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. We may still incur legal costs for a matter even if we have not established a reserve. In addition, the actual cost of resolving a legal claim may be substantially higher than any amounts reserved for that matter. The ultimate resolution of a pending legal proceeding, depending on the remedy sought and granted, could materially adversely affect our results of operations and financial condition.

Changes in the method of determining the London Interbank Offered Rate (LIBOR) or other reference rates may adversely impact the value of debt securities and other financial instruments we hold or issue that are linked to such reference rates and could adversely impact our financial condition or results of operations. As a result of concerns about the accuracy of the calculation of the daily LIBOR, a number of British Bankers' Association (the "BBA") member banks entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and there are ongoing investigations by regulators and governmental authorities in various jurisdictions. Following a review of LIBOR conducted at the request of the U.K. Government, on September 28, 2012, recommendations for reforming the setting and governing of LIBOR were released (the "Wheatley Review"). The Wheatley Review made a number of recommendations for changes with respect to LIBOR, including the introduction of statutory regulation of LIBOR, the transfer of responsibility for LIBOR from the BBA to an independent administrator, changes to the method of compilation of lending rates and new regulatory oversight and enforcement mechanisms for rate-setting and a reduction in the number of currencies and tenors for which LIBOR is published. Based on the Wheatley Review and on a subsequent public and governmental consultation process, on March 25, 2013, the U.K. Financial Services Authority published final rules for the U.K. Financial Conduct Authority's regulation and supervision of LIBOR (the "FCA Rules"). In particular, the FCA Rules include requirements that (1) an independent LIBOR administrator monitor and survey LIBOR submissions to identify breaches of practice standards and/or potentially manipulative behavior, and (2) firms submitting data to LIBOR establish and maintain a clear conflicts of interest policy and appropriate systems and controls. The FCA Rules took effect on April 2, 2013. NYSE Euronext Rate Administration Ltd. has been appointed as the independent LIBOR administrator, effective in early 2014. Similar changes may occur with respect to other reference rates. Accordingly, it is not currently possible to determine whether, or to what extent, any such changes would impact the value of any debt securities we hold or issue that are linked to LIBOR or other reference rates, or any loans, derivatives and other financial obligations or extensions of credit we hold or are due to us, or for which we are an obligor, that are linked to LIBOR or other reference rates, or whether, or to what extent, such changes would impact our financial condition or results of operations.

Regulatory requirements in the U.S. and in non-U.S. jurisdictions to facilitate the future orderly resolution of large financial institutions could negatively impact our business structures, activities and practices. The Dodd-Frank Act requires HSBC as a foreign bank holding company and our ultimate parent to prepare and submit annually a plan for the orderly resolution of the U.S. businesses under the U.S. Bankruptcy Code in the event of future material financial distress or failure. The Dodd-Frank Act focuses on reducing risks to the U.S. financial system, requiring a plan to demonstrate how the relevant entities can be resolved in a "rapid and orderly" fashion in a manner that avoids systemic risks. Similarly, HSBC Bank USA must prepare and submit an annual resolution plan under the Federal Deposit Insurance Act. HSBC Bank USA is required to regularly provide a plan to the FDIC that is executable for resolving the bank in the event of its failure that protects depositors, maximizes the net present value return on assets and minimizes the amount of any losses to creditors, including the FDIC's Deposit Insurance Fund. These plans must include information on resolution strategy, major counterparties and "interdependencies," among other things, and require substantial effort, time and cost across all of our businesses and geographies. These resolution plans are subject to review by the FRB and the FDIC.

If the FRB and the FDIC both determine that these resolution plans are not "credible" (which, although not defined, is generally believed to mean the regulators do not believe the plans are feasible or would otherwise allow the regulators to resolve the U.S. businesses in a way that protects systemically important functions without severe systemic disruption and without exposing taxpayers to loss), and we do not remedy the deficiencies within the required time period, we could be required to restructure or reorganize businesses, legal entities, or operational systems and intracompany transactions in ways that could negatively impact operations, or be subject to restrictions on growth. We could also eventually be subjected to more stringent capital, leverage or liquidity requirements, or be required to divest certain assets or operations.

Management projections, estimates and judgments based on historical performance may not be indicative of our future performance. Our management is required to use certain estimates in preparing our financial statements, including accounting estimates to determine loan loss reserves, reserves related to litigation, deferred tax assets and the fair market value of certain assets and liabilities, including goodwill and intangibles, among other items. In particular, loan loss reserve estimates and certain asset and liability valuations are subject to management's judgment and actual results are influenced by factors outside our control. To the extent historical averages of the progression of loans into stages of delinquency or the amount of loss realized upon charge-off are not predictive of future losses and management is unable to accurately evaluate the portfolio risk factors not fully reflected in historical models, unexpected additional losses could result. Similarly, to the extent assumptions employed in measuring fair value of assets and liabilities not supported by market prices or other observable parameters do not sufficiently capture their inherent risk, unexpected additional losses could result.

We are required to establish a valuation allowance for deferred tax assets and record a charge to income or shareholders' equity if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved business plans, future capital requirements and ongoing tax planning strategies, including capital support from HSBC necessary as part of such plans and strategies. This evaluation process involves significant management judgment about assumptions that are subject to change from period to period. The recognition of deferred tax assets requires management to make significant judgments about future earnings, the periods in which items will impact taxable income, future corporate tax rates, and the application of inherently complex tax laws. The use of different estimates can result in changes in the amounts of deferred tax items recognized, which can result in equity and earnings volatility because such changes are reported in current period earnings. See Note 17, "Income Taxes," in the accompanying consolidated financial statements for additional discussion of our deferred tax assets.

Changes in accounting standards are beyond our control and may have a material impact on how we report our financial results and condition. Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board ("FASB"), the International Accounting Standards Board ("IASB"), the SEC and our bank regulators, including the OCC and the FRB, change the financial accounting and reporting standards, or the interpretation thereof, and guidance that govern the preparation and disclosure of external financial statements. These changes are beyond our control, can be hard to predict and could materially impact how we report and disclose our financial results and condition, including our segment results. For example, the FASB's financial instruments project could, among other things, significantly change how we value our receivables portfolio, which could also affect the level of deferred tax assets that we recognize. We could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements in material amounts. We may, in certain instances, change a business practice in order to comply with new or revised standards.

The exposure to certain countries in the eurozone may adversely impact our earnings. Eurozone countries are members of the EU and part of the euro single currency bloc. The peripheral eurozone countries are those that exhibited levels of market volatility that exceeded other eurozone countries, demonstrating fiscal or political uncertainty which may persist into 2014. In 2013, in spite of improvements through austerity and structural reforms, the peripheral countries of Greece, Ireland, Italy, Portugal and Spain continued to exhibit a high ratio of sovereign debt to gross domestic product and excessive fiscal deficits. During 2013, we continued to monitor and reduce where appropriate our overall net exposure to counterparties domiciled in other eurozone countries that had exposures to sovereign and/or banks in peripheral eurozone countries of sufficient size to threaten their on-going viability in the event of an unfavorable conclusion to the current crisis. However, we continue to be exposed to certain eurozone related risk as it relates to governments and central banks of selected eurozone countries with near/quasi government agencies, banks and other financial institutions and other corporates. Given that the recent fiscal or political instability while improved is not completely ameliorated for many of these countries, it is possible that our continued exposure to these economies may adversely impact our earnings.

Key employees may be difficult to retain due to contraction of the business and limits on promotional activities. Our employees are our most important resource and, in many areas of the financial services industry, competition for qualified personnel is intense. If we were unable to continue to attract and retain qualified key employees to support the various functions of our businesses, our performance, including our competitive position, could be materially adversely affected. Our financial performance, reductions in variable compensation and other benefits could raise concerns about key employees' future compensation and opportunities for promotion. As economic conditions improve, we may face increased difficulty in retaining top performers and critical skilled employees. If key personnel were to leave us and equally knowledgeable or skilled personnel are unavailable within the HSBC Group or could not be sourced in the market, our ability to manage our business, in particular through any future difficult economic environment may be hindered or impaired.

Significant reductions in pension assets may require additional financial contributions from us. Effective January 1, 2005, our previously separate qualified defined benefit pension plan was combined with that of HSBC Finance's into a single HSBC North America qualified defined benefit plan. At December 31, 2010, the defined benefit plan was frozen, significantly reducing future benefit accruals. At December 31, 2013, plan assets were lower than projected plan liabilities resulting in an under-funded status. The accumulated benefit obligation exceeded the fair value of the plan assets by approximately $457 million. As these obligations relate to the HSBC North America pension plan, only a portion of this deficit could be considered our responsibility. We and other HSBC North America affiliates with employees participating in this plan will be required to make up this shortfall over a number of years as specified under the Pension Protection Act. This can be accomplished through direct contributions, appreciation in plan assets and/or increases in interest rates resulting in lower liability valuations. See Note 21, "Pension and Other Postretirement Benefits," in the accompanying consolidated financial statements for further information concerning the HSBC North America defined benefit plan.

We may not be able to meet regulatory requests for data. New regulatory requirements necessitate more frequent reporting, which requires accurate, consistent and timely management information and analysis to be produced. Inadequate management information systems or processes could lead to a failure to meet our regulatory reporting obligations or other internal or external information demands.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The principal executive offices of HSBC USA and HSBC Bank USA are located at 452 Fifth Avenue, New York, New York 10018, which HSBC Bank USA owned until April 2010. In April 2010, HSBC Bank USA sold our headquarters building at 452 Fifth Avenue and entered into a lease for the entire building for one year, followed by eleven floors of the building for a total of 10 years, along with four other temporary floors for periods between nine and 15 months. The main office of HSBC Bank USA is located at 1800 Tysons Blvd., Suite 50, McLean, Virginia 22102. HSBC Bank USA has 157 branches in New York, 37 branches in California, 18 branches in Florida, nine branches in New Jersey, seven branches in Virginia, four branches in Washington, three branches in Connecticut, three branches in Maryland, two branches in the District of Columbia, two branches in Pennsylvania and one branch in each of Delaware and Oregon at December 31, 2013. We also have 13 representative offices in New York, three in California, two in Texas, Pennsylvania and Massachusetts, and one in each of the District of Columbia, Florida, Georgia, Illinois, North Carolina, New Jersey, Oregon, and Washington. Approximately 21 percent of these offices are located in buildings owned by HSBC Bank USA and the remaining are located in leased premises. In addition, there are offices and locations for other activities occupied under various types of ownership and leaseholds in New York and other states, none of which are materially important to our operations. HSBC Bank USA also owns properties in Montevideo, Uruguay and leases premises in Bogota, Columbia and Lima, Peru.

In 2012, we completed the sale of 195 non-strategic retail branches, including certain loans, deposits and related branch premises, located primarily in upstate New York, to First Niagara Bank N.A.

Item 3. Legal Proceedings

See "Litigation and Regulatory Matters" in Note 28, "Litigation and Regulatory Matters," in the accompanying consolidated financial statements beginning on page 235 for our legal proceedings disclosure, which is incorporated herein by reference.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

PART II

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Not applicable.

Item 6. Selected Financial Data

On May 1, 2012, HSBC, through its wholly-owned subsidiaries HSBC Finance, HSBC USA and other wholly-owned affiliates, completed the sale of its Card and Retail Services business to Capital One. The sale included our General Motors and Union Plus credit card receivables as well as our private label credit card and closed-end receivables, all of which were purchased from HSBC Finance. Because the credit card and private label receivables sold were classified as held for sale prior to disposition and the operations and cash flows from these receivables were eliminated from our ongoing operations upon disposition without any significant continuing involvement, we have reported the results of these credit card and private label card and closed-end receivables sold as discontinued operations for all periods presented.

In June 2010, we decided to exit our wholesale banknotes business. During the fourth quarter of 2010, we completed the exit of substantially all of this business and as a result, this business is reported as discontinued operations for all periods presented.

The following selected financial data presented below excludes the results of our discontinued operations for all periods presented.

Year Ended December 31,	2013			2012			2011		2010		2009
	(dollars are in millions)
Statement of Income (Loss) Data:
Net interest income......................................................................	$	2,041		$	2,158		$	2,434	$	2,613	$	2,984
Provision for credit losses ⁽¹⁾.....................................................	193			293			258		34		1,431
Total other revenues...................................................................	1,857			1,973			2,325		2,207		1,401
Operating expenses excluding goodwill impairment and expense relating to certain regulatory matters........................	3,356			3,367			3,819		3,341		3,219
Goodwill impairment....................................................................	616			-			-		-		-
Expense relating to certain regulatory matters........................	-			1,381			-		-		-
Income (loss) from continuing operations before income tax expense (benefit)......................................................................	(267		)	(910		)	682		1,445		(265		)
Income tax expense (benefit)......................................................	71			338			227		439		(98		)
Income (loss) from continuing operations...............................	(338		)	(1,248		)	455		1,006		(167		)
Income from discontinued operations, net of tax...................	-			203			563		558		25
Net income (loss).........................................................................	$	(338	)	$	(1,045	)	$	1,018	$	1,564	$	(142	)
Balance Sheet Data as of December 31:
Loans:
Construction and other real estate......................................	$	9,034		$	8,457		$	7,860	$	8,228	$	8,858
Business and corporate banking.........................................	14,446			12,608			10,225		7,945		7,521
Global banking........................................................................	21,625			20,009			12,658		10,745		9,725
Other commercial loans.........................................................	3,389			3,076			2,906		3,085		3,910
Total commercial loans.............................................................	48,494			44,150			33,649		30,003		30,014
Residential mortgages...........................................................	15,826			15,371			14,113		13,697		13,722
Home equity mortgages........................................................	2,011			2,324			2,563		3,820		4,164
Credit card...............................................................................	854			815			828		1,250		1,273
Auto finance...........................................................................	-			-			-		-		1,701
Other consumer......................................................................	510			598			714		1,039		1,187
Total consumer loans...............................................................	19,201			19,108			18,218		19,806		22,047
Total loans....................................................................................	67,695			63,258			51,867		49,809		52,061
Loans held for sale......................................................................	230			1,018			3,670		2,390		2,908
Total assets⁽⁵⁾...............................................................................	185,487			191,446			186,507		160,223		142,850
Total tangible assets⁽⁵⁾................................................................	183,817			189,150			184,264		157,578		140,177
Total deposits⁽²⁾...........................................................................	112,608			117,671			139,729		120,618		118,203
Long-term debt.............................................................................	22,847			21,745			16,709		17,080		15,043
Preferred stock.............................................................................	1,565			1,565			1,565		1,565		1,565
Common shareholder's equity...................................................	14,899			16,271			16,937		15,168		13,612
Total shareholders' equity..........................................................	16,464			17,836			18,502		16,733		15,177
Tangible common shareholder's equity...................................	13,388			13,185			14,054		12,522		11,110

Year Ended December 31,	2013		2012		2011		2010		2009
	(dollars are in millions)
Selected Financial Ratios:
Total shareholders' equity to total assets...........................................	8.88	%	9.32	%	9.92	%	10.44	%	10.62	%
Tangible common shareholder's equity to total tangible assets.....	7.28		6.97		7.63		7.95		7.93
Total capital to risk weighted assets....................................................	16.47		19.52		18.39		18.14		14.19
Tier 1 capital to risk weighted assets...................................................	11.73		13.61		12.74		11.80		9.61
Tier 1 common equity to risk weighted assets...................................	10.01		11.63		10.72		9.82		7.82
Rate of return on average:
Total assets...........................................................................................	(.2	)	(.7	)	.3		.6		(.1	)
Total common shareholder's equity..................................................	(2.6	)	(7.9	)	2.4		6.3		(1.9	)
Net interest margin.................................................................................	1.29		1.30		1.45		1.69		2.00
Loans to deposits ratio⁽³⁾.......................................................................	79.16		71.35		53.33		57.38		66.05
Efficiency ratio........................................................................................	101.9		114.9		80.2		69.3		73.4
Commercial allowance as a percent of loans⁽⁴⁾...................................	.64		.72		1.31		1.74		3.02
Commercial net charge-off ratio⁽⁴⁾........................................................	.15		.37		.21		1.04		.75
Consumer allowance as a percent of loans⁽⁴⁾.....................................	1.55		1.73		1.65		1.66		3.15
Consumer two-months-and-over contractual delinquency.............	6.85		6.92		6.01		6.04		7.33
Consumer net charge-off ratio⁽⁴⁾...........................................................	.85		1.32		1.33		2.13		2.47

⁽¹⁾During the fourth quarter of 2012 we extended our loss emergence for loans collectively evaluated for impairment using a roll rate migration analysis to 12 months, which resulted in an increase to our provision for credit losses of approximately $80 million. See ""Credit Quality" in Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operations," and Note 7, "Allowance for Credit Losses," in the accompanying consolidated financial statements for additional discussion.

⁽²⁾Includes $15.1 billion of deposits held for sale at December 31, 2011.

⁽³⁾Represents period end loans as a percentage of domestic deposits equal to or less than $100,000. Excluding the deposits and loans held for sale to First Niagara, the ratio was 59.60 percent at December 31, 2011.

⁽⁴⁾Excludes loans held for sale.

⁽⁵⁾Reductions in trading assets and trading liabilities of $5.1 billion, $2.3 billion and $1.0 billion at December 31, 2012, 2011 and 2010, respectively, were made to properly reflect the elimination of certain affiliate inter-company balances relating to trading derivatives. We have determined that this correction had no impact to any other consolidated financial information presented for these years.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Certain matters discussed throughout this Form 10-K are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make or approve certain statements in future filings with the SEC, in press releases, or oral or written presentations by representatives of 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 not involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from that which was expressed or implied by such forward-looking statements.

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

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

• changes in laws and regulatory requirements;

• extraordinary government actions as a result of market turmoil;

• capital and liquidity requirements under Basel III, CCAR, and DFAST;

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

• the ability of HSBC and HSBC Bank USA to fulfill the requirements imposed by the U.S., the DANY DPA, the GLBA Agreement and other consent agreements;

• damage to our reputation;

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

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

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

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

• our ability to meet our funding requirements;

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

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

• changes in FASB and IASB accounting standards;

• changes to our mortgage servicing and foreclosure practices;

• changes in the methodology for determining benchmark rates;

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

• additional financial contribution requirements to the HSBC North America pension plan; and

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

Forward-looking statements are based on our current views and assumptions and speak only as of the date they are made. We undertake no obligation to update any forward-looking statement to reflect subsequent circumstances or events. For more information about factors that could cause actual results to differ materially from those in the forward-looking statements, see Item 1A, "Risk Factors" in this Form 10-K.

Executive Overview

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

Through our subsidiaries, we offer a comprehensive range of consumer and commercial banking products and related financial services. HSBC Bank USA, National Association ("HSBC Bank USA"), our principal U.S. banking subsidiary, is a national banking association with banking branch offices and/or representative offices in 16 states and the District of Columbia. In addition to our domestic offices, we currently maintain foreign branch offices, subsidiaries and/or representative offices in Europe, Asia, Latin America and Canada. Our customers include individuals, including high net worth individuals, small businesses, corporations, institutions and governments. We also engage in mortgage banking and serve as an international dealer in derivative instruments denominated in U.S. dollars and other currencies, focusing on structuring of transactions to meet clients' needs.

The following discussion of our financial condition and results of operations excludes the results of our discontinued operations unless otherwise noted. See Note 3, "Discontinued Operations," in the accompanying consolidated financial statements for further discussion.

Current Environment The U.S. economy continued to slowly improve throughout 2013, however gross domestic product growth remained below the economy's potential growth rate. Consumer confidence improved during 2013 as consumers continued to feel better about their household finances due to rising home values and subdued inflation. Nonetheless, with continuing high gasoline prices, the increase in payroll taxes at the beginning of the year and the onset of budget sequestration in March, consumer confidence remained volatile in 2013. While progress on the Federal budget was finally made in December 2013 and January 2014, domestic fiscal uncertainties, including federal budget and debt ceiling debates, continued to affect consumer sentiment throughout most of the year. Long-term interest rates began to rise during 2013, in part out of concern that the Federal Reserve would begin to slow its quantitative easing program if the economy continued to strengthen. While these concerns subsided to a certain extent in September when the Federal Reserve Board ("FRB") announced its bond buying program would continue at then current levels to support the slow growing economy, they resurfaced again towards the end of the year due to continuing improvements in economic growth and a stronger than expected November jobs report. That led to the FRB's announcement in mid-December that it would reduce its bond buying stimulus program beginning in January 2014. The Fed's announcement was greeted favorably by Wall Street and many others in the financial services industry as a sign of validation that the U.S. economy and the job market were finally on a more solid footing. As part of this announcement, FRB policy makers also strengthened their statement on short-term interest rates indicating that they would remain at near zero "well past" the time the unemployment rate falls below 6.5 percent. The prolonged period of low interest rates continues to put pressure on spreads earned on our deposit base.

While the economy continued to add jobs in 2013, the pace of new job creation continued to be slower than needed to reduce unemployment to historical averages. Although unemployment rates, which are a major factor influencing credit quality, fell from 7.9 percent at the beginning of the year to 6.7 percent in December 2013, unemployment remains high based on historical averages. Also, a significant number of U.S. residents are no longer looking for work and are not reflected in the U.S. unemployment rates. Unemployment has continued to have an impact on the provision for credit losses in our loan portfolio and in loan portfolios across the industry. Concerns about the future of the U.S. economy, including the pace and magnitude of recovery from the recent economic recession, consumer confidence, fiscal policy, volatility in energy prices, credit market volatility including the ability to resolve various global financial issues and trends in corporate earnings will continue to influence the U.S. economic recovery and the capital markets. In particular, continued improvement in unemployment rates, a sustained recovery of the housing markets and stabilization in energy prices remain critical components of a broader U.S. economic recovery. These conditions in combination with the impact of recent regulatory changes, including the on-going implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ( the "Dodd-Frank Act" or "Dodd-Frank"), will continue to impact our results in 2014 and beyond.

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

2013 Events

• During the second quarter of 2013, we completed the conversion of our mortgage processing and servicing operations to PHH Mortgage under our previously announced strategic relationship agreement with PHH Mortgage. See Note 10, "Intangible Assets," in the accompanying consolidated financial statements for further discussion of this agreement. We continue to originate mortgages for our customers with particular emphasis on Premier relationships.

• In July 2013, we completed our annual impairment test of goodwill and determined that the fair value of all of our reporting units exceeded their carrying amounts. However, our testing results continued to indicate that there was only marginal excess of fair value over book value in our Global Banking and Markets reporting unit as its book value including goodwill was 92 percent of fair value. During the fourth quarter of 2013, in conjunction with the preparation of HSBC North America's first Comprehensive Capital Analysis and Review ("CCAR") submission and HSBC Bank USA's first Dodd-Frank Act Stress Testing ("DFAST") submission along with the finalization of Basel III rules, we made the decision to manage our businesses to a higher common equity Tier 1 ratio and, for years beginning with 2015, that we would calculate risk-weighted assets in our projections for goodwill impairment testing purposes based on Basel III advanced requirements (as opposed to Basel 2.5). Accordingly, we performed an interim impairment test of the goodwill associated with all of our reporting units at December 31, 2013. As a result of this testing, the fair value of our Retail Banking and Wealth Management, Commercial Banking and Private Banking reporting units continued to exceed their carrying values, with the book value of each reporting unit, including allocated goodwill being 80 percent or less of fair value. However, while our updated cash flow projections for our Global Banking and Markets reporting unit continue to reflect strong levels of earnings as we continue to expand this business, as a result of the capital and risk-weighted asset changes discussed above, the interim impairment test of the goodwill associated with this reporting unit as of December 31, 2013 indicated the book value of the reporting unit including goodwill was higher than its fair value and, as a result of completing our step two analysis, the entire amount of goodwill allocated to this reporting unit of $616 million was fully impaired and written off.

• In October 2013, our Board of Directors approved a sale of our London Branch precious metals custody and clearing business to HSBC Bank plc. As the sale of this business is between affiliates under common control, we expect the consideration received in excess of our carrying value will result in an increase to additional paid-in-capital, net of tax, of approximately $60 million upon close. The cash sale is currently expected to be completed in the first half of 2014. At December 31, 2013, assets and liabilities related to this business totaled approximately $11.9 billion each, while revenue associated with this business was approximately $45 million and $70 million during 2013 and 2012, respectively. We will continue to operate our metals trading business which is unaffected by this decision.

• During the fourth quarter of 2013, we entered into a settlement with the Federal National Mortgage Association (" FNMA") for $83 million which settled our liability for substantially all loans sold to FNMA between January 1, 2000 and June 26, 2012. The settlement resulted in a release of $15 million in repurchase reserves previously provided for this exposure. We continue to maintain repurchase reserves for FNMA exposure associated with residual risk not covered by the settlement agreement. A significant majority of the remaining repurchase reserve relates to repurchase exposure for loans sold to Federal Home Loan Mortgage Corporation ("FHLMC").

• During 2013, we continued to reduce legacy and other risk positions as opportunities arose, including the sale of $475 million of leveraged acquisition finance loans previously held for sale. The following table provides a summary of the significant valuation adjustments associated with these legacy positions that impacted revenue during 2013, 2012 and 2011:

Year Ended December 31,	2013		2012			2011
	(in millions)
Gains (Losses)
Insurance monoline structured credit products⁽¹⁾.........................................................	$	54	$	21		$	15
Other structured credit products⁽¹⁾..................................................................................	59		107			77
Mortgage whole loans held for sale (predominantly subprime)⁽²⁾..............................	3		(13		)	(22		)
Leverage acquisition finance loans⁽³⁾..............................................................................	13		49			(16		)
Total gains...........................................................................................................................	$	129	$	164		$	54

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

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

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

• Compliance related costs continued to be a significant component of our cost base totaling $302 million in 2013, compared with $426 million in 2012 and $295 million in 2011. While compliance related costs have continued to remain a significant component of our cost base in 2013, such costs declined compared with 2012 as the prior year reflects investment in Bank Secrecy Act ("BSA")/Anti-Money Laundering ("AML") process enhancements and infrastructure and, to a lesser extent, foreclosure remediation which did not occur at the same level in 2013. While we continue to focus on cost mitigation efforts as discussed below, we believe compliance related costs have permanently increased to higher levels due to the remediation of and continued compliance with the regulatory consent agreements.

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

• 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.

Performance, Developments and Trends Income (loss) from continuing operations was a loss of $338 million in 2013 compared with a loss of $1,248 million in 2012 and income of $455 million in 2011. Income (loss) from continuing operations before income tax was a loss of $267 million in 2013 compared with a loss of $910 million and income of $682 million in 2012 and 2011, respectively. The significant improvement in income (loss) from continuing operations before income tax compared with 2012 was driven largely by significantly lower operating expenses and, to a lesser extent, a lower provision for credit losses. Although operating expenses in 2013 includes goodwill impairment of $616 million, operating expenses in 2012 includes an expense of $1,381 million related to certain regulatory matters. These improvements were partially offset by lower net interest income and lower other revenues. Other revenues in 2012 includes a pre-tax gain of $433 million from the sale of certain retail branches to First Niagara Bank, N.A. ("First Niagara"). Income from continuing operations before income tax declined in 2012 compared with 2011 due to higher operating expenses for certain regulatory matters, lower net interest income, lower other revenue and a higher provision for credit losses. Our results in all periods were impacted by the change in the fair value of our own debt attributable to credit spread for which we have elected fair value option which distorts comparability of the underlying performance trends of our business. The following table summarizes the impact of this item on our income from continuing operations before income tax for all periods presented:

Year Ended December 31,	2013			2012			2011
	(in millions)
Income (loss) from continuing operations before income tax, as reported................................	$	(267	)	$	(910	)	$	682
Fair value movement on own fair value option debt attributable to credit spread....................	165			361			(376		)
Underlying income (loss) from continuing operations before income tax ⁽¹⁾.............................	$	(102	)	$	(549	)	$	306

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

Excluding the impact of the change in the fair value of our own debt attributable to credit spread for which we have elected fair value option accounting in the table above, our underlying income (loss) from continuing operations before tax for 2013 improved $447 million, compared with 2012 as significantly lower operating expenses as discussed above and a lower provision for credit losses was partially offset by lower net interest income and lower other revenues.

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

Future Prospects Our operations are dependent upon our ability to attract and retain deposits and, to a lesser extent, access to the global capital markets. Numerous factors, both internal and external, may impact our access to, and the costs associated with, both sources of funding. These factors may include our debt ratings, overall economic conditions, overall market volatility, the counterparty credit limits of investors to the HSBC Group as a whole and the effectiveness of our management of credit risks inherent in our customer base.

Our results are also impacted by general economic conditions, including unemployment, housing market conditions, property valuations, interest rates and legislative and regulatory changes, all of which are beyond our control. Changes in interest rates generally affect both the rates we charge to our customers and the rates we pay on our borrowings. Achieving our profitability goals in 2014 is largely dependent upon macro-economic conditions which include a low interest rate environment, a housing market in the early stages of recovery, high unemployment, slow economic growth, debt and capital market volatility and our ability to attract and retain loans and deposits from customers, all of which could impact trading and other revenue, net interest income, loan volume, charge-offs and ultimately our results of operations.

Basis of Reporting

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

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

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

Year Ended December 31,	2013			2012			2011
	(in millions)
Net income (loss) - U.S. GAAP basis.......................................................................................	$	(338	)	$	(1,045	)	$	1,018
Adjustments, net of tax:
IFRSs reclassification of fair value measured financial assets during 2008......................	(17		)	(69		)	1
Goodwill impairment..................................................................................................................	136			-			-
Securities.....................................................................................................................................	3			(3		)	13
Derivatives..................................................................................................................................	2			5			8
Loan impairment.........................................................................................................................	29			69			(1		)
Property.......................................................................................................................................	(10		)	(15		)	(23		)
Pension costs.............................................................................................................................	16			7			22
Purchased loan portfolios.........................................................................................................	-			-			(49		)
Transfer of credit card receivables to held for sale and subsequent sale.........................	-			(31		)	-
Gain on sale of branches...........................................................................................................	-			92			-
Litigation accrual........................................................................................................................	63			(4		)	22
Other............................................................................................................................................	(30		)	11			3
Net income (loss) - IFRSs basis.................................................................................................	(146		)	(983		)	1,014
Tax expense - IFRSs basis..........................................................................................................	219			411			575
Profit (loss) before tax - IFRSs basis.........................................................................................	$	73		$	(572	)	$	1,589

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

IFRS reclassification of fair value measured financial assets during 2008 - Certain securities were reclassified from "trading assets" to "loans and receivables" under IFRSs as of July 1, 2008 pursuant to an amendment to IAS 39, "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.

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 were classified as "held for sale" and carried at fair value due to the irrevocable nature of the fair value option. Substantially all of the remaining balance of these loans were sold in the first quarter of 2013.

Goodwill impairment - Under IFRSs, goodwill was amortized until 2005 however under U.S. GAAP, goodwill was amortized until 2002, which resulted in a lower carrying amount of goodwill and, therefore, a lower impairment charge under IFRSs.

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 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 measured at fair value through other comprehensive income. If it is determined these shares have become impaired, the unrealized loss in accumulated other comprehensive income is reclassified to profit or loss. There is no similar requirement under U.S. GAAP.

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

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 is reversed, which is not permitted under U.S. GAAP. Additionally under IFRSs, future recoveries on charged-off loans or loans written down to fair value less cost to obtain title and sell are accrued for on a discounted basis and a recovery asset is recorded. Subsequent recoveries are recorded to earnings under U.S. GAAP, but are adjusted against the recovery asset under IFRSs. Under IFRSs, interest on impaired loans is recorded at the effective interest rate on the customer loan balance net of impairment allowances.

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

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

For loans collectively evaluated for impairment under U.S. GAAP, bank industry practice which we adopted in the fourth quarter of 2012 generally results in a loss emergence period for these loans using a roll rate migration analysis which results in 12 months of losses in our allowance for credit losses. Under IFRSs, we concluded that the estimated average period of time from last current status to write-off for real estate loans collectively evaluated for impairment using a roll rate migration analysis was 10 months which was also adopted in the fourth quarter of 2012. In the second quarter of 2013, we updated our review under IFRSs to reflect the period of time after a loss event a loan remains current before delinquency is observed which resulted in an estimated average period of time from a loss event occurring and its ultimate migration from current status through to delinquency and ultimately write-off for real estate loans collectively evaluated for impairment using a roll rate migration analysis of 12 months.

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 - Pension expense under U.S. GAAP is generally higher than under IFRSs as a result of the amortization of the amount by which actuarial losses exceeds the higher of 10 percent of the projected benefit obligation or fair value of plan assets (the "corridor"). As a result of amendments to the applicable IFRSs effective January 1, 2013, interest cost and expected return on plan assets is replaced by a finance cost component comprising the net interest on the net defined benefit liability. This has resulted in an increase in pension expense as the net interest does not reflect the benefit from the expectation of higher returns on plan assets.

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 upon acquisition. 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 when certain criteria are met which are generally more stringent than those under U.S. GAAP, but does not change the recognition and measurement criteria. Accordingly for IFRSs purposes, such loans continue to be accounted for 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.

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

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

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, interest recognition, restructuring costs, servicing assets, precious metals and loans held for sale.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting standards generally accepted in the United States. We believe our policies are appropriate and fairly present the financial position and results of operations of HSBC USA Inc.

The significant accounting policies used in the preparation of our consolidated financial statements are more fully described in Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," in the accompanying consolidated financial statements. Certain critical accounting policies affecting the reported amounts of assets, liabilities, revenues and expenses, are complex and involve significant judgments by our management, including the use of estimates and assumptions. As a result, changes in estimates, assumptions or operational policies could significantly affect our financial position and our results of operations. We base our accounting estimates on historical experience, observable market data, inputs derived from or corroborated by observable market data by correlation or other means and on various other assumptions that we believe to be appropriate, including assumptions based on unobservable inputs. To the extent we use models to assist us in measuring the fair value of particular assets or liabilities, we strive to use models that are consistent with those used by other market participants. Actual results may differ from these estimates due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change. The impact of estimates and assumptions on the financial condition or operating performance may be material.

Of the significant accounting policies used in the preparation of our consolidated financial statements, the items discussed below involve what we have identified as critical accounting estimates based on the associated degree of judgment and complexity. Our management has reviewed these critical accounting policies as well as the associated estimates, assumptions and accompanying disclosure with the Audit Committee of our Board of Directors.

Allowance for Credit Losses Because we lend money to others, we are exposed to the risk that borrowers may not repay amounts owed when they become contractually due. Consequently, we maintain an allowance for credit losses that reflects our estimate of probable incurred losses in the existing loan portfolio. Estimates are reviewed periodically and adjustments to the allowance for credit losses are reflected through the provision for credit losses in the period they become known. We believe the accounting estimate relating to the allowance for credit losses is a "critical accounting estimate" for the following reasons:

• Changes in the provision can materially affect our financial results;

• Estimates related to the allowance for credit losses require us to project future delinquency and charge offs, which are highly uncertain; and

• The allowance for credit losses is influenced by factors outside of our control such as customer payment patterns, economic conditions such as national and local trends in housing markets, interest rates, unemployment, bankruptcy trends and the effects of laws and regulations.

Because our estimates of the allowance for credit losses involves judgment and is influenced by factors outside of our control, there is uncertainty inherent in these estimates, making it reasonably possible such estimates could change. Our estimate of probable incurred credit losses is inherently uncertain because it is highly sensitive to changes in economic conditions which influence growth, portfolio seasoning, bankruptcy trends, trends in housing markets, delinquency rates and the flow of loans through various stages of delinquency, the realizability of any collateral and actual loss experience. Changes in such estimates could significantly impact our allowance and provision for credit losses.

As an illustration of the effect of changes in estimates related to the allowance for credit losses a 10 percent change in our projection of probable net credit losses on our loans would have resulted in a change of approximately $61 million in our allowance for credit losses at December 31, 2013.

Our allowance for credit losses is based on estimates and is intended to be adequate but not excessive. The allowance for credit losses is regularly assessed for adequacy through a detailed review of the loan portfolio. The allowance is comprised of two balance sheet components:

• The allowance for credit losses, which is carried as a reduction to loans on the balance sheet, includes reserves for inherent probable credit losses associated with all loans outstanding; and

• The reserve for off-balance sheet risk, which is recorded in other liabilities, includes probable and reasonably estimable credit losses arising from off-balance sheet arrangements such as letters of credit and undrawn commitments to lend.

Both components include amounts calculated for specific individual loan balances and for collective loan portfolios depending on the nature of the exposure and the manner in which risks inherent in that exposure are managed.

• All commercial loans that exceed $500,000 are evaluated individually for impairment. When a loan is found to be "impaired," a specific reserve is calculated. Reserves against impaired loans, including consumer and commercial loans modified in troubled debt restructurings, are determined primarily by an analysis of discounted expected cash flows with reference to independent valuations of underlying loan collateral and considering secondary market prices for distressed debt where appropriate.

• Loans which are not individually evaluated for impairment and those evaluated and found not to be impaired are pooled into homogeneous categories of loans and collectively evaluated to determine if it is deemed probable, based on historical data and other environmental factors, that a loss has been incurred even though it has not yet been manifested itself in a specific loan.

For consumer receivables and certain small business loans other than troubled debt restructurings, we utilize a roll rate migration analysis that estimates the likelihood that a loan will progress through the various stages of delinquency, or buckets and ultimately charge-off based upon recent performance experience of other receivables in our portfolio. This analysis considers delinquency status, loss experience and severity and takes into account whether loans are in bankruptcy or have been subject to account management actions, such as the re-age of accounts or modification arrangements. We also consider the expected loss severity based on the underlying collateral, if any, for the loan in the event of default. In addition to roll rate reserves, we provide loss reserves on consumer and commercial receivables to reflect our judgment of portfolio risk factors which may not be fully reflected in the roll rate statistics or historical trends that are not reflective of current inherent losses in the loan portfolio. Portfolio risk factors considered in establishing the allowance for credit losses on receivables include, as appropriate, growth, product mix and risk selection, bankruptcy trends, geographic concentrations, loan product features such as adjustable rate loans, economic conditions such as national and local trends in unemployment, housing markets and interest rates, portfolio seasoning, changes in underwriting practices, current levels of charge-offs and delinquencies, changes in laws and regulations, customer concentration and other factors which can affect payment patterns on outstanding receivables such as natural disasters. We also consider key ratios such as allowance as a percentage of loans, allowance as a percentage of nonperforming loans and allowance as a percentage of net charge-offs in developing our allowance estimates.

An advanced credit risk methodology is utilized to support the estimation of incurred losses inherent in pools of homogeneous commercial loans and off-balance sheet risk. This methodology uses the probability of default from the customer risk rating assigned to each counterparty, the "Loss Given Default" rating assigned to each transaction or facility based on the collateral securing the transaction, and the measure of exposure based on the transaction. A suite of models, tools and templates is maintained using quantitative and statistical techniques, which are combined with management's judgment to support the assessment of each transaction. These were developed using internal data and supplemented with data from external sources which was judged to be consistent with our internal credit standards. These advanced measures are applied to the homogeneous credit pools to estimate the required allowance for credit losses.

The results from the commercial analysis, consumer roll rate analysis and the specific impairment reserving process are reviewed each quarter by the Credit Reserve Committee. This committee also considers other observable factors, both internal and external to us in the general economy, to ensure that the estimates provided by the various models adequately include all known information at each reporting period. Loss reserves are maintained to reflect the committee's judgment of portfolio risk factors which may not be fully reflected in statistical models. The Committee's judgment may also be used when they believe historical trends are not reflective of current inherent incurred losses in the loan portfolio. Our Risk and Finance departments independently assess and approve our allowance for credit losses.

Goodwill Impairment Goodwill is not subject to amortization but is tested for possible impairment at least annually or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset might be impaired. Impairment testing requires that the fair value of each reporting unit be compared with its carrying amount, which is determined on the basis of capital invested in the unit including attributable goodwill. We determine the invested capital of a reporting unit by applying to the reporting unit's risk-weighted assets a capital charge that, prior to the fourth quarter of 2013, was consistent with Basel 2.5 requirements, and additionally, allocating to that unit the remaining carrying amount of HUSI's net assets that is attributable to that unit. Accordingly, the entire carrying amount of HUSI's net assets is allocated to our reporting units. During the fourth quarter of 2013, in conjunction with the preparation of HSBC North America's first CCAR submission and HSBC Bank USA's first DFAST submission along with the finalization of Basel III rules, we made the decision to manage our businesses to a higher common equity Tier 1 ratio and, for years beginning with 2015, that we would calculate risk-weighted assets in our projections for goodwill impairment testing purposes based on Basel III advanced requirements (as opposed to Basel 2.5). Significant and long-term changes in the applicable reporting unit's industry and related economic conditions are considered to be primary indicators of potential impairment due to their impact on expected future cash flows. In addition, shorter-term changes may impact the discount rate applied to such cash flows based on changes in investor requirements or market uncertainties. In evaluating possible impairment, specific factors we consider are: (a) the observance of material changes to business plan information (e.g., financial forecasts); (b) significant increases in observed peer group discount rates; (c) significant announced or planned business divestitures; (d) the margin by which the fair value of each reporting unit exceeded the carrying amount at the previous testing date; (e) deterioration in macroeconomic, industry or market conditions that have not yet been reflected in the latest business plan information; (f) other relevant events specific to the reporting unit (e.g., changes in management, strategy or customers, capital allocation or litigation).

The impairment testing of our goodwill is a "critical accounting estimate" due to the significant judgment required in the use of the approaches to determine fair value. We employ the discounted cash flow method and, starting with the goodwill impairment assessment made at December 31, 2012, a market approach, which focuses on valuation multiples for reasonably similar publicly traded companies and also considers recent market transactions, to determine fair value. The discounted cash flow method includes such variables as revenue growth rates, expense trends, interest rates and terminal values. Based on an evaluation of key data and market factors, management's judgment is required to select the specific variables to be incorporated into the models. Additionally, the estimated fair value can be significantly impacted by the risk adjusted cost of capital percentage used to discount future cash flows. The risk adjusted cost of capital percentage is derived from an appropriate capital asset pricing model, which itself depends on a number of financial and economic variables which are established on the basis of that used by market participants which involves management's judgment. Because our fair value estimate involves judgment and is influenced by factors outside our control, it is reasonably possible such estimate could change. When management's judgment is that the anticipated cash flows have decreased and/or the cost of capital percentage has increased, the effect will be a lower estimate of fair value. If the fair value of the reporting unit is determined to be lower than the carrying amount, an impairment charge may be recorded and net income will be negatively impacted.

Impairment testing of goodwill requires that the fair value of each reporting unit be compared with its carrying amount, including goodwill. Reporting units were identified based upon an analysis of each of our individual operating segments. A reporting unit is defined as an operating segment or any distinct, separately identifiable component one level below an operating segment for which complete, discrete financial information is available that management regularly reviews. Goodwill was allocated to the carrying amount of each reporting unit based on its relative fair value.

We have established July 1 of each year as the date for conducting our annual goodwill impairment assessment. We have decided not to elect the option to apply a qualitative assessment to our goodwill impairment testing in 2013 and, therefore continue to utilize a two-step process. The first step, used to identify potential impairment, involves comparing each reporting unit's fair value to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, including allocated goodwill, there is no indication of impairment and no further procedures are required. If the carrying amount including allocated goodwill of the reporting unit exceeds the unit's fair value, a second step is performed to quantify the impairment amount, if any. If the implied fair value of goodwill as determined using the same methodology as used in a business combination is less than the carrying amount of goodwill, an impairment charge is recorded for the excess. Any impairment charge recognized cannot exceed the amount of goodwill assigned to a reporting unit. Subsequent reversals of goodwill impairments are not permitted. At July 1, 2013, the estimated fair value of each reporting unit exceeded its carrying amount and, as such, none of our recorded goodwill was deemed to be impaired.

Due to historically narrow differences between the carrying amount and fair value of our Global Banking and Markets reporting unit and the results of our annual impairment testing at July 1, 2013, we performed an interim impairment test of the goodwill associated with this reporting unit at September 30, 2013 at which time the fair value of this reporting unit continued to exceed its carrying amount, including goodwill. During the fourth quarter of 2013, in conjunction with the preparation of HSBC North America's first CCAR submission and HSBC Bank USA's first DFAST submission along with the finalization of Basel III rules, we made the decision to manage our businesses to a higher common equity Tier 1 ratio and, for years beginning with 2015, that we would calculate risk-weighted assets in our projections for goodwill impairment testing purposes based on Basel III advanced requirements (as opposed to Basel 2.5). Accordingly, we performed an interim impairment test of the goodwill associated with all of our reporting units at December 31, 2013. As a result of this testing, the fair value of our Retail Banking and Wealth Management, Commercial Banking and Private Banking reporting units continued to exceed their carrying values, with the book value of each reporting unit, including allocated goodwill being 80 percent or less of fair value. However, while our updated cash flow projections for our Global Banking and Markets reporting unit continue to reflect strong levels of earnings as we continue to expand this business, as a result of the changes discussed above related to the Tier 1 common ratio and Basel III risk-weighted asset calculations, the interim impairment test of the goodwill associated with our Global Banking and Markets reporting unit as of December 31, 2013 indicated the book value of the reporting unit including goodwill was higher than its fair value. As a result of this indicator of impairment, the second step of testing was performed for this reporting unit whereby the fair value of tangible net assets and unrecognized intangible assets were deducted from the fair value of the reporting unit to determine the implied fair value of goodwill. As the fair value of the tangible net assets and unrecognized intangible assets exceeded the fair value of this reporting unit, the step two analysis resulted in the impairment and write-off of the entire $616 million of goodwill allocated to this reporting unit. See Note 11, "Goodwill," in the accompanying consolidated financial statements for additional discussion.

Our goodwill impairment testing is highly sensitive to certain assumptions and estimates used as discussed above. We continue to perform periodic analyses of the risks and strategies of our business and product offerings. If a significant deterioration in economic and credit conditions, a change in the strategy or performance of our business or product offerings, or an increase in the capital requirements of our business occurs, interim impairment tests for reporting units could again be required which may indicate that goodwill at one or more of our reporting units is impaired, in which case we would be required to recognize an impairment charge.

Valuation of Financial Instruments A significant portion of our financial assets and liabilities are carried at fair value. These include trading assets and liabilities, derivatives held for trading or used for hedging, securities available-for-sale and loans held for sale. Furthermore, we have elected to measure specific assets and liabilities at fair value under the fair value option, including commercial leveraged finance loans, structured deposits, structured notes, and certain own debt issuances. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, we use quoted prices to determine fair value. If quoted prices are not available, we base fair value on models using inputs that are either directly observable or are derived from and corroborated by market data.

Valuation Governance Framework - We have established a control framework to ensure fair values are either determined or validated by a function independent of the risk-taker. Controls over the valuation process are summarized in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Fair Value."

Valuation of Major Classes of Assets and Liabilities - The Fair Value Framework establishes a three-tiered fair value hierarchy with Level 1 representing quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs are inputs that are observable for the identical asset or liability, either directly or indirectly. 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 inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. Classification within the fair value hierarchy is based on the lowest hierarchical level input that is significant to the fair value measurement. As such, the classification of a financial asset or liability within the fair value hierarchy is dynamic in that the asset or liability could be transferred to other hierarchy levels in each reporting period as a result of price discovery. We review and update our fair value hierarchy classifications quarterly. Changes from one quarter to the next related to the observability of the inputs into a fair value measurement may result in a reclassification between hierarchy levels. Level 3 assets as a percentage of total assets measured at fair value were approximately 2.41 percent at December 31, 2013.

Imprecision in estimating unobservable market inputs can impact the amount of revenue, loss or other comprehensive income recorded for a particular financial instrument. While we believe our valuation methods are appropriate, the use of different methodologies or assumptions to determine the fair value of certain financial assets and liabilities could result in a different estimate of fair value at the reporting date. For a more detailed discussion of the determination of fair value for individual financial assets and liabilities carried at fair value see "Fair Value" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

The following is a description of the significant estimates used in the valuation of financial assets and liabilities for which quoted market prices and observable market parameters are not available.

• Derivatives - We manage groups of derivative instruments with offsetting market and credit risks. Accordingly, we measure the fair value of each group of derivative instruments based on the exit price of the group's net risk position. The fair value of a net risk position is determined using internal models that utilize multiple market inputs. The majority of the market inputs can be validated through market consensus data. For complex or long-dated derivative products where market data is not available, fair value is sensitive to the limitation of the valuation model (model risk), the liquidity of the product (liquidity risk) and the assumptions about inputs not obtainable through price discovery process (data uncertainty risk). Accordingly, we make valuation adjustments to capture the risks and uncertainties. Because of the interrelated nature, we do not separately make an explicit adjustment to the fair value for each of these risks. Instead, we apply a range of assumptions to the valuation input that we believe implicitly incorporates adjustments for liquidity, model and data uncertainty risks.

We also include a credit risk adjustment to reflect the credit risk associated with the net derivative positions. In estimating the credit valuation adjustment, we net the derivative positions by counterparties. The fair value for a net long credit risk position is adjusted for the counterparty's credit risk referred to as credit valuation adjustment (CVA) whereas the fair value for a net short credit risk position is adjusted for HUSI's own credit risk referred to as debit valuation adjustment (DVA). We calculate the credit risk adjustment by applying the probability of default of the counterparty to the expected exposure, and multiplying the result by the expected loss given default. We estimate the implied probability of default based on the credit spreads of the specific counterparties observed in the credit default swap market. Where credit default spread of the specific counterparty is not available, we use the credit default spread of a specific proxy (e.g., the CDS spread of the parent). Where specific proxy credit default swap is not available, we apply a blended approach based on a combination of credit default swaps referencing to credit names of similar credit standing in the same industry sector and the historical rating-based probability of default. During 2012, we changed to use a market-implied probability of default in the determination of the credit risk adjustment to reflect evolving market practices which reduced trading revenue by $47 million.

We do not include a funding spread in the discount rate applied to the fair value measurement of uncollateralized derivatives. The application of such "funding fair value adjustment" is under consideration by the financial services industry, although no consensus has yet emerged. In the future, and possibly in 2014, we may adopt a "funding fair value adjustment" to reflect funding of uncollateralized derivatives at rates other than interbank offer rates.

• Valuation of Securities - For the majority of our trading and available-for-sale securities, we obtain fair value for each security instrument from multiple independent pricing vendors (IPVs) and brokers, if available. We have established adequate controls in pricing vendor selection and fair value validation. The validation methods include but are not limited to comparisons among IPV prices for the same instrument, review and challenge IPV valuation methodologies, inputs and assumptions, and the elapsed time between the date to which market data relates and the measurement date. For securities that are difficult to value, we use a discounted cash flow model which estimates the fair value based on our assumptions in prepayment risk, default risk and loss upon default. We exercise significant judgment in estimating these assumptions and inputs to the valuation model. Nonetheless, we believe these model inputs reflect market participants' assumptions about risks and the risk premium required to compensate for undertaking risks. For certain non-recourse instruments, we use the fair value of the collateral as a proxy to the measurement.

• Loans Held for Sale - Certain residential mortgage whole loans, consumer receivables and commercial loans are classified as held for sale and are accounted for at the lower of amortized cost or fair value. Where available, we measure held for sale mortgage whole loans based on transaction prices of loan portfolios of similar characteristics observed in the whole loan market. Adjustments are made to reflect differences in collateral location, loan-to-value ratio, FICO scores, vintage year, default rates, the completeness of the loan documentation and other risk characteristics. The fair value estimates of consumer receivables and commercial loans are determined primarily using the discounted cash flow method with estimated inputs in prepayment rates, default rates, loss severity, and market rate of return.

• Commercial Leveraged Finance Loans - Where available, fair value is based on observable market consensus pricing obtained from independent sources, relevant broker quotes or observed market prices of instruments with similar characteristics. Where observable market parameters are not available, fair value is determined based on contractual cash flows adjusted for estimates of prepayment rates, expected default rates, loss severity discounted at management's estimate of the expected rate of return required by market participants. We also consider loan specific risk mitigating factors such as collateral arrangements in determining the fair value estimate.

• Mortgage Servicing Rights - The fair value of mortgage servicing rights is estimated using a discounted cash flow model which incorporates our estimates of unobservable inputs for prepayment rates, discount rates and market servicing costs.

• Structured Notes and Deposits- Structured notes and structured deposits are hybrid instruments containing embedded derivatives. The valuation of the hybrid instruments is predominantly driven by the derivative features embedded within the instruments. Depending on the complexity of the embedded derivative, the same risk elements of valuation adjustments described in the derivative section above would also apply to hybrid instruments. In addition, cash flows for the funded notes and deposits are discounted at the relevant interest rates for the duration of the instrument adjusted for our own credit spreads. The credit spreads so applied are determined with reference to our own debt issuance rates observed in primary and secondary markets, internal funding rates and the structured note rates in recent executions.

Except for structured notes and deposits with embedded credit derivative features, the associated risks embedded in the hybrid instruments issued to customers are economically hedged with our affiliates through a freestanding derivative. As a result, HUSI is market risk neutral in substantially all of the structured notes and deposits.

• Long-Term Debt (Own Debt Issuances) - The fair value of own debt issuances is based on the observed price for the identical or similar instruments transacted in the secondary market. However, the secondary market could become inactive or price quotes could be stale or differ among market participants. In those circumstances, we use inputs to value the interest rate and the credit spread components of the debt. Changes in such estimates, and in particular the own credit spreads could be volatile and markedly impact the total mark-to-market on debt designated at fair value recorded in our consolidated statement of income (loss). For example, a 10 percent change in the value of our debt designated at fair value would have resulted in a change to our reported mark-to-market of approximately $759 million for the year ended December 31, 2013.

Because the fair value of certain financial assets and liabilities are significantly impacted by the use of estimates, the use of different assumptions can result in changes in the estimated fair value of those assets and liabilities, which can result in equity and earnings volatility as follows:

• Changes in the fair value of trading assets and liabilities (including derivatives held for trading) are recorded in current period earnings;

• Changes in the fair value of a derivative that has been designated and qualifies as a fair value hedge, along with the changes in the fair value of the hedged asset or liability (including losses or gains on firm commitments, if any), are recorded in current period earnings;

• Changes in the fair value of a derivative that has been designated and qualifies as a cash flow hedge are recorded in other comprehensive income, net of tax, to the extent of its effectiveness, until earnings are impacted by the variability of cash flows from the hedged item. Any ineffectiveness is recognized in current period earnings;

• Changes in the fair value of securities available-for-sale are recorded in other comprehensive income;

• Changes in the fair value of loans held for sale when their cost exceeds fair value are recorded in current period earnings; and

• Changes in the fair value of commercial leveraged finance loans, structured deposits, structured notes and long-term debt that we have elected to measure at fair value under the fair value option are recorded in current period earnings.

Derivatives Held for Hedging Derivatives designated as qualified hedges are tested for hedge effectiveness. For these transactions, assessments are made at the inception of the hedge and on a recurring basis, whether the derivative used in the hedging transaction has been and is expected to continue to be highly effective in offsetting changes in fair values or cash flows of the hedged item. This assessment is conducted using statistical regression analysis.

If we determine as a result of this assessment that a derivative is no longer a highly effective hedge, hedge accounting is discontinued as of the quarter in which such determination was made. The assessment of the effectiveness of the derivatives used in hedging transactions is considered to be a "critical accounting estimate" due to the use of statistical regression analysis in making this determination. Similar to discounted cash flow modeling techniques, statistical regression analysis requires the use of estimates regarding the amount and timing of future cash flows which are susceptible to significant changes in future periods based on changes in market rates. Statistical regression analysis also involves the use of additional assumptions including the determination of the period over which the analysis should occur as well as the selection of a convention for the treatment of credit spreads in the analysis.

The outcome of the statistical regression analysis serves as the foundation for determining whether or not a derivative is highly effective as a hedging instrument. This can result in earnings volatility as the mark-to-market on derivatives which do not qualify as effective hedges and the ineffectiveness associated with qualifying hedges are recorded in current period earnings. For example, a 10 percent adverse change in the value of our derivatives that do not qualify as effective hedges would have reduced revenue by approximately $194 million for the year ended December 31, 2013.

Mortgage Servicing Rights Prior to the conversion of our mortgage processing and servicing operations to PHH Mortgage, we retained the right to service agency eligible mortgage loans and recognized retained rights to service mortgage loans as a separate and distinct asset at the time the loans were sold. We initially valued residential mortgage servicing rights ("MSRs") at fair value at the time the related loans were sold and subsequently measure residential MSRs at fair value at each reporting date with changes in fair value reflected in earnings in the period that the changes occur. Residential MSRs recorded on our balance sheet totaled $227 million and $168 million at December 31, 2013 and 2012, respectively. Beginning with May 2013 applications, we now sell our agency eligible mortgage originations to PHH Mortgage on a servicing released basis which results in no new servicing rights being recognized

MSRs are subject to interest rate risk in that their fair value will fluctuate as a result of changes in the interest rate environment. Fair value is determined based upon the application of valuation models and other inputs. The valuation models incorporate assumptions market participants would use in estimating future cash flows. These assumptions include expected prepayments, default rates and market-based option adjusted spreads. The estimate of fair value is considered to be a "critical accounting estimate" because the assumptions used in the valuation models involve a high degree of subjectivity that is dependent upon future interest rate movements. The reasonableness of these pricing models is validated on a quarterly basis by reference to external independent broker valuations and industry surveys.

Because the fair values of MSRs are significantly impacted by the use of estimates, the use of different estimates can result in changes in the estimated fair values of those MSRs, which can result in equity and earnings volatility because such changes are reported in current period earnings.

Deferred Tax Asset Valuation Allowance We recognize deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax credits and state net operating losses. Our net deferred tax assets, including deferred tax liabilities, totaled $1.6 billion and $0.9 billion as of December 31, 2013 and 2012, respectively. We evaluate our deferred tax assets for recoverability considering negative and positive evidence, including our historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences and any carryback availability. We are required to establish a valuation allowance for deferred tax assets and record a charge to earnings or shareholders' equity if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved business plans, future capital requirements and ongoing tax planning strategies, including capital support from HSBC necessary as part of such plans and strategies. This process involves significant management judgment about assumptions that are subject to change from period to period. Because the recognition of deferred tax assets requires management to make significant judgments about future earnings, the periods in which items will impact taxable income and the application of inherently complex tax laws, we have identified the assessment of deferred tax assets and the need for any related valuation allowance as a critical accounting estimate.

We are included in HSBC North America's consolidated U.S. Federal income tax return and in certain combined state tax returns. We have entered into a tax allocation agreement with HSBC North America and its subsidiary entities ("HNAH Group") included in the consolidated return which govern the current amount of taxes to be paid or received by the various entities and, therefore, we look at HSBC North America and its affiliates, together with the tax planning strategies identified, in reaching conclusions on recoverability. Based on our forecasts of future taxable income, we currently anticipate that our continuing operations will generate sufficient taxable income to allow us to realize our deferred tax assets. However, market conditions have created losses in the HNAH Group in recent periods and volatility in our pre-tax book income. As a consequence, our current analysis of the recoverability of the deferred tax assets significantly discounts any future taxable income expected from operations and relies on continued liquidity and capital support from HSBC, including tax planning strategies implemented in relation to such support. Absent capital support from HSBC and implementation of the related tax planning strategies, we would record a valuation allowance against our deferred tax assets.

The use of different assumptions of future earnings, the periods in which items will impact taxable income and the application of inherently complex tax laws can result in changes in the amounts of deferred tax items recognized, which can result in equity and earnings volatility because such changes are reported in current period earnings. Furthermore, if future events differ from our current forecasts, valuation allowances may need to be established or adjusted, which could have a material adverse effect on our results of operations, financial condition and capital position. We will continue to update our assumptions and forecasts of future taxable income and assess the need and adequacy of any valuation allowance.

Additional detail on our assumptions with respect to the judgments made in evaluating the realizability of our deferred tax assets and on the components of our deferred tax assets and deferred tax liabilities as of December 31, 2013 and 2012 can be found in Note 17, "Income Taxes," in the accompanying consolidated financial statements.

Our interpretations of tax laws are subject to examination by the Internal Revenue Service and state taxing authorities. Resolution of disputes over interpretations of tax laws may result in us being assessed additional income taxes. We regularly review whether we may be assessed such additional income taxes and recognize liabilities for such potential future tax obligations as appropriate.

We are subject to the income tax laws of the U.S., its states and the jurisdictions in which we have significant business operations. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. The Company must make judgments and interpretations about the application of these inherently complex tax laws and related rulings when determining the provision for income taxes and must also make estimates about when certain items affect taxable income in its various tax jurisdictions. Disputes over interpretations of the tax laws may be settled with the taxing authority upon examination or audit. We periodically evaluate the likelihood of assessments in each taxing jurisdiction resulting from current and subsequent years' examinations, and unrecognized tax benefits related to uncertain tax positions are adjusted when there is more information available or when an event occurs requiring a change. The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate was $334 million, $314 million and $276 million at December 31, 2013, 2012 and 2011, respectively. It is reasonably possible that there could be a change in the amount of our unrecognized tax benefits within the next 12 months due to settlements or statutory expirations in various state and local tax jurisdictions.

It is our policy to recognize accrued interest related to uncertain tax positions in interest expense in the consolidated statement of income (loss) and to recognize penalties, if any related to uncertain tax positions as a component of other expenses in the consolidated statement of income (loss). We had accruals for the payment of interest and penalties associated with uncertain tax positions of $208 million, $159 million and $130 million at December 31, 2013, 2012 and 2011, respectively See Note 17, "Income Taxes" in the accompanying consolidated financial statements for additional detail related to our uncertain tax positions.

Contingent Liabilities Both we and certain of our subsidiaries are parties to various legal proceedings resulting from ordinary business activities relating to our current and/or former operations. These actions include assertions concerning violations of laws and/or unfair treatment of consumers. We have also been subject to various governmental and regulatory proceedings.

We estimate and provide for potential losses that may arise out of litigation and regulatory proceedings to the extent that such losses are probable and can be reasonably estimated. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different from those estimates. Our total estimated liability in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, our experience and the experience of others in similar cases or proceedings and the opinions and views of legal counsel.

Litigation and regulatory exposure represents a key area of judgment and is subject to uncertainty and certain factors outside of our control. Due to the inherent uncertainties and other factors involved in such matters, we cannot be certain that we will ultimately prevail in each instance. Such uncertainties impact our ability to determine whether it is probable that a liability exists and whether the amount can be reasonably estimated. Also, as the ultimate resolution of these proceedings is influenced by factors that are outside of our control, it is reasonably possible our estimated liability under these proceedings may change. We will continue to update our accruals for these legal, governmental and regulatory proceedings as facts and circumstances change. For further details, see Note 28, "Litigation and Regulatory Matters" in the accompanying consolidated financial statements.

Balance Sheet Review

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

			Increase (Decrease) From
			December 31, 2012					December 31, 2011
	December 31, 2013		Amount			%		Amount			%
	(dollars are in millions)
Period end assets:
Short-term investments..........................................	$	22,694	$	4,907		27.6	%	$	(7,485	)	(24.8	)%
Loans, net.................................................................	67,089		4,478			7.2		15,965			31.2
Loans held for sale..................................................	230		(788		)	(77.4	)	(3,440		)	(93.7	)
Trading assets.........................................................	28,894		(1,980		)	(6.4	)	(7,587		)	(20.8	)
Securities..................................................................	56,264		(13,072		)	(18.9	)	948			1.7
Other assets.............................................................	10,316		496			5.1		(20,875		)	(66.9	)
......................................................................................	$	185,487	$	(5,959	)	(3.1	)%	$	(22,474	)	(10.8	)%
Funding sources:
Total deposits..........................................................	$	112,608	$	(5,063	)	(4.3	)%	$	(27,121	)	(19.4	)%
Trading liabilities.....................................................	10,875		(3,824		)	(26.0	)	(992		)	(8.4	)
Short-term borrowings............................................	19,135		4,202			28.1		3,126			19.5
All other liabilities...................................................	3,558		(1,004		)	(22.0	)	(1,587		)	(30.8	)
Long-term debt........................................................	22,847		1,102			5.1		6,138			36.7
Shareholders' equity...............................................	16,464		(1,372		)	(7.7	)	(2,038		)	(11.0	)
......................................................................................	$	185,487	$	(5,959	)	(3.1	)%	$	(22,474	)	(10.8	)%

Short-Term Investments Short-term investments include cash and due from banks, interest bearing deposits with banks and securities purchased under resale agreements. Balances will fluctuate from period to period depending upon our liquidity position at the time. Overall balances increased since December 31, 2012 as we managed our short-term liquidity to maximize earnings while retaining liquidity. Compared with December 31, 2011, overall balances decreased reflecting lower deposit levels and a redeployment of excess liquidity into loans.

Loans, Net The following summarizes our loan balances at December 31, 2013 and increases (decreases) over prior periods:

			Increase (Decrease) From
			December 31, 2012					December 31, 2011
	December 31, 2013		Amount			%		Amount			%
	(dollars are in millions)
Commercial loans:
Construction and other real estate...................	$	9,034	$	577		6.8	%	$	1,174		14.9	%
Business and corporate banking......................	14,446		1,838			14.6		4,221			41.3
Global banking⁽¹⁾..................................................	21,625		1,616			8.1		8,967			70.8
Other commercial loans......................................	3,389		313			10.2		483			16.6
Total commercial loans.......................................	48,494		4,344			9.8		14,845			44.1
Consumer loans:
Residential mortgages.....................................	15,826		455			3.0		1,713			12.1
Home equity mortgages..................................	2,011		(313		)	(13.5	)	(552		)	(21.5	)
Total residential mortgages...............................	17,837		142			.8		1,161			7.0
Credit Card...........................................................	854		39			4.8		26			3.1
Other consumer...................................................	510		(88		)	(14.7	)	(204		)	(28.6	)
Total consumer loans.........................................	19,201		93			.5		983			5.4
Total loans..............................................................	67,695		4,437			7.0		15,828			30.5
Allowance for credit losses..................................	606		(41		)	(6.3	)	(137		)	(18.4	)
Loans, net...............................................................	$	67,089	$	4,478		7.2	%	$	15,965		31.2	%

⁽¹⁾Represents large multinational firms including globally focused U.S. corporate and financial institutions and U.S. Dollar lending to multinational banking customers managed by HSBC on a global basis as well as loans to HSBC affiliates which totaled $5,328 million, $4,514 million and $858 million at December 31, 2013, 2012 and 2011, respectively.

Commercial loan balances increased compared with both December 31, 2012 and 2011 due to new business activity, largely in global banking, including an increase in affiliate loans of $4,470 million since December 31, 2011, as well as in business and corporate banking, and, to a lesser extent, in construction and other real estate which reflects our continued focus on expanding our core proposition and proactively targeting companies with international banking requirements in key growth markets. This growth was strongest in the non-bank holding companies, health care and energy industries. These increases were partially offset by pay downs and managed reductions in certain exposures.

Residential mortgage loans increased modestly since December 31, 2012 due primarily to the inclusion of approximately $309 million in guaranteed loans purchased from the Government National Mortgage Association ("GNMA") which had previously been recorded in other assets. Repayments on these purchased GNMA loans are predominantly insured by the Federal Housing Administration and as such, these loans have different risk characteristics from the rest of our consumer loan portfolio. Compared with December 31, 2011, residential mortgage loans increased due to increases to the portfolio associated with originations targeted at our Premier customer relationships. 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 portion of our new residential loan originations and target new residential mortgage loan originations towards our Premier customer relationships.

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

	LTVs at December 31, 2013⁽¹⁾⁽²⁾				LTVs at December 31, 2012⁽¹⁾⁽²⁾
	First Lien		Second Lien		First Lien		Second Lien
LTV < 80%...........................................................................................	87.4	%	65.0	%	79.5	%	59.4	%
80% < LTV < 90%...............................................................................	6.0		14.1		8.6		13.3
90% < LTV < 100%.............................................................................	3.8		9.5		5.7		11.5
LTV > 100%.........................................................................................	2.9		11.3		6.2		15.8
Average LTV for portfolio.................................................................	61.4		67.3		66.6		71.9

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

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

Credit card receivable balances, which represent our legacy HSBC Bank USA credit card portfolio, have remained relatively flat compared with December 31, 2012 and 2011.

Other consumer loans have continued to decrease since December 31, 2012 and 2011, reflecting the discontinuation of student loan originations and the run-off of our installment loan and auto finance portfolios.

Loans Held for Sale The following table summarizes loans held for sale at December 31, 2013 and increases (decreases) over prior periods:

			Increase (Decrease) From
				December 31, 2012					December 31, 2011
	December 31, 2013			Amount			%		Amount			%
	(dollars are in millions)
Total commercial loans........................................	$	76		$	(405	)	(84.2	)%	$	(889	)	(92.1	)%
Consumer loans:
Residential mortgages.................................	91			(381		)	(80.7	)	(1,967		)	(95.6	)
Credit card receivables................................	-			-			-		(416		)	(100.0	)
Other consumer............................................	63			(2		)	(3.1	)	(168		)	(72.7	)
Total consumer loans.....................................	154			(383		)	(71.3	)	(2,551		)	(94.3	)
Total loans held for sale......................................	$	230		$	(788	)	(77.4	)%	$	(3,440	)	(93.7	)%

Commercial loans held for sale decreased compared with both December 31, 2012 and 2011. During the first quarter of 2013, we completed the sale of substantially all of our remaining leveraged acquisition finance syndicated loans which were originated with the intent of selling them to unaffiliated third parties, but we had been holding since the financial crisis. Commercial loans held for sale under this program were $3 million, $465 million and $377 million at December 31, 2013, 2012 and 2011, respectively. In addition, during 2012 we sold $2.5 billion of loans that were held for sale at December 31, 2011 as part of our agreement to sell certain retail branches to First Niagara which included $521 million of commercial loans, $1.4 billion of residential mortgages, $416 million of credit card receivables and $161 million of other consumer loans. Commercial loans held for sale also includes a $55 million global banking project financing syndicated loan at December 31, 2013, as well as commercial real estate loans of $18 million, $16 million, and $55 million at December 31, 2013, 2012 and 2011, respectively.

Residential mortgage loans held for sale decreased compared with both December 31, 2013 and 2012. In addition to the residential mortgage loans held for sale to First Niagara at December 31, 2011 as discussed above, residential mortgage loans held for sale primarily includes agency eligible first mortgage loans originated and held for sale. Upon conversion of our mortgage processing and servicing operations to PHH Mortgage in the second quarter of 2013, these loans are sold servicing released directly to PHH Mortgage beginning with May 2013 applications. Also included in residential mortgage loans held for sale are subprime residential mortgage loans of $46 million, $52 million and $181 million at December 31, 2013, 2012 and 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.

In addition to the other consumer loans held for sale to First Niagara at December 31, 2011 as discussed above, other consumer loans held for sale in all periods also includes 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 these was $77 million and $114 million at December 31, 2013 and 2012, respectively.

Trading Assets and Liabilities The following table summarizes trading assets and liabilities balances at December 31, 2013 and increases (decreases) over prior periods:

			Increase (Decrease) From
			December 31, 2012					December 31, 2011
	December 31, 2013		Amount			%		Amount			%
	(dollars are in millions)
Trading assets:
Securities⁽¹⁾...............................................................	$	11,152	$	(2,007	)	(15.3	)%	$	(1,794	)	(13.9	)%
Precious metals........................................................	11,751		(581		)	(4.7	)	(5,331		)	(31.2	)
Derivatives⁽²⁾............................................................	5,991		608			11.3		(462		)	(7.2	)
......................................................................................	$	28,894	$	(1,980	)	(6.4	)%	$	(7,587	)	(20.8	)%
Trading liabilities:
Securities sold, not yet purchased.......................	308		101			48.8	%	(35		)	(10.2	)%
Payables for precious metals.................................	3,826		(1,941		)	(33.7	)	(3,173		)	(45.3	)
Derivatives⁽³⁾............................................................	6,741		(1,984		)	(22.7	)	2,216			49.0
......................................................................................	$	10,875	$	(3,824	)	(26.0	)%	$	(992	)	(8.4	)%

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

⁽²⁾At December 31, 2013, 2012 and 2011 the fair value of derivatives included in trading assets has been reduced by $3.9 billion, $5.1 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 December 31, 2013, 2012 and 2011 the fair value of derivatives included in trading liabilities has been reduced by $2.1 billion and $1.3 billion and $6.3 billion respectively, relating to amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties.

Securities balances decreased since December 31, 2012 and 2011 due to a decrease in U.S. Treasury, corporate and foreign sovereign positions held to mitigate the risks of interest rate products issued to customers of domestic and emerging markets. Balances of securities sold, not yet purchased increased since December 31, 2012 due to an increase in short U.S. Treasury positions related to hedges of derivatives in the interest rate trading portfolio and remained relatively flat with 2011 levels.

Precious metals trading assets decreased since December 31, 2012 due primarily to a sharp decline in spot rates, which was partially offset by an increase in inventory held as hedges for client activity. Compared with December 31, 2011, precious metals trading assets decreased due primarily to a decline in spot rates, a decrease in our own inventory positions held as hedges for client activity, and a decrease in unallocated metal balances held for customers due to increased competition for metal custody business. The lower payable for precious metals compared with December 31, 2012 and 2011 was primarily due to a decrease in obligations to return unallocated client balances as well as a reduction in spot rates.

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

Derivative asset balances increased since December 31, 2012 due to market movements of foreign exchange and commodity derivatives which more than offset reductions in interest rate and credit derivatives. Compared with December 31, 2011, derivative asset balances decreased mainly due to market movements as valuations of interest rate, foreign exchange and credit derivatives all declined. The balances also reflect the continued decrease in credit derivative positions as a number of transaction unwinds and commutations reduced the outstanding market value as we continue to actively reduce the exposure in the legacy structured credit business. Derivative liabilities decreased since December 31, 2012 due to market movements in interest rate and credit derivatives which more than offset increases in foreign exchange derivatives. Compared with December 31, 2011, derivative liability balances increased due to market movements as valuations of interest rate, foreign exchange and credit derivatives all increased.

Securities Securities include securities available-for-sale and securities held-to-maturity. Balances will fluctuate between periods depending upon our liquidity position at the time. The decline in balances since December 31, 2012 reflects the sale of U.S. Treasury, mortgage-backed and other asset-backed securities as part of a continuing strategy to re-balance the securities portfolio for risk management purposes based on the current interest rate environment. Partially offsetting the decline was the addition of $200 million of securities held-to-maturity as a result of the consolidation of Bryant Park Funding LLC in the second quarter of 2013. Securities balances remained relatively flat compared with December 31, 2011. See Note 5, "Securities," in the accompanying consolidated financial statements for additional information.

Other Assets Other assets includes intangibles, goodwill and in 2011, assets of discontinued operations. The increase from 2012 was driven by higher deferred tax assets, partially offset by the full impairment in 2013 of $616 million of goodwill previously allocated to our Global Banking and Markets ("GB&M") reporting unit. See Note 11, "Goodwill," in the accompanying consolidated financial statements for additional discussion. Compared with 2011, other assets declined primarily related to a reduction in assets of discontinued operations as a result of the sale of certain credit card receivables to Capital One in May 2012.

Deposits The following summarizes deposit balances by major depositor categories at December 31, 2013 and increases (decreases) over prior periods:

			Increase (Decrease) From
			December 31, 2012					December 31, 2011
	December 31, 2013		Amount			%		Amount			%
	(dollars are in millions)
Individuals, partnerships and corporations......	$	91,229	$	(4,621	)	(4.8	)%	$	(10,440	)	(10.3	)%
Domestic and foreign banks................................	$	20,425	166			.8		(201		)	(1.0	)
U.S. government and states and political subdivisions.......................................................	672		(21		)	(3.0	)	(163		)	(19.5	)
Foreign governments and official institutions..	282		(587		)	(67.5	)	(1,173		)	(80.6	)
Deposits held for sale⁽¹⁾........................................	-		-			-		(15,144		)	(100.0	)
Total deposits.........................................................	$	112,608	$	(5,063	)	(4.3	)%	$	(27,121	)	(19.4	)%
Total core deposits⁽²⁾.............................................	$	85,809	(4,272		)	(4.7	)%	$	(18,330	)	(17.6	)%

⁽¹⁾Represents deposits sold to First Niagara.

⁽²⁾We monitor "core deposits" as a key measure for assessing results of our core banking network. Core deposits, as calculated in accordance with Federal Financial Institutions Examination Council ("FFIEC") guidelines, generally include all domestic demand, money market and other savings accounts, as well as time deposits with balances not exceeding $100,000.

Deposits continued to be a significant source of funding during all periods. Deposit balances at December 31, 2013 decreased since December 31, 2012 and 2011 driven by a strategic decision to actively reduce deposit interest rates in all customer segments with particular emphasis in the non-premier segments and, compared with December 31, 2011, the completion of the sale of 195 retail branches. The strategy for our core retail banking business includes building relationship deposits and wealth management across multiple markets, channels and segments. This strategy involves various initiatives, such as:

• HSBC Premier, a premium service wealth and relationship banking proposition designed for the internationally-minded client with a dedicated premier relationship manager. Total Premier deposits decreased to $20.9 billion at December 31, 2013 as compared with $22.8 billion and $29.9 billion at December 31, 2012 and 2011, primarily as a result of the impact of the deposit rate reductions; and

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

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

Short-Term Borrowings Short-term borrowings increased since December 31, 2012 and 2011 as a result of increased levels of securities sold under agreements to repurchase, partially offset by a reduction in commercial paper outstanding, and compared with 2011, a reduction in certain other short-term borrowings.

Long-Term Debt Long-term debt increased compared with both December 31, 2012 and 2011 due primarily to the impact of debt issuances, partially offset by long-term debt retirements. Debt issuances during 2013 and 2012, respectively, included $1.0 billion and $3.8 billion of senior notes and $4.5 billion and $3.8 billion of medium-term notes, of which $1.1 billion and $299 million was issued by HSBC Bank USA.

Incremental issuances from the $40 billion HSBC Bank USA Global Bank Note Program totaled $1.1 billion during 2013 and $299 million during 2012. Total debt outstanding under this program was $4.5 billion and $4.8 billion at December 31, 2013 and 2012, respectively. Given the adequate liquidity of HSBC Bank USA, we do not anticipate the Global Bank Note Program being heavily used in the future as deposits will continue to be the primary funding source for HSBC Bank USA.

Incremental long-term debt issuances from our shelf registration statement with the Securities and Exchange Commission ("SEC") totaled $4.4 billion during 2013 and $7.3 billion during 2012. Total long-term debt outstanding under this shelf was $11.7 billion and $10.1 billion at December 31, 2013 and 2012, respectively.

Borrowings from the Federal Home Loan Bank of New York ("FHLB") totaled $1.0 billion at both December 31, 2013 and 2012. At December 31, 2013, we had the ability to access further borrowings of up to $5.3 billion based on the amount pledged as collateral with the FHLB.

In December 2012, we exercised our option to call $309 million of debentures previously issued by HUSI to HSBC USA Capital Trust VII (the "Trust") at the contractual call price of 103.925 percent which resulted in a net loss on extinguishment of approximately $12 million. The Trust used the proceeds to redeem the trust preferred securities previously issued to an affiliate. Under the proposed Basel III capital requirements, the trust preferred securities would have no longer qualified as Tier I capital. We subsequently issued one share of common stock to our parent, HNAI in 2012 for a capital contribution of $312 million.

All Other Liabilities All other liabilities decreased compared with both December 31, 2012 and 2011 largely as a result of lower derivative balances associated with hedging activities, as well as lower outstanding settlement balances and lower repurchase reserves due primarily to the settlement with FNMA that occurred in the fourth quarter of 2013.

Results of Operations

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

Net Interest Income Net interest income declined in 2013 reflecting the impact of lower interest income on securities and short-term investments due to lower interest rates and lower average outstanding balances. These decreases were partially offset by lower interest expense on deposits reflecting lower average rates paid and lower average outstanding balances including the impact of completing our retail branch sale to First Niagara in 2012, and higher interest income on loans driven by higher average balances on commercial loans due to new business volume. Net interest income declined in 2012 compared with 2011 due to lower interest income on securities and short-term investments due to lower rates partially offset by lower interest expense on deposits and higher interest income on loans driven by higher average commercial loan balances as discussed above and lower interest charges relating to estimated tax exposures.

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."

In the following table, which summarizes the significant components of net interest income, interest expense includes $50 million and $237 million in 2012 and 2011 that has been allocated to our discontinued operations in accordance with our existing internal transfer pricing policies as external interest expense is unaffected by these transactions.

			2013 Compared to 2012 Increase (Decrease)								2012 Compared to 2011 Increase (Decrease)
Year Ended December 31,	2013		Volume			Rate			2012		Volume			Rate			2011
	(in millions)
Interest income:
Interest bearing deposits with banks.......................	$	58	$	6		$	(6	)	$	58	$	(16	)	$	(2	)	$	76
Federal funds sold and securities purchased under resale agreements........................................	10		(24		)	(4		)	38		13			(32		)	57
Trading assets.............................................................	118		(16		)	24			110		(16		)	(71		)	197
Securities......................................................................	897		(88		)	(126		)	1,111		252			(404		)	1,263
Loans:
Commercial................................................................	1,142		169			(79		)	1,052		198			(49		)	903
Consumer:
Residential mortgages........................................	559		16			(52		)	595		26			(68		)	637
Home equity mortgages.....................................	71		(21		)	(3		)	95		(25		)	2			118
Credit cards..........................................................	72		(13		)	5			80		(15		)	8			87
Other consumer...................................................	32		(9		)	(4		)	45		(14		)	(8		)	67
Total consumer....................................................	734		(27		)	(54		)	815		(28		)	(66		)	909
Other interest...............................................................	41		(4		)	2			43		(22		)	21			44
Total interest income..................................................	3,000		16			(243		)	3,227		381			(603		)	3,449
Interest expense:
Deposits in domestic offices:
Savings deposits......................................................	65		(24		)	(89		)	178		(27		)	(52		)	257
Other time deposits..................................................	107		26			(61		)	142		4			(5		)	143
Deposits in foreign offices:
Foreign banks deposits...........................................	5		(1		)	-			6		2			(5		)	9
Other time and savings............................................	6		(7		)	(1		)	14		(6		)	2			18
Deposits held for sale.................................................	1		(16		)	-			17		-			1			16
Short-term borrowings...............................................	40		8			4			28		(9		)	(7		)	44
Long-term debt............................................................	661		71			(90		)	680		45			(10		)	645
Total interest expense.................................................	885		57			(237		)	1,065		9			(76		)	1,132
Tax interest expense....................................................	53		3			17			33		32			(98		)	99
Tax liabilities.................................................................	938		60			(220		)	1,098		41			(174		)	1,231
Net interest income - taxable equivalent basis......	2,062		$	(44	)	$	(23	)	2,129		$	340		$	(429	)	2,218
Less: tax equivalent adjustment................................	21								21								21
Net interest income - non taxable equivalent basis..........................................................................	$	2,041							$	2,108							$	2,197

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

Year Ended December 31,	2013		2012		2011
Yield on total earning assets.............................................................................................................	1.88	%	1.98	%	2.26	%
Expense on interest bearing liabilities.............................................................................................	.79		.84		.86
Interest rate spread............................................................................................................................	1.09		1.14		1.40
Benefit from net non-interest paying funds⁽¹⁾................................................................................	.20		.16		.05
Net interest margin.............................................................................................................................	1.29	%	1.30	%	1.45	%

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

The following table summarizes the significant trends affecting the comparability of 2013, 2012 and 2011 net interest income and interest rate spread. Net interest income in the table is presented on a taxable equivalent basis.

	2013					2012					2011
Year Ended December 31,	Amount			Interest Rate Spread		Amount			Interest Rate Spread		Amount			Interest Rate Spread
	(dollars are in millions)
Net interest income/interest rate spread from prior year...............................................	$	2,129		1.14	%	$	2,218		1.40	%	$	2,324		1.66	%
Increase (decrease) in net interest income associated with:
Trading related activities...........................	26					(109		)			129
Balance sheet management activities⁽¹⁾...	(14		)			(15		)			(84		)
Commercial loans........................................	120					38					(13		)
Deposits.......................................................	(20		)			(80		)			96
Residential mortgage banking...................	(15		)			(44		)			18
Interest on estimated tax exposures.........	(20		)			66					(94		)
Other activity...............................................	(144		)			55					(158		)
Net interest income/interest rate spread for current year........................................	$	2,062		1.09	%	$	2,129		1.14	%	$	2,218		1.40	%

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

Trading related activities Net interest income for trading related activities increased during 2013 as lower funding costs and higher rates were partially offset by lower average balances. Net interest income for trading related activities decreased during 2012 primarily due to lower rates earned on interest earning trading assets. Net interest income for trading related activities increased during 2011 primarily due to higher balances on interest earning trading securities, which was partially offset by lower rates earned on these assets.

Balance sheet management activities Lower net interest income from balance sheet management activities during 2013, 2012 and 2011 reflects the impact of the sale of certain securities for risk management purposes and a lower interest rate environment which, in 2013, was partially offset by lower funding costs.

Commercial loans Net interest income on commercial loans increased during 2013 primarily due to higher average loan balances due to new business activity as well as lower levels of nonperforming loans which was partially offset by higher funding costs and a lower average yield on these loans. Net interest income on commercial loans increased during 2012 primarily due to higher average loan balances as well as lower levels of nonperforming loans and lower funding costs which was partially offset by a lower average yield on these loans. Net interest income on commercial loans was lower during 2011 due to lower average loan yields, partially offset by lower funding costs and higher average loan balances.

Deposits Lower net interest income during 2013 primarily reflects the impact of lower rates of return on invested capital and, to a lesser extent, lower average balances and lower rates paid on interest bearing deposits. Lower net interest income during 2012 reflects the impact of lower average balances on interest bearing deposits and 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. Higher net interest income during 2011 reflects higher spreads in RBWM and CMB business segments as deposit pricing was 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.

Residential mortgage banking revenue Net interest income on residential mortgage banking revenue was lower in both 2013 and 2012 reflecting lower residential mortgage average outstanding balances and increased deferred cost amortization due to higher portfolio prepayments, partially offset in 2013 by widening interest spreads largely as a result of lower portfolio funding costs. The reduction in residential mortgage average outstanding balances was primarily as a result of the sale of branches to First Niagara in 2012, which was partially offset by an increase in residential mortgage loans to our Premier customers. Higher net interest income during 2011 resulted from lower funding costs.

Interest on estimated tax exposures Reflects the impact of the change in interest expense associated with tax reserves on estimated exposures between periods.

Other activity Net interest income on other activity was lower during 2013, largely driven by lower rates of return on invested capital related to short-term and long-term borrowing. Net interest income on other activity was higher during 2012, largely driven by lower unallocated funding costs. Net interest income on other activity was lower during 2011, largely attributable to lower net interest income from the sale of auto finance receivables in the previous year.

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

Year Ended December 31,	2013			2012			2011
	(dollars are in millions)
Commercial:
Construction and other real estate................................................................................................	$	(7	)	$	(33	)	$	11
Business and corporate banking...................................................................................................	48			48			(3		)
Global banking..................................................................................................................................	26			14			31
Other commercial..............................................................................................................................	(5		)	(10		)	(28		)
Total commercial...............................................................................................................................	$	62		$	19		$	11
Consumer:
Residential mortgages.....................................................................................................................	42			114			133
Home equity mortgages..................................................................................................................	54			72			49
Credit card receivables....................................................................................................................	32			67			46
Other consumer................................................................................................................................	3			21			19
Total consumer.................................................................................................................................	131			274			247
Total provision for credit losses.......................................................................................................	$	193		$	293		$	258
Provision as a percentage of average loans...................................................................................	0.3		%	0.5		%	0.5		%

During 2013, our provision for credit losses decreased $100 million driven by a lower provision for credit losses in our consumer loan portfolio partially offset by a higher provision for credit losses in our commercial loan portfolio. During 2012, our provision for credit losses increased $35 million primarily due to completing our review of loss emergence period for loans collectively evaluated for impairment using a roll rate migration analysis and extending our loss emergence period for these loans to 12 months for U.S. GAAP which resulted in the recording of an incremental credit loss provision of approximately $80 million ($75 million of which related to consumer loans, including $50 million related to residential mortgage loans and $25 million related to credit card loans) in the fourth quarter of 2012. Excluding the impact of this incremental provision, our provision for credit losses declined in 2012, driven by a lower provision in our consumer loan portfolio, partially offset by a modestly higher provision in our commercial loan portfolio. During 2013, 2012 and 2011, we decreased our credit loss reserves as the provision for credit losses was lower than net charge-offs by $41 million, $96 million and $63 million, respectively.

In our commercial portfolio, the provision for credit losses in 2013 includes a specific provision associated with a single corporate banking customer relationship. Excluding the impact of this item, our commercial provision for credit losses remained higher reflecting higher levels of reserves primarily associated with large global banking loan exposures. Our commercial portfolio provision for credit losses was modestly higher in 2012 driven largely by increased levels of reserves for risk factors associated with expansion activities in the U.S. and Latin America. In addition, we experienced continued improvements in economic and credit conditions including lower nonperforming loans and criticized asset levels in all years, including reductions in higher risk rated loan balances, stabilization in credit downgrades, including managed reductions in certain exposures and improvements in the financial circumstances of certain customer relationships. While these improvements resulted in an overall release of loss reserves in all years, the releases were lower in 2013 when compared with 2012 and in 2012 when compared with 2011.

The provision for credit losses on residential mortgages including home equity mortgages decreased $90 million during 2013. Excluding the impact of the incremental provision for the change in loss emergence period as discussed above, the provision for credit losses on residential mortgages including home equity mortgages decreased $46 million in 2012. The decreases in both years were driven by continued improvements in economic and credit conditions including lower dollars of delinquency on accounts less than 180 days contractually delinquent and improvements in loan delinquency roll rates. Partially offsetting the decrease in 2012 were higher charge-offs in our home equity mortgage portfolio due to an increased volume of loans where we had decided not to pursue foreclosure.

The provision for credit losses associated with credit card receivables decreased $35 million during 2013. Excluding the impact of the incremental provision for the change in loss emergence period as discussed above, the provision for credit losses on credit card receivables decreased $4 million in 2012. The decreases in both years reflect improved economic conditions, including lower dollars of delinquency, improvements in loan delinquency roll rates and lower average receivable levels.

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

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

Year Ended December 31,	2013			2012			2011
	(dollars are in millions)
Credit card fees....................................................................................................................................	$	43		$	87		$	129
Other fees and commissions.............................................................................................................	706			766			832
Trust income........................................................................................................................................	123			110			108
Trading revenue..................................................................................................................................	474			498			349
Other securities gains, net.................................................................................................................	202			145			129
HSBC affiliate income:
Fees and commissions..................................................................................................................	154			164			167
Other affiliate income....................................................................................................................	48			38			35
Total HSBC affiliate income..........................................................................................................	202			202			202
Residential mortgage banking revenue...........................................................................................	80			16			37
Gain (loss) on instruments designated at fair value and related derivatives.............................	(32		)	(342		)	471
Gain on sale of branches....................................................................................................................	-			433			-
Other income:
Valuation of loans held for sale...................................................................................................	9			(12		)	(27		)
Insurance........................................................................................................................................	11			9			13
Earnings from equity investments..............................................................................................	3			(1		)	40
Miscellaneous income..................................................................................................................	36			62			42
Total other income.........................................................................................................................	59			58			68
Total other revenues...........................................................................................................................	$	1,857		$	1,973		$	2,325

Credit card fees Credit card fees declined in 2013 and 2012 due to lower outstanding balances driven by the sale of a portion of the portfolio as part of the sale of 195 retail branches in 2012, as well as a continued trend towards lower late fees due to improved customer behavior. Also contributing to the decrease in 2013 was higher costs associated with our credit card rewards program due to higher estimated customer redemption rates which increased our redemption liability by approximately $16 million.

Other fees and commissions Other fee-based income declined in 2013 reflecting lower account service related fees primarily due to the impact of the sale of 195 retail branches as discussed above and a decline in credit facility related fees primarily due to a decrease in syndication fees. Also contributing to the decline in 2013 was lower custodial fees due to a decrease in precious metals average inventory held under custody as well as a decline in average metals prices. Other fee-based income decreased in 2012 reflecting the impact of the retail branch sale as discussed above and the implementation of new legislation in late 2011 which limits fees paid by retailers to banks on debit card purchases. The following table summarizes the components of other fees and commissions.

Year Ended December 31,	2013		2012		2011
	(dollars are in millions)
Account services...........................................................................................................................	$	289	$	309	384
Credit facilities................................................................................................................................	197		220		250
Custodial fees.................................................................................................................................	57		76		74
Other fees........................................................................................................................................	163		161		124
Total other fees and commissions....................................................................................................	$	706	$	766	$	832

Trust income Trust income increased in 2013 reflecting higher fee income associated with our management of fixed income assets driven by growth in emerging market debt and offshore high yield and high income assets. Trust income was relatively flat in 2012.

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

Year Ended December 31,	2013			2012			2011
	(dollars are in millions)
Trading revenue..................................................................................................................................	$	474		$	498		$	349
Net interest income.............................................................................................................................	(15		)	(42		)	78
Trading related revenue.....................................................................................................................	$	459		$	456		$	427
Business Activities:
Derivatives⁽¹⁾...................................................................................................................................	$	185		$	172		$	199
Balance sheet management..........................................................................................................	12			(9		)	(62		)
Foreign exchange...........................................................................................................................	174			207			209
Precious metals...............................................................................................................................	74			76			93
Global banking................................................................................................................................	5			1			2
Other trading...................................................................................................................................	9			9			(14		)
Trading related revenue.....................................................................................................................	$	459		$	456		$	427

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

2013 Compared with 2012 Trading related revenue remained stable during 2013 as higher revenue from balance sheet management activities, derivatives and global banking were largely offset by lower revenue from foreign exchange.

Trading revenue from derivative products increased during 2013 driven by higher new deal activity on domestic interest rate products and lower interest costs related to structured notes issuance. Partly offsetting these revenue improvements was a decline in emerging markets related derivatives, which were impacted by less stable economic conditions in Latin America, and lower valuation gains from structured credit products. In addition, revenue from debit valuation adjustments on derivative liabilities declined in 2013 as our own credit spread tightened relative to 2012. In addition, 2012 included a gain from the change in methodology for estimating debit valuation adjustments as discussed below.

Trading revenue related to balance sheet management activities increased during 2013 primarily due to the performance of economic hedge positions used to manage interest rate risk.

Foreign exchange trading revenue decreased during 2013 due to lower revenue from a reduction in trade volumes and price volatility. Precious metals revenue decreased slightly during 2013 from reduced client demand.

Global banking revenue improved during 2013 from valuation gains on credit default swap hedge positions, additionally 2012 included a loss on a loan sale.

Other trading revenue remained flat during 2013.

2012 Compared with 2011 Trading related revenue increased during 2012 due to higher revenue from balance sheet management and other trading activities, partially offset by lower revenue from derivatives, precious metals and foreign exchange.

Trading revenue related to derivatives products decreased in 2012 due primarily to a change in credit risk adjustment estimates on derivatives. During 2012, we changed our estimate of credit valuation adjustments on derivative assets and debit valuation adjustments on derivative liabilities to be based on a market-implied probability of default calculation rather than a ratings-based historical counterparty probability of default calculation, consistent with evolving market practices. This change resulted in a reduction to other trading revenue of $47 million. Also contributing to lower revenues in 2012 was lower net interest income, mainly from reduced holdings of interest bearing instruments and higher interest costs associated with increased issuances of structured notes. Partially offsetting these revenue decreases was higher income from our credit related exposures, including reserve releases in valuations associated with our legacy global markets businesses and gains associated with the termination of certain structured credit exposures in advance of scheduled maturity dates.

Trading revenue related to balance sheet management activities improved during 2012 primarily as economic hedge positions used to manage interest rate risk improved due to a more stable interest rate environment.

Foreign exchange trading revenue decreased during 2012 from lower volumes and reduced margins due to tightening spreads.

Precious metals trading revenues decreased during 2012 as a result of lower metals price volatility and a decline in trading volumes.

Global banking trading revenue decreased during 2012 mainly from a loss on a loan sale partially offset by the change in the valuation of credit default swap hedge positions.

Other trading revenue increased in 2012 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 2013, 2012 and 2011, we sold $35.3 billion, $10.5 billion and $21.4 billion, respectively, of U.S. Treasury, mortgage-backed and other asset-backed securities as part of a continuing strategy to re-balance the securities portfolio for risk management purposes based on the current interest rate environment and, in 2011, to adjust portfolio risk duration as well as to reduce risk-weighted asset levels. The gross realized gains and losses from sales of securities in all years, which is included as a component of other securities gains, net above, are summarized in Note 5, "Securities," in the accompanying consolidated financial statements.

HSBC affiliate income Affiliate income remained flat in both 2013 and 2012.

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

Year Ended December 31,	2013			2012			2011
	(dollars are in millions)
Net interest income	$	180		$	195		$	239
Servicing related income:
Servicing fee income	79			87			109
Changes in fair value of MSRs due to:
Changes in valuation model inputs or assumptions	88			(15		)	(136		)
Customer payments	(43		)	(61		)	(77		)
Trading - Derivative instruments used to offset changes in value of MSRs	(69		)	31			173
Total servicing related income	55			42			69
Originations and sales related income:
Gains on sales of residential mortgages	37			80			40
Provision for repurchase obligations	(21		)	(134		)	(92		)
Trading and hedging activity	(5		)	4			(11		)
Total originations and sales related income (loss)	11			(50		)	(63		)
Other mortgage income	14			24			31
Total residential mortgage banking revenue included in other revenues	80			16			37
Total residential mortgage banking related revenue	$	260		$	211		$	276

Net interest income was lower in 2013 and 2012 reflecting lower residential mortgage average outstanding balances primarily as a result of the sale of branches to First Niagara in 2012 and continued higher portfolio prepayments as a result of the low mortgage rate environment. Partially offsetting the decrease in 2013 was widening interest spreads, largely a result of lower portfolio funding costs. Consistent with our Premier strategy, additions to our residential mortgage portfolio are primarily to our Premier customers, while sales of loans consist of conforming loans sold to PHH Mortgage as discussed further below.

Total servicing related income increased in 2013 driven by improved net hedged MSR performance partially offset by lower servicing fees due to a lower average serviced loan portfolio as a result of prepayments in excess of new additions to the serviced portfolio. As a result of our strategic relationship with PHH Mortgage, beginning with May 2013 applications, we no longer add new volume to our serviced portfolio as all agency eligible loans are now sold on a servicing released basis. Changes in MSR valuations are driven by updated market based assumptions such as interest rates, expected prepayments, primary-secondary spreads and cost of servicing. Consequently, primarily as a result of rising mortgage rates, the MSR asset fair value increased in 2013 partially offset by losses on instruments used to hedge changes in the fair value of the MSRs. Total servicing related income decreased in 2012 driven by a lower average serviced loan portfolio as well as a decline in net hedged MSR performance. Due to the generally declining rate environment in 2012, updates to the MSR assumptions discussed above led to a lower MSR value.

Originations and sales related income (loss) improved in 2013 largely due to lower loss provisions for loan repurchase obligations associated with loans previously sold partially offset by lower gains on sales of residential mortgage loans. Originations and sales related income (loss) improved in 2012 as higher loss provisions for loan repurchase obligations associated with loans previously sold were more than offset by both increased gains on individual loan sales and improved trading and hedging activity. During 2013, we recorded a charge of $21 million due to our estimated exposure associated with repurchase obligations on loans previously sold compared with charges of $134 million and $92 million in 2012 and 2011, respectively. During the fourth quarter of 2013, we entered into a settlement with FNMA for $83 million which settled our liability for substantially all loans sold to FNMA between January 1, 2000 and June 26, 2012. The settlement resulted in a release of $15 million in repurchase reserves previously provided for this exposure. We continue to maintain repurchase reserves for FNMA exposure associated with residual risk not covered by the settlement agreement. A significant majority of the remaining repurchase reserve related to repurchase exposure for loans sold to the FHLMC.

Other mortgage income has fallen in 2013 due to a contractual fee arrangement with PHH Mortgage wherein PHH Mortgage retains ancillary fee income.

Gain (loss) on instruments designated at fair value and related derivatives We have elected to apply fair value option accounting to commercial leveraged acquisition finance loans, unfunded commitments, certain own fixed-rate debt issuances and all structured notes and structured deposits issued after January 1, 2006 that contain embedded derivatives. We also use derivatives to economically hedge the interest rate risk associated with certain financial instruments for which fair value option has been elected. See Note 16, "Fair Value Option" in the accompanying consolidated financial statements for additional information including a breakout of these amounts by individual component.

Gain on sale of branches As discussed above, in 2012 we completed the sale of 195 non-strategic retail branches to First Niagara and recognized a pre-tax gain, net of allocated non-deductible goodwill, of $433 million.

Valuation of loans held for sale Valuation adjustments on loans held for sale improved in 2013 and 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 $46 million, $52 million and $181 million as of December 31, 2013, 2012 and 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 (loss).

Other income Other income, excluding the valuation of loans held for sale as discussed above, decreased during 2013 driven largely by the establishment of a repurchase reserve of approximately $8 million relating to loans previously securitized, lower income from commercial and whole loan sales and the non-recurrence of miscellaneous income recorded in 2012 related to the retail branch sale which were partially offset by higher income associated with fair value hedge ineffectiveness related to securities available-for-sale. Other income in 2011 included gains of $53 million and $10 million, respectively, relating to the sale of our equity interest in a joint venture and the sale of certain non-marketable securities. Excluding the impact of these items, other income increased in 2012 driven by higher income associated with fair value hedge ineffectiveness, partially offset by lower earnings from equity investments.

Operating Expenses Lower operating expenses in 2013 reflect lower compliance costs, the impact of our retail branch divestitures which reduced salaries and employee benefits expense as well as occupancy expense and the non-recurrence of expense related to certain regulatory matters which totaled $1,381 million during 2012, which was partially offset by a goodwill impairment of $616 million, higher fees paid to HTSU due to implementation of new regulatory requirements and higher other expenses driven by increased litigation expense. Compliance costs, while remaining a significant component of our cost base, declined to $302 million in 2013 compared with $426 million in 2012 as the prior year reflects investment in BSA/AML process enhancements and infrastructure and, to a lesser extent, foreclosure remediation which did not occur at the same level in 2013. While we continue to focus attention on cost mitigation efforts in order to continue realization of optimal cost efficiencies, we believe compliance related costs have permanently increased to higher levels due to the remediation required by regulatory consent agreements.

The following table summarizes the components of operating expenses.

Year Ended December 31,	2013			2012			2011
	(dollars are in millions)
Salary and employee benefits...........................................................................................................	$	922		$	944		1,114
Occupancy expense, net....................................................................................................................	230			241			280
Support services from HSBC affiliates:
Fees paid to HSBC Finance for loan servicing and other administrative support............................................................................................................................................	14			27			36
Fees paid to HMUS.......................................................................................................................	228			326			275
Fees paid to HTSU........................................................................................................................	1,000			912			967
Fees paid to other HSBC affiliates..............................................................................................	217			215			235
Total support services from HSBC affiliates..............................................................................	1,459			1,480			1,513
Goodwill impairment...........................................................................................................................	616			-			-
Expense related to certain regulatory matters.................................................................................	-			1,381			-
Other expenses:
Equipment and software...............................................................................................................	54			43			156
Marketing........................................................................................................................................	43			47			67
Outside services............................................................................................................................	94			103			68
Professional fees............................................................................................................................	112			123			151
Postage, printing and office supplies.........................................................................................	6			13			15
Off-balance sheet credit reserves................................................................................................	(14		)	(26		)	15
FDIC assessment fee.....................................................................................................................	90			99			122
Insurance business.......................................................................................................................	1			12			-
Miscellaneous................................................................................................................................	359			288			318
Total other expenses.....................................................................................................................	745			702			912
Total operating expenses...................................................................................................................	$	3,972		$	4,748		$	3,819
Personnel - average number..............................................................................................................	6,481			7,765			9,582
Efficiency ratio.....................................................................................................................................	101.9		%	114.9		%	80.2		%

Salaries and employee benefits Total salaries and employee benefits expense decreased during 2013 and 2012 driven by the impact of the sale of 195 non-strategic retail branches completed in 2012, continued cost management efforts and, compared with 2012, the non-recurrence of a pension curtailment gain recorded in 2012 which were partially offset by higher salaries expense relating to expansion activities associated with certain businesses.

Occupancy expense, net Occupancy expense decreased in 2013 reflecting the impact of the reduction in size of our retail branch network including lower maintenance and utilities costs. Occupancy expense decreased in 2012 reflecting lower rent and lower utilities costs, including the impact of the retail branch sales as discussed above, as well as the commencement of the recognition of a $117 million deferred gain on the sale of our 452 Fifth Avenue headquarters building which began in April 2012 and is being recognized over the eight year remaining life of our lease. In addition, occupancy expense during 2011 includes $21 million relating to the write-off of leasehold improvements and lease abandonment costs associated with the consolidation of certain retail branch offices as well as a charge of $5 million associated with the closure of the Amherst Data Center.

Support services from HSBC affiliates Includes technology and certain centralized support services, including human resources, corporate affairs and other shared services, legal, compliance, tax and finance charged to us by HTSU. Support services from HSBC affiliates also includes services charged to us by an HSBC affiliate located outside of the United States which provides operational support to our businesses, including among other areas, customer service, systems, risk management, collection and accounting functions as well as servicing fees paid to HSBC Finance for servicing nonconforming residential mortgage loans and, prior to May 1, 2012, certain credit card receivables. Support services from HSBC affiliates declined in 2013 as higher fees paid to HTSU relating to additional staff and consulting fees associated with regulatory reporting and capital planning activities were more than offset by lower fees paid to HMUS largely related to lower compliance costs as 2012 reflects investment in AML process enhancements and infrastructure which did not occur at the same level in 2013 and lower fees paid to HSBC Finance, which no longer services our credit card portfolio. Support services from affiliates declined in 2012 compared with 2011, reflecting lower fees paid to HTSU as increased costs relating to compliance, including costs associated with our BSA/AML and foreclosure remediation activities, was more than offset by workforce reductions in certain shared services functions which resulted in lower allocated costs for these functions and, as discussed above, lower fees paid to HSBC Finance partially offset by higher fees paid to HMUS, primarily related to compliance costs. Compliance costs reflected in support services from affiliates totaled $289 million during 2013 compared with $375 million and $252 million in 2012 and 2011, respectively.

Goodwill impairment Reflects the full impairment in 2013 of $616 million of goodwill previously allocated to our GB&M reporting unit. See Note 11, "Goodwill," in the accompanying consolidated financial statements for additional discussion.

Expense related to certain regulatory matters Included in 2012 is an expense of $1,381 million related to certain regulatory matters. See Note 28, "Litigation and Regulatory Matters," in the accompanying consolidated financial statements for additional information.

Other expenses Other expenses increased in 2013 due to higher litigation expenses on exposure associated with certain previous residential mortgage-backed securities activity, lower recoveries on off-balance sheet credit exposures and higher capitalized software amortization which were partially offset by lower insurance expense, lower professional fees and lower FDIC assessment fees. Other expenses in 2012 included a $19 million expense accrual related to mortgage servicing matters and in 2011 included a charge of $110 million included within equipment and software relating to the impairment of certain previously capitalized software development costs which are no longer realizable. Also included in 2011 was a provision for interchange litigation as well as estimated costs associated with penalties related to foreclosure delays involving loans serviced for the GSEs and other third parties and an expense accrual related to mortgage servicing matters which collectively totaled $123 million. Excluding these amounts, other expenses were higher in 2012 largely due to higher outside services fees and higher litigation expenses.

Efficiency ratio Our efficiency ratio from continuing operations was 101.9 percent during 2013 compared with 114.9 percent in 2012 and 80.2 percent in 2011. Our efficiency ratio was impacted in each period by the change in the fair value of our own debt attributable to credit spread for which we have elected fair value option accounting. Excluding the impact of this item, our efficiency ratio for 2013 was 97.8 percent compared with 105.7 percent in 2012 and 87.1 percent in 2011. Our efficiency ratio improved in 2013 compared with 2012 due to a decrease in operating expenses partially offset by a decrease in net interest income and in other revenues as 2012 includes a $433 million pre-tax gain from the sale of certain branches to First Niagara. While operating expenses declined in 2013, driven by the impact of our retail branch divestitures, cost mitigation efforts and the non-recurrence of a $1,381 million expense recorded in 2012 related to certain regulatory matters which was partially offset in 2013 by a goodwill impairment, they continue to reflect elevated levels of compliance costs. Excluding the impact of fair value on our own debt attributable to credit spread, our efficiency ratio remained higher in 2012 compared with 2011, due to higher operating expenses associated with the expense related to certain regulatory matters, partially offset by higher other revenues which included the branch sale gain. In addition to the items discussed above, the efficiency ratio increase in 2012 also reflects the non-recurrence of an impairment of certain software development costs as well as the impairment of leasehold improvements associated with certain branch closures which were recorded in 2011.

Income taxes Our effective tax rate was 26.6 percent in 2013 compared with 37.1 percent in 2012 and 33.3 percent in 2011. For a complete analysis of the differences between effective tax rates based on the total income tax provision attributable to pretax income and the statutory U.S. Federal income tax rate, see Note 17, "Income Taxes," in the accompanying consolidated financial statements.

Segment Results - IFRSs Basis

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

Our segment results are reported on a continuing operations basis. As previously disclosed, CMB has historically held investments in low income housing tax credits. The financial benefit from these investments is obtained through lower taxes. Since business segment returns are measured on a pre-tax basis, a revenue share has historically been in place in the form of a funding credit to provide CMB with an exact and equal offset booked to the Other segment. Beginning in 2013, this practice was eliminated and the low income housing tax credit investments and related financial impact are recorded entirely in the Other segment. We have reclassified prior period results in both the CMB and Other segments to conform to the revised current year presentation. As disclosed in Note 3, "Discontinued Operations," in the accompanying consolidated financial statements, our Card and Retail Services business, which was previously reported in our RBWM segment, is reported as discontinued operations and is not included in our segment presentation.

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

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

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

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

Year Ended December 31,	2013			2012			2011
	(in millions)
Net interest income.............................................................................................................................	$	842		$	854		$	1,023
Other operating income......................................................................................................................	347			555			409
Total operating income.......................................................................................................................	1,189			1,409			1,432
Loan impairment charges...................................................................................................................	129			204			247
Net operating income	1,060			1,205			1,185
Operating expenses.............................................................................................................................	1,206			1,301			1,653
Loss before tax.....................................................................................................................................	$	(146	)	$	(96	)	$	(468	)

2013 loss before tax compared with 2012 Our RBWM segment reported a higher loss before tax during 2013. Our loss before tax in 2012 includes a gain of $238 million relating to the sale of certain branches to First Niagara. Excluding the gain on the sale of these branches, loss before tax improved $188 million during 2013 driven by lower operating expenses, lower loan impairment charges, and higher other operating income, partially offset by lower net interest income.

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

Other operating income included a gain from the completion of the sale of certain branches to First Niagara totaling $238 million in 2012. Excluding the gain on the sale of branches, other operating income increased in 2013 driven by lower provisions for mortgage loan repurchase obligations associated with previously sold loans and improved net hedged mortgage servicing rights results, partially offset by lower gains on sales of mortgage loans.

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

Operating expenses were lower in 2013 primarily due to the sale of the 195 branches to First Niagara as well as lower compliance and legal costs and decreases in expenses driven by several cost reduction initiatives relating to our retail branch network, primarily optimizing staffing and administrative areas, as well as reduced marketing expenditures. Partially offsetting these improvements was the impact of a reduction in the amount of branch costs allocated to CMB and expense of $11 million related primarily to the lease obligations of seven branch offices recorded in the fourth quarter of 2013 that will be closed in 2014.

2012 loss before tax compared with 2011 Our RBWM segment reported a lower loss before tax during 2012, reflecting higher other operating income as a result of a gain from the sale of certain branches, lower loan impairment charges and lower operating expenses, partially offset by lower net interest income.

Net interest income was lower during 2012 driven by lower deposit margins primarily as a result of lower returns related to deposits held for sale to First Niagara due to their short term nature, lower deposit balances as a result of the sale as well as a low interest rate environment. Net interest income related to consumer loans was lower as a result of the branch sale, however, net interest income related to residential mortgages improved as net interest income from the discounted collateral values on delinquent mortgage loans was partially offset by narrower spreads and increased deferred origination cost amortization as a result of higher prepayments. Residential mortgage average balances were slightly lower as the impact of the branch sale were almost entirely offset by an increase in residential mortgage loans to our Premier customers.

Other operating income included a gain from the sale of certain branches to First Niagara totaling $238 million in 2012. Excluding the gain on the sale of certain branches, other operating income decreased in 2012 driven by 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. These items were partially offset by improved gains on sales of loans sold to GSEs.

Loan impairment charges decreased in 2012 driven by improvements in economic and credit conditions including lower delinquency levels on accounts less than 180 days contractually delinquent and improvements in delinquency roll rates, partially offset by an incremental provision of approximately $25 million during the fourth quarter of 2012 associated with the completion of a review which concluded that the estimated average period of time from current status to write-off for loans collectively evaluated for impairment using a roll rate migration analysis was 10 months (previously a period of 7 months was used) under IFRSs.

Operating expenses in 2012 included $56 million in litigation related charges, $19 million in expense related to mortgage servicing matters, partially offset by an $8 million reduction in estimated cost associated with penalties related to foreclosure delays involving loans serviced for GSEs. Operating expenses in 2011 included the impairment of previously capitalized software development costs, which resulted in a charge of $87 million, and charges of $86 million for estimated costs associated with penalties related to foreclosure delays involving loans serviced for the GSEs and other third parties as well as an expense accrual related to mortgage servicing matters. Excluding these amounts, operating expenses were lower in 2012 primarily due to the sale of the 195 branches to First Niagara as well as 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 expenditures. 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 transaction costs associated with our announced branch sale as well as increased compliance costs, increased cards servicing costs and the impact of a reduction in the amount of branch costs allocated to CMB based upon an updated cost study.

Commercial Banking CMB's goal is to be the leading international trade and business bank in the U.S. CMB strives to execute this vision and strategy in the U.S. by focusing on key markets with high concentration of internationally minded customers. Our CMB segment serves the markets through three client groups, notably Corporate Banking, Business Banking and Commercial Real Estate which allows us to align our resources in order to efficiently deliver suitable products and services based on our client's needs. Whether it is through commercial centers, the retail branch network, or via HSBCnet, CMB provides customers with products and services needed to grow their businesses internationally and delivers those products and services through its relationship managers who operate within a robust, customer focused compliance and risk culture and collaborate across HSBC to capture a larger percentage of a relationship. During 2013, an increase in the number of relationship managers and product partners is enabling us to gain a larger presence in key growth markets, including the West Coast, Southeast and Midwest. This strategy has also led to a reduction in certain Business Banking customers who do not have significant international needs.

New loan originations have resulted in a 16 percent increase in average loans outstanding to Corporate Banking customers since 2012. The Commercial Real Estate group is focusing on selective business opportunities in markets with strong portfolio expertise, which resulted in a 13 percent increase in average outstanding loans for this portfolio since 2012. Total average loans increased 11 percent across all CMB business lines as compared with 2012.

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

Year Ended December 31,	2013		2012		2011
	(in millions)
Net interest income.............................................................................................................................	$	706	$	673	$	728
Other operating income......................................................................................................................	293		539		322
Total operating income.......................................................................................................................	999		1,212		1,050
Loan impairment charges...................................................................................................................	45		4		6
Net operating income	954		1,208		1,044
Operating expenses.............................................................................................................................	680		631		652
Profit before tax....................................................................................................................................	$	274	$	577	$	392

2013 profit before tax compared with 2012 Our CMB segment reported a lower profit before tax during 2013. Profit before tax in 2012 includes a gain of $278 million relating to the sale of certain branches to First Niagara. Excluding the gain on the sale of these branches, profit before tax remained lower, declining $25 million during 2013, driven by higher operating expenses and higher loan impairment charges, partially offset by higher net interest income and higher other operating income.

Net interest income increased in 2013 due to the favorable impact of higher loan balances in expansion markets which more than offset lower business banking revenue due to the branch sale.

Other operating income includes a gain from the completion of the sale of certain branches to First Niagara totaling $278 million in 2012. Excluding the gain on the sale of branches, other operating income was higher during 2013 due to higher fees generated from trade services, foreign currency revenue and credit commitments, as well as an increase in debt and leverage acquisition financing activity.

Loan impairment charges were higher during 2013 primarily due to higher provisions as a result of loan growth in expansion markets.

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

2012 profit before tax compared with 2011 Our CMB segment reported a 47 percent increase in profit before tax during 2012 as higher other operating income as a result of a gain from the sale of certain branches and lower operating expenses were partially offset by lower net interest income.

Net interest income in 2012 was lower, reflecting higher funding costs and lower business banking revenue due to the branch sale, partially offset by the favorable impact of higher loan balances.

Other operating income in 2012 reflects a $278 million gain from the sale of certain branches. Excluding the gain, other operating income was lower in 2012 due to lower interchange and deposit service fees as a result of our sale of certain branches.

Loan impairment charges were relatively flat in 2012 compared with 2011.

Operating expenses decreased during 2012 as additional expenses relating to staffing increases in growth markets as well as higher compliance and technology infrastructure costs were more than offset by lower branch network charges, including a reduction in the amount of branch costs allocated from RBWM based upon an updated cost study. Included in 2011 was an $18 million impairment charge associated with previously capitalized as software development costs.

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

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

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

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 corporate loan balances as well as growth in revenue from the cross-sale of our products to CMB and RBWM customers consistent with our global strategy of cross-sale to other global businesses. GB&M segment results during 2013 benefited from more stable U.S. financial market conditions, which reflected continued low interest rates and generally less volatile credit spreads and foreign exchange prices.

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

Year Ended December 31,	2013			2012			2011
	(in millions)
Net interest income.............................................................................................................................	$	423		$	606		$	504
Other operating income......................................................................................................................	1,165			916			969
Total operating income⁽¹⁾....................................................................................................................	1,588			1,522			1,473
Loan impairment charges (recoveries).............................................................................................	(4		)	(1		)	5
Net operating income	1,592			1,523			1,468
Goodwill impairment............................................................................................................................	480			-			-
Operating expenses, excluding goodwill impairment.....................................................................	984			997			986
Profit before tax....................................................................................................................................	$	128		$	526		$	482

⁽¹⁾The following table summarizes the impact of key activities on total operating income of the GB&M segment. The table has been updated to reflect the new management structure of GB&M (prior year comparatives have been restated to reflect this change).

Year Ended December 31,	2013			2012			2011
	(in millions)
Credit⁽²⁾................................................................................................................................	$	104		$	(11	)	$	35
Rates....................................................................................................................................	116			49			141
Foreign Exchange and Metals...............................................................................................	311			415			421
Equities................................................................................................................................	55			-			46
Total Global Markets..............................................................................................................	586			453			643
Capital Financing....................................................................................................................	247			235			163
Payments and Cash Management............................................................................................	337			348			304
Securities Services...................................................................................................................	13			36			69
Global Trade and Receivables Finance.....................................................................................	42			41			41
Balance Sheet Management⁽³⁾..................................................................................................	382			366			262
Debit Valuation Adjustment.....................................................................................................	(13		)	51			-
Other⁽⁴⁾...................................................................................................................................	(6		)	(8		)	(9		)
Total operating income..........................................................................................................	$	1,588		$	1,522		$	1,473

⁽²⁾ Credit includes $111 million, $56 million and $77 million in 2013, 2012 and 2011, respectively, of operating income related to structured credit products and mortgage loans held for sale which we no longer offer.

⁽³⁾Includes gains on the sale of securities of $200 million, $123 million and $131 million in 2013, 2012 and 2011, respectively.

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

2013 profit before tax compared with 2012 Our GB&M segment reported a lower profit before tax during 2013. The 2013 results include a full impairment of $480 million of goodwill previously allocated to our GB&M reporting unit. The carrying amounts of goodwill and the goodwill impairment were lower under IFRSs compared with U.S. GAAP, because under IFRSs, goodwill was amortized until 2005 while under U.S. GAAP, goodwill was amortized until 2002. See Note 11, "Goodwill," in the accompanying consolidated financial statements for additional discussion regarding the factors which led to the impairment. Excluding the goodwill impairment, profit before tax increased $82 million during 2013, driven primarily by higher other operating income and lower operating expenses, partially offset by lower interest income.

Foreign Exchange and Metals revenue declined during 2013 from reduced trading volumes and lower fees from metals safekeeping. In addition, 2012 included a one-time gain from the sale of an investment. Credit revenue increased during 2013 largely from valuation adjustments on legacy credit exposures. Gains on structured credit products from changes in fair value were $108 million during 2013 compared with $48 million during 2012. Included in the gains from structured credit products were increases in fair value related to exposures to monoline insurance companies of $54 million during 2013 compared with $21 million during 2012. Credit revenue also included valuation gains of $4 million during 2013 related to the fair value of sub-prime residential mortgage loans held for sale compared with valuation losses of $8 million during 2012. Revenue from Rates and Equities increased during 2013 due primarily to the impact of fair value adjustments on structured note liabilities which were related to movements in our own credit spreads. The increase in Rates was partially offset by lower revenue from emerging markets related products which were affected by less stable economic conditions in Latin America.

Corporate loan growth and lower liquidity costs on unused commitments resulted in higher Capital Financing revenue during 2013. Payments and Cash Management revenue decreased due to lower average deposit balances. Security services revenue declined in 2013 due to the transfer of our fund services business to an affiliate entity.

Balance Sheet Management reflected higher gains from the sales of securities during 2013, partially offset by lower net interest income resulting from lower reinvestment rates.

Debit valuation adjustments on derivative liabilities decreased during 2013 as our own credit spreads tightened compared with 2012. In addition, 2012 included a gain from the change in methodology for estimating debit valuation adjustments as discussed below.

Loan impairment charges were relatively flat in 2013 reflecting a stable credit environment.

Goodwill impairment reflects the full impairment in 2013 of $480 million of goodwill previously allocated to our GB&M reporting unit.

Operating expenses excluding goodwill impairment decreased during 2013 due primarily to reduced staff costs due to lower headcount and lower compliance costs associated with our BSA/AML remediation activities partially offset by higher litigation costs associated with our legacy credit business.

2012 profit before tax compared with 2011 Our GB&M segment reported a higher profit before tax during 2012 driven by higher net interest income and lower loan impairment charges (recoveries) partially offset by lower other operating income and higher operating expenses.

Net interest income increased during 2012 due to higher corporate loan and investment balances, partially offset by lower credit spreads on corporate loans as the business managed down high risk credit exposures and increased costs related to liquidity facilities.

Other operating income decreased in 2012 due to lower revenue from Foreign Exchange and Metals driven by a reduction in trading volumes and price volatility, losses from fair value adjustments on our structured notes liabilities and a decline in Security Services revenue resulting from the transfer of our fund services business to an affiliate entity. In addition, other operating income declined in 2012 due to a change in estimation methodology with respect to credit valuation adjustments and debit valuation adjustments, as discussed below. These reductions were partially offset by improved performance of economic hedges employed by Balance Sheet Management to manage interest rate risk, increased income from Payments and Cash Management generated from services to affiliates and increased financing revenue growth in loan balances.

During 2012, we changed our estimate of credit valuation adjustments on derivative assets and debit valuation adjustments on derivative liabilities to be based on a market implied probability of default calculation rather than a ratings based historical counterparty probability of default calculation, consistent with evolving market practice. This change resulted in a reduction to other operating income of $42 million.

Other operating income reflected gains on structured credit products of $81 million during 2012 compared with gains of $83 million during 2011. Included in structured credit products were exposures to monoline insurance companies that resulted in gains of $6 million during 2012 compared with gains of $15 million during 2011. Valuation losses of $8 million during 2012 were recorded against the fair values of sub-prime residential mortgage loans held for sale compared with valuation losses of $24 million in 2011.

Loan impairment charges decreased during 2012 due to reductions in higher risk rated loan balances and the stabilization of credit downgrades.

Operating expenses increased during 2012 as higher compliance costs associated with our BSA/AML remediation activities were partially offset by decreased staff costs as a result of lower headcount.

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

During 2013, we continued to dedicate resources in the wealth management market. Areas of focus are banking and cash management, investment advice including discretionary portfolio management, investment and structured products, residential mortgages, as well as wealth planning for trusts and estates. Also in 2013, our compliance and risk framework was strengthened by the establishment of a Global Private Banking Global Standards Committee and a revised risk appetite framework. Client deposit levels decreased $100 million or 1 percent compared with December 31, 2012 mainly from international market customers. Total loans increased $530 million or 10 percent compared with the prior year from both commercial and residential mortgage portfolios. Overall period end client assets were lower than December 31, 2012 by $2.1 billion primarily due to a reduction in highly active institutional custody customer balances partially offset by higher PB wealth management and investment products.

The following table provides additional information regarding client assets during 2013 and 2012:

Year Ended December 31,	2013			2012
	(in billions)
Client assets at beginning of the period.........................................................................................................	$	46.5		$	47.7
Net new money (outflows).............................................................................................................................	(2.0		)	(1.7		)
Value change....................................................................................................................................................	(.1		)	.5
Client assets at end of period...........................................................................................................................	$	44.4		$	46.5

The following table summarizes IFRSs results for the PB segment.

Year Ended December 31,	2013		2012			2011
	(in millions)
Net interest income.............................................................................................................................	$	189	$	184		$	180
Other operating income......................................................................................................................	109		106			184
Total operating income.......................................................................................................................	298		290			364
Loan impairment charges (recoveries).............................................................................................	5		(3		)	(30		)
Net operating income	293		293			394
Operating expenses.............................................................................................................................	254		232			261
Profit (loss) before tax.........................................................................................................................	$	39	$	61		$	133

2013 profit before tax compared with 2012 Our PB segment reported lower profit before tax during 2013 driven primarily by higher operating expenses and higher loan impairment charges, partially offset by higher net interest income.

Net interest income was higher from improved volumes in lending, partially offset by lower net interest from the reduction in demand deposit and certificate of deposit balances.

Other operating income was relatively flat in 2013 compared with 2012 as increased fees and commissions from higher managed and investment product balances was largely offset by reductions in other income from affiliates and custody product fees.

Loan impairment charges increased during 2013 due to a lower level of recoveries and higher provisions as a result of loan growth.

Operating expenses increased during 2013 primarily due to higher compliance and regulatory costs and costs associated with the closure of a foreign branch.

2012 profit before tax compared with 2011 Our PB segment reported lower profit before tax during 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 2012 due to improved volumes of banking and lending as well as improved spreads on mortgage products.

Other operating income was lower in 2012 reflecting lower fees on managed and structured investment products, fund fees, custody fees as well as the impact in 2011 of a gain of $57 million related to the sale of our equity interest in a joint venture.

Recoveries on loan impairment charges were lower in 2012 while continued improved credit conditions and client credit ratings favorably impacted 2012, these factors were more pronounced in 2011 leading to an overall reduction in recoveries compared with 2012.

Operating expenses decreased during 2012 due to lower staff costs and lower support service costs.

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

In the fourth quarter of 2013, we concluded that given the inter-relationship between the tax benefits obtained from our investment in low income housing tax credits and the amortization of our investment balance in these credits, such amounts would be better presented net in other operating income rather than separately in operating expense and income tax provision for segment reporting purposes. We have reclassified results in all periods presented below to conform to this revised presentation.

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

Year Ended December 31,	2013			2012			2011
	(in millions)
Net interest expense...........................................................................................................................	$	(46	)	$	(43	)	$	(100	)
Gain (loss) on own fair value option debt attributable to credit spread.....................................	(165		)	(361		)	376
Other operating income (loss)...........................................................................................................	87			92			117
Total operating income (loss)............................................................................................................	(124		)	(312		)	393
Loan impairment charges...................................................................................................................	-			-			-
Net operating income	(124		)	(312		)	393
Operating expenses............................................................................................................................	98			1,465			68
Profit (loss) before tax........................................................................................................................	$	(222	)	$	(1,777	)	$	325

2013 profit (loss) before tax compared with 2012 Profit (loss) before tax improved during 2013 driven largely by an expense accrual related to certain regulatory matters totaling $1.4 billion recorded in 2012 that did not re-occur. Excluding the impact of this item, profit (loss) before tax improved $174 million during 2013 primarily due to improvements in revenue associated with changes in fair value attributable to the credit spread of our own debt for which fair value option was elected.

2012 profit (loss) before tax compared with 2011 Profit (loss) before tax decreased in 2012 driven largely by an expense related to certain regulatory matters totaling $1.4 billion in 2012 as well as losses associated with changes in fair value attributable to the credit spread of our own debt for which fair value option was elected. Net interest expense was higher in 2012 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 IFRSs basis. See Note 23, "Business Segments," in the accompanying consolidated financial statements for a discussion of the differences between IFRSs and U.S. GAAP. For segment reporting purposes, intersegment transactions have not been eliminated, and we generally account for transactions between segments as if they were with third parties. Also see Note 23, "Business Segments," in the accompanying consolidated financial statements for a reconciliation of our IFRSs segment results to U.S. GAAP consolidated totals.

Credit Quality

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

Allowance for Credit Losses Commercial loans are monitored on a continuous basis with a formal assessment completed, at a minimum, annually. As part of this process, a credit grade and Loss Given Default are assigned and an allowance is established for these loans based on a probability of default estimate associated with each credit grade under the allowance for credit losses methodology. Credit Review, an independent second line of defense function, provides an ongoing assessment of lending activities that includes independently assessing credit grades and Loss Given Default estimates. See the caption "Risk Management" in this MD&A for additional information regarding the Credit Review function. When it is deemed probable based upon known facts and circumstances that full interest and principal on an individual loan will not be collected in accordance with its contractual terms, the loan is considered impaired. An impairment reserve is 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.

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

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

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

For pools of homogeneous consumer loans which do not qualify as troubled debt restructures, probable losses are estimated using a roll rate migration analysis that estimates the likelihood that a loan will progress through the various stages of delinquency, or buckets, and ultimately charge-off based upon recent historical performance experience of other loans in our portfolio. This migration analysis incorporates estimates of the period of time between a loss occurring and the confirming event of its charge-off. This analysis considers delinquency status, loss experience and severity and takes into account whether loans are in bankruptcy or have been subject to account management actions, such as the re-age of accounts or modification arrangements. The allowance for credit losses on consumer receivables also takes into consideration the loss severity expected based on the underlying collateral, if any, for the loan in the event of default based on historical and recent trends which are updated monthly based on a rolling average of several months' data using the most recently available information and is typically in the range of 30-55 percent for first lien mortgage loans and 95-100 percent for second lien home equity loans. At December 31, 2013, approximately 1 percent of our second lien mortgages where the first lien mortgage is held or serviced by us and has a delinquency status of 90 days or more delinquent, were less than 90 days delinquent and not considered to be a troubled debt restructure or already recorded at fair value less costs to sell.

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

As discussed above, we historically have estimated probable losses for consumer loans and certain small balance commercial loans which do not qualify as a troubled debt restructure using a roll rate migration analysis. This has historically resulted in the identification of a loss emergence period for these loans collectively evaluated for impairment using a roll rate migration analysis which results in less than 12 months of losses in our allowance for credit losses. A loss coverage of 12 months using a roll rate migration analysis would be more aligned with U.S. bank industry practice. As previously disclosed, during 2012 our regulators indicated they would like us to more closely align our loss coverage period implicit within the roll rate methodology with U.S. bank industry practice for these loan products. Therefore, during 2012, we extended our loss emergence period to 12 months for U.S. GAAP resulting in an increase to our allowance for credit losses by approximately $80 million for these loans. We regularly monitor our portfolio to evaluate the period of time utilized in our roll rate migration analysis and perform a formal review on an annual basis.

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" in this MD&A and in Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," in the accompanying consolidated financial statements. Our approach toward credit risk management is summarized under the caption "Risk Management" in this MD&A.

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

At December 31,	2013			2012			2011			2010			2009
	(dollars are in millions)
Allowance for credit losses..................................................................	$	606		$	647		$	743		$	852		$	1,602
Ratio of Allowance for credit losses to:
Loans:⁽¹⁾
Commercial...............................................................................................	.6		%	.7		%	1.3		%	1.7		%	3.0		%
Consumer:
Residential mortgages.......................................................................	1.2			1.4			1.4			1.2			2.5
Home equity mortgages....................................................................	2.4			1.9			2.0			2.0			4.4
Credit card receivables......................................................................	5.9			6.7			4.7			4.6			6.3
Auto finance.......................................................................................	-			-			-			-			2.1
Other consumer loans.......................................................................	2.5			3.3			2.5			2.6			4.0
Total consumer loans........................................................................	1.6			1.7			1.7			1.7			3.2
Total..........................................................................................................	.9		%	1.0		%	1.4		%	1.7		%	3.1		%
Net charge-offs⁽¹⁾:
Commercial..........................................................................................	433.8		%	220.1		%	669.7		%	169.8		%	359.9		%
Consumer............................................................................................	182.8			134.7			118.0			73.9			114.9
Total..........................................................................................................	259.0		%	166.3		%	232.0		%	113.2		%	186.9		%
Nonperforming loans⁽¹⁾:
Commercial..........................................................................................	118.5		%	63.4		%	52.7		%	53.0		%	64.0		%
Consumer............................................................................................	28.0			28.2			31.4			31.3			67.3
Total..........................................................................................................	45.8		%	38.7		%	41.3		%	41.8		%	65.4		%

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

The following table summarizes the changes in the allowance for credit losses by product and the related loan balance by product during the years ended December 31, 2013, 2012, 2011, 2010 and 2009:

	Commercial												Consumer
	Construction and Other Real Estate			Business and Corporate Banking			Global Banking			Other Comm'l			Residential Mortgages			Home Equity Mortgages			Credit Card			Auto Finance			Other Consumer			Total
	(in millions)
Year Ended December 31, 2013:
Allowance for credit losses - beginning of period...........	$	162		$	97		$	41		$	17		$	210		$	45		$	55		$	-		$	20		$	647
Provision charged to income.	(7		)	48			26			(5		)	42			54			32			-			3			193
Charge offs.........................	(62		)	(42		)	-			-			(78		)	(52		)	(41		)	-			(13		)	(288		)
Recoveries..........................	15			9			1			8			12			2			4			-			3			54
Net (charge offs) recoveries..	(47		)	(33		)	1			8			(66		)	(50		)	(37		)	-			(10		)	(234		)
Other....................................	-			-			-			-			-			-			-			-			-			-
Allowance for credit losses - end of period.....................	$	108		$	112		$	68		$	20		$	186		$	49		$	50		$	-		$	13		$	606

	Commercial												Consumer
	Construction and Other Real Estate			Business and Corporate Banking			Global Banking			Other Comm'l			Residential Mortgages			Home Equity Mortgages			Credit Card			Auto Finance			Other Consumer			Total
	(in millions)
Year Ended December 31, 2012:
Allowance for credit losses - beginning of period...........	$	212		$	78		$	131		$	21		$	192		$	52		$	39		$	-		$	18		$	743
Provision charged to income.	(33		)	48			14			(10		)	114			72			67			-			21			293
Charge offs.........................	(36		)	(37		)	(105		)	(1		)	(107		)	(79		)	(62		)	-			(25		)	(452		)
Recoveries..........................	19			8			1			7			11			-			11			-			6			63
Net (charge offs) recoveries..	(17		)	(29		)	(104		)	6			(96		)	(79		)	(51		)	-			(19		)	(389		)
Other....................................	-			-			-			-			-			-			-			-			-			-
Allowance for credit losses - end of period.....................	$	162		$	97		$	41		$	17		$	210		$	45		$	55		$	-		$	20		$	647
Year Ended December 31, 2011:
Allowance for credit losses - beginning of period...........	$	243		$	132		$	116		$	32		$	167		$	77		$	58		$	-		$	27		$	852
Provision charged to income.	11			(3		)	31			(28		)	133			49			46			-			19			258
Charge offs.........................	(51		)	(53		)	-			(6		)	(106		)	(70		)	(71		)	-			(29		)	(386		)
Recoveries..........................	9			12			-			23			5			-			12			-			4			65
Net (charge offs) recoveries..	(42		)	(41		)	-			17			(101		)	(70		)	(59		)	-			(25		)	(321		)
Allowance on loans transferred to held for sale	-			(10		)	(16		)	-			(7		)	(4		)	(6		)	-			(3		)	(46		)
Other....................................	-			-			-			-			-			-			-			-			-			-
Allowance for credit losses - end of period.....................	$	212		$	78		$	131		$	21		$	192		$	52		$	39		$	-		$	18		$	743
Year Ended December 31, 2010:
Allowance for credit losses - beginning of period...........	$	303		$	184		$	301		$	119		$	347		$	185		$	80		$	36		$	47		$	1,602
Provision charged to income.	101			19			(163		)	(35		)	(14		)	13			68			35			10			34
Charge offs.........................	(173		)	(88		)	(24		)	(59		)	(170		)	(121		)	(98		)	(37		)	(36		)	(806		)
Recoveries..........................	12			17			2			5			4			-			8			(1		)	6			53
Net (charge offs) recoveries..	(161		)	(71		)	(22		)	(54		)	(166		)	(121		)	(90		)	(38		)	(30		)	(753		)
Allowance on loans transferred to held for sale	-			-			-			-			-			-			-			(33		)	-			(33		)
Other....................................	-			-			-			2			-			-			-			-			-			2
Allowance for credit losses - end of period.....................	$	243		$	132		$	116		$	32		$	167		$	77		$	58		$	-		$	27		$	852
Year Ended December 31, 2009:
Allowance for credit losses - beginning of period...........	$	186		$	189		$	131		$	31		$	207		$	167		$	74		$	5		$	37		$	1,027
Provision charged to income.	177			137			215			93			364			195			100			104			46			1,431
Charge offs.........................	(64		)	(158		)	(45		)	(8		)	(235		)	(189		)	(100		)	(92		)	(42		)	(933		)
Recoveries..........................	4			16			-			3			11			12			6			18			6			76
Net (charge offs) recoveries..	(60		)	(142		)	(45		)	(5		)	(224		)	(177		)	(94		)	(74		)	(36		)	(857		)
Allowance on loans transferred to held for sale	-			-			-			-			-			-			-			(12		)	-			(12		)
Other....................................	-			-			-			-			-			-			-			13			-			13
Allowance for credit losses - end of period.....................	$	303		$	184		$	301		$	119		$	347		$	185		$	80		$	36		$	47		$	1,602

The allowance for credit losses at December 31, 2013 decreased $41 million, or 6 percent as compared with December 31, 2012 due to lower loss estimates in both our consumer and commercial loan portfolios. Our consumer allowance for credit losses decreased $32 million in 2013, driven primarily by lower loss estimates in our residential mortgage loan portfolio due to continued improvements in credit quality including lower delinquency levels on accounts less than 180 days contractually delinquent and improvements in loan delinquency roll rates. Also contributing to the decrease was lower loss estimates in our credit card portfolio due to improvements in credit quality including improved loan delinquency roll rates. Reserve levels for all consumer loan categories however continue to be impacted by the slow pace of the economic recovery in the U.S. economy, including elevated unemployment rates and, as it relates to residential mortgage loans, a housing market which is in the early stages of recovery. Our commercial allowance for credit losses decreased $9 million in 2013 due to reductions in certain loan exposures including the charge-off of certain client relationships and continued improvements in economic conditions which led to lower levels of non-performing loans and criticized assets. These reductions were partially offset by higher allowances for certain portfolio risk factors associated primarily with our increased exposure to individually significant loans.

The allowance for credit losses at December 31, 2012 decreased $96 million, or 13 percent as compared with December 31, 2011, driven largely by lower loss estimates in our commercial loan portfolio, partially offset by a higher allowance in our consumer loan portfolio due to an incremental provision of $75 million, (including $50 million relating to residential mortgage loans and $25 million relating to credit card loans), associated with changes in the loss emergence period used in our roll rate migration analysis as previously discussed. Excluding the impact of this incremental provision, our consumer allowance for credit losses declined $48 million in 2012, driven by lower loss estimates in our residential mortgage loan portfolio due to continued improvements in credit quality including lower delinquency levels on accounts less than 180 days contractually delinquent and improvements in loan delinquency roll rates. Reserve levels for all consumer loan categories however continued to be impacted by the slow pace of the economic recovery in the U.S. economy, including elevated unemployment rates and, as it relates to residential mortgage loans, a housing market which was slow to recover. Reserve requirements in our commercial loan portfolio declined in 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.

The allowance for credit losses at December 31, 2011 decreased $109 million, or 13 percent as compared with December 31, 2010, driven by lower loss estimates in our commercial loan portfolio and, to a lesser extent, in our home equity mortgage and credit card loan portfolios, partially offset by higher loss estimates in our residential mortgage portfolio excluding home equity loans. Reserve requirements in our commercial loan portfolio declined since December 31, 2010 due to pay-offs, including managed reductions in certain exposures and improvements in the financial circumstances of several customer relationships which led to credit upgrades on certain problem credits and lower levels of criticized assets. The lower allowance on our credit card portfolio was due to lower receivable levels including the transfer of certain receivables to held for sale and lower dollars of delinquency and charge-off. Our allowance for our residential mortgage loan portfolio, excluding home equity loans, increased largely due to higher troubled debt restructures and higher loss severities. Reserve levels for all consumer loan categories however remained elevated due to ongoing weakness in the U.S. economy, including elevated unemployment rates and as it relates to residential mortgage loans, continued weakness in the housing market.

The allowance for credit losses at December 31, 2010 decreased $750 million, or 47 percent, as compared with December 31, 2009 reflecting lower loss estimates in all of our consumer and commercial loan portfolios. The lower delinquency levels resulted from continued improvement in early stage delinquencies as economic conditions improved. The decrease in the allowance for our residential mortgage loan portfolio and home equity loan portfolios reflects lower receivable levels and dollars of delinquency, moderation in loss severities and an improved outlook for incurred future losses. The lower allowance in our credit card portfolio was due to lower receivable levels as a result of actions previously taken to reduce risk which has led to improved credit quality including lower delinquency levels as well as an increased focus by consumers to reduce outstanding credit card debt. The decline in the allowance for credit losses relating to auto finance loans reflects the sale of all remaining auto loans previously purchased from HSBC Finance to Santander Consumer USA ("SC USA") in August 2010. Reserve levels for all consumer loan categories however remained elevated due to continued weakness in the U.S. economy, including elevated unemployment rates. Reserve requirements in our commercial loan portfolio also declined due to run-off, including managed reductions in certain 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 residential mortgage loan allowance for credit losses in all periods reflects consideration of certain risk factors relating to trends such as recent portfolio performance as compared with average roll rates and economic uncertainty, including housing market trends and foreclosure timeframes.

The allowance for credit losses as a percentage of total loans at December 31, 2013, 2012, 2011 and 2010 decreased compared with their respective prior year periods for the reasons discussed above.

The allowance for credit losses as a percentage of net charge-offs increased as compared with December 31, 2012 largely due to lower net charge-offs in both our commercial and consumer portfolios as the decline outpaced the decrease in the allowance. The allowance for credit losses as a percentage of net charge-offs decreased in 2012 as compared with 2011 in our commercial loan portfolio driven by increased charge-off associated with reductions in certain global banking exposures while the commercial allowance for credit losses declined. This was partially offset by the impact of a higher allowance for credit losses in our consumer loan portfolio driven by changes in the loss emergence period used in our roll rate migration analysis as previously discussed while consumer loan charge-off decreased. In 2011, the allowance for credit losses as a percentage of net charge-offs improved as the decline in dollars of net charge-off outpaced the decline in the allowance. Net charge-off levels declined in 2011 due to improved economic conditions as the decline in overall delinquency levels experienced resulted in lower charge-off. In 2010, the allowance for credit losses as a percentage of net charge-offs declined driven by a significantly lower allowance for credit losses in both our commercial and consumer portfolios as delinquency and economic conditions improved.

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

	Amount		% of Loans to Total Loans⁽¹⁾		Amount		% of Loans to Total Loans⁽¹⁾		Amount		% of Loans to Total Loans⁽¹⁾		Amount		% of Loans to Total Loans⁽¹⁾		Amount		% of Loans to Total Loans⁽¹⁾
At December 31,	2013				2012				2011				2010				2009
	(dollars are in millions)
Commercial⁽²⁾....................	$	308	71.6	%	$	317	69.8	%	$	442	64.9	%	$	523	60.2	%	$	907	57.7	%
Consumer:
Residential mortgages..................................	186		23.4		210		24.3		192		27.2		167		27.5		347		26.4
Home equity mortgages...............	49		3.0		45		3.7		52		4.9		77		7.7		185		8.0
Credit card receivables..............	50		1.3		55		1.3		39		1.6		58		2.5		80		2.4
Auto finance...............	-		-		-		-		-		-		-		-		36		3.3
Other consumer..........	13		.7		20		.9		18		1.4		27		2.1		47		2.3
Total consumer...........	298		28.4		330		30.2		301		35.1		329		39.8		695		42.3
Total..................................	$	606	100.0	%	$	647	100.0	%	$	743	100.0	%	$	852	100.0	%	$	1,602	100.0	%

⁽¹⁾Excluding loans held for sale.

⁽²⁾See Note 7, "Allowance for Credit Losses," in the accompanying consolidated financial statements for components of the commercial allowance for credit losses.

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

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

At December 31,	2013		2012		2011		2010		2009
	(dollars are in millions)
Off-balance sheet credit risk reserve....................................................	$	60	$	139	$	155	$	94	$	188

The decrease in off-balance sheet reserves at December 31, 2013 as compared with December 31, 2012 largely reflects the impact of an upgrade to an individual monoline which resulted in an improvement to our expectation of cash flows from an off-balance sheet liquidity facility and the consolidation of Bryant Park Funding LLC in the second quarter of 2013 which resulted in the reclassification of $61 million of this reserve to held-to-maturity investment securities on our balance sheet. The decrease in off-balance sheet reserves in 2012 compared with 2011 reflects reductions in exposure estimates on certain facilities while the increase in 2011 reflects the deconsolidation of a commercial paper variable interest entity ("VIE") which resulted in the establishment of a liability for credit exposure related to our commitments to this entity which was originally consolidated in 2010. Off-balance sheet exposures are summarized under the caption "Off-Balance Sheet Arrangements, Credit Derivatives and Other Contractual Obligations" in this MD&A. See Note 25, "Variable Interest Entities," in the accompanying consolidated financial statements for additional information regarding the consolidation of Bryant Park Funding LLC.

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"):

	2013												2012
	Dec. 31			Sept. 30			June 30			Mar. 31			Dec. 31			Sept. 30			June 30			Mar. 31
	(dollars are in millions)
Delinquent loans:
Commercial........................................	$	135		$	153		$	197		$	160		$	339		$	217		$	226		$	298
Consumer:
Residential mortgages.............	1,208			1,221			1,170			1,158			1,233			1,148			1,107			1,063
Home equity mortgages..........	68			75			77			85			75			67			62			94
Total residential mortgages⁽¹⁾⁽²⁾	1,276			1,296			1,247			1,243			1,308			1,215			1,169			1,157
Credit card receivables..............	21			18			15			18			21			22			23			25
Other consumer..........................	29			28			26			24			30			29			28			26
Total consumer...........................	1,326			1,342			1,288			1,285			1,359			1,266			1,220			1,208
Total...................................................	$	1,461		$	1,495		$	1,485		$	1,445		$	1,698		$	1,483		$	1,446		$	1,506
Delinquency ratio:
Commercial........................................	.28		%	.32		%	.42		%	.37		%	.76		%	.50		%	.59		%	.82		%
Consumer:
Residential mortgages.............	7.59			7.70			7.26			7.23			7.78			7.34			7.16			6.94
Home equity mortgages..........	3.38			3.61			3.55			3.80			3.23			2.81			2.33			2.81
Total residential mortgages⁽²⁾...	7.11			7.23			6.82			6.81			7.20			6.74			6.45			6.20
Credit card receivables..............	2.46			2.10			1.75			2.40			2.58			2.76			2.62			2.13
Other consumer..........................	5.06			4.65			4.08			3.74			4.25			4.26			3.68			2.92
Total consumer...........................	6.85			6.92			6.51			6.54			6.92			6.49			6.18			5.83
Total...................................................	2.15		%	2.21		%	2.21		%	2.29		%	2.64		%	2.37		%	2.49		%	2.63		%

⁽¹⁾At December 31, 2013 and 2012, residential mortgage loan delinquency includes $1.1 billion and $1.0 billion, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less costs to sell, including $27 million and $39 million, respectively, relating to loans held for sale.

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

	2013												2012
	Dec. 31			Sept. 30			June 30			Mar. 31			Dec. 31			Sept. 30			June 30			Mar. 31
	(dollars are in millions)
Dollars of delinquent loans:
Interest-only loans.................	$	58		$	66		$	68		$	74		$	87		$	114		$	120		$	124
ARM loans.............................	304			315			338			337			356			419			423			428
Delinquency ratio:
Interest-only loans.................	1.59		%	1.79		%	1.78		%	1.92		%	2.18		%	2.86		%	3.03		%	3.09		%
ARM loans.............................	2.85			2.97			3.19			3.24			3.43			4.09			4.16			4.27

Compared with September 30, 2013, our two-months-and-over contractual delinquency ratio declined 6 basis points as we experienced lower dollars of delinquency in both our commercial and consumer loan portfolios. Our consumer loan two-month-and-over contractual delinquency ratio at December 31, 2013 decreased 7 basis points from September 30, 2013 due to lower levels of late-stage residential mortgage loan delinquency. Residential mortgage loan delinquency levels continue to be impacted by an elongated foreclosure process which has resulted in loans which would otherwise have been foreclosed and transferred to REO remaining in loan account and, consequently, in delinquency. Compared with September 30, 2013, our commercial two-months-and-over contractual delinquency ratio decreased 4 basis points due primarily to the charge-off of a specific corporate banking relationship.

Compared with December 31, 2012, our two-months-and-over contractual delinquency ratio decreased 49 basis points as we experienced lower dollars of delinquency in both our commercial and consumer loan portfolios. Our commercial loan two-months-and-over contractual delinquency ratio decreased 48 basis points compared with December 31, 2012 due to higher outstanding loan balances as well as improved credit quality including reductions in certain exposures and the resolution of certain matured loans which were in the process of refinancing or pay down at year-end. Compared with December 31, 2012, our consumer loan two-months-and-over contractual delinquency ratio decreased 7 basis points due to lower residential mortgage delinquency levels. The lower levels of residential mortgage loan delinquency reflect lower dollars of delinquency on accounts less than 180 days contractually delinquent due to improvements in credit quality, including improved delinquency roll rates, partially offset by higher late stage delinquency. Credit card delinquency also improved due to continued improvements in economic conditions.

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

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

	2013					2012
	Full Year	Quarter Ended				Full Year	Quarter Ended				2011 Full Year
	Full Year	Dec. 31	Sept. 30	June 30	Mar. 31	Full Year	Dec.31	Sept. 30	June 30	Mar. 31	2011 Full Year
	(dollars are in millions)
Net Charge-off Dollars:
Commercial:

Construction and other real estate....	$	47		$	(2	)	$	2		$	(8	)	$	55		$	17		$	22		$	6		$	2		$	(13	)	$	42
Business and corporate banking.	33			22			-			8			3			29			4			6			11			8			41
Global banking...........	(1		)	(1		)	-			-			-			104			20			-			-			84			-
Other commercial.....	(8		)	(4		)	-			(4		)	-			(6		)	-			-			(5		)	(1		)	(17		)
Total commercial.........	71			15			2			(4		)	58			144			46			12			8			78			66
Consumer:
Residential mortgages...........	66			4			37			10			15			96			32			21			18			25			101
Home equity mortgages...........	50			13			14			11			12			79			14			18			30			17			70
Total residential mortgages..............	116			17			51			21			27			175			46			39			48			42			171
Credit card receivables.............................	37			6			10			10			11			51			11			12			13			15			59
Other consumer.........	10			2			1			3			4			19			7			3			4			5			25
Total consumer............	163			25			62			34			42			245			64			54			65			62			255
Total............................	$	234		$	40		$	64		$	30		$	100		$	389		$	110		$	66		$	73		$	140		$	321
Net Charge-off Ratio:.........................
Commercial:
Construction and other real estate....	.55		%	(.09		)%	.09		%	(.38		)%	2.62		%	.21		%	1.05		%	.30		%	.10		%	(.67		)%	.52		%
Business and corporate banking.	.25			.61			-			.26			.13			.25			.13			.20			.39			.30			.46
Global banking...........	-			(.02		)	-			-			-			.65			.41			-			-			2.49			-
Other commercial.....	(.27		)	(.60		)	-			(.52		)	-			(.19		)	-			-			(.65		)	.13			.53
Total commercial.........	.15			.12			.02			(.04		)	.55			.37			.42			.12			.09			.90			.21
Consumer:
Residential mortgages...........	.42			.10			.93			.25			.40			.65			.83			.56			.50			.71			.72
Home equity mortgages...........	2.31			2.55			2.63			2.00			2.15			3.24			2.38			2.93			4.87			2.69			2.13
Total residential mortgages..............	.65			.38			1.13			.47			.62			1.02			1.04			.89			1.14			1.01			.99
Credit card receivables.............................	4.50			2.85			4.65			4.90			5.84			6.38			5.54			5.98			6.55			7.47			6.10
Other consumer.........	1.80			1.63			.71			2.05			2.71			2.91			4.61			1.91			2.41			2.81			2.76
Total consumer............	.85			.52			1.27			.70			.89			1.32			1.34			1.14			1.41			1.36			1.33
Total............................	.36		%	.24		%	.38		%	.19		%	.65		%	.68		%	.70		%	.45		%	.54		%	1.06		%	.64		%

Our net charge-off ratio as a percentage of average loans decreased 32 basis points for the full year of 2013 compared with the full year of 2012, due to lower commercial loan charge-offs and the impact of higher average commercial loan receivable balances due to loan growth as well as lower consumer loan charge-offs driven by a decrease in residential mortgage loan charge-offs. The decrease in residential mortgage loan charge-offs in the current year reflects the impact of improved credit quality including the impact of lower levels of delinquency on accounts less than 180 days delinquent and improvements in housing market conditions which were partially offset by a charge-off of $17 million of corporate advances on loans which had been largely reserved for.

Our net charge-off ratio as a percentage of average loans increased 4 basis points for the full year of 2012 compared with the full year of 2011, driven by higher commercial loan charge-offs in global banking, as well as the impact in the prior year of a partial recovery relating to a previously charged off loan relating to a single client relationship. Our consumer loan net charge-off ratio remained relatively flat for the full year 2012 compared with the full year 2011 with residential mortgage loan charge-offs increasing modestly driven by higher home equity charge-offs due to the impact of an increased volume of loans where we decided not to pursue foreclosure, which was partially offset by lower charge-offs on first lien residential mortgage loans which also includes the impact of $13 million of additional charge-offs associated with loans discharged under Chapter 7 bankruptcy and not re-affirmed.

Nonperforming Assets Nonperforming assets consisted of the following:

At December 31,	2013			2012			2011
	(dollars are in millions)
Nonaccrual loans:
Commercial:
Real Estate:
Construction and land loans..............................................................................................	$	44		$	104		$	103
Other real estate....................................................................................................................	122			281			512
Business and corporate banking.............................................................................................	21			47			58
Global banking...........................................................................................................................	65			18			137
Other commercial.......................................................................................................................	2			13			15
Total commercial........................................................................................................................	254			463			825
Consumer:
Residential mortgages............................................................................................................	949			1,038			815
Home equity mortgages.........................................................................................................	77			86			89
Total residential mortgages^(1)(2)(3)(4).........................................................................................	1,026			1,124			904
Others..........................................................................................................................................	-			5			8
Total consumer loans................................................................................................................	1,026			1,129			912
Nonaccrual loans held for sale...................................................................................................	25			37			91
Total nonaccruing loans.............................................................................................................	$	1,305		$	1,629		$	1,828
Accruing loans contractually past due 90 days or more:
Commercial:
Real Estate:
Construction and land loans..............................................................................................	$	-		$	-		$	-
Other real estate....................................................................................................................	-			8			1
Business and corporate banking.............................................................................................	5			28			11
Other commercial.......................................................................................................................	1			1			2
Total commercial........................................................................................................................	6			37			14
Consumer:
Credit card receivables..............................................................................................................	14			15			20
Other consumer..........................................................................................................................	24			28			27
Total consumer loans................................................................................................................	38			43			47
Total accruing loans contractually past due 90 days or more.............................................	44			80			61
Total nonperforming loans.........................................................................................................	1,349			1,709			1,889
Other real estate owned...............................................................................................................	47			80			81
Total nonperforming assets.......................................................................................................	$	1,396		$	1,789		$	1,970
Allowance for credit losses as a percent of nonperforming loans⁽⁵⁾:
Commercial..................................................................................................................................	118.5		%	63.4		%	52.7		%
Consumer....................................................................................................................................	28.0			28.2			31.4

⁽¹⁾At December 31, 2013 and 2012, residential mortgage loan nonaccrual balances include $0.9 billion and $1.0 billion, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.

⁽²⁾Nonaccrual residential mortgages includes all receivables which are 90 or more days contractually delinquent as well as loans discharged under Chapter 7 bankruptcy and not re-affirmed and second lien loans where the first lien loan that we own or service is 90 or more days contractually delinquent.

⁽³⁾Residential mortgage nonaccrual loans for all periods does not include guaranteed loans purchased from GNMA. Repayment of these loans are predominantly insured by the Federal Housing Administration and as such, these loans have different risk characteristics from the rest of our customer loan portfolio.

⁽⁴⁾In 2012, we reclassified $66 million of residential mortgage loans discharged under Chapter 7 bankruptcy and not re-affirmed to nonaccrual, consistent with issued regulatory guidance. Interest income reversed on these loans was not material.

⁽⁵⁾Represents our commercial or consumer allowance for credit losses, as appropriate, divided by the corresponding outstanding balance of total nonperforming loans held for investment. Nonperforming loans include accruing loans contractually past due 90 days or more. Ratio excludes nonperforming loans associated with loan portfolios which are considered held for sale as these loans are carried at the lower of amortized cost or fair value.

Nonaccrual loans at December 31, 2013 decreased as compared with December 31, 2012 due to lower levels of both commercial and consumer non-accrual loans. Commercial non-accrual loans decreased due to payoffs, charge-offs and customer upgrades out of default outpacing new defaults. Our consumer nonaccrual loans also decreased compared with December 31, 2012 driven by lower nonaccrual residential mortgage loans due to improved credit quality. Residential mortgage loan nonaccrual levels however continue to be impacted by an elongated foreclosure process as previously discussed. Accruing loans past due 90 days or more decreased compared with December 31, 2012 driven primarily by lower commercial loan balances due to the resolution of certain loans which were refinanced in early 2013 at market rates.

Nonaccrual loans at December 31, 2012 declined as compared with December 31, 2011 driven largely by lower levels of commercial non-accrual loans, partially offset by increases in residential mortgage non-accrual loans. The increase in nonaccrual residential mortgage loans reflects the reclassification of $66 million of residential mortgage loans discharged under Chapter 7 bankruptcy during the third quarter as previously discussed as well as 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 due to credit risk rating upgrades outpacing credit risk rating downgrades, managed reductions in certain exposures, as well as payments and charge-offs within our global banking portfolio as previously discussed. Accruing loans past due 90 days or more increased since December 31, 2011 driven by commercial loan receivable activity, a substantial majority of which was refinanced in early 2013 at market rates without foreclosure.

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. 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 the accompanying consolidated financial statements.

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

At December 31,	2013		2012		2011
	(in millions)
Impaired commercial loans:
Balance at end of period.............................................................................................................	$	481	$	697	$	1,087
Amount with impairment reserve...............................................................................................	165		250		597
Impairment reserve.......................................................................................................................	40		96		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.

The following table summarizes criticized loans.

At December 31,	2013		2012		2011
	(in millions)
Special mention:
Commercial loans.......................................................................................................................	$	1,354	$	1,125	$	1,598
Substandard:
Commercial loans.......................................................................................................................	647		916		1,759
Consumer loans.........................................................................................................................	944		1,031		1,356
Total substandard.....................................................................................................................	1,591		1,947		3,115
Doubtful:
Commercial loans.......................................................................................................................	37		117		307
Total...............................................................................................................................................	$	2,982	$	3,189	$	5,020

Criticized loans at December 31, 2013 decreased compared with December 31, 2012 as lower levels of substandard and doubtful commercial loans due to improved credit quality, pay downs and managed reductions in certain exposures. Partially offsetting were higher levels of special mention commercial loans primarily due the addition of six loans as a result of a regulatory shared national credit review.

Criticized loans at December 31, 2012 decreased compared with December 31, 2011 primarily from changes in the financial condition of certain customers, some of which were upgraded during the period as well as paydowns and charge-off related to certain exposures as well as general improvement in market conditions.

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

Our loan portfolio includes the following types of loans:

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

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

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

At December 31,	2013		2012
	(in billions)
Interest-only residential mortgage loans	$	3.6	$	4.0
ARM loans⁽¹⁾	10.7		10.4

⁽¹⁾ARM loan balances above exclude $11 million and $19 million of subprime residential mortgage loans held for sale at December 31, 2013 and 2012, respectively. In 2014 and 2015, approximately $263 million and $205 million, respectively, of the ARM loans will experience their first interest rate reset.

The following table summarizes the concentrations of first and second liens within the outstanding residential mortgage loan portfolio. Amounts in the table exclude residential mortgage loans held for sale of $91 million and $472 million at December 31, 2013 and 2012, respectively.

At December 31,	2013		2012
	(in millions)
Closed end:
First lien.......................................................................................................................................................	$	15,826	$	15,371
Second lien.................................................................................................................................................	137		186
Revolving:
Second lien.................................................................................................................................................	1,874		2,138
Total..................................................................................................................................................................	$	17,837	$	17,695

Geographic Concentrations The following table reflects regional exposure at December 31, 2013 for certain loan portfolios.

	Commercial Construction and Other Real Estate Loans		Residential Mortgage Loans		Credit Card Receivables
New York State....................................................................................................	39.0	%	33.8	%	56.0	%
California..............................................................................................................	17.4		31.5		9.0
North Central United States..............................................................................	2.6		6.0		3.7
North Eastern United States, excluding New York State...............................	11.6		9.4		12.4
Southern United States......................................................................................	23.1		14.9		14.0
Western United States, excluding California..................................................	6.3		4.4		2.6
Others...................................................................................................................	-		-		2.3
Total......................................................................................................................	100.0	%	100.0	%	100.0	%

Commercial Credit Exposure Our commercial credit exposure is diversified across a broad range of industries. Commercial loans outstanding and unused commercial commitments by industry are presented in the table below.

	Commercial Utilized				Unused Commercial Commitments
At December 31,	2013		2012		2013		2012
	(in millions)
Real estate and related.................................................................................................	$	8,672	$	8,625	$	3,172	$	2,400
Petroleum, gas and related...........................................................................................	4,364		3,262		5,161		4,488
Non bank holding companies.....................................................................................	3,158		2,134		2,190		2,030
Health, child care and education................................................................................	2,830		1,607		6,632		4,974
Mining and metals........................................................................................................	2,318		2,749		2,576		3,111
Electronic and electrical equipment............................................................................	2,007		1,656		8,175		7,537
Recreational industry...................................................................................................	1,980		1,551		1,179		1,098
Banks and depository institutions.............................................................................	1,958		1,859		880		341
Business and professional services...........................................................................	1,377		1,206		2,562		2,727
Chemicals, plastics and rubber...................................................................................	1,341		1,946		2,728		2,552
Security brokers and dealers.......................................................................................	1,270		1,002		2,063		2,092
Food and kindred products.........................................................................................	1,242		1,306		4,410		3,603
Textile, apparel and leather goods..............................................................................	1,208		978		1,462		1,209
Transportation services...............................................................................................	1,078		1,182		1,233		907
Printing, publishing and broadcasting......................................................................	781		452		1,389		1,158
Industrial machinery and equipment..........................................................................	618		518		1,755		1,542
Non deposit credit institutions...................................................................................	611		446		2,825		1,711
Non-durable consumer products................................................................................	516		563		2,013		1,840
Retail stores...................................................................................................................	313		304		2,787		2,449
Insurance business.......................................................................................................	138		92		1,934		2,014
Total commercial credit exposure in top 15 industries based on utilization.........	37,780		33,438		57,126		49,783
All other industries.......................................................................................................	5,386		6,198		5,439		5,945
Total commercial credit exposure by industry ⁽¹⁾......................................................	$	43,166	$	39,636	$	62,565	$	55,728

⁽¹⁾Excludes commercial credit exposures with affiliates.

Exposures to Certain Countries in the Eurozone Eurozone countries are members of the European Union and part of the euro single currency bloc. The disclosure in this section is limited to the peripheral eurozone countries of Spain, Ireland, Italy, Greece and Portugal which exhibited levels of market volatility that exceeded other eurozone countries, demonstrating fiscal or political uncertainty that persisted throughout 2013. During the year, core eurozone countries such as Germany and the Netherlands demonstrated an improvement in economic fundamentals and the risk of contagion leading to a broadly based failure of the euro abated considerably. Our net exposure at December 31, 2013 to the peripheral eurozone countries was $2,908 million which includes $2,306 million of unfunded commitments.

The tables below summarize our exposures to the peripheral eurozone countries in 2013, including:

• governments and central banks along with quasi government agencies;

• banks; and

• other financial institutions and other corporates.

Exposures to banks, other financial institutions and other corporates are based on the counterparty's country of domicile.

The net on-balance sheet exposure is stated after taking into account mitigating offsets that are incorporated into the risk management view of the exposure but do not meet accounting offset requirements. These risk mitigating offsets include:

• short positions managed together with trading assets;

• derivative liabilities for which a legally enforceable right to offset with derivative assets exists; and

• collateral received on derivative assets.

Off-balance sheet exposures primarily relate to commitments to lend and the amount shown in the tables represent the maximum amount that could be drawn down by the counterparty.

Credit default swaps ("CDSs") reported in the detailed peripheral eurozone country tables are not included in the derivative exposure line as they are typically transacted with counterparties incorporated or domiciled outside of the country whose exposure they reference.

Exposures to peripheral eurozone countries - sovereign and agencies	Greece		Ireland		Italy		Portugal		Spain		Total
	(in millions)
Net on-balance sheet exposures..................................................	$	-	$	-	$	-	$	-	$	-	$	-
Net off-balance sheet exposures..................................................	-		-		-		-		-		-
Total net exposures........................................................................	$	-	$	-	$	-	$	-	$	-	$	-
CDS asset positions.......................................................................	$	-	$	-	$	-	$	-	$	21	$	21
CDS liability positions...................................................................	-		-		-		-		-		-
CDS asset notionals.......................................................................	-		14		-		-		470		484
CDS liability notionals...................................................................	-		40		-		-		950		990

Exposures to peripheral eurozone countries - banks	Greece		Ireland		Italy		Portugal		Spain		Total
	(in millions)
Loans⁽¹⁾ ...........................................................................................	$	-	$	-	$	-	$	-	$	9	$	9
Gross derivative assets.................................................................	-		21		-		-		291		312
Collateral and derivative liabilities...............................................	-		18		-		-		284		302
Derivatives....................................................................................	-		3		-		-		7		10
Net on-balance sheet exposures..................................................	-		3		-		-		16		19
Net off-balance sheet exposures..................................................	-		-		-		-		3		3
Total net exposures........................................................................	$	-	$	3	$	-	$	-	$	19	$	22
CDS asset positions.......................................................................	$	-	$	-	$	-	$	-	$	-	$	-
CDS liability positions...................................................................	-		-		2		-		-		2
CDS asset notionals.......................................................................	-		-		76		29		-		105
CDS liability notionals...................................................................	-		-		71		39		-		110

⁽¹⁾Allowance for loan loss is not significant.

Exposures to peripheral eurozone countries - other financial institutions and corporates	Greece		Ireland		Italy		Portugal		Spain		Total
	(in millions)
Gross trading assets......................................................................	$	-	$	28	$	-	$	-	$	-	$	28
Loans ⁽¹⁾............................................................................................	3		114		31		-		250		398
Gross derivative assets.................................................................	-		1		-		-		1		2
Collateral and derivative liabilities...............................................	-		-		-		-		1		1
Derivatives....................................................................................	-		1		-		-		-		1
Net on-balance sheet exposures..................................................	3		143		31		-		250		427
Net off-balance sheet exposures..................................................	-		2,335		86		-		-		2,421
Total net exposures........................................................................	$	3	$	2,478	$	117	$	-	$	250	$	2,848
CDS asset positions.......................................................................	$	-	$	-	$	-	$	-	$	-	$	-
CDS liability positions...................................................................	-		-		2		-		2		4
CDS asset notionals.......................................................................	-		-		109		-		158		267
CDS liability notionals...................................................................	-		-		122		-		172		294

⁽¹⁾Allowance for loan loss is not significant.

Cross-Border Net Outstandings Cross-border net outstandings are amounts payable by residents of foreign countries regardless of the currency of claim and local country claims in excess of local country obligations. Cross- border net outstandings, as calculated in accordance with FFIEC guidelines, include deposits placed with other banks, loans, acceptances, securities available-for-sale, trading securities, revaluation gains on foreign exchange and derivative contracts and accrued interest receivable. Excluded from cross-border net outstandings are, among other things, the following: local country claims funded by non-local country obligations (U.S. dollar or other non-local currencies), principally certificates of deposit issued by a foreign branch, where the providers of funds agree that, in the event of the occurrence of a sovereign default or the imposition of currency exchange restrictions in a given country, they will not be paid until such default is cured or currency restrictions lifted or, in certain circumstances, they may accept payment in local currency or assets denominated in local currency (hereinafter referred to as constraint certificates of deposit); and cross-border claims that are guaranteed by cash or other external liquid collateral. Cross-border net outstandings that exceed .75 percent of total assets at year-end are summarized in the following table.

	Banks and Other Financial Institutions		Commercial and Industrial		Total
	(in millions)
December 31, 2013:
Brazil........................................................................................................................	$	2,265	$	4,021	$	6,286
Mexico.....................................................................................................................	829		6,150		6,979
Canada....................................................................................................................	135		1,667		1,802
Chile.........................................................................................................................	528		930		1,458
Total.........................................................................................................................	$	3,757	$	12,768	$	16,525
December 31, 2012:
Brazil........................................................................................................................	$	1,839	$	3,389	$	5,228
Mexico.....................................................................................................................	704		7,405		8,109
Canada....................................................................................................................	1,049		1,905		2,954
Chile.........................................................................................................................	1,027		843		1,870
Total.........................................................................................................................	$	4,619	$	13,542	$	18,161
December 31, 2011:
Japan.......................................................................................................................	$	82	$	2,526	$	2,608
Canada....................................................................................................................	663		3,444		4,107
Mexico.....................................................................................................................	1,079		4,043		5,122
Brazil........................................................................................................................	1,067		2,075		3,142
Total.........................................................................................................................	$	2,891	$	12,088	$	14,979

Cross-border net outstandings related to Portugal, Ireland, Italy, Greece and Spain totaled .32 percent of total assets and did not individually exceed .24 percent of total assets.

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

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

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

• current market events or trends;

• country risk;

• maturity and liquidity of contracts;

• credit worthiness of the counterparties in the transaction;

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

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

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

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

At December 31,	2013		2012
	(in millions)
Risk associated with derivative contracts:
Total credit risk exposure....................................................................................................................................	$	40,654	$	41,248
Less: collateral held against exposure...............................................................................................................	5,917		7,530
Net credit risk exposure.......................................................................................................................................	$	34,737	$	33,718

The table below summarizes the risk profile of the counterparties of off-balance sheet exposure to derivative contracts, net of cash and other highly liquid collateral. The ratings presented in the table below are equivalent ratings based on our internal credit rating system.

	Percent of Current Credit Risk Exposure, Net of Collateral
Rating equivalent at December 31	2013		2012
AAA to AA-.........................................................................................................................................................	34	%	32	%
A+ to A-................................................................................................................................................................	52		38
BBB+ to BBB-......................................................................................................................................................	10		11
BB+ to B-..............................................................................................................................................................	3		17
CCC+ and below...................................................................................................................................................	1		2
Total........................................................................................................................................................................	100	%	100	%

Our principal exposure to monoline insurance companies is through a number of OTC derivative transactions, primarily credit default swaps ("CDS"). We have entered into CDS to purchase credit protection against securities held within the available for sale and trading portfolios. Due to downgrades in the internal credit ratings of monoline insurers, fair value adjustments have been recorded due to counterparty credit exposures. The table below sets out the mark-to-market value of the derivative contracts at December 31, 2013 and 2012. The "Credit Risk Adjustment" column indicates the valuation adjustment taken against the mark-to-market exposures and reflects the deterioration in creditworthiness of the monoline insurers. The exposure relating to monoline insurance companies that are rated CCC+ and below were fully written down as of December 31, 2013 and 2012. These adjustments have been charged to the consolidated statement of income (loss).

	Net Exposure before Credit Risk Adjustment⁽¹⁾		Credit Risk Adjustment⁽²⁾			Net Exposure After Credit Risk Adjustment
	(in millions)
December 31, 2013:
Derivative contracts with monoline counterparties:
Monoline - investment grade....................................................................................	$	243	$	(49	)	$	194
Monoline - below investment grade........................................................................	95		(16		)	79
Total..................................................................................................................................	$	338	$	(65	)	$	273
December 31, 2012:
Derivative contracts with monoline counterparties:
Monoline - investment grade....................................................................................	$	482	$	(93	)	$	389
Monoline - below investment grade........................................................................	188		(43		)	145
Total..................................................................................................................................	$	670	$	(136	)	$	534

⁽¹⁾Net exposure after legal netting and any other relevant credit mitigation prior to deduction of credit risk adjustment

⁽²⁾Fair value adjustment recorded against the over-the-counter derivative counterparty exposures to reflect the credit worthiness of the counterparty.

Market risk is the adverse effect that a change in market liquidity, interest rates, credit spreads, currency or implied volatility rates has on the value of a financial instrument. We manage the market risk associated with interest rate and foreign exchange contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. We also manage the market risk associated with trading derivatives through hedging strategies that correlate the rates, price and spread movements. This risk is measured daily by using Value at Risk and other methodologies. See the caption "Risk Management" in this MD&A for additional information regarding the use of Value at Risk analysis to monitor and manage interest rate and other market risks.

Liquidity and Capital Resources

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

During 2013, marketplace liquidity continued to remain available for most sources of funding except mortgage securitization. However marketplace liquidity continued to be impacted for most of the year by concerns regarding government spending, the federal debt ceiling limit and whether it would be raised and the budget deficit as well as concern that the FRB would begin to slow its quantitative easing program if the economy continued to strengthen. The combination of these factors has caused long-term interest rates to rise in 2013. While these concerns subsided to a degree in September when the FRB announced its bond buying program would continue at current levels, they resurfaced again toward the end of the year when better than expected economic data resulted in the FRB announcement in mid-December that it would reduce its bond buying stimulus program beginning in January 2014. The prolonged period of low interest rates also continues to put pressure on spreads earned on our deposit base.

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

Interest Bearing Deposits with Banks totaled $19.6 billion and $13.3 billion at December 31, 2013 and 2012, respectively, which includes $18.5 billion and $10.7 billion, respectively, held with the Federal Reserve Bank. Balances will fluctuate from year to year depending upon our liquidity position at the time and our strategy for deploying such liquidity.

Securities Purchased under Agreements to Resell totaled $2.1 billion and $3.1 billion at December 31, 2013 and 2012, respectively. Balances will fluctuate from year to year depending upon our liquidity position at the time and our strategy for deploying such liquidity.

Short-Term Borrowings totaled $19.1 billion and $14.9 billion at December 31, 2013 and 2012, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on short-term borrowing trends.

Deposits totaled $112.6 billion and $117.7 billion at December 31, 2013 and 2012, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on deposit trends.

Long-Term Debt increased to $22.8 billion at December 31, 2013 from $21.7 billion at December 31, 2012. The following table summarizes issuances and retirements of long-term debt during the 2013 and 2012:

Year Ended December 31,	2013			2012
	(in millions)
Long-term debt issued..............................................................................................................................................	$	5,547		$	7,626
Long-term debt repaid..............................................................................................................................................	(4,370		)	(3,453		)
Net long-term debt issued........................................................................................................................................	$	1,177		$	4,173

Under our shelf registration statement on file with the SEC, we may issue debt securities or preferred stock. The shelf has no dollar limit, but the amount of debt outstanding is limited by the authority granted by the Board of Directors. At December 31, 2013, we were authorized to issue up to $21 billion, of which $7.7 billion was available. HSBC Bank USA also has a $40 billion Global Bank Note Program of which $15.8 billion was available at December 31, 2013.

As a member of the New York Federal Home Loan Bank ("FHLB"), we have a secured borrowing facility which is collateralized by real estate loans and investment securities. At December 31, 2013 and 2012, long-term debt included $1.0 billion under this facility. The facility also allows access to further borrowings of up to $5.3 billion based upon the amount pledged as collateral with the FHLB.

Preferred Equity See Note 18, "Preferred Stock," in the accompanying consolidated financial statements for information regarding all outstanding preferred share issues.

Common Equity During 2013, we did not receive any cash capital contributions from HNAI and we did not make any capital contributions to our subsidiary, HSBC Bank USA. During 2012, we issued one share of common stock to our parent, HNAI, for a capital contribution of $312 million and we contributed $2 million of capital to our subsidiary, HSBC Bank USA.

Selected Capital Ratios Capital amounts and ratios are calculated in accordance with banking regulations in effect as of December 31, 2013 and 2012. In managing capital, we develop targets for Tier 1 capital to risk weighted assets, Tier 1 common equity to risk weighted assets, Total capital to risk weighted assets and Tier 1 capital to average assets (this latter ratio, also known as the "leverage ratio"). Our targets may change from time to time to accommodate changes in the operating environment, regulatory requirements or other considerations such as those listed above. As further discussed below, U.S. regulators have implemented revised capital regulations effective January 1, 2014 for banking organizations such as HSBC North America and HSBC Bank USA, although certain provisions will be phased in over time through the beginning of 2019.

The following table summarizes selected capital ratios:

At December 31,	2013		2012
Tier 1 capital to risk weighted assets...........................................................................................................	11.73	%	13.61	%
Tier 1 common equity to risk weighted assets...........................................................................................	10.01		11.63
Total capital to risk weighted assets............................................................................................................	16.47		19.52
Tier 1 capital to average assets (leverage ratio).........................................................................................	7.90		7.70
Total equity to total assets............................................................................................................................	8.88		9.32

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

Regulatory capital requirements are based on the amount of capital required to be held, as defined by regulations, and the amount of risk weighted assets, also calculated based on regulatory definitions. Economic Capital is a proprietary measure to estimate unexpected loss at the 99.5 percent confidence level over a 1-year time horizon. Quarterly, Economic Capital is compared to a calculation of available capital resources to assess capital adequacy as part of the ICAAP. In addition, Risk Adjusted Return On Economic Capital (RAROC) is computed for our businesses to allow for a comparison of return on risk.

In June 2012, U.S. regulators issued a final rule, 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 became effective January 1, 2013, and its implementation is reflected in our December 31, 2013 Basel I capital ratios and risk-weighted asset levels. In December 2013, the FRB adopted changes to the Basel 2.5 rule that would conform to changes in the Basel III Final Rule (described below).

In October 2013, the U.S. banking regulators published a final rule in the Federal Register implementing the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision, and establishes an integrated regulatory capital framework to improve the quality and quantity of regulatory capital. The final rule also introduces the "Standardized Approach" for risk weighted assets, which will replace the Basel I risk-based guidance for determining risk-weighted assets as of January 1, 2015, and certain changes required by Dodd-Frank. For the largest banking organizations, such as HSBC USA, the final rule will take effect from January 1, 2014, but with a number of the provisions being phased in through to 2019.

With regard to the elements of capital, the final rule will require HSBC USA to phase trust preferred securities issued prior to May 19, 2010 out of Tier 1 Capital by January 1, 2016, with 50 percent of these capital instruments includable in Tier 1 Capital in 2014 and 25 percent includable in 2015. The trust preferred securities excluded from Tier 1 Capital may be included fully in Tier 2 Capital during those two years, but must be phased out of Tier 2 Capital by January 1, 2022. As previously noted (see "Liquidity and Capital Resources-Long-Term Debt" in our 2012 Form 10-K), we exercised our option to call and redeem the trust preferred securities issued by HSBC USA Capital Trust VII. We continue to consider options for redeeming other trust preferred securities issued which total $550 million at December 31, 2013.

In connection with the final rule, the regulatory agencies provided certain information with regard to the appropriate subordination standard for Tier 2 qualifying subordinated debt. This information represents a modification of current guidance on the subordination standards to qualify for Tier 2 regulatory capital treatment at the bank holding company level. Under the final rule, any nonconforming Tier 2 subordinated debt issued prior to May 19, 2010 will be required to be phased out by January 1, 2016, and issuances after May 19, 2010 will be required to be excluded from capital as of January 1, 2014. Approximately $200 million of our currently outstanding Tier 2 qualifying subordinated debt will be excluded from capital under the final rule. Also under the final rule, Tier 1 capital is expected to include only noncumulative perpetual preferred stock, in addition to common stock and the final rule removes the limitation on the amount of Tier 2 capital that may be recognized relative to Tier 1 capital. The final rule has not yet been the subject of regulatory guidance and interpretation and we will continue to review the final rule and its impact on our regulatory capital.

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

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, including HSBC North America, are required to submit annual capital plans for review. Under the capital plan rules, the FRB will annually evaluate bank holding companies' capital adequacy, internal capital assessment process and plans for capital distributions and will approve capital distributions only for companies whose capital plans have not received an objection and that are able to demonstrate sufficient capital strength after making the capital distribution.

In October 2012, the FRB published a final rule setting out the stress testing requirements for large bank holding companies with $50 billion or more in total consolidated assets. HSBC North America became subject to the rule from October 2013 and was required to comply with the FRB's Comprehensive Capital Analysis and Review ("CCAR") program for its capital plan submission in January 2014. HSBC Bank USA is also subject to stress testing requirements under OCC rules finalized in October 2012 and was required to submit its stress testing results in January 2014. The FRB rule includes the requirement for large bank holding companies, such as HSBC North America, for an annual supervisory stress test conducted by the FRB, as well as semi-annual bank holding company-run stress tests. The OCC rules require certain banks, such as HSBC Bank USA, to conduct annual bank-run stress tests. HSBC North America and its subsidiaries already conduct semi-annual stress testing as part of their risk management and capital planning procedures, and in conjunction with wider HSBC procedures and to meet the requirements of the Prudential Regulation Authority ("PRA"), formerly the Financial Services Authority ("FSA") and other regulatory bodies. HSBC North America will continue to build on its stress testing capabilities to enhance its risk management and capital planning procedures and to meet all regulatory requirements. In 2014 HSBC North America and HSBC Bank USA will be required to publicly disclose the results of their stress tests and the FRB will publicly disclose the results of its stress testing of HSBC North America.

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 24, "Retained Earnings and Regulatory Capital Requirements," in the accompanying consolidated financial statements.

HSBC USA Inc. We are an indirect wholly-owned subsidiary of HSBC and the parent company of HSBC Bank USA and other subsidiaries through which we offer consumer and commercial banking products and related financial services including derivatives, payments and cash management, trade finance and investment solutions. Our main source of funds is cash received from financing activities, primarily through debt issuance, and subsidiaries in the form of dividends. In addition, we receive cash from third parties and affiliates by issuing preferred stock and debt and from our parent by receiving capital contributions when necessary.

We received cash dividends from our subsidiaries of $1 million and $57 million in 2013 and 2012, respectively.

We have a number of obligations to meet with our available cash. We must be able to service our debt and meet the capital needs of our subsidiaries. We also must pay dividends on our preferred stock and may pay dividends on our common stock. Dividends paid on preferred stock totaled $73 million in 2013 and 2012. No dividends were paid to HNAI, our immediate parent company, on our common stock during either 2013 or 2012. We may pay dividends to HNAI in the future, but will maintain our capital at levels that we perceive to be consistent with our current ratings either by limiting the dividends to, or through capital contributions from, our parent.

At various times, we will make capital contributions to our subsidiaries to comply with regulatory guidance, support receivable growth, maintain acceptable investment grade ratings at the subsidiary level, or provide funding for long-term facilities and technology improvements. We made no capital contributions to our subsidiaries in 2013. In 2012, we made capital contributions to certain subsidiaries of $2 million.

In 2013, HSBC Bank USA had the ability to pay dividends under bank regulatory guidelines, as cumulative net profits for 2010 through 2012 exceed dividends attributable to this period. Any significant dividend from HSBC Bank USA would require the approval of the OCC.

Subsidiaries At December 31, 2013, we had one major subsidiary, HSBC Bank USA. We manage substantially all of our operations through HSBC Bank USA, which funds our businesses primarily through receiving deposits from customers; the collection of receivable balances; issuing short-term, medium-term and long-term debt and selling residential mortgage receivables. The vast majority of our domestic medium-term notes and long-term debt is marketed through subsidiaries of HSBC. Intermediate and long-term debt may also be marketed through unaffiliated investment banks.

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

	(in billions)
Funding needs:
Net loan growth..........................................................................................................................................................................	$	6
Long-term debt maturities.........................................................................................................................................................	3
Total funding needs......................................................................................................................................................................	$	9
Funding sources:
Liquidation of short-term investments....................................................................................................................................	$	8
Long-term debt issuance...........................................................................................................................................................	1
Total funding sources...................................................................................................................................................................	$	9

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

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

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

HSBC Bank USA is subject to significant restrictions imposed by federal law on extensions of credit to, and certain other "covered transactions" with HSBC USA and other affiliates. Covered transactions include loans and other extensions of credit, investments and asset purchases, and certain other transactions involving the transfer of value from a subsidiary bank to an affiliate or for the benefit of an affiliate. Beginning in July 2012, a bank's credit exposure to an affiliate as a result of a derivative, securities lending/borrowing or repurchase transaction is also subject to these restrictions. A bank's transactions with its non-bank affiliates are also required to be on arm's length terms.

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

Capital Expenditures We made capital expenditures of $59 million and $33 million during 2013 and 2012, respectively. In addition to these amounts, during 2013 and 2012, we capitalized $30 million and $27 million, respectively, relating to the building of several new retail banking platforms as part of an initiative to build common platforms across HSBC.

Commitments See "Off-Balance Sheet Arrangements, Credit Derivatives and Other Contractual Obligations" below for further information on our various commitments.

Contractual Cash Obligations The following table summarizes our long-term contractual cash obligations at December 31, 2013 by period due.

	2014		2015		2016		2017		2018		Thereafter		Total
	(in millions)
Subordinated long-term debt and perpetual capital notes⁽¹⁾	$	1,152	$	-	$	-	$	513	$	92	$	5,576	$	7,333
Other long-term debt, including capital lease obligations⁽¹⁾	2,774		4,332		1,462		1,347		2,975		2,624		15,514
Other postretirement benefit obligations⁽²⁾	6		6		6		6		6		28		58
Obligation to the HSBC North America Pension Plan⁽³⁾	28		23		16		11		6		2		86
Minimum future rental commitments on operating leases⁽⁴⁾	144		134		113		100		88		173		752
Purchase obligations⁽⁵⁾	77		80		74		68		31		-		330
Total	$	4,181	4,575		1,671		$	2,045	$	3,198	$	8,403	$	24,073

⁽¹⁾Represents future principal payments related to debt instruments included in Note 14, "Long-Term Debt," of the accompanying consolidated financial statements.

⁽²⁾Represents estimated future employee benefits expected to be paid over the next ten years based on assumptions used to measure our allocated portion of benefit obligation at December 31, 2013. See Note 21, "Pension and Other Postretirement Benefits," in the accompanying consolidated financial statements.

⁽³⁾Our contractual cash obligation to the HSBC North America Pension Plan included in the table above is based on the Pension Funding Policy which establishes required annual contributions by HSBC North America through 2019. The amounts included in the table above reflect an estimate of our portion of those annual contributions based on plan participants at December 31, 2013. See Note 21, "Pension and Other Postretirement Benefits," in the accompanying consolidated financial statements for further information about the HSBC North America Pension Plan.

⁽⁴⁾Represents expected minimum lease payments, net of minimum sublease income under noncancellable operating leases for premises and equipment included in Note 26, "Guarantees Arrangements and Pledged Assets," in the accompanying consolidated financial statements.

⁽⁵⁾Represents binding agreements for facilities management and maintenance contracts, custodial account processing services, internet banking services, consulting services, real estate services and other services.

These cash obligations could be funded primarily through cash collections on receivables and from the issuance of new unsecured debt or receipt of deposits.

Our purchase obligations for goods and services at December 31, 2013 were not significant.

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

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

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

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

													Balance at December, 31
	2014		2015		2016		2017		2018		Thereafter		2013		2012
	(in billions)
Standby letters of credit, net of participations⁽¹⁾.................	$	5.7	$	1.1	$	.9	$	.3	$	.2	$	.2	$	8.4	$	8.4
Commercial letters of credit.....	.5		-		-		-		-		-		.5		1.0
Credit derivatives⁽²⁾..................	51.7		27.7		32.6		40.8		15.4		12.3		180.5		237.5
Other commitments to extend credit:
Commercial⁽³⁾...........................	15.4		4.5		12.1		11.9		20.1		2.3		66.3		57.7
Consumer................................	6.7		-		-		-		-		-		6.7		7.0
Total............................................	$	80.0	$	33.3	$	45.6	$	53.0	$	35.7	$	14.8	$	262.4	$	311.6

⁽¹⁾Includes $865 million and $808 million issued for the benefit of HSBC affiliates at December 31, 2013 and 2012, respectively.

⁽²⁾Includes $34.9 billion and $44.2 billion issued for the benefit of HSBC affiliates at December 31, 2013 and 2012, respectively.

⁽³⁾Includes $3.8 billion and $1.9 billion issued for the benefit of HSBC affiliates at December 31, 2013 and 2012, respectively.

Letters of Credit A letter of credit may be issued for the benefit of a customer, authorizing a third party to draw on the letter for specified amounts under certain terms and conditions. The issuance of a letter of credit is subject to our credit approval process and collateral requirements. We issue commercial and standby letters of credit.

• A commercial letter of credit is drawn down on the occurrence of an expected underlying transaction, such as the delivery of goods. Upon the occurrence of the transaction, the amount drawn under the commercial letter of credit is recorded as a receivable from the customer in other assets and as a liability to the vendor in other liabilities until settled.

• A standby letter of credit is issued to third parties for the benefit of a customer and is essentially a guarantee that the customer will perform, or satisfy some obligation, under a contract. It irrevocably obligates us to pay a third party beneficiary when a customer either: (1) in the case of a performance standby letter of credit, fails to perform some contractual non-financial obligation, or (2) in the case of a financial standby letter of credit, fails to repay an outstanding loan or debt instrument.

Fees are charged for issuing letters of credit commensurate with the customer's credit evaluation and the nature of any collateral. Included in other liabilities are deferred fees on standby letters of credit amounting to $46 million and $46 million at December 31, 2013 and 2012, respectively. Fees are recognized ratably over the term of the standby letter of credit. Also included in other liabilities is a credit loss reserve on unfunded standby letters of credit of $18 million and $19 million at December 31, 2013 and 2012, respectively. See Note 26, "Guarantee Arrangements, Pledged Assets and Collateral," in the accompanying consolidated financial statements for further discussion on off-balance sheet guarantee arrangements.

Credit Derivatives Credit derivative contracts are entered into both for our own benefit and to satisfy the needs of our customers. Credit derivatives are arrangements where one party (the "beneficiary") transfers the credit risk of a reference asset to another party (the "guarantor"). Under this arrangement the guarantor assumes the credit risk associated with the reference asset without directly owning it. The beneficiary agrees to pay to the guarantor a specified fee. In return, the guarantor agrees to reimburse the beneficiary an agreed amount if there is a default to the reference asset during the term of the contract.

We offset most of the market risk by entering into a buy protection credit derivative contract with another counterparty. Credit derivatives, although having characteristics of a guarantee, are accounted for as derivative instruments and are carried at fair value. The commitment amount included in the table above is the maximum amount that we could be required to pay, without consideration of the approximately equal amount receivable from third parties and any associated collateral. See Note 26, "Guarantee Arrangements, Pledged Assets and Collateral," in the accompanying consolidated financial statements for further discussion on off-balance sheet guarantee arrangements.

Other Commitments to Extend Credit Other commitments to extend credit include arrangements whereby we are contractually obligated to extend credit in the form of loans, participations in loans, lease financing receivables, or similar transactions. Consumer commitments are comprised of certain unused MasterCard/Visa credit card lines and commitments to extend credit secured by residential properties. We have the right to change or terminate any terms or conditions of a customer's credit card or home equity line of credit account, for cause, upon notification to the customer. Commercial commitments comprise primarily those related to secured and unsecured loans and lines of credit and certain asset purchase commitments. In connection with our commercial lending activities, we provide liquidity support to a number of multi-seller and single-seller asset backed commercial paper conduits ("ABCP conduits") sponsored by affiliates and third parties. See Note 25, "Variable Interest Entities," in the accompanying consolidated financial statements for additional information regarding these ABCP conduits and our variable interests in them.

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

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

The following tables present information on our liquidity facilities with ABCP conduits at December 31, 2013. The maximum exposure to loss presented in the first table represents the maximum contractual amount of loans and asset purchases we could be required to make under the liquidity agreements. This amount does not reflect the funding limits discussed above and also assumes that we suffer a total loss on all amounts advanced and all assets purchased from the ABCP conduits. As such, we believe that this measure significantly overstates our expected loss exposure.

			Conduit Assets⁽¹⁾			Conduit Funding⁽¹⁾
Conduit Type	Maximum Exposure to Loss		Total Assets		Weighted Average Life (Months)	Commercial Paper		Weighted Average Life (Days)
	(dollars are in millions)
HSBC affiliate sponsored (multi-seller).....................................	$	1,751	$	1,154	12	$	1,154	12
Third-party sponsored:
Single-seller................................................................................	299		3,583		37	3,363		60
Total...............................................................................................	$	2,050	$	4,737		$	4,517

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

	Average Asset Mix		Average Credit Quality⁽¹⁾
Asset Class	Average Asset Mix		AAA		AA+/AA		A		A-		BB/BB-
Multi-seller conduits
Debt securities backed by:
Auto loans and leases...............................................	29	%	53	%	-	%	-	%	-	%	-	%
Trade receivables.......................................................	42		-		100		65		-		-
Credit card receivables..............................................	3		-		-		35		-		-
Equipment loans.........................................................	26		47		-		-		-		-
	100	%	100	%	100	%	100	%	-	%	-	%

⁽¹⁾Credit quality is based on Standard and Poor's ratings at December 31, 2013 except for loans and trade receivables held by single-seller conduits, which are based on our internal ratings. For the single-seller conduits, external ratings are not available; however, our internal credit ratings were developed using similar methodologies and rating scales equivalent to the external credit ratings.

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

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

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

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

Fair Value

Fair value measurement accounting principles require a reporting entity to take into consideration its own credit risk in determining the fair value of financial liabilities. The incorporation of our own credit risk accounted for an increase of $40 million in the fair value of financial liabilities during 2013, compared with an increase of $436 million during 2012.

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 2013 should not be considered indicative of the results for any future period.

Control Over Valuation Process and Procedures We have established a control framework which is designed to ensure that fair values are either determined or validated by a function independent of the risk-taker. See Note 27, "Fair Value Measurements" in the accompanying consolidated financial statements for further details on our valuation control framework.

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

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

• the level of bid-ask spreads;

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

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

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

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

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

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

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

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

Level 3 inputs are unobservable estimates that management expects market participants would use to determine the fair value of the asset or liability. That is, Level 3 inputs incorporate market participants' assumptions about risk and the risk premium required by market participants in order to bear that risk. We develop Level 3 inputs based on the best information available in the circumstances. As of December 31, 2013 and 2012, our Level 3 instruments included the following: collateralized debt obligations ("CDOs") for which there is a lack of pricing transparency due to market illiquidity, certain structured deposits as well as certain structured credit and structured equity derivatives where significant inputs (e.g., volatility or default correlations) are not observable, credit default swaps with certain monoline insurers where the deterioration in the creditworthiness of the counterparty has resulted in significant adjustments to fair value, U.S. subprime mortgage loans and subprime related asset-backed securities, mortgage servicing rights, and derivatives referenced to illiquid assets of less desirable credit quality. See Note 27, "Fair Value Measurements" in the accompanying consolidated financial statements for additional information on Level 3 inputs.

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

Transfers Between Level 1 and Level 2 Measurements During 2013 and 2012, there were no transfers between Level 1 and Level 2 measurements.

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

	December 31, 2013			December 31, 2012
	(dollars are in millions)
Level 3 assets⁽¹⁾⁽²⁾.............................................................................................................................................	$	3,831		$	4,701
Total assets measured at fair value⁽³⁾............................................................................................................	158,834			185,040
Level 3 liabilities...............................................................................................................................................	3,751			3,854
Total liabilities measured at fair value⁽¹⁾........................................................................................................	97,540			111,607
Level 3 assets as a percent of total assets measured at fair value............................................................	2.4		%	2.5		%
Level 3 liabilities as a percent of total liabilities measured at fair value...................................................	3.8		%	3.5		%

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

⁽²⁾Includes $3.7 billion of recurring Level 3 assets and $164 million of non-recurring Level 3 assets at December 31, 2013. Includes $4.5 billion of recurring Level 3 assets and $222 million of non-recurring Level 3 assets at December 31, 2012.

⁽³⁾Includes $158.1 billion of assets measured on a recurring basis and $740 million of assets measured on a non-recurring basis at December 31, 2013. Includes $184.1 billion of assets measured on a recurring basis and $968 million of assets measured on a non-recurring basis at December 31, 2012.

Significant Changes in Fair Value for Level 3 Assets and Liabilities

Derivative Assets and Counterparty Credit Risk We have entered into credit default swaps with monoline insurers to hedge our credit exposure in certain asset-backed securities and synthetic CDOs. We made $54 million positive and $21 million positive credit risk adjustments to the fair value of our credit default swap contracts during 2013 and 2012, respectively, which is reflected in trading revenue. We have recorded a cumulative credit adjustment reserve of $64 million and $136 million against our monoline exposure at December 31, 2013 and 2012, respectively. The fair value of our monoline exposure net of cumulative credit adjustment reserves equaled $273 million and $534 million at December 31, 2013 and 2012, respectively. The decrease since December 31, 2012 reflects both reductions in our outstanding positions and improvements in exposure estimates.

Loans As of December 31, 2013 and 2012, we have classified $46 million and $52 million, respectively, of subprime residential mortgage loans held for sale as a non-recurring Level 3 financial asset. These mortgage loans are accounted for on a lower of amortized cost or fair value basis. Based on our assessment, we recorded gains of $3 million and losses of $13 million during 2013 and 2012, respectively. The changes in fair value are recorded as other revenues in the consolidated statement of income (loss).

Significant Transfers Into and Out of Level 3 Measurements During 2013, we transferred $45 million of credit derivatives from Level 2 to Level 3 as result of including specific fair value adjustments related to certain credit default swaps. During 2013, we transferred $516 million of deposits in domestic offices and $226 million of long-term debt, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer to maturity and there is more observability in short term volatility. Additionally, during 2013, we transferred $305 million of deposits in domestic offices and $38 million of long-term debt, which we have elected to carry at fair value, from Level 2 to Level 3 as a result of a change in the observability of underlying instruments that resulted in the embedded derivative being unobservable.

During 2012, we transferred $848 million of deposits in domestic offices, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer in maturity and there is more observability in short term volatility.

See Note 27, "Fair Value Measurements," in the accompanying consolidated financial statements for information on additions to and transfers into (out of) Level 3 measurements during 2013 and 2012 as well as for further details including the classification hierarchy associated with assets and liabilities measured at fair value.

Assets Underlying Asset-backed Securities The following tables summarize the types of assets underlying our asset-backed securities as well as certain collateralized debt obligations held as of December 31, 2013:

		Total
Rating of securities:⁽¹⁾	Collateral type:	(in millions)
AAA....................................................	Commercial mortgages.......................................................................................	$	126
	Residential mortgages - Alt A...........................................................................	91
	Residential mortgages - Subprime...................................................................	1
..............................................................	Total AAA...........................................................................................................	218
A...........................................................	Residential mortgages - Alt A...........................................................................	11
	Residential mortgages - Subprime...................................................................	62
	Home equity - Alt A...........................................................................................	98
	Student loans......................................................................................................	68
	Total A..................................................................................................................	239
BBB......................................................	Residential mortgages - Alt A...........................................................................	8
..............................................................	Other - Alt A........................................................................................................	94
..............................................................	Collateralized debt obligations.........................................................................	254
..............................................................	Total BBB.............................................................................................................	356
CCC......................................................	Residential mortgages - Subprime...................................................................	5
..............................................................	Home equity - Alt A...........................................................................................	129
..............................................................	Total CCC.............................................................................................................	134
Unrated................................................	Residential mortgages - Alt A...........................................................................	1
		$	948

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

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

The unobservable input parameters selected are subject to the internal valuation control processes and procedures. When we perform a test of all the significant input parameters to the extreme values within the range at the same time, it could result in an increase of the overall fair value measurement of approximately $48 million or a decrease of the overall fair value measurement of approximately $59 million as of December 31, 2013. The effect of changes in significant unobservable input parameters are primarily driven by mortgage servicing rights, certain asset-backed securities including CDOs, and the uncertainty in determining the fair value of credit derivatives executed against monoline insurers.

Risk Management

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

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

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

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

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

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

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

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

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

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

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

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

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

The objective of our risk management system is to identify, measure, monitor and manage risks so that:

• potential costs can be weighed against the expected rewards from taking the risks;

• appropriate disclosures are made;

• adequate protections, capital and other resources can be put in place to weather all significant risks; and

• compliance with all relevant laws, codes, rules and regulations is ensured through staff education, adequate processes and controls, and ongoing monitoring efforts.

Our risk management policies are designed to identify and analyze these risks, to set appropriate limits and controls, and to monitor the risks and limits continually by means of reliable and up-to-date administrative and information systems. We continually modify and enhance our risk management policies and systems to reflect changes in markets and products and to better align overall risk management processes. Training, individual responsibility and accountability, together with a disciplined, conservative and constructive culture of control, lie at the heart of our management of risk.

Senior managers within an independent, central risk organization under the leadership of the HSBC North America Chief Risk Officer ensure that risks are appropriately identified, measured, reported and managed. For all risk types, independent risk specialists set standards, develop new risk methodologies, maintain central risk databases and conduct reviews and analysis. For instance, market risk is managed by the HSBC North America Head of Market Risk. Credit Risk is managed by the Chief Credit Officer/HSBC North America Head of Wholesale Credit and Market Risk and the HSBC North America Chief Retail Credit Officer. Management of operational risk is the responsibility of all businesses and corporate functions under the direction and framework set by the HSBC North America Head of Operational Risk and a centralized team. Fiduciary Risk is a component of the Operational Risk framework and resources with expertise provide advice on Fiduciary Risk matters. Compliance risk is managed through an enterprise-wide compliance risk management program made up of Regulatory Compliance and Financial Crime Compliance designed to prevent, detect and deter compliance issues, including money laundering and terrorist financing activities. Our risk management policies assign primary responsibility and accountability for the management of compliance risk in the lines of business to business line management. Under the oversight of the Compliance Committee of the Board of Directors and senior management, the HSBC North America Chief Risk Officer works with the AML Director and the Head of Regulatory Compliance to oversee the design, execution and administration of the enterprise-wide compliance program.

Historically, our approach toward risk management has emphasized a culture of business line responsibility combined with central requirements for diversification of customers and businesses. Our risk management policies are primarily carried out in accordance with practice and limits set by the HSBC North America Management Board and the HSBC Group Management Board, which consists of senior executives throughout HSBC. As such, extensive centrally determined requirements for controls, limits, reporting and the escalation of issues have been detailed in our policies and procedures.

A well-established and maintained internal control structure is vital to the success of all operations. All management within the HSBC Group, including our management, is accountable for identifying, assessing and managing the broad spectrum of risks to which the HSBC Group is subject and the related controls to mitigate the risk. HSBC has adopted a 'Three Lines of Defense' model to ensure that the risks and controls are properly managed within Global Businesses, Global Functions and HSBC Technology & Services (USA) Inc. on an on-going basis. The model delineates management's accountabilities and responsibilities over risk management and the control environment and includes mechanisms to assess the effectiveness of executing these responsibilities.

The First Line of Defense comprises predominantly management who are accountable and responsible for their day to day activities, processes and controls. The First Line of Defense must ensure all key risks within their activities and operations are identified, mitigated and monitored by an appropriate control environment that is commensurate with risk appetite. It is the responsibility of management to establish their own control teams, including Business Risk Control Managers, where required to discharge these accountabilities.

The Second Line comprises predominantly the Global Functions, such as Finance, Legal, Risk (including Compliance), and Human Resources, whose role is to ensure that HSBC's Risk Appetite Statement is observed. They are responsible for:

• providing assurance, oversight, and challenge over the effectiveness of the risk and control activities conducted by the First Line;

• establishing frameworks to identify and measure the risks being taken by their respective parts of the business; and

• monitoring the performance of the key risks, through the key indicators and oversight/assurance programs against defined risk appetite and tolerance levels.

Global Functions must also maintain and monitor controls for which they are directly responsible.

The Third Line of Defense, Internal Audit, provides independent assurance as to the effectiveness of the design, implementation and embedding of the risk management frameworks, as well as the management of the risks and controls by the First Line and control oversight by the Second Line. Audit coverage is implemented through a combination of governance audits with sampled assessment of the global and regional control frameworks, HSBC Group-wide themed audits of key existing and emerging risks and project audits to assess major change initiatives.

In the course of our regular risk management activities, we use simulation models to help quantify the risk we are taking. The output from some of these models is included in this section of our filing. By their nature, models are based on various assumptions and relationships. We believe that the assumptions used in these models are reasonable, but events may unfold differently than what is assumed in the models. In actual stressed market conditions, these assumptions and relationships may no longer hold, causing actual experience to differ significantly from the results predicted in the model. Consequently, model results may be considered reasonable estimates, with the understanding that actual results may differ significantly from model projections. Risk management oversight begins with our Board of Directors and its various committees, principally the Audit, Risk and Compliance Committees. Management oversight is provided by corporate and business unit risk management committees with the participation of the Chief Executive Officer or her staff. An HSBC USA Risk Management Committee, chaired by the Chief Risk Officer, focuses on governance, emerging issues and risk management strategies.

The HSBC North America Chief Risk Officer also serves as the HUSI Chief Risk Officer and leads a distinct, cross-disciplinary risk organization and integrated risk function. Additionally, the HSBC North America Anti-Money Laundering Director serves as the designated Anti-Money Laundering Director and Bank Secrecy Act Compliance Officer for HUSI. Specific oversight of various risk management processes is provided by the Risk Management Committee, with the assistance of the following principal HSBC USA subcommittees:

• the Asset and Liability Management Committee ("ALCO");

• the Fiduciary Risk Management Committee; and

• the Operational Risk and Internal Control Committee ("ORIC").

Risk oversight and governance is also provided within a number of specialized cross-functional North America risk management subcommittees, including the HSBC North America Model Oversight Committee, the HSBC North America Risk Executive Committee and the Capital Management Review Meeting which includes risk appetite and stress testing management review.

While the charters of the Risk Management Committee and each sub-committee are tailored to reflect the roles and responsibilities of each committee, they all have the following common themes:

• defining and measuring risk and establishing policies, limits and thresholds;

• monitoring and assessing exposures, trends and the effectiveness of the risk management framework; and

• reporting through the Chief Risk Officer to the Board of Directors.

HSBC North America's Risk Appetite framework describes through its Risk Appetite Statement and its Risk Appetite Limits and Thresholds the quantum and types of risk that it is prepared to take in executing its strategy. It develops and maintains the linkages between strategy, capital, risk management processes and HSBC Group Strategy and directs HSBC North America's businesses to be targeted along strategic and risk priorities and in line with the forward view of available capital under stress.

Oversight of all liquidity, interest rate and market risk is provided by ALCO which is chaired by the HUSI Chief Financial Officer. Subject to the approval of our Board of Directors and HSBC, ALCO sets the limits of acceptable risk, monitors the adequacy of the tools used to measure risk and assesses the adequacy of reporting. In managing these risks, we seek to protect both our income stream and the value of our assets. ALCO also conducts contingency planning with regard to liquidity.

Credit Risk 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.

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

• loan portfolios;

• investment portfolios;

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

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

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

Our credit risk management procedures are designed for all stages of economic and financial cycles, including the current protracted and challenging period of market volatility and economic uncertainty. The credit risk function continues to refine "early warning" indicators and reporting, including stress testing scenarios on the basis of current experience. These risk management tools are embedded within our business planning process. Action has been taken, where necessary, to improve our resilience to risks associated with the current market conditions by selectively discontinuing business lines or products, tightening underwriting criteria and investing in improved fraud prevention technologies.

The responsibilities of the credit risk function include:

• Formulating credit risk policies - Our policies are designed to ensure that all of our various retail and commercial business units operate within clear standards of acceptable credit risk. Our policies ensure that the HSBC standards are consistently implemented across all businesses and that all regulatory requirements are also considered. Credit policies are reviewed and approved annually by the Risk Management Committee.

• Approving new credit exposures and independently assessing large exposures annually - The Chief Credit Officer delegates limited credit authority to our various lending units. However, most large credits are reviewed and approved centrally through a dedicated Credit Approval Unit that reports directly to the Chief Credit Officer. In addition, the Chief Credit Officer coordinates the approval of material credits with the HSBC Group Credit Risk which, subject to certain agreed-upon limits, will review and concur on material new and renewal transactions.

• Overseeing retail credit risk - The HSBC North America Chief Retail Credit Officer manages the credit risk associated with retail portfolios and is supported by expertise from a dedicated advanced risk analytics unit.

• Maintaining and developing the governance and operation of the commercial risk rating system - A two-dimensional credit risk rating system is utilized in order to categorize exposures meaningfully and enable focused management of the risks involved. This ratings system is comprised of a 23 category Customer Risk Rating, which considers the probability of default of an obligor and a separate assessment of a transaction's potential loss given default. Each credit grade has a probability of default estimate. Rating methodologies are based upon a wide range of analytics and market data-based tools, which are core inputs to the assessment of counterparty risk. Although automated risk rating processes are increasingly used, for larger facilities the ultimate responsibility for setting risk grades rests in each case with the final approving executive. Risk grades are reviewed frequently and amendments, where necessary, are implemented promptly.

• Measuring portfolio credit risk - We continue to advance the measurement of the risk in our credit portfolios using techniques such as stress testing, economic capital and correlation analysis in certain internal and Board of Directors reporting. Efforts continue to refine both the inputs and assumptions used to increase the usefulness in the evaluation of large and small commercial and retail customer portfolio products and business unit return on risk.

• Monitoring portfolio performance - Credit data warehouses have been implemented to centralize the reporting of credit risk, support the analysis of risk using tools such as Economic Capital, and to calculate credit loss reserves. This data warehouse also supports HSBC's wider effort to meet the requirements of Basel II and to generate credit reports for management and the Board of Directors.

• Establishing counterparty and portfolio limits - We monitor and limit our exposure to individual counterparties and to the combined exposure of related counterparties. In addition, selected industry portfolios, such as real estate, are subject to caps that are established by the Chief Credit Officer and reviewed where appropriate by management committees and the Board of Directors. Counterparty credit exposure related to derivative activities is also managed under approved limits. Since the exposure related to derivatives is variable and uncertain, internal risk management methodologies are used to calculate the 95 percent worst-case potential future exposure for each customer. These methodologies take into consideration, among other factors, cross-product close-out netting, collateral received from customers under Collateral Support Annexes (CSAs), termination clauses, and off-setting positions within the portfolio.

• Managing problem commercial loans - Special attention is paid to problem loans. When appropriate, our commercial Special Credits Unit and retail Default Services teams provide customers with intensive management and control support in order to help them avoid default wherever possible and maximize recoveries.

• Establishing allowances for credit losses - The Chief Credit Officer and the HSBC North America Chief Retail Credit Officer share responsibility with the Chief Financial Officer for establishing appropriate levels of allowances for credit losses inherent in various loan portfolios.

Credit Review is an independent and critical second line of defense function. Its mission is to identify and evaluate areas of credit risk within our business. Credit Review will focus on the review and evaluation of Wholesale and Retail lending activities and will identify risks and provide an ongoing assessment as to the effectiveness of the risk management framework and the related portfolios. Credit Review will independently assess the business units and Risk Management functions to ensure the portfolios are managed and operating in a manner that is consistent with HSBC Group strategy, risk appetite, appropriate local and HSBC Group credit policies and procedures and applicable regulatory requirements. For example, this includes the unilateral authority to independently assess and revise customer risk ratings, facility grades and loss given default estimates. To ensure its independent stature, the Credit Reviews Charter is endorsed by the Risk Committee of our Board of Directors which grants the Head of Credit Review unhindered access to the Risk Committee and executive sessions at the discretion of the Head of Credit Review. Accordingly, our Board of Directors has oversight of the Credit Review annual and ongoing plan, quarterly plan updates and results of reviews.

Liquidity Risk Liquidity risk is the risk that an institution will be unable to meet its obligations as they become due or fund its customers because of an inability to liquidate assets or obtain adequate funding. We continuously monitor the impact of market events on our liquidity positions. Historically, we have seen the greatest strain 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). Core deposits, as calculated in accordance with FFIEC guidelines, comprise 76 percent of our total deposit base, providing more stable balances, less sensitivity to market events or changes in interest rates. Our limited dependence upon the wholesale markets for funding has been a significant competitive advantage through the recent period of financial market turmoil. We will continue to adapt the liquidity framework described below to reflect market events and the evolving regulatory landscape and view as to best practices.

Liquidity is managed to provide the ability to generate cash to meet lending, deposit withdrawal and other commitments at a reasonable cost in a reasonable amount of time while maintaining routine operations and market confidence. Market funding is planned in conjunction with HSBC, as the markets increasingly view debt issuances from the separate companies within the context of their common parent company. Liquidity management is performed at both HSBC USA and HSBC Bank USA. Each entity is required to have sufficient liquidity for a crisis situation. ALCO is responsible for the development and implementation of related policies and procedures to ensure that the minimum liquidity ratios and a strong overall liquidity position are maintained.

In carrying out this responsibility, ALCO projects cash flow requirements and determines the level of liquid assets and available funding sources to have at our disposal, with consideration given to anticipated deposit and balance sheet growth, contingent liabilities, and the ability to access wholesale funding markets. In addition to base case projections, multiple stress scenarios are generated to simulate crisis conditions, including:

• run-off of non-core deposits;

• inability to renew maturing interbank fundings;

• draw downs of committed loan facilities;

• four-notch rating downgrade of HSBC Bank USA; and

• increased discount on security values for repos or disposals.

Stressed coverage ratios are derived from stressed cash flow scenario analyses and express the stressed cash inflows as a percentage of stressed cash outflows over one-month and three-month time horizons. At December 31, 2013, our one-month and three-month stressed coverage ratios were 114 percent and 110 percent, respectively. A stressed coverage ratio of 100 percent or higher reflects a positive cumulative cash flow under the stress scenario being monitored. HSBC operating entities are required to maintain a ratio of 100 percent or greater out to three months under the combined market-wide and HSBC-specific stress scenario defined by the inherent liquidity risk categorization of the operating entity concerned.

ALCO monitors the overall mix of deposit and funding concentrations to avoid undue reliance on individual funding sources and large deposit relationships. In addition, ALCO analyzes changes in the uses of liquidity, establishes policy on balance sheet usage, and sets limits on and monitors the ratio of Advances to Core Funding ("ACF"). This ratio measures what percentage of our stable sources of long-term funding (generally customer deposits deemed to be "core" in accordance with HSBC policy and debt with at least 12 months until maturity), are utilized in providing loans to customers. We are required to maintain an ACF ratio below 105 percent. Currently our ACF ratio stands at 85 percent.

ALCO must also maintain a liquidity management and contingency funding plan, which identifies certain potential early indicators of liquidity problems, and actions that can be taken both initially and in the event of a liquidity crisis, to minimize the long-term impact on our businesses and customer relationships. The liquidity contingency funding plan is reviewed annually and approved by the Risk Committee of our Board of Directors. We recognize a liquidity crisis can either be specific to us, relating to our ability to meet our obligations in a timely manner, or market-wide, caused by a macro risk event in the broader financial system. A range of indicators are monitored to attain an early warning of any liquidity issues. These include widening of key spreads or indicies used to track market volatility, material reductions or extreme volatility in customer deposit balances, increased utilization of credit lines, widening of our credit spreads and higher borrowing costs. In the event of a cash flow crisis, our objective is to fund cash requirements without access to the wholesale unsecured funding market for at least one year. Contingency funding needs will be satisfied primarily through sales of securities from the investment portfolio and secured borrowing using the mortgage portfolio as collateral. Securities may be sold or used as collateral in a repurchase agreement depending on the scenario. Portions of the mortgage portfolio may be used as collateral at the FHLB to increase borrowings. We maintain a Liquid Asset Buffer consisting of cash, short-term liquid assets and unencumbered government and other highly rated investment securities as a source of funding. Further, collateral is maintained at the Federal Reserve Bank discount window and the FHLB, providing additional secured borrowing capacity in a liquidity crisis.

A key assumption of our internal liquidity risk framework is the categorization of customer deposits into core and non-core based on our expectation of the behavior of these deposits during liquidity stress. This characterization takes into account the inherent liquidity risk categorization of the operating entity originating the deposit, the nature of the customer and the size and pricing of the deposit. The core deposit base is considered to be a long-term source of funding and therefore is assumed not to be withdrawn in the liquidity stress scenario that we use to calculate our principal liquidity risk metrics. Deposits from affiliates and banks are treated entirely as non-core.

The three filters considered in assessing whether a deposit is core are:

Ÿ price: any deposit priced significantly above market or benchmark rates is generally treated as entirely non-core;

Ÿ size: for depositors with total funds above certain monetary thresholds, amounts over the thresholds are excluded. Thresholds are established by considering the business line; and

Ÿ line of business: the element of any deposit remaining after the application of the price and size filters is assessed on the basis of the line of business to which the deposit is associated. The proportion of any customer deposit that can be considered core under this filter is between 35 percent and 90 percent.

Given our overall liquidity position, during 2013, we have continued to manage down low-margin commercial and institutional deposits in order to maximize profitability.

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

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

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

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

(1) Dominion Bond Rating Service.

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

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

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

Numerous factors, internal and external, may impact access to and costs associated with issuing debt in the global capital markets. These factors include our debt ratings, overall economic conditions, overall capital markets volatility and the effectiveness of the management of credit risks inherent in our customer base.

Cash resources, short-term investments and a trading asset portfolio are available to provide highly liquid funding for us. Additional liquidity is provided by available for sale debt securities. Approximately $1.4 billion of debt securities in this portfolio at December 31, 2013 are expected to mature in 2014. The remaining $53.4 billion of debt securities not expected to mature in 2014 are available to provide liquidity by serving as collateral for secured borrowings, or if needed, by being sold. Further liquidity is available through our ability to sell or securitize loans in secondary markets through loan sales and securitizations. In 2013, we did not sell any residential mortgage loan portfolios other than normal loan sales to PHH Mortgage and, prior to May 2013 applications, government sponsored enterprises.

It is the policy of HSBC Bank USA to maintain both primary and secondary collateral in order to ensure precautionary borrowing availability from the Federal Reserve. Primary collateral is collateral that is physically maintained at the Federal Reserve, and serves as a safety net against any unexpected funding shortfalls that may occur. Secondary collateral is collateral that is acceptable to the FRB, but is not maintained there. If unutilized borrowing capacity were to be low, secondary collateral would be identified and maintained as necessary. Further liquidity is available from the Federal Home Loan Bank of New York. As of December 31, 2013, we had outstanding advances of $1.0 billion. The facility also allows access to further borrowings of up to $5.3 billion based upon the amount pledged as collateral with the FHLB.

As of December 31, 2013, any significant dividend from HSBC Bank USA to us would require the approval of the OCC. See Note 24, "Retained Earnings and Regulatory Capital Requirements," in the accompanying consolidated financial statements for further details. In determining the extent of dividends to pay, HSBC Bank USA must also consider the effect of dividend payments on applicable risk-based capital and leverage ratio requirements, as well as policy statements of federal regulatory agencies that indicate that banking organizations should generally pay dividends out of current operating earnings.

Under a shelf registration statement filed with the SEC, we may issue debt securities or preferred stock, either separately or represented by depositary shares, warrants, purchase contracts and units. We satisfy the eligibility requirements for designation as a "well-known seasoned issuer," which allows us to file a registration statement that does not have a limit on issuance capacity. The ability to issue debt under the registration statement is limited by the debt issuance authority granted by the Board. We are currently authorized to issue up to $21 billion, of which $7.7 billion is available. During 2013, we issued $4.4 billion of long-term debt from this shelf.

HSBC Bank USA has a $40 billion Global Bank Note Program, which provides for issuance of subordinated and senior notes. Incremental borrowings from the Global Bank Note Program totaled $1.1 billion in 2013. There is approximately $15.8 billion of borrowing availability.

Interest Rate Risk Interest rate risk is the potential impairment of net interest income due to mismatched pricing between assets and liabilities. We are subject to interest rate risk associated with the repricing characteristics of our balance sheet assets and liabilities. Specifically, as interest rates change, amounts of interest earning assets and liabilities fluctuate, and interest earning assets reprice at intervals that do not correspond to the maturities or repricing patterns of interest bearing liabilities. This mismatch between assets and liabilities in repricing sensitivity results in shifts in net interest income as interest rates move. To help manage the risks associated with changes in interest rates, and to manage net interest income within ranges of interest rate risk that management considers acceptable, we use derivative instruments such as interest rate swaps, options, futures and forwards as hedges to modify the repricing characteristics of specific assets, liabilities, forecasted transactions or firm commitments. Day-to-day management of interest rate risk is centralized principally under the Treasurer.

We have substantial, but historically well controlled, interest rate risk in large part as a result of our portfolio of residential mortgages and mortgage backed securities, which consumers can prepay without penalty, and our large base of demand and savings deposits. These deposits can be withdrawn by consumers at will, but historically they have been a stable source of relatively low cost funds. Market risk exists principally in treasury businesses and to a lesser extent in the residential mortgage business where mortgage servicing rights and the pipeline of forward mortgage sales are hedged. We have little foreign currency exposure from investments in overseas operations, which are limited in scope. Total equity investments, excluding stock owned in the Federal Reserve Bank and New York Federal Home Loan Bank, represent less than one percent of total available-for-sale securities.

The following table shows the repricing structure of assets and liabilities as of December 31, 2013. For assets and liabilities whose cash flows are subject to change due to movements in interest rates, such as the sensitivity of mortgage loans to prepayments, data is reported based on the earlier of expected repricing or maturity and reflects anticipated prepayments based on the current rate environment. The resulting "gaps" are reviewed to assess the potential sensitivity to earnings with respect to the direction, magnitude and timing of changes in market interest rates. Data shown is as of year-end, and one-day figures can be distorted by temporary swings in assets or liabilities.

December 31, 2013	Within One Year			After One But Within Five Years			After Five But Within Ten Years			After Ten Years			Total
	(in millions)
Commercial loans.........................................................................	$	43,185		$	4,824		$	324		$	237		$	48,570
Residential mortgages.................................................................	7,385			5,699			3,194			1,650			17,928
Credit card receivables................................................................	854			-			-			-			854
Other consumer loans.................................................................	464			80			25			4			573
Total loans⁽¹⁾..............................................................................	51,888			10,603			3,543			1,891			67,925
Securities available-for-sale and securities held-to-maturity	7,828			30,428			10,808			7,200			56,264
Other assets..................................................................................	57,331			3,627			340			-			61,298
Total assets................................................................................	117,047			44,658			14,691			9,091			185,487
Domestic deposits⁽²⁾:
Savings and demand................................................................	58,768			14,989			9,430			-			83,187
Certificates of deposit..............................................................	9,217			204			2			-			9,423
Long-term debt.............................................................................	12,947			5,000			2,200			2,700			22,847
Other liabilities/equity.................................................................	58,163			11,343			-			524			70,030
Total liabilities and equity........................................................	139,095			31,536			11,632			3,224			185,487
Total balance sheet gap...........................................................	(22,048		)	13,122			3,059			5,867			-
Effect of derivative contracts.....................................................	10,195			(3,906		)	(3,900		)	(2,389		)	-
Total gap position.....................................................................	$	(11,853	)	$	9,216		$	(841	)	$	3,478		$	-

⁽¹⁾Includes loans held for sale.

⁽²⁾Does not include purchased or wholesale deposits. For purposes of this table purchased and wholesale deposits are reflected in "Other liabilities/equity".

Various techniques are utilized to quantify and monitor risks associated with the repricing characteristics of our assets, liabilities and derivative contracts.

In the course of managing interest rate risk, a present value of a basis point ("PVBP") analysis is utilized in conjunction with a combination of other risk assessment techniques, including economic value of equity, net interest income simulation modeling, capital risk and Value at Risk ("VAR") analyses. The combination of these tools enables management to identify and assess the potential impact of interest rate movements and take appropriate action. This combination of techniques, with some focusing on the impact of interest rate movements on the value of the balance sheet (PVBP, economic value of equity, VAR) and others focusing on the impact of interest rate movements on earnings (net interest income simulation modeling) allows for comprehensive analyses from different perspectives. Discussion of the use of VAR analyses to monitor and manage interest rate and other market risks is included in the discussion of market risk management below.

A key element of managing interest rate risk is the management of the convexity of the balance sheet, largely resulting from the mortgage related products on the balance sheet. Convexity risk arises as mortgage loan consumers change their behavior significantly in response to large movements in market rates, but do not change behavior appreciably for smaller changes in market rates. Certain interest rate management tools, such as net interest income simulation modeling described below, better capture the embedded convexity in the balance sheet, while measures such as PVBP are designed to capture the risk of smaller changes in rates.

Refer to "Market Risk Management" for discussion regarding the use of VAR analyses to monitor and manage interest rate risk.

The assessment techniques discussed below act as a guide for managing interest rate risk associated with balance sheet composition and off-balance sheet hedging strategy (the risk position). Calculated values within limit ranges reflect an acceptable risk position, although possible future unfavorable trends may prompt adjustments to on or off-balance sheet exposure. Calculated values outside of limit ranges will result in consideration of adjustment of the risk position, or consideration of temporary dispensation from making adjustments.

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

At December 31,	2013		2012
	(in millions)
Institutional PVBP movement limit............................................................................................................	$	8.0	$	8.0
PVBP position at period end......................................................................................................................	6.8		1.7

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

At December 31, 2013	Amount			%
	(dollars are in millions)
Projected change in net interest income (reflects projected rate movements on January 1, 2014):
Change resulting from a gradual 100 basis point increase in the yield curve...............................	$	(5	)	-
Change resulting from a gradual 100 basis point decrease in the yield curve..............................	(68		)	(3	)
Change resulting from a gradual 200 basis point increase in the yield curve...............................	(43		)	(2	)
Change resulting from a gradual 200 basis point decrease in the yield curve..............................	(137		)	(6	)
Other significant scenarios monitored (reflects projected rate movements on January 1, 2014):
Change resulting from an immediate 100 basis point increase in the yield curve.........................	(7		)	-
Change resulting from an immediate 100 basis point decrease in the yield curve........................	(109		)	(5	)
Change resulting from an immediate 200 basis point increase in the yield curve.........................	(39		)	(2	)
Change resulting from an immediate 200 basis point decrease in the yield curve........................	(257		)	(12	)

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

Capital Risk/Sensitivity of Other Comprehensive Income Large movements of interest rates could directly affect some reported capital balances and ratios. The mark-to-market valuation of available-for-sale securities is credited on a tax effective basis to accumulated other comprehensive income. Although this valuation mark is currently excluded from Tier 1 capital, it is included in two important accounting based capital ratios: tangible common equity to tangible assets and tangible common equity to risk weighted assets. Under the final rule adopting the Basel III regulatory capital reforms, the valuation mark will no longer be excluded from Tier 1 capital and the impact of this change for HSBC USA will be assessed along with the other Basel III changes being introduced. As of December 31, 2013, we had an available-for-sale securities portfolio of approximately $54.9 billion with a negative mark-to-market of $29 million included in tangible common equity of $13.4 billion. An increase of 25 basis points in interest rates of all maturities would lower the mark-to-market by approximately $284 million to a net loss of $313 million with the following results on our tangible capital ratios.

At December 31, 2013	Actual		Proforma⁽¹⁾
Tangible common equity to tangible assets...........................................................................................	7.28	%	7.20	%
Tangible common equity to risk weighted assets..................................................................................	10.85		10.72

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

Market Risk Market risk is the risk that movements in market risk factors, including foreign exchange rates and commodity prices, interest rates, credit spreads and equity prices, will reduce HSBC USA's income or the value of its portfolios. We separate exposures to market risk into trading and non-trading portfolios. Trading portfolios include those positions arising from market-making and other mark-to-market positions so designated. Non-trading portfolios primarily arise from the interest rate management of our retail and commercial banking assets and liabilities, financial investments classified as available-for-sale and held-to-maturity. Our objective is to manage and control market risk exposures in order to optimize returns on risk while maintaining positions within management identified risk appetite defined in sensitivity, VAR and RWA term.

We have incorporated the qualitative and quantitative requirements of Basel 2.5, including stressed VAR, Incremental Risk Charge and Comprehensive Risk Measure into our process and received regulatory approval to initiate these enhancements effective January 1, 2013.

We use a range of tools to monitor and limit market risk exposures, including:

Sensitivity measures Sensitivity measures are used to monitor the market risk positions within each risk type, for example, PVBP movement in interest rates for interest rate risk. Sensitivity limits are set for portfolios, products and risk types, with the depth and the volatility of the market being one of the principal factors in determining the level of limits set.

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

The VAR models are based predominantly on historical simulation. These models derive plausible future scenarios from past series of recorded market rate and price changes, and applies these to their current rates and prices. The model also incorporates the effect of option features on the underlying exposures. The historical simulation models used by us incorporate the following features:

• market movement scenarios are derived with reference to data from the past two years;

• scenario profit and losses are calculated with the derived market scenarios for foreign exchange rates and commodity prices, interest rates, credit spreads equity prices, volatilities; and

• VAR is calculated to a 99 percent confidence level for a one-day holding period.

We routinely validate the accuracy of our VAR models by back-testing the actual daily profit and loss results, adjusted to remove non-modeled items such as fees and commissions and intraday trading, against the corresponding VAR numbers. Statistically, we would expect to see losses in excess of VAR only one percent of the time. The number of backtesting breaches in a period is used to assess how well the model is performing and, occasionally, new parameters are evaluated and introduced to improve the models' fit. Although a valuable guide to risk, VAR must always be viewed in the context of its limitations, that is:

• the use of historical data as a proxy for estimating future events may not encompass all potential events, particularly those which are extreme in nature;

• the use of a one-day holding period assumes that all positions can be liquidated or the risks offset in one day. This may not fully reflect the market risk arising at times of severe illiquidity, when a one-day holding period may be insufficient to liquidate or fully hedge all positions;

• the use of a 99 percent confidence level, by definition, does not take into account losses that might occur beyond this level of confidence;

• VAR is calculated on the basis of exposures outstanding at the close of business and therefore does not necessarily reflect intraday exposures; and

• VAR is unlikely to reflect loss potential on exposures that only arise under significant market moves.

Stress testing In recognition of the limitations of VAR, we complement VAR with stress testing to evaluate the potential impact on portfolio values of more extreme, although plausible, events or movements in a set of financial variables. Stress testing is performed at a portfolio level, as well as on the consolidated positions of the HSBC Group, and covers the following scenarios:

• Sensitivity scenarios, which consider the impact of market moves to any single risk factor or a set of factors. For example the impact resulting from a break of a currency peg that will not be captured within the VAR models;

• Technical scenarios, which consider the largest move in each risk factor, without consideration of any underlying market correlation;

• Hypothetical scenarios, which consider potential macro economic events; and

• Historical scenarios, which incorporate historical observations of market moves during previous periods of stress which would not be captured within VAR.

Stress testing is governed by the Stress Testing Review Group forum that coordinates the HSBC Group stress testing scenarios in conjunction with the regional risk managers. Consideration is given to the actual market risk exposures, along with market events in determining the stress scenarios.

Stress testing results are reported to senior management and provide them with an assessment of the financial impact such events would have on our profits and capitalization.

Market risk was relatively stable during 2013 as the Global Markets business in the US continued to focus on customer facilitation and simplifying its trading products. Overnight risk taking was limited against the backdrop of concerns around the FRB's proposed quantitative easing tapering policy and its related impact on emerging market capital flows as well as political issues such as the U.S. debt ceiling negotiations. Non-trading VAR varied considerably during the year given the relatively increased volatility in interest rates and mortgage spreads.

The major contributor to the trading and non-trading VAR for us is our GB&M business.

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 GB&M.

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 GB&M business segment, which include warehoused residential mortgage loans purchased with the intent of selling them, and within mortgage banking which is included within the RBWM business segment. Portfolios include foreign exchange, interest rate swaps and credit derivatives, precious metals (i.e. gold, silver, platinum), equities and money market instruments including "repos" and securities. Trading occurs as a result of customer facilitation 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 2013:

	December 31, 2013		Full Year 2013						December 31, 2012
	December 31, 2013		Minimum		Maximum		Average		December 31, 2012
	(in millions)
Total trading......................................................................	$	9	$	6	$	19	$	9	$	8
Foreign exchange.............................................................	7		4		12		7		5
Interest rate directional and credit spread....................	10		5		11		8		6

The following table summarizes the frequency distribution of daily market risk-related revenues for trading activities during 2013. Market risk-related trading revenues include realized and unrealized gains (losses) related to trading activities, but exclude the related net interest income. Analysis of the gain (loss) data for 2013 shows that the largest daily gain was $8 million and the largest daily loss was $13 million.

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

Below

$(5)

to $0

to $5

to $10

Over

$10

(dollars are in millions)

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

117

123

The risk associated with movements in credit spreads is primarily managed through sensitivity limits, stress testing and VAR on those portfolios where it is calculated. Credit spread, which is calculated for credit derivatives portfolios, is a separate risk type within our VAR models and is included in total VAR for trading activities in the table above.

The sensitivity of trading mark to market to the effect of one basis point movement in credit spreads on the total trading activities was less than one million for both December 31, 2013 and 2012. The combination of directional interest rate risk and credit spread were the largest contributors to VAR in both 2013 and 2012.

Certain transactions are structured such that the risk is negligible under a wide range of market conditions or events, but in which there exists a remote possibility that a significant gap event could lead to loss. A gap event could be seen as a change in market price from one level to another with no trading opportunity in between, and where the price change breaches the threshold beyond which the risk profile changes from having no open risk to having full exposure to the underlying structure. Such movements may occur, for example, when there are adverse news announcements and the market for a specific investment becomes illiquid, making hedging impossible. Given the characteristics of these transactions, they will make little or no contribution to VAR or to traditional market risk sensitivity measures. We capture the risks for such transactions within our stress testing scenarios. Gap risk arising is monitored on an ongoing basis, and we incurred no gap losses on such transactions in 2013.

The ABS/MBS exposures within the trading portfolios are managed within sensitivity and VAR limits and are included within the stress testing scenarios described above.

At December 31,	2013		2012
	(in millions)
Stressed Value at Risk (1-day equivalent)................................................................................................	$	28	$	13

Stressed VAR is calculated based on a 99 percent confidence level utilizing a significant period of stress in financial markets. The stressed VAR figure at December 31, 2013 reflects exposure to extreme movements in both interest rates and credit spreads. During 2013, this sensitivity increased based on the positions in the trading book.

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

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

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

	December 31, 2013		Full Year 2013						December 31, 2012
	December 31, 2013		Minimum		Maximum		Average		December 31, 2012
	(in millions)
Total Accrual VAR............................................................	$	104	$	78	$	145	$	99	$	92

The sensitivity of equity to the effect of a one basis point movement in credit spreads on our investment securities was $4 million and $5 million at December 31, 2013 and 2012, respectively. The sensitivity was calculated on the same basis as that applied to the trading portfolio.

Market risk also arises on fixed-rate securities we issue. These securities are issued to support long-term capital investments in subsidiaries and include non-cumulative preferred shares, noncumulative perpetual preferred securities and fixed rate subordinated debt.

Market risk arises on debt securities held as available-for-sale. The fair value of these securities was $54.9 billion and $67.7 billion at December 31, 2013 and 2012, respectively.

A principal part of our management of market risk in non-trading portfolios is to monitor the sensitivity of projected net interest income under varying interest rate scenarios (simulation modeling). We aim, through our management of market risk in non-trading portfolios, to mitigate the effect of prospective interest rate movements which could reduce future net interest income, while balancing the cost of such hedging activities on the current net revenue stream. See "Interest Rate Risk Management" above for further discussion.

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

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

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

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

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

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

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

Ranges of mortgage economic value from market risk-related activities

Below

$(2)

to $0

to $2

to $4

Over

(dollars are in millions)

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

Operational Risk Operational risk results from inadequate or failed internal processes, people and systems or from external events, including legal risk. Operational risk is relevant to every aspect of our business and covers a wide spectrum of risks. Our strategy is to manage operational risks in a cost effective manner, within targeted levels consistent with the risk appetite. Our Operational Risk and Internal Control ("ORIC") management framework ensures minimum standards of governance and organization over operational risk and internal control throughout HSBC USA and covers all our businesses and operations (including all entities, activities, processes, systems and products). During 2013, our risk profile was dominated by compliance and legal risks and the incidence of and response to regulatory proceedings and other adversarial proceedings against financial services firms is significant. We have prioritized resources to develop and execute remedial actions to regulatory matters, including enhancing or adding internal controls and we closely monitor the possible impacts of litigation on our operational risk profile. We are operating under a U.S. Deferred Prosecution Agreement ("U.S. DPA") with the U.S. Department of Justice, the U.S. Attorney's Office for the Eastern District of New York, and the U.S. Attorney's Office for the Northern District of West Virginia. We have also been served with cease and desist orders from the U.S. FRB and the OCC. These orders cite substantial actions needed to correct deficiencies in Compliance, Risk Management and AML programs. A breach of the U.S. DPA would have a significant impact on us as a whole and could result in parties to the DPA reinstituting civil or criminal proceedings against us. Failure to close the various cease and desist and/or the consent orders would result in our inability to operate in a compliant manner. We have committed to take or continue to adhere to a number of remedial measures related to the U.S. DPA and regulatory orders.

The security of our information and technology infrastructure is crucial for maintaining our applications and processes while protecting our customers and the HSBC brand. In common with other financial institutions and multinational organizations, HSBC faces a growing threat of cyber-attacks that continue to increase in sophistication. A failure of our defenses against such attacks could result in financial loss, loss of customer data and other sensitive information which could undermine both our reputation and our ability to attract and retain our customers. We experienced cyberattacks in 2013, none of which resulted in material financial loss or the loss of customer data. We continue to enhance our cyber-threat intelligence capability and detection and response capabilities to minimize the impacts of cyber-attacks. This area will continue to be a focus of ongoing initiatives to strengthen the control environment and our readiness to respond in the event of an attack.

We have established an independent Operational Risk and Internal Control management discipline in North America which is led by the HSBC North America Head of Operational Risk and Internal Control, reporting to the HSBC North America Chief Risk Officer. The mission of the Operational Risk and Internal Control Committee, chaired by the HSBC North America Chief Risk Officer, is to provide governance and strategic oversight of the operational risk management framework, including the identification , assessment, monitoring and appetite for operational risk. Selected results and reports from this committee are communicated to the Risk Management Committee and subsequently to the Risk Committee of the Board of Directors. While management in the First Line of Defense is responsible for managing and controlling operational risk, the central Operational Risk and Internal Control function provides functional oversight by coordinating the following activities:

• developing Operational Risk and Internal Control policies and procedures;

• developing and managing methodologies and tools to support the identification, assessment, and monitoring of operational risks;

• providing firm-wide operational risk and control reporting and facilitating the development of action plans;

• identifying emerging risks and monitoring operational risks and internal controls to reduce foreseeable, future loss exposure;

• analyze root-cause of large operational risk losses;

• providing operational risk training and awareness programs for employees throughout the firm;

• communicating with Business Risk Control Managers to ensure the operational risk management framework is executed within their respective business or function;

• independently reviewing the operational risk and control assessments, communicating results to business management and monitoring remedial actions that may be necessary to improve the assessments; and

• modeling operational risk losses and scenarios for capital management purposes.

Management of operational risk includes identification, assessment, monitoring, mitigation, rectification, and reporting of the results of risk events, including losses and compliance with local regulatory requirements. These key components of the operational risk management framework have been communicated by issuance of HSBC standards. Details and local application of the standards have been documented and communicated by issuance of a HSBC North America Operational Risk and Internal Control policy. Key elements of the policy and our operational risk management framework include:

• business and function management is responsible for the assessment, identification, management, and reporting of their operational risks and monitoring the ongoing effectiveness of key controls;

• material risks are assigned an overall risk prioritization / rating based on the typical and extreme assessments and considers the direct financial costs and the indirect financial impacts to the business. An assessment of the effectiveness of key controls that mitigate these risks is made. An operational risk database records the risk and control assessments and tracks risk mitigation action plans. The risk assessments are reviewed at least annually, or as business conditions change;

• key risk indicators are established and monitored where appropriate; and

• the database is also used to track operational losses for analysis of root causes, comparison with risk assessments, lessons learned and capital modeling.

Management practices include standard reporting to senior management and the Operational Risk and Internal Control Committee of high risks, significant control deficiencies, risk mitigation action plans, losses and key risk indicators. We also monitor external operational risk events to ensure that we remain in line with best practice and take into account lessons learned from publicized operational failures within the financial services industry. Operational risk management is an integral part of the new product development and approval process and the employee performance management process, as applicable.

Internal audits provide an important independent check on controls and test institutional compliance with the operational risk management framework. Internal audit utilizes a risk-based approach to determine its audit coverage in order to provide an independent assessment of the design and effectiveness of key controls over our operations, regulatory compliance and reporting. This includes reviews of the operational risk framework, the effectiveness and accuracy of the risk assessment process, and the loss data collection and reporting activities.

Compliance Risk Compliance risk is the risk that we fail to observe the letter and spirit of all relevant laws, codes, rules, regulations and standards of good market practice. It is a composite risk that can result in regulatory sanctions, financial penalties, litigation exposure and loss of reputation. Compliance risk is inherent throughout our organization.

All HSBC companies are required to observe the letter and spirit of all relevant laws, codes, rules, regulations and standards of good market practice. In 2013, we experienced increasing levels of compliance risk as regulators and other agencies pursued investigations into historical activities and as we continued to work with them in relation to already identified issues. These included an appearance before the U.S. Senate Permanent Subcommittee on Investigations and the Deferred Prosecution Agreement reached with U.S. authorities in relation to investigations regarding inadequate compliance with anti-money laundering, the U.S. Bank Secrecy Act and sanctions laws, plus a related undertaking with the U.K.'s PRA;

HSBC has already taken specific steps to address these issues including making significant changes to strengthen compliance, risk management and culture. These steps, which should also serve over time to enhance our compliance risk management capabilities, include the following:

• the creation of a new global structure, which will make the HSBC Group easier to manage and control;

• simplifying HSBC's businesses through the ongoing implementation of an organizational effectiveness program and a five economic filters strategy;

• implementing a sixth global risk filter which will standardize the way HSBC does business in high risk countries;

• substantially increasing resources, doubling global expenditure and significantly strengthening Compliance as a control (and not only as an advisory) function;

• continuing to roll out cultural and values programs that define the way everyone in the HSBC Group should act; and

• adopting and enforcing the most effective standards globally, including a globally consistent approach to knowing and retaining our customers.

Additionally, HSBC has substantially revised its governance framework in this area, appointing a Chief Legal Officer with particular expertise and experience in U.S. law and regulation, and creating and appointing experienced individuals to the new roles of Head of Group Financial Crime Compliance and Global Head of Regulatory Compliance.

It is clear from both our own and wider industry experience that there is a significantly increased level of activity from regulators and law enforcement agencies in pursuing investigations in relation to possible breaches of regulation and that the direct and indirect costs of such breaches can be significant. Coupled with a substantial increase in the volume of new regulation, much of which has some level of extra-territorial effect, and the geographical spread of our businesses, we believe that the level of inherent compliance risk that we face will continue to remain high for the foreseeable future.

Within the U.S., the Compliance Committee of the Board of Directors oversees the remediation of the compliance risk management program. The compliance function is led by the Chief Risk Officer ("CRO") for HSBC North America, who reports directly to the HSBC North America Chief Executive Officer, and the HSBC Head of Group Risk. Further, the senior compliance personnel functionally report to the CRO for HSBC North America. This reporting relationship enables the CRO to have direct access to HSBC Group Compliance, HSBC Group Risk and the HSBC North America Chief Executive Officer, as well as allowing for line of business personnel to be independent. The CRO for HSBC North America has broad authority from the Board of Directors and senior management to develop the enterprise-wide compliance program and oversee the compliance activities across all business units, jurisdictions and legal entities. This broad authority enables the CRO for HSBC North America to identify and resolve compliance issues in a timely and effective manner, and to escalate issues promptly to senior management, the Board of Directors, and HSBC as appropriate.

We are committed to delivering the highest quality financial products and services to our customers. Critical to our relationship with our customers is their trust in us, as fiduciary, advisor and service provider. That trust is earned not only through superior service, but also through the maintenance of the highest standards of integrity and conduct. We must, at all times, comply with high ethical standards, treat customers fairly, and comply with both the letter and spirit of all applicable laws, codes, rules, regulations and standards of good market practice, and HSBC policies and standards. It is also our responsibility to foster good relations with regulators, recognizing and respecting their role in ensuring adherence with laws and regulations. An important element of this commitment to our customers and shareholders is our compliance risk management program, which is applied enterprise-wide.

Our enterprise-wide program in HSBC North America is designed in accordance with HSBC policy and the principles established by the FRB in Supervision and Regulation Letter 08-8 (SR 08-8) dated October 16, 2008. By leveraging industry-leading practices and taking an enterprise-wide, integrated approach to managing our compliance risks, we can better identify and understand our compliance requirements, monitor our compliance risk profile, and assess and report our compliance performance across the organization. Consistent with the expectations of HSBC North America's regulators, our enterprise-wide compliance risk management program is designed to promote a consistent understanding of roles and responsibilities, as well as consistency in compliance program activities. The program is structured to pro-actively identify as well as quickly react to emerging issues and to, assess, control, measure, monitor and report compliance risks across the company, both within and across business lines, support units, jurisdictions and legal entities.

As a result of the Servicing Consent Orders, we have submitted plans and continue to review related areas to address the deficiencies noted in the joint examination and described in the Servicing Consent Orders.

Fiduciary Risk Fiduciary risk is the risk of breaching fiduciary duties where we act in a fiduciary capacity. It is the risk associated with failing to offer services honestly and properly to clients in that capacity. We define a fiduciary duty as any duty where we hold, manage, oversee or have responsibilities for assets of a third party that involves a legal and/or regulatory duty to act with the highest standard of care and with utmost good faith. A fiduciary must make decisions and act in the best interests of the third parties and must place the wants and needs of the client first, above the needs of the organization. Fiduciary duties can also be established by case law, statue or regulation. Fiduciary capacity is primarily defined in banking regulation as:

ž serving traditional fiduciary duties such as trustee, executor, administrator, registrar of stocks and bonds, transfer agent, guardian, receiver or assigns;

ž providing investment advice for a fee; or

ž possessing investment discretion on behalf of another.

Fiduciary risks, as defined above, reside in our PB businesses (such as Investment Management, Personal Trust, Security Operation Services) and other business lines outside of PB (such as Corporate Trust) and ruled/guided primarily (but, not exclusively) by OCC Fiduciary-targeted Regulations (i.e. Regulation 12 CFR 9, Regulation 12 CFR 12). Additionally, Fiduciary Risk also includes risk associated with certain SEC regulated Registered Investment Advisers ("RIA"), which lie outside of the traditional banking regulatory fiduciary risk definitions as described above. Asset Management ("AMUS") would fall into that category as would HSI/Private Client Services. The RIA definition of fiduciary capacity primarily applies in the following circumstances and is ruled/guided primarily (but, not exclusively) by SEC Fiduciary-targeted Regulations (i.e. Investment Advisers Act of 1940 and Investment Company Act of 1940):

ž receiving fees for advising people, pension funds and institutions on investment matters;

ž managing assets on behalf of another; or

ž organizing organizations that engage in investing, reinvesting and trading securities (such as mutual funds) and whose own securities are offered to the investing public.

The fiduciary risks present in both the standard banking and RIA business lines almost always occur where we are entrusted to handle and execute client business affairs and transactions in a fiduciary capacity.

As discussed above, we have established an independent Operational Risk and Internal Control management discipline in North America. Included in the management of Operational Risk, as discussed above, the Operational Risk and Internal Control function has included in the risk management framework a Fiduciary Risk Stream, as specifically defined, and is managed, monitored, and controlled with acceptable risk appetite levels, and to report and escalate elevated risks to senior management and the Fiduciary Committee of the Board of Directors. Fiduciary Risk management is included in the formal Risk and Control Assessment process (along with other primary Operational Risks), Key Risk Indicator monitoring, management of self-identified issues reporting and a governance framework.

Fiduciary Risk is governed by the Fiduciary Committee of the Board of Directors. The Fiduciary Committee has established the Fiduciary Risk Management Committee ("FRMC") to carry out the day-to-day activities of managing Fiduciary Risk. The FRMC is chaired by the HSBC North America Operational Risk Head and includes Fiduciary business line heads as well as representatives from legal, compliance and audit and other fiduciary support functions. The FRMC also includes a Fiduciary Risk Specialist who has the requisite expertise to oversee and provide governance and advice on Fiduciary Risk matters. The Fiduciary Risk Specialist partners with the lines of business and other functional areas performing these fiduciary activities as well as interacts with regulators on fiduciary matters.

Reputational Risk The safeguarding of our reputation is of paramount importance to our continued prosperity and is the responsibility of every member of our staff. Reputational risk can arise from social, ethical or environmental issues, or as a consequence of operational and other risk events. Our good reputation depends upon the way in which we conduct our business, but can also be affected by the way in which customers to whom we provide financial services conduct themselves.

Reputational risk is considered and assessed by the HSBC Group Management Board, our HSBC Group and local Board of Directors and senior management during the establishment of standards for all major aspects of business and the formulation of policy and products. These policies, which are an integral part of the internal control systems, are communicated through manuals and statements of policy, internal communication and training. The policies set out operational procedures in all areas of reputational risk, including money laundering deterrence, economic sanctions, environmental impact, anti-corruption measures and employee relations.

We have taken steps over the past several years to de-risk our businesses and product offering to reduce reputational risk. In addition, we continue to strengthen our internal control structure to minimize the risk of operational and financial failure and to ensure that a full appraisal of reputational risk is made before strategic decisions are taken.

The HSBC North America Risk Management Committee provides governance and oversight of reputational risk. The monthly Risk Map process assesses our level and direction of reputational risk and helps ensure appropriate management action is taken when necessary. The Risk Map is a reporting tool where management assesses the overall level and direction of several distinct risk categories, including management action necessary to control or address risks outside of an acceptable level or risk appetite. Each wholesale business (GB&M, CMB, PB) reviews transactions via the Reputational Risk Committee that may adversely affect our public perception. The Committee is chaired by a Managing Director from Wholesale Credit Risk and is comprised of senior members from the business, legal, compliance, credit risk and other invited parties. The Committee is responsible for reviewing the individual merits and involved parties in high-risk transactions, and approving or declining transactions based on the potential reputational risks to us. Separately, a Client Selection Committee exists within the individual Wholesale Businesses which reviews incoming and current relationships to ensure that we are not dealing with clients whose controls and standards do not match those of ours. In addition to the committees, the responsibility of the practical implementation of such policies and the compliance with the letter and spirit of them rests with our Chief Executive Officer and senior management of our businesses.

Strategic Risk 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. Risk may be mitigated by consideration of the potential opportunities and challenges through the strategic planning process.

This risk is also a function of the compatibility of our strategic goals, the business strategies developed to achieve those goals, the resources deployed against those goals and the quality of implementation.

We have established a strong internal control structure to minimize the impact of strategic risk to our earnings and capital. All changes in strategy as well as the process in which new strategies are implemented are subject to detailed reviews and approvals at business line, functional, regional, board and HSBC levels. This process is monitored by the Strategy and Planning Group to ensure compliance with our policies and standards.

Security and Fraud Risk We are committed to the protection of employees, customers and shareholders by a quick response to all threats to the organization, whether they are of a physical or financial nature. To that end we ensure that all physical security, fraud, business continuity, information and geopolitical risks are appropriately identified, measured, managed, controlled, and reported in a timely and consistent manner. The Security and Fraud Risk function ("S&FR"), headed by an Executive Vice President who reports directly to the HSBC North America Chief Risk Officer, provides assurance, oversight and challenge over the effectiveness of the risk and control activities conducted by the businesses as the First Line of Defense, establishes frameworks to identify and measure the risks being taken by their respective businesses, and monitors the performance of the key risks through key indicators and the oversight and assurance programs against defined risk appetite and risk tolerance. S&FR is split into six functions:

• Client Intelligence Group, whose purpose is to provide timely and reliable intelligence on the potential financial crime risks posed by GB&M, CMB and PB clients and prospects to enable better risk management;

• Business Continuity Management, is responsible for ensuring that risk identification and incident handling, ranging from natural disasters to terrorism and flu pandemics, together with business recovery standards, are appropriate and are planned for, robust and tested. A major part of this responsibility is the identification of emerging risks to ensure they can be mitigated as much as possible by the flexibility of our planning, both for current incidents but also on a strategic basis in the years ahead;

• Fraud Risk is responsible for establishing and operating policies, standards, systems and other controls to prevent and detect fraud against us or our customers. Where fraud occurs, the Fraud risk function is responsible for investigating this, identifying control weaknesses or failures, recovering stolen monies and forming evidential cases for law enforcement prosecution;

• Information Security Risk (ISR) is responsible for protecting HSBC's information from theft, corruption or loss, whether caused deliberately or inadvertently by its staff or external parties. Its primary mechanisms for doing this are robust assessments of evolving threats, layers of controls on what information staff have access to and how it is stored and conveyed, and a series of technical defenses and monitoring operations to mitigate the risks of externally instigated breaches causing harm or corruption to data or systems integrity. The ISR function is also responsible for investigating information breaches and taking remedial action;

• Physical Security Risk develops practical physical, electronic, and operational countermeasures to ensure that the people, property and assets managed by us are protected from crime, theft, attack and groups hostile to our interests. Security travel controls and guidance are also maintained; and

• Geopolitical Risk provides both regular and ad hoc reporting to business executives and senior S&FR management on geopolitical risk profiles and evolving threats in the U.S. and other countries in which we operate. This enhances strategic business planning and provides an early view into developing security risks.

There are several Security and Fraud Risk related committees that aid and assist the S&FR function to identify, measure, monitor, and manage the Security and Fraud risks across HSBC North America.

Model Risk In order to manage the risks arising out of the use of incorrect or misused model output or reports, a comprehensive Model Governance framework has been established that provides oversight and challenge to all models across HSBC North America. This framework includes a revamped HSBC North America Model Standards Policy, the transformation of the HSBC North America Credit Risk Analytics Oversight Committee into a HSBC North America Model Oversight Committee that is chaired by the Chief Risk Officer and has broad representation from across HSBC North America businesses and functions. The committee provides broad oversight around model risk management including the review and approval of model governance sub-committees. Materiality levels of models are approved by the HSBC North America Model Oversight Committee that is also notified of all material model approvals or changes to existing material models by the respective business or functional areas. A complete inventory of all HSBC North America models is maintained and reported to the HSBC North America Model Oversight Committee at least semi-annually.

An Independent Model Review ("IMR") function is responsible for providing effective challenge of models and critical processes implemented for use within HSBC North America. Reviews are conducted in-line with supervisory guidance on model risk management issued by the OCC and FRB as well as other applicable internal and regulatory guidelines. Effective challenge is defined as a critical analysis by objective, informed parties who can identify model limitations and assumptions and produce appropriate changes. IMR's activities are segregated from the model development process to ensure that incentives are aligned with the function's role to challenge models and identify model limitations, and the authority and access provided by the Board of Directors provides the function with the necessary influence to ensure that its recommendations are acted upon. The independent model review process assesses model development, implementation, use, validation, and governance. IMR's scope covers models reported on the HSBC North America model inventory and critical non model processes. Examples of models and processes that IMR currently reviews include: Basel II Credit and Operational Risk, CCAR, ICAAP, Allowance for Loan and Lease Losses, Loss Forecasting, Retail Credit Risk Management, and AML.

Pension Risk Pension risk is the risk that the cash flows associated with pension assets will not be enough to cover the pension benefit obligations. Effective January 1, 2005,our previously separate qualified defined benefit pension plan was combined with that of HSBC Finance's into a single HSBC North America qualified defined benefit plan. At December 31, 2010, the defined benefit plan was frozen, significantly reducing future benefit accruals. At December 31, 2013, plan assets were lower than projected plan liabilities resulting in an under-funded status. The accumulated benefit obligation exceeded the fair value of the plan assets by approximately $457 million. As these obligations relate to the HSBC North America pension plan, only a portion of this deficit could be considered our responsibility. We and other HSBC North America affiliates with employees participating in this plan will be required to make up this shortfall over a number of years as specified under the Pension Protection Act. This can be accomplished through direct contributions, appreciation in plan assets and/or increases in interest rates resulting in lower liability valuations. See Note 21, "Pension and Other Postretirement Benefits," in the accompanying consolidated financial statements for further information concerning the HSBC North America defined benefit plan.

New Accounting Pronouncements to be Adopted in Future Periods

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

Accounting for Investments in Qualified Housing ProjectsIn January 2014, the FASB issued an Accounting Standards Update ("ASU") which permits, but does not require, an investor to amortize its Low Income Housing Tax Credit ("LIHTC") investments in proportion to the allocated Low Income Housing Federal tax benefits and present such tax benefits net of investment amortization in the income tax line. The ASU is effective for fiscal years beginning after December 15, 2014 to be applied retrospectively with early adoption permitted. Although we have not made a final decision, we currently expect to early adopt the new standard in the first quarter of 2014, effective January 1, 2014. The new standard will result in a change in the income statement presentation for the amortization expense of the LIHTC investments and will result in a reduction to operating expenses of approximately $85 million in each of the three years ended December 31, 2013, 2012 and 2011 with a corresponding increase to income tax expense and is not expected to have any impact to net income.

GLOSSARY OF TERMS

Balance Sheet Management -Represents our activities to manage interest rate risk associated with the repricing characteristics of balance sheet assets and liabilities.

Basis point - A unit that is commonly used to calculate changes in interest rates. The relationship between percentage changes and basis points can be summarized as a 1 percent change equals a 100 basis point change or .01 percent change equals 1 basis point.

CDS - Credit Default Swap.

Contractual Delinquency - A method of determining aging of past due accounts based on the past due status of payments under the loan. Delinquency status may be affected by customer account management policies and practices such as the re-age of accounts or modification arrangements.

Delinquency Ratio - Two-months-and-over contractual delinquency expressed as a percentage of loans and loans held for sale at a given date.

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

FRB - The Federal Reserve Board; our principal regulator.

Futures Contract - An exchange-traded contract to buy or sell a stated amount of a financial instrument or index at a specified future date and price.

Global Bank Note Program - A $40 billion note program, under which HSBC Bank USA issues senior and subordinated debt.

GM Portfolio - A portfolio of General Motors MasterCard receivables we purchased from HSBC Finance in January 2009. New loan originations subsequent to the initial purchase were purchased daily by HSBC Bank USA. The GM portfolio was sold to Capital One on May 1, 2012.

Goodwill - The excess of purchase price over the fair value of identifiable net assets acquired, reduced by liabilities assumed in a business combination.

HELOC - A revolving line of credit with an adjustable interest rate secured by a lien on the borrower's home which reduces the borrower's equity in the home. HELOCs are classified as home equity mortgages.

IFRS Basis - A non-U.S. GAAP measure of reporting results in accordance with International Financial Reporting Standards.

Intangible Assets - Assets, excluding financial assets, that lack physical substance. Our intangible assets include mortgage servicing rights and favorable lease arrangements.

Interest Rate Swap - Contract between two parties to exchange interest payments on a stated principal amount (notional principal) for a specified period. Typically, one party makes fixed rate payments, while the other party makes payments using a variable rate.

LIBOR - London Interbank Offered Rate; A widely quoted market rate which is frequently the index used to determine the rate at which we borrow funds.

Liquidity - A measure of how quickly we can convert assets to cash or raise additional cash by issuing debt.

Loan-to-Value ("LTV") Ratio - For first liens, the current loan balance expressed as a percentage of the current property value. For second liens, the current loan balance plus the senior lien amount at origination expressed as a percentage of the current property value.

Mortgage Servicing Rights ("MSRs") - An intangible asset which represents the right to service mortgage loans. These rights are recognized at the time the related loans are sold or the rights are acquired.

Net Charge-off Ratio - Net charge-offs of loans expressed as a percentage of average loans outstanding for a given period.

Net Interest Income - Interest income earned on interest-bearing assets less interest expense on deposits and borrowed funds.

Net Interest Margin - Net interest income expressed as a percentage of average interest earning assets for a given period.

Net Interest Income to Total Assets - Net interest income expressed as a percentage of average total assets for a given period.

Nonaccruing Loans - Loans on which we no longer accrue interest because ultimate collection is unlikely.

OCC - The Office of the Comptroller of the Currency; the principal regulator for HSBC Bank USA.

Options - A contract giving the owner the right, but not the obligation, to buy or sell a specified item at a fixed price for a specified period.

Portfolio Seasoning - Relates to the aging of origination vintages. Loss patterns emerge slowly over time as new accounts are booked.

Private Label Credit Card - A line of credit made available to customers of retail merchants evidenced by a credit card bearing the merchant's name. The private label credit card portfolio was sold to Capital One on May 1, 2012.

Private Label Card Receivable Portfolio - Loan and credit card receivable portfolio acquired from HSBC Finance on December 29, 2004. The private label card receivable portfolio was sold to Capital One on May 1, 2012.

Rate of Return on Common Shareholder's Equity - Net income, reduced by preferred dividends, divided by average common shareholder's equity for a given period.

Rate of Return on Total Assets -Net income after taxes divided by average total assets for a given period.

Residential Mortgage Loan -Closed-end loans and revolving lines of credit secured by first or second liens on residential real estate. Depending on the type of residential mortgage, interest can either be fixed or adjustable.

REO - Real Estate Owned

SEC - The Securities and Exchange Commission.

Secured Financing - A Collateralized Funding Transaction in which the interests in a dedicated pool of consumer receivables, typically credit card, auto or personal non-credit card receivables, are sold to investors. Generally, the pool of consumer receivables is sold to a special purpose entity which then issues securities that are sold to investors. Secured Financings do not receive sale treatment and, as a result, the receivables and related debt remain on our balance sheet.

Tangible Common Shareholder's Equity to Total Tangible Assets - Common shareholder's equity less goodwill, other intangibles, unrealized gains and losses on cash flow hedging instruments, postretirement benefit plan adjustments, and unrealized gains and losses on available-for-sale securities expressed as a percentage of total assets less goodwill and other intangibles.

TDR Loans - Troubled debt restructurings.

Total Average Shareholders' Equity to Total Assets - Average total shareholders' equity expressed as a percentage of average total assets for a given period.

Total Period End Shareholders' Equity to Total Assets - Total shareholders' equity expressed as a percentage of total assets as of a given date.

UP Portfolio - A portfolio of AFL-CIO Union Plus MasterCard/Visa receivables that we purchased from HSBC Finance in January 2009. New loan originations subsequent to the initial purchase were purchased daily by HSBC Bank USA. The UP portfolio was sold to Capital One on May 1, 2012.

U.S. GAAP - Generally accepted accounting principles in the United States.

CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES

The following tables summarize the year-to-date average daily balances of the principal components of assets, liabilities and shareholders' equity together with their respective interest amounts and rates earned or paid, presented on a taxable equivalent basis. Net interest margin is calculated by dividing annualized net interest income by the average interest earning assets from which interest income is earned. Loan interest for the years ended December 31, 2013, 2012 and 2011 included fees of $108 million, $85 million and $81 million, respectively. The calculation of net interest margin includes interest expense of $50 million and $237 million for 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.

	2013							2012							2011
	Average Balance			Interest		Rate⁽¹⁾		Average Balance			Interest		Rate⁽¹⁾		Balance			Interest		Rate⁽¹⁾
	(dollars are in millions)
Assets
Interest bearing deposits with banks...................................	$	22,555		$	58	.26	%	$	20,381		$	58	.28	%	$	25,945		$	76	.29	%
Federal funds sold and securities purchased under resale agreements..........................	1,989			10		.49		6,678			38		.57		5,230			57		1.09
Trading assets..........................	10,563			118		1.11		12,249			110		.90		13,423			197		1.47
Securities.................................	56,105			897		1.60		61,184			1,111		1.82		49,802			1,263		2.54
Loans:
Commercial..........................	45,922			1,142		2.49		39,272			1,052		2.68		31,971			903		2.83
Consumer:
Residential mortgages......	15,928			559		3.51		15,510			595		3.84		14,877			637		4.28
Home equity mortgages...	2,160			71		3.28		2,802			95		3.38		3,547			118		3.33
Credit cards......................	823			72		8.74		976			80		8.17		1,166			87		7.47
Other consumer...............	619			32		5.14		784			45		5.76		1,022			67		6.57
Total consumer.....................	19,530			734		3.76		20,072			815		4.06		20,612			909		4.41
Total loans............................	65,452			1,876		2.87		59,344			1,867		3.15		52,583			1,812		3.45
Other.......................................	3,140			41		1.32		3,416			43		1.25		5,716			44		.76
Total interest earning assets.....	159,804			$	3,000	1.88	%	163,252			$	3,227	1.98	%	152,699			$	3,449	2.26	%
Allowance for credit losses.......	(601		)					(647		)					(767		)
Cash and due from banks..........	1,099							1,486							1,617
Other assets.............................	22,591							25,053							25,621
Assets of discontinued operations...............................	-							6,871							21,000
Total assets..............................	$	182,893						$	196,015						$	200,170
Liabilities and Shareholders' Equity
Deposits in domestic offices:
Savings deposits....................	$	43,448		$	65	.15	%	$	51,375		$	178	.35	%	$	57,979		$	257	.44	%
Other time deposits...............	20,110			107		.53		16,542			142		.85		16,085			143		.89
Deposits in foreign offices:
Foreign banks deposits..........	7,669			5		.06		8,443			6		.08		6,503			9		.14
Other interest bearing deposits.................................	6,314			6		.09		13,463			14		.11		19,119			18		.09
Deposits held for sale...............	-			1		-		6,335			17		.27		6,366			16		.25
Total interest bearing deposits.	77,541			184		.24		96,158			357		.37		106,052			443		.42
Short-term borrowings.............	18,496			40		.21		14,640			28		.19		18,876			44		.23
Long-term debt........................	21,938			661		3.01		19,761			680		3.44		18,459			645		3.49
Total interest bearing deposits and debt...............................	117,975			885		.75		130,559			1,065		.82		143,387			1,132		.79
Tax liabilities...........................	499			53		10.54		463			33		7.10		319			99		31.22
Total interest bearing liabilities	118,474			938		.79		131,022			1,098		.84		143,706			1,231		.86
Net interest income/Interest rate spread				$	2,062	1.09	%				$	2,129	1.14	%				$	2,218	1.40	%
Noninterest bearing deposits....	31,057							28,387							22,418
Other liabilities........................	15,816							17,502							15,344
Liabilities of discontinued operations...........................	-							785							1,022
Total shareholders' equity........	17,546							18,319							17,680
Total liabilities and shareholders' equity.............	$	182,893						$	196,015						$	200,170
Net interest margin on average earning assets.......................						1.29	%						1.30	%						1.45	%
Net interest income to average total assets...........................						1.13	%						1.12	%						1.24	%

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Information required by this Item is included within Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the Risk Management section under the captions "Interest Rate Risk" and "Market Risk".

Item 8. Financial Statements and Supplementary Data

Our 2013 Financial Statements meet the requirements of Regulation S-X. The 2013 Financial Statements and supplementary financial information specified by Item 302 of Regulation S-K are set forth below.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

HSBC USA Inc.:

We have audited the accompanying consolidated balance sheet of HSBC USA Inc. and subsidiaries (the Company), an indirect wholly-owned subsidiary of HSBC Holdings plc, as of December 31, 2013 and 2012, and the related consolidated statements of income (loss), comprehensive income (loss), changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2013, and the accompanying consolidated balance sheet of HSBC Bank USA, National Association and subsidiaries (the Bank) as of December 31, 2013 and 2012. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2013, and the financial position of the Bank as of December 31, 2013 and 2012, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

New York, New York

February 24, 2014

CONSOLIDATED STATEMENT OF INCOME (LOSS)
Year Ended December 31,	2013			2012			2011
	(in millions)
Interest income:
Loans.........................................................................................................................................	$	1,876		$	1,867		$	1,812
Securities..................................................................................................................................	876			1,090			1,242
Trading assets.........................................................................................................................	118			110			197
Short-term investments..........................................................................................................	68			96			133
Other..........................................................................................................................................	41			43			44
Total interest income..................................................................................................................	2,979			3,206			3,428
Interest expense:
Deposits....................................................................................................................................	184			316			251
Short-term borrowings............................................................................................................	40			28			44
Long-term debt........................................................................................................................	661			671			600
Other..........................................................................................................................................	53			33			99
Total interest expense.................................................................................................................	938			1,048			994
Net interest income.......................................................................................................................	2,041			2,158			2,434
Provision for credit losses...........................................................................................................	193			293			258
Net interest income after provision for credit losses............................................................	1,848			1,865			2,176
Other revenues:
Credit card fees........................................................................................................................	43			87			129
Other fees and commissions..................................................................................................	706			766			832
Trust income............................................................................................................................	123			110			108
Trading revenue......................................................................................................................	474			498			349
Other securities gains, net.....................................................................................................	202			145			129
Servicing and other fees from HSBC affiliates....................................................................	202			202			202
Residential mortgage banking revenue................................................................................	80			16			37
Gain (loss) on instruments designated at fair value and related derivatives.................	(32		)	(342		)	471
Gain on sale of branches........................................................................................................	-			433			-
Other income............................................................................................................................	59			58			68
Total other revenues....................................................................................................................	1,857			1,973			2,325
Operating expenses:
Salaries and employee benefits.............................................................................................	922			944			1,114
Support services from HSBC affiliates.................................................................................	1,459			1,480			1,513
Occupancy expense, net........................................................................................................	230			241			280
Goodwill impairment (Note 11)..............................................................................................	616			-			-
Expense related to certain regulatory matters (Note 28)....................................................	-			1,381			-
Other expenses........................................................................................................................	745			702			912
Total operating expenses...........................................................................................................	3,972			4,748			3,819
Income (loss) from continuing operations before income tax expense................................	(267		)	(910		)	682
Income tax expense.......................................................................................................................	71			338			227
Income (loss) from continuing operations.............................................................................	(338		)	(1,248		)	455
Discontinued Operations (Note 3):
Income from discontinued operations before income tax expense.......................................	-			315			871
Income tax expense.......................................................................................................................	-			112			308
Income from discontinued operations....................................................................................	-			203			563
Net income (loss)..........................................................................................................................	$	(338	)	$	(1,045	)	$	1,018

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

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31,	2013			2012			2011
	(in millions)
Net income (loss)..........................................................................................................................	$	(338	)	$	(1,045	)	$	1,018
Net change in unrealized gains (losses), net of tax:
Securities available-for-sale................................................................................................	(1,010		)	109			786
Other-than-temporarily impaired debt securities available-for-sale..............................	-			-			1
Other-than-temporarily impaired debt securities held-to-maturity................................	7			-			11
Adjustment to reverse other-than-temporary impairment on securities held-to-maturity due to deconsolidation of a variable interest entity....................................	-			-			142
Derivatives designated as cash flow hedges...................................................................	118			28			(142		)
Pension and post-retirement benefit plan.........................................................................	8			6			(3		)
Total other comprehensive income (loss)...............................................................................	(877		)	143			795
Comprehensive income (loss)....................................................................................................	$	(1,215	)	$	(902	)	$	1,813

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

CONSOLIDATED BALANCE SHEET
At December 31,	2013			2012
	(in millions, except share data)
Assets⁽¹⁾
Cash and due from banks..............................................................................................................................	$	961		$	1,359
Interest bearing deposits with banks............................................................................................................	19,614			13,279
Securities purchased under agreements to resell...........................................................................................	2,119			3,149
Trading assets...............................................................................................................................................	28,894			30,874
Securities available-for-sale...........................................................................................................................	54,906			67,716
Securities held-to-maturity (fair value of $1.5 billion and $1.8 billion at December 31, 2013 and 2012, respectively).............................................................................................................................................	1,358			1,620
Loans.............................................................................................................................................................	67,695			63,258
Less - allowance for credit losses.................................................................................................................	606			647
Loans, net................................................................................................................................................	67,089			62,611
Loans held for sale (includes $3 million and $465 million designated under fair value option at December 31, 2013 and 2012, respectively)..............................................................................................................	230			1,018
Properties and equipment, net......................................................................................................................	269			276
Intangible assets, net.....................................................................................................................................	295			247
Goodwill.......................................................................................................................................................	1,612			2,228
Other assets..................................................................................................................................................	8,140			7,069
Total assets....................................................................................................................................................	$	185,487		$	191,446
Liabilities⁽¹⁾
Debt:
Deposits in domestic offices:
Noninterest bearing............................................................................................................................	$	29,707		$	31,315
Interest bearing (includes $7.7 billion and $8.7 billion designated under fair value option at December 31, 2013 and 2012, respectively)..................................................................................	62,903			66,520
Deposits in foreign offices:
Noninterest bearing............................................................................................................................	1,364			1,813
Interest bearing...................................................................................................................................	18,634			18,023
Total deposits..........................................................................................................................................	112,608			117,671
Short-term borrowings.............................................................................................................................	19,135			14,933
Long-term debt (includes $7.6 billion and $7.3 billion designated under fair value option at December 31, 2013 and 2012, respectively)........................................................................................................	22,847			21,745
Total debt......................................................................................................................................................	154,590			154,349
Trading liabilities...........................................................................................................................................	10,875			14,699
Interest, taxes and other liabilities.................................................................................................................	3,558			4,562
Total liabilities.............................................................................................................................................	169,023			173,610
Shareholders' equity
Preferred stock..............................................................................................................................................	1,565			1,565
Common shareholder's equity:
Common stock ($5 par; 150,000,000 shares authorized; 713 shares issued and outstanding at December 31, 2013 and 2012)........................................................................................................	-			-
Additional paid-in capital...................................................................................................................	14,106			14,123
Retained earnings................................................................................................................................	952			1,363
Accumulated other comprehensive income........................................................................................	(159		)	785
Total common shareholder's equity..............................................................................................................	14,899			16,271
Total shareholders' equity............................................................................................................................	16,464			17,836
Total liabilities and shareholders' equity....................................................................................................	$	185,487		$	191,446

⁽¹⁾The following table summarizes assets and liabilities related to our consolidated variable interest entities ("VIEs") as of December 31, 2013 and 2012 which are consolidated on our balance sheet. Assets and liabilities exclude intercompany balances that eliminate in consolidation. See Note 25, "Variable Interest Entities," for additional information.

At December 31,	2013		2012
	(in millions)
Assets
Interest bearing deposits with banks...............................................................................................	$	5	$	-
Securities held-to-maturity.............................................................................................................	200		-
Other assets...................................................................................................................................	502		533
Total assets....................................................................................................................................	$	707	$	533
Liabilities
Long-term debt..............................................................................................................................	92		92
Interest, taxes and other liabilities..................................................................................................	93		152
Total liabilities...............................................................................................................................	$	185	$	244

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

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
At December 31,	2013			2012			2011
	(dollars are in millions)
Preferred stock
Balance at beginning and end of period....................................................................................	$	1,565		$	1,565		$	1,565
Common stock
Balance at beginning and end of period....................................................................................	-			-			-
Additional paid-in capital
Balance at beginning of period..................................................................................................	14,123			13,814			13,785
Capital contributions from parent............................................................................................	-			312			21
Employee benefit plans and other............................................................................................	(17		)	(3		)	8
Balance at end of period...........................................................................................................	14,106			14,123			13,814
Retained earnings
Balance at beginning of period..................................................................................................	1,363			2,481			1,536
Net income (loss).....................................................................................................................	(338		)	(1,045		)	1,018
Cash dividends declared on preferred stock.............................................................................	(73		)	(73		)	(73		)
Balance at end of period...........................................................................................................	952			1,363			2,481
Accumulated other comprehensive income
Balance at beginning of period..................................................................................................	785			642			(153		)
Other-than-temporary impairment on securities held-to-maturity due to the consolidation of a variable interest entity...................................................................................................	(67		)	-			-
Other comprehensive income (loss), net of tax........................................................................	(877		)	143			795
Balance at end of period...........................................................................................................	(159		)	785			642
Total common shareholder's equity.........................................................................................	$	14,899		$	16,271		$16,937
Total shareholders' equity........................................................................................................	$	16,464		$	17,836		$	18,502
Preferred stock
Number of shares at beginning and end of period...............................................................	25,947,500			25,947,500			25,947,500
Common stock
Issued
Number of shares at beginning of period............................................................................	713			712			712
Number of shares of common stock issued to parent.........................................................	-			1			-
Number of shares at end of period......................................................................................	713			713			712

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

CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,	2013			2012			2011
	(in millions)
Cash flows from operating activities
Net income (loss)...................................................................................................................................	$	(338	)	$	(1,045	)	$	1,018
Income from discontinued operations....................................................................................................	-			203			563
Income (loss) from continuing operations..............................................................................................	(338		)	(1,248		)	455
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization..........................................................................................................	286			321			268
Gain on sale of branches...................................................................................................................	-			(433		)	-
Impairment of internally developed software...................................................................................	-			-			110
Goodwill impairment........................................................................................................................	616			-			-
Provision for credit losses.................................................................................................................	193			293			258
Deferred income tax provision (benefit)...........................................................................................	2			40			(289		)
Realized gains on securities available-for-sale...................................................................................	(194		)	(145		)	(129		)
Realized gains on securities held-to-maturity...................................................................................	(8		)	-			-
Net change in other assets and liabilities...........................................................................................	(481		)	36			108
Net change in loans held for sale:
Originations of loans....................................................................................................................	(2,078		)	(3,566		)	(3,248		)
Sales and collection of loans held for sale....................................................................................	2,446			3,755			3,319
Net change in trading assets and liabilities........................................................................................	(1,844		)	8,900			(2,712		)
Lower of amortized cost or fair value adjustments on loans held for sale........................................	9			38			51
Loss (gain) on instruments designated at fair value and related derivatives......................................	32			342			(471		)
Cash provided by (used in) operating activities - continuing operations..............................................	(1,359		)	8,333			(2,280		)
Cash provided by operating activities - discontinued operations.........................................................	-			34			2,642
Net cash provided by (used in) operating activities...............................................................................	(1,359		)	8,367			362
Cash flows from investing activities
Net change in interest bearing deposits with banks...............................................................................	(6,316		)	12,175			(17,252		)
Net change in securities purchased under agreements to resell..............................................................	1,030			(40		)	5,127
Securities available-for-sale:
Purchases of securities available-for-sale..........................................................................................	(32,824		)	(37,003		)	(30,153		)
Proceeds from sales of securities available-for-sale..........................................................................	35,211			10,547			21,468
Proceeds from maturities of securities available-for-sale..................................................................	7,954			12,022			3,686
Securities held-to-maturity:
Purchases of securities held-to-maturity..........................................................................................	-			-			(11		)
Proceeds from sales of securities held-to-maturity...........................................................................	79			-			-
Proceeds from maturities of securities held-to-maturity..................................................................	433			424			568
Change in loans:
Originations, net of collections.........................................................................................................	(4,765		)	(11,603		)	(6,034		)
Loans sold to third parties................................................................................................................	499			186			975
Net cash used for acquisitions of properties and equipment.................................................................	(52		)	(17		)	(33		)
Net outflows related to the sale of branches..........................................................................................	-			(10,137		)	-
Other, net...............................................................................................................................................	(16		)	(48		)	(77		)
Cash provided by (used in) investing activities - continuing operations...............................................	1,233			(23,494		)	(21,736		)
Cash provided by (used in) investing activities - discontinued operations...........................................	-			20,746			(606		)
Net cash provided by (used in) investing activities...............................................................................	1,233			(2,748		)	(22,342		)
Cash flows from financing activities
Net change in deposits...........................................................................................................................	(5,146		)	(9,174		)	18,693
Debt:
Net change in short-term borrowings................................................................................................	3,787			(1,076		)	3,449
Issuance of long-term debt................................................................................................................	5,547			7,626			6,271
Repayment of long-term debt...........................................................................................................	(4,370		)	(3,445		)	(6,274		)
Repayment of debt related to the sale and leaseback of 452 Fifth Avenue property.......................	-			(8		)	(23		)
Capital contribution from parent...........................................................................................................	-			312			-
Other increases (decreases) in capital surplus........................................................................................	(17		)	(3		)	8
Dividends paid.......................................................................................................................................	(73		)	(73		)	(73		)
Cash provided by (used in) financing activities - continuing operations...............................................	(272		)	(5,841		)	22,051
Cash used in financing activities - discontinued operations..................................................................	-			(35		)	(148		)
Net cash provided by (used in) financing activities...............................................................................	(272		)	(5,876		)	21,903
Net change in cash and due from banks..................................................................................................	(398		)	(257		)	(77		)
Cash and due from banks at beginning of period⁽¹⁾................................................................................	1,359			1,616			1,693
Cash and due from banks at end of period...........................................................................................	$	961		$	1,359		$	1,616
Supplemental disclosure of cash flow information
Interest paid during the period...............................................................................................................	$	921		$	1,085		$	1,231
Net income taxes paid during the period................................................................................................	64			578			498
Supplemental disclosure of non-cash investing activities
Transfer of loans to held for sale............................................................................................................	79			42			23,755
Fair value of properties added to real estate owned...............................................................................	51			60			107

⁽¹⁾Cash at beginning of period includes $117 million for discontinued operations as of January 1, 2011.

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

CONSOLIDATED BALANCE SHEET
At December 31,	2013			2012
	(in millions)
Assets⁽¹⁾
Cash and due from banks................................................................................................................................	$	953		$	1,356
Interest bearing deposits with banks..............................................................................................................	19,062			12,718
Securities purchased under agreements to resell.............................................................................................	2,119			3,149
Trading assets.................................................................................................................................................	29,172			31,964
Securities available-for-sale.............................................................................................................................	54,402			67,101
Securities held-to-maturity (fair value of $1.5 billion and $1.8 billion at December 31, 2013 and 2012, respectively)...............................................................................................................................................	1,354			1,612
Loans...............................................................................................................................................................	63,387			59,511
Less - allowance for credit losses...................................................................................................................	606			647
Loans, net..................................................................................................................................................	62,781			58,864
Loans held for sale (includes $3 million and $465 million designated under fair value option at December 31, 2013 and 2012, respectively).........................................................................................	230			1,018
Properties and equipment, net........................................................................................................................	268			276
Intangible assets, net.......................................................................................................................................	295			247
Goodwill.........................................................................................................................................................	1,612			1,718
Other assets....................................................................................................................................................	7,492			6,736
Total assets......................................................................................................................................................	$	179,740		$	186,759
Liabilities⁽¹⁾
Debt:
Deposits in domestic offices:
Noninterest bearing....................................................................................................................................	$	36,283		$	37,315
Interest bearing (includes $7.7 billion and $8.7 billion designated under fair value option at December 31, 2013 and 2012, respectively).........................................................................................	66,718			70,680
Deposits in foreign offices:
Noninterest bearing....................................................................................................................................	1,364			1,813
Interest bearing..........................................................................................................................................	18,634			18,023
Total deposits.................................................................................................................................................	122,999			127,831
Short-term borrowings...............................................................................................................................	15,756			9,916
Long-term debt (includes $2.2 billion and $2.6 billion designated under fair value option at December 31, 2013 and 2012, respectively...........................................................................................	7,698			8,279
Total debt........................................................................................................................................................	146,453			146,026
Trading liabilities.............................................................................................................................................	11,713			16,625
Interest, taxes and other liabilities...................................................................................................................	3,365			5,286
Total liabilities...............................................................................................................................................	161,531			167,937
Shareholders' equity
Preferred stock................................................................................................................................................	-			-
Common shareholder's equity:
Common stock ($100 par; 50,000 shares authorized; 20,016 shares issued and outstanding at December 31, 2013 and 2012, respectively).........................................................................................	2			2
Additional paid-in capital.............................................................................................................................	16,045			16,061
Retained earnings..........................................................................................................................................	2,311			1,987
Accumulated other comprehensive loss.......................................................................................................	(149		)	772
Total common shareholder's equity................................................................................................................	18,209			18,822
Total shareholders' equity..............................................................................................................................	18,209			18,822
Total liabilities and shareholders' equity......................................................................................................	$	179,740		$	186,759

At December 31,	2013		2012
	(in millions)
Assets
Interest bearing deposits with banks...............................................................................................	$	5	$	-
Securities held-to-maturity.............................................................................................................	200		-
Other assets...................................................................................................................................	502		533
Total assets....................................................................................................................................	$	707	$	533
Liabilities
Long-term debt..............................................................................................................................	$	92	$	92
Interest, taxes and other liabilities..................................................................................................	93		152
Total liabilities...............................................................................................................................	$	185	$	244

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

This information is provided by RNS

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