UNITED STATES SECURITIES AND

EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2014

OR

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

For the transition period from to

Commission file number 1-7436

HSBC USA Inc.

(Exact name of registrant as specified in its charter)

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

(212) 525-5000

Registrant’s telephone number, including area code

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

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

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

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

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

As of October 31, 2014, there were 713 shares of the registrant’s common stock outstanding, all of which are owned by HSBC North America Inc.

HSBC USA Inc.

TABLE OF CONTENTS

Part/Item No.
Part I		Page
Item 1.	Financial Statements (Unaudited):
	Consolidated Statement of Income	3
	Consolidated Statement of Comprehensive Income (Loss)	4
	Consolidated Balance Sheet	5
	Consolidated Statement of Changes in Shareholders' Equity	7
	Consolidated Statement of Cash Flows	8
	Notes to the Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations:
	Forward-Looking Statements	81
	Executive Overview	83
	Basis of Reporting	86
	Balance Sheet Review	87
	Results of Operations	92
	Segment Results - IFRSs Basis	107
	Credit Quality	115
	Liquidity and Capital Resources	124
	Off-Balance Sheet Arrangements	128
	Fair Value	129
	Risk Management	133
	Consolidated Average Balances and Interest Rates	140
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	142
Item 4.	Controls and Procedures	142
Part II
Item 1.	Legal Proceedings	142
Item 5.	Other Information	142
Item 6.	Exhibits	145
Index		146
Signatures		148

2

HSBC USA Inc.

PART I

Item 1. Financial Statements (Unaudited)

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Interest income:
Loans	$	483		$	454		$	1,418		$	1,396
Securities	182			208			583			661
Trading assets	63			34			176			85
Short-term investments	22			19			58			49
Other	9			10			31			31
Total interest income	759			725			2,266			2,222
Interest expense:
Deposits	37			48			108			147
Short-term borrowings	14			11			37			28
Long-term debt	165			159			487			492
Other	—			15			(101		)	40
Total interest expense	216			233			531			707
Net interest income	543			492			1,735			1,515
Provision for credit losses	23			54			124			142
Net interest income after provision for credit losses	520			438			1,611			1,373
Other revenues:
Credit card fees	13			1			40			35
Other fees and commissions	186			181			541			527
Trust income	35			29			98			92
Trading revenue (expense)	(9		)	117			139			388
Net other-than-temporary impairment losses(1)	(4		)	—			(11		)	—
Other securities gains (losses), net	27			35			42			189
Servicing and other fees from HSBC affiliates	53			41			151			154
Residential mortgage banking revenue	17			18			87			73
Gain (loss) on instruments designated at fair value and related derivatives	36			(6		)	20			82
Other income	32			16			40			50
Total other revenues	386			432			1,147			1,590
Operating expenses:
Salaries and employee benefits	226			218			664			717
Support services from HSBC affiliates	388			378			1,127			1,064
Occupancy expense, net	59			57			168			173
Other expenses	261			181			601			414
Total operating expenses	934			834			2,560			2,368
Income (loss) before income tax	(28		)	36			198			595
Income tax expense (benefit)	(29		)	32			(86		)	228
Net income	$	1		$	4		$	284		$	367

⁽¹⁾  During the three and nine months ended September 30, 2014, other-than-temporary impairment ("OTTI") losses on securities held-to-maturity totaling $4 million and $11 million, respectively, were recognized in other revenues. There were no OTTI losses in the non-credit component of such impaired securities reflected in accumulated other comprehensive income ("AOCI"), net of tax during the periods. During the three and nine months ended September 30, 2013, there were no OTTI losses on securities recognized in other revenues and no OTTI losses in the non-credit component of securities recognized in AOCI, net of tax.

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

3

HSBC USA Inc.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Net income	$	1		$	4		$	284		$	367
Net change in unrealized gains (losses), net of tax:
Investment securities	(87		)	(50		)	218			(785		)
Other-than-temporarily impaired debt securities held-to-maturity	6			2			9			2
Derivatives designated as cash flow hedges	(5		)	21			(40		)	95
Pension and post-retirement benefit plan	—			1			—			1
Total other comprehensive income (loss)	(86		)	(26		)	187			(687		)
Comprehensive income (loss)	$	(85	)	$	(22	)	$	471		$	(320	)

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

4

HSBC USA Inc.

CONSOLIDATED BALANCE SHEET (UNAUDITED)
	September 30, 2014		December 31, 2013
	(in millions, except share data)
Assets(1)
Cash and due from banks	$	1,013	$	961
Interest bearing deposits with banks	26,379		19,614
Federal funds sold and securities purchased under agreements to resell	1,096		2,119
Trading assets	22,099		28,894
Securities available-for-sale	29,801		54,906
Securities held-to-maturity (fair value of $12.2 billion and $1.5 billion at September 30, 2014 and December 31, 2013, respectively)	12,045		1,358
Loans	73,439		67,695
Less – allowance for credit losses	631		606
Loans, net	72,808		67,089
Loans held for sale (includes $69 million and $58 million designated under fair value option at September 30, 2014 and December 31, 2013, respectively)	327		230
Properties and equipment, net	249		269
Intangible assets, net	234		295
Goodwill	1,612		1,612
Other assets	7,349		8,140
Total assets	$	175,012	$	185,487
Liabilities(1)
Debt:
Deposits in domestic offices:
Noninterest bearing	$	30,485	$	29,707
Interest bearing (includes $7.5 billion and $7.7 billion designated under fair value option at September 30, 2014 and December 31, 2013, respectively)	65,714		62,903
Deposits in foreign offices:
Noninterest bearing	1,284		1,364
Interest bearing	11,194		18,634
Total deposits	108,677		112,608
Short-term borrowings	11,864		19,135
Long-term debt (includes $8.7 billion and $7.6 billion designated under fair value option at September 30, 2014 and December 31, 2013, respectively)	25,034		22,847
Total debt	145,575		154,590
Trading liabilities	9,177		10,875
Interest, taxes and other liabilities	3,377		3,558
Total liabilities	158,129		169,023
Shareholders' equity
Preferred stock	1,565		1,565
Common shareholder’s equity:
Common stock ($5 par; 150,000,000 shares authorized; 713 shares issued and outstanding at September 30, 2014 and December 31, 2013)	—		—
Additional paid-in capital	14,109		14,106
Retained earnings	1,181		952
Accumulated other comprehensive income (loss)	28		(159		)
Total common shareholder’s equity	15,318		14,899
Total shareholders’ equity	16,883		16,464
Total liabilities and shareholders’ equity	$	175,012	$	185,487

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

5

HSBC USA Inc.

	September 30, 2014		December 31, 2013
	(in millions)
Assets
Interest bearing deposits with banks	$	3	$	5
Securities held-to-maturity	76		200
Other assets	436		502
Total assets	$	515	$	707
Liabilities
Long-term debt	92		92
Interest, taxes and other liabilities	81		93
Total liabilities	$	173	$	185

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

6

HSBC USA Inc.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Nine Months Ended September 30,	2014			2013
	(dollars are in millions)
Preferred stock
Balance at beginning and end of period	$	1,565		$	1,565
Common stock
Balance at beginning and end of period	—			—
Additional paid-in capital
Balance at beginning of period	14,106			14,123
Employee benefit plans	3			(12		)
Balance at end of period	14,109			14,111
Retained earnings
Balance at beginning of period	952			1,363
Net income	284			367
Cash dividends declared on preferred stock	(55		)	(55		)
Balance at end of period	1,181			1,675
Accumulated other comprehensive income (loss)
Balance at beginning of period	(159		)	785
Adjustment to add other-than-temporary impairment on securities held-to-maturity due to the consolidation of a variable interest entity	—			(67		)
Other comprehensive income (loss), net of tax	187			(687		)
Balance at end of period	28			31
Total common shareholder's equity	$	15,318		$	15,817
Total shareholders’ equity	$	16,883		$	17,382

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

7

HSBC USA Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,	2014			2013
	(in millions)
Cash flows from operating activities
Net income	$	284		$	367
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	87			249
Provision for credit losses	124			142
Net realized gains on securities available-for-sale	(42		)	(181		)
Realized (gains) losses on securities held-to-maturity	11			(8		)
Net change in other assets and liabilities	338			(661		)
Net change in loans held for sale:
Originations of loans	(1,040		)	(1,461		)
Sales and collection of loans held for sale	1,004			1,804
Net change in trading assets and liabilities	5,097			1,713
Lower of amortized cost or fair value adjustments on loans held for sale	(2		)	(10		)
Loss (gain) on instruments designated at fair value and related derivatives	(20		)	(82		)
Net cash provided by (used in) operating activities	5,841			1,872
Cash flows from investing activities
Net change in interest bearing deposits with banks	(6,765		)	(16,619		)
Net change in federal funds sold and securities purchased under agreements to resell	1,023			933
Securities available-for-sale:
Purchases of securities available-for-sale	(11,775		)	(22,594		)
Proceeds from sales of securities available-for-sale	23,600			33,270
Proceeds from maturities of securities available-for-sale	3,037			7,099
Securities held-to-maturity:
Proceeds from sales of securities held-to-maturity	—			79
Proceeds from maturities of securities held-to-maturity	305			340
Change in loans:
Originations, net of collections	(6,707		)	(4,687		)
Loans sold to third parties	790			491
Net cash used for acquisitions of properties and equipment	(23		)	(26		)
Other, net	34			(17		)
Net cash provided by (used in) investing activities	3,519			(1,731		)
Cash flows from financing activities
Net change in deposits	(4,048		)	(4,761		)
Debt:
Net change in short-term borrowings	(7,271		)	4,151
Issuance of long-term debt	4,984			4,630
Repayment of long-term debt	(2,921		)	(3,941		)
Other increases (decreases) in capital surplus	3			(12		)
Dividends paid	(55		)	(55		)
Net cash provided by (used in) financing activities	(9,308		)	12
Net change in cash and due from banks	52			153
Cash and due from banks at beginning of period	961			1,359
Cash and due from banks at end of period	$	1,013		$	1,512

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

8

HSBC USA Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note		Page	Note		Page
1	Organization and Presentation	9	11	Accumulated Other Comprehensive Income (Loss)	41
2	Trading Assets and Liabilities	10	12	Pension and Other Postretirement Benefits	43
3	Securities	11	13	Related Party Transactions	44
4	Loans	18	14	Business Segments	47
5	Allowance for Credit Losses	28	15	Retained Earnings and Regulatory Capital Requirements	50
6	Loans Held for Sale	30	16	Variable Interest Entities	51
7	Intangible Assets	31	17	Guarantee Arrangements, Pledged Assets and Collateral	53
8	Goodwill	32	18	Fair Value Measurements	59
9	Derivative Financial Instruments	32	19	Litigation and Regulatory Matters	77
10	Fair Value Option	39	20	New Accounting Pronouncements	80

1. Organization and Presentation

HSBC USA Inc. ("HSBC USA"), incorporated under the laws of Maryland, is a New York State based bank holding company and an indirect wholly-owned subsidiary of HSBC North America Holdings Inc. ("HSBC North America"), which is an indirect wholly-owned subsidiary of HSBC Holdings plc ("HSBC" and, together with its subsidiaries, "HSBC Group"). The accompanying unaudited interim consolidated financial statements of HSBC USA and its subsidiaries (collectively "HUSI") have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, as well as in accordance with predominant practices within the banking industry. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods have been made. HUSI may also be referred to in these notes to the consolidated financial statements as "we", "us" or "our". These unaudited interim consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Form 10-K"). Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. Interim results should not be considered indicative of results in future periods.

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

9

HSBC USA Inc.

2.    Trading Assets and Liabilities

Trading assets and liabilities consisted of the following.

	September 30, 2014		December 31, 2013
	(in millions)
Trading assets:
U.S. Treasury	$	1,955	$	1,344
U.S. Government agency issued or guaranteed	3		19
U.S. Government sponsored enterprises(1)	97		159
Obligations of U.S. states and political subdivisions	611		25
Asset backed securities	502		481
Corporate and foreign bonds	6,265		9,099
Other securities	22		25
Precious metals	7,998		11,751
Derivatives	4,646		5,991
	$	22,099	$	28,894
Trading liabilities:
Securities sold, not yet purchased	$	507	$	308
Payables for precious metals	3,118		3,826
Derivatives	5,552		6,741
	$	9,177	$	10,875

⁽¹⁾  Includes mortgage backed securities of $97 million and $133 million issued or guaranteed by the Federal National Mortgage Association ("FNMA") and $0 million and $26 million issued or guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC") at September 30, 2014 and December 31, 2013, respectively.

At September 30, 2014 and December 31, 2013, the fair value of derivatives included in trading assets has been reduced by $3,759 million and $3,870 million, respectively, relating to amounts recognized for the obligation to return cash collateral received under master netting agreements with derivative counterparties.

At September 30, 2014 and December 31, 2013, the fair value of derivatives included in trading liabilities has been reduced by $1,725 million and $2,116 million, respectively, relating to amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties.

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

10

HSBC USA Inc.

3. Securities

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

September 30, 2014	Amortized Cost		Non-Credit Loss Component of OTTI Securities			Unrealized Gains		Unrealized Losses			Fair Value
	(in millions)
Securities available-for-sale:
U.S. Treasury	$	13,088	$	—		$	351	$	(34	)	$	13,405
U.S. Government sponsored enterprises:(1)
Mortgage-backed securities	506		—			—		(5		)	501
Collateralized mortgage obligations	29		—			—		—			29
Direct agency obligations	3,977		—			251		(8		)	4,220
U.S. Government agency issued or guaranteed:
Mortgage-backed securities	5,887		—			101		(79		)	5,909
Collateralized mortgage obligations	290		—			3		(4		)	289
Obligations of U.S. states and political subdivisions	702		—			11		(7		)	706
Asset backed securities collateralized by:
Residential mortgages	1		—			—		—			1
Commercial mortgages	60		—			—		—			60
Home equity	100		—			—		(8		)	92
Other	106		—			—		(11		)	95
Foreign debt securities(2)	4,327		—			9		(7		)	4,329
Equity securities	165		—			3		(3		)	165
Total available-for-sale securities	$	29,238	$	—		$	729	$	(166	)	$	29,801
Securities held-to-maturity:(5)
U.S. Government sponsored enterprises:(3)
Mortgage-backed securities	$	4,402	$	—		$	79	$	(1	)	$	4,480
U.S. Government agency issued or guaranteed:
Mortgage-backed securities	3,028		—			9		—			3,037
Collateralized mortgage obligations	4,503		—			26		—			4,529
Obligations of U.S. states and political subdivisions	24		—			1		—			25
Asset-backed securities collateralized by residential mortgages	12		—			1		—			13
Asset-backed securities and other debt securities held by a consolidated VIE(4)	164		(88		)	61		—			137
Total held-to-maturity securities	$	12,133	$	(88	)	$	177	$	(1	)	$	12,221

11

HSBC USA Inc.

December 31, 2013	Amortized Cost		Non-Credit Loss Component of OTTI Securities			Unrealized Gains		Unrealized Losses			Fair Value
	(in millions)
Securities available-for-sale:
U.S. Treasury	$	27,716	$	—		$	391	$	(113	)	$	27,994
U.S. Government sponsored enterprises:(1)
Mortgage-backed securities	159		—			—		(14		)	145
Collateralized mortgage obligations	41		—			—		(1		)	40
Direct agency obligations	4,115		—			225		(16		)	4,324
U.S. Government agency issued or guaranteed:
Mortgage-backed securities	10,304		—			40		(342		)	10,002
Collateralized mortgage obligations	6,584		—			17		(154		)	6,447
Obligations of U.S. states and political subdivisions	755		—			12		(25		)	742
Asset backed securities collateralized by:
Residential mortgages	1		—			—		—			1
Commercial mortgages	125		—			1		—			126
Home equity	263		—			—		(36		)	227
Other	100		—			—		(6		)	94
Foreign debt securities(2)	4,607		—			10		(15		)	4,602
Equity securities	165		—			2		(5		)	162
Total available-for-sale securities	$	54,935	$	—		$	698	$	(727	)	$	54,906
Securities held-to-maturity:
U.S. Government sponsored enterprises:(3)
Mortgage-backed securities	$	845	$	—		$	88	$	—		$	933
U.S. Government agency issued or guaranteed:
Mortgage-backed securities	52		—			8		—			60
Collateralized mortgage obligations	214		—			24		—			238
Obligations of U.S. states and political subdivisions	29		—			1		—			30
Asset-backed securities collateralized by residential mortgages	18		—			1		—			19
Asset-backed securities and other debt securities held by a consolidated VIE(4)	304		(104		)	19		—			219
Total held-to-maturity securities	$	1,462	$	(104	)	$	141	$	—		$	1,499

⁽¹⁾  Includes securities at amortized cost of $507 million and $167 million issued or guaranteed by FNMA at September 30, 2014 and December 31, 2013, respectively, and $28 million and $33 million issued or guaranteed by FHLMC at September 30, 2014 and December 31, 2013, respectively.

⁽²⁾  At September 30, 2014 and December 31, 2013, foreign debt securities consisted of $1,040 million and $1,101 million, respectively, of securities fully backed by foreign governments. The remainder of foreign debt securities represents public sector entity, bank or corporate debt.

⁽³⁾  Includes securities at amortized cost of $2,776 million and $398 million issued or guaranteed by FNMA at September 30, 2014 and December 31, 2013, respectively, and $1,626 million and $447 million issued and guaranteed by FHLMC at September 30, 2014 and December 31, 2013, respectively.

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

⁽⁵⁾  During the third quarter of 2014, we transferred U.S. government sponsored and U.S. government agency mortgage-backed securities with a fair value of $10,985 million from available-for-sale to held-to-maturity. These securities were transferred to held-to-maturity at fair value as of the transfer date with the fair value amount becoming the amortized cost basis for the transferred securities. The difference between the par value of the securities and their fair value at the date of transfer will be amortized as an adjustment to yield over the remaining contractual life of each security. At the date of the transfer, AOCI included net pretax unrealized losses of $234 million related to the transferred securities which will be amortized over the remaining contractual life of each security as an adjustment of yield in a manner consistent with the amortization of any premium or discount. The transfers reflect our intent to hold the securities to maturity and will reduce the impact of price volatility on AOCI and regulatory capital under Basel III.

12

HSBC USA Inc.

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

	One Year or Less						Greater Than One Year
September 30, 2014	Number of Securities	Gross Unrealized Losses			Aggregate Fair Value of Investment		Number of Securities	Gross Unrealized Losses			Aggregate Fair Value of Investment
	(dollars are in millions)
Securities available-for-sale:
U.S. Treasury	10	$	(14	)	$	3,515	5	$	(20	)	$	1,582
U.S. Government sponsored enterprises	13	(2		)	361		25	(11		)	432
U.S. Government agency issued or guaranteed	6	(80		)	891		10	(3		)	62
Obligations of U.S. states and political subdivisions	23	(2		)	141		29	(5		)	285
Asset backed securities	5	(11		)	129		6	(8		)	93
Foreign debt securities	5	—			696		6	(7		)	2,419
Equity securities	1	(3		)	156		—	—			—
Securities available-for-sale	63	$	(112	)	$	5,889	81	$	(54	)	$	4,873
Securities held-to-maturity:
U.S. Government sponsored enterprises	213	$	(1	)	$	1,200	49	$	—		$	—
U.S. Government agency issued or guaranteed	116	—			1,266		809	—			2
Obligations of U.S. states and political subdivisions	—	—			—		3	—			1
Securities held-to-maturity	329	$	(1	)	$	2,466	861	$	—		$	3

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

Net unrealized gains and losses increased within the available-for-sale portfolio in the nine months ended September 30, 2014 due to the transfer of certain securities from available-for-sale to held-to-maturity discussed above, sales of U.S. government agency

13

HSBC USA Inc.

mortgage-backed securities and other asset-backed securities that were in a net unrealized loss position at December 31, 2013 and a decrease in yields on U.S. Government agency securities and U.S. Treasury securities during the period.

We have reviewed the securities for which there is an unrealized loss for other-than-temporary impairment in accordance with our accounting policies, discussed further below. We have held-to-maturity asset backed securities that were previously determined to be other-than-temporarily impaired which totaled $76 million and $200 million at September 30, 2014 and December 31, 2013, respectively. We do not consider any other debt securities to be other-than-temporarily impaired at September 30, 2014 as we expect to recover their amortized cost basis and we neither intend nor expect to be required to sell these securities prior to recovery, even if that equates to holding securities until their individual maturities. However, additional other-than-temporary impairments may occur in future periods if the credit quality of the securities deteriorates.

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

If the entity intends to sell the debt security or if it is more likely than not that the entity will be required to sell the debt security before the recovery of its amortized cost basis, the impairment is considered other-than-temporary and is recorded in earnings. An impairment is also considered other-than-temporary if a credit loss exists (i.e., the present value of the expected future cash flows is less than the amortized cost basis of the debt security). In the event of a credit loss, the credit loss component of an other-than-temporary impairment is recorded in earnings while the remaining portion of the impairment loss attributable to factors other than credit loss is recognized, net of tax, in other comprehensive income.

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

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

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

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

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

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

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

• The severity and duration of unrealized loss.

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

During the three and nine months ended September 30, 2014, none of our debt securities were determined to have initial other-than-temporary impairment while two held-to-maturity asset-backed debt securities were determined to have changes to their previous other-than-temporary impairment estimates related to the credit component. The additional credit losses associated with the impaired debt securities, which reflects the excess of amortized cost over the present value of expected future cash flows, were $4 million and $11 million during the three and nine months ended September 30, 2014, respectively, and were recorded as a component of net other-than-temporary impairment losses in the accompanying consolidated statement of income.

During the three and nine months ended September 30, 2013, none of our debt securities were determined to have either initial other-than-temporary impairment or changes to previous other-than-temporary impairment estimates relating to the credit component, as such, there were no other-than-temporary impairment losses recognized related to credit loss.

At September 30, 2014 and December 31, 2013, the excess of discounted future cash flows over fair value, representing the non-credit component of the unrealized loss associated with other-than-temporary impaired securities which is recognized in accumulated other comprehensive income (loss), was $88 million and $104 million, respectively.

14

HSBC USA Inc.

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

	Three Months Ended September 30, 2014		Nine Months Ended September 30, 2014
	(in millions)
Beginning balance of credit losses on held-to-maturity debt securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (loss)	$	68	$	61
Increase in credit losses for which an other-than-temporary impairment was previously recognized	4		11
Ending balance of credit losses on held-to-maturity debt securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (loss)	$	72	$	72

At September 30, 2014, we held 17 individual asset-backed securities in the available-for-sale portfolio, of which 5 were also wrapped by a monoline insurance company. The asset-backed securities backed by a monoline wrap comprised $187 million of the total aggregate fair value of asset-backed securities of $248 million at September 30, 2014. The gross unrealized losses on these monoline wrapped securities were $19 million at September 30, 2014. We did not take into consideration the value of the monoline wrap of any non-investment grade monoline insurers as of September 30, 2014 and, therefore, we only considered the financial guarantee of monoline insurers on securities for purposes of evaluating other-than-temporary impairment on securities with a fair value of $92 million.

At December 31, 2013, we held 22 individual asset-backed securities in the available-for-sale portfolio, of which 8 were also wrapped by a monoline insurance company. The asset-backed securities backed by a monoline wrap comprised $321 million of the total aggregate fair value of asset-backed securities of $448 million at December 31, 2013. The gross unrealized losses on these monoline wrapped securities were $42 million at December 31, 2013. We did not take into consideration the value of the monoline wrap of any non-investment grade monoline insurers as of December 31, 2013 and, therefore, we only considered the financial guarantee of monoline insurers on securities with a fair value of $98 million for purposes of evaluating other-than-temporary impairment.

As discussed above, certain asset-backed securities in the available-for-sale portfolio have an embedded financial guarantee provided by monoline insurers. Because the financial guarantee is not a separate and distinct contract from the asset-backed security, they are considered as a single unit of account for fair value measurement and impairment assessment purposes. The monoline insurers are regulated by the insurance commissioners of the relevant states and certain monoline insurers that write the financial guarantee contracts are public companies. We did not consider the value of the monoline wrap of any non-investment grade monoline insurer at September 30, 2014 and December 31, 2013. In evaluating the extent of our reliance on investment grade monoline insurance companies, consideration is given to our assessment of the creditworthiness of the monoline and other market factors. We perform both a credit as well as a liquidity analysis on the monoline insurers each quarter. Our analysis also compares market-based credit default spreads, when available, to assess the appropriateness of our monoline insurer’s creditworthiness. Based on the public information available, including the regulatory reviews and actions undertaken by the state insurance commissions and the published financial results, we determine the degree of reliance to be placed on the financial guarantee policy in estimating the cash flows to be collected for the purpose of recognizing and measuring impairment loss.

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

15

HSBC USA Inc.

Realized Gains (Losses) The following table summarizes realized gains and losses on investment securities transactions attributable to available-for-sale securities:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Gross realized gains	$	45		$	68		$	113		$	275
Gross realized losses	(18		)	(33		)	(71		)	(94		)
Net realized gains	$	27		$	35		$	42		$	181

During the first quarter of 2013, we sold six asset-backed securities out of our held-to-maturity portfolio with a total carrying value of $71 million and recognized a gain of $8 million. These sales were in response to the significant credit deterioration which had occurred on these securities which had been classified as substandard for regulatory reporting purposes and, therefore, these disposals did not affect our intent and ability to hold our remaining held-to-maturity portfolio until maturity.

Contractual Maturities and Yields The following table summarizes the amortized cost and fair values of securities available-for-sale and securities held-to-maturity at September 30, 2014 by contractual maturity. Expected maturities differ from contractual maturities because borrowers have the right to prepay obligations without prepayment penalties in certain cases. Securities available-for-sale amounts exclude equity securities as they do not have stated maturities. The table below also reflects the distribution of maturities of debt securities held at September 30, 2014, together with the approximate taxable equivalent yield of the portfolio. The yields shown are calculated by dividing annual interest income, including the accretion of discounts and the amortization of premiums, by the amortized cost of securities outstanding at September 30, 2014. Yields on tax-exempt obligations have been computed on a taxable equivalent basis using applicable statutory tax rates.

	Within One Year				After One But Within Five Years				After Five But Within Ten Years				After Ten Years
Taxable Equivalent Basis	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
	(dollars are in millions)
Available-for-sale:
U.S. Treasury	$	275	.35	%	$	9,446	.84	%	$	1,514	3.67	%	$	1,853	3.73	%
U.S. Government sponsored enterprises	—		—		1,074		3.08		2,316		3.26		1,122		3.31
U.S. Government agency issued or guaranteed	—		—		11		4.22		47		3.89		6,119		2.97
Obligations of U.S. states and political subdivisions	—		—		121		3.72		284		3.27		297		3.45
Asset backed securities	—		—		—		—		—		—		267		3.48
Foreign debt securities	454		2.84		3,873		1.95		—		—		—		—
Total amortized cost	$	729	1.90	%	$	14,525	1.33	%	$	4,161	3.42	%	$	9,658	3.18	%
Total fair value	$	729			$	14,595			$	4,455			$	9,857
Held-to-maturity:
U.S. Government sponsored enterprises	$	—	—	%	$	92	1.38	%	$	407	2.86	%	$	3,903	3.22	%
U.S. Government agency issued or guaranteed	—		—		1		7.63		52		2.56		7,478		2.47
Obligations of U.S. states and political subdivisions	5		5.52		9		3.97		5		4.00		5		4.98
Asset backed securities	—		—		—		—		—		—		12		6.41
Asset backed securities issued by consolidated VIE	—		—		76		0.39		—		—		—		—
Total amortized cost	$	5	5.52	%	$	178	1.11	%	$	464	2.84	%	$	11,398	2.73	%
Total fair value	$	5			$	240			$	467			$	11,509

16

HSBC USA Inc.

Investments in Federal Home Loan Bank stock and Federal Reserve Bank stock of $108 million and $483 million, respectively, were included in other assets at September 30, 2014. Investments in Federal Home Loan Bank stock and Federal Reserve Bank stock of $139 million and $483 million, respectively, were included in other assets at December 31, 2013.

17

HSBC USA Inc.

4. Loans

Loans consisted of the following:

	September 30, 2014		December 31, 2013
	(in millions)
Commercial loans:
Construction and other real estate	$	9,661	$	9,034
Business and corporate banking	17,355		14,446
Global banking(1)	24,001		21,625
Other commercial	3,045		3,389
Total commercial	54,062		48,494
Consumer loans:
Residential mortgages	16,402		15,826
Home equity mortgages	1,824		2,011
Credit cards	686		854
Other consumer	465		510
Total consumer	19,377		19,201
Total loans	$	73,439	$	67,695

⁽¹⁾  Represents large multinational firms including globally focused U.S. corporate and financial institutions and U.S. dollar lending to multinational banking customers managed by HSBC on a global basis. Also includes loans to HSBC affiliates which totaled $4,812 million and $5,328 million at September 30, 2014 and December 31, 2013, respectively. See Note 13, "Related Party Transactions" for additional information regarding loans to HSBC affiliates.

Net deferred origination fees totaled $14 million and $23 million at September 30, 2014 and December 31, 2013, respectively. At September 30, 2014 and December 31, 2013, we had a net unamortized premium on our loans of $13 million and $16 million, respectively.

18

HSBC USA Inc.

Age Analysis of Past Due Loans  The following table summarizes the past due status of our loans at September 30, 2014 and December 31, 2013. The aging of past due amounts is determined based on the contractual delinquency status of payments under the loan. An account is generally considered to be contractually delinquent when payments have not been made in accordance with the loan terms. Delinquency status is affected by customer account management policies and practices such as re-age, which results in the re-setting of the contractual delinquency status to current.

	Past Due				Total Past Due 30 Days or More
At September 30, 2014	30 - 89 days		90+ days				Current(1)		Total Loans
	(in millions)
Commercial loans:
Construction and other real estate	$	4	$	11	$	15	$	9,646	$	9,661
Business and corporate banking	24		20		44		17,311		17,355
Global banking	—		—		—		24,001		24,001
Other commercial	25		6		31		3,014		3,045
Total commercial	53		37		90		53,972		54,062
Consumer loans:
Residential mortgages	399		913		1,312		15,090		16,402
Home equity mortgages	19		55		74		1,750		1,824
Credit cards	11		10		21		665		686
Other consumer	10		10		20		445		465
Total consumer	439		988		1,427		17,950		19,377
Total loans	$	492	$	1,025	$	1,517	$	71,922	$	73,439

	Past Due				Total Past Due 30 Days or More
At December 31, 2013	30 - 89 days		90+ days				Current(1)		Total Loans
	(in millions)
Commercial loans:
Construction and other real estate	$	6	$	58	$	64	$	8,970	$	9,034
Business and corporate banking	48		36		84		14,362		14,446
Global banking	8		3		11		21,614		21,625
Other commercial	27		9		36		3,353		3,389
Total commercial	89		106		195		48,299		48,494
Consumer loans:
Residential mortgages	443		1,037		1,480		14,346		15,826
Home equity mortgages	28		59		87		1,924		2,011
Credit cards	16		14		30		824		854
Other consumer	12		13		25		485		510
Total consumer	499		1,123		1,622		17,579		19,201
Total loans	$	588	$	1,229	$	1,817	$	65,878	$	67,695

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

19

HSBC USA Inc.

Nonaccrual Loans  Nonaccrual loans totaled $1,072 million and $1,305 million at September 30, 2014 and December 31, 2013, respectively. For an analysis of reserves for credit losses, see Note 5, "Allowance for Credit Losses." Nonaccrual loans and accruing receivables 90 days or more delinquent consisted of the following:

	September 30, 2014		December 31, 2013
	(in millions)
Nonaccrual loans:
Commercial:
Real Estate:
Construction and land loans	$	11	$	44
Other real estate	54		122
Business and corporate banking	25		21
Global banking	—		65
Other commercial	2		2
Total commercial	92		254
Consumer:
Residential mortgages	851		949
Home equity mortgages	68		77
Total residential mortgages(1)(2)(3)	919		1,026
Total consumer loans	919		1,026
Nonaccrual loans held for sale	61		25
Total nonaccruing loans	1,072		1,305
Accruing loans contractually past due 90 days or more:
Commercial:
Business and corporate banking	3		5
Other commercial	1		1
Total commercial	4		6
Consumer:
Credit card receivables	10		14
Other consumer	11		14
Total consumer loans	21		28
Total accruing loans contractually past due 90 days or more	25		34
Total nonperforming loans	$	1,097	$	1,339

⁽¹⁾  At September 30, 2014 and December 31, 2013, residential mortgage loan nonaccrual balances include $827 million and $841 million, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.

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

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

The following table provides additional information on our nonaccrual loans:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(in millions)
Interest income that would have been recorded if the nonaccrual loans had been current in accordance with contractual terms during the period	$	23	$	25	$	77	$	86
Interest income that was recorded on nonaccrual loans and included in interest income during the period	6		8		20		18

20

HSBC USA Inc.

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

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

Modifications for consumer or commercial loans may include changes to one or more terms of the loan, including, but not limited to, a change in interest rate, extension of the amortization period, reduction in payment amount and partial forgiveness or deferment of principal. A substantial amount of our modifications involve interest rate reductions which lower the amount of interest income we are contractually entitled to receive in future periods. Through lowering the interest rate and other loan term changes, we believe we are able to increase the amount of cash flow that will ultimately be collected from the loan, given the borrower’s financial condition. TDR Loans are reserved for either based on the present value of expected future cash flows discounted at the loans’ original effective interest rates which generally results in a higher reserve requirement for these loans or in the case of certain secured loans, the estimated fair value of the underlying collateral. Once a consumer loan is classified as a TDR Loan, it continues to be reported as such until it is paid off or charged-off. For commercial loans, if subsequent performance is in accordance with the new terms and such terms reflect current market rates at the time of restructure, they will no longer be reported as a TDR Loan beginning in the year after restructuring. Since 2012, there have been no commercial loans that met this criteria and were removed from TDR Loan classification.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(in millions)
Commercial loans:
Construction and other real estate	$	—	$	—	$	—	$	15
Business and corporate banking	5		29		16		34
Global banking	—		51		—		51
Other commercial	—		—		10		—
Total commercial	5		80		26		100
Consumer loans:
Residential mortgages	38		63		117		152
Home equity mortgages	1		1		3		3
Credit cards	1		—		4		1
Total consumer	40		64		124		156
Total	$	45	$	144	$	150	$	256

The weighted-average contractual rate reduction for consumer loans which became classified as TDR Loans during the three and nine months ended September 30, 2014 was 1.64 percent and 1.55 percent, respectively, compared with 1.76 percent and 1.97 percent during the three and nine months ended September 30, 2013, respectively. The weighted-average contractual rate reduction for commercial loans was not significant in either the number of loans or rate.

21

HSBC USA Inc.

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

	September 30, 2014		December 31, 2013
	(in millions)
TDR Loans(1)(2):
Commercial loans:
Construction and other real estate	$	200	$	292
Business and corporate banking	29		21
Global banking	—		51
Other commercial	—		25
Total commercial	229		389
Consumer loans:
Residential mortgages(3)	950		953
Home equity mortgages(3)	20		20
Credit cards	7		8
Total consumer	977		981
Total TDR Loans(4)	$	1,206	$	1,370

	September 30, 2014		December 31, 2013
	(in millions)
Allowance for credit losses for TDR Loans(5):
Commercial loans:
Construction and other real estate	$	2	$	16
Business and corporate banking	7		1
Total commercial	9		17
Consumer loans:
Residential mortgages	51		66
Home equity mortgages	2		2
Credit cards	2		2
Total consumer	55		70
Total allowance for credit losses for TDR Loans	$	64	$	87

⁽¹⁾  TDR Loans are considered to be impaired loans. For consumer loans, all such loans are considered impaired loans regardless of accrual status. For commercial loans, impaired loans include other loans in addition to TDR Loans which totaled $20 million and $92 million at September 30, 2014 and December 31, 2013, respectively.

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

22

HSBC USA Inc.

	September 30, 2014		December 31, 2013
	(in millions)
Commercial loans:
Construction and other real estate	$	215	$	309
Business and corporate banking	60		60
Global banking	—		51
Other commercial	—		28
Total commercial	275		448
Consumer loans:
Residential mortgages	1,116		1,113
Home equity mortgages	44		40
Credit cards	7		8
Total consumer	1,167		1,161
Total	$	1,442	$	1,609

⁽³⁾  Includes $741 million and $706 million at September 30, 2014 and December 31, 2013, respectively, of loans, primarily residential mortgages, that are recorded at the lower of amortized cost or fair value of the collateral less cost to sell.

⁽⁴⁾  Includes $478 million and $528 million at September 30, 2014 and December 31, 2013, respectively, of loans which are classified as nonaccrual.

⁽⁵⁾  Included in the allowance for credit losses.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(in millions)
Average balance of TDR Loans
Commercial loans:
Construction and other real estate	$	202	$	405	$	233	$	362
Business and corporate banking	29		39		24		49
Global banking	—		25		13		13
Other commercial	—		28		9		29
Total commercial	231		497		279		453
Consumer loans:
Residential mortgages	949		884		935		889
Home equity mortgages	19		20		19		21
Credit cards	8		11		8		12
Total consumer	976		915		962		922
Total average balance of TDR Loans	$	1,207	$	1,412	$	1,241	$	1,375
Interest income recognized on TDR Loans
Commercial loans:
Construction and other real estate	$	2	$	4	$	9	$	9
Other commercial	—		1		—		3
Total commercial	2		5		9		12
Consumer loans:
Residential mortgages	9		8		26		23
Home equity mortgages	—		—		1		1
Credit cards	—		—		—		1
Total consumer	9		8		27		25
Total interest income recognized on TDR Loans	$	11	$	13	$	36	$	37

23

HSBC USA Inc.

The following table presents loans which were classified as TDR Loans during the previous 12 months which for commercial loans became 90 days or greater contractually delinquent or for consumer loans became 60 days or greater contractually delinquent during the three and nine months ended September 30, 2014 and 2013:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(in millions)
Commercial loans:
Construction and other real estate	$	—	$	28	$	12	$	28
Business and corporate banking	—		2		—		2
Total commercial	—		30		12		30
Consumer loans:
Residential mortgages	10		10		27		34
Home equity mortgages	—		—		—		1
Total consumer	10		10		27		35
Total	$	10	$	40	$	39	$	65

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

	Amount with Impairment Reserves		Amount without Impairment Reserves		Total Impaired Commercial Loans(1)(2)		Impairment Reserve
	(in millions)
At September 30, 2014
Construction and other real estate	$	12	$	190	$	202	$	2
Business and corporate banking	27		10		37		7
Global banking	—		—		—		—
Other commercial	2		8		10		1
Total	$	41	$	208	$	249	$	10
At December 31, 2013
Construction and other real estate	$	122	$	211	$	333	$	32
Business and corporate banking	28		12		40		3
Global banking	14		51		65		5
Other commercial	1		42		43		—
Total	$	165	$	316	$	481	$	40

⁽¹⁾  Includes impaired commercial loans that are also considered TDR Loans which totaled $229 million and $389 million at September 30, 2014 and December 31, 2013, respectively.

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

	September 30, 2014		December 31, 2013
	(in millions)
Construction and other real estate	$	220	$	380
Business and corporate banking	78		91
Global banking	—		123
Other commercial	10		47
Total	$	308	$	641

24

HSBC USA Inc.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
					(in millions)
Average balance of impaired commercial loans:
Construction and other real estate	$	208	$	443	$	252	$	444
Business and corporate banking	40		62		37		69
Global banking	—		42		16		30
Other commercial	10		63		21		69
Total average balance of impaired commercial loans	$	258	$	610	$	326	$	612
Interest income recognized on impaired commercial loans:
Construction and other real estate	$	2	$	4	$	9	$	10
Other commercial	—		1		—		4
Total interest income recognized on impaired commercial loans	$	2	$	5	$	9	$	14

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

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

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

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

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

The following table summarizes criticized assets for commercial loans:

	Special Mention		Substandard		Doubtful		Total
	(in millions)
At September 30, 2014
Construction and other real estate	$	292	$	247	$	6	$	545
Business and corporate banking	933		121		1		1,055
Global banking	96		142		—		238
Other commercial	24		9		2		35
Total	$	1,345	$	519	$	9	$	1,873
At December 31, 2013
Construction and other real estate	$	351	$	346	$	30	$	727
Business and corporate banking	557		156		2		715
Global banking	367		112		5		484
Other commercial	79		33		—		112
Total	$	1,354	$	647	$	37	$	2,038

25

HSBC USA Inc.

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

	Performing Loans		Nonaccrual Loans		Accruing Loans Contractually Past Due 90 days or More		Total
	(in millions)
At September 30, 2014
Commercial:
Construction and other real estate	$	9,596	$	65	$	—	$	9,661
Business and corporate banking	17,327		25		3		17,355
Global banking	24,001		—		—		24,001
Other commercial	3,042		2		1		3,045
Total commercial	$	53,966	$	92	$	4	$	54,062
At December 31, 2013
Commercial:
Construction and other real estate	$	8,868	$	166	$	—	$	9,034
Business and corporate banking	14,420		21		5		14,446
Global banking	21,560		65		—		21,625
Other commercial	3,386		2		1		3,389
Total commercial	$	48,234	$	254	$	6	$	48,494

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

	Investment Grade(1)		Non-Investment Grade		Total
	(in millions)
At September 30, 2014
Construction and other real estate	$	7,193	$	2,468	$	9,661
Business and corporate banking	8,635		8,720		17,355
Global banking	21,199		2,802		24,001
Other commercial	1,567		1,478		3,045
Total commercial	$	38,594	$	15,468	$	54,062
At December 31, 2013
Construction and other real estate	$	6,069	$	2,965	$	9,034
Business and corporate banking	7,279		7,167		14,446
Global banking	18,636		2,989		21,625
Other commercial	1,583		1,806		3,389
Total commercial	$	33,567	$	14,927	$	48,494

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

26

HSBC USA Inc.

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

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

	September 30, 2014				December 31, 2013
	Delinquent Loans		Delinquency Ratio		Delinquent Loans		Delinquency Ratio
	(dollars are in millions)
Consumer:
Residential mortgages	$	1,055	6.42	%	$	1,208	7.59	%
Home equity mortgages	60		3.29		68		3.38
Total residential mortgages(1)	1,115		6.10		1,276		7.11
Credit cards	14		2.04		21		2.46
Other consumer	14		2.64		19		3.32
Total consumer	$	1,143	5.87	%	$	1,316	6.80	%

⁽¹⁾  At September 30, 2014 and December 31, 2013, residential mortgage loan delinquency includes $967 million and $1,074 million, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.

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

	Performing Loans		Nonaccrual Loans		Accruing Loans Contractually Past Due 90 days or More		Total
	(in millions)
At September 30, 2014
Consumer:
Residential mortgages	$	15,551	$	851	$	—	$	16,402
Home equity mortgages	1,756		68		—		1,824
Total residential mortgages	17,307		919		—		18,226
Credit cards	676		—		10		686
Other consumer	454		—		11		465
Total consumer	$	18,437	$	919	$	21	$	19,377
At December 31, 2013
Consumer:
Residential mortgages	$	14,877	$	949	$	—	$	15,826
Home equity mortgages	1,934		77		—		2,011
Total residential mortgages	16,811		1,026		—		17,837
Credit cards	840		—		14		854
Other consumer	496		—		14		510
Total consumer	$	18,147	$	1,026	$	28	$	19,201

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

Concentration of Credit Risk  At September 30, 2014 and December 31, 2013, our loan portfolio included interest-only residential mortgage loans totaling $3,585 million and $3,643 million, respectively. An interest-only residential mortgage loan allows a customer to pay the interest-only portion of the monthly payment for a period of time which results in lower payments during the initial loan period. However, subsequent events affecting a customer's financial position could affect the ability of customers to repay the loan in the future when the principal payments are required which increases the credit risk of this loan type.

27

HSBC USA Inc.

5.    Allowance for Credit Losses

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

	Commercial												Consumer
	Construction and Other Real Estate			Business and Corporate Banking			Global Banking			Other Comm’l			Residential Mortgages			Home Equity Mortgages			Credit Card			Other Consumer			Total
	(in millions)
Three Months Ended September 30, 2014
Allowance for credit losses – beginning of period	$	94		$	180		$	96		$	13		$	149		$	42		$	39		$	11		$	624
Provision charged (credited) to income	(9		)	36			—			1			(11		)	(5		)	9			2			23
Charge offs	—			(5		)	—			—			(9		)	(3		)	(10		)	(2		)	(29		)
Recoveries	1			2			—			3			3			2			2			—			13
Net (charge offs) recoveries	1			(3		)	—			3			(6		)	(1		)	(8		)	(2		)	(16		)
Allowance for credit losses – end of period	$	86		$	213		$	96		$	17		$	132		$	36		$	40		$	11		$	631
Three Months Ended September 30, 2013
Allowance for credit losses – beginning of period	$	110		$	103		$	69		$	17		$	196		$	52		$	45		$	13		$	605
Provision charged (credited) to income	(10		)	28			(2		)	—			(1		)	28			10			1			54
Charge offs	(3		)	(3		)	—			—			(40		)	(15		)	(11		)	(1		)	(73		)
Recoveries	1			3			—			—			3			1			1			—			9
Net (charge offs) recoveries	(2		)	—			—			—			(37		)	(14		)	(10		)	(1		)	(64		)
Allowance for credit losses – end of period	$	98		$	131		$	67		$	17		$	158		$	66		$	45		$	13		$	595
Nine Months Ended September 30, 2014
Allowance for credit losses – beginning of period	$	108		$	112		$	68		$	20		$	186		$	49		$	50		$	13		$	606
Provision charged (credited) to income	(1		)	111			36			(12		)	(20		)	(11		)	18			3			124
Charge offs	(24		)	(16		)	(8		)	—			(45		)	(11		)	(33		)	(7		)	(144		)
Recoveries	3			6			—			9			11			9			5			2			45
Net (charge offs) recoveries	(21		)	(10		)	(8		)	9			(34		)	(2		)	(28		)	(5		)	(99		)
Allowance for credit losses – end of period	$	86		$	213		$	96		$	17		$	132		$	36		$	40		$	11		$	631
Ending balance: collectively evaluated for impairment	$	84		$	206		$	96		$	16		$	81		$	34		$	38		$	11		$	566
Ending balance: individually evaluated for impairment	2			7			—			1			51			2			2			—			65
Total allowance for credit losses	$	86		$	213		$	96		$	17		$	132		$	36		$	40		$	11		$	631
Loans:
Collectively evaluated for impairment	$	9,459		$	17,318		$	24,001		$	3,035		$	14,662		$	1,753		$	679		$	465		$	71,372
Individually evaluated for impairment(1)	202			37			—			10			224			5			7			—			485
Loans carried at lower of amortized cost or fair value less cost to sell	—			—			—			—			1,516			66			—			—			1,582
Total loans	$	9,661		$	17,355		$	24,001		$	3,045		$	16,402		$	1,824		$	686		$	465		$	73,439

28

HSBC USA Inc.

	Commercial											Consumer
	Construction and Other Real Estate			Business and Corporate Banking			Global Banking		Other Comm’l			Residential Mortgages			Home Equity Mortgages			Credit Card			Other Consumer			Total
	(in millions)
Nine Months Ended September 30, 2013
Allowance for credit losses – beginning of period	$	162		$	97		$	41	$	17		$	210		$	45		$	55		$	20		$	647
Provision charged (credited) to income	(15		)	45			26		(4		)	10			58			21			1			142
Charge offs	(62		)	(18		)	—		—			(69		)	(38		)	(34		)	(10		)	(231		)
Recoveries	13			7			—		4			7			1			3			2			37
Net (charge offs) recoveries	(49		)	(11		)	—		4			(62		)	(37		)	(31		)	(8		)	(194		)
Allowance for credit losses – end of period	$	98		$	131		$	67	$	17		$	158		$	66		$	45		$	13		$	595
Ending balance: collectively evaluated for impairment	$	81		$	99		$	58	$	17		$	92		$	64		$	42		$	13		$	466
Ending balance: individually evaluated for impairment	17			32			9		—			66			2			3			—			129
Total allowance for credit losses	$	98		$	131		$	67	$	17		$	158		$	66		$	45		$	13		$	595
Loans:
Collectively evaluated for impairment	$	8,499		$	13,612		$	23,305	$	2,491		$	13,963		$	2,004		$	846		$	538		$	65,258
Individually evaluated for impairment(1)	420			56			65		61			215			19			10			—			846
Loans carried at lower of amortized cost or fair value less cost to sell	—			—			—		—			1,542			64			—			—			1,606
Total loans	$	8,919		$	13,668		$	23,370	$	2,552		$	15,720		$	2,087		$	856		$	538		$	67,710

⁽¹⁾  For consumer loans and certain small business loans, these amounts represent TDR Loans for which we evaluate reserves using a discounted cash flow methodology. Each loan is individually identified as a TDR Loan and then grouped together with other TDR Loans with similar characteristics. The discounted cash flow analysis is then applied to these groups of TDR Loans. Loans individually evaluated for impairment exclude TDR loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell which totaled $741 million and $687 million at September 30, 2014 and 2013, respectively.

29

HSBC USA Inc.

6. Loans Held for Sale

Loans held for sale consisted of the following:

	September 30, 2014		December 31, 2013
	(in millions)
Commercial loans	$	223	$	76
Consumer loans:
Residential mortgages	38		91
Other consumer	66		63
Total consumer	104		154
Total loans held for sale	$	327	$	230

We originate commercial loans in connection with our participation in a number of syndicated credit facilities. Syndicated loans that are originated with the intent of selling them to unaffiliated third parties are classified as commercial loans held for sale. The fair value of commercial loans held for sale under this program was $69 million and $58 million at September 30, 2014 and December 31, 2013, respectively. We have elected to designate all commercial syndicated loans classified as held for sale at fair value under the fair value option. See Note 10, "Fair Value Option," for additional information.

Commercial loans held for sale also includes a $44 million global banking loan at September 30, 2014, which was transferred to held for sale during the first quarter of 2014, as well as commercial real estate loans totaling $110 million and $18 million at September 30, 2014 and December 31, 2013, respectively.

We sell all our agency eligible loan originations servicing released directly to PHH Mortgage Corporation ("PHH Mortgage"). Gains and losses from the sale of residential mortgage loans are reflected as a component of residential mortgage banking revenue in the accompanying consolidated statement of income. Also included in residential mortgage loans held for sale are subprime residential mortgage loans with a fair value of $21 million and $46 million at September 30, 2014 and December 31, 2013, respectively, which were acquired from unaffiliated third parties and from HSBC Finance Corporation ("HSBC Finance") with the intent of securitizing or selling the loans to third parties.

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

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

Excluding the commercial loans designated under fair value option discussed above, loans held for sale are recorded at the lower of amortized cost or fair value. While the initial carrying amount of consumer loans held for sale continued to exceed fair value at September 30, 2014, we experienced a decrease in the valuation allowance for consumer loans held for sale during the nine months ended September 30, 2014 due primarily to subprime residential mortgage loan sales. The valuation allowance on consumer loans held for sale was $42 million and $77 million at September 30, 2014 and December 31, 2013, respectively. The valuation allowance on commercial loans held for sale was $5 million at September 30, 2014 compared with no allowance at December 31, 2013.

30

HSBC USA Inc.

7. Intangible Assets

Intangible assets consisted of the following:

	September 30, 2014		December 31, 2013
	(in millions)
Mortgage servicing rights:
Residential	$	182	$	227
Commercial	2		10
Total mortgage servicing rights	$	184	$	237
Purchased credit card relationships	49		54
Favorable lease agreements	1		4
Total intangible assets	$	234	$	295

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

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

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

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

	September 30, 2014		December 31, 2013
Annualized constant prepayment rate ("CPR")	13.8	%	11.3	%
Constant discount rate	13.6	%	12.7	%
Weighted average life (in years)	4.6		5.3

The following table summarizes residential MSRs activity:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Fair value of MSRs:
Beginning balance	$	186		$	225		$	227		$	168
Additions related to loan sales	—			3			—			14
Changes in fair value due to:
Change in valuation model inputs or assumptions	2			4			(22		)	73
Customer payments	(6		)	(8		)	(23		)	(31		)
Ending balance	$	182		$	224		$	182		$	224

The outstanding principal balance of serviced for others mortgages, which are not included in the consolidated balance sheet, totaled $24,048 million and $26,951 million at September 30, 2014 and December 31, 2013, respectively.

31

HSBC USA Inc.

Servicing fees collected are included in residential mortgage banking revenue and totaled $17 million and $52 million during the three and nine months ended September 30, 2014, respectively, compared with $20 million and $62 million during the three and nine months ended September 30, 2013, respectively.

During the second quarter of 2013, we completed the conversion of our mortgage processing and servicing operations to PHH Mortgage. Under the terms of the agreement, PHH Mortgage provides us with mortgage origination processing services as well as the sub-servicing of our portfolio of owned and serviced for others mortgages with an outstanding principal balance of $41,638 million and $44,039 million at September 30, 2014 and December 31, 2013, respectively. Although we continue to own both the mortgages on our balance sheet and the mortgage servicing rights associated with the serviced loans at the time of conversion, beginning with May 2013 applications, we sell our agency eligible originations to PHH Mortgage on a servicing released basis which results in no new mortgage servicing rights being recognized.

Commercial mortgage servicing rights During the third quarter of 2014, we completed the sale of certain commercial MSRs associated with commercial mortgages originated and sold to FNMA, which had previously been classified as held for sale, to a third party for $22 million and recognized a gain of $16 million. Our remaining commercial MSRs represent servicing rights associated with commercial mortgage loans originated and sold to FHLMC which continue to be accounted for at the lower of amortized cost or fair value.

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

8. Goodwill

Goodwill was $1,612 million at both September 30, 2014 and December 31, 2013. Included in goodwill for these periods were accumulated impairment losses of $670 million.

During the third quarter of 2014, we completed our annual impairment test of goodwill and determined that the fair value of all of our reporting units exceeded their carrying amounts, with the book value of each reporting unit, including allocated goodwill, being 65 percent or less of fair value.

9. Derivative Financial Instruments

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

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

32

HSBC USA Inc.

	September 30, 2014					December 31, 2013
	Derivative assets		Derivative liabilities			Derivative assets		Derivative liabilities
	(in millions)
Derivatives accounted for as fair value hedges(1)
OTC-cleared(2)	$	15	$	117		$	75	$	20
Bilateral OTC(2)	45		205			203		192
Interest rate contracts	60		322			278		212
Derivatives accounted for as cash flow hedges(1)
Bilateral OTC(2)	26		(1		)	—		3
Foreign exchange contracts	26		(1		)	—		3
OTC-cleared(2)	7		—			16		—
Bilateral OTC(2)	3		112			16		62
Interest rate contracts	10		112			32		62
Total derivatives accounted for as hedges	96		433			310		277
Trading derivatives not accounted for as hedges(3)
Exchange-traded(2)	39		33			82		32
OTC-cleared(2)	12,179		13,178			24,218		25,468
Bilateral OTC(2)	27,794		27,366			31,097		30,451
Interest rate contracts	40,012		40,577			55,397		55,951
Exchange-traded(2)	—		9			7		16
Bilateral OTC(2)	18,033		17,151			15,422		14,565
Foreign exchange contracts	18,033		17,160			15,429		14,581
Equity contract - bilateral OTC(2)	1,423		1,420			1,413		1,412
Exchange-traded(2)	203		5			181		6
Bilateral OTC(2)	1,306		754			1,402		815
Precious metals contracts	1,509		759			1,583		821
OTC-cleared(2)	458		514			576		604
Bilateral OTC(2)	3,819		3,696			4,079		4,104
Credit contracts	4,277		4,210			4,655		4,708
Other derivatives not accounted for as hedges(1)
Interest rate contracts - bilateral OTC(2)	619		79			470		91
Foreign exchange contracts - bilateral OTC(2)	—		38			—		44
Equity contracts - bilateral OTC(2)	703		190			789		148
Precious metals contracts - bilateral OTC(2)	—		30			—		36
Credit contracts - bilateral OTC(2)	30		10			9		11
Total derivatives	66,702		64,906			80,055		78,080
Less: Gross amounts of receivable / payable subject to enforceable master netting agreements(4)(6)	56,849		56,849			68,616		68,616
Less: Gross amounts of cash collateral received / posted subject to enforceable master netting agreements(5)(6)	3,759		1,725			3,870		2,116
Net amounts of derivative assets / liabilities presented in the balance sheet	6,094		6,332			7,569		7,348
Less: Gross amounts of financial instrument collateral received / posted subject to enforceable master netting agreements but not offset in the consolidated balance sheet	1,399		2,652			1,641		3,094
Net amounts of derivative assets / liabilities	$	4,695	$	3,680		$	5,928	$	4,254

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

⁽²⁾  Over-the-counter (OTC) derivatives include derivatives executed and settled bilaterally with counterparties without the use of an organized exchange or central clearing house. The credit risk associated with bilateral OTC derivatives is managed through master netting agreements and obtaining collateral.

33

HSBC USA Inc.

OTC-cleared derivatives are executed bilaterally in the OTC market but then novated to a central clearing counterparty, whereby the central clearing counterparty becomes the counterparty to both of the original counterparties. Exchange traded derivatives are executed directly on an organized exchange that provides pre-trade price transparency. Credit risk is minimized for OTC-cleared derivatives and exchange traded derivatives through daily margining required by central clearing counterparties.

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

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

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

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

See Note 17, "Guarantee Arrangements, Pledged Assets and Collateral," for further information on offsetting related to resale and repurchase agreements and securities borrowing and lending arrangements.

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

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

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

The changes in the fair value of the hedged item designated in a qualifying hedge are captured as an adjustment to the carrying amount of the hedged item (basis adjustment). If the hedging relationship is terminated and the hedged item continues to exist, the basis adjustment is amortized over the remaining life of the hedged item. We recorded basis adjustments for active fair value hedges which increased the carrying amount of our debt by $0 million and less than $1 million during the three and nine months ended September 30, 2014, respectively, compared with an increase in the carrying amount of our debt of less than $1 million and $1 million during the three and nine months ended September 30, 2013. We amortized $1 million and $6 million of basis adjustments related to terminated and/or re-designated fair value hedge relationships of our debt during the three and nine months ended September 30, 2014, respectively, compared with $3 million and $10 million during the three and nine months ended September 30, 2013. The total accumulated unamortized basis adjustments for terminated fair value hedges amounted to an increase in the carrying amount of our debt of $26 million and $33 million as of September 30, 2014 and December 31, 2013, respectively. Basis adjustments for active fair value hedges of available-for-sale ("AFS") securities decreased the carrying amount of the securities by $21 million and increased the carrying amount of the securities by $317 million during the three and nine months ended September 30, 2014, respectively, compared with an increase of $38 million and a decrease of $563 million during the three and nine months ended September 30, 2013. Total accumulated unamortized basis adjustments for active fair value hedges of available-for-sale securities amounted to an increase in the carrying amount of $262 million as of September 30, 2014 compared with a decrease of $84 million as of December 31, 2013.

34

HSBC USA Inc.

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

	Gain (Loss) on Derivative						Gain (Loss) on Hedged Items						Net Ineffective Gain (Loss) Recognized
	Interest Income (Expense)			Other Income			Interest Income (Expense)			Other Income			Other Income
	(in millions)
Three Months Ended September 30, 2014
Interest rate contracts/AFS Securities	$	(61	)	$	10		$	90		$	(10	)	$	—
Interest rate contracts/subordinated debt	2			—			—			—			—
Total	$	(59	)	$	10		$	90		$	(10	)	$	—
Three Months Ended September 30, 2013
Interest rate contracts/AFS Securities	$	(56	)	$	42		$	112		$	(39	)	$	3
Interest rate contracts/subordinated debt	4			—			(15		)	1			1
Total	$	(52	)	$	42		$	97		$	(38	)	$	4
Nine Months Ended September 30, 2014
Interest rate contracts/AFS Securities	$	(188	)	$	(396	)	$	289		$	391		$	(5	)
Interest rate contracts/subordinated debt	7			(1		)	(16		)	1			—
Total	$	(181	)	$	(397	)	$	273		$	392		$	(5	)
Nine Months Ended September 30, 2013
Interest rate contracts/AFS Securities	$	(168	)	$	609		$	337		$	(593	)	$	16
Interest rate contracts/subordinated debt	12			(1		)	(46		)	1			—
Total	$	(156	)	$	608		$	291		$	(592	)	$	16

Cash Flow Hedges  We own or issue floating rate financial instruments and enter into forecasted transactions that give rise to variability in future cash flows. As a part of our risk management strategy, we use interest rate swaps, currency swaps and futures contracts to mitigate risk associated with variability in the cash flows. Changes in fair value of a derivative instrument associated with the effective portion of a qualifying cash flow hedge are recognized initially in other comprehensive income. When the cash flows for which the derivative is hedging materialize and are recorded in income or expense, the associated gain or loss from the hedging derivative previously recorded in accumulated other comprehensive income (loss) is reclassified into earnings in the same accounting period in which the designated forecasted transaction or hedged item affects earnings. If a cash flow hedge of a forecasted transaction is de-designated because it is no longer highly effective, or if the hedge relationship is terminated, the cumulative gain or loss on the hedging derivative to that date will continue to be reported in accumulated other comprehensive income (loss) unless it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period as documented at the inception of the hedge, at which time the cumulative gain or loss is released into earnings. As of September 30, 2014 and December 31, 2013, active cash flow hedge relationships extend or mature through July 2036. During the three and nine months ended September 30, 2014, $2 million and $4 million of losses related to terminated and/or re-designated cash flow hedge relationships were amortized to earnings from accumulated other comprehensive income (loss) compared with losses of $2 million and $9 million during the three and nine months ended September 30, 2013. During the next twelve months, we expect to amortize $10 million of remaining losses to earnings resulting from these terminated and/or re-designated cash flow hedges. The interest accrual related to the derivative contract is recognized in interest income.

35

HSBC USA Inc.

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

	Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)					Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Gain (Loss) Reclassed From AOCI into Income (Effective Portion)						Location of Gain (Loss) Recognized in Income on the Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Gain (Loss) Recognized in Income on the Derivative (Ineffective Portion)
	2014			2013			2014			2013				2014		2013
	(in millions)
Three Months Ended September 30,
Foreign exchange contracts	$	1		$	2	Interest income (expense)	$	—		$	—		Other income	$	—	$	—
Interest rate contracts	(11		)	32		Interest income (expense)	(2		)	(2		)	Other income	—		—
Total	$	(10	)	$	34		$	(2	)	$	(2	)		$	—	$	—
Nine Months Ended September 30,
Foreign exchange contracts	$	2		$	3	Interest income (expense)	$	—		$	—		Other income	$	—	$	—
Interest rate contracts	(72		)	150		Interest income (expense)	(4		)	(9		)	Other income	—		—
Total	$	(70	)	$	153		$	(4	)	$	(9	)		$	—	$	—

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

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

36

HSBC USA Inc.

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

	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives
		Three Months Ended September 30,						Nine Months Ended September 30,
		2014			2013			2014			2013
		(in millions)
Interest rate contracts	Trading revenue (expense)	$	215		$	13		$	183		$	(369	)
Interest rate contracts	Residential mortgage banking revenue	(2		)	(4		)	33			(45		)
Foreign exchange contracts	Trading revenue (expense)	(182		)	77			(99		)	655
Equity contracts	Trading revenue (expense)	—			2			—			4
Precious metals contracts	Trading revenue (expense)	36			(55		)	54			6
Credit contracts	Trading revenue (expense)	(76		)	2			(191		)	80
Total		$	(9	)	$	35		$	(20	)	$	331

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

	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives
		Three Months Ended September 30,						Nine Months Ended September 30,
		2014			2013			2014			2013
								(in millions)
Interest rate contracts	Gain (loss) on instruments designated at fair value and related derivatives	$	42		$	(15	)	$	269		$	(253	)
Interest rate contracts	Residential mortgage banking revenue	—			(9		)	—			(5		)
Foreign exchange contracts	Gain (loss) on instruments designated at fair value and related derivatives	5			(2		)	18			(57		)
Equity contracts	Gain (loss) on instruments designated at fair value and related derivatives	(67		)	234			272			474
Precious metals contracts	Gain (loss) on instruments designated at fair value and related derivatives	(12		)	42			12			—
Credit contracts	Gain (loss) on instruments designated at fair value and related derivatives	(1		)	(1		)	—			—
Credit contracts	Other income	3			(3		)	(8		)	—
Total		$	(30	)	$	246		$	563		$	159

Credit-Risk Related Contingent Features  We enter into total return swap, interest rate swap, cross-currency swap and credit default swap contracts, amongst others which contain provisions that require us to maintain a specific credit rating from each of the major credit rating agencies. Sometimes the derivative instrument transactions are a part of broader structured product transactions. If HSBC Bank USA, National Association's ("HSBC Bank USA") credit ratings were to fall below the current ratings, the counterparties to our derivative instruments could demand us to post additional collateral. The amount of additional collateral required to be posted will depend on whether HSBC Bank USA is downgraded by one or more notches and whether the downgrade is in relation to long-term or short-term ratings. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position as of September 30, 2014, was $5,098 million for which we have posted collateral of $4,137 million. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position as of December 31, 2013, was $5,614 million for which we have posted collateral of $5,059 million. Substantially all of the collateral posted is in the form of cash or securities available-for-sale. See Note 17, "Guarantee Arrangements, Pledged Assets and Collateral," for further details.

37

HSBC USA Inc.

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

Moody’s	Long-Term Ratings
Short-Term Ratings	A1		A2		A3
	(in millions)
P-1	$	—	$	35	$	250
P-2	1		35		250

S&P	Long-Term Ratings
Short-Term Ratings	AA-		A+		A
	(in millions)
A-1+	$	—	$	—	$	34
A-1	3		3		37

We would be required to post $4 million of additional collateral on total return swaps if HSBC Bank USA is downgraded by S&P and Moody’s by two notches on our long term rating accompanied by one notch downgrade in our short term rating.

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

	September 30, 2014		December 31, 2013
	(in millions)
Interest rate:
Futures and forwards	$	220,669	$	175,468
Swaps	3,056,578		3,645,085
Options written	53,332		85,021
Options purchased	70,007		87,735
	3,400,586		3,993,309
Foreign Exchange:
Swaps, futures and forwards	892,385		804,278
Options written	131,705		82,817
Options purchased	133,386		84,835
Spot	79,880		52,193
	1,237,356		1,024,123
Commodities, equities and precious metals:
Swaps, futures and forwards	50,332		41,123
Options written	14,740		21,531
Options purchased	20,491		21,723
	85,563		84,377
Credit derivatives	346,794		355,286
Total	$	5,070,299	$	5,457,095

38

HSBC USA Inc.

10. Fair Value Option

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

Loans  We elected to apply FVO accounting to certain commercial syndicated loans which are originated with the intent to sell and are included as loans held for sale in the consolidated balance sheet. The election allows us to account for these loans at fair value which is consistent with the manner in which the instruments are managed. Interest from these loans is recorded as interest income in the consolidated statement of income. Because a substantial majority of the loans elected for the fair value option are floating rate assets, changes in their fair value are primarily attributable to changes in loan-specific credit risk factors. The components of gain (loss) related to loans designated at fair value are summarized in the table below. As of September 30, 2014 and December 31, 2013, no loans for which the fair value option has been elected are 90 days or more past due or on nonaccrual status.

Long-Term Debt (Own Debt Issuances)  We elected to apply FVO accounting for certain fixed-rate long-term debt for which we had applied or otherwise would elect to apply fair value hedge accounting. The election allows us to achieve a similar accounting effect without having to meet the hedge accounting requirements. The own debt issuances elected under FVO are traded in secondary markets and, as such, the fair value is determined based on observed prices for the specific instruments. The observed market price of these instruments reflects the effect of changes to our own credit spreads and interest rates. Interest on the fixed-rate debt accounted for under FVO is recorded as interest expense in the consolidated statement of income. The components of gain (loss) related to long-term debt designated at fair value are summarized in the table below.

Hybrid Instruments  We elected to apply FVO accounting to all of our hybrid instruments issued, inclusive of structured notes and structured deposits. The valuation of the hybrid instruments is predominantly driven by the derivative features embedded within the instruments. Cash flows of the hybrid instruments are discounted at an appropriate rate for the applicable duration of the instrument adjusted for our own credit spreads. The credit spreads applied to structured notes are determined with reference to our own debt issuance rates observed in the primary and secondary markets, internal funding rates, and structured note rates in recent executions while the credit spreads applied to structured deposits are determined using market rates currently offered on comparable deposits with similar characteristics and maturities. Interest on this debt is recorded as interest expense in the consolidated statement of income. The components of gain (loss) related to hybrid instruments designated at fair value which reflect the instruments described above are summarized in the table below.

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

	Fair Value		Unpaid Principal Balance
	(in millions)
At September 30, 2014
Commercial syndicated loans	$	69	$	69
Fixed rate long-term debt	2,080		1,750
Hybrid instruments:
Structured deposits	7,537		7,392
Structured notes	6,616		6,355
At December 31, 2013
Commercial syndicated loans	$	58	$	59
Fixed rate long-term debt	1,893		1,750
Hybrid instruments:
Structured deposits	7,740		7,539
Structured notes	5,693		5,377

39

HSBC USA Inc.

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

	Loans			Long-Term Debt			Hybrid Instruments			Total
	(in millions)
Three Months Ended September 30, 2014
Interest rate and other components(1)	$	1		$	(24	)	$	70		$	47
Credit risk component(2)(3)	—			7			15			22
Total mark-to-market on financial instruments designated at fair value	1			(17		)	85			69
Mark-to-market on the related derivatives	—			14			(64		)	(50		)
Net realized gain on the related long-term debt derivatives	—			17			—			17
Gain (loss) on instruments designated at fair value and related derivatives	$	1		$	14		$	21		$	36
Three Months Ended September 30, 2013
Interest rate and other components(1)	$	—		$	40		$	(280	)	$	(240	)
Credit risk component(2)(3)	—			(63		)	39			(24		)
Total mark-to-market on financial instruments designated at fair value	—			(23		)	(241		)	(264		)
Mark-to-market on the related derivatives	—			(39		)	280			241
Net realized gain on the related long-term debt derivatives	—			17			—			17
Gain (loss) on instruments designated at fair value and related derivatives	$	—		$	(45	)	$	39		$	(6	)
Nine Months Ended September 30, 2014
Interest rate and other components(1)	$	1		$	(167	)	$	(413	)	$	(579	)
Credit risk component(2)(3)	—			(20		)	48			28
Total mark-to-market on financial instruments designated at fair value	1			(187		)	(365		)	(551		)
Net realized loss on financial instruments	—			—			—			—
Mark-to-market on the related derivatives	—			134			386			520
Net realized gain on the related long-term debt derivatives	—			51			—			51
Gain (loss) on instruments designated at fair value and related derivatives	$	1		$	(2	)	$	21		$	20
Nine Months Ended September 30, 2013
Interest rate and other components(1)	$	—		$	223		$	(392	)	$	(169	)
Credit risk component(2)(3)	21			(52		)	126			95
Total mark-to-market on financial instruments designated at fair value	21			171			(266		)	(74		)
Net realized loss on financial instruments	(8		)	—			—			(8		)
Mark-to-market on the related derivatives	—			(229		)	344			115
Net realized gain on the related long-term debt derivatives	—			49			—			49
Gain (loss) on instruments designated at fair value and related derivatives	$	13		$	(9	)	$	78		$	82

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

40

HSBC USA Inc.

⁽²⁾  During the three months ended September 30, 2014, the gain in the credit risk component for long-term debt is attributable to the widening of our own credit spreads while the loss in the nine months ended September 30, 2014, is attributable to the tightening of our own credit spreads. The losses in the three and nine months ended September 30, 2013 are also attributable to the tightening of our own credit spreads.

⁽³⁾  During the three and nine months September 30, 2014 and 2013, the gains in the credit risk component for hybrid instruments are attributable primarily to the widening of credit spreads on structured deposits and structured notes.

11. Accumulated Other Comprehensive Income (Loss)

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

Three Months Ended September 30,	2014			2013
	(in millions)
Unrealized gains (losses) on investment securities:
Balance at beginning of period	$	287		$	257
Other comprehensive income (loss) for period:
Net unrealized gains (losses) arising during period, net of tax of $(44) million and $(13) million, respectively	(71		)	(29		)
Reclassification adjustment for (gains) losses realized in net income, net of tax of $(10) million and $(14) million, respectively(1)	(17		)	(21		)
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity realized in net income, net of tax of less than $1 million(2)	1			—
Total other comprehensive income (loss) for period	(87		)	(50		)
Balance at end of period	200			207
Unrealized losses on other-than-temporarily impaired debt securities held-to-maturity:
Balance at beginning of period	(57		)	(67		)
Other comprehensive income for period:
Reclassification adjustment related to the accretion of unrealized other-than-temporary impairment, net of tax of $4 million and $1 million, respectively(3)	6			2
Total other comprehensive income for period	6			2
Balance at end of period	(51		)	(65		)
Unrealized gains (losses) on derivatives designated as cash flow hedges:
Balance at beginning of period	(118		)	(127		)
Other comprehensive income (loss) for period:
Net gains (losses) arising during period, net of tax of $(4) million and $14 million, respectively	(6		)	20
Reclassification adjustment for losses realized in net income, net of tax of less than $1 million and $1 million, respectively(4)	1			1
Total other comprehensive income (loss) for period	(5		)	21
Balance at end of period	(123		)	(106		)
Pension and postretirement benefit liability:
Balance at beginning of period	2			(6		)
Other comprehensive income for period:
Change in pension and postretirement liability, net of tax of less than $1 million	—			1
Total other comprehensive income for period	—			1
Balance at end of period	2			(5		)
Total accumulated other comprehensive income at end of period	$	28		$	31

41

HSBC USA Inc.

Nine Months Ended September 30,	2014			2013
	(in millions)
Unrealized gains (losses) on investment securities:
Balance at beginning of period	$	(18	)	$	992
Other comprehensive income (loss) for period:
Net unrealized gains (losses) arising during period, net of tax of $157 million and $(468) million, respectively	243			(679		)
Reclassification adjustment for gains realized in net income, net of tax of $(16) million and $(75) million, respectively(1)	(26		)	(106		)
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity realized in net income, net of tax of less than $1 million(2)	1			—
Total other comprehensive income (loss) for period	218			(785		)
Balance at end of period	200			207
Unrealized losses on other-than-temporarily impaired debt securities held-to-maturity:
Balance at beginning of period	(60		)	—
Adjustment to add other-than-temporary impairment due to the consolidation of a VIE, net of tax of $(48) million	—			(67		)
Other comprehensive income for period:
Reclassification adjustment related to the accretion of unrealized other-than-temporary impairment, net of tax of $7 million and $1 million, respectively(3)	9			2
Total other comprehensive income for period	9			2
Balance at end of period	(51		)	(65		)
Unrealized gains (losses) on derivatives designated as cash flow hedges:
Balance at beginning of period	(83		)	(201		)
Other comprehensive income (loss) for period:
Net gains (losses) arising during period, net of tax of $(28) million and $63 million, respectively	(42		)	90
Reclassification adjustment for losses realized in net income, net of tax of $2 million and $4 million, respectively(4)	2			5
Total other comprehensive income (loss) for period	(40		)	95
Balance at end of period	(123		)	(106		)
Pension and postretirement benefit liability:
Balance at beginning of period	2			(6		)
Other comprehensive income for period:
Change in pension and postretirement liability, net of tax of less than $1 million	—			1
Total other comprehensive income for period	—			1
Balance at end of period	2			(5		)
Total accumulated other comprehensive income at end of period	$	28		$	31

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

⁽²⁾  Amount amortized to net income is included in interest income in our consolidated statement of income. During the third quarter of 2014, we transferred securities from available-for-sale to held-to-maturity. At the date of the transfer, AOCI included net pretax unrealized losses of $234 million related to the transferred securities which will be amortized over the remaining contractual life of each security as an adjustment of yield in a manner consistent with the amortization of any premium or discount.

⁽³⁾  Amount reclassified to the carrying value of the debt securities is included in securities held-to-maturity in our consolidated balance sheet.

⁽⁴⁾  Amount reclassified to net income is included in interest income (expense) in our consolidated statement of income.

42

HSBC USA Inc.

12. Pension and Other Postretirement Benefits

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Service cost – benefits earned during the period	$	1		$	1		$	3		$	3
Interest cost on projected benefit obligation	17			18			53			52
Expected return on assets	(22		)	(19		)	(64		)	(60		)
Recognized losses	8			10			27			36
Pension expense	$	4		$	10		$	19		$	31

Pension expense was lower during the three and nine months ended September 30, 2014 due to lower recognized losses as well as a higher expected return on plan assets. During the first quarter of 2014, an additional contribution of $74 million was made to the Plan.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014			2013
	(in millions)
Interest cost	$	1	$	1	$	2		$	2
Amortization of gain	—		—		(1		)	—
Net periodic postretirement benefit cost	$	1	$	1	$	1		$	2

43

HSBC USA Inc.

13. Related Party Transactions

In the normal course of business, we conduct transactions with HSBC and its subsidiaries. These transactions occur at prevailing market rates and terms and include funding arrangements, derivative, servicing arrangements, information technology, centralized support services, banking and other miscellaneous services. All extensions of credit by (and certain credit exposures of) HSBC Bank USA to other HSBC affiliates (other than Federal Deposit Insurance Corporation ("FDIC") insured banks) are legally required to be secured by eligible collateral. The following tables and discussions below present the more significant related party balances and the income (expense) generated by related party transactions:

	September 30, 2014		December 31, 2013
	(in millions)
Assets:
Cash and due from banks	$	159	$	102
Interest bearing deposits with banks (1)	960		631
Trading assets (2)	17,908		17,082
Loans	4,812		5,328
Other (3)	1,359		1,219
Total assets	$	25,198	$	24,362
Liabilities:
Deposits	$	12,672	$	16,936
Trading liabilities (2)	18,670		19,463
Short-term borrowings	504		1,514
Long-term debt	3,984		3,987
Other (3)	598		573
Total liabilities	$	36,428	$	42,473

⁽¹⁾  Includes interest bearing deposits with HSBC Mexico S.A. of $800 million and $500 million at September 30, 2014 and December 31, 2013, respectively.

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

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

44

HSBC USA Inc.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Income/(Expense):
Interest income	$	37		$	31		$	160		$	143
Interest expense	(19		)	(19		)	(56		)	(59		)
Net interest income	$	18		$	12		$	104		$	84
Servicing and other fees from HSBC affiliate:
Fees and commissions:
HSBC Finance Corporation	$	24		$	20		$	62		$	67
HSBC Markets (USA) Inc. ("HMUS")	3			4			8			13
Other HSBC affiliates	12			9			43			39
Other HSBC affiliates income	14			8			38			35
Total affiliate income	$	53		$	41		$	151		$	154
Support services from HSBC affiliates:
HSBC Finance Corporation	$	(2	)	$	(2	)	$	(8	)	$	(11	)
HMUS	(52		)	(58		)	(156		)	(164		)
HSBC Technology & Services (USA) ("HTSU")	(274		)	(274		)	(798		)	(749		)
Other HSBC affiliates	(60		)	(44		)	(165		)	(140		)
Total support services from HSBC affiliates	$	(388	)	$	(378	)	$	(1,127	)	$	(1,064	)
Stock based compensation expense with HSBC (1)	$	(18	)	$	(7	)	$	(36	)	$	(29	)

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

Funding Arrangements with HSBC Affiliates:

We use HSBC affiliates to fund a portion of our borrowing and liquidity needs. Long-term debt with affiliates reflects $4.0 billion in floating rate senior debt with HSBC North America. Of this amount, $1.0 billion matures in August 2015 and $3.0 billion matures in October 2015. The debt bears interest at 90 day U.S. dollar Libor plus a spread, with each maturity at a different spread.

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

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

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

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

45

HSBC USA Inc.

Lending and Derivative Related Arrangements Extended to HSBC Affiliates:

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

	September 30, 2014		December 31, 2013
	(in millions)
HSBC Finance Corporation	$	3,014	$	3,015
HSBC Markets (USA) Inc. ("HMUS") and subsidiaries	559		199
HSBC Bank Brasil S.A.	1,103		1,000
Other short-term affiliate lending	136		1,114
Total loans	$	4,812	$	5,328

HSBC Finance Corporation - We have extended a $5.0 billion, 364-day uncommitted unsecured revolving credit agreement to HSBC Finance which expires during the fourth quarter of 2015. The credit agreement allows for borrowings with maturities of up to 5 years. At both September 30, 2014and December 31, 2013, $3.0 billion was outstanding under this credit agreement with $512 million maturing in September 2017, $1.5 billion maturing in January 2018 and $1.0 billion maturing in September 2018. We have also extended a committed revolving credit facility to HSBC Finance of $1.0 billion which did not have any outstanding balance at either September 30, 2014 or December 31, 2013. This credit facility expires in May 2017.

HMUS and subsidiaries - We have extended loans and lines, some of them uncommitted, to HMUS and its subsidiaries in the amount of $6.7 billion and $3.8 billion at September 30, 2014 and December 31, 2013, respectively, of which $559 million and $199 million, respectively, was outstanding. The outstanding balances mature at various stages between 2015 and 2017.

HSBC Bank Brasil S.A. - We have extended uncommitted lines of credit to HSBC Bank Brasil in the amount of $1.3 billion and $1.5 billion at September 30, 2014 and December 31, 2013, respectively, of which $1.1 billion and $1.0 billion, respectively, was outstanding. The outstanding balances mature at various stages between 2015 and 2016.

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

Other short-term affiliate lending - In addition to loans and lines extended to affiliates discussed above, from time to time we may extend loans to affiliates which are generally short term in nature. At September 30, 2014 and December 31, 2013, there were $136 million and $1,114 million, respectively, of these loans outstanding.

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

As part of a global HSBC strategy to offset interest rate or other market risks associated with debt issues and derivative contracts with unaffiliated third parties, we routinely enter into derivative transactions with HSBC Finance and other HSBC affiliates. The notional value of derivative contracts related to these contracts was approximately $1,119.1 billion and $1,210.6 billion at September 30, 2014 and December 31, 2013, respectively. The net credit exposure (defined as the net fair value of derivative assets and liabilities) related to the contracts was approximately $649 million and $845 million at September 30, 2014 and December 31, 2013, respectively. Our Global Banking and Markets business accounts for these transactions on a mark to market basis, with the change in value of contracts with HSBC affiliates substantially offset by the change in value of related contracts entered into with unaffiliated third parties.

Services Provided Between HSBC Affiliates:

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

• Servicing activities for residential mortgage loans across North America are performed both by us and HSBC Finance. As a result, we receive servicing fees from HSBC Finance for services performed on their behalf and pay servicing fees to HSBC Finance for services performed on our behalf. The fees we receive from HSBC Finance are reported in Servicing and other fees from HSBC affiliates. Fees we pay to HSBC Finance are reported in Support services from HSBC affiliates. This includes fees paid for the servicing of residential mortgage loans (with a carrying amount of $867 million and $983 million at September 30, 2014 and December 31, 2013, respectively) that we purchased from HSBC Finance in 2003 and 2004.

• HSBC North America's technology and certain centralized support services including human resources, corporate affairs, risk management, legal, compliance, tax, finance and other shared services that are centralized within HTSU. HTSU also provides certain item processing and statement processing activities to us. The fees we pay HTSU for the centralized support services

46

HSBC USA Inc.

and processing activities are included in Support services from HSBC affiliates. We also receive fees from HTSU for providing certain administrative services to them. The fees we receive from HTSU are included in Servicing and other fees from HSBC affiliates. In certain cases, for facilities used by HTSU, we may guarantee their performance under the lease agreements.

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

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

Other Transactions with HSBC Affiliates

We also received revenue from our affiliates for rent on certain office space, which has been recorded as a component of support services from HSBC affiliates. Rental revenue from our affiliates totaled $14 million and $41 million during the three and nine months ended September 30, 2014, respectively, compared with $12 million and $37 million during the three and nine months ended September 30, 2013, respectively.

14. Business Segments

We have four distinct business segments that we utilize for management reporting and analysis purposes, which are aligned with HSBC's global businesses and business strategy: Retail Banking and Wealth Management ("RBWM"), Commercial Banking ("CMB"), Global Banking and Markets ("GB&M") and Private Banking ("PB"). There have been no changes in the basis of our segmentation or measurement of segment profit as compared with the presentation in our 2013 Form 10-K.

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

A summary of the significant differences between U.S. GAAP and IFRSs as they impact our results are presented in Note 23, "Business Segments," in our 2013 Form 10-K. There have been no significant changes since December 31, 2013 in the differences between U.S. GAAP and IFRSs impacting our results.

47

HSBC USA Inc.

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

	IFRSs Consolidated Amounts
	RBWM			CMB		GB&M			PB			Other			Adjustments/ Reconciling Items			Total			IFRSs Adjustments(4)			IFRSs Reclassi- fications(5)			U.S. GAAP Consolidated Totals
	(in millions)
Three Months Ended September 30, 2014
Net interest income(1)	$	196		$	204	$	74		$	47		$	(2	)	$	8		$	527		$	(20	)	$	36		$	543
Other operating income	98			90		191			28			23			(8		)	422			7			(43		)	386
Total operating income	294			294		265			75			21			—			949			(13		)	(7		)	929
Loan impairment charges(3)	11			29		11			(4		)	—			—			47			(14		)	(10		)	23
	283			265		254			79			21			—			902			1			3			906
Operating expenses(2)	343			169		553			58			30			—			1,153			(222		)	3			934
Profit (loss) before income tax expense	$	(60	)	$	96	$	(299	)	$	21		$	(9	)	$	—		$	(251	)	$	223		$	—		$	(28	)
Three Months Ended September 30, 2013
Net interest income(1)	$	205		$	181	$	78		$	46		$	(6	)	$	(2	)	$	502		$	(17	)	$	7		$	492
Other operating income	81			77		296			27			(38		)	2			445			(8		)	(5		)	432
Total operating income	286			258		374			73			(44		)	—			947			(25		)	2			924
Loan impairment charges(3)	44			26		(3		)	3			—			—			70			(11		)	(5		)	54
	242			232		377			70			(44		)	—			877			(14		)	7			870
Operating expenses(2)	301			169		255			62			31			—			818			9			7			834
Profit (loss) before income tax expense	$	(59	)	$	63	$	122		$	8		$	(75	)	$	—		$	59		$	(23	)	$	—		$	36
Nine Months Ended September 30, 2014
Net interest income(1)	$	606		$	593	$	280		$	152		$	63		$	(1	)	$	1,693		$	(51	)	$	93		$	1,735
Other operating income	315			222		636			78			10			1			1,262			(3		)	(112		)	1,147
Total operating income	921			815		916			230			73			—			2,955			(54		)	(19		)	2,882
Loan impairment charges(3)	34			119		66			(9		)	—			—			210			(62		)	(24		)	124
	887			696		850			239			73			—			2,745			8			5			2,758
Operating expenses(2)	920			501		1,031			174			83			—			2,709			(154		)	5			2,560
Profit (loss) before income tax expense	$	(33	)	$	195	$	(181	)	$	65		$	(10	)	$	—		$	36		$	162		$	—		$	198
Balances at end of period:
Total assets	$	19,339		$	27,769	$	169,686		$	7,670		$	839		$	—		$	225,303		$	(50,353	)	$	62		$	175,012
Total loans, net	16,491			26,626		20,056			5,981			—			—			69,154			1,224			2,430			72,808
Goodwill	581			358		—			325			—			—			1,264			348						1,612
Total deposits	28,515			22,616		32,753			11,221			—			—			95,105			(3,758		)	17,330			108,677

48

HSBC USA Inc.

	IFRSs Consolidated Amounts
	RBWM			CMB		GB&M		PB		Other			Adjustments/ Reconciling Items			Total		IFRSs Adjustments(4)			IFRSs Reclassi- fications(5)			U.S. GAAP Consolidated Totals
	(in millions)
Nine Months Ended September 30, 2013
Net interest income(1)	$	626		$	523	$	312	$	140	$	(34	)	$	(9	)	$	1,558	$	(55	)	$	12		$	1,515
Other operating income	270			219		973		85		13			9			1,569		30			(9		)	1,590
Total operating income	896			742		1,285		225		(21		)	—			3,127		(25		)	3			3,105
Loan impairment charges(3)	97			41		6		4		—			—			148		(15		)	9			142
	799			701		1,279		221		(21		)	—			2,979		(10		)	(6		)	2,963
Operating expenses(2)	892			502		735		189		74			—			2,392		(18		)	(6		)	2,368
Profit (loss) before income tax expense	$	(93	)	$	199	$	544	$	32	$	(95	)	$	—		$	587	$	8		$	—		$	595
Balances at end of period:
Total assets	$	19,297		$	22,571	$	190,174	$	7,996	$	804		$	—		$	240,842	$	(53,563	)	$	96		$	187,375
Total loans, net	16,221			21,414		19,521		5,869		—			—			63,025		1,794			2,296			67,115
Goodwill	581			358		480		325		—			—			1,744		484			—			2,228
Total deposits	30,594			21,614		34,306		11,875		—			—			98,389		(4,491		)	19,023			112,921

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

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

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

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

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

49

HSBC USA Inc.

15. Retained Earnings and Regulatory Capital Requirements

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

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

	September 30, 2014						December 31, 2013
	Capital Amount		Well-Capitalized Minimum Ratio(1)(2)		Actual Ratio		Capital Amount		Well-Capitalized Minimum Ratio(1)			Actual Ratio(3)
	(dollars are in millions)
Total capital ratio:
HSBC USA	$	20,885	10.00	%	16.00	%	$	20,242	10.00	%		16.36	%
HSBC Bank USA	22,616		10.00	%	17.98		21,324		10.00	%		18.03
Tier 1 capital ratio:
HSBC USA	15,124		6.00		11.58		14,409		6.00			11.65
HSBC Bank USA	17,116		8.00		13.61		15,763		6.00			13.33
Common equity Tier 1 ratio(4):
HSBC USA	13,647		4.50		10.45		12,301		5.00		(5)	9.94
HSBC Bank USA	17,116		6.50		13.61		15,763		5.00			13.33
Tier 1 leverage ratio:
HSBC USA	15,124		4.00		8.56		14,409		3.00		(6)	7.90
HSBC Bank USA	17,116		5.00		10.09		15,763		5.00			9.06
Risk weighted assets:
HSBC USA	130,561						123,737
HSBC Bank USA	125,768						118,285

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

⁽²⁾  As previously discussed, the minimum regulatory ratios for a depository institution to be well-capitalized will increase in 2015 under Basel III, and the new ratios are shown above. The total capital and Tier 1 capital ratios shown above for HSBC USA are the well-capitalized ratios for a bank holding company. There are no common equity Tier 1 or Tier 1 leverage ratio components in the definition of a well-capitalized bank holding company and the ratios shown are the required minimum ratios beginning in 2015.

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

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

⁽⁵⁾  There was no Tier 1 common ratio component in the definition of a well-capitalized bank holding company under Basel I. The ratio shown is the required minimum Tier 1 common ratio, calculated under Basel I, as included in the Federal Reserve Board's final rule regarding capital plans for U.S. bank holding companies with total consolidated assets of $50 billion or more.

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

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

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

50

HSBC USA Inc.

16. Variable Interest Entities

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

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

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

Consolidated VIEs  The following table summarizes assets and liabilities related to our consolidated VIEs as of September 30, 2014 and December 31, 2013 which are consolidated on our balance sheets. Assets and liabilities exclude intercompany balances that eliminate in consolidation.

	September 30, 2014				December 31, 2013
	Consolidated Assets		Consolidated Liabilities		Consolidated Assets		Consolidated Liabilities
	(in millions)
Asset-backed commercial paper conduit:
Interest bearing deposits with banks	3		—		5		—
Held-to-maturity securities	76		—		200		—
Other assets	37		—		45		—
Other liabilities	—		—		—		3
Subtotal	116		—		250		3
Low income housing limited liability partnership:
Other assets	399		—		457		—
Long-term debt	—		92		—		92
Other liabilities	—		81		—		90
Subtotal	$	399	$	173	$	457	$	182
Total	$	515	$	173	$	707	$	185

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

Low income housing limited liability partnershipIn 2009, all low income housing investments held by us at the time were transferred to a Limited Liability Partnership ("LLP") in exchange for debt and equity while a third party invested cash for an

51

HSBC USA Inc.

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

Unconsolidated VIEs  We also have variable interests in other VIEs that are not consolidated because we are not the primary beneficiary. The following table provides additional information on these unconsolidated VIEs, including the variable interests held by us and our maximum exposure to loss arising from our involvements in these VIEs, as of September 30, 2014 and December 31, 2013:

	Variable Interests Held Classified as Assets		Variable Interests Held Classified as Liabilities		Total Assets in Unconsolidated VIEs		Maximum Exposure to Loss
	(in millions)
At September 30, 2014
Asset-backed commercial paper conduits	$	59	$	—	$	10,673	$	2,354
Structured note vehicles	2,830		8		5,899		5,885
Low income housing partnerships	5		4		5		5
Total	$	2,894	$	12	$	16,577	$	8,244
At December 31, 2013
Asset-backed commercial paper conduits	$	417	$	—	$	17,044	$	2,560
Structured note vehicles	2,272		55		6,190		5,888
Total	$	2,689	$	55	$	23,234	$	8,448

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

Asset-backed commercial paper ("ABCP") conduitsSeparately from the Bryant Park facility discussed above, we provide liquidity facilities to Regency, a multi-seller ABCP conduit consolidated by our affiliate. Customers sell financial assets, such as trade receivables, to Regency, which funds the purchases by issuing short-term highly-rated commercial paper collateralized by the assets acquired. We, along with other financial institutions, provide liquidity facilities to Regency in the form of lines of credit or asset purchase commitments. These liquidity facilities support transactions associated with a specific seller of assets to the conduit and we would only be required to provide support in the event of certain triggers associated with those transactions and assets. Our obligations are generally pari passu with those of other institutions that also provide liquidity support to the same conduit or for the same transactions. We do not provide any program-wide credit enhancements to ABCP conduits.

Each seller of assets to an ABCP conduit typically provides credit enhancements in the form of asset overcollateralization and, therefore, bears the risk of first loss related to the specific assets transferred. We do not transfer our own assets to Regency. We also do not provide the majority of the liquidity facilities to Regency. We have no ownership interests in, perform no administrative duties for, and do not service any of the assets held by Regency. We are not the primary beneficiary and do not consolidate Regency. Credit risk related to the liquidity facilities provided is managed by subjecting these facilities to our normal underwriting and risk management processes. The $2,354 million maximum exposure to loss presented in the table above represents the maximum amount of loans and asset purchases we could be required to fund under the liquidity facilities. The maximum loss exposure is estimated assuming the facilities are fully drawn and the underlying collateralized assets are in default with zero recovery value.

Structured note vehiclesOur involvement in structured note vehicles includes derivatives such as interest rate and currency swaps and investments in the vehicles' debt instruments. With respect to several of these VIEs, we hold variable interests in the form of total return swaps under which we receive the total return on certain assets held by the VIE and pay a market rate of return.

We also hold credit default swaps with these structured note VIEs under which we receive credit protection on specified reference assets in exchange for the payment of a premium. Through these derivatives, the VIEs assume the credit risk associated with the reference assets which are then passed on to the holders of the debt instruments they issue. Because they create rather than absorb variability, the credit default swaps we hold are not considered variable interests. In limited circumstances, we entered into total

52

HSBC USA Inc.

return swaps taking on the risks and benefits of certain structured notes issued by unconsolidated VIEs. The same risks and benefits are passed on to third party entities through back-end total return swaps. We earn a spread for facilitating the transaction. Our maximum exposure to loss is the notional amount of the structured notes covered by the swap. The maximum exposure to loss will occur in the unlikely scenario where the value of the structured notes is reduced to zero and, at the same time, the counterparty of the back-end swap defaults with zero recovery.

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

Low income housing partnerships Separately from the low income housing LLP discussed above, we invest as a limited partner in a low-income housing partnership that operates qualified affordable housing projects and generates tax benefits, including federal low-income housing tax credits, for investors. The partnership is deemed to be a VIE because it does not have sufficient equity investment at risk and is structured with non-substantive voting rights. We are not the primary beneficiary of the VIE and do not consolidate it.

Our investment in the low-income housing partnership is recorded in other assets on the consolidated balance sheet. As a practical expedient, we amortize the investment in proportion to the allocated tax credits under the proportional amortization method of accounting. The maximum exposure to loss shown in the table above represents our recorded investment.

Beneficial interests issued by third-party sponsored securitization entitiesWe hold certain beneficial interests such as mortgage-backed securities issued by third party sponsored securitization entities which may be considered VIEs. The investments are transacted at arm's-length and decisions to invest are based on a credit analysis of the underlying collateral assets or the issuer. We are a passive investor in these issuers and do not have the power to direct the activities of these issuers. As such, we do not consolidate these securitization entities. Additionally, we do not have other involvements in servicing or managing the collateral assets or provide financial or liquidity support to these issuers which potentially give rise to risk of loss exposure. These investments are an integral part of the disclosure in Note 3, "Securities," and Note 18, "Fair Value Measurements," and, therefore, are not disclosed in this note to avoid redundancy.

17. Guarantee Arrangements, Pledged Assets and Collateral

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

The following table presents total carrying value and contractual amounts of our sell protection credit derivatives and major off-balance sheet guarantee arrangements as of September 30, 2014 and December 31, 2013. Following the table is a description of the various arrangements.

	September 30, 2014				December 31, 2013
	Carrying Value		Notional/Maximum Exposure to Loss		Carrying Value		Notional/Maximum Exposure to Loss
	(in millions)
Credit derivatives(1)(4)	$	569	$	171,067	$	545	$	180,380
Financial standby letters of credit, net of participations(2)(3)	—		5,612		—		5,237
Performance (non-financial) guarantees(3)	—		3,037		—		3,172
Liquidity asset purchase agreements(3)	—		2,354		—		2,560
Total	$	569	$	182,070	$	545	$	191,349

⁽¹⁾  Includes $36,672 million and $34,856 million of notional issued for the benefit of HSBC affiliates at September 30, 2014 and December 31, 2013, respectively.

⁽²⁾  Includes $932 million and $865 million issued for the benefit of HSBC affiliates at September 30, 2014 and December 31, 2013, respectively.

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

53

HSBC USA Inc.

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

Credit-Risk Related Guarantees

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

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

We manage our exposure to credit derivatives using a variety of risk mitigation strategies where we enter into offsetting hedge positions or transfer the economic risks, in part or in entirety, to investors through the issuance of structured credit products. We actively manage the credit and market risk exposure in the credit derivative portfolios on a net basis and, as such, retain no or a limited net sell protection position at any time. The following table summarizes our net credit derivative positions as of September 30, 2014 and December 31, 2013:

	September 30, 2014						December 31, 2013
	Carrying (Fair) Value			Notional			Carrying (Fair) Value			Notional
	(in millions)
Sell-protection credit derivative positions	$	569		$	171,067		$	545		$	180,380
Buy-protection credit derivative positions	(417		)	175,727			(505		)	174,906
Net position(1)	$	152		$	(4,660	)	$	40		$	5,474

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

Standby letters of credit  A standby letter of credit is issued to a third party for the benefit of a customer and is a guarantee that the customer will perform or satisfy certain obligations under a contract. It irrevocably obligates us to pay a specified amount to the third party beneficiary if the customer fails to perform the contractual obligation. We issue two types of standby letters of credit: performance and financial. A performance standby letter of credit is issued where the customer is required to perform some nonfinancial contractual obligation, such as the performance of a specific act, whereas a financial standby letter of credit is issued where the customer's contractual obligation is of a financial nature, such as the repayment of a loan or debt instrument. As of September 30, 2014, the total amount of outstanding financial standby letters of credit (net of participations) and performance guarantees were $5,612 million and $3,037 million, respectively. As of December 31, 2013, the total amount of outstanding financial standby letters of credit (net of participations) and performance guarantees were $5,237 million and $3,172 million, respectively.

The issuance of a standby letter of credit is subject to our credit approval process and collateral requirements. We charge fees for issuing letters of credit commensurate with the customer's credit evaluation and the nature of any collateral. Included in other liabilities are deferred fees on standby letters of credit, which represent the value of the stand-ready obligation to perform under these guarantees, amounting to $41 million and $46 million at September 30, 2014 and December 31, 2013, respectively. Also included in other liabilities is an allowance for credit losses on unfunded standby letters of credit of $19 million and $18 million at September 30, 2014 and December 31, 2013, respectively.

54

HSBC USA Inc.

The following table summarizes the credit ratings of credit risk related guarantees including the credit ratings of counterparties against which we sold credit protection and financial standby letters of credit as of September 30, 2014 as an indicative proxy of payment risk:

	Average Life (in years)	Credit Ratings of the Obligors or the Transactions
Notional/Contractual Amounts		Investment       Grade		Non-Investment Grade		Total
	(dollars are in millions)
Sell-protection Credit Derivatives(1)
Single name credit default swaps ("CDS")	2.4	$	105,388	$	21,741	$	127,129
Structured CDS	1.9	14,811		2,386		17,197
Index credit derivatives	2.5	15,997		6,812		22,809
Total return swaps	3.0	3,521		411		3,932
Subtotal		139,717		31,350		171,067
Standby Letters of Credit(2)	1.0	6,419		2,230		8,649
Total		$	146,136	$	33,580	$	179,716

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

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

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

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

Mortgage Loan Repurchase Obligations

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

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

55

HSBC USA Inc.

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

	September 30, 2014		December 31, 2013
	(in millions)
GSEs	$	2	$	41
Others	1		3
Total	$	3	$	44

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

The following table summarizes the change in our estimated repurchase liability for loans sold to the GSEs and other third parties during the three and nine months ended September 30, 2014 and 2013 for obligations arising from the breach of representations and warranties associated with the sale of these loans:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Balance at beginning of period	$	34		$	217		$	99		$	219
Increase (decrease) in liability recorded through earnings	(4		)	—			(38		)	36
Realized losses	—			(19		)	(31		)	(57		)
Balance at end of period	$	30		$	198		$	30		$	198

Our remaining mortgage repurchase liability of $30 million at September 30, 2014 represents our best estimate of the loss that has been incurred including interest, resulting from various representations and warranties in the contractual provisions of our mortgage loan sales adjusted for settlements reached with counterparties. Because the level of mortgage loan repurchase losses is dependent upon economic factors, investor demand strategies and other external risk factors such as housing market trends that may change, the level of the liability for mortgage loan repurchase losses requires significant judgment. We have seen recent changes in investor demand trends, including significantly lower levels of demands received, and continue to evaluate our methods of determining the best estimate of loss based on these recent trends. As these estimates are influenced by factors outside our control, there is uncertainty inherent in these estimates making it reasonably possible that they could change. The range of reasonably possible losses in excess of our recorded repurchase liability is between zero and $25 million at September 30, 2014. This estimated range of reasonably possible losses was determined based upon modifying the assumptions utilized in our best estimate of probable losses to reflect what we believe to be reasonably possible adverse assumptions.

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

Liquidity asset purchase agreements  We provide liquidity facilities to Regency, a multi-seller ABCP conduit consolidated by our affiliate. Regency finances the purchase of individual assets by issuing commercial paper to third party investors. Each liquidity facility is transaction specific and has a maximum limit. Pursuant to the liquidity agreements, we are obligated, subject to certain limitations, to advance funds in an amount not to exceed the face value of the commercial paper in the event Regency is unable or unwilling to refinance its commercial paper. A liquidity asset purchase agreement is economically a conditional written put option issued to the conduit where the exercise price is the face value of the commercial paper. As of September 30, 2014 and December 31, 2013, we had issued $2,354 million and $2,560 million, respectively, of liquidity facilities to provide liquidity support to ABCP conduits. See Note 16, "Variable Interest Entities," for further information.

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

56

HSBC USA Inc.

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

	September 30, 2014		December 31, 2013
	(in millions)
Interest bearing deposits with banks	$	374	$	355
Trading assets(1)	2,086		1,296
Securities available-for-sale(2)	15,208		21,346
Securities held-to-maturity	1,140		362
Loans(3)	3,603		3,969
Other assets(4)	2,325		2,904
Total	$	24,736	$	30,232

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

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

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

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

Debt securities pledged as collateral that can be sold or repledged by the secured party continue to be reported on the consolidated balance sheet. The fair value of securities available-for-sale that can be sold or repledged was $5,149 million and $10,950 million at September 30, 2014 and December 31, 2013, respectively. The fair value of trading assets that can be sold or repledged was $2,086 million and $1,296 million at September 30, 2014 and December 31, 2013, respectively.

The fair value of collateral we accepted but not reported on the consolidated balance sheet that can be sold or repledged was $4,895 million and $4,187 million at September 30, 2014 and December 31, 2013, respectively. This collateral was obtained under security resale agreements. Of this collateral, $3,597 million and $2,771 million has been sold or repledged as collateral under repurchase agreements or to cover short sales at September 30, 2014 and December 31, 2013, respectively.

Securitization Activity  In addition to the repurchase risk described above, we have also been involved as a sponsor/seller of loans used to facilitate whole loan securitizations underwritten by our affiliate, HSI. In this regard, we began acquiring residential mortgage loans in 2005 which were warehoused on our balance sheet with the intent of selling them to HSI to facilitate HSI’s whole loan securitization program which was discontinued in 2007. During 2005-2007, we purchased and sold $24 billion of such loans to HSI which were subsequently securitized and sold by HSI to third parties. See "Mortgage Securitization Activity and Litigation" in Note 19, "Litigation and Regulatory Matters," for additional discussion of related exposure.

57

HSBC USA Inc.

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

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

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

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

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

					Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts Recognized		Gross Amounts Offset in the Balance Sheet(1)	Net Amounts Presented in the Balance Sheet	Financial Instruments (2)	Cash Collateral Received / Pledged	Net Amount (3)
	(in millions)
As of September 30, 2014:
Assets:
Securities purchased under agreements to resell	$	5,295	4,199	1,096	1,096	—	$	—
Liabilities:
Securities sold under repurchase agreements	$	10,833	4,199	6,634	6,634	—	$	—
As of December 31, 2013:
Assets:
Securities purchased under agreements to resell	$	4,187	2,068	2,119	2,118	—	$	1
Liabilities:
Securities sold under repurchase agreements	$	14,989	2,068	12,921	12,913	—	$	8

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

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

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

58

HSBC USA Inc.

18. Fair Value Measurements

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

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

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

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

Liquidity risk adjustment - The liquidity risk adjustment (primarily in the form of bid-offer adjustment) reflects the cost that would be incurred to close out the market risks by hedging, disposing or unwinding the position. Valuation models generally produce mid market values. The bid-offer adjustment is made in such a way that results in a measure that reflects the exit price that most represents the fair value of the financial asset or financial liability under consideration or, where applicable, the fair value of the net market risk exposure of a group of financial assets or financial liabilities. These adjustments relate primarily to Level 2 assets.

Model valuation adjustment - Where fair value measurements are determined using an internal valuation model based on observable and unobservable inputs, certain valuation inputs may be less readily determinable. There may be a range of possible valuation inputs that market participants may assume in determining the fair value measurement. The resultant fair value measurement has inherent measurement risk if one or more parameters are unobservable and must be estimated. An input valuation adjustment is necessary to reflect the likelihood that market participants may use different input parameters, and to mitigate the possibility of measurement error. In addition, the values derived from valuation techniques are affected by the choice of valuation model and model limitation. When different valuation techniques are available, the choice of valuation model can be subjective. Furthermore, the valuation model applied may have measurement limitations. In those cases, an additional valuation adjustment is also applied to mitigate the measurement risk. Model valuation adjustments are not material and relate primarily to Level 2 instruments.

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

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

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

59

HSBC USA Inc.

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

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

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

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

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

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

The following factors are considered in determining fair values:

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

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

▪ consistency among different pricing sources;

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

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

▪ the source of the fair value information; and

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

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

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

60

HSBC USA Inc.

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

September 30, 2014	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Short-term financial assets	$	27,443	$	27,443	$	1,013	$	26,379	$	51
Federal funds sold and securities purchased under resale agreements	1,096		1,096		—		1,096		—
Non-derivative trading assets	17,453		17,453		1,958		12,397		3,098
Derivatives	6,094		6,094		22		6,029		43
Securities	41,934		42,022		21,744		20,278		—
Commercial loans, net of allowance for credit losses	53,650		55,333		—		—		55,333
Commercial loans designated under fair value option and held for sale	69		69		—		69		—
Commercial loans held for sale	154		154		—		154		—
Consumer loans, net of allowance for credit losses	19,158		17,311		—		—		17,311
Consumer loans held for sale:
Residential mortgages	38		38		—		17		21
Other consumer	66		66		—		—		66
Financial liabilities:
Short-term financial liabilities	$	11,933	$	11,933	$	—	$	11,882	$	51
Deposits:
Without fixed maturities	98,939		98,939		—		98,939		—
Fixed maturities	2,201		2,204		—		2,204		—
Deposits designated under fair value option	7,537		7,537		—		5,632		1,905
Non-derivative trading liabilities	3,625		3,625		412		3,213		—
Derivatives	6,332		6,332		5		6,305		22
Long-term debt	16,338		16,919		—		16,919		—
Long-term debt designated under fair value option	8,696		8,696		—		8,064		632

61

HSBC USA Inc.

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

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

Assets and Liabilities Recorded at Fair Value on a Recurring Basis  The following table presents information about our assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:

62

HSBC USA Inc.

	Fair Value Measurements on a Recurring Basis
September 30, 2014	Level 1		Level 2		Level 3		Gross Balance		Netting(1)			Net Balance
	(in millions)
Assets:
Trading Securities, excluding derivatives:
U.S. Treasury, U.S. Government agencies and sponsored enterprises	$	1,958	$	97	$	—	$	2,055	$	—		$	2,055
Obligations of U.S. States and political subdivisions	—		611		—		611		—			611
Collateralized debt obligations	—		—		269		269		—			269
Asset-backed securities:
Residential mortgages	—		149		—		149		—			149
Student Loans	—		84		—		84		—			84
Corporate and other domestic debt securities	—		—		2,829		2,829		—			2,829
Debt Securities issued by foreign entities:
Corporate	—		274		—		274		—			274
Government-backed	—		3,162		—		3,162		—			3,162
Equity securities	—		22		—		22		—			22
Precious metals trading	—		7,998		—		7,998		—			7,998
Derivatives(2):
Interest rate contracts	39		40,658		4		40,701		—			40,701
Foreign exchange contracts	—		18,046		13		18,059		—			18,059
Equity contracts	—		1,995		131		2,126		—			2,126
Precious metals contracts	203		1,306		—		1,509		—			1,509
Credit contracts	—		3,989		318		4,307		—			4,307
Derivatives netting	—		—		—		—		(60,608		)	(60,608		)
Total derivatives	242		65,994		466		66,702		(60,608		)	6,094
Securities available-for-sale:
U.S. Treasury, U.S. Government agencies and sponsored enterprises	21,744		2,609		—		24,353		—			24,353
Obligations of U.S. states and political subdivisions	—		706		—		706		—			706
Asset-backed securities:
Residential mortgages	—		1		—		1		—			1
Commercial mortgages	—		60		—		60		—			60
Home equity	—		92		—		92		—			92
Other	—		95		—		95		—			95
Debt Securities issued by foreign entities:
Corporate	—		859		—		859		—			859
Government-backed	—		3,470		—		3,470		—			3,470
Equity securities	—		165		—		165		—			165
Loans(3)	—		69		—		69		—			69
Mortgage servicing rights(4)	—		—		182		182		—			182
Total assets	$	23,944	$	86,517	$	3,746	$	114,207	$	(60,608	)	$	53,599
Liabilities:
Deposits in domestic offices(5)	$	—	$	5,632	$	1,905	$	7,537	$	—		$	7,537
Trading liabilities, excluding derivatives	412		3,213		—		3,625		—			3,625
Derivatives(2):
Interest rate contracts	33		41,057		—		41,090		—			41,090
Foreign exchange contracts	9		17,172		16		17,197		—			17,197
Equity contracts	—		1,492		118		1,610		—			1,610
Precious metals contracts	5		784		—		789		—			789
Credit contracts	—		4,123		97		4,220		—			4,220
Derivatives netting	—		—		—		—		(58,574		)	(58,574		)
Total derivatives	47		64,628		231		64,906		(58,574		)	6,332
Long-term debt(6)	—		8,064		632		8,696		—			8,696
Total liabilities	$	459	$	81,537	$	2,768	$	84,764	$	(58,574	)	$	26,190

63

HSBC USA Inc.

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

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

64

HSBC USA Inc.

⁽²⁾  Includes trading derivative assets of $4,646 million and $5,991 million and trading derivative liabilities of $5,552 million and $6,741 million as of September 30, 2014 and December 31, 2013, respectively, as well as derivatives held for hedging and commitments accounted for as derivatives.

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

⁽⁴⁾  See Note 7, "Intangible Assets," for additional information.

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

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

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

Transfers between Levels 1 and 2 Measurements  There were no transfers between Levels 1 and 2 during the three and nine months ended September 30, 2014 and 2013.

Information on Level 3 assets and liabilities  The following table summarizes additional information about changes in the fair value of Level 3 assets and liabilities during the three and nine months ended September 30, 2014 and 2013. As a risk management practice, we may risk manage the Level 3 assets and liabilities, in whole or in part, using securities and derivative positions that are classified as Level 1 or Level 2 measurements within the fair value hierarchy. Since those Level 1 and Level 2 risk management positions are not included in the table below, the information provided does not reflect the effect of such risk management activities related to the Level 3 assets and liabilities.

	Jul.  1, 2014			Total Gains and  (Losses) Included in(1)					Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Sep. 30, 2014			Current Period Unrealized Gains (Losses)
				Trading Revenue (Loss)			Other Revenue
	(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations	$	260		$	20		$	—	$	—	$	—		$	(11	)	$	—		$	—		$	269		$	19
Corporate and other domestic debt securities	2,819			—			—		10		—			—			—			—			2,829			—
Government debt securities issued by foreign entities	—			—			—		—		—			—			—			—			—			—
Derivatives, net(2):
Interest rate contracts	—			4			—		—		—			—			—			—			4			3
Foreign exchange contracts				(3		)	—		—		—			—			—			—			(3		)	(3		)
Equity contracts	59			(21		)	—		—		—			(23		)	(1		)	(1		)	13			(32		)
Precious metals contracts	—			—			—		—		—			—			—			—			—			—
Credit contracts	257			(31		)	—		—		—			(5		)	—			—			221			(36		)
Mortgage servicing rights(3)	186			—			2		—		—			(6		)	—			—			182			2
Total assets	$	3,581		$	(31	)	$	2	$	10	$	—		$	(45	)	$	(1	)	$	(1	)	$	3,515		$	(47	)
Liabilities:
Deposits in domestic offices	$	(2,257	)	$	(2	)	$	—	$	—	$	(111	)	$	129		$	(59	)	$	395		(1,905		)	$	26
Long-term debt	(738		)	27			—		—		(82		)	82			(2		)	81			(632		)	9
Total liabilities	$	(2,995	)	$	25		$	—	$	—	$	(193	)	$	211		$	(61	)	$	476		$	(2,537	)	$	35

65

HSBC USA Inc.

	Jan. 1, 2014			Total Gains and  (Losses) Included in(1)						Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Sep. 30, 2014			Current Period Unrealized Gains (Losses)
				Trading Revenue (Loss)			Other Revenue
	(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations	$	254		$	34		$	—		$	—	$	—		$	(19	)	$	—		$	—		$	269		$	31
Corporate and other domestic debt securities	2,260			(5		)	—			574		—			—			—			—			2,829			(4		)
Government debt securities issued by foreign entities	121			5			—			—		—			(7		)	—			(119		)	—			—
Derivatives, net(2):
Interest rate contracts	1			3			—			—		—			—			—			—			4			3
Foreign exchange contracts	95			7			—			—		—			(12		)	—			(93		)	(3		)	(1		)
Equity contracts	3			65			—			—		—			(59		)	7			(3		)	13			8
Precious metals contracts	(2		)	2			—			—		—			—			—			—			—			—
Credit contracts	191			(86		)	—			—		—			2			—			114			221			(134		)
Mortgage servicing rights(3)	227			—			(22		)	—		—			(23		)	—			—			182			(22		)
Total assets	$	3,150		$	25		$	(22	)	$	574	$	—		$	(118	)	$	7		$	(101	)	$	3,515		$	(119	)
Liabilities:
Deposits in domestic offices	$	(2,334	)	$	(211	)	$	—		$	—	$	(271	)	$	428		$	(108	)	$	591		(1,905		)	$	(10	)
Long-term debt	(900		)	121			—			—		(234		)	202			(2		)	181			(632		)	(15		)
Total liabilities	$	(3,234	)	$	(90	)	$	—		$	—	$	(505	)	$	630		$	(110	)	$	772		$	(2,537	)	$	(25	)

66

HSBC USA Inc.

	Jul.  1, 2013			Total Gains and  (Losses) Included in(1)						Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Sep. 30, 2013			Current Period Unrealized Gains (Losses)
				Trading Revenue (Loss)			Other Revenue
	(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations	$	227		$	21		$	—		$	—	$	—		$	(3	)	$	—		$	—		$	245		$	20
Corporate and other domestic debt securities	1,498			—			—			15		—			—			—			—			1,513			—
Corporate debt securities issued by foreign entities	285			6			—			—		—			(99		)	—			—			192			6
Government debt securities issued by foreign entities	135			(7		)	—			—		—			(7		)	—			—			121			(8		)
Equity securities	—			—			—			—		—			—			—			—			—			—
Derivatives, net(2):
Interest rate contracts	(1		)	—			2			—		—			—			—			—			1			2
Foreign exchange contracts	104			6			—			—		—			(6		)	1			—			105			—
Equity contracts	(83		)	50			—			—		—			(5		)	4			(4		)	(38		)	47
Precious metals contracts	—			(1		)	—			—		—			—			—			—			(1		)	(1		)
Credit contracts	225			(26		)	—			—		—			14			—			—			213			(18		)
Mortgage servicing rights(3)	225			—			(1		)	—		—			—			—			—			224			(1		)
Total assets	$	2,615		$	49		$	1		$	15	$	—		$	(106	)	$	5		$	(4	)	$	2,575		$	47
Liabilities:
Deposits in domestic offices	$	(2,448	)	$	(33	)	$	—		$	—	$	(73	)	$	85		$	(84	)	$	79		(2,474		)	$	(18	)
Long-term debt	(672		)	(9		)	—			—		(156		)	83			(25		)	24			(755		)	(18		)
Total liabilities	$	(3,120	)	$	(42	)	$	—		$	—	$	(229	)	$	168		$	(109	)	$	103		$	(3,229	)	$	(36	)

67

HSBC USA Inc.

	Jan. 1, 2013			Total Gains and  (Losses) Included in(1)						Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Sep. 30, 2013			Current Period Unrealized Gains (Losses)
				Trading Revenue (Loss)			Other Revenue
	(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations	$	466		$	139		$	—		$	236	$	—		$	(596	)	$	—		$	—		$	245		$	137
Corporate and other domestic debt securities	1,861			28			—			46		—			(422		)	—			—			1,513			28
Corporate debt securities issued by foreign entities	299			(8		)	—			—		—			(99		)	—			—			192			(8		)
Government debt securities issued by foreign entities	311			14			—			—		—			(204		)	—			—			121			2
Equity securities	9			(5		)	—			—		—			(4		)	—			—			—			(5		)
Derivatives, net(2):
Interest rate contracts	7			—			(6		)	—		—			—			—			—			1			(7		)
Foreign exchange contracts	5			2			—			—		—			110			(12		)	—			105			107
Equity contracts	(7		)	30			—			—		—			(52		)	16			(25		)	(38		)	(28		)
Precious metals contracts	—			(1		)	—			—		—			—			—			—			(1		)	(1		)
Credit contracts	571			(186		)	—			—		—			(126		)	(46		)	—			213			(287		)
Mortgage servicing rights(3)	168			—			45			—		11			—			—			—			224			45
Total assets	$	3,690		$	13		$	39		$	282	$	11		$	(1,393	)	$	(42	)	$	(25	)	$	2,575		$	(17	)
Liabilities:
Deposits in domestic offices	$	(2,635	)	$	333		$	—		$	—	$	(558	)	$	304		$	(241	)	$	323		(2,474		)	$	133
Long-term debt	(429		)	(268		)	—			—		(425		)	188			(25		)	204			(755		)	(228		)
Total liabilities	$	(3,064	)	$	65		$	—		$	—	$	(983	)	$	492		$	(266	)	$	527		$	(3,229	)	$	(95	)

⁽¹⁾  Includes realized and unrealized gains and losses.

⁽²⁾  Level 3 net derivatives included derivative assets of $466 million and derivative liabilities of $231 million as of September 30, 2014 and derivative assets of $897 million and derivative liabilities of $618 million as of September 30, 2013.

⁽³⁾  See Note 7, "Intangible Assets," for additional information.

68

HSBC USA Inc.

The following table presents quantitative information about the unobservable inputs used to determine the recurring fair value measurement of assets and liabilities classified as Level 3 fair value measurements as of September 30, 2014 and December 31, 2013:

September 30, 2014
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Collateralized debt obligations	269		Broker quotes or consensus pricing and, where applicable, discounted cash flows	Prepayment rates	1% - 6%
				Conditional default rates	6% - 12%
				Loss severity rates	90% - 91%
Corporate and other domestic debt securities	2,829		Discounted cash flows	Spread volatility on collateral assets	1% - 3%
				Correlation between insurance claim shortfall and collateral value	80%
Interest rate derivative contracts	4		Market comparable adjusted for probability to fund	Probability to fund for rate lock commitments	5% - 98%
				Probability to fund for deal contingent swaps	90% - 100%
Foreign exchange derivative contracts(1)	(3	)	Option pricing model	Implied volatility of currency pairs	13% - 18%
Equity derivative contracts(1)	13		Option pricing model	Equity / Equity Index volatility	8% - 48%
				Equity / Equity and Equity / Index correlation	47% - 73%
Credit derivative contracts	221		Option pricing model	Correlation of defaults of a portfolio of reference credit names	51% - 62%
				Issuer by issuer correlation of defaults	82% - 83%
Mortgage servicing rights	182		Option adjusted discounted cash flows	Constant prepayment rates	8% - 45%
				Option adjusted spread	8% - 19%
				Estimated annualized costs to service	$91 - $333 per account
Deposits in domestic offices (structured deposits)(1)(2)	(1,905	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	13% - 18%
				Equity / Equity Index volatility	8% - 48%
				Equity / Equity and Equity / Index correlation	47% - 73%
Long-term debt (structured notes)(1)(2)	(632	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	13% - 18%
				Equity / Equity Index volatility	8% - 48%
				Equity / Equity and Equity / Index correlation	47% - 73%

69

HSBC USA Inc.

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

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

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

Significant Unobservable Inputs for Recurring Fair Value Measurements

Collateralized Debt Obligations (CDOs)

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

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

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

70

HSBC USA Inc.

Derivatives

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

▪ Implied volatility - The implied volatility is a significant pricing input for freestanding or embedded options including equity, foreign currency and interest rate options. The level of volatility is a function of the nature of the underlying risk, the level of strike price and the years to maturity of the option. Depending on the underlying risk and tenure, we determine the implied volatility based on observable input where information is available. However, substantially all of the implied volatilities are derived based on historical information. The implied volatility for different foreign currency pairs is between 13 percent and 18 percent while the implied volatility for equity/equity or equity/equity index is between 8 percent and 48 percent, respectively at September 30, 2014. Although implied foreign currency volatility and equity volatility appear to be widely distributed at the portfolio level, the deviation of implied volatility on a trade-by-trade basis is narrower. The average deviation of implied volatility for the foreign currency pair and at-the-money equity option are 4 percent and 5 percent, respectively at September 30, 2014.

▪ Correlations of a group of foreign currency or equity - Correlation measures the relative change in values among two or more variables (i.e., equity or foreign currency pair). Variables can be positively or negatively correlated. Correlation is a key input in determining the fair value of a derivative referenced to a basket of variables such as equities or foreign currencies. A majority of the correlations are not observable, but are derived based on historical data. The correlation between equity/equity and equity/equity index was between 47 percent and 73 percent at September 30, 2014.

Sensitivity of Level 3 Inputs to Fair Value Measurements

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

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

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

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

Significant Transfers Into and Out of Level 3 Measurements During the three and nine months ended September 30, 2014, we transferred $395 million and $591 million, respectively, of deposits in domestic offices and $81 million and $181 million, respectively, of long-term debt, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer to maturity and there is more observability in short term volatility. During the second quarter of 2014, we transferred $119 million of government debt securities issued by foreign governments from Level 3 to Level 2 due to the availability of inputs in the market including independent pricing service valuations. Additionally, during the three and nine months ended September 30, 2014, we transferred $59 million and $108 million, respectively, of deposits in domestic offices, which we have elected to carry at fair value, from Level 2 to Level 3 as a result of a change in the observability of underlying instruments that resulted in the embedded derivative being unobservable.

During the three and nine months ended September 30, 2013, we transferred $79 million and $323 million, respectively, of deposits in domestic offices and $24 million and $204 million, respectively, of long-term debt, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer in maturity and there is more observability in short term volatility. Additionally, during the three and nine months ended September 30, 2013, we transferred $84 million and $241 million, respectively, of deposits in domestic offices, which we have elected to

71

HSBC USA Inc.

carry at fair value, from Level 2 to Level 3 as a result of a change in the observability of underlying instruments that resulted in the embedded derivative being unobservable.

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

	Non-Recurring Fair Value Measurements as of September 30, 2014								Total Gains (Losses) For the Three Months Ended September 30, 2014			Total Gains (Losses) For the Nine Months Ended September 30, 2014
	Level 1		Level 2		Level 3		Total
	(in millions)
Residential mortgage loans held for sale(1)	$	—	$	3	$	21	$	24	$	(1	)	$	(1	)
Impaired commercial loans(2)	—		—		19		19		3			6
Consumer loans(3)	—		139		—		139		(10		)	(33		)
Real estate owned(4)	—		19		—		19		2			4
Commercial loans held for sale(5)	—		80		—		80		—			(7		)
Total assets at fair value on a non-recurring basis	$	—	$	241	$	40	$	281	$	(6	)	$	(31	)

	Non-Recurring Fair Value Measurements as of December 31, 2013								Total Gains (Losses) For the Three Months Ended September 30, 2013			Total Gains (Losses) For the Nine Months Ended September 30, 2013
	Level 1		Level 2		Level 3		Total
	(in millions)
Residential mortgage loans held for sale(1)	$	—	$	9	$	56	$	65	$	(14	)	$	(4	)
Impaired commercial loans(2)	—		—		108		108		19			17
Consumer loans(3)	—		492		—		492		(21		)	(72		)
Real estate owned(4)	—		20		—		20		(2		)	—
Total assets at fair value on a non-recurring basis	$	—	$	521	$	164	$	685	$	(18	)	$	(59	)

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

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

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

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

⁽⁵⁾  As of September 30, 2014, the fair value of the loans held for sale was below cost.

72

HSBC USA Inc.

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

As of September 30, 2014
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Residential mortgage loans held for sale	$	21	Valuation of third party appraisal on underlying collateral	Loss severity rates	0% - 100%
Impaired commercial loans	19		Valuation of third party appraisal on underlying collateral	Loss severity rates	17% - 47%

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

Significant Unobservable Inputs for Non-Recurring Fair Value Measurements

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

Impaired loans represent commercial loans. The weighted average severity rate for these loans was approximately 25 percent at September 30, 2014. These severity rates are primarily impacted by the value of the underlying collateral securing the loans.

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

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

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

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

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

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

73

HSBC USA Inc.

current market conditions. In those cases, we also consider the loan specific attributes and inherent credit risk and risk mitigating factors such as collateral arrangements.

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

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

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

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

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

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

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

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

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

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

74

HSBC USA Inc.

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

Trading asset-backed securities:

Rating of Securities:(1)	Collateral Type:	Level 2		Level 3		Total
		(in millions)
AAA -A	Residential mortgages - Alt A	$	87	$	—	$	87
	Residential mortgages - Subprime	57		—		57
	Student loans	84		—		84
	Total AAA -A	228		—		228
BBB -B	Collateralized debt obligations	—		269		269
CCC-Unrated	Residential mortgages - Subprime	5		—		5
		$	233	$	269	$	502

Available-for-sale securities backed by collateral:

Rating of Securities:(1)	Collateral Type:	Level 2		Level 3		Total
		(in millions)
AAA -A	Commercial mortgages	$	60	$	—	$	60
	Home equity - Alt A	92		—		92
	Other	95		—		95
	Total AAA -A	247		—		247
CCC -Unrated	Residential mortgages - Alt A	1		—		1
		$	248	$	—	$	248

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

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

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

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

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

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

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

75

HSBC USA Inc.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

76

HSBC USA Inc.

19. Litigation and Regulatory Matters

The following supplements, and should be read together with, the disclosure in Note 28, "Litigation and Regulatory Matters," in our 2013 Form 10-K and our Form 10-Q for the three month period ended March 31, 2014 (the "2014 First Quarter 10-Q") and the six month period ended June 30, 2014 (the "2014 Second Quarter 10-Q"). Only those matters with significant updates and new matters since our disclosure in our 2013 Form 10-K and our 2014 First Quarter and 2014 Second Quarter 10-Q's are reported herein.

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

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

For the litigation and governmental and regulatory matters disclosed below and inNote 28, "Litigation and Regulatory Matters," in our 2013 Form 10-K and in Note 19 "Litigation and Regulatory Matters" in each of our 2014 First Quarter and Second Quarter 10-Q's as to which a loss in excess of accrued liability is reasonably possible in future periods and for which there is sufficient currently available information on the basis of which management believes it can make a reliable estimate, we believe a reasonable estimate could be as much as $50 million for HUSI and its U.S. affiliates. The litigation and governmental and regulatory matters underlying this estimate of possible loss will change from time to time and actual results may differ significantly from this current estimate.

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

Litigation

Credit Card Litigation To date, certain groups of opt-out merchants have entered into settlement agreements with the defendants in those actions and certain HSBC entities that, pursuant to the MDL 1720 Sharing Agreements, are responsible for a pro rata portion of any judgment or settlement amount awarded in actions consolidated into MDL 1720.

DeKalb The HSBC defendants filed a motion for summary judgment, which remains pending.

Cook County The HSBC defendants' motion to dismiss the amended complaint is fully submitted and we await a decision.

Lender-Placed Insurance Matters The Southern District of Florida granted final approval of the class settlement in the Diaz v. HSBC Bank USA, N.A., et al. (S.D. Fla 13-CV-21104) action (formerly known as Lopez v. HSBC Bank, USA, N.A., et al.) on October 29, 2014. The settlement pays claims of class members, on a claims made basis, based on a formula, as well as class plaintiffs’ attorneys’ fees and costs of administration, with an overall cap of $32 million for all payments. This settlement does not include claims related to lender-placed flood insurance, such as those asserted in the Montanez, et al. v. HSBC Mortgage Corporation (USA), et al. (E.D. Pa. No. 11-CV-4074) and Weller, et al. v. HSBC Mortgage Services, Inc., et al. (D. Col. No. 13-CV-00185) actions.

Private Mortgage Insurance Matters The stay in the Ba v. HSBC Bank USA, N.A., et al (E.D. Pa. No. 2:13-cv-00072PD) case has been lifted.

Credit Default Swap Litigation On September 4, 2014, the court granted in part and denied in part defendants’ motion to dismiss the second amended, consolidated complaint. Discovery is proceeding.

77

HSBC USA Inc.

Foreign Exchange (“FX”) Litigation Defendants’ motion to dismiss the March 31, 2014 amended consolidated complaint has been fully briefed and submitted to the court for determination.

Gold and Silver Fix Litigation

The putative class actions alleging a conspiracy to manipulate the price of gold and gold derivatives have been transferred to and centralized in the U.S. District Court for the Southern District of New York. An amended consolidated class action complaint is expected in December 2014. The putative class actions alleging a conspiracy to manipulate the price of physical silver and silver derivatives, also have been transferred to and centralized in the U.S. District Court for the Southern District of New York.

Madoff Litigation

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

In re Herald, Primeo and Thema Funds Securities Litigation Plaintiffs’ petition for rehearing en banc relating to the dismissal of their claims on forum non conveniens grounds was denied. If plaintiffs do not file a petition for certiorari with the Supreme Court within the required time, the matter will be concluded.

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

Benchmark Rate Litigation In October 2014 HSBC Bank USA, along with the other U.S. dollar Libor panel banks, were named as defendants in a lawsuit filed by the National Credit Union Administration Board (“NCUA”), in its capacity as liquidator for several failed credit unions seeking unspecified damages as a result of alleged artificial suppression of U.S. dollar Libor rates between August 2007 to May 2010 which NCUA alleges resulted in the failed credit unions receiving substantially less interest income in connection with certain investments and interest rate swaps tied to U.S. dollar Libor. This action has been consolidated with the U.S. dollar Libor Multi-District Litigation proceeding pending in the U.S. District Court for the Southern District of New York. HSBC and HSBC Bank plc are defendants in that proceeding as well. This action is subject to a stay imposed by the court.

Mortgage Securitization Activity and Litigation 

In addition to the repurchase risk described in Note 17, "Guarantee Arrangements and Pledged Assets," HSBC BankUSA has also been involved as a sponsor/seller of loans used to facilitate whole loan securitizations underwritten by HSI. During 2005-2007, HSBC Bank USA purchased and sold $24 billion of whole loans to HSI which were subsequently securitized and sold by HSI to third parties. The outstanding principal balance on these loans was approximately $5.9 billion and $6.5 billion at September 30, 2014 and December 31, 2013, respectively.

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

Federal Housing Finance Agency, as Conservator for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation v. HSBC North America Holdings Inc. et al. (S.D.N.Y. No. CV 11-6189-LAK) On September 12, 2014

78

HSBC USA Inc.

the parties announced that this matter has been resolved by settlement requiring HSBC to pay to the Federal Housing Finance Agency ("FHFA") a total of $550 million. HSBC USA paid $297 million of the total settlement amount of $550 million and took a charge of $108 million during the quarter.

Mortgage Securitization Pool Trust Litigation Additional claims have been filed against HSBC Bank USA ("HBUS") in its role as trustee for certain trusts ("Trusts"). Federal Home Loan Bank of Topeka, along with other investors, filed an action in New York State Supreme Court, New York County against HBUS, as trustee of an unidentified number of Trusts, alleging that the Trusts have sustained losses in collateral value of at least $1.34 billion. The lawsuit seeks unspecified damages resulting from an alleged breach of the Trust Indenture Act, breach of fiduciary duties, and negligence as a result of the alleged failure to address the problem of defective Countrywide loans in the Trusts. Royal Park Investments SA/NV ("RPI") filed an action in the US District Court for the Southern District of New York against HBUS as trustee for three Trusts, alleging that the Trusts have sustained losses in collateral value of at least $1.25 billion. The lawsuit seeks damages resulting from an alleged breach of the Trust Indenture Act, breach of contract, and breach of the common law "duty of trust." These actions, as well as a similar action filed in June 2014 by certain trust investors including BlackRock and PIMCO and previously reported in our Second Quarter 10-Q, are at an early stage.

Shareholder Derivative Action On October 17, 2014, the nominal corporate defendants, HSBC, HSBC Bank USA, HSBC North America and HSBC USA, moved to dismiss the shareholder derivative action, captioned Michael Mason-Mahon v. Douglas J. Flint, et al. (New York State Supreme Court, Nassau County, Index No. 602052/2014) filed by a shareholder of HSBC (who is not a shareholder of HSBC Bank USA, HSBC North America or HSBC USA) purportedly on behalf of HSBC, HSBC Bank USA, HSBC North America and HSBC USA against the directors, certain officers and certain former directors of those HSBC companies. Other defendants who had been served also responded to the complaint.

79

HSBC USA Inc.

20. New Accounting Pronouncements

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

Accounting for Investments in Qualified Housing Projects In January 2014, the FASB issued an ASU which permits, but does not require, an investor to amortize its Low Income Housing Tax Credit ("LIHTC") investments in proportion to the allocated Low Income Housing Federal tax benefits and present such tax benefits net of investment amortization in the income tax line. The ASU is effective for fiscal years beginning after December 15, 2014 to be applied retrospectively with early adoption permitted. We elected to early adopt the ASU on January 1, 2014 due to its improvement in the presentation of the economic benefits of this investment class. The early adoption of the ASU required the previous period to also be restated and resulted in a reduction to operating expenses of $21 million and $64 million in both of the three and nine months ended September 30, 2014 and 2013, respectively, with a corresponding increase to income tax expense. There was no overall impact to net income.

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

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

Repurchase to Maturity Transactions, Repurchase Financings, and Disclosures In June 2014, the FASB issued an ASU which changes the accounting for repurchase-to-maturity transactions to secured borrowing accounting and requires secured borrowing accounting for the repurchase agreement in a contemporaneous repurchase financing arrangement. The accounting changes in the ASU will be effective for all annual and interim periods beginning January 1, 2015 and will require the changes in accounting for transactions outstanding on the effective date to be presented as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The ASU also requires new disclosure about certain transactions accounted for as a sale to be presented for interim and annual periods beginning January 1, 2015, and new disclosure about repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings to be presented for annual periods beginning January 1, 2015, and for interim periods beginning April 1, 2015. The adoption of this guidance is not expected to have a significant impact on our financial position or results of operations.

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

80

HSBC USA Inc.

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

Forward-Looking Statements

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

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

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

• changes in laws and regulatory requirements;

• extraordinary government actions as a result of market turmoil;

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

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

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

• damage to our reputation;

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

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

• a failure in or a breach of our operation or security systems or infrastructure, or those of third party servicers or vendors, including as a result of cyber attacks;

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

• our ability to meet our funding requirements;

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

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

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

• heightened regulatory and government enforcement scrutiny of financial institutions;

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

• changes to our mortgage servicing and foreclosure practices;

• changes in the methodology for determining benchmark rates;

81

HSBC USA Inc.

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

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

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

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

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

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

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

82

HSBC USA Inc.

Executive Overview

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

Current Environment The U.S. economy continued its gradual recovery during the first nine months of 2014. In September, consumer confidence rose to its highest level in more than a year, buoyed by healthy job growth, improved income expectations, gains in wealth and a decline in energy prices. During the first nine months of 2014, the Federal Reserve Board announced further reductions in its bond buying stimulus program which concluded in October. In addition, the Federal Reserve Board indicated that it would look at ‘a broad range of economic indicators’ in deciding when to start raising short-term interest rates and announced that short-term interest rates would remain low for a considerable time after the bond buying program ends. The prolonged period of low interest rates continues to put pressure on spreads earned on our deposit base.

The economy continued to add jobs throughout 2014, adding an average of over 200 thousand jobs each month during the first nine months of 2014, increasing the employment population rate 40 basis points since year-end, while the number of long-term unemployed fell almost 25 percent since year-end. While unemployment fell to 5.9 percent at September 30, 2014, it remains high based on historical averages and 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 employment, a sustained recovery of the housing markets and stability in energy prices remain critical components of a broader U.S. economic recovery. These conditions in combination with global economic conditions, 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") and the heightened regulatory and government scrutiny of financial institutions will continue to impact our results in 2014 and beyond.

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

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(dollars are in millions)
Net income	$	1		$	4		$	284		$	367
Rate of return on average:
Total assets	—		%	—		%	.2		%	.3		%
Total common shareholder’s equity	(.4		)	(.4		)	2.0			2.6
Net interest margin	1.37			1.26			1.44			1.29
Efficiency ratio	100.5			90.3			88.8			76.3
Commercial net charge-off ratio(1)	(.01		)	.02			.08			.18
Consumer net charge-off ratio(1)	.35			1.27			.48			.94

⁽¹⁾ Excludes loans held for sale.

83

HSBC USA Inc.

	September 30, 2014			December 31, 2013
	(dollars are in millions)
Additional Select Ratios:
Allowance as a percent of loans(1)	.86		%	.90		%
Commercial allowance as a percent of loans(1)	.76			.64
Consumer allowance as a percent of loans(1)	1.13			1.55
Consumer two-months-and-over contractual delinquency	5.87			6.80
Loans to deposits ratio(2)	85.25			78.45
Tier 1 capital to risk weighted assets	11.58			11.65
Common equity Tier 1 ratio(3)	10.45			9.94
Total capital to risk weighted assets	16.00			16.36
Total shareholders’ equity to total assets	9.65			8.88
Select Balance Sheet Data:
Cash and interest bearing deposits with banks	$	27,392		$	20,575
Trading assets	22,099			28,894
Securities available-for-sale	29,801			54,906
Loans:
Commercial loans	54,062			48,494
Consumer loans	19,377			19,201
Total loans	73,439			67,695
Deposits	108,677			112,608

⁽¹⁾ Excludes loans held for sale.

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

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

Net income was $1 million and $284 million during the three and nine months ended September 30, 2014, respectively, compared with net income of $4 million and $367 million during the three and nine months ended September 30, 2013, respectively. Income (loss) before income tax was a loss of $28 million during the three months ended September 30, 2014 and income of $198 million during the nine months ended September 30, 2014 compared with income before income tax of $36 million and $595 million during the three and nine months ended September 30, 2013, respectively. Our results in all periods were impacted by the change in the fair value of our own debt attributable to credit spread for which we have elected fair value option which distorts comparability of the underlying performance trends of our business. The following table summarizes the impact of this item on our income (loss) before income taxes for all periods presented:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014		2013
	(in millions)
Income (loss) before income tax, as reported	$	(28	)	$	36	$	198	$	595
Fair value movement on own fair value option debt attributable to credit spread	(7		)	63		20		52
Underlying income (loss) before income tax(1)	$	(35	)	$	99	$	218	$	647

⁽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) before income tax for the three and nine months ended September 30, 2014 decreased $134 million and $429 million, respectively, compared with the prior year periods. The decreases reflect lower other revenues driven by lower trading revenue and, in the year-to-date period, lower gains on security sales as well

84

HSBC USA Inc.

as higher operating expenses driven primarily by higher litigation expense, partially offset by higher net interest income and a lower provision for credit losses.

During the nine months ended September 30, 2014, we continued to reduce legacy and other risk positions as opportunities arose. The following table provides a summary of the significant adjustments associated with these legacy positions that impacted revenue for the three and nine months ended September 30, 2014 and 2013:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014			2013
	(in millions)
Insurance monoline structured credit products(1)	$	1		$	1	$	14		$	42
Other structured credit products(1)	(43		)	15		(41		)	53
Total gains (loss)	$	(42	)	$	16	$	(27	)	$	95

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

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

In September 2014, HSBC USA and its affiliates reached an agreement with the Federal Housing Finance Agency ("FHFA") to settle the claims brought by FHFA in 2011 related to residential mortgage-backed securities that the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation purchased from HSBC between 2005 and 2007. The cost for resolving this matter was partially covered by reserves. HSBC USA paid $297 million of the total settlement amount and recorded a charge of $108 million to other expenses in the third quarter of 2014. For additional discussion, see Note 19, "Litigation and Regulatory Matters," in the accompanying consolidated financial statements.

During the first nine months of 2014, we revised certain estimates used in our commercial loan collective impairment calculation to better reflect inherent losses in a growing loan portfolio. This resulted in an increase to our allowance for credit losses of approximately $118 million ($25 million of which was recorded in the third quarter) for these loans. We are continuing to refine aspects of our commercial loan allowance calculation and, as a result, there could be further adjustments to our credit loss estimates for commercial loans in future periods. While we have seen significant loan growth in our target markets, our commercial loan risk appetite and business model remain unchanged.

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

In October 2013, our Board of Directors approved a sale of our London Branch precious metals custody and clearing business to HSBC Bank plc. As the sale of this business is between affiliates under common control, we expect the consideration received in excess of our carrying value will result in an increase to additional paid-in-capital, net of tax, of approximately $50 million upon close. The cash sale is currently expected to be completed in the fourth quarter of 2014. At September 30, 2014, assets and liabilities related to this business totaled approximately $7.2 billion each, while revenue associated with this business was approximately $28 million and $37 million during the nine months ended September 30, 2014 and 2013, respectively. The disposition of this business will not qualify for discontinued operations presentation under the new accounting standards update issued by the FASB in April 2014. We will continue to operate our metals trading business which is unaffected by this decision.

We continue to focus on cost optimization efforts to ensure realization of cost efficiencies. To date, we have identified and implemented various opportunities to reduce costs through organizational structure redesign, vendor spending, discretionary spending and other general efficiency initiatives. Additional cost reduction opportunities have been identified and are in the process of implementation. Workforce reductions, some of which relate to our retail branch divestitures, have resulted in total full-time equivalent employees being reduced by 39 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 also 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.

85

HSBC USA Inc.

Basis of Reporting

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

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

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in millions)
Net income – U.S. GAAP basis	$	1		$	4		$	284		$	367
Adjustments, net of tax:
IFRSs reclassification of fair value measured financial assets during 2008	—			—			(1		)	(17		)
Securities	1			6			(1		)	2
Loan impairment	(2		)	3			2			14
Property	(3		)	(6		)	(5		)	(10		)
Pension costs	—			3			11			10
Litigation expense	(131		)	13			(79		)	6
Other	(5		)	(1		)	(20		)	(23		)
Net income (loss) – IFRSs basis	(139		)	22			191			349
Tax expense (benefit) – IFRSs basis	(112		)	37			(155		)	238
Profit (loss) before tax – IFRSs basis	$	(251	)	$	59		$	36		$	587

The significant differences between U.S. GAAP and IFRSs impacting our results presented in the table above are discussed in more detail within "Basis of Reporting" in our 2013 Form 10-K. There have been no significant changes since December 31, 2013 in the differences between U.S. GAAP and IFRSs impacting our results.

86

HSBC USA Inc.

Balance Sheet Review

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

			Increase (Decrease) From
			December 31, 2013
	September 30, 2014		Amount			%
	(dollars are in millions)
Period end assets:
Short-term investments	$	28,488	$	5,794		25.5	%
Loans, net	72,808		5,719			8.5
Loans held for sale	327		97			42.2
Trading assets	22,099		(6,795		)	(23.5	)
Securities	41,846		(14,418		)	(25.6	)
Other assets	9,444		(872		)	(8.5	)
	$	175,012	$	(10,475	)	(5.6	)%
Funding sources:
Total deposits	$	108,677	$	(3,931	)	(3.5	)%
Trading liabilities	9,177		(1,698		)	(15.6	)
Short-term borrowings	11,864		(7,271		)	(38.0	)
Long-term debt	25,034		2,187			9.6
All other liabilities	3,377		(181		)	(5.1	)
Shareholders’ equity	16,883		419			2.5
	$	175,012	$	(10,475	)	(5.6	)%

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

87

HSBC USA Inc.

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

			Increase (Decrease) From
			December 31, 2013
	September 30, 2014		Amount			%
	(dollars are in millions)
Commercial loans:
Construction and other real estate	$	9,661	$	627		6.9	%
Business and corporate banking	17,355		2,909			20.1
Global banking(1)	24,001		2,376			11.0
Other commercial loans	3,045		(344		)	(10.2	)
Total commercial loans	54,062		5,568			11.5	%
Consumer loans:
Residential mortgages	16,402		576			3.6
Home equity mortgages	1,824		(187		)	(9.3	)
Total residential mortgages	18,226		389			2.2
Credit cards	686		(168		)	(19.7	)
Other consumer	465		(45		)	(8.8	)
Total consumer loans	19,377		176			.9	%
Total loans	73,439		5,744			8.5
Allowance for credit losses	631		25			4.1
Loans, net	$	72,808	$	5,719		8.5	%

⁽¹⁾  Represents large multinational firms including globally focused U.S. corporate and financial institutions and U.S. dollar lending to multinational banking customers managed by HSBC on a global basis. Also includes loans to HSBC affiliates which totaled $4,812 million and $5,328 million at September 30, 2014 and December 31, 2013, respectively.

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

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

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

	LTVs at September 30, 2014(1)(2)				LTVs at December 31, 2013(1)(2)
	First Lien		Second Lien		First Lien		Second Lien
LTV < 80%	91.2	%	72.3	%	87.4	%	65.0	%
80% < LTV < 90%	4.7		12.6		6.0		14.1
90% < LTV < 100%	2.5		8.1		3.8		9.5
LTV > 100%	1.6		7.0		2.9		11.3
Average LTV for portfolio	58.4		62.9		61.4		67.3

⁽¹⁾  LTVs for first liens are calculated using the loan balance as of the reporting date. LTVs for second liens are calculated using the loan balance as of the reporting date plus the senior lien amount at origination. Current estimated property values are derived from the property's appraised value at the time of

88

HSBC USA Inc.

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 June 30, 2014 and September 30, 2013, respectively.

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

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

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

			Increase (Decrease) From
			December 31, 2013
	September 30, 2014		Amount			%
	(dollars are in millions)
Total commercial loans	$	223	$	147		*
Consumer loans:
Residential mortgages	38		(53		)	(58.2	)%
Other consumer	66		3			4.8
Total consumer loans	104		(50		)	(32.5	)%
Total loans held for sale	$	327	$	97		42.2	%

* Not meaningful.

Commercial loans held for sale increased compared with December 31, 2013. Commercial syndicated loans that are originated with the intent of selling them to unaffiliated third parties are classified as commercial loans held for sale and are recorded at fair value as we have elected to designate these loans under fair value option. The fair value of commercial loans held for sale under this program was $69 million and $58 million at September 30, 2014 and December 31, 2013, respectively.

Commercial loans held for sale also includes a $44 million global banking loan at September 30, 2014, which was transferred to held for sale during the first quarter of 2014, as well as commercial real estate loans of $110 million and $18 million at September 30, 2014 and December 31, 2013, respectively.

Residential mortgage loans held for sale decreased compared with December 31, 2013. We sell all our agency eligible loan originations servicing released directly to PHH Mortgage. Also included in residential mortgage loans held for sale are subprime residential mortgage loans of $21 million and $46 million at September 30, 2014 and December 31, 2013, respectively, which were acquired from unaffiliated third parties and from HSBC Finance Corporation ("HSBC Finance") with the intent of securitizing or selling the loans to third parties.

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

Excluding the commercial loans designated under fair value option discussed above, loans held for sale are recorded at the lower of amortized cost or fair value. The valuation allowance on consumer loans held for sale was $42 million and $77 million at September 30, 2014 and December 31, 2013, respectively. The valuation allowance on commercial loans held for sale was $5 million at September 30, 2014 compared with no allowance at December 31, 2013.

89

HSBC USA Inc.

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

			Increase (Decrease) From
			December 31, 2013
	September 30, 2014		Amount			%
	(dollars are in millions)
Trading assets:
Securities(1)	$	9,455	$	(1,697	)	(15.2	)%
Precious metals	7,998		(3,753		)	(31.9	)
Derivatives(2)	4,646		(1,345		)	(22.5	)
	$	22,099	$	(6,795	)	(23.5	)%
Trading liabilities:
Securities sold, not yet purchased	507		199			64.6
Payables for precious metals	3,118		(708		)	(18.5	)
Derivatives(3)	5,552		(1,189		)	(17.6	)
	$	9,177	$	(1,698	)	(15.6	)%

⁽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 September 30, 2014 and December 31, 2013 the fair value of derivatives included in trading assets has been reduced by $3,759 million and $3,870 million, respectively, relating to amounts recognized for the obligation to return cash collateral received under master netting agreements with derivative counterparties.

⁽³⁾  At September 30, 2014 and December 31, 2013 the fair value of derivatives included in trading liabilities has been reduced by $1,725 million and $2,116 million, respectively, relating to amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties.

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

Precious metals trading assets decreased since December 31, 2013 due primarily to a decrease in unallocated metal inventory that resulted from client activity. The lower payable for precious metals compared with December 31, 2013 was primarily due to a decrease in unallocated metal balances held on behalf of clients.

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

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

Securities   Securities include securities available-for-sale and securities held-to-maturity. Balances will fluctuate between periods depending upon our liquidity position at the time. The decline in balances since December 31, 2013 largely reflects the sales of U.S. Treasury, government agency mortgage-backed and other asset-backed securities as part of a continuing strategy to re-balance the securities portfolio for risk management purposes based on the current interest rate environment. During the third quarter of 2014, we transferred U.S. government sponsored and U.S. government agency mortgage-backed securities with a fair value of $10,985 million from available-for-sale to held-to-maturity. These securities were transferred to held-to-maturity at fair value as of the transfer date. The transfers reflect our intent to hold the securities to maturity and will reduce the impact of price volatility on accumulated other comprehensive income ("AOCI") and regulatory capital under Basel III. There could be additional transfers of securities to held-to-maturity in future periods.

Other Assets  Other assets includes intangibles and goodwill. Other assets decreased since December 31, 2013 due primarily to lower outstanding balances related to the settlement of derivative and precious metal stock positions, lower levels of cash collateral posted, lower derivative balances associated with hedging activities and a decline in net deferred tax assets.

90

HSBC USA Inc.

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

			Increase (Decrease) From
			December 31, 2013
	September 30, 2014		Amount			%
	(dollars are in millions)
Individuals, partnerships and corporations	$	90,902	$	(327	)	(.4	)%
Domestic and foreign banks	16,474		(3,951		)	(19.3	)
U.S. government and states and political subdivisions	1,022		350			52.1
Foreign governments and official institutions	279		(3		)	(1.1	)
Total deposits	$	108,677	$	(3,931	)	(3.5	)%
Total core deposits(1)	$	85,787	(22		)	—	%

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

Deposit balances decreased since December 31, 2013 largely due to lower levels of affiliate call deposits, decreases in deposits from individuals, primarily reflected in on-line savings accounts, and reductions in demand and short-term time deposits from certain global banking customers as counterparties seek alternative placement options given the low rate environment. Total deposits from HSBC affiliates decreased $4,264 million since December 31, 2013. Partially offsetting these decreases was an increase in wholesale time deposits driven by new issuances from a wholesale term certificate of deposit issuance program that was launched in 2014. 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 slightly to $20,697 million at September 30, 2014 as compared with $20,877 million at December 31, 2013; and

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

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

Short-Term Borrowings  Short-term borrowings decreased since December 31, 2013 primarily due to decreased levels of securities sold under agreements to repurchase resulting from the management of our short-term liquidity positions as well as a decline in metals leases. Partially offsetting the decreases was an increase in commercial paper outstanding.

Long-Term Debt  Long-term debt increased compared with December 31, 2013 due primarily to the impact of debt issuances, partially offset by debt retirements. Debt issuances totaled $1,097 million and $4,997 million during the three and nine months ended September 30, 2014, respectively, of which $18 million and $46 million, respectively, was issued by HSBC Bank USA. During the second quarter of 2014, $2,250 million of senior debt was issued by HSBC USA.

Incremental issuances from the $40 billion HSBC Bank USA Global Bank Note Program totaled $46 million during the nine months ended September 30, 2014. Total debt outstanding under this program was $4,530 million and $4,535 million at September 30, 2014 and December 31, 2013, respectively. We anticipate using the Global Bank Note Program more in the future as part of our efforts designed to minimize overall funding costs while accessing diverse funding channels.

Incremental issuances from our shelf registration statement with the SEC totaled $4,901 million during the nine months ended September 30, 2014. Total long-term debt outstanding under this shelf was $14,761 million and $11,738 million at September 30, 2014 and December 31, 2013, respectively.

Borrowings from the Federal Home Loan Bank of New York ("FHLB") totaled $1,000 million at both September 30, 2014 and December 31, 2013. At September 30, 2014, we had the ability to access further borrowings of up to $4,981 million based on the amount pledged as collateral with the FHLB.

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

91

HSBC USA Inc.

Results of Operations

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

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

				2014 Compared  to 2013 Increase (Decrease)
Three Months Ended September 30,	2014			Volume			Rate			2013
	(dollars are in millions)
Interest income:
Short-term investments	$	22		$	1		$	2		$	19
Trading assets	63			—			29			34
Securities	185			(36		)	8			213
Commercial loans	304			45			(16		)	275
Consumer loans	179			(4		)	4			179
Other	9			—			(1		)	10
Total interest income	762			6			26			730
Interest expense:
Deposits	37			4			(15		)	48
Short-term borrowings	14			(2		)	5			11
Long-term debt	165			27			(21		)	159
Tax liabilities	—			(7		)	(8		)	15
Total interest expense	216			22			(39		)	233
Net interest income – taxable equivalent basis	546			$	(16	)	$	65		497
Less: tax equivalent adjustment	3									5
Net interest income – non taxable equivalent basis	$	543								$	492
Yield on total interest earning assets	1.91		%							1.84		%
Cost of total interest bearing liabilities	.72									.79
Interest rate spread	1.19									1.05
Benefit from net non-interest paying funds(1)	.18									.21
Net interest margin on average earning assets	1.37		%							1.26		%

92

HSBC USA Inc.

				2014 Compared  to 2013 Increase (Decrease)
Nine Months Ended September 30,	2014			Volume			Rate			2013
	(dollars are in millions)
Interest income:
Short-term investments	$	58		$	6		$	3		$	49
Trading assets	176			8			83			85
Securities	595			(99		)	18			676
Commercial loans	886			122			(79		)	843
Consumer loans	532			(15		)	(6		)	553
Other	31			2			(2		)	31
Total interest income	2,278			24			17			2,237
Interest expense:
Deposits	108			2			(41		)	147
Short-term borrowings	37			9			—			28
Long-term debt	487			36			(41		)	492
Tax liabilities	(101		)	(11		)	(130		)	40
Total interest expense	531			36			(212		)	707
Net interest income – taxable equivalent basis	1,747			$	(12	)	$	229		1,530
Less: tax equivalent adjustment	12									16
Net interest income – non taxable equivalent basis	$	1,735								$	1,514
Yield on total interest earning assets	1.88		%							1.88		%
Cost of total interest bearing liabilities	.57									.80
Interest rate spread	1.31									1.08
Benefit from net non-interest paying funds(1)	.13									.21
Net interest margin on average earning assets	1.44		%							1.29		%

⁽¹⁾  Represents the benefit associated with interest earning assets in excess of interest bearing liabilities. Increased percentages reflect growth in this excess, while decreased percentages reflect a reduction in this excess.

Net interest income in the year-to-date period reflects a $120 million benefit to tax liabilities interest expense related to the conclusion of certain state and local tax audits in the second quarter of 2014, as discussed further below under the heading "Income Taxes." Excluding the impact of this item, net interest incomeincreased $51 million and $101 million during the three and nine months ended September 30, 2014, respectively. Compared with the prior year periods, interest income increased as higher income from trading assets, commercial loans and short-term investments was partially offset by lower income from securities and, in the year-to-date period, consumer loans, while interest expense decreased reflecting lower expense from deposits and tax liabilities partially offset by higher expense from short-term borrowings and, in the three month period, long-term debt.

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

Trading Assets The increase in interest income during the three and nine months ended September 30, 2014 reflects a shift in asset mix to longer term, higher yielding securities and, in the year-to-date period, higher average securities balances. Securities in the trading portfolio are managed as hedges against the derivative activity of our customers, which, in response to the current interest rate environment, has shifted towards longer term, higher yielding returns.

Securities Interest income decreased during the three and nine months ended September 30, 2014 due primarily to sales of U.S. government agency mortgage-backed and other asset-backed securities which resulted in lower average outstanding balances, partially offset by a shift in asset mix to higher yielding securities compared with the prior year periods.

93

HSBC USA Inc.

Commercial Loans Interest income increased during the three and nine months ended September 30, 2014 driven by higher average balances due to loan growth, partially offset by lower yields on newly originated loans and refinanced loans. Lower yields reflect a continued focus on higher quality lending to reduce credit risk exposure in our loan portfolios.

Consumer Loans Interest income was flat during the three months ended September 30, 2014. Interest income declined during the nine months ended September 30, 2014 due primarily to lower yields on newly originated loans. Lower yields reflect a continued focus on higher quality lending to reduce credit risk exposure in our loan portfolios.

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

Short-term borrowings The increase in interest expense during the three months ended September 30, 2014 was primarily due to a shift in mix driven, in part, by an increase in commercial paper outstanding, partially offset by lower average outstanding borrowings overall. In the year-to-date period, interest expense was higher due to higher average outstanding borrowings primarily in securities sold under repurchase agreements, which continue to be preferred sources of funding given the current interest rate environment.

Long-term debt Interest expense was higher during the three months ended September 30, 2014 driven by higher outstanding borrowings, partially offset by a shift in mix towards lower yielding non-subordinated debt. In the year-to-date period, increased interest expense related to higher outstanding borrowings was more than offset by a shift in mix towards lower yielding non-subordinated debt.

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

94

HSBC USA Inc.

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

							Increase (Decrease)
Three Months Ended September 30,	2014			2013			Amount			%
	(dollars are in millions)
Commercial:
Construction and other real estate	$	(9	)	$	(10	)	$	1		10.0	%
Business and corporate banking	36			28			8			28.6
Global banking	—			(2		)	2			100.0
Other commercial	1			—			1			*
Total commercial	$	28		$	16		$	12		75.0
Consumer:
Residential mortgages	(11		)	(1		)	(10		)	*
Home equity mortgages	(5		)	28			(33		)	*
Credit card receivables	9			10			(1		)	(10.0	)
Other consumer	2			1			1			100.0
Total consumer	(5		)	38			(43		)	*
Total provision for credit losses	$	23		$	54		$	(31	)	(57.4	)%
Provision as a percentage of average loans, annualized	0.1		%	0.3		%
							Increase (Decrease)
Nine Months Ended September 30,	2014			2013			Amount			%
	(dollars are in millions)
Commercial:
Construction and other real estate	$	(1	)	$	(15	)	$	14		93.3	%
Business and corporate banking	111			45			66			*
Global banking	36			26			10			38.5
Other commercial	(12		)	(4		)	(8		)	*
Total commercial	$	134		$	52		$	82		*
Consumer:
Residential mortgages	(20		)	10			(30		)	*
Home equity mortgages	(11		)	58			(69		)	*
Credit card receivables	18			21			(3		)	(14.3	)
Other consumer	3			1			2			*
Total consumer	(10		)	90			(100		)	*
Total provision for credit losses	$	124		$	142		$	(18	)	(12.7	)%
Provision as a percentage of average loans, annualized	0.2		%	0.3		%

* Not meaningful.

Our provision for credit losses decreased$31 million and $18 million during the three and nine months ended September 30, 2014 driven by lower provisions for credit losses in our consumer loan portfolio, partially offset by higher provisions in our commercial loan portfolio. During the three and nine months ended September 30, 2014, we increased our allowance for credit losses as the provision for credit losses was higher than net charge-offs by $7 million and $25 million, respectively.

In our commercial portfolio, the provision for credit losses increased $12 million and $82 million during the three and nine months ended September 30, 2014. During the first nine months of 2014, we revised certain estimates used in our commercial loan impairment calculation resulting in an incremental provision for credit losses of approximately $118 million ($25 million of which was recorded in the third quarter) for these loans. Excluding the impact of this item, our commercial provision for credit losses decreased $13 million and $36 million during the three and nine months ended September 30, 2014, respectively. The decrease in

95

HSBC USA Inc.

both periods reflects the non-recurrence of a specific provision associated with a single customer relationship that was recorded in the prior year, partially offset by higher provisions associated with loan growth and for risk factors associated with emerging market loan exposures. The decrease in the year-to-date period also reflects lower provisions for risk factors associated with global banking and other large loan exposures and expansion market loan exposures as well as improvements in economic and credit conditions which led to lower nonperforming loans and criticized asset levels.

The provision for credit losses on residential mortgages including home equity mortgages decreased$43 million and $99 million during the three and nine months ended September 30, 2014, respectively. The decrease in both periods reflects lower severity estimates driven by improvements in home prices, continued improvements in economic and credit conditions, lower dollars of delinquency on accounts less than 180 days contractually delinquent and lower losses associated with advances made on behalf of borrowers. During the third quarter of 2014, we determined that delays in the processing of certain operational transactions were overstating our estimate of residential mortgage loan loss severity which resulted in a $10 million reduction to our residential mortgage allowance for credit losses related to 2013, which was not material to the results of that year. These improvements were partially offset in the year-to-date period by increased loss estimates associated with the remediation of certain mortgage servicing activities.

The provision for credit losses associated with credit card receivables decreased$1 million and $3 million during the three and nine months ended September 30, 2014, respectively, reflecting improved economic conditions, including lower dollars of delinquency and lower receivable levels.

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

96

HSBC USA Inc.

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

							Increase (Decrease)
Three Months Ended September 30,	2014			2013			Amount			%
	(dollars are in millions)
Credit card fees	$	13		$	1		$	12		*
Other fees and commissions	186			181			5			2.8
Trust income	35			29			6			20.7
Trading revenue (expense)	(9		)	117			(126		)	*
Net other-than-temporary impairment losses	(4		)	—			(4		)	*
Other securities gains (losses), net	27			35			(8		)	(22.9	)
HSBC affiliate income:
Fees and commissions	39			32			7			21.9
Other affiliate income	14			9			5			55.6
Total HSBC affiliate income	53			41			12			29.3
Residential mortgage banking revenue	17			18			(1		)	(5.6	)
Gain (loss) on instruments designated at fair value and related derivatives	36			(6		)	42			*
Other income:
Valuation of loans held for sale	2			1			1			100.0
Insurance	5			4			1			25.0
Miscellaneous income	25			11			14			*
Total other income	32			16			16			100.0
Total other revenues	$	386		$	432		$	(46	)	(10.6	)%
							Increase (Decrease)
Nine Months Ended September 30,	2014			2013			Amount			%
	(dollars are in millions)
Credit card fees	$	40		$	35		$	5		14.3	%
Other fees and commissions	541			527			14			2.7
Trust income	98			92			6			6.5
Trading revenue	139			388			(249		)	(64.2	)
Net other-than-temporary impairment losses	(11		)	—			(11		)	*
Other securities gains (losses), net	42			189			(147		)	(77.8	)
HSBC affiliate income:
Fees and commissions	113			118			(5		)	(4.2	)
Other affiliate income	38			36			2			5.6
Total HSBC affiliate income	151			154			(3		)	(1.9	)
Residential mortgage banking revenue	87			73			14			19.2
Gain (loss) on instruments designated at fair value and related derivatives	20			82			(62		)	(75.6	)
Other income:
Valuation of loans held for sale	2			10			(8		)	(80.0	)
Insurance	13			8			5			62.5
Miscellaneous income	25			32			(7		)	(21.9	)
Total other income	40			50			(10		)	(20.0	)
Total other revenues	$	1,147		$	1,590		$	(443	)	(27.9	)%

* Not meaningful.

97

HSBC USA Inc.

Credit card fees  Credit card fees increased in the three and nine months ended September 30, 2014 as the prior year periods reflect higher costs associated with our credit card rewards program due to an increase in estimated customer redemption rates, partially offset by lower late fees due to improved customer behavior.

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

					Increase (Decrease)
Three Months Ended September 30,	2014		2013		Amount			%
	(dollars are in millions)
Account services	$	80	$	76	4			5.3
Credit facilities	56		48		8			16.7
Custodial fees	11		12		(1		)	(8.3	)
Other fees	39		45		(6		)	(13.3	)
Total other fees and commissions	$	186	$	181	$	5		2.8	%
					Increase (Decrease)
Nine Months Ended September 30,	2014		2013		Amount			%
	(dollars are in millions)
Account services	$	228	$	216	$	12		5.6	%
Credit facilities	161		152		9			5.9
Custodial fees	32		45		(13		)	(28.9	)
Other fees	120		114		6			5.3
Total other fees and commissions	$	541	$	527	$	14		2.7	%

Trust income  Trust income increased in the three and nine months ended September 30, 2014 reflecting higher fee income associated with our management of fixed income assets driven primarily by growth in emerging market debt sales.

98

HSBC USA Inc.

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

							Increase (Decrease)
Three Months Ended September 30,	2014			2013			Amount			%
	(dollars are in millions)
Trading revenue (expense)	$	(9	)	$	117		$	(126	)	*
Net interest income	23			2			21			*
Trading related revenue	$	14		$	119		$	(105	)	(88.2	)%
Business:
Derivatives(1)	$	(48	)	$	71		$	(119	)	*
Balance sheet management	(6		)	7			(13		)	*
Foreign exchange	50			28			22			78.6
Precious metals	17			11			6			54.5
Global banking	1			1			—			—
Other trading	—			1			(1		)	(100.0	)
Trading related revenue	$	14		$	119		$	(105	)	(88.2	)%
							Increase (Decrease)
Nine Months Ended September 30,	2014			2013			Amount			%
	(dollars are in millions)
Trading revenue	$	139		$	388		$	(249	)	(64.2	)%
Net interest income	72			(13		)	85			*
Trading related revenue	$	211		$	375		$	(164	)	(43.7	)%
Business Activities:
Derivatives(1)	$	24		$	166		$	(142	)	(85.5	)%
Balance sheet management	(9		)	11			(20		)	*
Foreign exchange	160			136			24			17.6
Precious metals	38			59			(21		)	(35.6	)
Global Banking	1			2			(1		)	(50.0	)
Other trading	(3		)	1			(4		)	*
Trading related revenue	$	211		$	375		$	(164	)	(43.7	)%

* Not meaningful.

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

Trading related revenue decreased during the three and nine months ended September 30, 2014 due to lower revenue from derivatives and balance sheet management partially offset by higher revenue from foreign exchange. While lower precious metals revenue contributed to the decrease in the year-to-date period, precious metals revenue was higher during the three month period.

Trading revenue from derivative products decreased during the three and nine months ended September 30, 2014 due to the performance of our legacy structured credit products, which included losses on the transfer of risk associated with portions of our credit derivatives portfolio and lower valuation gains, as well as lower new deal activity on domestic interest rate products and, in the three month period, lower new deal activity on emerging markets related products. In the year-to-date period, revenue from emerging markets related products were higher, benefiting from higher yielding trading asset balances.

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

99

HSBC USA Inc.

Foreign exchange trading revenue increased during the three and nine months ended September 30, 2014 due to higher client trading volumes.

Precious metals revenue increased during the three months ended September 30, 2014 driven by higher client trading volumes and decreased during nine months ended September 30, 2014 from reduced trade volumes as investor demand shifted in favor of other assets.

Net other-than-temporary impairment losses During the three and nine months ended September 30, 2014, the debt securities held by a consolidated variable interest entity ("VIE") were determined to have changes to their previous other-than-temporary impairment estimates related to the credit component which was recognized in earnings. During the three and nine months ended September 30, 2013, there were no other-than-temporary impairment losses recognized.

Other securities gains (losses), net  We maintain various securities portfolios as part of our balance sheet diversification and risk management strategies. As part of a continuing strategy to re-balance the securities portfolio for risk management purposes based on the current interest rate environment, during the three and nine months ended September 30, 2014, respectively, we sold $7,601 million and $23,600 million of primarily U.S. Treasury, government agency mortgage-backed and other asset-backed securities compared with sales of $11,054 million and $33,349 million during the three and nine months ended September 30, 2013, respectively. The gross realized gains and losses from sales of securities in both years, which is included as a component of other securities gains (losses), net above, are summarized in Note 3, "Securities," in the accompanying consolidated financial statements.

HSBC affiliate income  Affiliate income increased in the three months ended September 30, 2014 reflecting higher billings associated with internal audit activities performed for other HSBC affiliates and higher fees associated with residential mortgage loan servicing activities performed on behalf of HSBC Finance. In the year-to-date period, these increases were more than offset by lower fees related to lending arrangements extended to other HSBC affiliates.

100

HSBC USA Inc.

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

							Increase (Decrease)
Three Months Ended September 30,	2014			2013			Amount			%
	(dollars are in millions)
Net interest income	$	45		$	42		$	3		7.1	%
Servicing related income:
Servicing fee income	17			20			(3		)	(15.0	)
Changes in fair value of Mortgage Servicing Rights ("MSRs") due to:
Changes in valuation model inputs or assumptions	2			5			(3		)	(60.0	)
Customer payments	(6		)	(8		)	2			25.0
Trading – Derivative instruments used to offset changes in value of MSRs	—			(1		)	1			100.0
Total servicing related income	13			16			(3		)	(18.8	)
Originations and sales related income:
Gains on sales of residential mortgages	(2		)	9			(11		)	*
Recovery (provision) for repurchase obligations	4			—			4			*
Trading and hedging activity	—			(9		)	9			100.0
Total originations and sales related income	2			—			2			*
Other mortgage income	2			2			—			—
Total residential mortgage banking revenue included in other revenues	17			18			(1		)	(5.6	)
Total residential mortgage banking related revenue	$	62		$	60		$	2		3.3	%
							Increase (Decrease)
Nine Months Ended September 30,	2014			2013			Amount			%
	(dollars are in millions)
Net interest income	$	137		$	137		$	—		—	%
Servicing related income:
Servicing fee income	52			62			(10		)	(16.1	)
Changes in fair value of MSRs due to:
Changes in valuation model inputs or assumptions	(22		)	73			(95		)	*
Customer payments	(23		)	(31		)	8			25.8
Trading – Derivative instruments used to offset changes in value of MSRs	37			(42		)	79			*
Total servicing related income	44			62			(18		)	(29.0	)
Originations and sales related income:
Gains on sales of residential mortgages	(2		)	41			(43		)	*
Recovery (provision) for repurchase obligations	38			(36		)	74			*
Trading and hedging activity	—			(5		)	5			100.0
Total originations and sales related income	36			—			36			*
Other mortgage income	7			11			(4		)	(36.4	)
Total residential mortgage banking revenue included in other revenues	87			73			14			19.2
Total residential mortgage banking related revenue	$	224		$	210		$	14		6.7	%

* Not meaningful.

Net interest income was slightly higher in the three months ended September 30, 2014 and flat in the nine months ended September 30, 2014 reflecting lower amortization of deferred origination costs as a result of lower portfolio prepayments due to higher mortgage rates compared with the prior year. Both periods reflect lower net interest income resulting from lower spreads on newly

101

HSBC USA Inc.

originated residential mortgage loans which, in the year-to-date period, offset the lower amortization of deferred origination cost. Consistent with our strategy, additions to our residential mortgage portfolio are primarily mortgages to our Premier and Advance customers, while sales of newly originated conforming loans are sold to PHH Mortgage as discussed further below.

Total servicing related income decreased during both periods due to lower servicing fees due to a decline in our average serviced loan portfolio and, in the year-to-date period, a decline in net hedged MSR performance. 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 sold on a servicing released basis. Changes in net hedged MSR performance is driven by changes in the MSR valuations due to updated market based assumptions such as interest rates, expected prepayments, primary-secondary spreads and cost of servicing which differ from period to period along with changes in the value of the underlying instruments used to hedge changes in the fair value of the MSRs. Consequently, primarily as a result of the elimination of new volume and declining mortgage rates, our MSR fair value decreased during the nine months ended September 30, 2014, which was partially offset by gains on instruments used to hedge changes in the fair value of the MSR.

Originations and sales related income improved in the three and nine months ended September 30, 2014 largely due to lower loss estimates for loan repurchase obligations associated with loans previously sold partially offset by lower gains on sales of residential mortgage loans. During the three months ended September 30, 2014, we recorded a recovery for repurchase obligations of $4 million compared with no provision in the year ago period. During the nine months ended September 30, 2014, we recorded a recovery for repurchase obligations of $38 million compared with a provision of $36 million in the year ago period. The current year periods reflect reductions in our estimated exposure associated with repurchase obligations on loans previously sold. During the first quarter of 2014, we entered into a settlement with the Federal Home Loan Mortgage Corporation ("FHLMC") for $25 million which settled our liability for substantially all loans sold to FHLMC from January 1, 2000 through 2013. The settlement and a re-assessment of the residual exposure resulted in a release of reserves. A similar settlement was entered into with the Federal National Mortgage Association ("FNMA") in the fourth quarter of 2013. We continue to maintain repurchase reserves for FNMA and FHLMC exposure associated with residual risks not covered under these settlement agreements. The lower gains on sales of residential mortgage loans reflects the impact of lower salable loan volume due in part to higher interest rates in the year-to-date period compared with the prior year, the impact of our agreement with PHH Mortgage and losses associated with the execution of certain Community Reinvestment Act activities.

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

Valuation of loans held for sale  Valuation gains on loans held for sale were relatively flat during the three months ended September 30, 2014. In the year-to-date period, valuation gains decreased due primarily to valuation write-downs on certain commercial loans held for sale as well as lower valuation gains on residential mortgage loans held for sale due mostly to lower average balances in the current year period. Partially offsetting these decreases were higher valuation gains on certain student loans held for sale attributable to improved economic and regulatory conditions as well as increased investor demand. Residential mortgage loans held for sale includes subprime residential mortgage loans which were purchased from third parties and HSBC affiliates with the intent of securitization or sale, with a fair value of $21 million and $48 million as of September 30, 2014 and 2013, respectively. Loans held for sale are recorded at the lower of their aggregate cost or fair value, with adjustments to fair value being recorded as a valuation allowance. Valuations on residential mortgage loans held for sale that we originate are recorded as a component of residential mortgage banking revenue in the consolidated statement of income.

Other income  Other income, excluding the valuation of loans held for sale as discussed above, increased during the three months ended September 30, 2014 driven primarily by a gain of $16 million from the sale of certain commercial MSRs in the third quarter of 2014 and the establishment in the prior year period of a repurchase reserve of approximately $8 million relating to loans previously securitized. These improvements were partially offset by lower income associated with fair value hedge ineffectiveness related to securities available-for-sale. In the year-to-date period, the improvements noted above in the three month period as well as higher income associated with bank owned life insurance in the year-to-date period, were more than offset by lower income associated with fair value hedge ineffectiveness related to securities available-for-sale and lower income associated with credit default swap protection on certain commercial loans.

102

HSBC USA Inc.

Operating Expenses  Compliance costs, which remained a significant component of our cost base, totaled $54 million and $199 million in the three and nine months ended September 30, 2014, respectively, compared with $79 million and $228 million in the prior year periods. While we continue to focus attention on cost mitigation efforts in order to continue realization of optimal cost efficiencies, compliance related costs remain elevated due to the remediation required by regulatory consent agreements and the implementation of global standards.

The following table summarizes the components of operating expenses:

							Increase (Decrease)
Three Months Ended September 30,	2014			2013			Amount			%
	(dollars are in millions)
Salary and employee benefits	$	226		$	218		$	8		3.7	%
Occupancy expense, net	$	59		$	57		2			3.5
Support services from HSBC affiliates:
Fees paid to HSBC Finance	2			2			—			—
Fees paid to HSBC Markets (USA) Inc. ("HMUS")	52			58			(6		)	(10.3	)
Fees paid to HSBC Technology and Services (USA) ("HTSU")	274			274			—			—
Fees paid to other HSBC affiliates	60			44			16			36.4
Total support services from HSBC affiliates	388			378			10			2.6
Other expenses:
Equipment and software	12			14			(2		)	(14.3	)
Marketing	9			9			—			—
Outside services	5			31			(26		)	(83.9	)
Professional fees	35			38			(3		)	(7.9	)
Postage, printing and office supplies	1			1			—			—
Off-balance sheet credit reserves	3			4			(1		)	(25.0	)
FDIC assessment fee	22			24			(2		)	(8.3	)
Miscellaneous	174			60			114			*
Total other expenses	261			181			80			44.2
Total operating expenses	$	934		$	834		$	100		12.0	%
Personnel - average number	6,063			6,490
Efficiency ratio	100.5		%	90.3		%

103

HSBC USA Inc.

							Increase (Decrease)
Nine Months Ended September 30,	2014			2013			Amount			%
	(dollars are in millions)
Salary and employee benefits	$	664		$	717		$	(53	)	(7.4	)%
Occupancy expense, net	168			173			(5		)	(2.9	)
Support services from HSBC affiliates:
Fees paid to HSBC Finance	8			11			(3		)	(27.3	)
Fees paid to HMUS	156			164			(8		)	(4.9	)
Fees paid to HTSU	798			749			49			6.5
Fees paid to other HSBC affiliates	165			140			25			17.9
Total support services from HSBC affiliates	1,127			1,064			63			5.9
Other expenses:
Equipment and software	39			42			(3		)	(7.1	)
Marketing	39			27			12			44.4
Outside services	31			96			(65		)	(67.7	)
Professional fees	86			92			(6		)	(6.5	)
Postage, printing and office supplies	3			5			(2		)	(40.0	)
Off-balance sheet credit reserves	12			(14		)	26			*
FDIC assessment fee	79			66			13			19.7
Miscellaneous	312			100			212			*
Total other expenses	601			414			187			45.2
Total operating expenses	$	2,560		$	2,368		$	192		8.1	%
Personnel - average number	6,141			6,578
Efficiency ratio	88.8		%	76.3		%

* Not meaningful.

Salaries and employee benefits  Salaries and employee benefits expense increased during the three months ended September 30, 2014, but declined during the nine months ended September 30, 2014. Both 2014 periods benefited from the impact of continued cost management efforts which resulted in lower average personnel partially offset by increased staffing associated with strengthening controls in compliance and other risk management activities as well as capital planning and reporting. The benefit from lower average personnel was more than offset in the three month period by higher incentive compensation expense.

Occupancy expense, net  Occupancy expense was relatively flat in the three month period ended September 30, 2014. The decline in the year-to-date period primarily reflects lower rental expense, including the consolidation of office space in Buffalo, NY which was completed in the fourth quarter of 2013.

Support services from HSBC affiliates  Support services from HSBC affiliates increased in the three and nine months ended September 30, 2014 due, in part, to changing the billing process for certain third-party loan servicing costs from a direct expense in the prior year to support services from HTSU in 2014. Also contributing to higher support services from HSBC affiliates were higher cost allocations from various corporate functions as well as increased costs associated with our investment in process enhancements and infrastructure to improve and modernize our legacy business systems. Compliance costs reflected in support services from affiliates (primarily from HTSU) totaled $52 million and $191 million during the three and nine months ended September 30, 2014, respectively, compared with $76 million and $219 million in the year-ago periods. A summary of the activities charged to us from various HSBC affiliates is included in Note 13, "Related Party Transactions," in the accompanying consolidated financial statements.

Marketing Marketing expenses were flat in the three month period and increased during the nine months ended September 30, 2014 driven largely by marketing campaigns to support the re-launch of HSBC Premier in the second quarter of 2014.

Other expenses  Other expenses increased in the three and nine months ended September 30, 2014 largely driven by higher litigation costs including $108 million and $178 million of expense related to the settlement of the FHFA matter that was recorded during the three and nine months ended September 30, 2014, respectively, as well as higher expense associated with an increase in our expectation of compensatory fees payable to GSEs due to continuing challenges in the foreclosure environment and, in the year-

104

HSBC USA Inc.

to-date period, higher loss estimates associated with off-balance sheet credit exposures as the prior year reflects a reserve release due to an upgrade of an individual monoline, and higher deposit insurance assessment fees. Partially offsetting these increases in both periods was a decline in outside services expense due to moving the billing of certain third-party loan servicing costs from a direct expense in the prior year to support services from HTSU in 2014.

Efficiency ratio  Our efficiency ratio was 100.5 percent and 88.8 percent during the three and nine months ended September 30, 2014, respectively, compared with 90.3 percent and 76.3 percent during the year-ago periods. Our efficiency ratio was impacted in both periods by the change in the fair value of our own debt attributable to credit spread for which we have elected fair value option accounting. Excluding the impact of this item, our efficiency ratio for the three and nine months ended September 30, 2014 increased to 101.3 percent and 88.2 percent, respectively, compared with 84.5 percent and 75.0 percent in the year-ago periods due to higher operating expenses driven primarily by higher litigation expense, lower other revenues driven by lower trading revenue and, in the year-to date period, lower fair value option revenue and lower gains on security sales, partially offset by higher net interest income.

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

Three Months Ended September 30,	2014					2013
	(dollars are in millions)
Tax expense (benefit) at the U.S. federal statutory income tax rate	$	(10	)	(35.0	)%	$	13		35.0	%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit	(2		)	(7.1	)	1			2.8
Other non-deductible / non-taxable items(2)	1			3.6		(1		)	(2.8	)
Items affecting prior periods(3)	(11		)	(39.3	)	20			55.6
Impact of foreign operations(5)	2			7.1		5			13.9
Low income housing tax credit investments(6)	(7		)	(25.0	)	(8		)	(22.2	)
Change in valuation allowance reserves(7)	(3		)	(10.7	)	—			—
Other	1			3.6		2			5.6
Total income tax expense (benefit)	$	(29	)	(103.6	)%	$	32		88.9	%
Nine Months Ended September 30,	2014					2013
	(dollars are in millions)
Tax expense at the U.S. federal statutory income tax rate	$	69		35.0	%	$	208		35.0	%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit	11			5.6		31			5.2
Adjustment of tax rate used to value deferred taxes(1)	60			30.3		—			—
Other non-deductible / non-taxable items(2)	(3		)	(1.5	)	(14		)	(2.4	)
Items affecting prior periods(3)	(35		)	(17.7	)	(4		)	(0.7	)
Uncertain tax positions(4)	(181		)	(91.4	)	18			3.0
Impact of foreign operations(5)	3			1.5		9			1.5
Low income housing tax credits investments(6)	(21		)	(10.6	)	(22		)	(3.7	)
Change in valuation allowance reserves(7)	10			5.1		—			—
Other	1			0.5		2			0.3
Total income tax expense (benefit)	$	(86	)	(43.4	)%	$	228		38.3	%

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

⁽²⁾  For 2014, the amount relates to tax exempt interest income. For 2013, the amount relates to a change in the assessment of the deductibility of other non-deductible expenses and tax exempt interest income.

⁽³⁾  For 2014, the amount relates to changes in estimates in the amount of state income taxes deductible on the federal income tax return and changes in state tax expense as a result of filing amended state tax returns upon the closing of the 2006 - 2009 federal audits. For 2013, the amount relates to corrections to current and deferred tax balance sheet accounts and changes in estimates as a result of filing the federal and state income tax returns.

105

HSBC USA Inc.

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

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

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

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

During the second quarter of 2014, we concluded certain state and local tax audits resulting in the settlement of significant uncertain tax positions covering a number of years. As a result, we released tax reserves previously maintained in relation to the periods and issues under review which resulted in an income tax benefit of $183 million during the second quarter. The total amount of our unrecognized tax benefits related to uncertain tax positions was $27 million at September 30, 2014 compared with $540 million at December 31, 2013. In addition, we released our accrued interest associated with the tax reserves released which resulted in a $120 million benefit to interest expense during the second quarter. At September 30, 2014 our accrued liability for the payment of interest associated with uncertain tax positions was $4 million compared with $208 million at December 31, 2013.

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

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

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

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

106

HSBC USA Inc.

Segment Results – IFRSs Basis

We have four distinct business segments that are utilized for management reporting and analysis purposes which are aligned with HSBC's global businesses and business strategy. The segments, which are generally based upon customer groupings and global businesses, are described under Item 1, "Business," in our 2013 Form 10-K. There have been no changes in the basis of our segmentation or measurement of segment profit as compared with the presentation in our 2013 Form 10-K.

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

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

Consistent with our strategy, the growth of our residential mortgage portfolio is driven primarily by lending to our Premier and Advance customers, while sales of loans, which historically consisted primarily of conforming loans sold to GSEs, but beginning in May 2013, consist of loans sold to 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 upon sale. No such sales occurred in the periods presented. Following the conversion of our mortgage processing and servicing operations to PHH Mortgage, we now sell our agency eligible originations directly to PHH Mortgage on a servicing released basis, resulting in no new mortgage servicing rights being recognized.

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

							Increase (Decrease)
Three Months Ended September 30,	2014			2013			Amount			%
	(dollars are in millions)
Net interest income	$	196		$	205		$	(9	)	(4.4	)%
Other operating income	98			81			17			21.0
Total operating income	294			286			8			2.8
Loan impairment charges	11			44			(33		)	(75.0	)
Net operating income	283			242			41			16.9
Operating expenses	343			301			42			14.0
Loss before tax	$	(60	)	$	(59	)	$	(1	)	(1.7	)%
							Increase (Decrease)
Nine Months Ended September 30,	2014			2013			Amount			%
	(dollars are in millions)
Net interest income	$	606		$	626		$	(20	)	(3.2	)%
Other operating income	315			270			45			16.7
Total operating income	921			896			25			2.8
Loan impairment charges	34			97			(63		)	(64.9	)
Net operating income	887			799			88			11.0
Operating expenses	920			892			28			3.1
Loss before tax	$	(33	)	$	(93	)	$	60		64.5	%

* Not meaningful.

107

HSBC USA Inc.

Our RBWM segment reported relatively flat loss before tax during the three months ended September 30, 2014 as higher other operating income and lower loan impairment charges were offset by lower net interest income and higher operating expenses. In the year-to-date period, loss before tax improved driven by higher other operating income and lower loan impairment charges, partially offset by lower net interest income and higher operating expenses.

Net interest income was lower during the three and nine months ended September 30, 2014 due to lower deposit levels partially offset by margin improvements due to active repricing of the deposit base especially in the non-premier segments which reduced our funding costs. Also impacting net interest income in the current year are lower spreads on newly originated residential mortgage loans which reflects competitive pressures and the lower risk profile of our Premier customers. Further, in the year-to-date period, an $11 million release of accrued interest was recorded related to uncertain tax positions which were settled with the taxing authorities in the second quarter of 2014.

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

Loan impairment charges decreased during the three and nine months ended September 30, 2014, driven by lower severity estimates due to continued improvements in economic and credit conditions, lower delinquency levels on accounts less than 180 days contractually delinquent and lower charge-offs, including improvements in market value adjustments on loan collateral due to improvements in home prices. Lower severity estimates also reflect a revision to our loss severity calculation which reduced our residential mortgage allowance for credit losses by $10 million in the third quarter of 2014. Further, the current year periods reflect lower losses associated with advances made on behalf of borrowers. These improvements were partially offset in the year-to-date period by increased loss estimates associated with the remediation of certain mortgage servicing activities and the non-recurrence of an incremental loan impairment charge of $15 million that was recorded in 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 higher in the three months ended September 30, 2014 primarily due to higher litigation costs as well as an increase in our estimate of compensatory fees payable to GSEs due to continued challenges in the foreclosure environment. These increases were partially offset in the year-to-date period due primarily to lower expenses driven by several cost reduction initiatives relating to our retail branch network, primarily optimizing staffing and administrative areas.

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

New loan originations have resulted in a 32 percent increase in quarter-to-date average loans outstanding to Corporate Banking customers since the third quarter of 2013. The Commercial Real Estate group is focusing on selective business opportunities in markets where we have strong portfolio expertise, which reflects in a 14 percent increase in quarter-to-date average outstanding loans for this portfolio since the third quarter of 2013. Total quarter-to-date average loans increased 23 percent across all CMB business lines as compared with the third quarter of 2013.

108

HSBC USA Inc.

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

					Increase (Decrease)
Three Months Ended September 30,	2014		2013		Amount			%
	(dollars are in millions)
Net interest income	$	204	$	181	$	23		12.7	%
Other operating income	90		77		13			16.9
Total operating income	294		258		36			14.0
Loan impairment charges	29		26		3			11.5
Net operating income	265		232		33			14.2
Operating expenses	169		169		—			—
Profit before tax	$	96	$	63	$	33		52.4	%
					Increase (Decrease)
Nine Months Ended September 30,	2014		2013		Amount			%
	(dollars are in millions)
Net interest income	$	593	$	523	$	70		13.4	%
Other operating income	222		219		3			1.4
Total operating income	815		742		73			9.8
Loan impairment charges	119		41		78			*
Net operating income	696		701		(5		)	(.7	)
Operating expenses	501		502		(1		)	(.2	)
Profit before tax	$	195	$	199	$	(4	)	(2.0	)%

* Not meaningful.

Our CMB segment reported a higher profit before tax during the three months ended September 30, 2014, driven by higher net interest income and higher other operating income, partially offset by higher loan impairment charges. In the year-to-date period, profit before tax decreased as higher net interest income and higher other operating income was more than offset by higher loan impairment charges.

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

Other operating income was higher during the three and nine months ended September 30, 2014 driven primarily by a gain of $16 million from the sale of certain commercial MSRs in the third quarter of 2014 as well as higher fees generated from an increase in credit commitments and higher Global Banking and Markets ("GB&M") collaboration income due to an increase in debt and leverage acquisition financing activity. These improvements were largely offset in the year-to-date period by the non-recurrence of asset sales in commercial real estate in the prior year and lower trade revenues from managing risk with trading counterparties. Both periods also reflect lower revenues related to a reduction of certain business banking customers who do not have significant international needs.

Loan impairment charges were higher in both periods due to a revision to certain estimates used in our commercial loan impairment calculation which resulted in an incremental loan impairment charge of approximately $22 million and $94 million during the three and nine months ended September 30, 2014, respectively. Excluding the impact of this item, loan impairment charges were lower in both periods primarily due to the non-recurrence of a specific provision associated with a single customer relationship that was recorded in the prior year, partially offset by higher charges associated with loan growth. The decrease in the year-to-date period also reflects lower provisions for risk factors associated with expansion market loan exposures as well as improvements in economic and credit conditions which led to lower nonperforming loans and criticized asset levels.

Operating expenses were relatively flat during the three and nine months ended September 30, 2014.

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

109

HSBC USA Inc.

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

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

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

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

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

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

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

							Increase (Decrease)
Three Months Ended September 30,	2014			2013			Amount			%
	(dollars are in millions)
Net interest income	$	74		$	78		$	(4	)	(5.1	)%
Other operating income	191			296			(105		)	(35.5	)
Total operating income(1)	265			374			(109		)	(29.1	)
Loan impairment charges (recoveries)	11			(3		)	14			*
Net operating income	254			377			(123		)	(32.6	)
Operating expenses	553			255			298			*
Profit (loss) before tax	$	(299	)	$	122		$	(421	)	*
							Increase (Decrease)
Nine Months Ended September 30,	2014			2013			Amount			%
	(dollars are in millions)
Net interest income	$	280		$	312		$	(32	)	(10.3	)%
Other operating income	636			973			(337		)	(34.6	)
Total operating income(1)	916			1,285			(369		)	(28.7	)
Loan impairment charges	66			6			60			*
Net operating income	850			1,279			(429		)	(33.5	)
Operating expenses	1,031			735			296			40.3
Profit (loss) before tax	$	(181	)	$	544		$	(725	)	*

* Not meaningful.

110

HSBC USA Inc.

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

							Increase (Decrease)
Three Months Ended September 30,	2014			2013			Amount			%
	(in millions)
Credit(2)	$	(48	)	$	16		$	(64	)	*
Rates	14			40			(26		)	(65.0	)
Foreign Exchange and Metals	73			52			21			40.4
Equities	16			36			(20		)	(55.6	)
Total Global Markets	55			144			(89		)	(61.8	)
Capital Financing	66			70			(4		)	(5.7	)
Payments and Cash Management	89			88			1			1.1
Securities Services	3			3			—			—
Global Trade and Receivables Finance	11			10			1			10.0
Balance Sheet Management(3)	50			76			(26		)	(34.2	)
Debit Valuation Adjustment	(1		)	(7		)	6			85.7
Other(4)	(8		)	(10		)	2			20.0
Total operating income	$	265		$	374		$	(109	)	(29.1	)%
							Increase (Decrease)
Nine Months Ended September 30,	2014			2013			Amount			%
	(dollars are in millions)
Credit(2)	$	(22	)	$	75		$	(97	)	*
Rates	106			123			(17		)	(13.8	)
Foreign Exchange and Metals	216			243			(27		)	(11.1	)
Equities	6			51			(45		)	(88.2	)
Total Global Markets	306			492			(186		)	(37.8	)
Capital Financing	183			184			(1		)	(.5	)
Payments and Cash Management	261			250			11			4.4
Securities Services	9			10			(1		)	(10.0	)
Global Trade and Receivables Finance	34			32			2			6.3
Balance Sheet Management(3)	147			321			(174		)	(54.2	)
Debit Valuation Adjustment	(14		)	—			(14		)	*
Other(4)	(10		)	(4		)	(6		)	*
Total operating income	$	916		$	1,285		$	(369	)	(28.7	)%

* Not meaningful.

⁽²⁾  Credit includes losses of $43 million and $17 million in the three and nine months ended September 30, 2014, respectively, compared with gains of $16 million and $82 million in the three and nine months ended September 30, 2013, 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 $26 million and $42 million in the three and nine months ended September 30, 2014, respectively, compared with gains on the sale of securities of $35 million and $189 million in the three and nine months ended September 30, 2013, respectively.

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

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

Credit revenue decreased during the three and nine months ended September 30, 2014 from the performance of legacy credit products. Changes in the fair value of legacy structured credit products resulted in losses of $43 million and $19 million during the three and nine months ended September 30, 2014, respectively, which included losses on the transfer of risk associated with portions of our credit derivatives portfolio in the third quarter of 2014, compared with gains of $24 million and $79 million during the three and nine months ended September 30, 2013, respectively. Included in the changes in fair value from structured credit products were increases in fair value of $1 million and $14 million during the three and nine months ended September 30, 2014, respectively, related to exposures to monoline insurance companies, compared with increases of $1 million and $42 million during

111

HSBC USA Inc.

the three and nine months ended September 30, 2013, respectively. Credit revenue also included valuation losses of $1 million and less than $1 million during the three and nine months ended September 30, 2014, respectively, related to the fair value of sub-prime residential mortgage loans held for sale compared with valuation losses of $1 million and gains of $6 million during the three and nine months ended September 30, 2013, respectively. Revenue from Rates decreased during the three and nine months ended September 30, 2014 due to lower new deal activity. Foreign Exchange and Metals revenue increased during the three months ended September 30, 2014 due to higher client trading volumes. These improvement were more than offset in the year-to-date period due to decline in metals related client trading and lower custody fees. The decrease in Equities during the three and nine months ended September 30, 2014 was driven by the impact of fair value adjustments on certain equity linked structured note liabilities, which were related to movements in our own credit spreads.

Capital Financing revenues decreased during the three and nine months ended September 30, 2014 as higher revenue from increased corporate and asset backed financing activity was more than offset by lower revenue due to tightening credit spreads and lower project financing fees. Payments and Cash Management revenue increased in the year-to-date period due to higher average deposit balances and higher income from transaction related services.

Balance Sheet Management reflected lower gains from the sales of securities and the under-performance of economic hedge positions used to manage interest rate risk during the three and nine months ended September 30, 2014.

Debit valuation adjustments on derivative liabilities increased during the three months ended September 30, 2014 and decreased in the year-to-date period, which reflects a movement of our spreads relative to the year ago periods.

Loan impairment charges were higher during the three months ended September 30, 2014 reflecting a higher expected loss on a single name exposure as well as higher provisions for risk factors associated with emerging market and large loan exposures. Loan impairment charges were higher in the year-to-date period reflecting a higher expected loss on a single name exposure and, to a lesser extent, the revaluation of a loan held for sale, partially offset by lower provisions for risk factors associated with large loan exposures. Loan impairment charges in both periods also reflect a revision to certain estimates used in our commercial loan impairment calculation which resulted in a loan impairment charge of approximately $3 million and $23 million during the three and nine months ended September 30, 2014, respectively.

Operating expenses reflects $297 million of litigation expense that was recorded in the third quarter of 2014 related to the settlement of the FHFA matter. Excluding the impact of litigation expenses, operating expenses were relatively flat during the three and nine months ended September 30, 2014.

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

Client deposit levels decreased $680 million or 6 percent compared with September 30, 2013 from international market customers. Total loans increased $160 million or 3 percent compared with September 30, 2013 from commercial and industrial, and residential mortgage portfolios. Overall period end client assets were $300 million higher than September 30, 2013 and $325 million higher than December 31, 2013 primarily due to higher PB wealth management, fiduciary and investment products, partially offset by reductions in highly active institutional custody customer balances and deposits.

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

	2014			2013
	(in millions)
Client assets at beginning of the period	$	44,661		$	46,461
Net new money	(164		)	(2,284		)
Value change	488			497
Client assets at end of period	$	44,985		$	44,674

112

HSBC USA Inc.

The following table summarizes IFRSs results for the PB segment.

						Increase (Decrease)
Three Months Ended September 30,	2014			2013		Amount			%
	(dollars are in millions)
Net interest income	$	47		$	46	$	1		2.2	%
Other operating income	28			27		1			3.7
Total operating income	75			73		2			2.7
Loan impairment charges (recoveries)	(4		)	3		(7		)	*
Net operating income	79			70		9			12.9
Operating expenses	58			62		(4		)	(6.5	)
Profit before tax	$	21		$	8	$	13		*
						Increase (Decrease)
Nine Months Ended September 30,	2014			2013		Amount			%
	(dollars are in millions)
Net interest income	$	152		$	140	$	12		8.6	%
Other operating income	78			85		(7		)	(8.2	)
Total operating income	230			225		5			2.2
Loan impairment charges (recoveries)	(9		)	4		(13		)	*
Net operating income	239			221		18			8.1
Operating expenses	174			189		(15		)	(7.9	)
Profit before tax	$	65		$	32	$	33		*

* Not meaningful.

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

Net interest income was relatively flat in the three months ended September 30, 2014. In the year-to-date period, net interest income was higher due to improved volumes in lending and liquidity premiums on deposits, partially offset by lower net interest from reduced demand deposit and time deposit balances.

Other operating income was relatively flat during the three months ended September 30, 2014 and lower during the nine months ended September 30, 2014 mainly due to reductions in other income from affiliates and custody product fees in the year-to-date period.

Loan impairment charges decreased during the three and nine months ended September 30, 2014 due to releases of reserves from loan pay downs and higher recoveries, primarily from the payoff of a troubled debt restructuring loan in the first quarter of 2014.

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

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

113

HSBC USA Inc.

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

							Increase (Decrease)
Three Months Ended September 30,	2014			2013			Amount			%
	(dollars are in millions)
Net interest income (expense)	$	(2	)	$	(6	)	$	4		66.7	%
Gain (loss) on own fair value option debt attributable to credit spread	7			(63		)	70			*
Other operating income	16			25			(9		)	(36.0	)
Total operating income (expense)	21			(44		)	65			*
Loan impairment charges	—			—			—			—
Net operating income (expense)	21			(44		)	65			*
Operating expenses	30			31			(1		)	(3.2	)
Loss before tax	$	(9	)	$	(75	)	$	66		88.0	%
							Increase (Decrease)
Nine Months Ended September 30,	2014			2013			Amount			%
	(dollars are in millions)
Net interest income (expense)	$	63		$	(34	)	$	97		*
Gain (loss) on own fair value option debt attributable to credit spread	(20		)	(52		)	32			61.5
Other operating income	30			65			(35		)	(53.8	)
Total operating income (expense)	73			(21		)	94			*
Loan impairment charges	—			—			—			—
Net operating income (expense)	73			(21		)	94			*
Operating expenses	83			74			9			12.2
Loss before tax	$	(10	)	$	(95	)	$	85		89.5	%

* Not meaningful.

Loss before tax improved during the three months ended September 30, 2014 primarily due to higher total operating income driven by gains associated with changes in the fair value of our own debt for which fair value option accounting was elected and related derivatives. In the year-to-date period, loss before tax improved reflecting higher net interest income driven by an $87 million release of accrued interest related to uncertain tax positions which were settled with the taxing authorities in the second quarter of 2014, partially offset by increased operating expenses primarily reflecting a favorable fringe adjustment in the prior year. The current year periods also reflect lower net revenues from low income housing tax credit investments as, due to the significant involvement required by the business to manage the investments, a fee arrangement is in place in 2014 to share the net revenue of the investments with CMB and GB&M.

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

114

HSBC USA Inc.

Credit Quality

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

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

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

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

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

For pools of homogeneous consumer receivables and certain small business loans which do not qualify as troubled debt restructures, probable losses are estimated using a roll rate migration analysis that estimates the likelihood that a loan will progress through the various stages of delinquency, or buckets, and ultimately charge-off based upon recent historical performance experience of other loans in our portfolio. This migration analysis incorporates estimates of the period of time between a loss occurring and the confirming event of its charge-off. This analysis considers delinquency status, loss experience and severity and takes into account whether loans are in bankruptcy or have been subject to account management actions, such as the re-age of accounts or modification arrangements. The allowance for credit losses on consumer receivables also takes into consideration the loss severity expected based on the underlying collateral, if any, for the loan in the event of default based on historical and recent trends which are updated monthly based on a rolling average of several months' data using the most recently available information and is typically in the range of 30-55 percent for first lien mortgage loans and 75-100 percent for second lien home equity loans. At September 30, 2014, approximately 1 percent of our second lien mortgages where the first lien mortgage is held or serviced by us and has a delinquency status of 90 days or more delinquent, were less than 90 days delinquent and not considered to be a troubled debt restructure or already recorded at fair value less costs to sell.

115

HSBC USA Inc.

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

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

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

	September 30, 2014			June 30, 2014			December 31, 2013
	(dollars are in millions)
Allowance for credit losses	$	631		$	624		$	606
Ratio of Allowance for credit losses to:
Loans:(1)
Commercial	.8		%	.7		%	.6		%
Consumer:
Residential mortgages	0.8			0.9			1.2
Home equity mortgages	2.0			2.2			2.4
Credit card receivables	5.8			5.7			5.9
Other consumer loans	2.4			2.3			2.5
Total consumer loans	1.1			1.3			1.6
Total	.9		%	.9		%	.9		%
Net charge-offs(1)(2):
Commercial	*			1,367.9		%	513.3		%
Consumer	326.9			215.2			301.0
Total	1,001.6		%	445.7		%	381.1		%
Nonperforming loans(1):
Commercial	429.2		%	375.5		%	118.5		%
Consumer	23.3			24.8			28.3
Total	60.9		%	58.2		%	46.1		%

* Not meaningful.

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

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

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

The allowance for credit losses at September 30, 2014increased$7 million or 1 percent as compared with June 30, 2014 and increased $25 million or 4 percent as compared with December 31, 2013 due to higher loss estimates in our commercial loan portfolio, partially offset by lower loss estimates in our consumer loan portfolio as explained more fully below.

116

HSBC USA Inc.

Our commercial allowance for credit losses increased$29 million or 8 percent as compared with June 30, 2014 and increased$104 million or 34 percent as compared with December 31, 2013 primarily due to a revision to certain estimates used in our commercial loan impairment calculation as previously discussed. Excluding this item, our commercial allowance for credit losses increased $4 million as compared with June 30, 2014 and decreased $14 million as compared with December 31, 2013. While our commercial allowance for credit losses at September 30, 2014 reflects higher credit loss provisions associated with loan growth and increased levels of reserves for risk factors not fully reflected in the statistical reserve calculation including large loan as well as expansion and emerging markets loan exposure, these increases were more than offset when compared with December 31, 2013 by improvements in economic and credit conditions which led to lower nonperforming loans and lower criticized asset levels, as well as the sale or payoff of certain commercial exposures.

Our consumer allowance for credit losses decreased$22 million or 9 percent as compared with June 30, 2014 and decreased$79 million or 27 percent as compared with December 31, 2013. The decrease in both periods reflects lower loss estimates in our residential mortgage loan portfolio due to lower severity estimates driven by improvements in home prices and continued improvements in credit quality including lower delinquency levels. These improvements were partially offset in the year-to-date period by increased loss estimates associated with the remediation of certain mortgage servicing activities. Our residential mortgage loan allowance for credit losses in both periods reflects consideration of certain risk factors relating to trends such as recent portfolio performance as compared with average roll rates and economic uncertainty, including housing market trends and foreclosure timeframes. Also contributing to the decrease since December 31, 2013 was a lower allowance for credit losses for our credit card portfolio due to improved economic conditions, including lower dollars of delinquency and lower receivable levels.

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

The allowance for credit losses as a percentage of net charge-offs increased as compared with June 30, 2014 and December 31, 2013 due to lower dollars of net charge-offs in both our commercial and consumer loan portfolios and an increase in the overall allowance for credit losses.

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)
	September 30, 2014				June 30, 2014				December 31, 2013
	(dollars are in millions)
Commercial(2)	$	412	73.6	%	$	383	73.5	%	$	308	71.6	%
Consumer:
Residential mortgages	132		22.3		149		22.3		186		23.4
Home equity mortgages	36		2.5		42		2.7		49		3.0
Credit card receivables	40		.9		39		.9		50		1.3
Other consumer	11		.7		11		.6		13		.7
Total consumer	219		26.4		241		26.5		298		28.4
Total	$	631	100.0	%	$	624	100.0	%	$	606	100.0	%

⁽¹⁾  Excluding loans held for sale.

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

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

117

HSBC USA Inc.

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.

	September 30, 2014		June 30, 2014		December 31, 2013
Off-balance sheet credit risk reserve	$	73	$	68	$	60

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

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

	September 30, 2014			June 30, 2014			December 31, 2013
	(dollars are in millions)
Delinquent loans:
Commercial	$	101		$	101		$	135
Consumer:
Residential mortgages	1,055			1,086			1,208
Home equity mortgages	60			59			68
Total residential mortgages(1)(2)	1,115			1,145			1,276
Credit card receivables	14			15			21
Other consumer	14			15			19
Total consumer	1,143			1,175			1,316
Total	$	1,244		$	1,276		$	1,451
Delinquency ratio:
Commercial	.19		%	.19		%	.28		%
Consumer:
Residential mortgages	6.42			6.73			7.59
Home equity mortgages	3.29			3.08			3.38
Total residential mortgages(2)	6.10			6.34			7.11
Credit card receivables	2.04			2.20			2.46
Other consumer	2.64			2.78			3.32
Total consumer	5.87			6.10			6.80
Total	1.69		%	1.76		%	2.14		%

⁽¹⁾  At September 30, 2014, June 30, 2014 and December 31, 2013, residential mortgage loan delinquency includes $967 million, $983 million and $1,074 million, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less costs to sell, including $17 million, $18 million and $27 million, respectively, relating to loans held for sale.

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

	September 30, 2014			June 30, 2014			December 31, 2013
	(dollars are in millions)
Dollars of delinquent loans:
Interest-only loans	$	67		$	66		$	58
ARM loans	294			302			304
Delinquency ratio:
Interest-only loans	1.87		%	1.81		%	1.59		%
ARM loans	2.59			2.72			2.85

118

HSBC USA Inc.

Compared with June 30, 2014, our two-months-and-over contractual delinquency ratio decreased 7 basis points driven by lower dollars of two-months-and-over contractual delinquency in our consumer loan portfolio. Our consumer loan two-month-and-over contractual delinquency ratio at September 30, 2014decreased 23 basis points from June 30, 2014 primarily due to lower levels of residential mortgage loan delinquency driven by continued improvements in economic conditions, while total outstanding loan balances remained relatively flat. Residential mortgage loan delinquency levels however continue to be impacted by an elongated foreclosure process which has resulted in loans which would otherwise have been foreclosed and transferred to REO remaining in loan account and, consequently, in delinquency. Compared with June 30, 2014, our commercial loan two-months-and-over contractual delinquency ratio was flat.

Compared with December 31, 2013, our two-months-and-over contractual delinquency ratio decreased 45 basis points driven by lower dollars of two-months-and-over contractual delinquency in both our commercial and consumer loan portfolios and higher outstanding loan balances primarily in our commercial loan portfolio. Our consumer loan two-month-and-over contractual delinquency ratio at September 30, 2014decreased 93 basis points from December 31, 2013 primarily due to lower levels of residential mortgage loan delinquency and, to a lesser extent, credit card loan delinquency, driven by continued improvements in economic conditions, while total outstanding loan balances remained relatively flat. Compared with December 31, 2013, our commercial loan two-months-and-over contractual delinquency ratio decreased 9 basis points due to lower levels of commercial loan delinquency driven by continued improvements in the credit quality of the portfolio and managed reductions in certain loan exposures including the charge-off of certain client relationships as well as higher outstanding loan balances.

Residential mortgage delinquency is significantly higher than home equity mortgage delinquency in all periods largely due to the inventory of loans which are held at the lower of amortized cost or fair value of the collateral less cost to sell and are in the foreclosure process. Given the extended foreclosure time lines, particularly in those states where HUSI has a large footprint, the residential mortgage portfolio has a substantial inventory of loans which are greater than 180 days past due and have been written down to the fair value of the collateral less cost to sell. There is a substantially lower volume of home equity mortgage loans where we pursue foreclosure less frequently given the subordinate position of the lien. In addition, our legacy business originated through broker channels and loan transfers from HSBC Finance is of a lower credit quality and, therefore, contributes to an overall higher weighted average delinquency rate for our residential mortgages. Both of these factors are expected to diminish in future periods as the foreclosure backlog resulting from extended foreclosure time lines is managed down and the portfolio mix continues to shift to higher quality loans as the legacy broker originated business and prior loan transfers run off.

119

HSBC USA Inc.

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"):

	September 30, 2014			June 30, 2014			September 30, 2013
	(dollars are in millions)
Net Charge-off Dollars:
Commercial:
Construction and other real estate	$	(1	)	$	5		$	2
Business and corporate banking	3			5			—
Global banking	—			—			—
Other commercial	(3		)	(3		)	—
Total commercial	(1		)	7			2
Consumer:
Residential mortgages	6			14			37
Home equity mortgages	1			2			14
Total residential mortgages	7			16			51
Credit card receivables	8			10			10
Other consumer	2			2			1
Total consumer	17			28			62
Total	$	16		$	35		$	64
Net Charge-off Ratio:
Commercial:
Construction and other real estate	(.04		)%	.21		%	.09		%
Business and corporate banking	.07			.12			—
Global banking	—			—			—
Other commercial	(.41		)	(.41		)	—
Total commercial	(.01		)	.05			.02
Consumer:
Residential mortgages	.15			.35			.93
Home equity mortgages	.21			.42			2.63
Total residential mortgages	.15			.36			1.13
Credit card receivables	4.71			5.91			4.65
Other consumer	1.74			1.65			.71
Total consumer	.35			.59			1.27
Total	.09		%	.20		%	.38		%

Our net charge-off ratio as a percentage of average loans decreased 11 basis points for the quarter ended September 30, 2014 compared with the quarter ended June 30, 2014 due to lower levels of charge-offs in both our commercial and consumer loan portfolios as well as higher outstanding average loan balances. The decline in commercial net charge-offs largely reflects the sale or payoff of certain commercial exposures in the prior quarter while the decline in consumer net charge-offs was driven by lower residential mortgage charge-offs associated with advances made on behalf of borrowers.

Compared with the year-ago quarter, our net charge-off ratio as a percentage of average loans decreased 29 basis points due primarily to lower levels of charge-offs in our consumer loan portfolio as well as higher outstanding average loan balances. The decline in consumer net charge-offs reflects the impact of improved credit quality, including lower delinquency levels, and lower residential mortgage charge-offs associated with advances made on behalf of borrowers.

120

HSBC USA Inc.

Nonperforming Assets  Nonperforming assets consisted of the following:

	September 30, 2014			June 30, 2014			December 31, 2013
	(dollars are in millions)
Nonaccrual loans:
Commercial:
Real Estate:
Construction and land loans	$	11		$	17		$	44
Other real estate	54			47			122
Business and corporate banking	25			28			21
Global banking	—			—			65
Other commercial	2			2			2
Total commercial	92			94			254
Consumer:
Residential mortgages	851			879			949
Home equity mortgages	68			69			77
Total residential mortgages(1)(2)(3)	919			948			1,026
Total consumer loans	919			948			1,026
Nonaccrual loans held for sale	61			65			25
Total nonaccruing loans	$	1,072		1,107			$	1,305
Accruing loans contractually past due 90 days or more:
Commercial:
Business and corporate banking	3			7			5
Other commercial	1			1			1
Total commercial	4			8			6
Consumer:
Credit card receivables	10			11			14
Other consumer	11			11			14
Total consumer loans	21			22			28
Total accruing loans contractually past due 90 days or more	25			30			34
Total nonperforming loans	1,097			1,137			1,339
Other real estate owned	39			47			47
Total nonperforming assets	$	1,136		$	1,184		$	1,386
Allowance for credit losses as a percent of nonperforming loans(4):
Commercial	429.2		%	375.5		%	118.5		%
Consumer	23.3			24.8			28.3

⁽¹⁾  At September 30, 2014, June 30, 2014 and December 31, 2013, residential mortgage loan nonaccrual balances include $827 million, $832 million and $841 million, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.

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

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

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

Nonaccrual loans at September 30, 2014 decreased as compared with June 30, 2014 and December 31, 2013 due to lower levels of consumer nonaccrual loans and, in the year-to-date period, lower levels of commercial nonaccrual loans. Our consumer nonaccrual loans decreased as compared with June 30, 2014 and December 31, 2013 driven by lower residential mortgage nonaccrual loans due to improved credit quality. Residential mortgage nonaccrual loan levels however continue to be impacted by an elongated foreclosure process as previously discussed. Our commercial nonaccrual loans declined compared with June 30, 2014 but declined significantly compared with December 31, 2014 primarily due to the sale or payoff of certain commercial

121

HSBC USA Inc.

exposures as well as customer upgrades out of default outpacing new defaults. Accruing loans past due 90 days or more also declined compared with June 30, 2014 and December 31, 2013 due to improved credit quality.

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

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

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

Our loan portfolio includes the following types of loans:

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

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

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

	September 30, 2014		December 31, 2013
	(in millions)
Interest-only residential mortgage loans	$	3,585	$	3,643
ARM loans(1)	11,347		10,684

⁽¹⁾  ARM loan balances above exclude $4 million and $11 million of subprime residential mortgage loans held for sale at September 30, 2014 and December 31, 2013, respectively. During the remainder of 2014 and during 2015, approximately $39 million and $181 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 and home equity loan portfolios. Amounts in the table exclude residential mortgage loans held for sale of $38 million and $91 million at September 30, 2014 and December 31, 2013, respectively.

	September 30, 2014		December 31, 2013
	(in millions)
Closed end:
First lien	$	16,402	$	15,826
Second lien	117		137
Revolving:
Second lien	1,707		1,874
Total	$	18,226	$	17,837

122

HSBC USA Inc.

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

	Commercial Construction and Other Real Estate Loans		Residential Mortgages and Home Equity Mortgages		Credit Card Receivables
New York State	37.9	%	33.5	%	56.6	%
California	19.6		33.3		9.0
North Central United States	3.9		5.3		3.4
North Eastern United States, excluding New York State	12.9		9.4		12.4
Southern United States	20.2		14.1		13.7
Western United States, excluding California	5.5		4.4		2.6
Others	—		—		2.3
Total	100.0	%	100.0	%	100.0	%

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

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

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

• current market events or trends;

• country risk;

• maturity and liquidity of contracts;

• credit worthiness of the counterparties in the transaction;

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

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

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

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

	September 30, 2014		December 31, 2013
	(in millions)
Risk associated with derivative contracts:
Total credit risk exposure	$	42,067	$	44,209
Less: collateral held against exposure	6,578		6,064
Net credit risk exposure	$	35,489	$	38,145

123

HSBC USA Inc.

Liquidity and Capital Resources

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

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

On June 26, 2014, HSBC and HSBC Bank USA submitted is annual resolution plan jointly to the FRB and the Federal Deposit Insurance Corporation ("FDIC") as required under Dodd-Frank and a rule issued by 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 $26,379 million and $19,614 million at September 30, 2014 and December 31, 2013, respectively, which includes $24,882 million and $18,520 million, respectively, held with the Federal Reserve Bank. Balances will fluctuate from year to year depending upon our liquidity position at the time and our strategy for deploying such liquidity.

Federal Funds Sold and Securities Purchased under Agreements to Resell  totaled $1,096 million and $2,119 million at September 30, 2014 and December 31, 2013, respectively. Balances will fluctuate from year to year depending upon our liquidity position at the time and our strategy for deploying such liquidity.

Short-Term Borrowings  totaled $11,864 million and $19,135 million at September 30, 2014 and December 31, 2013, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on short-term borrowing trends.

Deposits  totaled $108,677 million and $112,608 million at September 30, 2014 and December 31, 2013, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on deposit trends.

Long-Term Debtincreased to $25,034 million at September 30, 2014 from $22,847 million at December 31, 2013. The following table presents the maturities of long-term debt at September 30, 2014:

	(in millions)
2014	$	510
2015	8,286
2016	703
2017	1,782
2018	3,119
Thereafter	10,634
Total	$	25,034

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

Nine Months Ended September 30,	2014			2013
	(in millions)
Long-term debt issued	$	4,997		$	4,630
Long-term debt repaid	(2,921		)	(3,941		)
Net long-term debt issued	$	2,076		$	689

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

Under our shelf registration statement on file with the SEC, we may issue debt securities or preferred stock. The shelf has no dollar limit, but the amount of debt outstanding is limited by the authority granted by the Board of Directors. At September 30, 2014,

124

HSBC USA Inc.

we were authorized to issue up to $21,000 million, of which $4,674 million was available. HSBC Bank USA also has a $40 billion Global Bank Note Program of which $15,787 million was available at September 30, 2014.

As a member of the FHLB, we have a secured borrowing facility which is collateralized by real estate loans and investment securities. At September 30, 2014 and December 31, 2013, long-term debt included $1,000 million under this facility. The facility also allows access to further borrowings of up to $4,981 million based upon the amount pledged as collateral with the FHLB.

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

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

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

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

	September 30, 2014		December 31, 2013
Common equity Tier 1 capital to risk weighted assets(1)	10.45	%	9.94	%
Tier 1 capital to risk weighted assets	11.58		11.65
Total capital to risk weighted assets	16.00		16.36
Tier 1 capital to average assets (leverage ratio)	8.56		7.90
Total equity to total assets	9.65		8.88

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

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

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

As previously disclosed in our 2013 Form 10-K, U.S. regulators issued a final rule implementing the Basel III capital framework in the U.S. which, for banking organizations such as HSBC North America and HSBC Bank USA, took effect from January 1, 2014 with certain provisions being phased in over time through the beginning of 2019. As a result, beginning in 2014, capital ratios are reported in accordance with the Basel III transition rules in the final rule. At December 31, 2013, capital ratios were reported according to Basel I rules and reflect the impact of the U.S. market risk final rule (known in the industry as Basel 2.5).

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

The Advanced Approach introduced by Basel II includes an internal ratings based approach for credit risk and an advanced measurement approach for operational risk and is applicable for banking organizations with $250 billion or more in total consolidated assets or $10 billion or more of foreign exposures (referred to as "Advanced Approach" banking organizations, which includes banking organizations such as HSBC North America and HSBC Bank USA). Adoption of the Advanced Approach requires the approval of U.S. regulators. Advanced Approach banking organizations, including HSBC North America and HSBC Bank USA,

125

HSBC USA Inc.

are required to operate initially in a "parallel run" wherein they must report their risk-based capital ratios using risk-weighted assets under both Basel I (and in 2015, the Standardized Approach) as well as the Advanced Approach to their primary federal regulator, but publicly disclose only their capital ratios calculated using Basel I (or in 2015, the Standardized Approach) risk-weighted assets. Upon receiving approval to exit parallel run, Advanced Approach banking organizations would then publicly disclose their capital ratios calculated using Basel I (or in 2015, their Standardized Approach) and Advanced Approach risk weighted assets. Although we began a parallel run period in January 2010, it is unclear as to when approval from the appropriate regulators will be received in order to exit parallel run.

With regard to the elements of capital, the application of the Basel III final rule requires HSBC USA to phase trust preferred securities issued prior to May 19, 2010 out of Tier 1 capital by January 1, 2016, with 50 percent of these capital instruments includable in Tier 1 capital in 2014 and 25 percent includable in 2015. The trust preferred securities excluded from Tier 1 capital may be included fully in Tier 2 capital during those two years, but must be phased out of Tier 2 capital by January 1, 2022. We continue to consider options for redeeming our outstanding trust preferred securities which total $550 million at September 30, 2014. In addition, any nonconforming Tier 2 subordinated debt issued prior to May 19, 2010 is required to be phased out by January 1, 2016. As a result, approximately $200 million of our currently outstanding Tier 2 qualifying subordinated debt will be phased out of capital under the final rule. Also under the final rule, Tier 1 capital generally includes only noncumulative perpetual preferred stock, in addition to common stock, and the final rule removes the limitation on the amount of Tier 2 capital that may be recognized relative to Tier 1 capital. As a result, our $300 million of cumulative perpetual preferred stock will be reclassified from Tier 1 to Tier 2 capital by January 1, 2016.

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

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

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

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

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

126

HSBC USA Inc.

not be viewed or interpreted as forecasts of expected outcomes or capital adequacy or of the actual financial condition of HSBC North America. Capital planning and stress testing for HSBC North America may impact our future capital and liquidity.

In October 2014, U.S. regulators issued a final rule that amends the CCAR capital planning and DFAST supervisory stress testing rules to shift the start date of the annual capital plan and supervisory and company-run stress test cycles back by one calendar quarter. The 2014 cycle began October 1, 2014 with a capital plan submission date of January 5, 2015. However, the next annual cycle will begin January 1, 2016 with a capital plan submission date of April 5, 2016. The final rule made certain other substantive changes to the capital plan and stress test regulations, including limiting a bank holding company's ability to make capital distributions (subject to certain exceptions) if its actual capital issuances in that quarter were less than the amount indicated in the capital plan. We are reviewing the potential impact of the final rule on our capital planning and stress testing processes.

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

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

	Actual January 1 through September 30, 2014		Estimated October 1 through December 31, 2014		Estimated Full Year 2014
	(in billions)
Funding needs:
Net loan growth	$	9	$	1	$	10
Long-term debt maturities	3		1		4
Total funding needs	$	12	$	2	$	14
Funding sources:
Liquidation of short-term investments	$	7	$	—	$	7
Long-term debt issuance	5		2		7
Total funding sources	$	12	$	2	$	14

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

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

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

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

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

127

HSBC USA Inc.

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 September 30, 2014
	One Year or Less		Over One through Five Years		Over Five Years		Total		Balance at December 31, 2013
	(in millions)
Standby letters of credit, net of participations(1)	$	6,093	$	2,498	$	58	$	8,649	$	8,409
Commercial letters of credit	372		308		—		680		528
Credit derivatives(2)	43,474		121,364		6,229		171,067		180,380
Other commitments to extend credit:
Commercial(3)	16,548		56,976		4,609		78,133		66,328
Consumer	6,785		—		—		6,785		6,714
Total	$	73,272	$	181,146	$	10,896	$	265,314	$	262,359

⁽¹⁾  Includes $932 million and $865 million issued for the benefit of HSBC affiliates at September 30, 2014 and December 31, 2013, respectively.

⁽²⁾  Includes $36,672 million and $34,856 million issued for the benefit of HSBC affiliates at September 30, 2014 and December 31, 2013, respectively.

⁽³⁾  Includes $3,549 million and $3,763 million issued for the benefit of HSBC affiliates at September 30, 2014 and December 31, 2013, respectively.

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

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

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

128

HSBC USA Inc.

			Conduit Assets(1)			Conduit Funding(1)
Conduit Type	Maximum Exposure to Loss		Total Assets		Weighted Average Life (Months)	Commercial Paper		Weighted Average Life (Days)
	(dollars are in millions)
HSBC affiliate sponsored (multi-seller)	$	2,354	$	1,280	15	$	1,280	12

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

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

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

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

The preceding tables do not include information on credit facilities that we previously provided to certain Canadian multi-seller ABCP conduits that have been subject to restructuring agreements as part of the Montreal Accord. As part of the enhanced collateral pool established for the restructuring, we provided a Margin Funding Facility to a Master Asset Vehicle which is undrawn and expires in July 2017. At September 30, 2014, the undrawn facility has been reduced to CAD$112 million from CAD $307 million at December 31, 2013.

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 a decrease of $22 million and a decrease of $28 million in the fair value of financial liabilities during the three and nine months ended September 30, 2014, respectively, compared with an increase of $24 million and a decrease of $74 million during the prior year periods.

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

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

129

HSBC USA Inc.

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

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

• the level of bid-ask spreads;

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

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

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

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

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

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

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

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

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

130

HSBC USA Inc.

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

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

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

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

	September 30, 2014			December 31, 2013
	(dollars are in millions)
Level 3 assets(1)(2)	$	3,786		$	3,831
Total assets measured at fair value(3)	114,488			158,834
Level 3 liabilities	2,768			3,751
Total liabilities measured at fair value(1)	84,764			97,540
Level 3 assets as a percent of total assets measured at fair value	3.3		%	2.4		%
Level 3 liabilities as a percent of total liabilities measured at fair value	3.3		%	3.8		%

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

⁽²⁾  Includes $3,746 million of recurring Level 3 assets and $40 million of non-recurring Level 3 assets at September 30, 2014. Includes $3,667 million of recurring Level 3 assets and $164 million of non-recurring Level 3 assets at December 31, 2013.

⁽³⁾  Includes $114,207 million of assets measured on a recurring basis and $281 million of assets measured on a non-recurring basis at September 30, 2014. Includes $158,149 million of assets measured on a recurring basis and $685 million of assets measured on a non-recurring basis at December 31, 2013.

Significant Changes in Fair Value for Level 3 Assets and Liabilities

Derivative Assets and Counterparty Credit Risk We have entered into credit default swaps with monoline insurers to hedge our credit exposure in certain asset-backed securities and synthetic CDOs. We made $1 million and $14 million positive credit risk adjustments to the fair value of our credit default swap contracts during the three and nine months ended September 30, 2014, respectively, compared with positive adjustments of $1 million and $42 million during the three and nine months ended September 30, 2013, respectively. These adjustments to fair value are recorded in trading revenue (expense) in the consolidated statement of income. We have recorded a cumulative credit adjustment reserve of $51 million and $64 million against our monoline exposure at September 30, 2014 and December 31, 2013, respectively. The fair value of our monoline exposure net of cumulative credit adjustment reserves equaled $200 million and $273 million at September 30, 2014 and December 31, 2013, respectively.

Loans As of September 30, 2014 and December 31, 2013, we have classified $21 million and $46 million, respectively, of subprime residential mortgage loans held for sale as a non-recurring Level 3 financial asset. These mortgage loans are accounted for on a lower of amortized cost or fair value basis. Based on our assessment, we recorded gains of $5 million during both the three and nine months ended September 30, 2014 compared with a loss of $2 million and a gain of $5 million during the three and nine months ended September 30, 2013, respectively. The changes in fair value are recorded in other revenues in the consolidated statement of income.

Significant Transfers Into and Out of Level 3 Measurements  During the three and nine months ended September 30, 2014, we transferred $395 million and $591 million, respectively, of deposits in domestic offices and $81 million and $181 million, respectively, of long-term debt, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer to maturity and there is more observability in short term volatility. During the second quarter of 2014, we transferred $119 million of government debt securities issued by foreign governments from Level 3 to Level 2 due to the availability of inputs in the market including independent pricing service valuations. Additionally, during the three and nine months ended September 30, 2014, we transferred $59 million and $108 million, respectively, of deposits in domestic offices, which we have elected to carry at fair value, from Level 2 to Level 3 as a result of a change in the observability of underlying instruments that resulted in the embedded derivative being unobservable.

131

HSBC USA Inc.

During the three and nine months ended September 30, 2013, we transferred $79 million and $323 million, respectively of deposits in domestic offices and $24 million and $204 million, respectively, of long-term debt, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer in maturity and there is more observability in short term volatility. Additionally, during the three and nine months ended September 30, 2013, we transferred $84 million and $241 million, respectively, of deposits in domestic offices, which we have elected to carry at fair value, from Level 2 to Level 3 as a result of a change in the observability of underlying instruments that resulted in the embedded derivative being unobservable.

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

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

		Total
		(in millions)
Rating of securities:(1)	Collateral type:
AAA	Commercial mortgages	$	60
	Residential mortgages - Alt A	87
	Residential mortgages - Subprime	1
	Total AAA	148
AA	Other	42
A	Residential mortgages - Alt A	10
	Residential mortgages - Subprime	56
	Home equity - Alt A	92
	Student loans	84
	Other	53
	Total A	295
BBB	Residential mortgages - Alt A	3
	Collateralized debt obligations	269
	Total BBB	272
CCC	Residential mortgages - Subprime	5
Unrated	Residential mortgages - Alt A	1
		$	763

⁽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 $32 million or a decrease of the overall fair value measurement of approximately $42 million as of September 30, 2014. The effect of changes in significant unobservable input parameters are primarily driven by mortgage servicing rights, certain asset-backed securities including CDOs, and the uncertainty in determining the fair value of credit derivatives executed against monoline insurers.

132

HSBC USA Inc.

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, fraud, information security, incidents/disasters, cyber-attacks and groups hostile to HSBC interests;

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

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

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

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

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

• loan portfolios;

• investment portfolios;

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

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

While credit risk exists widely in our operations, diversification among various commercial and consumer portfolios helps to lessen risk exposure. Day-to-day management of credit and market risk is performed by the Chief Credit Officer / Head of Wholesale Credit and Market Risk North America and the HSBC North America Chief Retail Credit Officer, who report directly to the HSBC

133

HSBC USA Inc.

North America Chief Risk Officer and maintain independent risk functions. The credit risk associated with commercial portfolios is managed by the Chief Credit Officer, while credit risk associated with retail consumer loan portfolios, such as credit cards, installment loans and residential mortgages, is managed by the HSBC North America Chief Retail Credit Officer. Further discussion of credit risk can be found under the "Credit Quality" caption in this MD&A.

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

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

In 2009, the Basel Committee proposed two minimum liquidity metrics for limiting risk: the liquidity coverage ratio ("LCR"), designed to be a short-term measure to ensure banks have sufficient high-quality liquid assets to cover net stressed cash outflows over the next 30 days, and the net stable funding ratio ("NSFR"), which is a longer term measure with a 12-month time horizon to ensure a sustainable maturity structure of assets and liabilities. The Basel Committee finalized it's LCR rule in January 2013 with phase-in beginning in 2015. The Basel Committee's NSFR proposals have not been finalized but are expected to become an established standard, subject to phase-in by 2018.

In September 2014, the FRB, the OCC and the FDIC issued final regulations to implement the LCR in the U.S., applicable to certain large banking institutions, including HSBC North America and HSBC Bank USA. The LCR final rule 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 final rule, 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 final rule 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 NSFR. U.S. regulators are expected to issue a proposed rulemaking implementing the NSFR in advance of its scheduled global implementation in 2018.

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

We believe that HSBC North America and HSBC Bank USA will meet these liquidity requirements prior to their formal introduction. HSBC North America and HSBC Bank USA will adjust their liquidity profiles to support compliance with these rules. We do not believe this will dramatically change our funding profile, but rather we will refine our funding strategy to most economically meet these requirements. HSBC North America and HSBC Bank USA may need to change their liquidity profile to support compliance with any future final rules.

134

HSBC USA Inc.

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 HSBC USA and HSBC Bank USA maintained at September 30, 2014:

	Moody’s	S&P	Fitch	DBRS(1)
HSBC USA:
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 September 18, 2014, S&P published revised criteria as to their treatment of Bank and Prudentially Regulated Finance Company Hybrid Capital Instruments. Following the publication of their criteria, on September 29, 2014 S&P lowered its credit ratings on 247 hybrid capital instruments issued by banks across the U.S., including the preferred stock and trust preferred securities issued or guaranteed by HSBC USA which were all downgraded two notches.

Rating agencies continue to evaluate economic and geopolitical trends, regulatory developments, future profitability, risk management practices and litigation matters, all of which could lead to adverse ratings actions. For example, S&P as well as Moody's have recently published a request for comment regarding proposed revisions to their criteria for rating certain non-bank financial institutions. Although we closely monitor and strive to manage factors influencing our credit ratings, there is no assurance that our credit ratings will not be changed in the future. As of September 30, 2014, there were no pending actions in terms of changes to ratings on the debt of HSBC USA or HSBC Bank USA from any of the rating agencies.

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

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

	September 30, 2014		December 31, 2013
	(in millions)
Institutional PVBP movement limit	$	8.0	$	8.0
PVBP position at period end	2.8		6.8

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

135

HSBC USA Inc.

	September 30, 2014					December 31, 2013
	Amount			%		Amount			%
	(dollars are in millions)
Projected change in net interest income (reflects projected rate movements on October 1 and January 1):
Change resulting from a gradual 100 basis point increase in the yield curve	$	133		6		$	(5	)	—
Change resulting from a gradual 100 basis point decrease in the yield curve	(149		)	(6	)	(68		)	(3	)
Change resulting from a gradual 200 basis point increase in the yield curve	235			10		(43		)	(2	)
Change resulting from a gradual 200 basis point decrease in the yield curve	(284		)	(12	)	(137		)	(6	)
Other significant scenarios monitored (reflects projected rate movements on October 1 and January 1):
Change resulting from an immediate 100 basis point increase in the yield curve	187			8		(7		)	—
Change resulting from an immediate 100 basis point decrease in the yield curve	(233		)	(10	)	(109		)	(5	)
Change resulting from an immediate 200 basis point increase in the yield curve	352			15		(39		)	(2	)
Change resulting from an immediate 200 basis point decrease in the yield curve	(444		)	(19	)	(257		)	(12	)

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

Capital Risk/Sensitivity of Other Comprehensive Income  Large movements of interest rates could directly affect some reported capital balances and ratios. The mark-to-market valuation of available-for-sale securities is credited on a tax effected basis to accumulated other comprehensive income (loss). This valuation mark is included in one important accounting based capital ratio: total shareholders' equity to total assets. Under the final rule adopting the Basel III regulatory capital reforms, the valuation mark will be included in common equity Tier 1 capital and the impact of this change for HSBC USA is being assessed along with the other Basel III changes being introduced. As of September 30, 2014, we had an available-for-sale securities portfolio of approximately $29,801 million with a positive mark-to-market of $563 million included in tangible common equity of $13,643 million. An increase of 25 basis points in interest rates of all maturities would lower the mark-to-market by approximately $211 million to a net gain of $352 million with the following results on the total shareholders' equity to total assets ratio.

	September 30, 2014				December 31, 2013
	Actual		Proforma(1)		Actual		Proforma(1)
Total shareholders' equity to total assets	9.65	%	9.59	%	8.88	%	8.80	%

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

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

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

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

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

Trading portfolios reside primarily within the Markets unit of the Global Banking and Markets business segment, which include warehoused residential mortgage loans purchased with the intent of selling them, and within the mortgage banking subsidiary

136

HSBC USA Inc.

included within the RBWM business segment. Portfolios include foreign exchange, interest rate swaps and credit derivatives, precious metals (i.e. gold, silver, platinum), equities and money market instruments including “repos” and securities. Trading primarily occurs as a result of customer facilitation and economic risk hedging. In this context, economic risk hedging may include forward contracts to sell residential mortgages and derivative contracts which, while economically viable, may not satisfy the hedge accounting requirements.

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

The following table summarizes trading VAR for the nine months ended September 30, 2014:

	September 30, 2014		Nine Months Ended September 30, 2014						December 31, 2013
			Minimum		Maximum		Average
	(in millions)
Total trading	$	8	$	3	$	12	$	8	$	9
Foreign exchange	5		1		8		5		7
Interest rate directional and credit spread	9		2		14		9		10

The following table summarizes the frequency distribution of daily market risk-related revenues for trading activities during the nine months ended September 30, 2014. Market risk-related trading revenue excludes certain items such as fees, commissions, fair value adjustments, net interest income and intra-day trading revenues. Analysis of the gain (loss) data for the nine months ended September 30, 2014 shows that the largest daily gain was $7 million and the largest daily loss was $7 million.

Ranges of daily trading revenue earned from market risk-related activities	Below $(5)	$(5) to $0	$0 to $5	$5 to $10	Over $10
	(dollars are in millions)
Number of trading days market risk-related revenue was within the stated range	2	103	81	2	—

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

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

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

	September 30, 2014		Nine Months Ended September 30, 2014						December 31, 2013
			Minimum		Maximum		Average
	(in millions)
Total Accrual VAR	$	53	$	53	$	100	$	62	$	104

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

MSRs are assets that represent the present value of net servicing income (servicing fees, ancillary income, escrow and deposit float, net of servicing costs). MSRs are separately recognized upon the sale of the underlying loans or at the time that servicing

137

HSBC USA Inc.

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:

	September 30, 2014			December 31, 2013
	(in millions)
Projected change in net market value of hedged MSRs portfolio (reflects projected rate movements on October 1 and January 1):
Value of hedged MSRs portfolio	$	182		$	227
Change resulting from an immediate 50 basis point decrease in the yield curve:
Change limit (no worse than)	(10		)	(20		)
Calculated change in net market value	(1		)	(2		)
Change resulting from an immediate 50 basis point increase in the yield curve:
Change limit (no worse than)	(4		)	(8		)
Calculated change in net market value	1			3
Change resulting from an immediate 100 basis point increase in the yield curve:
Change limit (no worse than)	(6		)	(12		)
Calculated change in net market value	3			6

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

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

Ranges of mortgage economic value from market risk-related activities	Below $(2)	$(2) to $0	$0 to $2	$2 to $4	Over $4
	(dollars are in millions)
Number of trading weeks market risk-related revenue was within the stated range	—	17	22	—	—

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

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

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

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

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

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

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

138

HSBC USA Inc.

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

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

139

HSBC USA Inc.

CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES

The following tables summarize the quarter-to-date average daily balances of the principal components of assets, liabilities and shareholders' equity together with their respective interest amounts and rates earned or paid, presented on a taxable equivalent basis. Net interest margin is calculated by dividing annualized net interest income by the average interest earning assets from which interest income is earned. Loan interest for the three and nine months ended September 30, 2014 included fees of $14 million and $48 million, respectively, compared with fees of $37 million and $80 million during the three and nine months ended September 30, 2013, respectively.

Three Months Ended September 30,	2014							2013
	Average Balance			Interest		Rate(1)		Average Balance			Interest		Rate(1)
	(dollars are in millions)
Assets
Interest bearing deposits with banks	$	27,435		$	19	.27	%	$	24,182		$	16	.26	%
Federal funds sold and securities purchased under resale agreements	1,488			3		.73		2,007			3		.61	%
Trading assets	9,810			63		2.57		9,734			34		1.39
Securities	43,474			185		1.69		52,064			213		1.62
Loans:
Commercial	53,982			304		2.23		46,152			275		2.36
Consumer:
Residential mortgages	16,320			138		3.37		15,990			138		3.41
Home equity mortgages	1,875			16		3.37		2,127			17		3.20
Credit cards	679			18		10.44		861			17		7.96
Other consumer	526			7		5.16		625			7		4.73
Total consumer	19,400			179		3.66		19,603			179		3.63
Total loans	73,382			483		2.61		65,755			454		2.74
Other	3,118			9		1.26		3,197			10		1.18
Total interest earning assets	158,707			$	762	1.91	%	156,939			$	730	1.84	%
Allowance for credit losses	(621		)					(614		)
Cash and due from banks	938							1,062
Other assets	19,932							20,278
Total assets	$	178,956						$	177,665
Liabilities and Shareholders’ Equity
Deposits in domestic offices:
Savings deposits	$	42,355		$	13	.12	%	$	42,577		$	16	.14	%
Other time deposits	22,403			22		.38		19,722			30		.60
Deposits in foreign offices:
Foreign banks deposits	6,171			1		.07		7,391			1		.06
Other interest bearing deposits	6,531			1		.06		5,850			1		.09
Total interest bearing deposits	77,460			37		.19		75,540			48		.25
Short-term borrowings	16,637			14		.34		19,506			11		.22
Long-term debt	25,000			165		2.63		21,183			159		2.97
Total interest bearing deposits and debt	119,097			216		.72		116,229			218		.74
Tax liabilities	27			—		(5.73	)	498			15		12.05
Total interest bearing liabilities	119,124			216		.72		116,727			233		.79
Net interest income/Interest rate spread				$	546	1.19	%				$	497	1.05	%
Noninterest bearing deposits	30,653							30,646
Other liabilities	12,223							12,976
Total shareholders’ equity	16,956							17,316
Total liabilities and shareholders’ equity	$	178,956						$	177,665
Net interest margin on average earning assets						1.37	%						1.26	%
Net interest income to average total assets						1.21	%						1.11	%

140

HSBC USA Inc.

Nine Months Ended September 30,	2014								2013
	Average Balance			Interest			Rate(1)		Average Balance			Interest		Rate(1)
	(dollars are in millions)
Assets
Interest bearing deposits with banks	$	25,454		$	51		.26	%	$	21,603		$	42	.26	%
Federal funds sold and securities purchased under resale agreements	1,421			7			.68		1,927			7		.49
Trading assets	11,473			176			2.05		10,567			85		1.07
Securities	49,209			595			1.62		57,396			676		1.58
Loans:
Commercial	51,885			886			2.28		44,974			843		2.51
Consumer:
Residential mortgages	16,100			410			3.41		15,927			424		3.55
Home equity mortgages	1,924			49			3.39		2,200			53		3.26
Credit cards	684			52			10.21		816			52		8.53
Other consumer	542			21			5.20		641			24		4.95
Total consumer	19,250			532			3.70		19,584			553		3.78
Total loans	71,135			1,418			2.67		64,558			1,396		2.89
Other	3,329			31			1.24		3,089			31		1.34
Total interest earning assets	162,021			$	2,278		1.88	%	159,140			$	2,237	1.88	%
Allowance for credit losses	(590		)						(607		)
Cash and due from banks	945								1,107
Other assets	20,778								22,410
Total assets	$	183,154							$	182,050
Liabilities and Shareholders’ Equity
Deposits in domestic offices:
Savings deposits	$	42,800		$	38		.12	%	$	43,694		$	52	.16	%
Other time deposits	21,314			64			.40		20,232			85		.57
Deposits in foreign offices:
Foreign banks deposits	7,006			3			.06		7,419			4		.07
Other interest bearing deposits	5,958			3			.07		6,452			5		.09
Deposits held for sale	—			—			—		—			1		—
Total interest bearing deposits	77,078			108			.19		77,797			147		.25
Short-term borrowings	22,899			37			.22		17,475			28		.22
Long-term debt	23,422			487			2.78		21,748			492		3.02
Total interest bearing deposits and debt	123,399			632			.69		117,020			667		.76
Tax liabilities	267			(101		)	(50.75	)	496			40		10.87
Total interest bearing liabilities	123,666			531			.57		117,516			707		.80
Net interest income/Interest rate spread				$	1,747		1.31	%				$	1,530	1.08	%
Noninterest bearing deposits	30,188								30,870
Other liabilities	12,466								16,026
Total shareholders’ equity	16,834								17,638
Total liabilities and shareholders’ equity	$	183,154							$	182,050
Net interest margin on average earning assets							1.44	%						1.29	%
Net interest income to average total assets							1.28	%						1.12	%

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

141

HSBC USA Inc.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

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

Item 4.    Controls and Procedures

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

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

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

PART II

Item 1. Legal Proceedings

See “Litigation and Regulatory Matters” in Note 19, “Litigation and Regulatory Matters,” in the accompanying consolidated financial statements beginning on page 77 for our legal proceedings disclosure, which is incorporated herein by reference.

Item 5.    Other Information

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

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

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

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

142

HSBC USA Inc.

license or an authorization from relevant authorities. Repayments have been received under a number of the loans in the third quarter of 2014.

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

In 2002, the HSBC Group provided a loan to Bank Tejarat with a guarantee from the Government of Iran to fund the construction of a petrochemical plant undertaken by a U.K. contractor. This loan was supported by the U.K. Export Credit Agency and is administered under license from the relevant European Government. This loan has now matured and the final claim for non-payment was processed by the supporting Export Credit Agency in the third quarter of 2014.

The HSBC Group also maintains sub-participations in loans provided by other international banks to Bank Tejarat and Bank Mellat with guarantees from the Government of Iran. In relation to Bank Mellat, the HSBC Group has one sub-participation supported by the Export Credit Agency of the Netherlands. The facility has matured and the final claim for non-payment was processed by the supporting Export Credit Agency in the third quarter of 2014. In relation to Bank Tejarat, the HSBC Group has one sub-participation supported by the Export Credit Agency of Italy. The repayments due under the sub-participation have not been received from Bank Tejarat and claims are being processed with the supporting Export Credit Agency. Licenses and relevant authorizations have been obtained from the competent authorities of the European Union in respect of the transactions.

Estimated gross revenue to the HSBC Group generated by these loans in repayment for the third quarter of 2014, which includes interest and fees, was approximately $366,000. Estimated net profit for the HSBC Group during the third quarter of 2014 was approximately $211,000. While the HSBC Group intends to continue to seek repayment under the existing loans, it does not intend to extend any new loans.

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

The HSBC Group has worked with relevant regulatory authorities to obtain licenses where required and ensure compliance with laws and regulations while seeking to cancel the guarantees and counter indemnities. None were canceled during the third quarter of 2014 and approximately 19 remain outstanding.

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

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

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

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

• In 2010, the HSBC Group closed its representative office in Iran. The HSBC Group maintains a local account with an Iranian bank in Tehran in order to facilitate residual activity related to the closure. The HSBC Group has been authorized by the U.S. Government (and by relevant non-U.S. regulators) to make payments in connection with the liquidation and deregistration of the representative office in Tehran. In the third quarter of 2014, the HSBC Group initiated payments of approximately $1,200 from this account to pay taxes and related expenses associated with the closure.

143

HSBC USA Inc.

Estimated gross revenue to the HSBC Group in the third quarter of 2014 for all Iranian bank-related activity described in this section, which includes fees and/or commissions, was approximately $178,000. The HSBC Group does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profits measure. The HSBC Group intends to continue to wind down this Iranian bank-related activity and not enter into any new such activity.

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

Activity related to U.S. Executive Order 13382 The HSBC Group holds an account for a customer that was a wholly owned subsidiary of an entity sanctioned under Executive Order 13382 in the first quarter of 2014. Those sanctions have now been lifted from the parent entity in the third quarter of 2014. The estimated gross revenue and the estimated net profits generated to the HSBC Group in the third quarter of 2014 were $1,500.

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

The HSBC Group processed checks payable to the Iranian Interests Section of the Embassy of Pakistan on behalf of a U.S. customer in respect of intellectual property protection in Iran. The estimated gross revenue and estimated net profits generated to the HSBC Group in the third quarter of 2014 were $48.

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

144

HSBC USA Inc.

Item 6.     Exhibits

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

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

145

HSBC USA Inc.

Index

Assets:	Equity securities available-for-sale 11
by business segment 47	Estimates and assumptions 9
consolidated average balances 140	Executive overview 83
fair value measurements 61	Fair value measurements:
nonperforming 20, 26, 27, 121	assets and liabilities recorded at fair value on a recurring basis 62
trading 10,90	assets and liabilities recorded at fair value on a non-recurring basis 72
Asset-backed commercial paper conduits 51	control over valuation process 129
Asset-backed securities 11, 63, 75, 132	financial instruments 61
Balance sheet:	hierarchy 59, 130
consolidated 5	transfers into/out of level one and two 65
consolidated average balances 140	transfers into/out of level two and three 65
review 87	valuation techniques 73
Basel I 125	Fiduciary risk 133, 138
Basel II 125	Financial assets:
Basel III 50, 125	designated at fair value 39
Basis of reporting 86	reclassification under IFRSs 48, 86
Business:	Financial highlights metrics 83
consolidated performance review 83	Financial liabilities:
Capital:	designated at fair value 39
2014 funding strategy 127	fair value of financial liabilities 61
common equity movements 125	Forward looking statements 81
consolidated statement of changes 7	Funding 127
regulatory capital 50	Gain on instruments designated at fair value and related derivatives 40
selected capital ratios 50, 84, 125, 136	Gains (losses) from securities 16, 97
Cash flow (consolidated) 8	Global Banking and Markets 48, 109
Cautionary statement regarding forward-looking statements 81	Geographic concentration of receivables 123
Collateral — pledged assets 57	Goodwill 32
Collateralized debt obligations 75, 132	Guarantee arrangements 53
Commercial banking segment results (IFRSs) 48, 108	Impairment:
Compliance risk 133, 138	available-for-sale securities 14
Controls and procedures 142	credit losses 28, 95, 115
Credit card fees 97	nonperforming loans 20, 26, 27, 121
Credit quality 115	impaired loans 21
Credit risk:	Income (loss) from financial instruments designated at fair value, net 40
adjustment 59	Income tax expenses 3, 105
component of fair value option 40	Intangible assets 31
concentration 27, 122	Interest rate risk 133, 135
exposure 133	Internal control 142
management 133	Key performance indicators 83
related contingent features 37	Legal proceedings 142
related arrangements 54	Liabilities:
Current environment 83	commitments, lines of credit 128
Deferred tax assets 105	deposits 91, 124
Deposits 91, 124	financial liabilities designated at fair value 39
Derivatives:	trading 10, 90
cash flow hedges 35	long-term debt 44, 61, 91, 124
fair value hedges 34	short-term borrowings 44, 61, 91, 124
notional value 38	Liquidity and capital resources 124
trading and other 36	Liquidity risk 133, 134
Equity:	Litigation and regulatory matters 77
consolidated statement of changes 7
ratios 50, 84, 125, 136

146

HSBC USA Inc.

Loans:	Reputational risk 133, 138
by category 18, 88	Results of operations 92
by charge-off (net) 28, 120	Residential Mortgage Revenue 101
by delinquency 27, 118	Retail banking and wealth management segment results (IFRSs) 48, 107
criticized assets 25	Risk elements in the loan portfolio 122
geographic concentration 123	Risk management:
held for sale 30	credit 133
impaired 21	compliance 133, 138
nonperforming 20, 26, 27, 121	fiduciary 133, 138
overall review 87	interest rate 133, 135
risk concentration 27, 122	liquidity 133, 134
troubled debt restructures 21	market 133, 136
Loan impairment charges — see Provision for credit losses	model 133, 138
Loan-to-deposits ratio 84	operational 133, 138
Loan to value (LTV) 88	pension 133, 139
Market risk 133, 136	reputational 133, 138
Market turmoil:	security and fraud risk 133, 139
exposures 136	strategic 133, 138
impact on liquidity risk 124	Securities:
Monoline insurers 15, 131	amortized cost 11
Mortgage lending products 18, 88	fair value 11
Mortgage servicing rights 31	impairment 14
Net interest income 92	maturity analysis 16
New accounting pronouncements 80	Segment results - IFRSs basis:
Off balance sheet arrangements 128	retail banking and wealth management 48, 107
Operating expenses 103	commercial banking 48, 108
Operational risk 133, 138	global banking and markets 48, 109
Other revenue 97	private banking 48, 112
Other segment results (IFRSs) 48, 113	other 48, 113
Pension and other postretirement benefits 43	overall summary 48, 107
Performance, developments and trends 83	Selected financial data 83
Pledged assets 57	Sensitivity:
Private banking segment results (IFRSs) 48, 112	projected net interest income 136
Profit (loss) before tax:	Statement of changes in shareholders’ equity 7
by segment — IFRSs 48	Statement of changes in comprehensive income 4
consolidated 3	Statement of income 3
Provision for credit losses 28, 95	Strategic risk 133, 138
Ratios:	Stress testing 124, 126
capital 50, 84, 125, 136	Table of contents 2
charge-off (net) 83, 116	Tax expense 3, 105
credit loss reserve related 116	Trading:
delinquency 118	assets 10, 90
earnings to fixed charges — Exhibit 12	derivatives 10, 90
efficiency 83, 103, 105	liabilities 10, 90
Reconciliation of U.S. GAAP results to IFRSs 86	portfolios 10
Refreshed loan-to-value 88	Trading revenue (net) 97, 99
Regulation 50, 125, 142	Troubled debt restructures 21
Related party transactions 44	Value at risk 136
	Variable interest entities 51

147

HSBC USA Inc.

Signatures

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

Date: November 3, 2014

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

148

HSBC USA Inc.

Exhibit Index

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

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

149