 |
Filed Pursuant to Rule 433 Registration No. 333-158385 March 9, 2012 FREE WRITING PROSPECTUS (To Prospectus dated April 2, 2009, Prospectus Supplement dated April 9, 2009, and Product Supplement dated April 9, 2009) |
| Structured Investments |
HSBC USA Inc. $ Dual Directional Knock-Out Notes Linked to the S&P 500® Index due March 27, 2013 (the “Notes”) |
General
| · | Terms used in this free writing prospectus are described or defined herein and in the accompanying product supplement, prospectus supplement and prospectus. The Notes offered will have the terms described in the product supplement, prospectus supplement and prospectus as supplemented by this free writing prospectus. The Notes do not guarantee return of principal, and you may lose up to 100.00% of your initial investment. The Notes will not bear interest. |
| · | All references to “Enhanced Market Participation Notes” in the product supplement shall refer to these Dual Directional Knock-Out Notes. |
| · | This free writing prospectus relates to a single note offering. The purchaser of a Note will acquire a security linked to a single Reference Asset described below. |
| · | Although the offering relates to a Reference Asset, you should not construe that fact as a recommendation as to the merits of acquiring an investment linked to the Reference Asset or any component security included in the Reference Asset or as to the suitability of an investment in the related Notes. |
| · | Senior unsecured debt obligations of HSBC USA Inc. maturing March 27, 2013. |
| · | Minimum denominations of $10,000 and integral multiples of $1,000 in excess thereof. |
| · | If the terms of the Notes set forth below are inconsistent with those described in the accompanying product supplement, the terms set forth below will supersede. |
Key Terms
| Issuer: | HSBC USA Inc. |
| Issuer Rating: | A+ (S&P), A1 (Moody’s), AA (Fitch)* |
| Reference Asset: | The S&P 500® Index (“SPX”) |
| Knock-Out Event: | A Knock-Out Event occurs if on the Final Valuation Date the Final Level has decreased, as compared to the Initial Level, by a percentage that is more than the Knock-Out Buffer Amount |
| Knock-Out Buffer Amount: | 15.00% |
| Principal Amount: | $1,000 per Note. |
| Trade Date: | March 9, 2012 |
| Pricing Date: | March 9, 2012 |
| Original Issue Date: | March 14, 2012 |
| Final Valuation Date: | March 22, 2013, subject to adjustment as described in the accompanying product supplement. |
| Maturity Date: | 3 business days after the Final Valuation Date and is expected to be March 27, 2013. The Maturity Date is subject adjustment as described in the accompanying product supplement and under “Market Disruption Events” herein. |
| Payment at Maturity: | If the Final Level is greater than or equal to the Initial Level, you will receive a cash payment on the Maturity Date that will reflect the performance of the Reference Asset subject to the Maximum Upside Cap. Under these circumstances, your Payment at Maturity per $1,000 Principal Amount of Notes will be calculated as the lesser of: |
| (a) $1,000 + ($1,000 × Reference Return); and | |
| (b) $1,000 + ($1,000 × Maximum Upside Cap). | |
| If the Final Level is less than the Initial Level and a Knock-Out Event does not occur, you will receive a cash payment on the Maturity Date that will reflect the absolute performance of the Reference Asset. Under these circumstances, your Payment at Maturity per $1,000 Principal Amount of Notes will be calculated as follows: | |
| $1,000 + ($1,000 × Absolute Reference Return) | |
| If the Final Level is less than the Initial Level and a Knock-Out Event occurs, you will lose 1% of the Principal Amount of your Notes for every 1% the Final Level is less than the Initial Level. Under these circumstances, your Payment at Maturity per $1,000 Principal Amount of Notes will be calculated as follows: | |
| $1,000 + ($1,000 × Reference Return) | |
| If a Knock-Out Event has occurred, you will lose some or all of your investment. This means that if the Reference Return is -100.00%, you will lose your entire investment. | |
| For additional clarification, please see “What is the Total Return on the Notes at Maturity Assuming a Range of Performance for the Reference Asset?” herein. | |
| Reference Return: | The quotient, expressed as a percentage, calculated as follows: |
| Final Level – Initial Level | |
| Initial Level | |
| Absolute Reference Return: | The absolute value of the Reference Return. The Absolute Reference Return will always be a positive value or zero. |
| Maximum Upside Cap: | The Maximum Upside Cap will be set on the Pricing Date and will not be less than 14.00%. Accordingly, the maximum Payment at Maturity if the Reference Return is positive will not exceed $1,140.00 per $1,000 Principal Amount of Notes |
| Initial Level: | The Official Closing Level of the Reference Asset on the Pricing Date |
| Final Level: | The Official Closing Level of the Reference Asset on the Final Valuation Date |
| Official Closing Level: | The closing level of the Reference Asset on any scheduled trading day as determined by the calculation agent based on the value displayed on Bloomberg Professional® service page “SPX <INDEX>” or any successor page on Bloomberg Professional® service or any successor service, as applicable. |
| CUSIP/ISIN: | 4042K1ZX4 / |
| Form of Notes: | Book-Entry |
| Listing: | The Notes will not be listed on any U.S. securities exchange or quotation system. |
*A credit rating reflects the creditworthiness of HSBC USA Inc. and is not indicative of the market risk associated with the Notes or the Reference Asset, nor is it a recommendation to buy, sell or hold Notes, and it may be subject to revision or withdrawal at any time by the assigning rating organization. The Notes themselves have not been independently rated. Each rating should be evaluated independently of any other rating.
Investment in the Notes involves certain risks. You should refer to “Selected Risk Considerations” beginning on page 3 of this document and “Risk Factors” on page PS-4 of the product supplement and page S-3 of the prospectus supplement.
Neither the U.S. Securities and Exchange Commission, or the SEC, nor any state securities commission has approved or disapproved of the Notes or determined that this free writing prospectus, or the accompanying product supplement, prospectus supplement and prospectus, is truthful or complete. Any representation to the contrary is a criminal offense.
HSBC Securities (USA) Inc. or another of our affiliates or agents may use the pricing supplement to which this free writing prospectus relates in market-making transactions in any Notes after their initial sale. Unless we or our agent informs you otherwise in the confirmation of sale, the pricing supplement to which this free writing prospectus relates will be used in a market-making transaction. HSBC Securities (USA) Inc., an affiliate of ours, will purchase the Notes from us for distribution to the placement agent. See “Supplemental Plan of Distribution (Conflicts of Interest)” on the last page of this free writing prospectus.
J.P. Morgan Securities LLC and certain of its registered broker-dealer affiliates are purchasing the Notes for resale. JPMorgan Chase Bank N.A. may purchase the Notes on behalf of certain fiduciary accounts. J.P. Morgan Securities LLC, certain of its registered broker-dealer affiliates and JPMorgan Chase Bank N.A. will not receive fees from us for sales to fiduciary accounts.
| Price to Public(1) | Fees and Commissions | Proceeds to Issuer | |
| Per Note | $1,000 | $10 | $990 |
| Total | $ | $ | $ |
(1) Certain fiduciary accounts purchasing the Notes will pay a purchase price of $990 per Note, and the placement agents with respect to sales made to such accounts will forgo any fees.
The Notes:
| Are Not FDIC Insured | Are Not Bank Guaranteed | May Lose Value |
JPMorgan
Placement Agent
March 9, 2012
Additional Terms Specific to the Notes
This free writing prospectus relates to a single Note offering linked to the Reference Asset identified on the cover page. The purchaser of a Note will acquire a senior unsecured debt security linked to the Reference Asset. We reserve the right to withdraw, cancel or modify any offering and to reject orders in whole or in part. Although the Note offering relates only to a single Reference Asset identified on the cover page, you should not construe that fact as a recommendation as to the merits of acquiring an investment linked to the Reference Asset or any securities comprising the Reference Asset or as to the suitability of an investment in the Notes.
You should read this document together with the prospectus dated April 2, 2009, the prospectus supplement dated April 9, 2009 and the product supplement dated April 9, 2009. If the terms of the Notes offered hereby are inconsistent with those described in the accompanying product supplement, prospectus supplement or prospectus, the terms described in this free writing prospectus shall control. You should carefully consider, among other things, the matters set forth in “Selected Risk Considerations” beginning on page 3 of this free writing prospectus and “Risk Factors” on page PS-4 of the product supplement and page S-3 of the prospectus supplement, as the Notes involve risks not associated with conventional debt securities. All references to “Enhanced Market Participation Notes” in the product supplement shall refer to these Dual Directional Knock-Out Notes. We urge you to consult your investment, legal, tax, accounting and other advisors before you invest in the Notes. As used herein, references to the “Issuer”, “HSBC”, “we”, “us” and “our” are to HSBC USA Inc.
HSBC has filed a registration statement (including a prospectus, a prospectus supplement and a product supplement) with the SEC for the offering to which this free writing prospectus relates. Before you invest, you should read the prospectus, prospectus supplement and product supplement in that registration statement and other documents HSBC has filed with the SEC for more complete information about HSBC and this offering. You may get these documents for free by visiting EDGAR on the SEC’s web site at www.sec.gov. Alternatively, HSBC Securities (USA) Inc. or any dealer participating in this offering will arrange to send you the prospectus, prospectus supplement and product supplement if you request them by calling toll-free 1 866 811 8049.
You may also obtain:
| • | the product supplement at www.sec.gov/Archives/edgar/data/83246/000114420409019791/v145840_424b2.htm |
| • | the prospectus supplement at www.sec.gov/Archives/edgar/data/83246/000114420409019785/v145824_424b2.htm |
| • | the prospectus at www.sec.gov/Archives/edgar/data/83246/000104746909003736/a2192100zs-3asr.htm |
We are using this free writing prospectus to solicit from you an offer to purchase the Notes. You may revoke your offer to purchase the Notes at any time prior to the time at which we accept your offer by notifying HSBC Securities (USA) Inc. We reserve the right to change the terms of, or reject any offer to purchase, the Notes prior to their issuance. In the event of any material changes to the terms of the Notes, we will notify you.
Supplemental Information Relating to the Terms of the Notes
Notwithstanding anything contained in the accompanying prospectus supplement or product supplement to the contrary, the Notes will be issued under the senior indenture dated March 31, 2009, between HSBC USA Inc., as Issuer, and Wells Fargo Bank, National Association, as trustee. Such indenture has substantially the same terms as the indenture described in the accompanying prospectus supplement and product supplement. HSBC Bank USA, N.A. will act as paying agent with respect to the Notes pursuant to a Paying Agent and Securities Registrar Agreement dated June 1, 2009, between HSBC USA Inc. and HSBC Bank USA, N.A.
Selected Purchase Considerations
| · | APPRECIATION POTENTIAL — The Notes provide the opportunity to earn an unleveraged return equal to any appreciation in the Reference Asset, up to the Maximum Upside Cap. The Maximum Upside Cap will be set on the Pricing Date and will not be less than 14.00%, and accordingly, the maximum Payment at Maturity if the Reference Return is positive will not exceed $1,140.00 per $1,000 Principal Amount Note. Because the Notes are our senior unsecured obligations, payment of any amount on the Notes is subject to our ability to pay our obligations as they become due. |
| · | POTENTIAL FOR UP TO A 15.00% RETURN ON THE NOTES EVEN IF THE INDEX RETURN IS NEGATIVE — If the Final Level is less than the Initial Level and a Knock-Out Event has not occurred, you will earn a positive, unleveraged return on the Notes equal to the Absolute Reference Return. Because the Absolute Reference Return is based on the absolute value of the change from the Initial Level to the Final Level, if the Absolute Reference Return is less than or equal to 15.00%, you will earn a positive return on the Notes even though the Final Level is less than the Initial Level. For example, if the Reference Return is -5%, the Absolute Reference Return will equal 5%. Because a Knock-Out Event will occur if the Final Level is less than the Initial Level by more than the Knock-Out Buffer |
| -2- |
Amount of 15.00% on the Final Valuation Date, your maximum Payment at Maturity if the Reference Return is negative is $1,150.00 per $1,000 Principal Amount of Notes.
| · | DIVERSIFICATION OF THE S&P 500® INDEX — The return on the Notes is linked to the S&P 500® Index. The S&P 500® Index consists of 500 component stocks selected to provide a performance benchmark for the U.S. equity markets. For additional information about the Reference Asset, see the information set forth under “Description of the Reference Asset” herein. |
| · | TAX TREATMENT — There is no direct legal authority as to the proper tax treatment of the Notes, and therefore significant aspects of the tax treatment of the Notes are uncertain as to both the timing and character of any inclusion in income in respect of the Notes. Under one approach, the Notes should be treated as executory contracts with respect to the Reference Asset. We intend to treat the Notes consistent with this approach. Pursuant to the terms of the Notes, you agree to treat the Notes under this approach for all U.S. federal income tax purposes. Notwithstanding any disclosure in the accompanying product supplement to the contrary, our special U.S. tax counsel in this transaction is Sidley Austin llp. Subject to the limitations described therein, and based on certain factual representations received from us, in the opinion of our special U.S. tax counsel, Sidley Austin llp, it is reasonable to treat the Notes as executory contracts with respect to the Reference Asset. Pursuant to this approach, we do not intend to report any income or gain with respect to the Notes prior to their maturity or an earlier sale or exchange and we intend to treat any gain or loss upon maturity or an earlier sale or exchange as long-term capital gain or loss, provided that you have held the Note for more than one year at such time for U.S. federal income tax purposes. For a further discussion of the U.S. federal income tax consequences related to the Notes, see the section “Certain U.S. Federal Income Tax Considerations” in the accompanying product supplement. |
Selected Risk Considerations
An investment in the Notes involves significant risks. Investing in the Notes is not equivalent to investing directly in any of the component securities of the Reference Asset. These risks are explained in more detail in the “Risk Factors” sections of the accompanying product supplement and prospectus supplement.
| · | SUITABILITY OF NOTES FOR INVESTMENT — You should only reach a decision to invest in the Notes after carefully considering, with your advisors, the suitability of the Notes in light of your investment objectives and the information set out in this free writing prospectus. Neither HSBC nor any dealer participating in the offering makes any recommendation as to the suitability of the Notes for investment. |
| · | YOUR INVESTMENT IN THE NOTES MAY RESULT IN A LOSS — The Notes do not guarantee any return of principal. The return on the Notes at maturity is linked to the performance of the Reference Asset and will depend on whether a Knock-Out Event has occurred and whether, and the extent to which, the Reference Return is positive or negative. If the Final Level is less than the Initial Level by more than the Knock-Out Buffer Amount of 15.00% on the Final Valuation Date, a Knock-Out Event has occurred, and the benefit provided by the Knock-Out Buffer Amount of 15.00% will terminate. Under these circumstances, you will lose 1% of the Principal Amount of your Notes for every 1% that the Final Level is less that the Initial Level. IF A KNOCK-OUT EVENT OCCURS, YOU MAY LOSE UP TO 100% OF YOUR INVESTMENT. |
| · | YOUR MAXIMUM GAIN ON THE NOTES IS LIMITED BY THE MAXIMUM UPSIDE CAP AND THE KNOCK-OUT BUFFER AMOUNT — If the Final Level is greater than the Initial Level, for each $1,000 Principal Amount of Notes, you will receive at maturity $1,000 plus an additional return that will not exceed a predetermined percentage of the Principal Amount, regardless of the appreciation in the Reference Asset, which may be significant. We refer to this predetermined percentage as the Maximum Upside Cap, which will be set on the Pricing Date and will not be less than 14.00%. In addition, if the Final Level is less than the Initial Level and a Knock-Out Event has not occurred, you will receive at maturity $1,000 plus an additional return equal to the Absolute Reference Return, up to 15.00%. Because a Knock-Out Event will occur if the Final Level is less than the Initial Level by more than the Knock-Out Buffer Amount of 15.00% on the Final Valuation Date, your maximum Payment at Maturity if the Reference Return is negative is $1,150.00 per $1,000 Principal Amount of Notes. |
| · | THE NOTES ARE SUBJECT TO THE CREDIT RISK OF HSBC USA INC. — The Notes are senior unsecured debt obligations of the Issuer, HSBC, and are not, either directly or indirectly, an obligation of any third party. As further described in the accompanying prospectus supplement and prospectus, the Notes will rank on par with all of the other unsecured and unsubordinated debt obligations of HSBC, except such obligations as may be preferred by operation of law. Any payment to be made on the Notes, including any return of principal at maturity, depends on the ability of HSBC to satisfy its obligations as they come due. As a result, the actual and perceived creditworthiness of HSBC may affect the market value of the Notes and, in the event HSBC were to default on its obligations, you may not receive the amounts owed to you under the terms of the Notes. |
| -3- |
| · | THE BENEFIT PROVIDED BY THE KNOCK-OUT BUFFER AMOUNT MAY TERMINATE ON THE FINAL VALUATION DATE — If on the Final Valuation Date the level of the Reference Asset has decreased as compared to the Initial Level by more than the Knock-Out Buffer Amount of 15.00%, you will be fully exposed at maturity to any depreciation in the Reference Asset. We refer to this feature as a contingent buffer. Under these circumstances, you will lose 1% of the principal amount of your investment for every 1% that the Final Level is less than the Initial Level. If these Notes had a non-contingent buffer feature, under the same scenario, you would have received the full Principal Amount of your Notes plus a return equal to the Reference Return if the Final Level is less than the Initial Level by up to the Knock-Out Buffer Amount of 15.00% or a return equal to the Reference Return plus the Knock-Out Buffer Amount of 15.00% at maturity. As a result, your investment in the Notes may not perform as well as an investment in a security with a return that includes a non-contingent buffer, and your return on the Notes may not reflect the return you would receive on a conventional fixed or floating rate debt instrument with a comparable term to maturity issued by HSBC or any other issuer with a similar credit rating. |
| · | CERTAIN BUILT-IN COSTS ARE LIKELY TO ADVERSELY AFFECT THE VALUE OF THE NOTES PRIOR TO MATURITY — While the Payment at Maturity described in this free writing prospectus is based on the full Principal Amount of your Notes, the original issue price of the Notes includes the placement agent’s commission and the estimated cost of hedging our obligations under the Notes through one or more of our affiliates. As a result, the price, if any, at which HSBC Securities (USA) Inc. will be willing to purchase Notes from you in secondary market transactions, if at all, will likely be lower than the original issue price, and any sale of Notes by you prior to the Maturity Date could result in a substantial loss to you. The Notes are not designed to be short-term trading instruments. Accordingly, you should be able and willing to hold your Notes to maturity. |
| · | NO INTEREST OR DIVIDEND PAYMENTS OR VOTING RIGHTS — As a holder of the Notes, you will not receive interest payments, and you will not have voting rights or rights to receive cash dividends or other distributions or other rights that holders of securities composing the Reference Asset would have. |
| · | THE NOTES LACK LIQUIDITY — The Notes will not be listed on any securities exchange. HSBC Securities (USA) Inc. may offer to purchase the Notes in the secondary market but is not required to do so and may cease making such offers at any time if at all. Because other dealers are not likely to make a secondary market for the Notes, the price at which you may be able to trade your Notes is likely to depend on the price, if any, at which HSBC Securities (USA) Inc. is willing to buy the Notes. Even if there is a secondary market, it may not provide enough liquidity to allow you to trade or sell the Notes easily. |
| · | POTENTIAL CONFLICTS — HSBC and its affiliates play a variety of roles in connection with the issuance of the Notes, including acting as calculation agent and hedging its obligations under the Notes. In performing these duties, the economic interests of the calculation agent and other affiliates of HSBC are potentially adverse to your interests as an investor in the Notes. HSBC will not have any obligation to consider your interests as a holder of the Notes in taking any corporate action that might affect the level of the Reference Asset and the value of the Notes. |
| · | The Notes are Not Insured by any Governmental Agency of the United States or any Other Jurisdiction — The Notes are not deposit liabilities or other obligations of a bank and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency or program of the United States or any other jurisdiction. An investment in the Notes is subject to the credit risk of HSBC, and in the event that HSBC is unable to pay its obligations as they become due, you may not receive the full Payment at Maturity of the Notes. |
| · | MANY ECONOMIC AND MARKET FACTORS WILL IMPACT THE VALUE OF THE NOTES — In addition to the level of the Reference Asset on any day, the value of the Notes will be affected by a number of economic and market factors that may either offset or magnify each other, including: |
| · | the expected volatility of the Reference Asset; |
| · | the time to maturity of the Notes; |
| · | whether a Knock-Out Event has occurred; |
| · | the dividend rate on the equity securities underlying the Reference Asset; |
| · | interest and yield rates in the market generally; |
| · | a variety of economic, financial, political, regulatory or judicial events that affect the Reference Asset or the stock markets generally; and |
| · | our creditworthiness, including actual or anticipated downgrades in our credit ratings. |
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What Is the Total Return on the Notes at Maturity Assuming a Range of Performance for the Reference Asset?
The following table and examples illustrate the hypothetical total return at maturity on the Notes. The “total return” as used in this term sheet is the number, expressed as a percentage, that results from comparing the Payment at Maturity per $1,000 Principal Amount of Notes to $1,000. The hypothetical total returns set forth below assume an Initial Level of 1300 and a Maximum Upside Cap of 14.00% and reflect the Knock-Out Buffer Amount of 15.00%. The hypothetical total returns set forth below are for illustrative purposes only and may not be the actual total returns applicable to a purchaser of the Notes. The numbers appearing in the following table and examples have been rounded for ease of analysis.
| Hypothetical Final Level | Hypothetical Reference Return | Absolute Reference Return | Hypothetical Total Return | |
| Knock-Out Event Has Not Occurred(1) | Knock-Out Event Has Occurred(2) | |||
| 2,340.00 | 80.00% | 80.00% | 14.00% | N/A |
| 2,210.00 | 70.00% | 70.00% | 14.00% | N/A |
| 2,080.00 | 60.00% | 60.00% | 14.00% | N/A |
| 1,950.00 | 50.00% | 50.00% | 14.00% | N/A |
| 1,820.00 | 40.00% | 40.00% | 14.00% | N/A |
| 1,690.00 | 30.00% | 30.00% | 14.00% | N/A |
| 1,560.00 | 20.00% | 20.00% | 14.00% | N/A |
| 1,495.00 | 15.00% | 15.00% | 14.00% | N/A |
| 1,482.00 | 14.00% | 14.00% | 14.00% | N/A |
| 1,430.00 | 10.00% | 10.00% | 10.00% | N/A |
| 1,365.00 | 5.00% | 5.00% | 5.00% | N/A |
| 1,352.00 | 4.00% | 4.00% | 4.00% | N/A |
| 1,313.00 | 1.00% | 1.00% | 1.00% | N/A |
| 1,300.00 | 0.00% | 0.00% | 0.00% | N/A |
| 1,235.00 | -5.00% | 5.00% | 5.00% | N/A |
| 1,170.00 | -10.00% | 10.00% | 10.00% | N/A |
| 1,105.00 | -15.00% | 15.00% | 15.00% | N/A |
| 1,040.00 | -20.00% | 20.00% | N/A | -20.00% |
| 910.00 | -30.00% | 30.00% | N/A | -30.00% |
| 780.00 | -40.00% | 40.00% | N/A | -40.00% |
| 650.00 | -50.00% | 50.00% | N/A | -50.00% |
| 520.00 | -60.00% | 60.00% | N/A | -60.00% |
| 390.00 | -70.00% | 70.00% | N/A | -70.00% |
| 260.00 | -80.00% | 80.00% | N/A | -80.00% |
| 130.00 | -90.00% | 90.00% | N/A | -90.00% |
| 0.00 | -100.00% | 100.00% | N/A | -100.00% |
| (1) | The Final Level has not declined, as compared to the Initial Level, by a percentage that is more than 15.00%. |
| (2) | The Final Level has declined, as compared to the Initial Level, by a percentage that is more than 15.00%. |
Hypothetical Examples of Amounts Payable at Maturity
The following examples illustrate how the total returns set forth in the table above are calculated.
Example 1: The level of the Reference Asset increases from the Initial Level of 1,300.00 to a Final Level of 1,365.00. Because the Reference Return of 5% is positive and does not exceed the hypothetical Maximum Upside Cap of 14.00%, the investor receives a Payment at Maturity of $1,050.00 per $1,000 Principal Amount of Notes, calculated as follows:
$1,000 + ($1,000 × 5%) = $1,050.00
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Example 2: The level of the Reference Asset increases from the Initial Level of 1,300.00 to a Final Level of 1,820.00. Because the Reference Return of 40% is positive and exceeds the hypothetical Maximum Upside Cap of 14.00%, the investor receives a Payment at Maturity of $1,140.00 per $1,000 Principal Amount of Notes, the hypothetical maximum payment on the Notes if the Reference Return is positive, calculated as follows.
$1,000 + ($1,000 × 14%) = $1,140.00
Example 3: The level of the Reference Asset decreases from the Initial Level of 1,300.00 to an Ending Index Level of 1,235.00. Although the Reference Return is negative, because a Knock-Out Event has not occurred, the investor receives the Absolute Reference Return of 5% or a Payment at Maturity of $1,050.00 per $1,000 Principal Amount of Notes, calculated as follows:
$1,000 + ($1,000 × 5%) = $1,050.00
Example 4: The level of the Reference Asset decreases from the Initial Level of 1,300.00 to a Final Level of 780.00. Because a Knock-Out Event has occurred and the Reference Return is -40%, the investor receives a Payment at Maturity of $600.00 per $1,000 Principal Amount of Notes, calculated as follows:
$1,000 + ($1,000 × -40%) = $600.00
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Description of the Reference Asset
General
This free writing prospectus is not an offer to sell and it is not an offer to buy interests in the Reference Asset or any of the securities comprising the Reference Asset. All disclosures contained in this free writing prospectus regarding the Reference Asset, including its make-up, performance, method of calculation and changes in its components, where applicable, are derived from publicly available information. Neither HSBC nor any of its affiliates assumes any responsibilities for the adequacy or accuracy of information about the Reference Asset or any constituent included in the Reference Asset contained in this free writing prospectus. You should make your own investigation into each Reference Asset.
We urge you to read the section “Sponsors or Issuers and Reference Asset” on page S-37 in the accompanying prospectus supplement.
The S&P 500® Index
HSBC has derived all information relating to the Reference Asset, including, without limitation, its make-up, performance, method of calculation and changes in its components, from publicly available sources. That information reflects the policies of and is subject to change by, Standard & Poor’s Financial Services LLC (“S&P”). S&P is under no obligation to continue to publish, and may discontinue or suspend the publication of the Reference Asset at any time.
S&P publishes the Reference Asset
The Reference Asset is intended to provide an indication of the pattern of common stock price movement. The calculation of the level of the Reference Asset, discussed below in further detail, is based on the relative value of the aggregate Market Value (as defined below) of the common stocks of 500 companies as of a particular time compared to the aggregate average Market Value of the common stocks of 500 similar companies during the base period of the years 1941 through 1943. S&P chooses companies for inclusion in the Reference Asset with the aim of achieving a distribution by broad industry groupings that approximates the distribution of these groupings in the common stock population of the Standard & Poor’s Stock Guide Database, which S&P uses as an assumed model for the composition of the total market. S&P may from time to time in its sole discretion, add companies to or delete companies from, the Reference Asset to achieve these objectives.
Relevant criteria employed by S&P include the viability of the particular company, the extent to which that company represents the industry group to which it is assigned, the extent to which the market price of that company’s common stock is generally responsive to changes in the affairs of the respective industry and the market value and trading activity of the common stock of that company. Ten main industry groups comprise the Reference Asset: Information Technology, Financials, Consumer Staples, Health Care, Energy, Industrials, Consumer Discretionary, Utilities, Materials and Telecommunication Services. Changes in the Reference Asset are reported daily in the financial pages of many major newspapers, on Bloomberg Professional® service under the symbol “SPX” and on the S&P website. Information contained in the S&P website is not incorporated by reference in, and should not be considered a part of, this document.
The Reference Asset does not reflect the payment of dividends on the stocks included in the Reference Asset and therefore the payment on the Notes will not produce the same return you would receive if you were able to purchase such underlying stocks and hold them until the Maturity Date.
Computation of the Reference Asset
Prior to March 2005, the Market Value of a component stock was calculated as the product of the market price per share and the total number of outstanding shares of the component stock. In March 2004, S&P announced that it would transition the Reference Asset to float-adjusted market capitalization weights. The transition began in March 2005 and was completed in September 2005. S&P’s criteria for selecting stock for the Reference Asset was not changed by the shift to float adjustment. However, the adjustment affects each company’s weight in the Reference Asset (i.e., its Market Value). Currently, S&P calculates the Reference Asset based on the total float-adjusted market capitalization of each component stock, where each stock’s weight in the Reference Asset is proportional to its float-adjusted Market Value.
Under float adjustment, the share counts used in calculating the Reference Asset reflect only those shares that are available to investors, not all of a company’s outstanding shares. S&P defines three groups of shareholders whose holdings are subject to float adjustment:
| · | holdings by other publicly traded corporations, venture capital firms, private equity firms, strategic partners, or leveraged buyout groups; |
| · | holdings by government entities, including all levels of government in the U.S. or foreign countries; and |
| · | holdings by current or former officers and directors of the company, founders of the company, or family trusts of officers, directors, or founders, as well as holdings of trusts, foundations, pension funds, employee stock ownership plans or other investment vehicles associated with and controlled by the company. |
However, treasury stock, stock options, restricted shares, equity participation units, warrants, preferred stock, convertible stock, and rights are not part of the float. In cases where holdings in a group exceed 10% of the outstanding shares of a company, the holdings of that group are excluded from the float-adjusted count of shares to be used in the index calculation.
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Mutual funds, investment advisory firms, pension funds, or foundations not associated with the company and investment funds in insurance companies, shares of a U.S. company traded in Canada as “exchangeable shares,” shares that trust beneficiaries may buy or sell without difficulty or significant additional expense beyond typical brokerage fees, and, if a company has multiple classes of stock outstanding, shares in an unlisted or non-traded class if such shares are convertible by shareholders without undue delay and cost, are also part of the float.
For each stock, an investable weight factor (“IWF”) is calculated by dividing the available float shares, defined as the total shares outstanding less shares held in one or more of the three groups listed above where the group holdings exceed 10% of the outstanding shares, by the total shares outstanding. The float-adjusted index is then calculated by dividing the sum of the IWF multiplied by both the price and the total shares outstanding for each stock by an Index divisor (the “Divisor”). For companies with multiple classes of stock, S&P calculates the weighted average IWF for each stock using the proportion of the total company market capitalization of each share class as weights.
As of the date of this document, the Reference Asset is also calculated using a base-weighted aggregate methodology: the level of the Reference Asset reflects the total Market Value of all the component stocks relative to the Reference Asset base period of 1941-43. The daily calculation of the Reference Asset is computed by dividing the Market Value of the Reference Asset component stocks by a Divisor, which is adjusted from time to time as discussed below.
The simplest capitalization weighted index can be thought of as a portfolio consisting of all available shares of the stocks in the index. While this might track this portfolio’s value in dollar terms, it would probably yield an unwieldy number in the trillions. Therefore, the actual number used in the Reference Asset is scaled to a more easily handled number, currently in the thousands, by dividing the portfolio Market Value by the Divisor.
Ongoing maintenance of the Reference Asset includes monitoring and completing the adjustments for additions and deletions of the constituent companies, share changes, stock splits, stock dividends and stock price adjustments due to company restructurings or spin-offs. Continuity in the level of the Reference Asset is maintained by adjusting the Divisor for all changes in the Reference Asset constituents’ share capital after the base period of 1941-43 with the level of the Reference Asset as of the base period set at 10. Some corporate actions, such as stock splits and stock dividends do not require Divisor adjustments because following a stock split or stock dividend, both the stock price and number of shares outstanding are adjusted by S&P so that there is no change in the Market Value of the component stock. All stock split and dividend adjustments are made after the close of trading on the day before the ex-date.
To prevent the level of the Reference Asset from changing due to corporate actions, all corporate actions which affect the total Market Value of the Reference Asset also require a Divisor adjustment. By adjusting the Divisor for the change in total Market Value, the level of the Reference Asset remains constant. This helps maintain the level of the Reference Asset as an accurate barometer of stock market performance and ensures that the movement of the Reference Asset does not reflect the corporate actions of individual companies in the Reference Asset. All Divisor adjustments are made after the close of trading and after the calculation of the closing levels of the Reference Asset. As noted in the preceding paragraph, some corporate actions, such as stock splits and stock dividends, require simple changes in the common shares outstanding and the stock prices of the companies in the Reference Asset and do not require Divisor adjustments.
The table below summarizes the types of Reference Asset maintenance adjustments and indicates whether or not a Divisor adjustment is required.
|
Type of Corporate Action
|
Comments
|
Divisor
|
| Company added/deleted | Net change in market value determines Divisor adjustment. | Yes |
| Change in shares outstanding | Any combination of secondary issuance, share repurchase or buy back—share counts revised to reflect change. | Yes |
| Stock split | Share count revised to reflect new count. Divisor adjustment is not required since the share count and price changes are offsetting. | No |
| Spin-off | If spun-off company is not being added to the index, the divisor adjustment reflects the decline in Index Market Value (i.e., the value of the spun-off unit). | Yes |
| Spin-off | Spun-off company added to the Reference Asset, no company removed from the Reference Asset. | No |
| Spin-off | Spun-off company added to the Reference Asset, another company removed to keep number of names fixed. Divisor adjustment reflects deletion. | Yes |
| Change in IWF | Increasing (decreasing) the IWF increases (decreases) the total market value of the Reference Asset. The Divisor change reflects the change in market value caused by the change to an IWF. | Yes |
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|
Type of Corporate Action
|
Comments
|
Divisor
|
| Special dividend | When a company pays a special dividend the share price is assumed to drop by the amount of the dividend; the divisor adjustment reflects this drop in Index Market Value. | Yes |
| Rights offering | Each shareholder receives the right to buy a proportional number of additional shares at a set (often discounted) price. The calculation assumes that the offering is fully subscribed. Divisor adjustment reflects increase in market cap measured as the shares issued multiplied by the price paid. | Yes |
Each of the corporate events exemplified in the table requiring an adjustment to the Divisor has the effect of altering the Market Value of the component stock and consequently of altering the aggregate Market Value of the Reference Asset component stocks (the “Post-Event Aggregate Market Value”). In order that the level of the Reference Asset (the “Pre-Event Index Value”) not be affected by the altered Market Value (whether increase or decrease) of the affected component stock, a new Divisor (“New Divisor”) is derived as follows:
| · | Post-Event Aggregate Market Value | = | Pre-Event Index Value |
| New Divisor | |||
| · | New Divisor | = | Post-Event Aggregate Market Value |
| Pre-Event Index Value |
Another large part of the Reference Asset maintenance process involves tracking the changes in the number of shares outstanding of each of the companies whose stocks are included in the Reference Asset. Four times a year, on a Friday close to the end of each calendar quarter, the share totals of companies in the Reference Asset are updated as required by any changes in the number of shares outstanding and then the Index Divisor is adjusted accordingly. In addition, changes in a company’s shares outstanding of 5% or more due to mergers, acquisitions, public offerings, private placements, tender offers, Dutch auctions or exchange offers are made as soon as reasonably possible. Other changes of 5% or more (due to, for example, company stock repurchases, redemptions, exercise of options, warrants, conversion of preferred stock, notes, debt, equity participations or other recapitalizations) are made weekly, and are announced on Wednesdays for implementation after the close of trading on the following Wednesday. If a 5% or more change causes a company’s IWF to change by 5 percentage points or more (for example from 0.80 to 0.85), the IWF will be updated at the same time as the share change, except IWF changes resulting from partial tender offers will be considered on a case-by-case basis. Changes to an IWF of less than 5 percentage points are implemented at the next IWF review, which occurs annually. In the case of certain rights issuances, in which the number of rights issued and/or terms of their exercise are deemed substantial, a price adjustment and share increase may be implemented immediately.
License Agreement with S&P
HSBC has entered into a nonexclusive license agreement providing for the license to it, in exchange for a fee, of the right to use indices owned and published by S&P in connection with some products, including the Notes.
The Notes are not sponsored, endorsed, sold or promoted by S&P or its third party licensors. Neither S&P nor its third party licensors makes any representation or warranty, express or implied, to the owners of the Notes or any member of the public regarding the advisability of investing in securities generally or in the Notes particularly or the ability of the SPX to track general stock market performance. S&P's and its third party licensor’s only relationship to HSBC USA Inc. is the licensing of certain trademarks and trade names of S&P and the third party licensors and of the SPX which is determined, composed and calculated by S&P or its third party licensors without regard to HSBC USA Inc. or the Notes. S&P and its third party licensors have no obligation to take the needs of HSBC USA Inc. or the owners of the Notes into consideration in determining, composing or calculating the SPX. Neither S&P nor its third party licensors is responsible for and has not participated in the determination of the prices and amount of the Notes or the timing of the issuance or sale of the Notes or in the determination or calculation of the equation by which the Notes are to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of the Notes.
NEITHER STANDARD & POOR’S, ITS AFFILIATES NOR THEIR THIRD PARTY LICENSORS GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS OR COMPLETENESS OF THE SPX OR ANY DATA INCLUDED THEREIN OR ANY COMMUNICATIONS, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATIONS (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. STANDARD & POOR’S, ITS AFFILIATES AND THEIR THIRD PARTY LICENSORS SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS OR DELAYS THEREIN. STANDARD & POOR’S MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE MARKS, THE SPX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE
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FOREGOING, IN NO EVENT WHATSOEVER SHALL STANDARD & POOR’S, ITS AFFILIATES OR THEIR THIRD PARTY LICENSORS BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY OR OTHERWISE.
“Standard & Poor’s®”, “S&P®” and “S&P 500®” are trademarks of Standard and Poor’s and have been licensed for use by HSBC USA Inc.
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Historical Performance of Reference Asset
The following graph sets forth the historical performance of the Reference Asset based on the daily historical closing levels from March 6, 2007 through March 6, 2012. The closing level for the Reference Asset on March 6, 2012 was 1,364.33. We obtained the closing levels below from Bloomberg Professional® service. We make no representation or warranty as to the accuracy or completeness of the information obtained from Bloomberg Professional® service.
The historical levels of the Reference Asset should not be taken as an indication of future performance, and no assurance can be given as to the Official Closing Level on the Final Valuation Date. We cannot give you assurance that the performance of the Reference Asset will result in the return of any of your initial investment.
Historical Performance of the S&P 500® Index
Source: Bloomberg
Market Disruption Events
Notwithstanding the definition of market disruption event in the accompanying product supplement, “market disruption event” means any scheduled trading day on which any relevant exchange or related exchange fails to open for trading during its regular trading session or on which any of the following events has occurred and is continuing which the calculation agent determines is material:
| (i) | Any suspension of or limitation imposed on trading by any relevant exchanges or related exchanges or otherwise, (A) relating to any component security included in the Reference Asset then constituting 20.00% or more of the level of such Reference Asset or (B) in futures or options contracts relating to the relevant Reference Asset on any related exchange; or |
| (ii) | Any event (other than any event described in (iii) below) that disrupts or impairs the ability of market participants in general (A) to effect transactions in, or obtain market values for any component security included in the Reference Asset then constituting 20.00% or more of the level of such Reference Asset or (B) to effect transactions in, or obtain market values for, futures or options contracts relating to the Reference Asset on any relevant related exchange; or |
| (iii) | The closure on any scheduled trading day of any relevant exchange or related exchange prior to its scheduled closing time (unless the earlier closing time is announced by the relevant exchange or related exchange at least one hour prior to |
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the earlier of (i) the actual closing time for the regular trading session on the exchange and (ii) the submission deadline for orders to be entered into the relevant exchange or related exchange for execution at the close of trading on that day).
Supplemental Plan of Distribution (Conflicts of Interest)
Pursuant to the terms of a distribution agreement, HSBC Securities (USA) Inc., an affiliate of HSBC, will purchase the Notes from HSBC for distribution to J.P. Morgan Securities LLC and certain of its registered broker-dealer affiliates, at the price indicated on the cover of the pricing supplement, the document that will be filed pursuant to Rule 424(b)(2) containing the final pricing terms of the Notes. J.P. Morgan Securities LLC and certain of its registered broker-dealer affiliates will act as placement agent for the Notes and will receive a fee that will not exceed $10.00 per $1,000 Principal Amount of Notes.
In addition, HSBC Securities (USA) Inc. or another of its affiliates or agents may use the pricing supplement to which this free writing prospectus relates in market-making transactions after the initial sale of the Notes, but is under no obligation to do so and may discontinue any market-making activities at any time without notice.
See “Supplemental Plan of Distribution” on page S-52 in the prospectus supplement. All references to NASD Rule 2720 in the prospectus supplement shall be to FINRA Rule 5121.
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