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Fair Value Measurements

3 Months Ended

Mar. 31, 2021

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 guidance 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 valuation adjustment - The credit valuation 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. See "Valuation Techniques - Derivatives" below for additional details.

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 at least a 95 percent confidence interval (i.e., two standard deviations). 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.

Funding Fair Value Adjustment ("FFVA") - The FFVA reflects the estimated present value of the future market funding cost or benefit associated with funding uncollateralized derivative exposure at rates other than the Overnight Indexed Swap ("OIS") rate. See "Valuation Techniques - Derivatives" below for additional details.

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

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

Level 2 valuation technique using observable inputs - Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are inactive, and measurements

determined using valuation models where all significant inputs are observable, such as interest rates and yield curves that are observable at commonly quoted intervals.

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

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.

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.

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 at March 31, 2021 and December 31, 2020, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. Unless otherwise noted below, assets and liabilities in the following table are recorded at fair value through net income (loss).


	Fair Value Measurements on a Recurring Basis
March 31, 2021	Level 1		Level 2		Level 3		Gross Balance		Netting(6)		Net Balance
	(in millions)
Assets:

Trading assets, excluding derivatives:
U.S. Treasury, U.S. Government agencies and sponsored enterprises	$	2,616	$	79	$	—	$	2,695	$	—	$	2,695

Asset-backed securities:
Collateralized debt obligations	—		66		—		66		—		66
Residential mortgages	—		—		24		24		—		24
Student loans	—		63		—		63		—		63



Debt securities issued by foreign entities	8,155		12		—		8,167		—		8,167
Equity securities	7,750		—		—		7,750		—		7,750
Precious metals trading	—		4,497		—		4,497		—		4,497
Derivatives:(1)
Interest rate contracts	7		3,670		3		3,680		—		3,680
Foreign exchange contracts	—		15,752		15		15,767		—		15,767
Equity contracts	—		3,991		466		4,457		—		4,457
Precious metals contracts	14		1,363		—		1,377		—		1,377
Credit contracts	—		289		50		339		—		339
Other contracts(2)	—		—		7		7		—		7
Derivatives netting	—		—		—		—		(23,001)		(23,001)
Total derivatives	21		25,065		541		25,627		(23,001)		2,626
Securities available-for-sale:(3)
U.S. Treasury, U.S. Government agencies and sponsored enterprises	15,091		16,417		—		31,508		—		31,508
Asset-backed securities:


Home equity	—		—		25		25		—		25

Other	—		—		105		105		—		105

Debt securities issued by foreign entities	2,947		74		—		3,021		—		3,021
Loans(4)	—		30		—		30		—		30
Loans held for sale(4)	—		83		—		83		—		83
Other assets:
Mortgage servicing rights	—		—		11		11		—		11
Equity securities	—		145		—		145		—		145
Equity securities measured at net asset value(5)	—		—		—		137		—		137
Total assets	$	36,580	$	46,531	$	706	$	83,954	$	(23,001)	$	60,953
Liabilities:
Domestic deposits(4)	$	—	$	3,166	$	599	$	3,765	$	—	$	3,765
Trading liabilities, excluding derivatives	655		—		—		655		—		655
Derivatives:(1)
Interest rate contracts	5		3,303		1		3,309		—		3,309
Foreign exchange contracts	—		14,678		17		14,695		—		14,695
Equity contracts	—		2,470		424		2,894		—		2,894
Precious metals contracts	—		1,228		—		1,228		—		1,228
Credit contracts	—		222		5		227		—		227
Other contracts(2)	—		—		57		57		—		57
Derivatives netting	—		—		—		—		(20,594)		(20,594)
Total derivatives	5		21,901		504		22,410		(20,594)		1,816

Long-term debt(4)	—		9,384		486		9,870		—		9,870
Total liabilities	$	660	$	34,451	$	1,589	$	36,700	$	(20,594)	$	16,106


	Fair Value Measurements on a Recurring Basis
December 31, 2020	Level 1		Level 2		Level 3		Gross Balance		Netting(6)		Net Balance
	(in millions)
Assets:

Trading assets, excluding derivatives:
U.S. Treasury, U.S. Government agencies and sponsored enterprises	$	5,145	$	192	$	—	$	5,337	$	—	$	5,337

Asset-backed securities:
Collateralized debt obligations	—		63		—		63		—		63
Residential mortgages	—		—		15		15		—		15
Student loans	—		65		—		65		—		65



Debt securities issued by foreign entities	7,953		18		—		7,971		—		7,971
Equity securities	6,043		—		—		6,043		—		6,043
Precious metals trading	—		4,989		—		4,989		—		4,989
Derivatives:(1)
Interest rate contracts	15		6,637		35		6,687		—		6,687
Foreign exchange contracts	—		18,452		15		18,467		—		18,467
Equity contracts	—		5,051		565		5,616		—		5,616
Precious metals contracts	—		1,323		—		1,323		—		1,323
Credit contracts	—		298		69		367		—		367
Other contracts(2)	—		—		8		8		—		8
Derivatives netting	—		—		—		—		(29,616)		(29,616)
Total derivatives	15		31,761		692		32,468		(29,616)		2,852
Securities available-for-sale:(3)
U.S. Treasury, U.S. Government agencies and sponsored enterprises	22,880		12,528		—		35,408		—		35,408

Asset-backed securities:


Home equity	—		—		27		27		—		27

Other	—		—		104		104		—		104

Debt securities issued by foreign entities	1,942		3,191		—		5,133		—		5,133
Loans(4)	—		32		—		32		—		32
Loans held for sale(4)	—		36		—		36		—		36
Other assets:
Mortgage servicing rights	—		—		7		7		—		7
Equity securities	—		149		—		149		—		149
Equity securities measured at net asset value(5)	—		—		—		135		—		135

Total assets	$	43,978	$	53,024	$	845	$	97,982	$	(29,616)	$	68,366
Liabilities:
Domestic deposits(4)	$	—	$	3,509	$	646	$	4,155	$	—	$	4,155
Trading liabilities, excluding derivatives	727		2,312		—		3,039		—		3,039
Derivatives:(1)
Interest rate contracts	9		6,615		1		6,625		—		6,625
Foreign exchange contracts	—		18,597		6		18,603		—		18,603
Equity contracts	—		3,845		446		4,291		—		4,291
Precious metals contracts	28		1,550		—		1,578		—		1,578
Credit contracts	—		291		6		297		—		297
Other contracts(2)	—		—		67		67		—		67
Derivatives netting	—		—		—		—		(28,914)		(28,914)
Total derivatives	37		30,898		526		31,461		(28,914)		2,547

Long-term debt(4)	—		10,277		448		10,725		—		10,725
Total liabilities	$	764	$	46,996	$	1,620	$	49,380	$	(28,914)	$	20,466

(1)Includes trading derivative assets of $2,560 million and $2,801 million and trading derivative liabilities of $1,664 million and $2,358 million at March 31, 2021 and December 31, 2020, respectively, as well as derivatives held for hedging and commitments accounted for as derivatives. See Note 9, "Derivative Financial Instruments," for additional information. Excluding changes in fair value of a derivative instrument associated with a qualifying cash flow hedge, which are recognized initially in other comprehensive income, derivative assets and liabilities are recorded at fair value through net income (loss).

(2)Consists of swap agreements entered into in conjunction with the sales of Visa Class B Shares.

(3)Securities available-for-sale are recorded at fair value through other comprehensive income. Changes in the allowance for credit losses on securities available-for-sale are recorded through net income (loss).

(4)See Note 10, "Fair Value Option," for additional information. Excluding the fair value movement on fair value option liabilities attributable to our own credit spread, which is recorded in other comprehensive income, fair value option assets and liabilities are recorded at fair value through net income (loss).

(5)Investments that are measured at fair value using the net asset value per share practical expedient have not been classified in the fair value hierarchy.

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

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 months ended March 31, 2021 and 2020. 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.




























	Jan. 1, 2021		Total Realized / Unrealized Gains (Losses) Included in				Purch- ases		Issu- ances		Settle- ments		Transfers Into Level 3		Transfers Out of Level 3		Mar. 31, 2021		Current Period Unrealized Gains (Losses) Still Held Included in
			Earnings		Other Compre- hensive Income														Earnings		Other Compre- hensive Income
	(in millions)
Assets:
Trading assets, excluding derivatives:(1)

Residential mortgage asset-backed securities	$	15	$	9	$	—	$	—	$	—	$	—	$	—	$	—	$	24	$	9	$	—



Derivatives, net:(2)
Interest rate contracts	34		(32)		—		—		—		—		—		—		2		(17)		—
Foreign exchange contracts	9		(11)		—		—		—		—		—		—		(2)		(12)		—
Equity contracts	119		(22)		—		—		—		(54)		—		(1)		42		(32)		—

Credit contracts	63		(17)		—		—		—		(1)		—		—		45		(19)		—
Other contracts(3)	(59)		2		—		—		—		7		—		—		(50)		—		—
Asset-backed securities available-for-sale(4)	131		—		1		—		—		(2)		—		—		130		—		1

Mortgage servicing rights(5)	7		1		—		—		3		—		—		—		11		1		—
Total assets	$	319	$	(70)	$	1	$	—	$	3	$	(50)	$	—	$	(1)	$	202	$	(70)	$	1
Liabilities:
Domestic deposits(6)	$	(646)	$	4	$	—	$	—	$	—	$	28	$	—	$	15	$	(599)	$	8	$	—
Long-term debt(6)	(448)		(3)		—		—		(123)		89		(2)		1		(486)		4		—
Total liabilities	$	(1,094)	$	1	$	—	$	—	$	(123)	$	117	$	(2)	$	16	$	(1,085)	$	12	$	—
































	Jan. 1, 2020		Total Realized / Unrealized Gains (Losses) Included in				Purch- ases		Issu- ances		Settle- ments		Transfers Into Level 3		Transfers Out of Level 3		Mar. 31, 2020		Current Period Unrealized Gains (Losses) Still Held Included in
			Earnings		Other Compre- hensive Income														Earnings		Other Compre- hensive Income
	(in millions)
Assets:
Trading assets, excluding derivatives:(1)

Residential mortgage asset-backed securities	$	17	$	(1)	$	—	$	—	$	—	$	—	$	—	$	—	$	16	$	(1)	$	—

Corporate and other domestic debt securities	510		(45)		—		—		—		—		—		—		465		(45)		—

Derivatives, net:(2)
Interest rate contracts	10		31		—		—		—		—		—		—		41		31		—
Foreign exchange contracts	(1)		(2)		—		—		—		—		—		—		(3)		(2)		—
Equity contracts	72		(74)		—		—		—		6		—		—		4		12		—

Credit contracts	59		35		—		—		—		4		—		—		98		35		—
Other contracts(3)	(75)		11		—		—		—		6		—		—		(58)		—		—
Asset-backed securities available-for-sale(4)	111		—		5		—		—		—		—		—		116		—		5
Mortgage servicing rights(5)	4		(1)		—		—		1		—		—		—		4		(1)		—
Total assets	$	707	$	(46)	$	5	$	—	$	1	$	16	$	—	$	—	$	683	$	29	$	5
Liabilities:
Domestic deposits(6)	$	(774)	$	1	$	18	$	—	$	(36)	$	105	$	—	$	33	$	(653)	$	—	$	18
Long-term debt(6)	(354)		5		10		—		(101)		65		—		4		(371)		4		10
Total liabilities	$	(1,128)	$	6	$	28	$	—	$	(137)	$	170	$	—	$	37	$	(1,024)	$	4	$	28

(1)Gains (losses) on trading assets, excluding derivatives are included in trading revenue in the consolidated statement of income (loss).

(2)Level 3 net derivatives included derivative assets of $541 million and derivative liabilities of $504 million at March 31, 2021 and derivative assets of $628 million and derivative liabilities of $546 million at March 31, 2020. Gains (losses) on derivatives, net are predominantly included in trading revenue and gain (loss) on instruments designated at fair value and related derivatives in the consolidated statement of income (loss).

(3)Consists of swap agreements entered into in conjunction with the sales of Visa Class B Shares. Gains (losses) on these swap agreements are included in other income in the consolidated statement of income (loss).

(4)Realized gains (losses) on securities available-for-sale are included in other securities gains, net in the consolidated statement of income (loss). Changes in the allowance for credit losses on securities available-for-sale are included in the provision for credit losses in the consolidated statement of income (loss). Unrealized gains (losses) on securities available-for-sale are included in other comprehensive income.

(5)Gain (losses) on mortgage servicing rights are included in other income in the consolidated statement of income (loss).

(6)Excluding unrealized gains (losses) on fair value option liabilities attributable to our own credit spread, which are recorded in other comprehensive income, gains (losses) on fair value option liabilities are included in gain (loss) on instruments designated at fair value and related derivatives in the consolidated statement of income (loss).

Significant Unobservable Inputs for Recurring Fair Value Measurements

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 at March 31, 2021 and December 31, 2020:


March 31, 2021
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs	Weighted Average(1)



Residential mortgage asset-backed securities	$	24	Broker quotes or consensus pricing and, where applicable, discounted cash flows	Prepayment rates	7%	N/A
				Conditional default rates	51%	N/A
				Loss severity rates	34%	N/A
				Discount margin	527bps	N/A






Interest rate derivative contracts	$	2	Market comparable adjusted for probability to fund and, where applicable, discounted cash flows or option pricing model	Probability to fund for rate lock commitments	36% - 100%	85%
				Likelihood of transaction being executed	90%	N/A
				Interest rate yield curve	8%	N/A
Foreign exchange derivative contracts(2)	$	(2)	Option pricing model	Implied volatility of currency pairs	8% - 12%	10%
				Cross-currency basis	(4)bps	N/A
Equity derivative contracts(2)	$	42	Option pricing model	Equity / Equity Index volatility	6% - 87%	36%
				Equity / Equity and Equity / Index correlation	36% - 96%	48%
				Equity dividend yields and forward price	(5)% - 1%	0%

Credit derivative contracts	$	45	Option pricing model and, where applicable, discounted cash flows	Credit default swap spreads	96bps - 234bps	102bps
Other derivative contracts	$	(50)	Discounted cash flows	Conversion rate	1.6 times	N/A
				Expected duration	1.8 years	N/A
Asset-backed securities available-for-sale	$	130	Discounted cash flows	Market assumptions related to yields for comparable instruments	2%	N/A
Mortgage servicing rights	$	11	Discounted cash flows	Constant prepayment rates	13% - 24%	13%
				Discount rate	9% - 10%	9%
				Estimated annualized costs to service	$72 - $152 per account	$75 per account
Domestic deposits (structured deposits)(2)(3)	$	(599)	Option adjusted discounted cash flows	Implied volatility of currency pairs	8% - 12%	10%
				Equity / Equity Index volatility	8% - 39%	17%
				Equity / Equity and Equity / Index correlation	48% - 66%	57%
Long-term debt (structured notes)(2)(3)	$	(486)	Option adjusted discounted cash flows	Implied volatility of currency pairs	8% - 12%	10%
				Equity / Equity Index volatility	8% - 64%	26%
				Equity / Equity and Equity / Index correlation	48% - 96%	88%


December 31, 2020
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs	Weighted Average(1)



Residential mortgage asset-backed securities	$	15	Broker quotes or consensus pricing and, where applicable, discounted cash flows	Prepayment rates	10%	N/A
				Conditional default rates	5%	N/A
				Loss severity rates	65%	N/A
				Discount margin	500bps	N/A








Interest rate derivative contracts	$	34	Market comparable adjusted for probability to fund and, where applicable, discounted cash flows or option pricing model	Probability to fund for rate lock commitments	41% - 100%	78%
				Likelihood of transaction being executed	90%	N/A
				Interest rate yield curve	4% - 7%	6%
Foreign exchange derivative contracts(2)	$	9	Option pricing model	Implied volatility of currency pairs	9% - 11%	10%
				Cross-currency basis	(9)bps - 40bps	24bps
Equity derivative contracts(2)	$	119	Option pricing model	Equity / Equity Index volatility	0% - 67%	27%
				Equity / Equity and Equity / Index correlation	17% - 62%	30%
				Equity dividend yields and forward price	(1)% - 0%	0%
Credit derivative contracts	$	63	Option pricing model and, where applicable, discounted cash flows	Credit default swap spreads	150bps	N/A
Other derivative contracts	$	(59)	Discounted cash flows	Conversion rate	1.6 times	N/A
				Expected duration	2 years	N/A
Asset-backed securities available-for-sale	$	131	Discounted cash flows	Market assumptions related to yields for comparable instruments	4%	N/A
Mortgage servicing rights	$	7	Discounted cash flows	Constant prepayment rates	17% - 26%	19%
				Discount rate	9% - 10%	9%
				Estimated annualized costs to service	$73 - $157 per account	$76 per account
Domestic deposits (structured deposits)(2)(3)	$	(646)	Option adjusted discounted cash flows	Implied volatility of currency pairs	9% - 11%	10%
				Equity / Equity Index volatility	0% - 42%	15%
				Equity / Equity and Equity / Index correlation	43% - 47%	45%
Long-term debt (structured notes)(2)(3)	$	(448)	Option adjusted discounted cash flows	Implied volatility of currency pairs	9% - 11%	10%
				Equity / Equity Index volatility	0% - 67%	23%
				Equity / Equity and Equity / Index correlation	32% - 62%	52%

(1)For foreign exchange derivatives, equity derivatives, credit derivatives, structured deposits and structured notes, weighted averages are calculated based on the fair value of the instruments. For all remaining instrument types, weighted averages are calculated based on the notional value of the instruments.

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

(3)Structured deposits and structured notes contain embedded derivative features whose fair value measurements contain significant Level 3 inputs. See equity and foreign exchange derivatives below for a discussion of the uncertainty of Level 3 inputs related to structured deposits and structured notes.

N/A Not Applicable

Uncertainty of Level 3 Inputs to Fair Value Measurements

Residential mortgage asset-backed securities - Prepayment rate, probability of default, loss severity rate and discount margin are significant unobservable inputs.

•Prepayment rate - The rate at which borrowers pay off the loans early. The prepayment rate is affected by a number of factors including location of the collateral, interest rate type of the loan, borrowers' credit and sensitivity to interest rate movement.

•Probability of default - Annualized percentage of default rate over a group of collateral such as residential mortgage loans.

•Loss severity rate - The loss severity rate is the percentage of total lifetime losses (both interest and principal) as a percentage of principal balance measured at default date.

•Discount margin - An expected return earned in addition to the index underlying (in this case LIBOR) is another input into valuation of securities.

A significant increase (decrease) in one or more of these inputs would have resulted in a lower (higher) fair value measurement of the securities. Generally, a change in assumption for default probability would have been accompanied by a directionally similar change in loss severity, and a directionally opposite change in prepayment speed.

Interest rate derivatives - The fair value measurement of certain forward starting interest rate derivatives is affected by the underlying project contingency risk for which probability of execution is not certain (i.e., the interest rate derivative can be canceled if the project fails to execute). For mortgage rate lock commitments, the fair value measurement is affected by the probability of executing and funding the mortgage. An increase (decrease) in the likelihood of a project or mortgage being executed would have resulted in a lower (higher) fair value measurement of the interest rate derivative. For certain other interest rate derivatives, the interest rates for longer dated tenors were not observable. An increase (decrease) in the interest rate would have resulted in a higher (lower) fair value measurement of the derivative depending on if we receive or pay the floating rate.

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 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 and are not observable. A significant increase (decrease) in the implied volatility would have resulted in a higher (lower) fair value of a long position in the derivative contract. For a derivative referenced to a basket of variables such as equities or foreign currencies, the fair value measurement is also affected by the correlation of the referenced variables. Correlation measures the relative change in values among two or more variables (i.e., equity or foreign currency pair), which can be positively or negatively correlated. A majority of the correlations are not observable, but are derived based on historical data. A significant increase (decrease) in the correlation of the referenced variables would have resulted in a higher (lower) fair value of a long position in the derivative contract. For certain other foreign exchange derivatives, the cross-currency basis for longer dated tenors were not observable. An increase (decrease) in the cross-currency basis would have resulted in a higher (lower) fair value measurement of the derivative depending on if we receive or pay the floating rate plus the basis spread.

Credit derivatives - The fair value measurement of certain credit derivatives is primarily affected by the credit spreads of credit default swap contracts insuring asset-backed securities. A significant increase (decrease) in the credit spreads would have resulted in a lower (higher) fair value measurement of the credit derivative.

Other derivatives - The fair value of the swap agreements we entered into in conjunction with the sales of Visa Class B Shares is dependent upon the final resolution of the related litigation. Significant unobservable inputs used in the fair value measurement include estimated changes in the conversion rate of Visa Class B Shares into Visa Class A Shares and the expected timing of the final resolution. An increase (decrease) in the loss estimate or in the timing of the resolution of the related litigation would have resulted in a higher (lower) fair value measurement of the derivative.

Asset-backed securities available-for-sale - The fair value measurement of certain asset-backed securities is primarily affected by estimated yields which are determined based on current market yields of comparable instruments adjusted for market liquidity. An increase (decrease) in the yields would have resulted in a lower (higher) fair value measurement of the securities.

Mortgage servicing rights - The fair value measurement of mortgage servicing rights is primarily affected by the estimated prepayment rates of the mortgage loans and the discount rates. An increase (decrease) in either of these inputs would have resulted in a lower (higher) fair value measurement of the mortgage servicing rights.

Significant Transfers Into and Out of Level 3 Measurements During the three months ended March 31, 2021, we transferred $15 million of domestic deposits and $1 million of long-term debt, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer to maturity and there is more observability in short term volatility.

During the three months ended March 31, 2020, we transferred $33 million of domestic deposits and $4 million of long-term debt, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer in maturity and there is more observability in short term volatility.

Assets and Liabilities Recorded at Fair Value on a Non-recurring Basis Certain financial and non-financial assets are measured at fair value on a non-recurring basis and therefore, are not included in the tables above. These assets include (a) loans classified as held for sale reported at the lower of amortized cost or fair value, (b) impaired loans or assets that are written down to fair value based on the valuation of underlying collateral during the period and (c) goodwill, lease ROU assets or leasehold improvement assets that were written down 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 at March 31, 2021 and December 31, 2020. The gains (losses) during the three months ended March 31, 2021 and 2020 are also included.


	Non-Recurring Fair Value Measurements at March 31, 2021								Total Gains (Losses) For the Three Months Ended March 31, 2021
	Level 1		Level 2		Level 3		Total
	(in millions)
Residential mortgage loans held for sale(1)	$	—	$	23	$	—	$	23	$	—
Consumer loans(2)	—		305		—		305		4

Commercial loans(3)	—		—		226		226		19
Real estate owned(4)	—		1		—		1		—



Total assets at fair value on a non-recurring basis	$	—	$	329	$	226	$	555	$	23


	Non-Recurring Fair Value Measurements at December 31, 2020								Total Gains (Losses) For the Three Months Ended March 31, 2020
	Level 1		Level 2		Level 3		Total
	(in millions)
Residential mortgage loans held for sale(1)	$	—	$	4	$	—	$	4	$	—
Consumer loans(2)	—		312		—		312		3
Commercial loans held for sale(5)	—		68		—		68		—
Commercial loans(3)	—		—		270		270		(53)
Real estate owned(4)	—		1		—		1		—
Goodwill(6)	—		—		—		—		(784)
Leases(7)	—		—		3		3		(68)
Total assets at fair value on a non-recurring basis	$	—	$	385	$	273	$	658	$	(902)

(1)At March 31, 2021 and December 31, 2020, the fair value of the loans held for sale was below cost.

(2)Represents residential mortgage loans held for investment whose carrying amount was adjusted during the period based on the fair value of the underlying collateral.

(3)Certain commercial loans are individually assessed for impairment. 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.

(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)At December 31, 2020, the fair value of the loans held for sale was below cost.

(6)During the first quarter of 2020, the goodwill allocated to our previously separate RBWM and PB businesses were both written down to $0 million. See Note 8, "Goodwill," in this From 10-Q for further discussion of the results of our goodwill impairment testing, including the events and circumstances leading to the impairments.

(7)During the first quarter of 2020, we determined that we would exit certain branches and, as a result, the lease ROU assets and leasehold improvement assets associated with these branches were written down based on their estimated remaining useful lives. See Note 2, "Strategic Initiatives," in this Form 10-Q for further discussion.

Significant Unobservable Inputs for Non-Recurring Fair Value Measurements

The following tables present quantitative information about non-recurring fair value measurements of assets and liabilities classified with Level 3 of the fair value hierarchy at March 31, 2021 and December 31, 2020:

At March 31, 2021

Financial Instrument Type

Fair Value (in millions)

Valuation Technique(s)

Significant Unobservable Inputs

Range of Inputs

Weighted Average(1)

Commercial loans

226

Valuation of third party appraisal
on underlying collateral

Loss severity rates

4% - 100%

35%

At December 31, 2020

Financial Instrument Type

Fair Value (in millions)

Valuation Technique(s)

Significant Unobservable Inputs

Range of Inputs

Weighted Average(1)

Commercial loans

270

Valuation of third party appraisal
on underlying collateral

Loss severity rates

0% - 76%

35%

(1)Weighted average is calculated based on the carrying value of the loans.

Valuation Techniques

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Consumer loans designated under FVO – We elected to apply FVO accounting to certain student loans held for investment. The fair value of these loans is based on observed market prices of instruments with similar characteristics.

Consumer loans held for sale – Consumer loans held for sale are recorded at the lower of amortized cost or fair value. The fair value estimates of consumer loans held for sale are determined primarily using observed market prices of instruments with similar characteristics. Adjustments are made to reflect differences in collateral location, loan-to-value ratio, FICO scores, vintage year, default rates, the completeness of the loan documentation and other risk characteristics. Where observable market parameters are not available, fair value is determined using the discounted cash flow method using assumptions consistent with those which would be used by market participants in valuing such loans, including estimates of prepayment rates, default rates, loss severities and market rates of return. We also may hold discussions on value directly with potential investors.

Commercial loans held for sale - Commercial loans held for sale (that are not designated under FVO as discussed below) are recorded at the lower of amortized cost or fair value. The fair value estimates of commercial loans held for sale are determined primarily using observable market pricing obtained from independent sources, relevant broker quotes or observed market prices of instruments with similar characteristics. We also may hold discussions on value directly with potential investors.

Commercial loans held for sale designated under FVO – We elected to apply FVO accounting to certain commercial loans held for sale at fair value. Where available, fair value is based on observable market pricing obtained from independent sources, relevant broker quotes or observed market prices of instruments with similar characteristics. Where observable market parameters are not available, fair value is determined based on contractual cash flows adjusted for estimates of prepayment rates, expected default rates and loss severity discounted at management's estimate of the expected rate of return required by market participants. We also consider loan-specific risk mitigating factors such as collateral arrangements in determining the fair value estimate.

Commercial loans individually assessed for impairment – Generally represents collateral-dependent commercial loans with fair value determined based on pricing quotes obtained from an independent third party appraisal.

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 CDOs – 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.

•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 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 – Fair value measurements are determined based on quoted prices for the identical security. Certain equity securities represent investments in private equity funds that help us comply with the Community Reinvestment Act. The fair value of these investments are estimated using the net asset value per share as calculated by the fund managers. Distributions will be received from the funds as the underlying assets are liquidated. While the funds do not allow us to redeem our investments, we are permitted to sell or transfer our investments subject to the approval of the fund manager. Unfunded commitments associated with these investments totaled $32 million and $33 million at March 31, 2021 and December 31, 2020, respectively.

The following tables provide additional information relating to our asset-backed securities, including CDOs, at March 31, 2021:

Trading asset-backed securities:


Rating of Securities:(1)	Collateral Type:	Level 2		Level 3		Total
		(in millions)


AAA - A	Collateralized debt obligations	$	41	$	—	$	41
	Student loans	63		—		63
	Total AAA - A	104		—		104
BBB - B	Collateralized debt obligations	25		—		25
CCC - Unrated	Residential mortgages - Subprime	—		24		24
		$	129	$	24	$	153

Available-for-sale asset-backed securities:

Rating of Securities:(1)

Collateral Type:

Level 3

(in millions)

AAA - A

Home equity - Alt A

BBB - B

Other

105

130

(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 CDOs represent the ratings associated with the underlying collateral.

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 OIS curves as the base discounting curve for measuring the fair value of all derivatives, both collateralized and uncollateralized, and apply a FFVA to reflect the estimated present value of the future market funding cost or benefit associated with funding uncollateralized derivative exposure at rates other than the OIS rate. The FFVA is calculated by applying future market funding spreads to the expected future funding exposure of any uncollateralized component of the OTC derivative

portfolio. The expected future funding exposure is calculated by a simulation methodology, where available, and is adjusted for events that may terminate the exposure, such as the default of HUSI or the counterparty.

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

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

•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 our own credit standing for financial liabilities (the "credit valuation adjustments") in determining the fair value measurement. For derivative instruments, we calculate the credit valuation 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 agreements in determining credit valuation 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) or a proxy based on credit default swaps referencing to credit names of similar credit standing.

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 90 days to reflect observable local market data, including local area sales data.

Mortgage servicing rights - Mortgage servicing rights are recorded at fair value. The fair value for the mortgage servicing rights is determined based on a single rate path cash flow analysis approach which involves discounting servicing cash flows under static interest rate projections at risk-adjusted rates. The valuation model also incorporates our best estimates of the prepayment speed of the mortgage loans, current cost to service and discount rates which are unobservable.

Structured notes and deposits designated under FVO – Structured notes and deposits are hybrid instruments containing embedded derivatives and are elected to be measured at fair value in their entirety under FVO accounting principles. The valuation of hybrid instruments is predominantly driven by the derivative features embedded within the instruments and our own credit risk. 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 and deposits in their entirety, including the embedded derivatives, are discounted at the relevant interest rates for the duration of the instrument adjusted for our own credit spreads. The credit spreads so applied are determined with reference to our own debt issuance rates observed in primary and secondary markets, internal funding rates, and the structured note rates in recent executions.

Long-term debt designated under FVO – We elected to apply FVO accounting to certain of our 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.

Additional Disclosures About the Fair Value of Financial Instruments that are Not Carried at Fair Value on the Consolidated Balance Sheet The fair value estimates set forth below 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 report.

The carrying amount of certain financial instruments recorded at cost on the consolidated balance sheet 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, federal funds sold and purchased, securities purchased and sold under resale and repurchase agreements, deposits with no stated maturity (e.g., demand, savings and certain money market deposits), short-term borrowings and dividends payable.

The following table summarizes the carrying value and estimated fair value of our financial instruments, excluding financial instruments that are carried at fair value on a recurring basis, at March 31, 2021 and December 31, 2020, and their classification within the fair value hierarchy:


March 31, 2021	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Short-term financial assets, net of allowance for credit losses	$	55,066	$	55,066	$	1,447	$	53,607	$	12
Federal funds sold and securities purchased under agreements to resell	3,760		3,760		—		3,760		—
Securities held-to-maturity, net of allowance for credit losses	7,837		8,166		—		8,166		—
Commercial loans, net of allowance for credit losses	40,482		41,303		—		—		41,303
Commercial loans held for sale	173		173		—		173		—
Consumer loans, net of allowance for credit losses	20,161		19,508		—		—		19,508

Residential mortgage loans held for sale	95		96		—		96		—


Financial liabilities:
Short-term financial liabilities	$	5,256	$	5,256	$	—	$	5,243	$	13
Deposits	144,817		144,821		—		144,821		—

Long-term debt	8,309		8,735		—		8,735		—


December 31, 2020	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Short-term financial assets, net of allowance for credit losses	$	15,667	$	15,667	$	1,302	$	14,353	$	12
Federal funds sold and securities purchased under agreements to resell	35,746		35,746		—		35,746		—
Securities held-to-maturity, net of allowance for credit losses	8,981		9,369		—		9,369		—
Commercial loans, net of allowance for credit losses	40,785		41,417		—		—		41,417
Commercial loans held for sale	93		93		—		93		—
Consumer loans, net of allowance for credit losses	20,256		19,865		—		—		19,865

Residential mortgage loans held for sale	208		217		—		217		—


Financial liabilities:
Short-term financial liabilities	$	4,965	$	4,965	$	—	$	4,952	$	13
Deposits	140,995		141,001		—		141,001		—

Long-term debt	9,254		9,720		—		9,720		—

Lending-related commitments - The fair value of loan commitments, revolving credit facilities and standby letters of credit are not included in the above 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 loan commitments, revolving credit facilities and standby letters of credit totaled $139 million and $137 million at March 31, 2021 and December 31, 2020, respectively.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details