Litigation and Regulatory Matters

The following supplements, and should be read together with, the disclosure in Note 27, "Litigation and Regulatory Matters," in our 2017 Form 10-K and in Note 20, "Litigation and Regulatory Matters," in our Form 10-Q for the three month period ended March 31, 2018 (the "2018 First Quarter Form 10-Q") and the six month period ended June 30, 2018 (the "2018 Second Quarter

Form 10-Q"). Only those matters with significant updates and new matters since our disclosure in our 2017 Form 10-K, our 2018 First Quarter Form 10-Q and our 2018 Second Quarter Form 10-Q are reported herein.

In addition to the matters described below and in our 2017 Form 10-K, our 2018 First Quarter Form 10-Q and our 2018 Second

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.

Due to 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. During the three and nine months ended September 30, 2018, we recorded expenses of $3 million and $513 million, respectively, related to various legal 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 2017 Form 10-K and in Note 20, "Litigation and Regulatory Matters," in our 2018 First Quarter Form 10-Q and our 2018 Second 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 $325 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.

In addition, based on the facts currently known for each of the ongoing investigations disclosed in Note 27, "Litigation and Regulatory Matters," in our 2017 Form 10-K and in Note 20, "Litigation and Regulatory Matters," in our 2018 First Quarter Form 10-Q and our 2018 Second 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.

Madoff Litigation

In 2008, Bernard L. Madoff ("Madoff") was arrested and ultimately pleaded guilty to 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 ("Trustee"), as described below) have commenced Madoff-related proceedings against numerous defendants arising out of Madoff Securities' fraud.

In the SPV OSUS Ltd. v. HSBC Bank plc, HSBC Bank USA N.A., et al. action, defendants filed a motion to dismiss plaintiffs’ amended complaint in September 2018.

The U.S. Bankruptcy Court for the Southern District of New York issued a partial decision in August 2018 in the actions brought by the liquidators of the Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited (together, “Fairfield”) funds against the defendants, including HSBC Bank USA. That decision denied defendants’ motion to dismiss for lack of subject matter jurisdiction and adopted defendants’ position that certain subscription agreements, allegedly signed by defendants when placing investments in the Fairfield funds, do not confer personal jurisdiction in this action. The remaining arguments raised in the parties’ motions remain pending. In September 2018, the court so-ordered a stipulation among the parties pursuant to which the court will resolve the remaining issues on defendants’ motion to dismiss and the liquidators’ motion to amend the complaints in any order the court deems appropriate. The motions thus remain pending in substantial part.

Mexican Government Bond Litigation In July 2018, plaintiffs filed an amended consolidated complaint on behalf of the putative class. Defendants filed motions to dismiss in September 2018.

Benchmark Rate Litigation

In October 2018, the court granted in part and denied in part the defendants’ motion to dismiss the second amended complaint and dismissed the non-SIBOR panel banks in Frontpoint Asian Event Driven Fund, L.P., et al. v. Citibank, N.A., et al. (Case No. 15-cv-05263). The Hongkong and Shanghai Banking Corporation Limited is the only remaining HSBC defendant in the action. Accordingly, this matter will no longer be reported.

Mortgage Securitization Matters

In October 2018, HSBC North America reached a definitive agreement to resolve the U.S. Department of Justice’s (“DOJ”) investigation of its legacy securitization, issuance and underwriting of residential mortgage-backed securities ("RMBS") issued between 2005 and 2007. Under the terms of the agreement, HSBC North America, without admitting liability or wrongdoing under the Financial Industry Reform, Recovery and Enforcement Act ("FIRREA"), paid to the DOJ in October a $765 million civil monetary penalty, of which $492 million was paid by HUSI. As previously disclosed, HSBC North America and HUSI were fully reserved for these amounts as of June 30, 2018. The settlement releases HSBC North America and its subsidiaries and affiliates, including HSBC Bank USA, from potential civil claims by the DOJ related to its legacy securitization, issuance and underwriting of RMBS from 2005 to 2007, and requires no additional remedial action.

Deutsche Bank National Trust Company, as trustee of HASCO 2007-NC1, filed a motion for leave to appeal the dismissal of the action with the New York Court of Appeals, which was granted in September 2018.

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

As previously disclosed, in June 2018, the Office of the Comptroller of the Currency ("OCC") terminated the 2010 consent cease and desist order and the 2012 enterprise-wide compliance consent order after determining that HSBC Bank USA had satisfied the requirements of the respective orders. In August 2018, the Federal Reserve Board terminated the 2010 consent cease and desist order entered into by our parent, HSBC North America. In September 2018, the OCC terminated the second OCC consent order entered into in 2012 by HSBC Bank USA which, among other things, required the bank to correct the circumstances noted in the OCC’s report and imposed certain restrictions on HSBC Bank USA.

Charlotte Freeman, et al. v. HSBC Holdings plc, et al. In August 2018, defendants submitted objections to the magistrate judge’s report and recommendation to deny defendants’ motion to dismiss, and plaintiffs submitted a response in October 2018. We await a decision from the district court.

Jeffrey Siegel, et al. v. HSBC Holdings plc, et al. In August 2018, ‎plaintiffs appealed the district court’s decision granting HSBC North America’s and HSBC Bank USA’s motion to dismiss.

Ramiro Giron, et al. v. Hong Kong and Shanghai Bank Corporation, Ltd., HSBC Bank USA, N.A., et al. The court granted plaintiffs’ motion to withdraw the appeal and the matter is now concluded.

Rigoberto Vasquez and Eva Garcia et al v. Hong Kong and Shanghai Banking Corporation Ltd., HSBC Bank USA, N.A., et al.

In August 2018, the HSBC defendants filed a motion to dismiss. In response, plaintiffs filed a motion for leave to amend the complaint, which the court granted. Plaintiffs filed an amended complaint in October 2018.