Litigation and Regulatory Matters

The following supplements, and should be read together with, the disclosure in Note 27, "Litigation and Regulatory Matters," in our 2015 Form 10-K and in Note 20, "Litigation and Regulatory Matters," in our Form 10-Q for the three month period ended March 31, 2016 (the "2016 First Quarter Form 10-Q"). Only those matters with significant updates and new matters since our disclosure in our 2015 Form 10-K and our 2016 First Quarter Form 10-Q are reported herein.

In addition to the matters described below, and in our 2015 Form 10-K and our 2016 First Quarter Form 10-Q, in the ordinary course of business, we are routinely named as defendants in, or as parties to, various legal actions and proceedings relating to activities of our current and/or former operations. These legal actions and proceedings may include claims for substantial or indeterminate compensatory or punitive damages, or for injunctive relief. In the ordinary course of business, we also are subject to governmental and regulatory examinations, information-gathering requests, investigations and proceedings (both formal and informal), certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. In connection with formal and informal inquiries by these regulators, we receive numerous requests, subpoenas and orders seeking documents, testimony and other information in connection with various aspects of our regulated activities.

In view of the inherent unpredictability of legal matters, including litigation, governmental 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 such matters or the eventual loss, fines, penalties or business impact, if any, that may result. We establish reserves for litigation, governmental 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 legal matters disclosed below, including litigation and governmental and regulatory matters, as well as for the legal matters disclosed in Note 27, "Litigation and Regulatory Matters," in our 2015 Form 10-K and in Note 20, "Litigation and Regulatory Matters," in our 2016 First Quarter Form 10-Q as to which a loss in excess of accrued liability is reasonably possible in future periods and for which there is sufficient currently available information on the basis of which management believes it can make a reliable estimate, we believe a reasonable estimate could be as much as $200 million for HUSI. The legal matters underlying this estimate of possible loss will change from time to time and actual results may differ significantly from this current estimate.

Based on the facts currently known, in respect of each of the below investigations as well as for the investigations disclosed in Note 27, "Litigation and Regulatory Matters," in our 2015 Form 10-K and in Note 20, "Litigation and Regulatory Matters," in our 2016 First Quarter Form 10-Q, it is not practicable at this time for us to determine the terms on which these ongoing investigations will be resolved or the timing of such resolution. As matters progress, it is possible that any fines and/or penalties could be significant.

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 any particular quarterly or annual period.

Credit Card Litigation In June 2016, the U.S. Court of Appeals for the Second Circuit issued a decision vacating class certification and approval of the class settlement in In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, MDL 1720 (E.D.N.Y.), concluding the class was inadequately represented by their counsel in violation the Federal Rule of Civil Procedure governing class actions as well as the Due Process Clause of the U.S. Constitution. Specifically, the Court held that there was a conflict between two different but overlapping settlement classes: (1) a so-called opt-out class, which permitted individual class members to forgo their share of the monetary relief and pursue individual claims; and (2) a non-opt-out class of merchants, including future merchants that do not currently exist, which provided injunctive relief mainly in the form of a rule change by Visa and MasterCard to allow merchants to surcharge card transactions until July 20, 2021. We anticipate that the parties will seek further review of the decision.

Lender-Placed Insurance Matters As discussed in our 2015 Form 10-K, in January 2014, HSBC Mortgage Corporation (USA)

and various other HSBC entities agreed to a settlement with the Massachusetts Attorney General concerning allegations of conflict of interest in placement of lender placed insurance and the HSBC entities paid approximately $4 million to be held in escrow until the settlement was finalized. On February 17, 2016, the settlement was finalized by the filing of an Assurance of Discontinuance in the Massachusetts Superior Court. The Massachusetts Attorney General began distributing settlement payments to borrowers in July 2016.

Interest Rate Swaps Litigation

In June 2016, the Judicial Panel on Multi-district Litigation ordered the cases be consolidated as In re Interest Rate Swaps Antitrust Litigation in the U.S. District Court for the Southern District of New York.

Benchmark Rate Litigation

HSBC Bank USA, HSBC, HSBC USA, HSBC North America and the Hongkong and Shanghai Banking Corporation Limited have been named as defendants, among others, in a putative class action brought in the U.S. District Court for the Southern District of New York on behalf of persons who transacted in products tied to the Singapore Interbank Offering Rate (“SIBOR”) or Singapore Swap Offer Rate (“SOR”) between January 1, 2007 and December 31, 2011. The complaint, encaptioned Frontpoint Asian Event Driven Fund, L.P., et al. v Citibank, N.A., et al. (Case No. 15-cv-05263), alleges that the defendant banks colluded to rig SIBOR and SOR by collusively making false SIBOR submissions and entering into collusive transactions directly in the swaps market, thereby fixing the prices of SIBOR and SOR based derivatives for their collective financial benefits. The defendants are accused of illegal restraint of trade in violation of the Sherman Act, violation of the Racketeer Influenced and Corrupt Organizations Act (“RICO"), and unjust enrichment. This matter is at a very early stage.

Anti-Money Laundering, Bank Secrecy Act and Office of Foreign Assets Control Matters

HSBC Bank USA is not currently in full compliance with the 2010 OCC consent cease-and-desist order. Steps are being taken to address the requirements of that and a similar order with the FRB to establish an effective compliance risk management program across HSBC’s US businesses, including risk management related to the Bank Secrecy Act and Anti-Money Laundering compliance.

Under the terms of the five-year deferred prosecution agreement that HSBC and HSBC Bank USA entered into with, among others, the U.S. Department of Justice (“DOJ”) (the "U.S. DPA"), HSBC and HSBC Bank USA undertook various obligations, including, among others, to continue to cooperate fully with the DOJ in any and all investigations, not to commit any crime under US federal law subsequent to the signing of the agreement, and to retain an independent compliance monitor (the “Monitor”). Through his country-level reviews, the Monitor identified potential anti-money laundering and sanctions issues that the U.S. Department of Justice and HSBC are reviewing further. Additionally, as discussed elsewhere in this Note 20 as well as the 2015 Form 10-K and the 2016 First Quarter Form 10-Q, we are the subject of other ongoing investigations and reviews by the DOJ.

Ramiro Giron, et al. v. Hong Kong and Shanghai Bank Company, Ltd., et al. On June 30, 2016, the court issued a decision partially granting and partially denying HSBC Bank USA, NA’s motion to dismiss. The court dismissed the RICO claims with prejudice and the UCL claim with leave to amend. The other causes of action remain. The Hong Kong and Shanghai Bank Company’s motion to dismiss remains pending. The case is at an early stage.

Zapata, et al. v. HSBC In June 2016, the HSBC defendants filed motions to transfer the case to the U.S. District Court for the Southern District of New York and to dismiss the action based on lack of personal jurisdiction as to certain defendants.

Telephone Consumer Protection Act Litigation

The HSBC defendants responded to the complaints in the Ahmed v. HSBC Bank USA, National Association and Monteleone v. HSBC Finance Corporation, et al. litigations in July 2016. These actions are at early stages.

Other Regulatory and Law Enforcement Investigations

We and certain other HSBC entities have received requests for information from various regulatory or law enforcement authorities around the world concerning persons and entities believed to be linked to Mossack Fonseca & Co, a service provider of personal investment companies. HSBC is cooperating with the relevant authorities.