UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q


(Mark One)
ý☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020March 31, 2021
OR
o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-07436
HSBC USA Inc.
(Exact name of registrant as specified in its charter)
Maryland13-2764867
(State of incorporation)(I.R.S. Employer Identification No.)
452 Fifth Avenue, New York, New York10018
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code (212) 525-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
$100,000,000 Zero Coupon Callable Accreting Notes due January 15, 2043 HBA/43New York Stock Exchange
$50,000,000 Zero Coupon Callable Accreting Notes due January 29, 2043HBA/43ANew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý☒  No  o☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý☒  No  o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero☐Accelerated filero☐Non-accelerated filerý☒Smaller reporting companyo☐Emerging growth companyo☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o☐  No  ý☒
As of July 31, 2020,April 23, 2021, there were 714 shares of the registrant's common stock outstanding, all of which are owned by HSBC North America Holdings Inc.




HSBC USA Inc.

TABLE OF CONTENTS
Part/Item No.
Part IPage
Item 1.Financial Statements (Unaudited):
Consolidated Statement of Income (Loss)
3
Consolidated Statement of Comprehensive Loss
4
Consolidated Balance Sheet
5
Consolidated Statement of Changes in Equity
7
Consolidated Statement of Cash Flows
8
Notes to the Consolidated Financial Statements
9
Part/Item No.
Part IPage
Item 1.Financial Statements (Unaudited):
Consolidated Statement of Income (Loss)
3
Consolidated Statement of Comprehensive Income (Loss)
4
Consolidated Balance Sheet
5
Consolidated Statement of Changes in Equity
7
Consolidated Statement of Cash Flows
9
Notes to the Consolidated Financial Statements
10
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations:
Forward-Looking Statements
8472
Executive Overview
8674
Basis of Reporting
9179
Critical Accounting Policies and Estimates
92
Balance Sheet Review
9380
Results of Operations
9885
Segment Results - Group Reporting Basis
10790
Credit Quality
11695
Liquidity and Capital Resources
124103
Off-Balance Sheet Arrangements, Credit Derivatives and Other Contractual Obligations
130107
Fair Value
131107
Risk Management
132109
Consolidated Average Balances and Interest Rates
138115
Item 3.
140116
Item 4.
140116
Part II
Part II
Item 1.
140116
Item 1A.5.
140116
Item 5.6.
142118
Item 6.
Exhibits
144
145119
 

2

HSBC USA Inc.

PART I

Item 1. Financial Statements
CONSOLIDATED STATEMENT OF INCOME (LOSS) (UNAUDITED)
CONSOLIDATED STATEMENT OF INCOME (LOSS) (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019
Three Months Ended March 31,Three Months Ended March 31,20212020
(in millions) (in millions)
Interest income:       Interest income:
Loans$580
 $743
 $1,218
 $1,459
Loans$451 $638 
Securities262
 298
 505
 602
Securities177 243 
Trading securities48
 67
 128
 130
Trading securities48 80 
Short-term investments23
 173
 110
 349
Short-term investments16 87 
Other5
 20
 24
 38
Other9 19 
Total interest income918
 1,301
 1,985
 2,578
Total interest income701 1,067 
Interest expense:       Interest expense:
Deposits200
 380
 521
 713
Deposits81 321 
Short-term borrowings15
 68
 55
 130
Short-term borrowings5 40 
Long-term debt162
 306
 360
 618
Long-term debt82 198 
Other3
 7
 7
 15
Other2 4 
Total interest expense380
 761
 943
 1,476
Total interest expense170 563 
Net interest income538
 540
 1,042
 1,102
Net interest income531 504 
Provision for credit losses219
 46
 945
 104
Provision for credit losses(227)726 
Net interest income after provision for credit losses319
 494
 97
 998
Net interest income (expense) after provision for credit lossesNet interest income (expense) after provision for credit losses758 (222)
Other revenues:       Other revenues:
Credit card fees, net9
 18
 20
 30
Credit card fees, net10 11 
Trust and investment management fees33
 31
 64
 61
Trust and investment management fees29 31 
Other fees and commissions137
 162
 288
 309
Other fees and commissions165 151 
Trading revenue192
 123
 206
 256
Trading revenue41 14 
Other securities gains, net31
 23
 59
 30
Other securities gains, net29 28 
Servicing and other fees from HSBC affiliates81
 88
 169
 169
Servicing and other fees from HSBC affiliates83 88 
Gain (loss) on instruments designated at fair value and related derivatives22
 (17) —
 (26)Gain (loss) on instruments designated at fair value and related derivatives18 (22)
Other income (loss)(41) 8
 45
 (3)
Other incomeOther income9 86 
Total other revenues464
 436
 851
 826
Total other revenues384 387 
Operating expenses:       Operating expenses:
Salaries and employee benefits190
 221
 397
 431
Salaries and employee benefits176 207 
Support services from HSBC affiliates389
 411
 771
 791
Support services from HSBC affiliates367 382 
Occupancy expense, net38
 48
 178
 93
Occupancy expense, net30 140 
Goodwill impairment (Note 8)—
 —
 784
 —
Goodwill impairment (Note 8)0 784 
Other expenses110
 94
 202
 209
Other expenses109 92 
Total operating expenses727
 774
 2,332
 1,524
Total operating expenses682 1,605 
Income (loss) before income tax56
 156
 (1,384) 300
Income (loss) before income tax460 (1,440)
Income tax expense (benefit)49
 35
 (108) 70
Income tax expense (benefit)121 (157)
Net income (loss)$7
 $121
 $(1,276) $230
Net income (loss)$339 $(1,283)


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

3

HSBC USA Inc.
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (UNAUDITED)

Three Months Ended March 31,20212020
 (in millions)
Net income (loss)$339 $(1,283)
Net change in unrealized gains (losses), net of tax:
Investment securities(631)758 
Fair value option liabilities attributable to our own credit spread(10)407 
Derivatives designated as cash flow hedges(12)90 
Total other comprehensive income (loss)(653)1,255 
Comprehensive loss$(314)$(28)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
 Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019
 (in millions)
Net income (loss)$7
 $121
 $(1,276) $230
Net change in unrealized gains (losses), net of tax:       
Investment securities110
 220
 868
 399
Fair value option liabilities attributable to our own credit spread(261) 7
 146
 (104)
Derivatives designated as cash flow hedges3
 5
 93
 19
Pension and post-retirement benefit plans—
 —
 —
 (3)
Total other comprehensive income (loss)(148) 232
 1,107
 311
Comprehensive income (loss)$(141) $353
 $(169) $541


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

4

HSBC USA Inc.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
March 31, 2021December 31, 2020
 (in millions, except share data)
Assets(1)
Cash and due from banks$1,447 $1,302 
Interest bearing deposits with banks53,607 14,353 
Federal funds sold and securities purchased under agreements to resell3,760 35,746 
Trading assets (includes $1.1 billion and $1.3 billion pledged to creditors at March 31, 2021 and December 31, 2020, respectively)25,822 27,284 
Securities available-for-sale (includes amortized cost of $34.5 billion and $39.6 billion at March 31, 2021 and December 31, 2020, respectively, an allowance for credit losses of $1 million at both March 31, 2021 and December 31, 2020, and $2.8 billion and $2.1 billion pledged to creditors at March 31, 2021 and December 31, 2020, respectively)34,659 40,672 
Securities held-to-maturity, net of allowance for credit losses of $2 million at both March 31, 2021 and December 31, 2020 (fair value of $8.2 billion and $9.4 billion at March 31, 2021 and December 31, 2020, respectively)7,837 8,981 
Loans (includes $30 million and $32 million designated under fair value option at March 31, 2021 and December 31, 2020, respectively)61,526 62,088 
Less – allowance for credit losses853 1,015 
Loans, net60,673 61,073 
Loans held for sale (includes $83 million and $36 million designated under fair value option at March 31, 2021 and December 31, 2020, respectively)351 337 
Properties and equipment, net133 144 
Goodwill458 458 
Other assets, net of allowance for credit losses of $2 million at both March 31, 2021 and December 31, 2020, respectively6,109 6,084 
Total assets$194,856 $196,434 
Liabilities(1)
Debt:
Domestic deposits:
Noninterest bearing$36,850 $32,428 
Interest bearing (includes $3.8 billion and $4.2 billion designated under fair value option at March 31, 2021 and December 31, 2020, respectively)104,533 107,427 
Foreign deposits - interest bearing7,199 5,295 
Total deposits148,582 145,150 
Short-term borrowings5,243 4,952 
Long-term debt (includes $9.9 billion and $10.7 billion designated under fair value option at March 31, 2021 and December 31, 2020, respectively)18,179 19,979 
Total debt172,004 170,081 
Trading liabilities2,319 5,397 
Interest, taxes and other liabilities2,559 2,665 
Total liabilities176,882 178,143 
Equity
Preferred stock (0 par value; 40,999,000 shares authorized; 1,265 shares issued and outstanding at both March 31, 2021 and December 31, 2020)1,265 1,265 
Common equity:
Common stock ($5 par; 150,000,000 shares authorized; 714 shares issued and outstanding at both March 31, 2021 and December 31, 2020)0 0 
Additional paid-in capital15,743 15,746 
Retained earnings940 601 
Accumulated other comprehensive income26 679 
Total common equity16,709 17,026 
Total equity17,974 18,291 
Total liabilities and equity$194,856 $196,434 
HSBC USA Inc.
(1)The following table summarizes assets and liabilities related to our consolidated variable interest entities ("VIEs") at March 31, 2021 and December 31, 2020. Assets and liabilities exclude intercompany balances that eliminate in consolidation. See Note 17, "Variable Interest Entities," for additional information.
5

CONSOLIDATED BALANCE SHEET (UNAUDITED)

June 30, 2020 December 31, 2019
 (in millions, except share data)
Assets(1)
   
Cash and due from banks$1,266
 $1,744
Interest bearing deposits with banks17,734
 2,038
Federal funds sold and securities purchased under agreements to resell29,255
 17,838
Trading assets (includes $2.8 billion and $336 million pledged to creditors at June 30, 2020 and December 31, 2019, respectively)32,409
 28,452
Securities available-for-sale (includes $1.7 billion and nil pledged to creditors at June 30, 2020 and December 31, 2019, respectively, and an allowance for credit losses of $3 million at June 30, 2020)41,668
 35,663
Securities held-to-maturity, net of allowance for credit losses of $2 million at June 30, 2020 (fair value of $12.1 billion and $13.4 billion at June 30, 2020 and December 31, 2019, respectively)11,635
 13,293
Loans (includes $35 million designated under fair value option at June 30, 2020)72,468
 68,553
Less – allowance for credit losses1,192
 637
Loans, net71,276
 67,916
Loans held for sale (includes $45 million and $178 million designated under fair value option at June 30, 2020 and December 31, 2019, respectively)147
 289
Properties and equipment, net148
 177
Goodwill458
 1,242
Other assets, net of allowance for credit losses of $4 million at June 30, 20206,866
 6,723
Total assets$212,862
 $175,375
Liabilities(1)
   
Debt:   
Domestic deposits:   
Noninterest bearing$30,902
 $24,132
Interest bearing (includes $5.4 billion and $7.2 billion designated under fair value option at June 30, 2020 and December 31, 2019, respectively)117,015
 90,766
Foreign deposits:   
Noninterest bearing175
 137
Interest bearing7,941
 4,658
Total deposits156,033
 119,693
Short-term borrowings (includes nil and $373 million designated under fair value option at June 30, 2020 and December 31, 2019, respectively)6,102
 3,659
Long-term debt (includes $9.3 billion and $10.3 billion designated under fair value option at June 30, 2020 and December 31, 2019, respectively)25,746
 26,697
Total debt187,881
 150,049
Trading liabilities3,218
 3,235
Interest, taxes and other liabilities3,619
 3,835
Total liabilities194,718
 157,119
Equity   
Preferred stock (no par value; 40,999,000 shares authorized; 1,265 shares issued and outstanding at both June 30, 2020 and December 31, 2019)1,265
 1,265
Common equity:   
Common stock ($5 par; 150,000,000 shares authorized; 714 shares issued and outstanding at both June 30, 2020 and December 31, 2019)—
 —
Additional paid-in capital15,746
 15,736
Retained earnings303
 1,534
Accumulated other comprehensive income (loss)830
 (279)
Total common equity16,879
 16,991
Total equity18,144
 18,256
Total liabilities and equity$212,862
 $175,375

(1)
The following table summarizes assets and liabilities related to our consolidated variable interest entities ("VIEs") at June 30, 2020 and December 31, 2019. Assets and liabilities exclude intercompany balances that eliminate in consolidation. See Note 17, "Variable Interest Entities," for additional information.

HSBC USA Inc.
March 31, 2021December 31, 2020
(in millions)
Assets
Loans$8 $10 
Other assets75 79 
Total assets$83 $89 
Liabilities
Interest, taxes and other liabilities$5 $10 
Total liabilities$5 $10 


June 30, 2020 December 31, 2019
 (in millions)
Assets   
Loans$39
 $—
Other assets86
 98
Total assets$125
 $98
Liabilities   
Interest, taxes and other liabilities$23
 $38
Total liabilities$23
 $38


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

6

HSBC USA Inc.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

Three Months Ended March 31,20212020
 (in millions)
Preferred stock
Balance at beginning and end of period$1,265 $1,265 
Common stock
Balance at beginning and end of period0 0 
Additional paid-in capital
Balance at beginning of period15,746 15,736 
Employee benefit plans(3)5 
Balance at end of period15,743 15,741 
Retained earnings
Balance at beginning of period601 1,534 
Cumulative effect adjustment to initially apply new accounting guidance for measuring credit losses on financial assets measured at amortized cost, net of tax— 84 
Cumulative effect adjustment to initially apply fair value option accounting election, as permitted under new accounting guidance, to certain student loans held for investment, net of tax— 2 
Reclassification from accumulated other comprehensive income of cumulative effect adjustment to initially apply new accounting guidance for measuring credit losses on securities available-for-sale, net of tax— (2)
Balance at beginning of period, adjusted601 1,618 
Net income (loss)339 (1,283)
Balance at end of period940 335 
Accumulated other comprehensive income
Balance at beginning of period679 (279)
Reclassification to retained earnings of cumulative effect adjustment to initially apply new accounting guidance for measuring credit losses on securities available-for-sale, net of tax— 2 
Balance at beginning of period, adjusted679 (277)
Other comprehensive income (loss), net of tax(653)1,255 
Balance at end of period26 978 
Total common equity16,709 17,054 
Total equity$17,974 $18,319 
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
Three Months Ended June 30,2020 2019
 (in millions)
Preferred stock   
Balance at beginning and end of period$1,265
 $1,265
Common stock   
Balance at beginning and end of period—
 —
Additional paid-in capital   
Balance at beginning of period15,741
 15,736
Employee benefit plans5
 (2)
Balance at end of period15,746
 15,734
Retained earnings   
Balance at beginning of period335
 1,607
Net income7
 121
Cash dividends declared on preferred stock(39) (38)
Balance at end of period303
 1,690
Accumulated other comprehensive income (loss)   
Balance at beginning of period978
 (287)
Other comprehensive income (loss), net of tax(148) 232
Balance at end of period830
 (55)
Total common equity16,879
 17,369
Total equity$18,144
 $18,634
    

HSBC USA Inc.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Continued) (UNAUDITED)
Six Months Ended June 30,2020 2019
 (in millions)
Preferred stock   
Balance at beginning and end of period$1,265
 $1,265
Common stock   
Balance at beginning and end of period—
 —
Additional paid-in capital   
Balance at beginning of period15,736
 18,136
Return of capital to parent—
 (2,400)
Employee benefit plans10
 (2)
Balance at end of period15,746
 15,734
Retained earnings   
Balance at beginning of period1,534
 1,471
Cumulative effect adjustment to initially apply new accounting guidance for measuring credit losses on financial assets measured at amortized cost, net of tax84
 —
Cumulative effect adjustment to initially apply fair value option accounting election, as permitted under new accounting guidance, to certain student loans held for investment, net of tax2
 —
Reclassification from accumulated other comprehensive income (loss) of cumulative effect adjustment to initially apply new accounting guidance for measuring credit losses on securities available-for-sale, net of tax(2) —
Cumulative effect adjustment to initially apply new accounting guidance for leases to recognize the previously deferred gain on the sale and leaseback of property, net of tax—
 27
Balance at beginning of period, adjusted1,618
 1,498
Net income (loss)(1,276) 230
Cash dividends declared on preferred stock(39) (38)
Balance at end of period303
 1,690
Accumulated other comprehensive income (loss)   
Balance at beginning of period(279) (366)
Reclassification to retained earnings of cumulative effect adjustment to initially apply new accounting guidance for measuring credit losses on securities available-for-sale, net of tax2
 —
Balance at beginning of period, adjusted(277) (366)
Other comprehensive income, net of tax1,107
 311
Balance at end of period830
 (55)
Total common equity16,879
 17,369
Total equity$18,144
 $18,634


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

7

HSBC USA Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

Three Months Ended March 31,20212020
 (in millions)
Cash flows from operating activities
Net income (loss)$339 $(1,283)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization60 77 
Goodwill impairment0 784 
Provision for credit losses(227)726 
Net realized gains on securities available-for-sale(29)(28)
Net change in other assets and liabilities685 (4,613)
Net change in loans held for sale:
Originations and purchases of loans held for sale(569)(1,239)
Sales and collections of loans held for sale662 1,184 
Net change in trading assets and liabilities(1,616)(77)
Lower of amortized cost or fair value adjustments on loans held for sale0 (1)
Loss (gain) on instruments designated at fair value and related derivatives(18)22 
Net cash used in operating activities(713)(4,448)
Cash flows from investing activities
Net change in federal funds sold and securities purchased under agreements to resell31,986 13,195 
Securities available-for-sale:
Purchases of securities available-for-sale(4,001)(9,918)
Proceeds from sales of securities available-for-sale3,907 4,630 
Proceeds from paydowns and maturities of securities available-for-sale4,593 2,295 
Securities held-to-maturity:
Purchases of securities held-to-maturity0 (515)
Proceeds from paydowns and maturities of securities held-to-maturity1,133 817 
Change in loans:
Collections, net of originations61 (13,510)
Loans sold to third parties392 299 
Net cash provided by disposals of properties and equipment4 7 
Other, net59 (213)
Net cash provided by (used in) investing activities38,134 (2,913)
Cash flows from financing activities
Net change in deposits3,473 14,153 
Debt:
Net change in short-term borrowings291 13,920 
Issuance of long-term debt2,288 5,844 
Repayment of long-term debt(4,071)(2,864)
Other increases (decreases) in capital surplus(3)5 
Net cash provided by financing activities1,978 31,058 
Net change in cash and due from banks and interest bearing deposits with banks39,399 23,697 
Cash and due from banks and interest bearing deposits with banks at beginning of period15,655 3,782 
Cash and due from banks and interest bearing deposits with banks at end of period$55,054 $27,479 
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30,2020 2019
 (in millions)
Cash flows from operating activities   
Net income (loss)$(1,276) $230
Adjustments to reconcile net income (loss) to net cash used in operating activities:   
Depreciation and amortization101
 30
Goodwill impairment784
 —
Provision for credit losses945
 104
Net realized gains on securities available-for-sale(59) (30)
Net change in other assets and liabilities(2,029) 2,306
Net change in loans held for sale:   
Originations and purchases of loans held for sale(1,854) (1,160)
Sales and collections of loans held for sale1,971
 1,155
Net change in trading assets and liabilities(3,974) (11,141)
Lower of amortized cost or fair value adjustments on loans held for sale8
 —
Loss on instruments designated at fair value and related derivatives—
 26
Net cash used in operating activities(5,383) (8,480)
Cash flows from investing activities   
Net change in federal funds sold and securities purchased under agreements to resell(11,417) 4,879
Securities available-for-sale:   
Purchases of securities available-for-sale(15,917) (12,608)
Proceeds from sales of securities available-for-sale7,899
 4,189
Proceeds from maturities of securities available-for-sale4,256
 3,832
Securities held-to-maturity:   
Purchases of securities held-to-maturity(515) (384)
Proceeds from sales of securities held-to-maturity340
 —
Proceeds from maturities of securities held-to-maturity1,810
 1,109
Change in loans:   
Originations, net of collections(4,450) (3,654)
Loans sold to third parties397
 464
Net cash provided by disposal (used for acquisitions) of properties and equipment2
 (15)
Other, net(218) 52
Net cash used in investing activities(17,813) (2,136)
Cash flows from financing activities   
Net change in deposits33,306
 5,671
Debt:   
Net change in short-term borrowings2,443
 4,469
Issuance of long-term debt6,350
 2,928
Repayment of long-term debt(3,656) (4,294)
Return of capital to parent—
 (2,400)
Other increases (decreases) in capital surplus10
 (2)
Dividends paid(39) (38)
Net cash provided by financing activities38,414
 6,334
Net change in cash and due from banks and interest bearing deposits with banks15,218
 (4,282)
Cash and due from banks and interest bearing deposits with banks at beginning of period3,782
 17,214
Cash and due from banks and interest bearing deposits with banks at end of period$19,000
 $12,932


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

8

HSBC USA Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NotePageNotePage
1 
Organization and Presentation
9
12 
43
2 
Strategic Initiatives
10
13 
Fee Income from Contracts with Customers
43
3 
12
14 
44
4 
Securities
13
15 
Business Segments
46
5 
Loans
17
16 
Retained Earnings and Regulatory Capital Requirements
48
6 
Allowance for Credit Losses
29
17 
Variable Interest Entities
50
7 
Loans Held for Sale
32
18 
Guarantee Arrangements, Pledged Assets and Repurchase Agreements
52
8 
33
19 
Fair Value Measurements
57
9 
Derivative Financial Instruments
33
20 
Litigation and Regulatory Matters
71
10 
Fair Value Option
39
21 
New Accounting Pronouncements
71
11 
Accumulated Other Comprehensive Income
42
Note Page Note Page
1
Organization and Presentation
10
 12
Pension and Other Postretirement Benefits
48
2
Strategic Initiatives
11
 13
Fee Income from Contracts with Customers
49
3
Trading Assets and Liabilities
12
 14
Related Party Transactions
50
4
Securities
13
 15
Business Segments
52
5
Loans
18
 16
Retained Earnings and Regulatory Capital Requirements
56
6
Allowance for Credit Losses
28
 17
Variable Interest Entities
57
7
Loans Held for Sale
34
 18
Guarantee Arrangements, Pledged Assets and Repurchase Agreements
60
8
Goodwill
35
 19
Fair Value Measurements
65
9
Derivative Financial Instruments
36
 20
Litigation and Regulatory Matters
81
10
Fair Value Option
42
 21
New Accounting Pronouncements
82
11
Accumulated Other Comprehensive Income (Loss)
46
    


1. Organization and Presentation
HSBC USA Inc. ("HSBC USA"), incorporated under the laws of Maryland, is a New York State based bank holding company and a wholly-owned subsidiary of HSBC North America Holdings Inc. ("HSBC North America"), which is an indirect wholly-owned subsidiary of HSBC Holdings plc ("HSBC" and, together with its subsidiaries, "HSBC Group"). The accompanying unaudited interim consolidated financial statements of HSBC USA and its subsidiaries (collectively "HUSI") have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, as well as in accordance with predominant practices within the banking industry. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair statement of financial position, results of operations and cash flows for the interim periods have been made. HUSI may also be referred to in these notes to the consolidated financial statements as "we," "us" or "our." These unaudited interim consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 20192020 (the "2019"2020 Form 10-K"). Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. Interim results should not be considered indicative of results in future periods.



9

HSBC USA Inc.

2. Strategic Initiatives
As discussed in our 20192020 Form 10-K, in February 2020, our Board of Directors approved a strategic plan to restructure our operations ("Restructuring Plan") in alignment with HSBC’s global strategy to refocus our wholesale operations to better serve our international corporate clients and restructure our retail operations to better meet the needs of globally mobile and affluent clients.We will Our Restructuring Plan also streamlineincludes streamlining our functional and operations support model by removing duplication and reducereducing the size of our balance sheet to better align with the scope and scale of the U.S. opportunity. We previously disclosed that we expect to incur pre-tax charges in connection with this Restructuring Plan largely over athe two year period of 2020-2021 of approximately $350-$520-$400590 million ($265-390-$305450 million after-tax). In addition, during the second quarter of 2020, we determined we would incur additional pre-tax charges of approximately $60-$80 million ($45-$60 million after-tax) as we continued to progress our Restructuring Plan. The following table presents a summary of the total pre-tax charges we expect to incur by reportable segment:
 
Expected Charges in Connection
with Restructuring Plan
 Minimum Maximum
 (in millions)
Wealth and Personal Banking$32
 $34
Commercial Banking8
 10
Global Banking and Markets120
 140
Corporate Center(1)
250
 296
Total$410
 $480
Expected Charges in Connection
with Restructuring Plan
MinimumMaximum
 (in millions)
Wealth and Personal Banking$50 $56 
Commercial Banking10 14 
Global Banking and Markets115 135 
Corporate Center(1)
345 385 
Total$520 $590 
(1)
Includes restructuring charges primarily related to lease impairment and other related costs, as well as severance costs associated with certain centralized activities and functions.
Late in(1)Includes restructuring charges primarily related to lease impairment and other related costs, support service project costs and severance costs associated with certain centralized activities and functions.
Throughout 2020 and into the secondfirst quarter of 2020,2021, we decidedcontinued to lift the pause we had put in place in March on staff reductions as coronavirus ("COVID-19") restrictions have begun to ease and some businesses began to re-open. Ourprogress our Restructuring Plan, is moving forward as planned, including consolidation of our retail branch network and wholesale and retail middle and back office functions, each under a single operations structure, simplification of our support service functions and the exit or transfer of certain derivative contracts. In 2020, we also completed the consolidation of our retail branch network and the creation of our Wealth and Personal Banking business which was completed in the second quarter.business. During the three and six months ended June 30, 2020March 31, 2021, we recorded pre-tax charges in connection with our Restructuring Plan totaling $49$18 million and $160compared with pre-tax charges totaling $109 million respectively. Whileduring the three months ended March 31, 2020. In total, we have recorded $298 million of pre-tax charges in connection with our Restructuring Plan. We remain committed to our multi-year strategic plan to re-profile our business, the timing of the strategic actions as outlined in our 2019 Form 10-K may be re-sequenced or delayed beyond 24 months as the circumstances around the COVID-19 pandemicand continue to develop. We continueexplore strategic options with respect to re-assess our strategic planretail operations to focus on our high net worth client base and may take additional actions in future periods.wealth management products.
The following table summarizes the changes in the liability associated with our Restructuring Plan during the three and six months ended June 30,March 31, 2021 and 2020:
 
Severance and Other Employee Costs(1)
 
Lease Termination and Associated Costs(2)
 Total
 (in millions)
Three Months Ended June 30, 2020     
Restructuring liability at beginning of period$9
 $24
 $33
Restructuring costs recorded during the period13
 —
 13
Restructuring costs paid during the period—
 (1) (1)
Restructuring liability at end of period$22
 $23
 $45
      
Six Months Ended June 30, 2020     
Restructuring liability at beginning of period$—
 $—
 $—
Restructuring costs recorded during the period22
 24
 46
Restructuring costs paid during the period—
 (1) (1)
Restructuring liability at end of period$22
 $23
 $45
Severance and Other Employee Costs(1)
Lease Termination and Associated Costs(2)
Other(3)
Total
 (in millions)
Three Months Ended March 31, 2021
Restructuring liability at beginning of period$10 $23 $0 $33 
Restructuring costs accrued during the period0 0 2 2 
Restructuring costs paid during the period(8)(1)(2)(11)
Restructuring liability at end of period$2 $22 $0 $24 
Three Months Ended March 31, 2020
Restructuring liability at beginning of period$0 $0 $0 $0 
Restructuring costs recorded during the period9 24 0 33 
Restructuring costs paid during the period0 0 0 0 
Restructuring liability at end of period$9 $24 $0 $33 

(1)Severance and other employee costs are included in salaries and employee benefits in the consolidated statement of income (loss). The majority of these costs were reported in the Wealth and Personal Banking and the Global Banking and Markets business segments. Not included in these costs are allocated severance costs from HSBC Technology & Services ("HTSU") discussed further below.
(2)Primarily includes real estate taxes, service charges and decommissioning costs. Lease termination and associated costs are included in occupancy expense, net in the consolidated statement of income (loss) and were reported in the Corporate Center business segment.
(3)Primarily includes professional fees, which are included in other expenses in the consolidated statement of income (loss).
10

HSBC USA Inc.

(1)
Severance and other employee costs are included in salaries and employee benefits in the consolidated statement of income (loss). The majority of these costs were reported in the Wealth and Personal Banking and the Global Banking and Markets business segments for segment reporting purposes. Not included in these costs are allocated severance costs from HSBC Technology & Services ("HTSU") discussed further below.USA Inc.
(2)
Primarily includes real estate taxes, service charges and decommissioning costs. Lease termination and associated costs are included in occupancy expense, net in the consolidated statement of income (loss) and were reported in the Corporate Center business segment for segment reporting purposes.
In connection with the restructuring costs reflected above, during the first quarter of 2020, we determined that we would exit approximately 60 branches (in addition to the approximately 20 branches for which we disclosed plans to exit in the fourth quarter of 2019). As a result, we recorded impairment charges during the first quarter of 2020 to write downwrite-down the lease right-of-use ("ROU") assets, net of estimated sublease income, by $52 million (was reduced by $6(which was increased to $67 million during the secondfourth quarter of 2020) and to write downwrite-down the leasehold improvement assets associated with these branches by $16 million based on their estimated remaining useful lives. The branches targeted for exit were closed by the end of the second quarter of 2020. These impairment charges are reflected in occupancy expense, net in the consolidated statement of income (loss) and were reported in the Corporate Center business segment for segment reporting purposes. The branches targeted for exit under the Restructuring Plan were closed by the end of the second quarter of 2020.segment.
In addition, during the secondfirst quarter of 2020,2021, we recorded $10$4 million of trading losses associated with the continued exit of certain derivative contracts as part of our Restructuring Plan. These losses are included in trading revenue in the consolidated statement of income (loss) and were reported in the Global Banking and Markets business segment for segment reporting purposes.segment. During the first quarter of 2021, as part of our Restructuring Plan, we also continued to transfer interest rate derivative contracts associated with Fixed Income activities to HSBC Bank plc. These activities are being consolidated in and operated from HSBC Bank plc to better utilize HSBC Group's global scale, which allows us to record revenue as a business introducer and hold fewer assets on our balance sheet. Transfers of interest rate derivative contracts with a notional value of $14.8 billion were completed during the first quarter of 2021 with the remainder of these contracts with a current notional value of up to $59.8 billion expected to be completed during the remainder of 2021. The transferred derivatives were substantially fully collateralized which resulted in an immaterial impact on our consolidated balance sheet.
Our Restructuring Plan also resulted in costs being allocated to us from HTSU, primarily severance costs and support service project costs, which are reflected in support services from HSBC affiliates in the consolidated statement of income (loss). During the three and six months ended June 30, 2020,first quarter of 2021, we recorded $32 million and $42$12 million of allocated costs from HTSU primarily including severancerelated to restructuring activities compared with $8 million of allocated costs and, induring the year-to-date period, contract cancellation and equipment removal charges associated with the branch exits discussed above.first quarter of 2020. These costs were reported in the Corporate Center business segment for segment reporting purposes.segment.

HSBC Group Restructuring Separate from the charges related to our Restructuring Plan as detailed above, during the first quarter of 2021, we also recorded $7 million of allocated costs from other HSBC affiliates related to the HSBC Group's restructuring activities, primarily support service project costs and severance costs. These costs are reflected in support services from HSBC affiliates in the consolidated statement of income (loss) and were reported in the Corporate Center business segment.

11

HSBC USA Inc.
3.    Trading Assets and Liabilities
Trading assets and liabilities consisted of the following:
March 31, 2021December 31, 2020
 (in millions)
Trading assets:
U.S. Treasury$2,616 $5,145 
U.S. Government agency issued or guaranteed18 0 
U.S. Government sponsored enterprises61 192 
Asset-backed securities153 143 
Foreign bonds8,167 7,971 
Equity securities7,750 6,043 
Precious metals4,497 4,989 
Derivatives, net2,560 2,801 
Total trading assets$25,822 $27,284 
Trading liabilities:
Securities sold, not yet purchased$655 $727 
Payables for precious metals0 2,312 
Derivatives, net1,664 2,358 
Total trading liabilities$2,319 $5,397 

June 30, 2020 December 31, 2019
 (in millions)
Trading assets:   
U.S. Treasury$6,317
 $6,763
U.S. Government agency issued or guaranteed16
 18
U.S. Government sponsored enterprises26
 20
Asset-backed securities148
 168
Corporate and foreign bonds9,302
 10,826
Equity securities3,178
 5,693
Precious metals10,139
 1,909
Derivatives, net3,283
 3,055
Total trading assets$32,409
 $28,452
Trading liabilities:   
Securities sold, not yet purchased$637
 $1,182
Payables for precious metals19
 124
Derivatives, net2,562
 1,929
Total trading liabilities$3,218
 $3,235
At June 30, 2020March 31, 2021 and December 31, 2019,2020, the fair value of derivatives included in trading assets is net of $3,516$2,862 million and $2,538$2,763 million,, respectively, relating to amounts recognized for the obligation to return cash collateral received under master netting agreements with derivative counterparties.
At June 30, 2020March 31, 2021 and December 31, 2019,2020, the fair value of derivatives included in trading liabilities is net of $6,043$1,953 million and $4,351$3,377 million,, respectively, relating to amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties.
See Note 9, "Derivative Financial Instruments," for further information on our trading derivatives and related collateral.

Dividend income on equity securities held for trading, which is recorded in interest income in the consolidated statement of income (loss), totaled $26 million during both the three months ended March 31, 2021 and 2020. Trading security positions are held as economic hedges of derivative products issued to our clients.


12

HSBC USA Inc.
4. Securities
HSBC USA Inc.

4. Securities
Our securities available-for-sale and securities held-to-maturity portfolios consisted of the following:
March 31, 2021Amortized
Cost		Allowance for Credit LossesUnrealized
Gains		Unrealized
Losses		Fair
Value
 (in millions)
Securities available-for-sale:
U.S. Treasury$13,574 $0 $262 $(146)$13,690 
U.S. Government sponsored enterprises:
Mortgage-backed securities6,700 0 153 (103)6,750 
Collateralized mortgage obligations1,904 0 8 (48)1,864 
Direct agency obligations1,318 0 19 0 1,337 
U.S. Government agency issued or guaranteed:
Mortgage-backed securities5,717 0 76 (38)5,755 
Collateralized mortgage obligations1,824 0 18 (12)1,830 
Direct agency obligations273 0 9 0 282 
Asset-backed securities collateralized by:
Home equity26 (1)0 0 25 
Other108 0 0 (3)105 
Foreign debt securities(1)
3,017 0 4 0 3,021 
Total available-for-sale securities$34,461 $(1)$549 $(350)$34,659 
Securities held-to-maturity:
U.S. Government sponsored enterprises:
Mortgage-backed securities$1,001 $0 $39 $0 $1,040 
Collateralized mortgage obligations700 0 46 0 746 
U.S. Government agency issued or guaranteed:
Mortgage-backed securities1,674 0 58 0 1,732 
Collateralized mortgage obligations4,454 0 183 0 4,637 
Obligations of U.S. states and political subdivisions8 0 1 0 9 
Asset-backed securities collateralized by residential mortgages2 (2)2 0 2 
Total held-to-maturity securities$7,839 $(2)$329 $0 $8,166 
13

HSBC USA Inc.
June 30, 2020
Amortized
Cost
 
Allowance for Credit Losses(1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
December 31, 2020December 31, 2020Amortized
Cost		Allowance for Credit LossesUnrealized
Gains		Unrealized
Losses		Fair
Value
(in millions) (in millions)
Securities available-for-sale:         Securities available-for-sale:
U.S. Treasury$17,695
 $—
 $658
 $(186) $18,167
U.S. Treasury$16,087 $0 $608 $(47)$16,648 
U.S. Government sponsored enterprises:         U.S. Government sponsored enterprises:
Mortgage-backed securities4,989
 —
 297
 —
 5,286
Mortgage-backed securities5,986 0 280 (2)6,264 
Collateralized mortgage obligations519
 —
 16
 —
 535
Collateralized mortgage obligations1,676 0 19 (2)1,693 
Direct agency obligations1,877
 —
 9
 (6) 1,880
Direct agency obligations1,236 0 17 0 1,253 
U.S. Government agency issued or guaranteed:         U.S. Government agency issued or guaranteed:
Mortgage-backed securities8,449
 —
 258
 (3) 8,704
Mortgage-backed securities6,993 0 152 0 7,145 
Collateralized mortgage obligations2,413
 —
 33
 (1) 2,445
Collateralized mortgage obligations2,093 0 22 (11)2,104 
Direct agency obligations310
 —
 1
 (7) 304
Direct agency obligations296 0 5 0 301 
Asset-backed securities collateralized by:         Asset-backed securities collateralized by:
Home equity31
 (3) —
 —
 28
Home equity28 (1)0 0 27 
Other116
 —
 —
 (7) 109
Other114 0 0 (10)104 
Foreign debt securities(2)
4,205
 —
 6
 (1) 4,210
Foreign debt securities(1)
Foreign debt securities(1)
5,127 0 6 0 5,133 
Total available-for-sale securities$40,604
 $(3) $1,278
 $(211) $41,668
Total available-for-sale securities$39,636 $(1)$1,109 $(72)$40,672 
Securities held-to-maturity:         Securities held-to-maturity:
U.S. Government sponsored enterprises:         U.S. Government sponsored enterprises:
Mortgage-backed securities$1,453
 $—
 $54
 $—
 $1,507
Mortgage-backed securities$1,137 $0 $44 $0 $1,181 
Collateralized mortgage obligations1,095
 —
 63
 (1) 1,157
Collateralized mortgage obligations780 0 53 0 833 
U.S. Government agency issued or guaranteed:         U.S. Government agency issued or guaranteed:
Mortgage-backed securities2,614
 —
 91
 —
 2,705
Mortgage-backed securities1,947 0 76 0 2,023 
Collateralized mortgage obligations6,463
 —
 261
 —
 6,724
Collateralized mortgage obligations5,107 0 212 0 5,319 
Obligations of U.S. states and political subdivisions10
 (1) 2
 —
 11
Obligations of U.S. states and political subdivisions10 0 1 0 11 
Asset-backed securities collateralized by residential mortgages2
 (1) 1
 —
 2
Asset-backed securities collateralized by residential mortgages2 (2)2 0 2 
Total held-to-maturity securities$11,637
 $(2) $472
 $(1) $12,106
Total held-to-maturity securities$8,983 $(2)$388 $0 $9,369 

HSBC USA Inc.
(1)Foreign debt securities represent public sector entity, bank or corporate debt.

December 31, 2019
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 (in millions)
Securities available-for-sale:       
U.S. Treasury$16,219
 $128
 $(269) $16,078
U.S. Government sponsored enterprises:       
Mortgage-backed securities3,358
 57
 (13) 3,402
Collateralized mortgage obligations345
 3
 (1) 347
Direct agency obligations1,382
 21
 —
 1,403
U.S. Government agency issued or guaranteed:       
Mortgage-backed securities10,009
 29
 (41) 9,997
Collateralized mortgage obligations741
 10
 (4) 747
Direct agency obligations254
 6
 —
 260
Asset-backed securities collateralized by:       
Home equity34
 —
 (2) 32
Other108
 3
 —
 111
Foreign debt securities(2)
3,282
 4
 —
 3,286
Total available-for-sale securities$35,732
 $261
 $(330) $35,663
Securities held-to-maturity:       
U.S. Government sponsored enterprises:       
Mortgage-backed securities$1,632
 $22
 $(1) $1,653
Collateralized mortgage obligations1,418
 40
 (4) 1,454
U.S. Government agency issued or guaranteed:       
Mortgage-backed securities3,004
 17
 —
 3,021
Collateralized mortgage obligations7,227
 85
 (22) 7,290
Obligations of U.S. states and political subdivisions10
 1
 —
 11
Asset-backed securities collateralized by residential mortgages2
 —
 —
 2
Total held-to-maturity securities$13,293
 $165
 $(27) $13,431
(1)
As discussed in Note 21, "New Accounting Pronouncements," beginning January 1, 2020, an allowance for credit losses is recognized for debt securities while, prior to January 1, 2020, debt securities were assessed for other-than-temporary impairment. At December 31, 2019, we did not consider any of our debt securities to be other-than-temporarily impaired
(2)
Foreign debt securities represent public sector entity, bank or corporate debt.
Securities Available-for-SaleThe following provides additional information about our portfolio of securities available-for-sale:
Allowance for credit losses On a quarterly basis, we perform an assessment to determine whether there have been any events or economic circumstances to indicate that a debt security available-for-sale in an unrealized loss position has suffered impairment due to credit factors. A debt security available-for-sale is considered impaired if its fair value is less than its amortized cost basis at the reporting date. If impaired, we assess whether the impairment is due to credit factors.
If we intend to sell the debt security or if it is more-likely-than-not that we will be required to sell the debt security before the recovery of its amortized cost basis, the impairment is recognized and the unrealized loss is recorded as a direct write-down of the security's amortized cost basis with an offsetting entry to earnings. If we do not intend to sell the debt security or believe we will not be required to sell the debt security before the recovery of its amortized cost basis, the impairment is assessed to determine if a credit loss component exists. We use a discounted cash flow method to determine the credit loss component. In the event a credit loss exists, an allowance for credit losses is recorded in earnings for the credit loss component of the impairment while the remaining portion of the impairment attributable to factors other than credit loss is recognized, net of tax, in other comprehensive income (loss).income. The amount of impairment recognized due to credit factors is limited to the excess of the amortized cost basis over the fair value of the security available-for-sale.

HSBC USA Inc.

In determining whether a credit loss component exists, we consider a series of factors which include:
•The extent to which the fair value is less than the amortized cost basis;
14

HSBC USA Inc.
•The credit protection features embedded within the instrument, which includes but is not limited to credit subordination positions, payment structure, over collateralization, protective triggers and financial guarantees provided by third parties;
•Changes in the near term prospects of the issuer or the underlying collateral of a security such as changes in default rates, loss severities given default and significant changes in prepayment assumptions;
•The level of excess cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and
•Any adverse change to the credit conditions of the issuer, the monoline insurer or the security such as credit downgrades by external rating agencies or changes to internal ratings.
At both June 30, 2020March 31, 2021 and January 1,December 31, 2020, the allowance for credit losses on securities available-for-sale was $3$1 million.
Securities in an unrealized loss position for which no allowance for credit losses has been recognizedThe following table summarizes gross unrealized losses and related fair values for securities available-for-sale by major security type at June 30,March 31, 2021 and December 31, 2020 classified as to the length of time the losses have existed:
One Year or LessGreater Than One Year
One Year or Less Greater Than One YearNumber
of
Securities		Gross
Unrealized
Losses		Aggregate
Fair Value
of Investment		Number
of
Securities		Gross
Unrealized
Losses		Aggregate
Fair Value
of Investment
June 30, 2020
Number
of
Securities
 
Gross
Unrealized
Losses
 
Aggregate
Fair Value
of Investment
 
Number
of
Securities
 
Gross
Unrealized
Losses
 
Aggregate
Fair Value
of Investment
(dollars are in millions) (dollars are in millions)
Securities available-for-sale:           
At March 31, 2021At March 31, 2021
U.S. Treasury16
 $(60) $2,241
 19
 $(126) $2,136
U.S. Treasury18 $(96)$2,882 11 $(50)$755 
U.S. Government sponsored enterprises11
 (5) 845
 9
 (1) 47
U.S. Government sponsored enterprises58 (150)5,120 8 (1)45 
U.S. Government agency issued or guaranteed10
 (9) 1,168
 5
 (2) 33
U.S. Government agency issued or guaranteed18 (49)2,648 4 (1)50 
Asset-backed securities3
 (7) 110
 2
 —
 —
Asset-backed securities2 (1)48 3 (2)57 
Foreign debt securities15
 (1) 1,477
 6
 —
 272
Foreign debt securities5 0 425 3 0 161 
Securities available-for-sale55
 $(82) $5,841
 41
 $(129) $2,488
Securities available-for-sale101 $(296)$11,123 29 $(54)$1,068 
At December 31, 2020At December 31, 2020
U.S. TreasuryU.S. Treasury5 $(5)$751 13 $(42)$1,271 
U.S. Government sponsored enterprisesU.S. Government sponsored enterprises15 (3)715 8 (1)46 
U.S. Government agency issued or guaranteedU.S. Government agency issued or guaranteed13 (11)1,482 3 0 8 
Asset-backed securitiesAsset-backed securities3 (10)104 2 0 0 
Foreign debt securitiesForeign debt securities6 0 766 5 0 241 
Securities available-for-saleSecurities available-for-sale42 $(29)$3,818 31 $(43)$1,566 
Gross unrealized losses improvedincreased as compared with December 31, 20192020 due primarily to decreasingincreasing yields on U.S. Treasury, U.S. Government sponsored mortgage-backed and U.S. Government agency mortgage-backed securities.
Although the fair value of a particular security may be below its amortized cost, it does not necessarily result in a credit loss and hence an allowance for credit losses. The decline in fair value may be caused by, among other things, the illiquidity of the market. We have reviewed the securities in an unrealized loss position for which no allowance for credit losses has been recognized in accordance with our accounting policies, discussed further above. At June 30, 2020,March 31, 2021, we do not consider any of these securities to be impaired due to credit factors as we expect to recover their amortized cost basis and we neither intend nor expect to be required to sell these securities prior to recovery, even if that equates to holding them until their individual maturities. However, impairments due to credit factors may occur in future periods if the credit quality of the securities deteriorates.

HSBC USA Inc.

For the comparative period prior to the adoption of the new accounting guidance on January 1, 2020, we have retained the following disclosure as previously reported, which included both securities available-for-sale and securities held-to-maturity. The following table summarizes gross unrealized losses and related fair values at December 31, 2019 classified as to the length of time the losses have existed:
 One Year or Less Greater Than One Year
December 31, 2019
Number
of
Securities
 
Gross
Unrealized
Losses
 
Aggregate
Fair Value
of Investment
 
Number
of
Securities
 
Gross
Unrealized
Losses
 
Aggregate
Fair Value
of Investment
 (dollars are in millions)
Securities available-for-sale:           
U.S. Treasury22
 $(61) $4,034
 28
 $(208) $4,962
U.S. Government sponsored enterprises18
 (8) 772
 83
 (6) 672
U.S. Government agency issued or guaranteed27
 (4) 1,961
 50
 (41) 2,508
Asset-backed securities—
 —
 —
 5
 (2) 33
Foreign debt securities11
 —
 1,238
 5
 —
 292
Securities available-for-sale78
 $(73) $8,005
 171
 $(257) $8,467
Securities held-to-maturity:           
U.S. Government sponsored enterprises15
 $—
 $63
 76
 $(5) $522
U.S. Government agency issued or guaranteed46
 (3) 887
 274
 (19) 1,705
Obligations of U.S. states and political subdivisions1
 —
 —
 1
 —
 —
Securities held-to-maturity62
 $(3) $950
 351
 $(24) $2,227
Securities Held-to-MaturityThe following provides additional information about our portfolio of securities held-to-maturity:
Allowance for credit losses As discussed further in Note 6, "Allowance for Credit Losses," beginning January 1, 2020, we We exclude from our calculation of lifetime expected credit losses ("lifetime ECL") securities for which we expect that non-payment of the amortized cost basis will be zero ("Zero Expected Credit Loss Exception"). Due to the composition of our portfolio of securities held-to-maturity, substantially all of our portfolio qualifies for the Zero Expected Credit Loss Exception and has been excluded from our lifetime ECL calculation. Our methodology for calculating lifetime ECL for our securities held-to-maturity which do not qualify for the Zero Expected Credit Loss Exception is consistent with our methodology for calculating lifetime ECL for loans. See Note 6, "Allowance for Credit Losses," for further discussion of this calculation including the use of probability-weighted scenarios, forward economic guidance and key model inputs. We calculate lifetime ECL for securities held-for-maturity based on the present value of expected future cash flows, discounted using the contractual interest rate which approximates the effective interest rate.
At both June 30, 2020March 31, 2021 and January 1,December 31, 2020, the allowance for credit losses on securities held-to-maturity was $2 million.
At June 30,March 31, 2021 and December 31, 2020, noneNaN of our securities held-to-maturity were past due or in nonaccrual status.
Credit risk profileSecurities are assigned a credit rating based on the estimated probability of default. The credit ratings are used as a credit quality indicator to monitor our securities held-to-maturity portfolio. We utilize Standard and Poor's ("S&P") as
15

HSBC USA Inc.
the primary source of our credit ratings. If S&P ratings are not available, ratings by Moody's and Fitch are used in that order. Investment grade includes securities with credit ratings of at least BBB- or above. The following table shows the credit risk profileAt March 31, 2021 and December 31, 2020, all of our securities held-to-maturity portfolio:were investment grade.
At June 30, 2020Investment Grade Non-Investment Grade Total
 (in millions)
U.S. Government sponsored enterprises$2,548
 $—
 $2,548
U.S. Government agency issued or guaranteed9,077
 —
 9,077
Obligations of U.S. states and political subdivisions10
 —
 10
Asset-backed securities collateralized by residential mortgages2
 —
 2
Total securities held-to-maturity$11,637
 $—
 $11,637

HSBC USA Inc.

Other securities gains, netThe following table summarizes realized gains and losses on investment securities transactions attributable to available-for-sale securities:
Three Months Ended March 31,20212020
 (in millions)
Gross realized gains$49 $51 
Gross realized losses(20)(23)
Net realized gains$29 $28 

Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
 (in millions)
Gross realized gains$36
 $27
 $87
 $43
Gross realized losses(5) (4) (28) (13)
Net realized gains$31
 $23
 $59
 $30
As discussed in Note 21, "New Accounting Pronouncements," we adopted new accounting guidance during the second quarter of 2020 that allows entities to make a one-time election to sell and/or transfer held-to-maturity debt securities that reference a rate affected by reference rate reform (e.g., the London Interbank Offered Rate ("LIBOR")). During the second quarter of 2020, we elected to sell all of our LIBOR-linked variable rate held-to-maturity securities maturing beyond 2021, consisting of U.S. Government agency and U.S. Government sponsored securities with a total carrying value of $340 million, and recognized a gain of less than $1 million. These sales did not affect our intent and ability to hold our remaining held-to-maturity portfolio until maturity.
Contractual Maturities and Yields  The following table summarizes the amortized cost and fair values of securities available-for-sale and securities held-to-maturity at June 30, 2020March 31, 2021 by contractual maturity. Expected maturities differ from contractual maturities because borrowers have the right to prepay obligations without prepayment penalties in certain cases. The table below also reflects the distribution of maturities of debt securities held at June 30, 2020,March 31, 2021, together with the approximate yield of the portfolio. The yields shown are calculated by dividing annualized interest income, including the accretion of discounts and the amortization of premiums, by the amortized cost of securities outstanding at June 30, 2020.March 31, 2021.
 Within
One Year		After One
But Within
Five Years		After Five
But Within
Ten Years		After Ten
Years
AmountYieldAmountYieldAmountYieldAmountYield
 (dollars are in millions)
Available-for-sale:
U.S. Treasury$1,437 2.41 %$3,097 1.56 %$5,384 1.35 %$3,656 2.27 %
U.S. Government sponsored enterprises31 2.71 966 1.94 2,771 2.56 6,154 1.74 
U.S. Government agency issued or guaranteed0 0 96 1.79 1 7.87 7,717 2.12 
Asset-backed securities0 0 0 0 59 5.06 75 3.36 
Foreign debt securities1,840 .51 1,177 .68 0 0 0 0 
Total amortized cost$3,308 1.36 %$5,336 1.44 %$8,215 1.79 %$17,602 2.02 %
Total fair value$3,326 $5,454 $8,286 $17,593 
Held-to-maturity:
U.S. Government sponsored enterprises$74 2.39 %$242 2.71 %$397 2.24 %$988 3.27 %
U.S. Government agency issued or guaranteed0 0 8 4.02 11 4.76 6,109 2.56 
Obligations of U.S. states and political subdivisions1 2.72 5 3.47 2 4.21 0 0 
Asset-backed securities0 0 0 0 0 0 2 5.85 
Total amortized cost$75 2.39 %$255 2.78 %$410 2.31 %$7,099 2.66 %
Total fair value$75 $265 $425 $7,401 
 
Within
One Year
 
After One
But Within
Five Years
 
After Five
But Within
Ten Years
 
After Ten
Years
 Amount Yield Amount Yield Amount Yield Amount Yield
 (dollars are in millions)
Available-for-sale:               
U.S. Treasury$1,020
 .43% $4,687
 1.50% $6,579
 1.38% $5,409
 1.80%
U.S. Government sponsored enterprises735
 2.82
 663
 1.92
 3,085
 2.55
 2,902
 2.37
U.S. Government agency issued or guaranteed—
 —
 99
 1.84
 1
 7.88
 11,072
 2.38
Asset-backed securities—
 —
 —
 —
 62
 4.84
 85
 3.02
Foreign debt securities2,696
 .51
 1,509
 1.24
 —
 —
 —
 —
Total amortized cost$4,451
 .87% $6,958
 1.49% $9,727
 1.78% $19,468
 2.22%
Total fair value$4,458
   $7,127
   $10,277
   $19,806
  
Held-to-maturity:               
U.S. Government sponsored enterprises$18
 2.73% $445
 2.66% $531
 2.27% $1,554
 3.21%
U.S. Government agency issued or guaranteed—
 —
 12
 3.76
 16
 4.60
 9,049
 2.62
Obligations of U.S. states and political subdivisions—
 —
 6
 3.56
 4
 4.17
 —
 —
Asset-backed securities—
 —
 —
 —
 —
 —
 2
 5.94
Total amortized cost$18
 2.74% $463
 2.70% $551
 2.35% $10,605
 2.71%
Total fair value$18
   $477
   $569
   $11,042
  

HSBC USA Inc.

Equity Securities Equity securities that are not classified as trading and are included in other assets consisted of the following:

June 30, 2020 December 31, 2019March 31, 2021December 31, 2020
(in millions) (in millions)
Equity securities carried at fair value$282
 $283
Equity securities carried at fair value$282 $284 
Equity securities without readily determinable fair values14
 12
Equity securities without readily determinable fair values14 14 
On a quarterly basis, we perform an assessment to determine whether any equity securities without readily determinable fair values are impaired. In the event an equity security is deemed impaired, the security is written down to fair value with impairment recorded in earnings. During the second quarter ofthree months ended March 31, 2021 and 2020, we determined that certain equity securities without readily determinable fair values were impaired and, as a result, we recorded an impairment loss of $2 million as a component of other income (loss) in the consolidated statement of income (loss). At December 31, 2019, noneNaN of our equity securities without readily determinable fair values were determined to be impaired.
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HSBC USA Inc.
Also included in other assets were investments in Federal Home Loan Bank ("FHLB") stock and Federal Reserve Bank stock of $327$192 million and $559 million, respectively, at June 30, 2020March 31, 2021 and $110$259 million and $559 million, respectively, at December 31, 2019.2020.


5. Loans
Loans consisted of the following:

June 30, 2020 December 31, 2019
 (in millions)
Commercial loans:   
Real estate, including construction$11,420
 $11,501
Business and corporate banking(1)
17,345
 13,479
Global banking(2)
18,668
 17,915
Other commercial:   
Affiliates(3)
1,565
 2,343
Other2,915
 2,973
Total other commercial4,480
 5,316
Total commercial51,913
 48,211
Consumer loans:   
Residential mortgages18,281
 17,801
Home equity mortgages792
 853
Credit cards1,175
 1,405
Other consumer(4)
307
 283
Total consumer20,555
 20,342
Total loans$72,468
 $68,553
March 31, 2021December 31, 2020
 (in millions)
Commercial loans:
Real estate, including construction$10,087 $10,464 
Business and corporate banking(1)
13,125 13,479 
Global banking(2)
13,157 13,519 
Other commercial:
Affiliates(3)
1,652 1,100 
Other3,131 3,037 
Total other commercial4,783 4,137 
Total commercial41,152 41,599 
Consumer loans:
Residential mortgages18,425 18,377 
Home equity mortgages698 727 
Credit cards937 1,066 
Other consumer(4)
314 319 
Total consumer20,374 20,489 
Total loans$61,526 $62,088 
(1)Includes loans funded under the Paycheck Protection Program ("PPP") which totaled $1,294 million and $1,043 million at March 31, 2021 and December 31, 2020, respectively. PPP loans are fully guaranteed by the Small Business Administration, if certain conditions are met.
(2)Represents large multinational firms including globally focused U.S. corporate and financial institutions, U.S. dollar lending to multinational banking clients managed by HSBC on a global basis and complex large business clients supported by Global Banking and Markets relationship managers.
(3)See Note 14, "Related Party Transactions," for additional information regarding loans to HSBC affiliates.
(4)Includes certain student loans that we have elected to designate under the fair value option and are therefore carried at fair value, which totaled $30 million and $32 million at March 31, 2021 and December 31, 2020, respectively. See Note 10, "Fair Value Option," for further details.
(1)
Includes loans funded under the Paycheck Protection Program ("PPP") which totaled $1,197 million at June 30, 2020. PPP loans are fully guaranteed by the Small Business Administration, if certain conditions are met.
(2)
Represents large multinational firms including globally focused U.S. corporate and financial institutions, U.S. dollar lending to multinational banking clients managed by HSBC on a global basis and complex large business clients supported by Global Banking and Markets relationship managers.
(3)
See Note 14, "Related Party Transactions," for additional information regarding loans to HSBC affiliates.
(4)
Includes certain student loans that we have elected to designate under the fair value option and are therefore carried at fair value, which totaled $35 million at June 30, 2020. See Note 10, "Fair Value Option," for further details.
Net deferred origination costs totaled $44$51 million and $79$57 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. At June 30, 2020March 31, 2021 and December 31, 2019,2020, we had a net unamortized premium on our loans of $9$8 million and $3$9 million, respectively.

HSBC USA Inc.

COVID-19Coronavirus ("COVID-19") Loan Forbearance InitiativesWe have implemented various loan modification payment deferral programs to provide borrowers relief from the economic impacts of COVID-19.the COVID-19 pandemic. In April2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law, which provided financial institutions with the option to temporarily suspend certain requirements under U.S. GAAP related to troubled debt restructurings ("TDR Loans") beginning March 1, 2020. This TDR Loan guidance can be applied until the earlier of January 1, 2022 or 60 days following the termination of the presidentially declared national emergency. We elected to adopt the TDR Loan guidance in the CARES Act and are not applying TDR Loan classification to COVID-19 related loan modifications in the form of a long-term payment deferral (for commercial loans all payment modifications, including all payment deferrals) granted to borrowers that were current (less than 30 days past due) as of December 31, 2019 which otherwise may have been reported as TDR Loans.
In 2020, federal banking regulators issued a revised interagency statement on loan modifications and the reporting for financial institutions working with customers affected by the COVID-19 pandemic ("Interagency Statement"). The Interagency Statement confirmed that COVID-19 related short-term loan modifications (e.g., payment deferrals of six months or less) provided to borrowers that were current (less than 30 days past due) at the time the relief was granted are not troubled debt restructurings ("TDR Loans"). We are applyingLoans. Borrowers that do not meet the guidancecriteria in the CARES Act or the Interagency Statement. Borrowers that were not current at the time the relief was grantedStatement are assessed for TDR Loan classification in accordance with our accounting policies.
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HSBC USA Inc.
In addition, under the Interagency Statement, for COVID-19 related loan modifications in the form of a payment deferral, the borrower’s past due status will not be impactedaffected during the deferral period and, if the loan was accruing at the time the relief was granted, the loan will generally not be placed on nonaccrual status as long as the borrower utilizes a payment deferral is forof six months or less. For consumer mortgage loans, when a borrower requests and is provided with extended relief in the form ofutilizes a payment deferral of more than six months, the loan will generally be placed on nonaccrual status and, if the loan does not meet the criteria in the CARES Act, assessed for TDR Loan classification. Any accrued interest recorded on these loans is generally not reversed against income and will remain recorded as accrued interest receivable. We have not modified our commercial loan nonaccrual policies as a result of this guidance.

HSBC USA Inc.

Aging Analysis of Past Due Loans  The following table summarizes the past due status of our loans at June 30, 2020March 31, 2021 and December 31, 2019.2020. The aging of past due amounts is determined based on the contractual delinquency status of payments under the loan. An account is generally considered to be contractually delinquent when payments have not been made in accordance with the loan terms. Delinquency status is affected by customer account management policies and practices such as re-age, which results in the re-setting of the contractual delinquency status to current. For COVID-19 related loan modifications in the form of a payment deferral, the borrower’s past due status will not be impactedaffected during the deferral period.
 Past Due Total Past Due 30 Days or More    
 30 - 89 Days 90+ Days  
Current(1)
 Total Loans
 (in millions)
At June 30, 2020         
Commercial loans:         
Real estate, including construction$11
 $—
 $11
 $11,409
 $11,420
Business and corporate banking20
 17
 37
 17,308
 17,345
Global banking—
 —
 —
 18,668
 18,668
Other commercial32
 —
 32
 4,448
 4,480
Total commercial63
 17
 80
 51,833
 51,913
Consumer loans:         
Residential mortgages387
 315
 702
 17,579
 18,281
Home equity mortgages13
 24
 37
 755
 792
Credit cards20
 27
 47
 1,128
 1,175
Other consumer6
 6
 12
 295
 307
Total consumer426
 372
 798
 19,757
 20,555
Total loans$489
 $389
 $878
 $71,590
 $72,468
At December 31, 2019         
Commercial loans:         
Real estate, including construction$7
 $1
 $8
 $11,493
 $11,501
Business and corporate banking60
 35
 95
 13,384
 13,479
Global banking—
 —
 —
 17,915
 17,915
Other commercial22
 —
 22
 5,294
 5,316
Total commercial89
 36
 125
 48,086
 48,211
Consumer loans:         
Residential mortgages342
 272
 614
 17,187
 17,801
Home equity mortgages10
 24
 34
 819
 853
Credit cards24
 24
 48
 1,357
 1,405
Other consumer5
 5
 10
 273
 283
Total consumer381
 325
 706
 19,636
 20,342
Total loans$470
 $361
 $831
 $67,722
 $68,553
 Past DueTotal Past Due 30 Days or More  
30 - 89 Days90+ Days
Current(1)
Total Loans
 (in millions)
At March 31, 2021
Commercial loans:
Real estate, including construction$79 $32 $111 $9,976 $10,087 
Business and corporate banking42 22 64 13,061 13,125 
Global banking3 138 141 13,016 13,157 
Other commercial32 0 32 4,751 4,783 
Total commercial156 192 348 40,804 41,152 
Consumer loans:
Residential mortgages280 333 613 17,812 18,425 
Home equity mortgages8 22 30 668 698 
Credit cards17 28 45 892 937 
Other consumer5 7 12 302 314 
Total consumer310 390 700 19,674 20,374 
Total loans$466 $582 $1,048 $60,478 $61,526 
At December 31, 2020
Commercial loans:
Real estate, including construction$78 $0 $78 $10,386 $10,464 
Business and corporate banking126 19 145 13,334 13,479 
Global banking0 60 60 13,459 13,519 
Other commercial24 0 24 4,113 4,137 
Total commercial228 79 307 41,292 41,599 
Consumer loans:
Residential mortgages435 311 746 17,631 18,377 
Home equity mortgages11 22 33 694 727 
Credit cards23 19 42 1,024 1,066 
Other consumer7 6 13 306 319 
Total consumer476 358 834 19,655 20,489 
Total loans$704 $437 $1,141 $60,947 $62,088 
(1)Loans less than 30 days past due are presented as current.
18

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

HSBC USA Inc.

Nonperforming Loans  Nonperforming loans, including nonaccrual loans and accruing loans contractually 90 days or more past due, consisted of the following:
 Nonaccrual Loans Accruing Loans Contractually Past Due 90 Days or More Nonaccrual Loans With No Allowance For Credit Losses
 (in millions)
At June 30, 2020     
Commercial:     
Real estate, including construction$41
 $—
 $1
Business and corporate banking229
 3
 11
Global banking383
 —
 132
Total commercial653
 3
 144
Consumer:     
Residential mortgages(1)(2)(3)
428
 —
 177
Home equity mortgages(1)(2)
38
 —
 31
Credit cards—
 28
 —
Other consumer—
 3
 —
Total consumer466
 31
 208
Total nonperforming loans$1,119
 $34
 $352
At December 31, 2019     
Commercial:     
Real estate, including construction$6
 $—
 $3
Business and corporate banking82
 1
 19
Global banking149
 —
 117
Total commercial237
 1
 139
Consumer:     
Residential mortgages(1)(2)(3)
381
 —
 257
Home equity mortgages(1)(2)
46
 —
 32
Credit cards—
 24
 —
Other consumer—
 5
 —
Total consumer427
 29
 289
Total nonperforming loans$664
 $30
 $428
Nonaccrual LoansAccruing Loans Contractually Past Due 90 Days or MoreNonaccrual Loans With No Allowance For Credit Losses
 (in millions)
At March 31, 2021
Commercial:
Real estate, including construction$54 $0 $39 
Business and corporate banking172 0 19 
Global banking252 0 47 
Total commercial478 0 105 
Consumer:
Residential mortgages(1)(2)(3)
1,101 0 231 
Home equity mortgages(1)(2)
64 0 33 
Credit cards0 28 0 
Other consumer0 3 0 
Total consumer1,165 31 264 
Total nonperforming loans$1,643 $31 $369 
At December 31, 2020
Commercial:
Real estate, including construction$44 $0 $31 
Business and corporate banking163 0 1 
Global banking337 0 93 
Total commercial544 0 125 
Consumer:
Residential mortgages(1)(2)(3)
1,079 0 241 
Home equity mortgages(1)(2)
63 0 34 
Credit cards0 19 0 
Other consumer0 2 0 
Total consumer1,142 21 275 
Total nonperforming loans$1,686 $21 $400 
(1)At March 31, 2021 and December 31, 2020, nonaccrual consumer mortgage loans include $371 million and $375 million, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.
(2)Nonaccrual consumer mortgage loans include all loans which are 90 or more days contractually delinquent as well as loans discharged under Chapter 7 bankruptcy and not re-affirmed and second lien loans where the first lien loan that we own or service is 90 or more days contractually delinquent. At March 31, 2021 and December 31, 2020, nonaccrual consumer mortgage loans also included $535 million and $590 million, respectively, of loans under COVID-19 related payment deferral programs where the borrowers utilized a payment deferral of more than six months and, as a result, have been placed on nonaccrual status.
(3)Nonaccrual consumer mortgage loans for all periods does not include guaranteed loans purchased from the Government National Mortgage Association. Repayment of these loans is predominantly insured by the Federal Housing Administration and as such, these loans have different risk characteristics from the rest of our consumer loan portfolio.
(1)
At June 30, 2020 and December 31, 2019, nonaccrual consumer mortgage loans include $293 million and $289 million, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell. The decrease in nonaccrual consumer mortgage loans with no allowance for credit losses at June 30, 2020 reflects the impact of adopting new accounting guidance which requires expected recoveries related to subsequent increases in the fair value of collateral for collateral-dependent loans to be recognized in the allowance for credit losses beginning January 1, 2020. See Note 21, "New Accounting Pronouncements," for additional discussion.
(2)
Nonaccrual consumer mortgage loans include all loans which are 90 or more days contractually delinquent as well as loans discharged under Chapter 7 bankruptcy and not re-affirmed and second lien loans where the first lien loan that we own or service is 90 or more days contractually delinquent.
(3)
Nonaccrual consumer mortgage loans for all periods does not include guaranteed loans purchased from the Government National Mortgage Association. Repayment of these loans is predominantly insured by the Federal Housing Administration and as such, these loans have different risk characteristics from the rest of our consumer loan portfolio.
The following table provides additional information on our nonaccrual loans:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Three Months Ended March 31,Three Months Ended March 31,20212020
(in millions)(in millions)
Interest income that would have been recorded if the nonaccrual loans had been current in accordance with contractual terms during the period$11
 $7
 $19
 $16
Interest income that would have been recorded if the nonaccrual loans had been current in accordance with contractual terms during the period$18 $8 
Interest income that was recorded on nonaccrual loans and included in interest income during the period(1) 3
 6
 6
Interest income that was recorded on nonaccrual loans and included in interest income during the period15 7 

19

HSBC USA Inc.

Collateral-Dependent Loans Loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty are considered to be collateral-dependent loans. Collateral can have a significant financial effect in mitigating our exposure to credit risk and, where there is sufficient collateral, an allowance for expected credit losses is not recognized or is minimal.risk.
Collateral-dependent residential mortgage loans are carried at the lower of amortized cost or fair value of the collateral less costs to sell, with any excess in the carrying amount of the loan generally charged off at the time foreclosure is initiated or when settlement is reached with the borrower, but not to exceed the end of the month in which the account becomes six months contractually delinquent. Collateral values are based on broker price opinions or appraisals which are updated at least every 180 days less estimated costs to sell. During the quarterly period between updates, real estate price trends are reviewed on a geographic basis and incorporated as necessary. At June 30, 2020March 31, 2021 and December 31, 2019,2020, we had collateral-dependent residential mortgage loans totaling $802$805 million and $803$817 million, respectively.
For collateral-dependent commercial loans, the allowance for expected credit losses is individually assessed based on the fair value of the collateral. Various types of collateral are used, including real estate, inventory, equipment, accounts receivable, securities and cash, among others. For commercial real estate loans, collateral values are generally based on appraisals which are updated based on management judgment under the specific circumstances on a case-by-case basis. In situations where an appraisal is not used, borrower-specific factors such as operating results, cash flows and debt service ratios are reviewed along with relevant market data of comparable properties in order to create a 10-year cash flow model to be discounted at appropriate rates to present value. The collateral value for securities is based on their quoted market prices or broker quotes. The collateral value for other financial assets is generally based on appraisals or is estimated using a discounted cash flow analysis. Commercial loan balances are charged off at the time all or a portion of the balance is deemed uncollectible. At June 30, 2020March 31, 2021 and December 31, 2019,2020, we had collateral-dependent commercial loans totaling $593$431 million and $227$456 million, respectively.
Troubled debt restructurings TDR Loans, including beginning in 2020 loans which we reasonably expect to become TDR Loans represent loans for which the original contractual terms have been modified to provide for terms that are less than what we would be willing to accept for new loans with comparable risk because of deterioration in the borrower's financial condition.
Modifications for consumer or commercial loans may include changes to one or more terms of the loan, including, but not limited to, a change in interest rate, extension of the amortization period, reduction in payment amount and partial forgiveness or deferment of principal, accrued interest or other loan covenants. A substantial amount of our modifications involve interest rate reductions on consumer loans, which lower the amount of interest income we are contractually entitled to receive in future periods. Through lowering the interest rate and other loan term changes, we believe we are able to increase the amount of cash flow that will ultimately be collected from the loan, given the borrower's financial condition. Once a consumer loan is classified as a TDR Loan, it continues to be reported as such until it is paid off or charged-off. For commercial loans, if subsequent performance is in accordance with the new terms and the loan is upgraded, it is possible the loan will no longer be reported as a TDR Loan at the earliest one year after the restructure had been anticipated.restructuring. During the three and six months ended June 30,March 31, 2021 and 2020, there were no0 commercial loans removed from TDR Loan classification. During the second quarter of 2019, a $12 million commercial loanthat met this criteria and waswere removed from TDR Loan classification.
As previously discussed, we have implemented various loan modification payment deferral programs to provide borrowers relief from the economic impacts of COVID-19. Substantially all of the loans under these programs are not classified as TDR Loans at June 30, 2020 due to our election to suspend TDR Loan classification under the CARES Act or their short-term nature as discussed under the Interagency Statement.
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HSBC USA Inc.
The following table summarizes our TDR Loans at June 30, 2020March 31, 2021 and December 31, 2019:2020:
March 31, 2021December 31, 2020
 (in millions)
Commercial loans:
Business and corporate banking$118 $94 
Global banking44 74 
Total commercial(1)(2)
162 168 
Consumer loans:
Residential mortgages(3)(4)
585 582 
Home equity mortgages(3)(4)
31 31 
Credit cards5 5 
Total consumer621 618 
Total TDR Loans(5)
$783 $786 
 June 30, 2020 December 31, 2019
 (in millions)
Commercial loans:   
Business and corporate banking$71
 $36
Global banking74
 68
Total commercial(1)
145
 104
Consumer loans:   
Residential mortgages(2)
549
 580
Home equity mortgages(2)
31
 32
Credit cards5
 4
Total consumer585
 616
Total TDR Loans(3)
$730
 $720

HSBC USA Inc.
(1)Additional commitments to lend to commercial borrowers whose loans have been modified in TDR Loans totaled $35 million and $107 million at March 31, 2021 and December 31, 2020, respectively.

(2)Not included in the table at March 31, 2021 and December 31, 2020 are $781 million and $924 million, respectively, of commercial loans that were exempted from TDR assessment due to our CARES Act election.
(3)At March 31, 2021 and December 31, 2020, the carrying value of consumer mortgage TDR Loans includes $478 million and $487 million, respectively, of loans that are recorded at the lower of amortized cost or fair value of the collateral less cost to sell.
(4)Not included in the table at March 31, 2021 and December 31, 2020 are $646 million and $736 million, respectively, of consumer mortgage loans under COVID-19 related payment deferral programs where the borrowers were provided with extended payment deferral relief of more than six months that were exempted from TDR assessment due to our CARES Act election.
(1)
(5)At March 31, 2021 and December 31, 2020, the carrying value of TDR Loans includes $458 million and $463 million, respectively, of loans which are classified as nonaccrual.
Additional commitments to lend to commercial borrowers whose loans have been modified in TDR Loans totaled $49 million and $222 million at June 30, 2020 and December 31, 2019, respectively.
(2)
At June 30, 2020 and December 31, 2019, the carrying value of consumer mortgage TDR Loans includes $501 million and $557 million, respectively, of loans that are recorded at the lower of amortized cost or fair value of the collateral less cost to sell.
(3)
At June 30, 2020 and December 31, 2019, the carrying value of TDR Loans includes $357 million and $230 million, respectively, of loans which are classified as nonaccrual.
The following table presents information about loans which were modified during the three and six months ended June 30,March 31, 2021 and 2020 and 2019 and as a result of this action became classified as TDR Loans:
Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019
Three Months Ended March 31,Three Months Ended March 31,20212020
(in millions)(in millions)
Commercial loans:       Commercial loans:
Business and corporate banking$4
 $—
 $4
 $—
Business and corporate banking$26 $0 
Global banking32
 —
 44
 —
Global banking15 12 
Total commercial36
 —
 48
 —
Total commercial41 12 
Consumer loans:       Consumer loans:
Residential mortgages3
 —
 7
 1
Residential mortgages16 4 
Home equity mortgages1
 —
 2
 —
Home equity mortgages0 1 
Credit cards1
 1
 2
 2
Credit cards1 1 
Total consumer5
 1
 11
 3
Total consumer17 6 
Total$41
 $1
 $59
 $3
Total$58 $18 
The weighted-average contractual rate reduction for consumer loans which became classified as TDR Loans during the three and six months ended June 30,March 31, 2021 and 2020 was 1.071.97 percent and 2.653.04 percent, respectively, compared with 3.88 percent and 1.45 percent, during the three and six months ended June 30, 2019, respectively. The weighted-average contractual rate reduction for commercial loans was not significant in either the number of loans or rate.
The following table presents consumer loans which were classified as TDR Loans during the previous 12 months which subsequently became 60 days or greater contractually delinquent during the three and six months ended June 30, 2020March 31, 2021 and 2019:2020:
Three Months Ended March 31,Three Months Ended March 31,20212020
(in millions)
Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019
(in millions)
Consumer loans:       Consumer loans:
Residential mortgages$—
 $1
 $1
 $3
Residential mortgages$3 $1 
Total consumer$—
 $1
 $1
 $3
Total consumer$3 $1 
During the three and six months ended June 30,March 31, 2021 and 2020, and 2019, there were no0 commercial TDR Loans which were classified as TDR Loans during the previous 12 months which subsequently became 90 days or greater contractually delinquent.

21

HSBC USA Inc.

Commercial Loan Credit Quality Indicators  The following credit quality indicators are utilized to monitor our commercial loan portfolio:
Criticized loans  Criticized loan classifications presented in the table below are determined by the assignment of various criticized facility grades based on the risk rating standards of our regulator. The following facility grades are deemed to be criticized:
Special Mention - generally includes loans that are protected by collateral and/or the credit worthiness of the customer, but are potentially weak based upon economic or market circumstances which, if not checked or corrected, could weaken our credit position at some future date.
Substandard - includes loans that are inadequately protected by the underlying collateral and/or general credit worthiness of the customer. These loans present a distinct possibility that we will sustain some loss if the deficiencies are not corrected.
Doubtful - includes loans that have all the weaknesses exhibited by substandard loans, with the added characteristic that the weaknesses make collection or liquidation in full of the recorded loan highly improbable. However, although the possibility of loss is extremely high, certain factors exist which may strengthen the credit at some future date, and therefore the decision to charge-off the loan is deferred. Loans graded as doubtful are required to be placed in nonaccrual status.
The following table summarizes our criticized commercial loans, including a disaggregation of the loans by year of origination as of June 30,March 31, 2021 and December 31, 2020:
2020 2019 2018 2017 2016 Prior Revolving
Loans		 Revolving Loans Converted to Term Loans Total at Jun. 30, 2020 Total at Dec. 31, 201920212020201920182017PriorRevolving
Loans		Revolving Loans Converted to Term LoansTotal at Mar. 31, 2021
(in millions) (in millions)
Real estate, including construction:                   Real estate, including construction:
Special mention$—
 $146
 $244
 $189
 $45
 $365
 $—
 $—
 $989
 $516
Special mention$0 $0 $162 $205 $210 $376 $0 $0 $953 
Substandard—
 130
 —
 —
 —
 52
 —
 —
 182
 203
Substandard0 0 415 0168 184 0 0 767 
Doubtful—
 —
 —
 —
 —
 34
 —
 —
 34
 —
Doubtful0 0 0 0 0 0 0 0 0 
Total real estate, including construction—
 276
 244
 189
 45
 451
 —
 —
 1,205
 719
Total real estate, including construction0 0 577 205 378 560 0 0 1,720 
Business and corporate banking:                   Business and corporate banking:
Special mention—
 23
 106
 16
 38
 779
 445
 5
 1,412
 467
Special mention0 18 21 63 29 463 575 36 1,205 
Substandard—
 —
 38
 61
 2
 246
 325
 2
 674
 386
Substandard0 5 33 32 31 224 389 5 719 
Doubtful—
 16
 —
 —
 —
 37
 115
 —
 168
 23
Doubtful0 0 0 0 0 47 55 0 102 
Total business and corporate banking—
 39
 144
 77
 40
 1,062
 885
 7
 2,254
 876
Total business and corporate banking0 23 54 95 60 734 1,019 41 2,026 
Global banking:                   Global banking:
Special mention—
 —
 49
 —
 —
 —
 474
 —
 523
 184
Special mention0 0 0 0 0 105 70 0 175 
Substandard—
 —
 —
 —
 —
 264
 166
 —
 430
 196
Substandard0 0 0 0 0 91 332 0 423 
Doubtful—
 —
 —
 —
 —
 74
 143
 —
 217
 15
Doubtful0 0 0 0 0 138 56 0 194 
Total global banking—
 —
 49
 —
 —
 338
 783
 —
 1,170
 395
Total global banking0 0 0 0 0 334 458 0 792 
Other commercial:                   Other commercial:
Special mention—
 —
 —
 —
 —
 126
 —
 —
 126
 11
Special mention0 0 0 0 8 50 40 0 98 
Substandard—
 —
 —
 —
 —
 —
 —
 —
 —
 —
Substandard0 0 0 0 0 70 0 0 70 
Doubtful—
 —
 —
 —
 —
 —
 —
 —
 —
 —
Doubtful0 0 0 0 0 0 0 0 0 
Total other commercial—
 —
 —
 —
 —
 126
 —
 —
 126
 11
Total other commercial0 0 0 0 8 120 40 0 168 
Total commercial:                   Total commercial:
Special mention—
 169
 399
 205
 83
 1,270
 919
 5
 3,050
 1,178
Special mention0 18 183 268 247 994 685 36 2,431 
Substandard—
 130
 38
 61
 2
 562
 491
 2
 1,286
 785
Substandard0 5 448 32 199 569 721 5 1,979 
Doubtful—
 16
 —
 —
 —
 145
 258
 —
 419
 38
Doubtful0 0 0 0 0 185 111 0 296 
Total commercial$—
 $315
 $437
 $266
 $85
 $1,977
 $1,668
 $7
 $4,755
 $2,001
Total commercial$0 $23 $631 $300 $446 $1,748 $1,517 $41 $4,706 

22

HSBC USA Inc.
20202019201820172016PriorRevolving
Loans		Revolving Loans Converted to Term LoansTotal at Dec. 31, 2020
 (in millions)
Real estate, including construction:
Special mention$0 $306 $115 $171 $85 $437 $0 $0 $1,114 
Substandard0 186 0 169 0 86 0 0 441 
Doubtful0 0 0 0 0 0 0 0 0 
Total real estate, including construction0 492 115 340 85 523 0 0 1,555 
Business and corporate banking:
Special mention17 71 43 32 10 390 600 48 1,211 
Substandard1 44 25 23 31 181 435 1 741 
Doubtful0 0 0 0 0 41 57 0 98 
Total business and corporate banking18 115 68 55 41 612 1,092 49 2,050 
Global banking:
Special mention0 0 0 0 0 142 98 0 240 
Substandard0 0 48 0 0 131 477 0 656 
Doubtful0 0 0 0 0 82 160 0 242 
Total global banking0 0 48 0 0 355 735 0 1,138 
Other commercial:
Special mention0 0 0 0 0 44 40 0 84 
Substandard0 0 0 0 0 70 0 0 70 
Doubtful0 0 0 0 0 0 0 0 0 
Total other commercial0 0 0 0 0 114 40 0 154 
Total commercial:
Special mention17 377 158 203 95 1,013 738 48 2,649 
Substandard1 230 73 192 31 468 912 1 1,908 
Doubtful0 0 0 0 0 123 217 0 340 
Total commercial$18 $607 $231 $395 $126 $1,604 $1,867 $49 $4,897 

23

HSBC USA Inc.
Nonperforming  The following table summarizes the nonperforming status of our commercial loan portfolio, including a disaggregation of the loans by year of origination as of June 30,March 31, 2021 and December 31, 2020:
20212020201920182017PriorRevolving
Loans		Revolving Loans Converted to Term LoansTotal at Mar. 31, 2021
 (in millions)
Real estate, including construction:
Performing loans$0 $563 $3,663 $2,753 $1,300 $1,681 $56 $17 $10,033 
Nonaccrual loans0 0 0 32 0 22 0 0 54 
Accruing loans contractually past due 90 days or more0 0 0 0 0 0 0 0 0 
Total real estate, including construction0 563 3,663 2,785 1,300 1,703 56 17 10,087 
Business and corporate banking:
Performing loans46 1,202 622 230 261 4,074 6,213 305 12,953 
Nonaccrual loans0 2 15 17 57 2 77 2 172 
Accruing loans contractually past due 90 days or more0 0 0 0 0 0 0 0 0 
Total business and corporate banking46 1,204 637 247 318 4,076 6,290 307 13,125 
Global banking:
Performing loans117 605 358 199 238 6,193 5,195 0 12,905 
Nonaccrual loans0 0 0 0 0 125 127 0 252 
Accruing loans contractually past due 90 days or more0 0 0 0 0 0 0 0 0 
Total global banking117 605 358 199 238 6,318 5,322 0 13,157 
Other commercial:
Performing loans44 436 402 215 113 780 2,793 0 4,783 
Nonaccrual loans0 0 0 0 0 0 0 0 0 
Accruing loans contractually past due 90 days or more0 0 0 0 0 0 0 0 0 
Total other commercial44 436 402 215 113 780 2,793 0 4,783 
Total commercial:
Performing loans207 2,806 5,045 3,397 1,912 12,728 14,257 322 40,674 
Nonaccrual loans0 2 15 49 57 149 204 2 478 
Accruing loans contractually past due 90 days or more0 0 0 0 0 0 0 0 0 
Total commercial$207 $2,808 $5,060 $3,446 $1,969 $12,877 $14,461 $324 $41,152 
24
 2020 2019 2018 2017 2016 Prior Revolving
Loans		 Revolving Loans Converted to Term Loans Total at Jun. 30, 2020 Total at Dec. 31, 2019
 (in millions)
Real estate, including construction:                   
Performing loans$538
 $3,865
 $3,154
 $1,384
 $268
 $2,061
 $84
 $25
 $11,379
 $11,495
Nonaccrual loans—
 —
 —
 —
 1
 40
 —
 —
 41
 6
Accruing loans contractually past due 90 days or more—
 —
 —
 —
 —
 —
 —
 —
 —
 —
Total real estate, including construction538
 3,865
 3,154
 1,384
 269
 2,101
 84
 25
 11,420
 11,501
Business and corporate banking:                   
Performing loans1,265
 837
 445
 301
 172
 4,273
 9,431
 389
 17,113
 13,396
Nonaccrual loans—
 15
 13
 52
 —
 20
 126
 3
 229
 82
Accruing loans contractually past
due 90 days or more		—
 —
 —
 —
 —
 —
 3
 —
 3
 1
Total business and corporate banking1,265
 852
 458
 353
 172
 4,293
 9,560
 392
 17,345
 13,479
Global banking:                   
Performing loans379
 1,082
 367
 265
 108
 6,754
 9,330
 —
 18,285
 17,766
Nonaccrual loans—
 —
 —
 —
 —
 141
 242
 —
 383
 149
Accruing loans contractually past due 90 days or more—
 —
 —
 —
 —
 —
 —
 —
 —
 —
Total global banking379
 1,082
 367
 265
 108
 6,895
 9,572
 —
 18,668
 17,915
Other commercial:                   
Performing loans91
 424
 275
 220
 110
 660
 2,700
 —
 4,480
 5,316
Nonaccrual loans—
 —
 —
 —
 —
 —
 —
 —
 —
 —
Accruing loans contractually past due 90 days or more—
 —
 —
 —
 —
 —
 —
 —
 —
 —
Total other commercial91
 424
 275
 220
 110
 660
 2,700
 —
 4,480
 5,316
Total commercial:                   
Performing loans2,273
 6,208
 4,241
 2,170
 658
 13,748
 21,545
 414
 51,257
 47,973
Nonaccrual loans—
 15
 13
 52
 1
 201
 368
 3
 653
 237
Accruing loans contractually past due 90 days or more—
 —
 —
 —
 —
 —
 3
 —
 3
 1
Total commercial$2,273
 $6,223
 $4,254
 $2,222
 $659
 $13,949
 $21,916
 $417
 $51,913
 $48,211


HSBC USA Inc.
20202019201820172016PriorRevolving
Loans		Revolving Loans Converted to Term LoansTotal at Dec. 31, 2020
 (in millions)
Real estate, including construction:
Performing loans$545 $3,775 $2,775 $1,368 $264 $1,594 $79 $20 $10,420 
Nonaccrual loans0 0 24 0 0 20 0 0 44 
Accruing loans contractually past due 90 days or more0 0 0 0 0 0 0 0 0 
Total real estate, including construction545 3,775 2,799 1,368 264 1,614 79 20 10,464 
Business and corporate banking:
Performing loans1,079 606 253 275 151 3,485 7,145 322 13,316 
Nonaccrual loans1 15 12 60 1 3 71 0 163 
Accruing loans contractually past due 90 days or more0 0 0 0 0 0 0 0 0 
Total business and corporate banking1,080 621 265 335 152 3,488 7,216 322 13,479 
Global banking:
Performing loans507 495 190 231 104 6,023 5,632 0 13,182 
Nonaccrual loans0 0 0 0 0 127 210 0 337 
Accruing loans contractually past due 90 days or more0 0 0 0 0 0 0 0 0 
Total global banking507 495 190 231 104 6,150 5,842 0 13,519 
Other commercial:
Performing loans378 431 215 105 119 630 2,259 0 4,137 
Nonaccrual loans0 0 0 0 0 0 0 0 0 
Accruing loans contractually past due 90 days or more0 0 0 0 0 0 0 0 0 
Total other commercial378 431 215 105 119 630 2,259 0 4,137 
Total commercial:
Performing loans2,509 5,307 3,433 1,979 638 11,732 15,115 342 41,055 
Nonaccrual loans1 15 36 60 1 150 281 0 544 
Accruing loans contractually past due 90 days or more0 0 0 0 0 0 0 0 0 
Total commercial$2,510 $5,322 $3,469 $2,039 $639 $11,882 $15,396 $342 $41,599 

25

HSBC USA Inc.
Credit risk profile  Commercial loans are assigned a credit rating based on the estimated probability of default. Investment grade includes loans with credit ratings of at least BBB- or above or the equivalent based on our internal credit rating system. The following table showssummarizes the credit risk profile of our commercial loan portfolio, including a disaggregation of the loans by year of origination as of June 30,March 31, 2021 and December 31, 2020:
20212020201920182017PriorRevolving
Loans		Revolving Loans Converted to Term LoansTotal at Mar. 31, 2021
 (in millions)
Real estate, including construction:
Investment grade$0 $339 $917 $979 $342 $542 $5 $0 $3,124 
Non-investment grade0 224 2,746 1,806 958 1,161 51 17 6,963 
Total real estate, including construction0 563 3,663 2,785 1,300 1,703 56 17 10,087 
Business and corporate banking:
Investment grade16 340 176 40 30 1,820 2,145 36 4,603 
Non-investment grade30 864 461 207 288 2,256 4,145 271 8,522 
Total business and corporate banking46 1,204 637 247 318 4,076 6,290 307 13,125 
Global banking:
Investment grade117 567 331 52 234 4,146 4,044 0 9,491 
Non-investment grade0 38 27 147 4 2,172 1,278 0 3,666 
Total global banking117 605 358 199 238 6,318 5,322 0 13,157 
Other commercial:
Investment grade5 423 145 214 113 659 2,601 0 4,160 
Non-investment grade39 13 257 1 0 121 192 0 623 
Total other commercial44 436 402 215 113 780 2,793 0 4,783 
Total commercial:
Investment grade138 1,669 1,569 1,285 719 7,167 8,795 36 21,378 
Non-investment grade69 1,139 3,491 2,161 1,250 5,710 5,666 288 19,774 
Total commercial$207 $2,808 $5,060 $3,446 $1,969 $12,877 $14,461 $324 $41,152 
26

HSBC USA Inc.
2020 2019 2018 2017 2016 Prior Revolving
Loans		 Revolving Loans Converted to Term Loans Total at Jun. 30, 2020 Total at Dec. 31, 201920202019201820172016PriorRevolving
Loans		Revolving Loans Converted to Term LoansTotal at Dec. 31, 2020
(in millions) (in millions)
Real estate, including construction:                   Real estate, including construction:
Investment grade$357
 $1,511
 $1,549
 $527
 $180
 $1,146
 $9
 $3
 $5,282
 $6,332
Investment grade$339 $1,123 $817 $318 $179 $640 $6 $0 $3,422 
Non-investment grade181
 2,354
 1,605
 857
 89
 955
 75
 22
 6,138
 5,169
Non-investment grade206 2,652 1,982 1,050 85 974 73 20 7,042 
Total real estate, including construction538
 3,865
 3,154
 1,384
 269
 2,101
 84
 25
 11,420
 11,501
Total real estate, including construction545 3,775 2,799 1,368 264 1,614 79 20 10,464 
Business and corporate banking:                   Business and corporate banking:
Investment grade354
 355
 73
 46
 33
 1,846
 3,301
 104
 6,112
 6,029
Investment grade342 147 37 34 23 1,486 2,499 47 4,615 
Non-investment grade911
 497
 385
 307
 139
 2,447
 6,259
 288
 11,233
 7,450
Non-investment grade738 474 228 301 129 2,002 4,717 275 8,864 
Total business and corporate banking1,265
 852
 458
 353
 172
 4,293
 9,560
 392
 17,345
 13,479
Total business and corporate banking1,080 621 265 335 152 3,488 7,216 322 13,479 
Global banking:                   Global banking:
Investment grade277
 1,003
 136
 250
 26
 4,247
 5,770
 —
 11,709
 12,981
Investment grade464 477 46 231 30 4,618 4,281 0 10,147 
Non-investment grade102
 79
 231
 15
 82
 2,648
 3,802
 —
 6,959
 4,934
Non-investment grade43 18 144 0 74 1,532 1,561 0 3,372 
Total global banking379
 1,082
 367
 265
 108
 6,895
 9,572
 —
 18,668
 17,915
Total global banking507 495 190 231 104 6,150 5,842 0 13,519 
Other commercial:                   Other commercial:
Investment grade83
 97
 127
 207
 105
 545
 2,377
 —
 3,541
 4,649
Investment grade372 163 117 105 116 525 1,932 0 3,330 
Non-investment grade8
 327
 148
 13
 5
 115
 323
 —
 939
 667
Non-investment grade6 268 98 0 3 105 327 0 807 
Total other commercial91
 424
 275
 220
 110
 660
 2,700
 —
 4,480
 5,316
Total other commercial378 431 215 105 119 630 2,259 0 4,137 
Total commercial:                   Total commercial:
Investment grade1,071
 2,966
 1,885
 1,030
 344
 7,784
 11,457
 107
 26,644
 29,991
Investment grade1,517 1,910 1,017 688 348 7,269 8,718 47 21,514 
Non-investment grade1,202
 3,257
 2,369
 1,192
 315
 6,165
 10,459
 310
 25,269
 18,220
Non-investment grade993 3,412 2,452 1,351 291 4,613 6,678 295 20,085 
Total commercial$2,273
 $6,223
 $4,254
 $2,222
 $659
 $13,949
 $21,916
 $417
 $51,913
 $48,211
Total commercial$2,510 $5,322 $3,469 $2,039 $639 $11,882 $15,396 $342 $41,599 
Consumer Loan Credit Quality Indicators  The following credit quality indicators are utilized to monitor our consumer loan portfolio:
Delinquency  The following table summarizes dollars of two-months-and-over contractual delinquency for our consumer loan portfolio, including a disaggregation of the loans by year of origination as of June 30,March 31, 2021 and December 31, 2020:
20212020201920182017PriorRevolving
Loans		Total at Mar. 31, 2021
 (in millions)
Residential mortgages(1)(2)
$0 $7 $19 $21 $28 $325 $0 $400 
Home equity mortgages(1)(2)
0 0 0 0 0 25 0 25 
Credit cards0 0 0 0 0 0 36 36 
Other consumer0 1 1 0 0 5 2 9 
Total consumer$0 $8 $20 $21 $28 $355 $38 $470 
 2020 2019 2018 2017 2016 Prior 
Revolving
Loans
 Total at Jun. 30, 2020 Total at Dec. 31, 2019
 (in millions)
Residential mortgages(1)(2)
$23
 $5
 $11
 $28
 $17
 $329
 $—
 $413
 $350
Home equity mortgages(1)(2)
—
 —
 —
 —
 —
 27
 —
 27
 25
Credit cards

 

 

 

 

 

 38
 38
 34
Other consumer1
 1
 —
 —
 —
 3
 3
 8
 7
Total consumer$24
 $6
 $11
 $28
 $17
 $359
 $41
 $486
 $416
20202019201820172016PriorRevolving
Loans		Total at Dec. 31, 2020
 (in millions)
Residential mortgages(1)(2)
$3 $15 $13 $25 $19 $329 $0 $404 
Home equity mortgages(1)(2)
0 0 0 0 0 25 0 25 
Credit cards0 0 0 0 0 0 28 28 
Other consumer1 1 0 0 0 0 2 8 
Total consumer$4 $16 $13 $25 $19 $354 $30 $465 
(1)At March 31, 2021 and December 31, 2020, consumer mortgage loan delinquency includes $273 million and $281 million, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.
(2)At March 31, 2021 and December 31, 2020, consumer mortgage loans include $102 millionand $109 million, respectively, of loans that were in the process of foreclosure.

27

(1)
At June 30, 2020 and December 31, 2019, consumer mortgage loan delinquency includes $243 million and $256 million, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.
(2)
At June 30, 2020 and December 31, 2019, consumer mortgage loans include $122 millionand $142 million, respectively, of loans that were in the process of foreclosure.

HSBC USA Inc.

Nonperforming The following table summarizes the nonperforming status of our consumer loan portfolio, including a disaggregation of the loans by year of origination as of June 30,March 31, 2021 and December 31, 2020:
20212020201920182017PriorRevolving
Loans		Total at Mar. 31, 2021
 (in millions)
Residential mortgages:
Performing loans$1,365 $4,243 $2,145 $1,198 $1,417 $6,956 $0 $17,324 
Nonaccrual loans0 46 115 110 94 736 0 1,101 
Total residential mortgages1,365 4,289 2,260 1,308 1,511 7,692 0 18,425 
Home equity mortgages:
Performing loans3 51 49 32 33 466 0 634 
Nonaccrual loans0 0 1 1 1 61 0 64 
Total home equity mortgages3 51 50 33 34 527 0 698 
Credit cards:
Performing loans0 0 0 0 0 0 909 909 
Accruing loans contractually past due 90 days or more0 0 0 0 0 0 28 28 
Total credit cards0 0 0 0 0 0 937 937 
Other consumer:
Performing loans25 79 32 1 1 124 49 311 
Accruing loans contractually past due 90 days or more0 1 1 0 0 0 1 3 
Total other consumer25 80 33 1 1 124 50 314 
Total consumer:
Performing loans1,393 4,373 2,226 1,231 1,451 7,546 958 19,178 
Nonaccrual loans0 46 116 111 95 797 0 1,165 
Accruing loans contractually past due 90 days or more0 1 1 0 0 0 29 31 
Total consumer$1,393 $4,420 $2,343 $1,342 $1,546 $8,343 $987 $20,374 
20202019201820172016PriorRevolving
Loans		Total at Dec. 31, 2020
 (in millions)
Residential mortgages:
Performing loans$4,491 $2,369 $1,338 $1,572 $1,852 $5,676 $0 $17,298 
Nonaccrual loans38 107 93 86 78 677 0 1,079 
Total residential mortgages4,529 2,476 1,431 1,658 1,930 6,353 0 18,377 
Home equity mortgages:
Performing loans50 51 33 34 45 451 0 664 
Nonaccrual loans0 0 1 1 2 59 0 63 
Total home equity mortgages50 51 34 35 47 510 0 727 
Credit cards:
Performing loans0 — 0 0 0 0 1,047 1,047 
Accruing loans contractually past due 90 days or more0 0 0 0 0 0 19 19 
Total credit cards0 0 0 0 0 0 1,066 1,066 
Other consumer:
Performing loans87 39 0 1 8 128 54 317 
Accruing loans contractually past due 90 days or more0 0 0 0 0 0 2 2 
Total other consumer87 39 0 1 8 128 56 319 
Total consumer:
Performing loans4,628 2,459 1,371 1,607 1,905 6,255 1,101 19,326 
Nonaccrual loans38 107 94 87 80 736 0 1,142 
Accruing loans contractually past due 90 days or more0 0 0 0 0 0 21 21 
Total consumer$4,666 $2,566 $1,465 $1,694 $1,985 $6,991 $1,122 $20,489 

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HSBC USA Inc.
 2020 2019 2018 2017 2016 Prior 
Revolving
Loans
 Total at Jun. 30, 2020 Total at Dec. 31, 2019
 (in millions)
Residential mortgages:                 
Performing loans$2,293
 $2,780
 $1,670
 $1,912
 $2,219
 $6,979
 $—
 $17,853
 $17,420
Nonaccrual loans11
 10
 9
 21
 20
 357
 —
 428
 381
Total residential mortgages2,304
 2,790
 1,679
 1,933
 2,239
 7,336
 —
 18,281
 17,801
Home equity mortgages:                 
Performing loans27
 54
 42
 39
 50
 542
 —
 754
 807
Nonaccrual loans—
 —
 1
 —
 —
 37
 —
 38
 46
Total home equity mortgages27
 54
 43
 39
 50
 579
 —
 792
 853
Credit cards:                 
Performing loans—
 —
 —
 —
 —
 —
 1,147
 1,147
 1,381
Accruing loans contractually past due 90 days or more—
 —
 —
 —
 —
 —
 28
 28
 24
Total credit cards—
 —
 —
 —
 —
 —
 1,175
 1,175
 1,405
Other consumer:                 
Performing loans58
 57
 1
 2
 3
 119
 64
 304
 278
Accruing loans contractually past due 90 days or more—
 1
 —
 —
 —
 —
 2
 3
 5
Total other consumer58
 58
 1
 2
 3
 119
 66
 307
 283
Total consumer:                 
Performing loans2,378
 2,891
 1,713
 1,953
 2,272
 7,640
 1,211
 20,058
 19,886
Nonaccrual loans11
 10
 10
 21
 20
 394
 —
 466
 427
Accruing loans contractually past due 90 days or more—
 1
 —
 —
 —
 —
 30
 31
 29
Total consumer$2,389
 $2,902
 $1,723
 $1,974
 $2,292
 $8,034
 $1,241
 $20,555
 $20,342
Troubled debt restructurings  The following table summarizes TDR Loans in our consumer loan portfolio, including a disaggregation of the loans by year of origination as of June 30,March 31, 2021 and December 31, 2020:
20212020201920182017PriorRevolving
Loans		Total at Mar. 31, 2021
 (in millions)
Residential mortgages$0 $3 $6 $11 $3 $562 $0 $585 
Home equity mortgages0 0 0 0 0 31 0 31 
Credit cards0 0 0 0 0 0 5 5 
Total consumer$0 $3 $6 $11 $3 $593 $5 $621 
2020 2019 2018 2017 2016 Prior 
Revolving
Loans
 Total at Jun. 30, 2020 Total at Dec. 31, 201920202019201820172016PriorRevolving
Loans		Total at Dec. 31, 2020
(in millions) (in millions)
Residential mortgages$—
 $—
 $—
 $1
 $1
 $547
 $—
 $549
 $580
Residential mortgages$3 $5 $6 $3 $2 $563 $0 $582 
Home equity mortgages—
 —
 —
 —
 —
 31
 —
 31
 32
Home equity mortgages0 0 0 0 0 31 0 31 
Credit cards—
 —
 —
 —
 —
 —
 5
 5
 4
Credit cards0 0 0 0 0 0 5 5 
Total consumer$—
 $—
 $—
 $1
 $1
 $578
 $5
 $585
 $616
Total consumer$3 $5 $6 $3 $2 $594 $5 $618 
Concentration of Credit Risk At June 30, 2020March 31, 2021 and December 31, 2019,2020, our loan portfolios included interest-only residential mortgage and home equity mortgage loans totaling $3,448$3,703 million and $3,362$3,597 million,, respectively. An interest-only residential mortgage loan allows a customer to pay the interest-only portion of the monthly payment for a period of time which results in lower payments during the initial loan period. However, subsequent events affecting a customer's financial position could affect the ability of customers to repay the loan in the future when the principal payments are required which increases the credit risk of this loan type.



HSBC USA Inc.

6.    Allowance for Credit Losses
As discussed further in Note 21, "New Accounting Pronouncements," beginning January 1, 2020, an allowance for credit losses is recognized based on lifetime ECL for loans, securities held-to-maturity and certain other financial assets measured at amortized cost, and an allowance for credit losses is also recognized for securities available-for-sale. Prior to January 1, 2020, an allowance for credit losses was recognized based on probable incurred losses for loans only while debt securities were assessed for other-than-temporary impairment. In addition, beginning January 1, 2020, the liability for off-balance sheet credit exposures is recognized based on lifetime ECL while, prior to January 1, 2020, it was recognized based on probable incurred losses. The new guidance also requires inclusionWe utilize a minimum of expected recoveries of amounts previously written off, limited to the cumulative amount of prior write-offs, when estimating the allowance for credit losses for in scope financial assets (including collateral-dependent assets). Prior to January 1, 2020, these expected recoveries were not recognized.
Comparative information at January 1, 2020, reflecting the adoption of the new accounting guidance has been included in the tables below where applicable. Comparative information at December 31, 2019, which is not comparable as it does not reflect the adoption of the new accounting guidance, has been retained as previously reported.
Measurement of ECL Estimates The recognition and measurement of lifetime ECL is highly complex and involves the use of significant judgment and estimation. Multiple3 forward-looking economic forecasts are formulated and incorporated into thescenarios to calculate lifetime ECL calculations when estimating the allowance for credit losses for in scope financial assets and the liability for off-balance sheet credit exposures as discussed below underexposures. The three scenarios are termed the heading "Calculation of Lifetime ECL". We utilize a standard framework to form economic scenarios to reflect assumptions about future economic conditions supplemented by the use of management judgment, which may result in using alternative or additional economic scenarios and/or management adjustments.
Methodology HUSI has adopted the use of three forward-looking economic scenarios, representative of management's view of forecasted economic conditions, sufficient to calculate unbiased expected loss in most economic environments. They"Consensus Economic Scenarios" and represent a 'most likely outcome' (the "Central scenario") and two less likely 'outer' scenarios, referred to as the "Upside scenario" and the "Downside scenario". Each scenario is assigned a weighting with the significant majority of the weighting placed on the Central scenario and lower equal weights placed on the Upside and Downside scenarios. This weighting is deemed appropriate for the estimation of lifetime ECL, unless determined otherwise. See Updates to Economic Scenarios and Other Changes Duringwith the Six Months Ended June 30, 2020 below for further discussion. Key Central scenario assumptions are set using the average of forecasts of external economists, helping to ensure the scenarios are unbiased and maximize the use of independent information, except when in management's judgment it is believed not to be representativemajority of the current economic environment. The Central, Upside and Downside scenarios selected with reference to external forecast distributions using the above approach are termed the "Consensus Economic Scenarios". We have determined that two years is a reasonable and supportable forecast period for the Consensus Economic Scenarios. At the end of the two year reasonable and supportable forecast period, assumption variables start to revert to their 20-year average of historical values over a reversion period. The reversion period for most assumption variables is generally three years, but is longer in some specific cases. The reversion path for this period is linear inweighting typically placed on the Central scenario for all variables. The reversion path for variables in the Upside and Downside scenarios is generally non-linear.
For the Central scenario, we set key assumptions such as Gross Domestic Product ("GDP") growth, inflation, unemployment, housing price growth, U.S. Treasury yields, equity price growth, short-term interest rates and oil price using either the average of external forecasts (commonly referred to as consensus forecasts) or market implied rates. An external provider's model, conditioned to follow the consensus forecasts for the above key assumption variables, projects the remaining variable paths required as inputs to credit models. This external provider is subject to our risk governance framework, including oversight by an internal independent model review team.
The Upside and Downside scenarios are constructed following a standard process supported by a scenario narrative reflecting our top and emerging risks and by consulting external and internal subject matter experts. They are designed to be cyclical in that GDP growth, inflation and unemployment usually revert back to the Central scenario after the first two years. We determine the maximum divergence of GDP growth from the Central scenario using the 10th and the 90th percentile of the entire distribution of consensus forecast outcomes. Using externally available forecast distributions ensures independence in scenario construction. Key economic variables are set with reference to external distributional forecasts and we project additional variable paths using the external provider's model.
Generally, the Upside and Downside scenarios are generated at year-end and are only updated during the year if economic conditions change significantly. The Central scenario is generated every quarter. In quarters where only the Central scenario is updated, the Upside and Downside scenarios used for commercial loans are adjusted such that the relationship between the key assumptions used in the Central scenario and the Upside and Downside scenarios in the quarter is consistent with that observed at the last full scenario generation. For consumer loans, in quarters where only the Central scenario is updated, the relationship between the Central scenario and the Upside and Downside scenarios is held constant with that observed at the last full scenario generation.

HSBC USA Inc.

We recognize that the Consensus Economic Scenario approach using three scenariosScenario. At management's discretion, changes may be insufficient in certain economic environments. Additional analysis may be requested at management's discretion. This may result in a changemade to the weighting assigned to the three scenarios or the inclusion of extra scenarios.
We exclude from our lifetime ECL calculation financial assets which qualify for the Zero Expected Credit Loss Exception. As a result, no allowance for credit losses is recorded for these financial assets. We have identified the following types of financial assets which we believe qualify for this exclusion:
U.S. Treasury securities;
U.S. Government agency issued or guaranteed securities;
U.S. Government sponsored enterprises securities;
G10 sovereign foreign debt securities;
Interest bearing deposits held with the Federal Reserve Bank; and
Loans guaranteed by a U.S. Government agency or U.S. Government sponsored enterprise, including PPP loans.
We also exclude from our lifetime ECL calculation financial assets which are secured by collateral maintenance provisions (e.g., the borrower is contractually required to adjust the amount of financial collateral securing the financial asset) if such collateral meets liquidity requirements. In most circumstances subject to such requirements, collateral exceeds our amortized cost basis and no allowance for credit losses is recorded for these financial assets, consisting of the substantial majority of our securities purchased under agreements to resell as well as substantially all of our margin loans provided to our private banking customers.
In addition, loans to other HSBC affiliated entities are exempt from ECL measurement.
Description of Consensus Economic Scenarios Adopted on January 1, 2020 The following discussion summarizes the key macroeconomic variable forecasts in the Central, Upside and Downsideadditional scenarios at January 1, 2020. The economic assumptions described in this section have been formed specifically for the purpose of calculating ECL. While macroeconomic assumptions have changed significantly during the first half of 2020, the following scenarios are being provided to explain the impact of adopting the Consensus Economic Scenarios on January 1, 2020.
The Central scenario at January 1, 2020 - In the Central scenario, growth was expected to slow down in the United States as the benefits from tax reform waned in 2020. Inflation was forecast to remain around the target of 2 percent, while the unemployment rate was expected to stay at a low level in 2020 before gradually rising towards its long-term trend. The expected paths for Federal Reserve Board ("FRB") policy rates implied three rate cuts in 2020.
The Upside scenario at January 1, 2020 - In the Upside scenario, the economic forecast distribution of risks (as captured by consensus probability distribution of GDP growth) showed a marginal increase in upside risk for the United States in the reasonable and supportable period. Increased confidence, positive resolution of trade disputes and expansionary fiscal policy supported the Upside scenario. In this scenario, GDP growth rose to 4.0 percent in 2020, which drove inflation higher and unemployment to fall further than in the Central scenario. Stronger GDP growth and domestic demand supported stronger equity and housing prices in this scenario.
The Downside scenario at January 1, 2020 - In the Downside scenario, the economic forecast distribution of risks (as captured by consensus probability distribution of GDP growth) showed a marginal increase in the downside risks for the United States in the reasonable and supportable period. In this scenario, the U.S. economy was expected to contract in 2020 before slowly reverting back to the long-run trend. The slowdown in growth was consistent with an escalation of trade tensions with China and other trading partners in this scenario. Additional tariffs and non-tariff barriers on trade were expected to lead to the benefits from corporate tax cuts being offset by a sharp rise in costs for businesses and consumers and a loss of confidence in this scenario, while lower business investment and confidence were expected to affect hiring, with an impact on the unemployment rate and earnings expectations. In the downside scenario, policy interest rates were expected tomay be cut back below 0.5 percentincluded in order to support growth and inflation.
In conjunction with adopting the new accounting guidance, we performed a review of the methodology used to estimate lifetime ECL and determined that risk associated with the non-homogeneous nature of ourconsider current commercial loan portfolio and the potential impact of large loan defaults was not fully captured in the models. As a result, we recorded a management judgment allowance of $125 million for risk factors associated with large loan exposure in our commercial loan portfolio at January 1, 2020.
Updates to Economic Scenarios and Other Changes During the Six Months Ended June 30, 2020 economic conditions. As a result of the deterioration in economic conditions caused by the spread of the COVID-19 pandemic during the first quarter of 2020 and the related increase in economic uncertainty given the rapidly changing economic impact, we determined that the Consensus Economic Scenarios described above were no longer representative of management's view of forecasted economic conditions and as a result, three new COVID-19 forward-looking economic scenarios were developed and utilized for estimating lifetime ECL at March 31, 2020. The three new COVID-19 scenarios, referred to as mild, moderate and severe, were assigned weightings with the majority of the weighting placed on the mild scenario and progressively lower weights placed on the moderate and severe scenarios. This weighting

HSBC USA Inc.

was deemed appropriate for the estimation of lifetime ECL under conditions at that time. See Note 6, "Allowance for Credit Losses," in our Form 10-Q for the three month period ended March 31, 2020 (the "2020 First Quarter Form 10-Q") for further discussion of the scenarios utilized at March 31, 2020.
During the second quarter of 2020, economic conditions remained weak andsignificant economic uncertainty caused by the COVID-19 pandemic, continued to remain high. As a result, we updated our Upside and Downside scenarios, in addition to updating our Central scenario, to reflect management's current view of forecasted economic conditions and utilized the three updated Consensus Economic Scenarios for estimating lifetime ECL at June 30, 2020. In addition, given the high level of economic uncertaintybeginning in the current environment,second quarter of 2020, we developed and utilized a fourth scenario for estimating lifetime ECL, referred to as the "Alternative Downside scenario", to reflect the possibility that the adverse impact associated with the deterioration in economic conditions could manifest itself over a far longer period of time.
Updates to Economic Scenarios and Other Changes During the Three Months Ended March 31, 2021 Although economic conditions improved during the first quarter of 2021, the impact of the COVID-19 pandemic continues to create uncertainty about the future economic environment. As a result, we updated our three Consensus Economic Scenarios and our Alternative Downside scenario to reflect management's current view of forecasted economic conditions and utilized the 4 updated scenarios for estimating lifetime ECL at March 31, 2021. Each of the four scenarios were assigned weightings with the majority of the weighting placed on the Central scenario, the second most weighting placed on the Downside scenario and lower equal weights placed on the Upside and Alternative Downside scenarios. This weighting was deemed appropriate for the estimation of lifetime ECL under current conditions. The following discussion summarizes the key macroeconomic variable forecasts in the Central, Upside, Downside and Alternative Downside scenarios at June 30, 2020.March 31, 2021. The economic assumptions described in this section have been formed specifically for the purpose of calculating ECL.
In the Central scenario, GDP returns toGross Domestic Product ("GDP") restarts the expansion in the third quarter of 2020, after quarter-over-quarter contractions in both the first and second quarters,2021 under the assumption ofthat new COVID-19 infections slow down as more people are vaccinated, and the latest stimulus bill boosts near-term economic growth. With a phased re-opening of the economy. With thestrong economic recovery, the unemployment rate gradually declines after peaking incontinues on its downward trend, while demand for housing continues to drive the second quarter of 2020. The residential housing market enters into a mild downturnto carry its growth momentum in 2021. Commercial real estate prices, however, continue to remain depressed, driven by adjustments induced by the second half of 2020, lagging behind the economy.pandemic. In the financial markets, growth in financial asset prices remains moderate, the federal funds rate remains at the lowestcurrent near-zero level for an extended period of timethe next two years, and the 10-year U.S. Treasury yield, slowly climbs after reaching its trough in the second quarter of 2020.which has recently experienced some increase, continues to climb modestly.
In the Upside scenario, the re-opening of the economy is expected to proceedgrow at a faster pace than in the Central scenario. As a result, the economy rebounds stronger and the unemployment rate falls faster. Home prices only drop slightlyfaster than in the Central scenario and, with increasing mobility, the commercial real estate index starts
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HSBC USA Inc.
to recover in the second half of 2020, before resuming an upward trend in the second quarter of 2021. In this scenario, the equity price index returnsclimbs with strong momentum, and overall optimism drives the 10-year U.S. Treasury yield to a level that is significantly higher than in the pre-COVID-19 level by the beginning of 2022 and the FRB begins raising its policy rate in 2021.Central Scenario.
In the Downside scenario, the re-opening of the economy is delayed due to a rapid rise of COVID-19 cases. In this scenario,slow vaccine rollout and the economic recovery starting in the third quarter of 2020 is quite anemic, with the unemployment rate stayingreversing its downward trend and remaining at double digits througha high level. In this scenario, the end of 2021. The residential housing downturn lasts longer than in the Central scenariomarket slowly loses its momentum due to weakness in the labor market and the commercial real estate market suffers a heavier blow than the residential housing market. The equity price index in this scenario loses more thanabout half of its value by the middleend of 2022, driven by disappointing corporate earnings,an overall erosion of consumer and business sentiments, and the FRBFederal Reserve Board ("FRB") keeps its policy rate at the lowest level for the next two years.
In the Alternative Downside scenarioeconomic recessions re-emerge, the U.S. economy re-enters into a recession in boththe second half of 2021 and 2022, under the assumption that no vaccine or effective treatmentstays in for COVID-19 can be broadly distributed.most of 2022. An extended period of economic contraction and stagnation keeps the unemployment rate at a very high level, which pressures residential housing prices to fall further. Atfurther, while at the same time, contracting corporate activities and rising unemployment pushes the commercial real estate market into a severe downturn. VolatilityIn this scenario, financial markets experience a major sell-off and volatility in the financial markets remains extremely high for the rest ofin 2021, drivingwidening corporate credit spreads even higher than the levels from the 2007-2009 recession. Flightsubstantially, and flight to safe haven assets pushes the 10-year U.S. Treasury yield to negative territorynear-zero levels in this scenario.2022.
The following table presents the forecasted key macroeconomic variables in our Central scenarios used for estimating lifetime ECL at March 31, 2021 and December 31, 2020:
For the Quarter Ended
June 30, 2021December 31, 2021June 30, 2022December 31, 2022
Unemployment rate (quarterly average):
Forecast at March 31, 20216.0 %5.5 %4.9 %4.4 %
Forecast at December 31, 20206.8 6.2 5.9 5.4 
GDP growth rate (year-over-year):
Forecast at March 31, 202111.0 (1)4.3 3.7 3.0 
Forecast at December 31, 20209.2 (1)5.3 3.1 1.8 
(1)Represents the change in forecasted GDP for the quarter ended June 30, 2021 relative to the GDP for the quarter ended June 30, 2020. The GDP year-over-year growth rate for the quarter ended June 30, 2020 was a decline of 9.0 percent.
In addition to the updates to the economic scenarios, duringwe decreased the three and six months ended June 30, 2020, we increased our management judgment allowance on our commercial loan portfolio for risk factors associated with large loan exposureeconomic uncertainty relating to the impact of COVID-19 that are not fully captured in the models. We also decreased the management judgment allowance on our commercialconsumer loan portfolio by $27 million and $122 million, respectively, to $247 million at June 30, 2020, reflecting an increasefor risk factors primarily associated with forbearance accounts that are not fully captured in projected lifetime large loan defaults.the models.
While we believe that the assumptions used in our credit loss models are reasonable within the parameters for which the models have been built and calibrated to operate, the severe projections of macro-economic variables during the current COVID-19 pandemic represent events outside the parameters for which the models have been built. As a result, adjustments to model outputs to reflect consideration of management judgment are used with stringent governance in place to ensure an appropriate lifetime ECL estimate.
The circumstances around the COVID-19 pandemic are evolving and will continue to impact our business and our allowance for credit losses in future periods. The details of how various U.S. Government actions will impact our customers and therefore the impact on our allowance for credit losses remains highly uncertain. We will continue to monitor the COVID-19 situation closely and will continue to adapt our Consensus Economic Scenarios approach as necessary to reflect management's current view of forecasted economic conditions.
Calculation of Lifetime ECL
Commercial loansCommercial loans are monitored on a continuous basis with a formal assessment completed, at a minimum, annually. As part of this process, a credit rating and loss given default ("LGD") are assigned and serve as the basis for establishing an allowance for these loans' expected balance at default ("EAD") based on a probability of default ("PD") estimate associated with each credit rating under the allowance for credit losses methodology. In assigning the credit ratings to a particular loan, among

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HSBC USA Inc.

the risk factors considered are the obligor's debt capacity and financial position, the level of earnings, the amount and sourcesAllowance for repayment, the level of contingencies, management strength and the industry or geography in which the obligor operates. We utilize a consistent methodologyCredit Losses / Liability for the application of forward economic guidance ("FEG") into the calculation of lifetime ECL by incorporating FEG into the estimation of the term structure of PD and LGD. For PDs, we consider the correlation of FEG to default rates for a particular industry. For LGDs, we consider the correlation of FEG to collateral values and realization rates for a particular industry and if applicable, country which is adjusted for recoveries. Our PD estimates are validated on an annual basis using back-testing of actual default rates and benchmarking of the internal ratings with external rating agency data like S&P ratings and default rates. PDs and LGDs are estimated for the entire term structure of the loan.Off-Balance Sheet Credit Review, a function independent of the business, provides an on-going assessment of lending activities that includes independently assessing credit ratings and LGD estimates for sampled credits across various portfolios.
Loans with similar risk characteristics are pooled for determining lifetime ECL. When it is deemed probable based upon known facts and circumstances that full interest and principal on an individual loan will not be collected in accordance with its contractual terms, in general the loan is no longer considered part of the collective pool of homogeneous loans against which lifetime ECL are established. Instead, an allowance for credit losses is established on an individual basis ("individually assessed") primarily based on the present value of expected future cash flows, discounted at the loan's original effective interest rate, or the fair value of the collateral if the loan is collateral dependent. Individually assessed loans are evaluated quarterly. Generally, loans that are placed on non-accrual must be removed from a collective pool and individually assessed.
In addition, the allowance for credit losses may reflect consideration of management judgment of risk factors that are considered likely to cause estimated credit losses associated with the existing portfolio to differ from historical loss experience as well as where the models used to generate the reserves do not produce an estimate that is sufficient to encompass the current view of lifetime ECL. In making this determination, we consider the characteristics of our portfolio and any other significant factors that are relevant. Factors that are relevant to determining the expected collectability of our loan portfolio include, but are not limited to, the volume and severity of past due loans, the volume and severity of adversely classified or rated loans, the underlying collateral on loans that are not collateral dependent, lending policies and procedures including changes in lending strategies, underwriting standards or collection and recovery practices as well as the obligor's operations, environmental factors of an obligor and the areas in which our credit exposure is concentrated, the non-homogeneous nature of the portfolio, changes and expected changes in the general market condition of either a geographical area or an industry, and changes in international, national, regional, and local economic and business conditions.
For loans which have been identified as TDR Loans, including beginning in 2020 loans which we reasonably expect to become TDR Loans, judgment will be used as to whether or not we expect full repayment of principal and interest. If full repayment is expected, the TDR Loan will remain in a collective pool of homogeneous loans for determining lifetime ECL. When full repayment of principal and interest is not expected or, beginning in 2020, when we anticipate offering payment concessions, the loan will be removed from the pool and individually assessed. If a commercial TDR subsequently performs in accordance with the new terms and the loan is upgraded, it is possible the loan will no longer be reported as a TDR Loan at the earliest one year after the restructure had been anticipated.
Consumer loansFor pools of homogeneous consumer loans and certain small business loans which do not qualify as TDR Loans, we estimate lifetime ECL using a component based framework based on PD, LGD and EAD that estimates the likelihood that a loan will progress through the various stages of delinquency and ultimately charge-off based upon a forward-looking view of macro-economic expectations that impact a lifetime ECL and historical experience. The impact of FEG on PD is modeled at the loan or segment level depending on the portfolio. Historic relationships between observed default rates and macroeconomic variables are integrated into lifetime ECL estimates by leveraging economic response models. The impact of FEG on PD is modeled over a period equal to the remaining maturity of the underlying loans. The impact on LGD is modeled for mortgage portfolios by forecasting future loan-to-value ("LTV") profiles for the remaining maturity of the loans by leveraging national forecasts of the house price index ("HPI") and applying the corresponding LGD expectation. The models consider delinquency status, loss experience and severity, and take into account where borrowers have historically filed for bankruptcy or have been subject to account management actions, such as the re-age or modification of accounts. Expected loss severity is based on the underlying collateral, if any, for the loan in the event of default based on historical and recent trends which are updated monthly based on a rolling average of several months' data using the most recently available information.
The lifetime ECL recognized for consumer loans considers the effect on lifetime ECL over a range of potential outcomes, calculated on a probability-weighted basis, based on the economic scenarios described above, including management judgment where required. Management judgment reflects consideration of risk factors that are considered likely to cause estimated credit losses associated with the existing portfolio to differ from historical loss experience as well as where the models used to generate the reserves do not produce an estimate that is sufficient to encompass the current view of lifetime ECL. In making this determination, we consider the characteristics of our portfolio and any other significant factors that are relevant. Factors that are relevant to determining the expected collectability of our consumer loan portfolio include, but are not limited to changes in risk selection or underwriting

HSBC USA Inc.

standards, changes in collection, account management, charge-off and recovery practices and changes in loan concentrations affecting either the frequency or severity of losses.
For loans which have been identified as TDR Loans, including beginning in 2020, loans which we reasonably expect to become TDR Loans, an allowance for credit losses is maintained primarily based on the present value of expected future cash flows, discounted at the loan's original effective interest rate, or the fair value of the collateral if the loan is collateral dependent. Once a loan is classified as a TDR Loan, it continues to be reported as such until it is paid off or charged-off.
Collateral-dependent loans As discussed above, beginning January 1, 2020, expected recoveries related to subsequent increases in the fair value of collateral for collateral-dependent loans that were previously written down below current recovery value estimates are recognized in the allowance for credit losses. The amount recognized is limited to the cumulative amount of prior write-offs. See Note 5, "Loans," for additional information regarding collateral-dependent loans.
Off-balance sheet credit exposuresA separate estimate of lifetime ECL for off-balance sheet credit exposures is also maintained, which is recorded in interest, taxes and other liabilities on the consolidated balance sheet and includes lifetime ECL arising from off-balance sheet exposures such as letters of credit, guarantees and unused commitments to extend credit. The process for measuring lifetime ECL on these exposures is consistent with that for commercial or consumer loans discussed above as applicable, but is subject to an additional parameter reflecting the likelihood that funding will occur. No lifetime ECL is recognized for off-balance sheet credit exposures that are unconditionally cancellable by us such as unused credit card lines of credit.
Securities See Note 4, "Securities," for discussion of the methodologies utilized for calculating the allowance for credit losses on our securities available-for-sale and securities held-to-maturity portfolios.
ExposuresThe following table summarizes our allowance for credit losses and the liability for off-balance sheet credit exposures:
 June 30, 2020 January 1, 2020 December 31, 2019
 (in millions)
Allowance for credit losses:     
Loans$1,192
 $467
 $637
Securities held-to-maturity(1)
2
 2
 —
Other financial assets measured at amortized cost(2)
4
 3
 —
Securities available-for-sale(1)
3
 3
 —
Total allowance for credit losses$1,201
 $475
 $637
      
Liability for off-balance sheet credit exposures$253
 $158
 $104
March 31, 2021December 31, 2020
 (in millions)
Allowance for credit losses:
Loans$853 $1,015 
Securities held-to-maturity(1)
2 2 
Other financial assets measured at amortized cost(2)
2 2 
Securities available-for-sale(1)
1 1 
Total allowance for credit losses$858 $1,020 
Liability for off-balance sheet credit exposures$155 $237 
(1)
(1)See Note 4, "Securities," for additional information regarding the allowance for credit losses associated with our security portfolios.
(2)Primarily includes accrued interest receivables and customer acceptances.
See Note 4, "Securities," for additional information regarding the allowance for credit losses associated with our security portfolios.
(2)
Primarily includes accrued interest receivables and customer acceptances.
The following table summarizes the changes in the allowance for credit losses on loans by product or line of business during the three and six months ended June 30, 2020March 31, 2021 and 2019:2020:
 Commercial LoansConsumer Loans 
Real Estate, including ConstructionBusiness
and Corporate Banking		Global
Banking		Other
Comm'l		Residential
Mortgages		Home
Equity
Mortgages		Credit
Cards		Other
Consumer		Total Loans
 (in millions)
Three Months Ended March 31, 2021
Allowance for credit losses – beginning of period$145 $375 $287 $7 $(9)$22 $161 $27 $1,015 
Provision charged (credited) to income(25)(53)(65)0 (2)(3)(1)4 (145)
Charge-offs0 (2)0 0 (1)0 (18)(4)(25)
Recoveries0 1 0 0 3 2 2 0 8 
Net (charge-offs) recoveries0 (1)0 0 2 2 (16)(4)(17)
Allowance for credit losses – end of period$120 $321 $222 $7 $(9)$21 $144 $27 $853 
Three Months Ended March 31, 2020
Allowance for credit losses – beginning of period$153 $239 $106 $9 $12 $6 $105 $7 $637 
Cumulative effect adjustment to initially apply new accounting guidance for measuring credit losses(1)
(112)(60)51 (5)(86)7 32 3 (170)
Allowance for credit losses – beginning of period, adjusted41 179 157 4 (74)13 137 10 467 
Provision charged (credited) to income51 213 110 1 30 3 95 9 512 
Charge-offs0 (12)(19)0 1 (2)(22)(2)(56)
Recoveries0 2 0 0 2 2 2 0 8 
Net (charge-offs) recoveries0 (10)(19)0 3 0 (20)(2)(48)
Allowance for credit losses – end of period$92 $382 $248 $5 $(41)$16 $212 $17 $931 
 Commercial Loans Consumer Loans  
 Real Estate, including Construction Business
and Corporate Banking		 Global
Banking		 Other
Comm'l		 Residential
Mortgages		 Home
Equity
Mortgages		 Credit
Cards		 Other
Consumer		 Total Loans
 (in millions)
Three Months Ended June 30, 2020                
Allowance for credit losses – beginning of period$92
 $382
 $248
 $5
 $(41) $16
 $212
 $17
 $931
Provision charged (credited) to income28
 106
 176
 (1) 20
 (1) 3
 6
 337
Charge-offs—
 (55) —
 —
 (1) —
 (26) (2) (84)
Recoveries—
 1
 —
 1
 3
 1
 1
 1
 8
Net (charge-offs) recoveries—
 (54) —
 1
 2
 1
 (25) (1) (76)
Allowance for credit losses – end of period$120
 $434
 $424
 $5
 $(19) $16
 $190
 $22
 $1,192
                  

(1)See Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," in our 2020 Form 10-K for additional discussion.
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HSBC USA Inc.

 Commercial Loans Consumer Loans  
 Real Estate, including Construction Business
and Corporate Banking		 Global
Banking		 Other
Comm'l		 Residential
Mortgages		 Home
Equity
Mortgages		 Credit
Cards		 Other
Consumer		 Total Loans
 (in millions)
Three Months Ended June 30, 2019                
Allowance for credit losses – beginning of period$119
 $239
 $122
 $15
 $10
 $8
 $63
 $7
 $583
Provision charged (credited) to income30
 13
 (9) (6) 1
 (1) 19
 (1) 46
Charge-offs—
 (2) (3) —
 (3) (1) (12) (2) (23)
Recoveries—
 1
 —
 —
 3
 1
 1
 1
 7
Net (charge-offs) recoveries—
 (1) (3) —
 —
 —
 (11) (1) (16)
Allowance for credit losses – end of period$149
 $251
 $110
 $9
 $11
 $7
 $71
 $5
 $613
                  
Six Months Ended June 30, 2020                
Allowance for credit losses – beginning of period$153
 $239
 $106
 $9
 $12
 $6
 $105
 $7
 $637
Cumulative effect adjustment to initially apply new accounting guidance for measuring credit losses(112) (60) 51
 (5) (86) 7
 32
 3
 (170)
Allowance for credit losses – beginning of period, adjusted41
 179
 157
 4
 (74) 13
 137
 10
 467
Provision charged (credited) to income79
 319
 286
 —
 50
 2
 98
 15
 849
Charge-offs—
 (67) (19) —
 —
 (2) (48) (4) (140)
Recoveries—
 3
 —
 1
 5
 3
 3
 1
 16
Net (charge-offs) recoveries—
 (64) (19) 1
 5
 1
 (45) (3) (124)
Allowance for credit losses – end of period$120
 $434
 $424
 $5
 $(19) $16
 $190
 $22
 $1,192
                  
Six Months Ended June 30, 2019                
Allowance for credit losses – beginning of period$116
 $219
 $108
 $15
 $13
 $7
 $58
 $5
 $541
Provision charged (credited) to income33
 35
 5
 (6) —
 —
 35
 2
 104
Charge-offs—
 (4) (3) —
 (7) (2) (25) (3) (44)
Recoveries—
 1
 —
 —
 5
 2
 3
 1
 12
Net (charge-offs) recoveries—
 (3) (3) —
 (2) —
 (22) (2) (32)
Allowance for credit losses – end of period$149
 $251
 $110
 $9
 $11
 $7
 $71
 $5
 $613
The following table summarizes the changes in the liability for off-balance sheet credit exposures during the three and six months ended June 30, 2020March 31, 2021 and 2019:2020:
Three Months Ended March 31,20212020
 (in millions)
Balance at beginning of period$237 $104 
Cumulative effect adjustment to initially apply new accounting guidance for measuring credit losses(1)
0 54 
Balance at beginning of period, adjusted237 158 
Provision charged (credited) to income(82)213 
Balance at end of period$155 $371 
 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
 (in millions)
Balance at beginning of period$371
 $89
 $104
 $96
Cumulative effect adjustment to initially apply new accounting guidance for measuring credit losses—
 —
 54
 —
Balance at beginning of period, adjusted371
 89
 158
 96
Provision charged (credited) to income(118) 1
 95
 (6)
Balance at end of period$253
 $90
 $253
 $90

HSBC USA Inc.
(1)See Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," in our 2020 Form 10-K for additional discussion

Accrued Interest Receivables The following table summarizes accrued interest receivables associated with financial assets carried at amortized cost and securities available-for-sale along with the related allowance for credit losses, which are reported net in other assets on the consolidated balance sheet. These accrued interest receivables are excluded from the amortized cost basis disclosures presented elsewhere in these financial statements, including Note 4, "Securities," and Note 5, "Loans."
June 30, 2020March 31, 2021December 31, 2020
(in millions) (in millions)
Accrued interest receivables: Accrued interest receivables:
Loans$156
Loans$137 $140 
Securities held-to-maturity29
Securities held-to-maturity20 23 
Other financial assets measured at amortized cost1
Other financial assets measured at amortized cost1 1 
Securities available-for-sale105
Securities available-for-sale90 100 
Total accrued interest receivables291
Total accrued interest receivables248 264 
Allowance for credit losses3
Allowance for credit losses2 2 
Accrued interest receivables, net$288
Accrued interest receivables, net$246 $262 
During the three and six months ended June 30,March 31, 2021 and 2020, we charged-off accrued interest receivables by reversing interest income for loans of $3 millionNaN and $4$1 million, respectively.


7. Loans Held for Sale
Loans held for sale consisted of the following:
March 31, 2021December 31, 2020
 (in millions)
Commercial loans:
Real estate, including construction$0 $10 
Global banking256 119 
Total commercial256 129 
Consumer loans:
Residential mortgages95 208 
Total consumer95 208 
Total loans held for sale$351 $337 

June 30, 2020 December 31, 2019
 (in millions)
Commercial loans:   
Real estate, including construction$—
 $83
Business and corporate banking—
 35
Global banking103
 94
Total commercial103
 212
Consumer loans:   
Residential mortgages44
 77
Total consumer44
 77
Total loans held for sale$147
 $289
Commercial LoansIncluded in commercial loans held for sale are certain loans that we have elected to designate under the fair value option which consists of loans that we originate in connection with our participation in a number of syndicated credit facilities with the intent of selling them to unaffiliated third parties as well as loans that we purchase from the secondary market and hold as hedges against our exposure to certain total return swaps. The fair value of these loans totaled $45$83 million and $178$36 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. See Note 10, "Fair Value Option," for additional information.
Commercial loans held for sale also includes certain loans that we no longer intend to hold for investment and were transferred to held for sale which totaled $58$173 million and $34$93 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. During
32

HSBC USA Inc.
both the three and six months ended June 30,March 31, 2021 and 2020, we recorded $9 million of lower of amortized cost or fair value adjustments associated with the write-down of commercial loans held for sale as a component of other income (loss) in the consolidated statement of income (loss) compared with recording no0 lower of amortized cost or fair value adjustments on commercial loans held for sale during both the three and six months ended June 30, 2019.sale.
Consumer Loans Included in residential mortgage loans held for sale are agency-eligible residential mortgage loans which are originated and held for sale to third parties, currently on a servicing retained basis. Gains and losses from the sale of these residential mortgage loans are reflected as a component of other income (loss) in the consolidated statement of income (loss).
Loans held for sale are subject to market risk, liquidity risk and interest rate risk, in that their value will fluctuate as a result of changes in market conditions, as well as the credit environment. Beginning with 2018 applications, interestInterest rate risk for agency-

HSBC USA Inc.

eligibleagency-eligible residential mortgage loans held for sale is partially mitigated through an economic hedging program to offset changes in the fair value of these mortgage loans held for sale, from the time of commitment to sale, attributable to changes in market interest rates. Revenue associated with this economic hedging program, which is reflected as a component of other income (loss) in the consolidated statement of income (loss), was a gain of $2 million andduring the three months ended March 31, 2021 compared with a loss of $1$3 million during the three and six months ended June 30, 2020, respectively, compared with losses of $1 million and $2 million during the three and six months ended June 30, 2019, respectively.March 31, 2020.
Valuation Allowances Excluding the commercial loans designated under the fair value option discussed above, loans held for sale are recorded at the lower of amortized cost or fair value, with adjustments to fair value being recorded as a valuation allowance through other revenues. The valuation allowance on consumer loans held for sale was $1 million and $2 millionNaN at June 30, 2020both March 31, 2021 and December 31, 2019, respectively.2020. The valuation allowance on commercial loans held for sale was $1 million and nil at June 30, 2020both March 31, 2021 and December 31, 2019, respectively.2020.


8. Goodwill
Goodwill was $458 million and $1,242 million at June 30, 2020both March 31, 2021 and December 31, 2019, respectively.2020. Goodwill for these periods reflects accumulated impairment losses of $1,819 million, and $1,035 million, respectively.which were recognized in prior periods. During the first quarter of 2021, there were no events or changes in circumstances to indicate that it is more likely than not the fair value of our Commercial Banking reporting unit has reduced below its carrying amount.
During the first quarter of 2020, as a result of the deterioration in economic conditions caused by the spread of the COVID-19 pandemic across the globe, including into the United States, and its impact on our businesses including changes to the interest rate environment as a result of recent FRB actions to combat the economic effects of the virus, and the amount of headroom calculated in our previous annual impairment test for certain reporting units, we determined that it was more likely than not that the fair value of one or more of our reporting units was lower than their carrying amounts, including goodwill. Based on this analysis, we determined thatperformed an interim goodwill impairment test should be performed for all of our reporting units as of March 31, 2020 and prepared updated cash flow projections for each reporting unit, resulting in a reduction in the long-term forecasts of profitability for both our Retail Banking and Wealth Management and our Private Banking reporting units as compared to the prior year forecasts. These projections were reviewed by senior management in early April in connection with the preparation of our first quarter financial statements and it was determined that these forecasts represent our current best estimate of future profitability and would be used to conduct our interim impairment test. We completed our interim impairment test of goodwill utilizing cash flow projections based on these forecasts under a present value approach and in conjunction with valuation estimates determined under a market approach, concluded that the fair value of our Commercial Banking reporting unit exceeded its carrying value, including goodwill. However, the cash flow projections for our Retail Banking and Wealth Management and our Private Banking reporting units were significantly lower than previous estimates which, in conjunction with valuation estimates under a market approach and in consideration of a challenging macroeconomic outlook, resulted in a fair value that was significantly lower than their book values, including goodwill. As a result, we recorded a non-cash impairment charge of $784 million in the first quarter of 2020, representing the entire amount of goodwill previously allocated to these reporting units. Beginning in the second quarter of 2020, our Retail Banking and Wealth Management and our Private Banking reporting units are being reported together within a newly created Wealth and Personal Banking segment for segment reporting purposes. As discussed in our 2019 Form 10-K, our goodwill impairment testing is highly sensitive to certain assumptions and estimates used.
During the second quarter of 2020, there were no events or changes in circumstances to indicate that it is more likely than not the fair value of our Commercial Banking reporting unit has reduced below its carrying amount.


HSBC USA Inc.

9. Derivative Financial Instruments
In the normal course of business, the derivative instruments we enter into are for trading, market making and risk management purposes. For financial reporting purposes, derivative instruments are designated in one of the following categories: (a) hedging instruments designated as qualifying hedges under derivative and hedge accounting principles, (b) financial instruments held for trading or (c) non-qualifying economic hedges. The derivative instruments held are predominantly swaps, futures, options and forward contracts. All derivatives are stated at fair value. Where we enter into enforceable master netting agreements with counterparties, the master netting agreements permit us to net those derivative asset and liability positions and to offset cash collateral held and posted with the same counterparty.
The following table presents the fair value of derivative contracts by major product type on a gross basis. Gross fair values exclude the effects of both counterparty netting as well as collateral, and therefore are not representative of our exposure. The table below also presents the amounts of counterparty netting and cash collateral that have been offset in the consolidated balance sheet, as well as cash and securities collateral posted and received under enforceable master netting agreements that do not meet the criteria for netting. Derivative assets and liabilities which are not subject to an enforceable master netting agreement, or are subject to a netting agreement where an appropriate legal opinion to determine such agreements are enforceable has not been either sought or obtained, have not been netted in the following table. Where we have received or posted collateral under netting agreements where an appropriate legal opinion to determine such agreements are enforceable has not been either sought or obtained, the related collateral also has not been netted in the following table.

33

HSBC USA Inc.
March 31, 2021December 31, 2020
Derivative AssetsDerivative LiabilitiesDerivative AssetsDerivative Liabilities
(in millions)
Derivatives accounted for as fair value hedges(1)
OTC-cleared(2)
$0 $39 $0 $0 
Bilateral OTC(2)
5 5 0 2 
Interest rate contracts5 44 0 2 
Derivatives accounted for as cash flow hedges(1)
Foreign exchange contracts - bilateral OTC(2)
51 0 0 53 
Total derivatives accounted for as hedges56 44 0 55 
Trading derivatives not accounted for as hedges(3)
Exchange-traded(2)
7 4 14 9 
OTC-cleared(2)
89 0 0 58 
Bilateral OTC(2)
3,524 3,258 6,584 6,555 
Interest rate contracts(4)
3,620 3,262 6,598 6,622 
OTC-cleared (2)
45 0 168 0 
Bilateral OTC(2)
15,671 14,694 18,299 18,549 
Foreign exchange contracts15,716 14,694 18,467 18,549 
Equity contracts - bilateral OTC(2)
2,685 2,843 4,009 4,200 
Exchange-traded(2)
14 0 0 28 
Bilateral OTC(2)
1,363 1,228 1,323 1,550 
Precious metals contracts1,377 1,228 1,323 1,578 
Credit contracts - bilateral OTC(2)
339 178 367 233 
Other non-qualifying derivatives not accounted for as hedges(1)
Interest rate contracts - bilateral OTC(2)
55 3 89 1 
Foreign exchange contracts - bilateral OTC(2)
0 1 0 1 
Equity contracts - bilateral OTC(2)
1,772 51 1,607 91 
OTC-cleared(2)
0 0 0 14 
Bilateral OTC(2)
0 49 0 50 
Credit contracts0 49 0 64 
Other contracts - bilateral OTC(2)(5)
7 57 8 67 
Total derivatives25,627 22,410 32,468 31,461 
Less: Gross amounts of receivable / payable subject to enforceable master netting agreements(6)(8)
18,641 18,641 25,537 25,537 
Less: Gross amounts of cash collateral received / posted subject to enforceable master netting agreements(7)(8)
4,360 1,953 4,079 3,377 
Net amounts of derivative assets / liabilities presented in the balance sheet2,626 1,816 2,852 2,547 
Less: Gross amounts of financial instrument collateral received / posted subject to enforceable master netting agreements but not offset in the consolidated balance sheet561 88 817 691 
Net amounts of derivative assets / liabilities$2,065 $1,728 $2,035 $1,856 
HSBC USA Inc.
(1)Derivative assets / liabilities related to cash flow hedges, fair value hedges and derivative instruments held for purposes other than for trading are recorded in other assets / interest, taxes and other liabilities on the consolidated balance sheet.
(2)Over-the-counter ("OTC") derivatives include derivatives executed and settled bilaterally with counterparties without the use of an organized exchange or central clearing house. The credit risk associated with bilateral OTC derivatives is managed through obtaining collateral and enforceable master netting agreements. OTC-cleared derivatives are executed bilaterally in the OTC market but then novated to a central clearing counterparty, whereby the central clearing counterparty becomes the counterparty to each of the original counterparties. Exchange traded derivatives are executed directly on an organized exchange. Credit risk is minimized for OTC-cleared derivatives and exchange traded derivatives through daily margining requirements. In addition, OTC-cleared interest rate and credit derivatives with certain central clearing counterparties are settled daily.
(3)Trading related derivative assets / liabilities are recorded in trading assets / trading liabilities on the consolidated balance sheet.
(4)The decreases in interest rate derivative assets and liabilities at March 31, 2021 primarily reflects reduced positions driven by the exit or transfer of certain contracts as part of our Restructuring Plan. See Note 2, "Strategic Initiatives," for additional information.
(5)Consists of swap agreements entered into in conjunction with the sales of Visa Inc. ("Visa") Class B common shares ("Class B Shares").
(6)Represents the netting of derivative receivable and payable balances for the same counterparty under enforceable netting agreements.
(7)Represents the netting of cash collateral posted and received by counterparty under enforceable netting agreements.
(8)Netting is performed at a counterparty level in cases where enforceable master netting agreements are in place, regardless of the type of derivative instrument. Therefore, we have not allocated netting to the different types of derivative instruments shown in the table above.
34

 June 30, 2020 December 31, 2019
 Derivative Assets Derivative Liabilities Derivative Assets Derivative Liabilities
 (in millions)
Derivatives accounted for as fair value hedges(1)
       
OTC-cleared(2)
$—
 $—
 $—
 $1
Bilateral OTC(2)
—
 84
 —
 164
Interest rate contracts—
 84
 —
 165
Derivatives accounted for as cash flow hedges(1)
       
Foreign exchange contracts - bilateral OTC(2)
19
 1
 16
 20
Interest rate contracts - bilateral OTC(2)
—
 —
 —
 1
Total derivatives accounted for as hedges19
 85
 16
 186
Trading derivatives not accounted for as hedges(3)
       
Exchange-traded(2)
9
 12
 110
 3
OTC-cleared(2)
71
 80
 167
 29
Bilateral OTC(2)
16,739
 19,146
 11,990
 13,324
Interest rate contracts16,819
 19,238
 12,267
 13,356
Exchange-traded(2)
—
 —
 80
 —
OTC-cleared (2)
—
 8
 —
 —
Bilateral OTC(2)
19,706
 18,871
 16,440
 15,786
Foreign exchange contracts19,706
 18,879
 16,520
 15,786
Equity contracts - Bilateral OTC(2)
3,585
 3,635
 3,753
 3,993
Exchange-traded(2)
1
 99
 71
 80
Bilateral OTC(2)
1,625
 1,791
 1,087
 1,309
Precious metals contracts1,626
 1,890
 1,158
 1,389
OTC-cleared(2)
94
 —
 1
 —
Bilateral OTC(2)
699
 900
 1,138
 1,024
Credit contracts793
 900
 1,139
 1,024
Other non-qualifying derivatives not accounted for as hedges(1)
       
Interest rate contracts - bilateral OTC(2)
139
 3
 128
 51
Foreign exchange contracts - bilateral OTC(2)
—
 1
 —
 —
Equity contracts - bilateral OTC(2)
857
 291
 1,354
 75
Credit contracts - bilateral OTC(2)
3
 54
 —
 44
Other contracts - bilateral OTC(2)(4)
9
 73
 10
 85
Total derivatives43,556
 45,049
 36,345
 35,989
Less: Gross amounts of receivable / payable subject to enforceable master netting agreements(5)(7)
36,240
 36,240
 29,510
 29,510
Less: Gross amounts of cash collateral received / posted subject to enforceable master netting agreements(6)(7)
3,913
 6,042
 3,683
 4,390
Net amounts of derivative assets / liabilities presented in the balance sheet3,403
 2,767
 3,152
 2,089
Less: Gross amounts of financial instrument collateral received / posted subject to enforceable master netting agreements but not offset in the consolidated balance sheet638
 1,002
 891
 553
Net amounts of derivative assets / liabilities$2,765
 $1,765
 $2,261
 $1,536

(1)
Derivative assets / liabilities related to cash flow hedges, fair value hedges and derivative instruments held for purposes other than for trading are recorded in other assets / interest, taxes and other liabilities on the consolidated balance sheet.
(2)
Over-the-counter ("OTC") derivatives include derivatives executed and settled bilaterally with counterparties without the use of an organized exchange or central clearing house. The credit risk associated with bilateral OTC derivatives is managed through obtaining collateral and enforceable master netting agreements. OTC-cleared derivatives are executed bilaterally in the OTC market but then novated to a central clearing counterparty, whereby the central clearing counterparty becomes the counterparty to each of the original counterparties. Exchange traded derivatives are executed directly on an organized exchange. Credit risk is minimized for OTC-cleared derivatives and exchange traded derivatives through daily margining requirements. In addition, OTC-cleared interest rate and credit derivatives with certain central clearing counterparties are settled daily.
(3)
Trading related derivative assets / liabilities are recorded in trading assets / trading liabilities on the consolidated balance sheet.
(4)
Consists of swap agreements entered into in conjunction with the sales of Visa Inc. ("Visa") Class B common shares ("Class B Shares").
(5)
Represents the netting of derivative receivable and payable balances for the same counterparty under enforceable netting agreements.
(6)
Represents the netting of cash collateral posted and received by counterparty under enforceable netting agreements.

HSBC USA Inc.

(7)
Netting is performed at a counterparty level in cases where enforceable master netting agreements are in place, regardless of the type of derivative instrument. Therefore, we have not allocated netting to the different types of derivative instruments shown in the table above.
See Note 18, "Guarantee Arrangements, Pledged Assets and Repurchase Agreements," for further information on offsetting related to resale and repurchase agreements.
Derivatives Held for Risk Management Purposes  Our risk management policy requires us to identify, analyze and manage risks arising from the activities conducted during the normal course of business. We use derivative instruments as an asset and liability management tool to manage our exposures in interest rate, foreign currency and credit risks in existing assets and liabilities, commitments and forecasted transactions. The accounting for changes in fair value of a derivative instrument will depend on whether the derivative has been designated and qualifies for hedge accounting.
We designate derivative instruments to offset the fair value risk and cash flow risk arising from fixed-rate and floating-rate assets and liabilities as well as forecasted transactions. We assess the hedging relationships, both at the inception of the hedge and on an ongoing basis, using a regression approach to determine whether the designated hedging instrument is highly effective in offsetting changes in the fair value or the cash flows attributable to the hedged risk. Accounting principles for qualifying hedges require us to prepare detailed documentation describing the relationship between the hedging instrument and the hedged item, including, but not limited to, the risk management objective, the hedging strategy and the methods to assess and measure the ineffectiveness of the hedging relationship. We discontinue hedge accounting when we determine that the hedge is no longer highly effective, the hedging instrument is terminated, sold or expired, the designated forecasted transaction is not probable of occurring, or when the designation is removed by us.
Fair Value Hedges  In the normal course of business, we hold fixed-rate loans and securities, and issue fixed-rate deposits and senior and subordinated debt obligations. The fair value of fixed-rate assets and liabilities fluctuates in response to changes in interest rates. We utilize interest rate swaps, forward and futures contracts to minimize our exposure to changes in fair value caused by interest rate volatility. The changes in the fair value of the hedged item designated in a qualifying hedge are captured as an adjustment to the carrying amount of the hedged item (basis adjustment). If the hedging relationship is discontinued and the hedged item continues to exist, the basis adjustment is amortized over the remaining life of the hedged item.
The following table presents the carrying amount of hedged items in fair value hedges recognized in the consolidated balance sheet at June 30, 2020March 31, 2021 and December 31, 2019,2020, along with the cumulative amount of fair value hedging adjustments included in the carrying amount of those hedged items:
 
Carrying Amount of Hedged Items(1)
 
Cumulative Amount of Fair Value Hedging Adjustments Increasing (Decreasing) the
Carrying Amount of Hedged Items
 Active Discontinued Total
 (in millions)
At June 30, 2020       
Securities available-for-sale ("AFS")$9,547
 $1,167
 $780
 $1,947
Deposits(2)
3,234
 234
 —
 234
Long-term debt5,932
 328
 (19) 309
At December 31, 2019       
Securities available-for-sale ("AFS")7,277
 554
 428
 982
Long-term debt10,975
 285
 (32) 253
 
Carrying Amount of Hedged Items(1)
Cumulative Amount of Fair Value Hedging Adjustments Increasing (Decreasing) the
Carrying Amount of Hedged Items
ActiveDiscontinuedTotal
 (in millions)
At March 31, 2021
Securities available-for-sale ("AFS")$7,952 $53 $703 $756 
Deposits3,640 140 0 140 
Long-term debt3,636 (40)176 136 
At December 31, 2020
Securities AFS7,966 681 738 1,419 
Deposits5,214 214 0 214 
Long-term debt2,227 242 (15)227 
(1)The carrying amount of securities AFS represents the amortized cost basis.
35

(1)
The carrying amount of securities AFS represents the amortized cost basis.
(2)
During the first quarter of 2020, $3.0 billion of fixed-rate senior debt obligations issued to HSBC North America were recharacterized as time deposits. The cumulative amount of fair value hedging adjustments associated with this debt was reclassified to deposits. See Note 14, "Related Party Transactions," for additional information.

HSBC USA Inc.

The following table presents information on gains and losses on derivative instruments designated and qualifying as hedging instruments and the hedged items in fair value hedges and their locations on the consolidated statement of income (loss):
 Location of Gain (Loss)
Recognized in Income		Gain (Loss) on DerivativesGain (Loss) on Hedged Items
 (in millions)
Three Months Ended March 31, 2021
Interest rate contracts / Securities AFSNet interest income$574 $(547)
Interest rate contracts / DepositsNet interest income(43)29 
Interest rate contracts / Long-term debtNet interest income(77)67 
Total$454 $(451)
Three Months Ended March 31, 2020
Interest rate contracts / Securities AFSNet interest income$(1,156)$1,178 
Interest rate contracts / DepositsNet interest income120 (146)
Interest rate contracts / Long-term debtNet interest income177 (229)
Total$(859)$803 
  
Location of Gain (Loss)
Recognized in Income		 Gain (Loss) on Derivatives Gain (Loss) on Hedged Items
   (in millions)
Three Months Ended June 30, 2020     
Interest rate contracts / Securities AFSNet interest income $12
 $52
Interest rate contracts / DepositsNet interest income —
 (35)
Interest rate contracts / Long-term debtNet interest income 50
 (61)
Total  $62
 $(44)
      
Three Months Ended June 30, 2019     
Interest rate contracts / Securities AFSNet interest income $(404) $488
Interest rate contracts / Long-term debtNet interest income 153
 (290)
Total  $(251) $198
      
Six Months Ended June 30, 2020     
Interest rate contracts / Securities AFSNet interest income $(1,144) $1,230
Interest rate contracts / DepositsNet interest income 120
 (181)
Interest rate contracts / Long-term debtNet interest income 227
 (290)
Total  $(797) $759
      
Six Months Ended June 30, 2019     
Interest rate contracts / Securities AFSNet interest income $(661) $838
Interest rate contracts / Long-term debtNet interest income 237
 (489)
Total  $(424) $349
Cash Flow Hedges  We own or issue floating rate financial instruments and enter into forecasted transactions that give rise to variability in future cash flows. As a part of our risk management strategy, we use interest rate swaps, currency swaps and futures contracts to mitigate risk associated with variability in the cash flows. Changes in fair value of a derivative instrument associated with a qualifying cash flow hedge are recognized in other comprehensive income (loss).income. When the cash flows being hedged materialize and are recorded in income or expense, the associated gain or loss from the hedging derivative previously recorded in accumulated other comprehensive income (loss) ("AOCI") is reclassified into earnings in the same accounting period in which the designated forecasted transaction or hedged item affects earnings. If a cash flow hedge of a forecasted transaction is discontinued because it is no longer highly effective, or if the hedge relationship is terminated, the cumulative gain or loss on the hedging derivative to that date will continue to be reported in AOCI unless it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period as documented at the inception of the hedge, at which time the cumulative gain or loss is released into earnings.
At June 30, 2020,March 31, 2021, active cash flow hedge relationships extend or mature through March 2023.2024. During the three and six months ended June 30, 2020, respectively, $4 million and $10March 31, 2021, $1 million of losses related to discontinued cash flow hedge relationships were amortized to earnings from AOCI compared with losses of $9$6 million and $19 million during the three and six months ended June 30, 2019, respectively.March 31, 2020. During the next twelve months, we expect to amortize $9$4 million of remaining losses to earnings resulting from these discontinued cash flow hedges. The interest accrual related to the hedging instruments is recognized in net interest income.

HSBC USA Inc.

The following table presents information on gains and losses on derivative instruments designated and qualifying as hedging instruments in cash flow hedges (including amounts recognized in AOCI from discontinued cash flow hedges) and their locations on the consolidated statement of income (loss):
 Gain (Loss) Recognized in
AOCI on Derivatives		Location of Gain (Loss)
Reclassified from AOCI into Income		Gain (Loss) Reclassified From
AOCI into Income
2021202020212020
 (in millions)
Three Months Ended March 31,
Foreign exchange contracts$(1)$0 Net interest income$0 $0 
Interest rate contracts(16)113 Net interest income(1)(6)
Total$(17)$113 $(1)$(6)

36

HSBC USA Inc.
 
Gain (Loss) Recognized in
AOCI on Derivatives
 
Location of Gain (Loss)
Reclassified from AOCI into Income
 
Gain (Loss) Reclassified From
AOCI into Income
 2020 2019  2020 2019
 (in millions)
Three Months Ended June 30,        
Foreign exchange contracts$—
 $—
 Net interest income $—
 $—
Interest rate contracts—
 (2) Net interest income (4) (9)
Total$—
 $(2)   $(4) $(9)
          
Six Months Ended June 30,        
Foreign exchange contracts$—
 $1
 Net interest income $—
 $—
Interest rate contracts113
 5
 Net interest income (10) (19)
Total$113
 $6
   $(10) $(19)
Trading Derivatives and Non-Qualifying Hedging Activities  In addition to risk management, we also enter into derivative contracts, including buy- and sell-protection credit derivatives, for the purposes of trading and market making, or repackaging risks to form structured trades to meet clients' risk taking objectives. Additionally, we buy or sell securities and use derivatives to mitigate the market risks arising from our trading activities with our clients that exceed our risk appetite. We also use buy-protection credit derivatives to manage our counterparty credit risk exposure. Where we enter into derivatives for trading purposes, realized and unrealized gains and losses are recognized in trading revenue. Counterparty credit risk associated with OTC derivatives, including risk-mitigating buy-protection credit derivatives, are recognized as an adjustment to the fair value of the derivatives and are recorded in trading revenue.
Our non-qualifying hedging and other activities include:
•Derivative contracts related to the fixed-rate long-term debt issuances and hybrid instruments, including all structured notes and deposits, for which we have elected fair value option accounting. These derivative contracts are non-qualifying hedges but are considered economic hedges.
•Credit default swaps which are designated as economic hedges against the credit risks within our loan portfolio. In the event of an impairment loss occurring in a loan that is economically hedged, the impairment loss is recognized as provision for credit losses while the gain on the credit default swap is recorded as other income (loss).income.
•Swap agreements entered into in conjunction with the sales of Visa Class B Shares to a third party to retain the litigation risk associated with the Class B Shares sold until the related litigation is settled and the Class B Shares can be converted into Class A common shares ("Class A Shares"). See Note 18, "Guarantee Arrangements, Pledged Assets and Repurchase Agreements," for additional information.
•Forward purchases or sales of to-be-announced ("TBA") securities used to economically hedge changes in the fair value of agency-eligible residential mortgage loans held for sale attributable to changes in market interest rates. Changes in the fair value of TBA positions, which are considered derivatives, are recorded in other income (loss).income. See Note 7, "Loans Held for Sale," for additional information.
Derivative instruments designated as economic hedges that do not qualify for hedge accounting are recorded at fair value through profit and loss. Realized and unrealized gains and losses on economic hedges are recognized in gain (loss) on instruments designated at fair value and related derivatives or other income (loss) while the derivative asset or liability positions are reflected as other assets or other liabilities.

HSBC USA Inc.

The following table presents information on gains and losses on derivative instruments held for trading purposes and their locations on the consolidated statement of income (loss):
 Location of Gain (Loss)
Recognized in Income on Derivatives		Gain (Loss) Recognized in Income on Derivatives
Three Months Ended March 31,
20212020
 (in millions)
Interest rate contractsTrading revenue$429 $17 
Foreign exchange contractsTrading revenue116 (665)
Equity contractsTrading revenue(279)1,257 
Precious metals contractsTrading revenue(80)160 
Credit contractsTrading revenue215 (657)
Total$401 $112 
 
Location of Gain (Loss)
Recognized in Income on Derivatives
Gain (Loss) Recognized in Income on Derivatives
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
  (in millions)
Interest rate contractsTrading revenue$(135) $(171) $(118) $(115)
Foreign exchange contracts(1)
Trading revenue(144) 253
 (809) 239
Equity contractsTrading revenue(189) (61) 1,068
 (150)
Precious metals contracts(1)
Trading revenue223
 36
 383
 53
Credit contractsTrading revenue35
 (145) (622) (267)
Total $(210) $(88) $(98) $(240)
(1)
During the third quarter of 2019, we changed our presentation for certain derivatives that were previously reported in foreign exchange contracts and began reporting these derivatives in precious metals contracts. As a result, we have reclassified $424 million and $575 million of gains from foreign exchange contracts to precious metals contracts during the three and six months ended June 30, 2019, respectively, to conform with the current year presentation.
The significant gains and losses recognized in trading revenue on derivatives during the sixthree months ended June 30,March 31, 2020 primarily in foreign exchange, equity and credit contracts, reflectreflects the impact of market volatility causeddriven by the spread of the COVID-19 pandemic.
37

HSBC USA Inc.
The following table presents information on gains and losses on derivative instruments held for non-qualifying hedging and other activities and their locations on the consolidated statement of income (loss):
 
Location of Gain (Loss)
Recognized in Income on Derivatives
Gain (Loss) Recognized in Income on Derivatives
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
  (in millions)
Interest rate contractsGain (loss) on instruments designated at fair value and related derivatives$19
 $180
 $269
 $336
Interest rate contractsOther income (loss)2
 (1) (1) (2)
Foreign exchange contractsGain (loss) on instruments designated at fair value and related derivatives—
 1
 (2) —
Equity contractsGain (loss) on instruments designated at fair value and related derivatives1,085
 324
 (613) 1,238
Credit contractsGain (loss) on instruments designated at fair value and related derivatives—
 —
 37
 —
Credit contractsOther income (loss)(38) (4) 13
 (14)
Other contracts(1)
Other income (loss)(12) (3) (1) (9)
Total $1,056
 $497
 $(298) $1,549
 Location of Gain (Loss)
Recognized in Income on Derivatives		Gain (Loss) Recognized in Income on Derivatives
Three Months Ended March 31,
20212020
 (in millions)
Interest rate contractsGain (loss) on instruments designated at fair value and related derivatives$(117)$250 
Interest rate contractsOther income2 (3)
Foreign exchange contractsGain (loss) on instruments designated at fair value and related derivatives0 (2)
Equity contractsGain (loss) on instruments designated at fair value and related derivatives486 (1,698)
Credit contractsGain (loss) on instruments designated at fair value and related derivatives0 37 
Credit contractsOther income(6)51 
Other contracts(1)
Other income2 11 
Total$367 $(1,354)
(1)
Consists of swap agreements entered into in conjunction with the sales of Visa Class B Shares.
(1)Consists of swap agreements entered into in conjunction with the sales of Visa Class B Shares.
Credit-Risk Related Contingent Features  The majority of our derivative contracts contain provisions that require us to maintain a specific credit rating from each of the major credit rating agencies. Sometimes the derivative instrument transactions are a part of broader structured product transactions. If our credit ratings were to fall below the current ratings, the counterparties to our derivative instruments could demand us to post additional collateral. The amount of additional collateral required to be posted will depend on whether we are downgraded by one or more notches. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a net liability position at June 30, 2020March 31, 2021 was $1,122$198 million,, for which we had posted collateral of $674 million.$113 million. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position at December 31, 20192020 was $611$221 million,, for which we had posted collateral of $316 million.

HSBC USA Inc.

$67 million. Substantially all of the collateral posted is in the form of cash or securities available-for-sale. See Note 18, "Guarantee Arrangements, Pledged Assets and Repurchase Agreements," for further details.
The following table presents the amount of additional collateral that we would be required to post (from the current collateral level) related to derivative instruments with credit-risk related contingent features if our long-term ratings were downgraded by one or two notches. A downgrade by a single rating agency that does not result in a rating lower than a preexisting corresponding rating provided by another rating agency will generally not result in additional collateral.
One-notch downgradeTwo-notch downgrade
 (in millions)
Amount of additional collateral to be posted upon downgrade$17 $35 
38

HSBC USA Inc.
 One-notch downgrade Two-notch downgrade
 (in millions)
Amount of additional collateral to be posted upon downgrade$33
 $183
Notional Value of Derivative Contracts  The following table summarizes the notional values of derivative contracts:

June 30, 2020 December 31, 2019
 (in millions)
Interest rate:   
Futures and forwards$492,827
 $597,980
Swaps1,633,572
 2,130,442
Options written85,733
 158,861
Options purchased90,289
 164,265
 2,302,421
 3,051,548
Foreign exchange:   
Swaps, futures and forwards1,114,801
 1,362,959
Options written31,766
 44,876
Options purchased31,970
 46,085
Spot81,472
 67,060
 1,260,009
 1,520,980
Commodities, equities and precious metals:   
Swaps, futures and forwards65,008
 55,678
Options written35,138
 39,035
Options purchased45,260
 49,517
 145,406
 144,230
Credit derivatives83,278
 90,049
Other contracts(1)
1,074
 1,044
Total$3,792,188
 $4,807,851
March 31, 2021December 31, 2020
 (in millions)
Interest rate:
Futures and forwards$24,317 $37,098 
Swaps299,206 406,609 
Options written20,766 33,269 
Options purchased22,579 32,427 
Total interest rate366,868 509,403 
Foreign exchange:
Swaps, futures and forwards1,132,775 1,195,449 
Options written36,859 53,200 
Options purchased37,250 53,595 
Spot40,632 57,040 
Total foreign exchange1,247,516 1,359,284 
Commodities, equities and precious metals:
Swaps, futures and forwards62,759 54,458 
Options written10,340 17,078 
Options purchased19,783 27,083 
Total commodities, equities and precious metals92,882 98,619 
Credit derivatives43,387 52,611 
Other contracts(1)
1,177 1,216 
Total$1,751,830 $2,021,133 
(1)
Consists of swap agreements entered into in conjunction with the sales of Visa Class B Shares.

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

10. Fair Value Option
We report our results to HSBC in accordance with HSBC Group accounting and reporting policies ("Group Reporting Basis"), which apply International Financial Reporting Standards ("IFRSs") as issued by the International Accounting Standards Board ("IASB") and endorsed by the European Union ("EU"). We typically have elected to apply fair value option ("FVO") accounting to selected financial instruments to align the measurement attributes of those instruments under U.S. GAAP and the Group Reporting Basis and to simplify the accounting model applied to those financial instruments. We elected to apply FVO accounting to certain commercial loans held for sale, certain securities purchased and sold under resale and repurchase agreements,student loans held for investment, certain fixed-rate long-term debt issuances and all of our hybrid instruments, including structured notes and deposits, and, beginning January 1, 2020, certain student loans held for investment.deposits. Excluding the fair value movement on fair value option liabilities attributable to our own credit spread, which is recorded in other comprehensive income, (loss), changes in the fair value of fair value option assets and liabilities as well as the mark-to-market adjustment on the related derivatives and the net realized gains or losses on these derivatives are reported in gain (loss) on instruments designated at fair value and related derivatives in the consolidated statement of income (loss).

HSBC USA Inc.

Loans and Loans Held For Sale We elected to apply FVO accounting to certain commercial syndicated loans which are originated with the intent to sell and certain commercial loans that we purchased from the secondary market and hold as hedges against our exposure to certain total return swaps and include these loans as loans held for sale in the consolidated balance sheet. Beginning January 1, 2020, weWe also elected to apply FVO accounting to certain student loans held for investment. These elections allow us to account for these loans at fair value which is consistent with the manner in which the instruments are managed. 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. Interest from these loans is recorded as interest income in the consolidated statement of income (loss). Because a substantial majority of the loans elected for the fair value option are floating ratefloating-rate commercial loans, changes in their fair value are primarily attributable to changes in loan-specific credit risk factors. The components of gain (loss) related to loans designated at fair value are
39

HSBC USA Inc.
summarized in the table below. At June 30, 2020, there were loans with a fair value of $5 million (unpaid principal balance of $9 million) for which the fair value option has been elected that were 90 days or more past due while there were no loans for which the fair value option has been elected in nonaccrual status. AtMarch 31, 2021 and December 31, 2019, no2020, 0 loans for which the fair value option has been elected were 90 days or more past due or in nonaccrual status.
Resale and Repurchase Agreements We elected to apply FVO accounting to certain securities purchased and sold under resale and repurchase agreements which are trading in nature. The election allows us to account for these resale and repurchase agreements at fair value which is consistent with the manner in which the instruments are managed. The fair value of the resale and repurchase agreements is determined using market rates currently offered on comparable transactions with similar underlying collateral and maturities. Interest on these resale and repurchase agreements is recorded as interest income or expense in the consolidated statement of income (loss). The components of gain (loss) related to these resale and repurchase agreements designated at fair value are summarized in the table below.
Long-Term Debt (Own Debt Issuances)  We elected to apply FVO accounting for certain fixed-rate long-term debt for which we had applied or otherwise would elect to apply fair value hedge accounting. The election allows us to achieve a similar accounting effect without having to meet the hedge accounting requirements. The own debt issuances elected under FVO are traded in secondary markets and, as such, the fair value is determined based on observed prices for the specific instruments. The observed market price of these instruments reflects the effect of changes to our own credit spreads and interest rates. Interest on the fixed-rate debt accounted for under FVO is recorded as interest expense in the consolidated statement of income (loss). Excluding the fair value movement attributable to our own credit spread, the components of gain (loss) in the consolidated statement of income (loss) related to long-term debt designated at fair value are summarized in the table below.
Hybrid Instruments  We elected to apply FVO accounting to all of our hybrid instruments issued, including structured notes and deposits. The valuation of the hybrid instruments is predominantly driven by the derivative features embedded within the instruments and our own credit risk. Cash flows of the hybrid instruments in their entirety, including the embedded derivatives, are discounted at an appropriate rate for the applicable duration of the instrument adjusted for our own credit spreads. The credit spreads applied to structured notes are determined with reference to our own debt issuance rates observed in the primary and secondary markets, internal funding rates, and structured note rates in recent executions while the credit spreads applied to structured deposits are determined using market rates currently offered on comparable deposits with similar characteristics and maturities. Interest on this debt is recorded as interest expense in the consolidated statement of income (loss). Excluding the fair value movement attributable to our own credit spread, the components of gain (loss) in the consolidated statement of income (loss) related to hybrid instruments designated at fair value are summarized in the table below.

HSBC USA Inc.

The following table summarizes the fair value and unpaid principal balance for items we account for under FVO:
Fair ValueUnpaid Principal BalanceFair Value Over (Under) Unpaid Principal Balance
Fair Value Unpaid Principal Balance Fair Value Over (Under) Unpaid Principal Balance (in millions)
(in millions)
At June 30, 2020     
At March 31, 2021At March 31, 2021
Student loans held for investment$35
 $37
 $(2)Student loans held for investment$30 $32 $(2)
Commercial loans held for sale45
 56
 (11)Commercial loans held for sale83 83 0 
Fixed rate long-term debt971
 741
 230
Fixed rate long-term debt933 741 192 
Hybrid instruments:     Hybrid instruments:
Structured deposits5,395
 6,092
 (697)Structured deposits3,765 3,448 317 
Structured notes8,350
 7,877
 473
Structured notes8,937 7,413 1,524 
At December 31, 2019     
At December 31, 2020At December 31, 2020
Student loans held for investmentStudent loans held for investment$32 $34 $(2)
Commercial loans held for sale$178
 $189
 $(11)Commercial loans held for sale36 36 0 
Securities sold under repurchase agreements373
 373
 —
Fixed rate long-term debt959
 741
 218
Fixed rate long-term debt1,030 741 289 
Hybrid instruments:     Hybrid instruments:
Structured deposits7,209
 7,491
 (282)Structured deposits4,155 3,844 311 
Structured notes9,388
 8,187
 1,201
Structured notes9,695 8,332 1,363 

40

HSBC USA Inc.

Components of Gain (Loss) on Instruments Designated at Fair Value and Related Derivatives  The following table summarizes the components of gain (loss) on instruments designated at fair value and related derivatives reflected in the consolidated statement of income (loss) for the three and six months ended June 30, 2020March 31, 2021 and 2019:2020:
 Loans and Loans Held for Sale 
Long-Term
Debt
 
Hybrid
Instruments
 Total
 (in millions)
Three Months Ended June 30, 2020       
Interest rate and other components(1)
$—
 $2
 $(1,089) $(1,087)
Credit risk component(2)(3)
5
 —
 —
 5
Total mark-to-market on financial instruments designated at fair value5
 2
 (1,089) (1,082)
Mark-to-market on related derivatives—
 —
 1,096
 1,096
Net realized gain on related long-term debt derivatives—
 8
 —
 8
Gain (loss) on instruments designated at fair value and related derivatives$5
 $10
 $7
 $22
        
Three Months Ended June 30, 2019       
Interest rate and other components(1)
$—
 $(100) $(422) $(522)
Credit risk component(2)
—
 —
 —
 —
Total mark-to-market on financial instruments designated at fair value—
 (100) (422) (522)
Mark-to-market on related derivatives—
 83
 413
 496
Net realized gain on related long-term debt derivatives—
 9
 —
 9
Gain (loss) on instruments designated at fair value and related derivatives$—
 $(8) $(9) $(17)
        
Six Months Ended June 30, 2020       
Interest rate and other components(1)
$—
 $(132) $490
 $358
Credit risk component(2)(3)
(49) —
 —
 (49)
Total mark-to-market on financial instruments designated at fair value(49) (132) 490
 309
Mark-to-market on related derivatives37
 150
 (510) (323)
Net realized gain on related long-term debt derivatives—
 14
 —
 14
Gain (loss) on instruments designated at fair value and related derivatives$(12) $32
 $(20) $—
        
Six Months Ended June 30, 2019       
Interest rate and other components(1)
$—
 $(169) $(1,434) $(1,603)
Credit risk component(2)
3
 —
 —
 3
Total mark-to-market on financial instruments designated at fair value3
 (169) (1,434) (1,600)
Mark-to-market on related derivatives—
 136
 1,419
 1,555
Net realized gain on related long-term debt derivatives—
 19
 —
 19
Gain (loss) on instruments designated at fair value and related derivatives$3
 $(14) $(15) $(26)
Loans and Loans Held for SaleLong-Term
Debt		Hybrid
Instruments		Total
(in millions)
Three Months Ended March 31, 2021
Interest rate and other components(1)
$0 $100 $(452)$(352)
Credit risk component(2)
1 0 0 1 
Total mark-to-market on financial instruments designated at fair value1 100 (452)(351)
Mark-to-market on related derivatives0 (108)468 360 
Net realized gain on related long-term debt derivatives0 9 0 9 
Gain (loss) on instruments designated at fair value and related derivatives$1 $1 $16 $18 
Three Months Ended March 31, 2020
Interest rate and other components(1)
$0 $(134)$1,579 $1,445 
Credit risk component(2)(3)
(54)0 0 (54)
Total mark-to-market on financial instruments designated at fair value(54)(134)1,579 1,391 
Mark-to-market on related derivatives37 150 (1,606)(1,419)
Net realized gain on related long-term debt derivatives0 6 0 6 
Gain (loss) on instruments designated at fair value and related derivatives$(17)$22 $(27)$(22)
(1)As it relates to hybrid instruments, interest rate and other components primarily includes interest rate, foreign exchange and equity contract risks.
(2)The fair value movement on fair value option liabilities attributable to our own credit spread is recorded in other comprehensive income.
(3)During the three months ended March 31, 2020, the loss in the credit risk component for loans and loans held for sale was attributable to the widening of credit spreads associated with certain commercial loans held for sale which were impacted by the COVID-19 pandemic.

41

(1)
As it relates to hybrid instruments, interest rate and other components primarily includes interest rate, foreign exchange and equity contract risks.
(2)
The fair value movement on fair value option liabilities attributable to our own credit spread is recorded in other comprehensive income (loss).
(3)
During six months ended June 30, 2020, the loss in the credit risk component for loans and loans held for sale was attributable to the widening of credit spreads associated with certain commercial loans held for sale which were impacted by the COVID-19 pandemic.

HSBC USA Inc.

11. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes certain items that are reported directly within a separate component of equity. The following table presents changes in accumulated other comprehensive income (loss) balances:
Three Months Ended March 31,20212020
 (in millions)
Unrealized gains (losses) on investment securities:
Balance at beginning of period$750 $(116)
Cumulative effect adjustment to initially apply new accounting guidance for measuring credit losses on securities available-for-sale, net of tax of $1 million(1)
— 2 
Balance at beginning of period, adjusted750 (114)
Other comprehensive income (loss) for period:
Net unrealized gains (losses) arising during period, net of tax of $(195) million and $245 million, respectively(613)775 
Reclassification adjustment for gains realized in net income (loss), net of tax of $(7) million and $(7) million, respectively(2)
(22)(21)
Provision for credit losses realized in net income (loss), net of tax of NaN and less than $1 million, respectively(3)
0 1 
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity realized in net income (loss), net of tax of $1 million and $1 million, respectively(4)
4 3 
Total other comprehensive income (loss) for period(631)758 
Balance at end of period119 644 
Unrealized gains (losses) on fair value option liabilities attributable to our own credit spread:
Balance at beginning of period15 (9)
Other comprehensive income (loss) for period:
Net unrealized gains (losses) arising during period, net of tax of $(3) million and $128 million, respectively(10)407 
Total other comprehensive income (loss) for period(10)407 
Balance at end of period5 398 
Unrealized gains (losses) on derivatives designated as cash flow hedges:
Balance at beginning of period(79)(151)
Other comprehensive income (loss) for period:
Net unrealized gains (losses) arising during period, net of tax of $(4) million and $28 million, respectively(13)85 
Reclassification adjustment for losses realized in net income (loss), net of tax of less than $1 million and $1 million, respectively(5)
1 5 
Total other comprehensive income (loss) for period(12)90 
Balance at end of period(91)(61)
Pension and postretirement benefit liability:
Balance at beginning and end of period(7)(3)
Total accumulated other comprehensive income at end of period$26 $978 
Three Months Ended June 30,2020 2019
 (in millions)
Unrealized gains (losses) on investment securities:   
Balance at beginning of period$644
 $(340)
Other comprehensive income (loss) for period:   
Net unrealized gains arising during period, net of tax of $41 million and $73 million, respectively129
 235
Reclassification adjustment for gains realized in net income (loss), net of tax of $(7) million and $(5) million, respectively(1)
(24) (18)
Provision for credit losses realized in net income (loss), net of tax of less than $1 million(2)
1
 —
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity realized in net income (loss), net of tax of $1 million and $1 million, respectively(3)
4
 3
Total other comprehensive income (loss) for period110
 220
Balance at end of period754
 (120)
Unrealized gains (losses) on fair value option liabilities attributable to our own credit spread:   
Balance at beginning of period398
 190
Other comprehensive income (loss) for period:   
Net unrealized gains (losses) arising during the period, net of tax of $(82) million and $2 million, respectively(261) 7
Total other comprehensive income (loss) for period(261) 7
Balance at end of period137
 197
Unrealized gains (losses) on derivatives designated as cash flow hedges:   
Balance at beginning of period(61) (145)
Other comprehensive income (loss) for period:   
Net unrealized losses arising during period, net of tax of nil and $(1) million, respectively—
 (1)
Reclassification adjustment for losses realized in net income (loss), net of tax of $1 million and $3 million, respectively(4)
3
 6
Total other comprehensive income for period3
 5
Balance at end of period(58) (140)
Pension and postretirement benefit liability:   
Balance at beginning and end of period(3) 8
Total accumulated other comprehensive income (loss) at end of period$830
 $(55)
    

HSBC USA Inc.
(1)See Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," in our 2020 Form 10-K for additional discussion.
(2)Amount reclassified to net income (loss) is included in other securities gains, net in our consolidated statement of income (loss).
(3)Changes in the allowance for credit losses on securities available-for-sale are included in the provision for credit losses in our consolidated statement of income (loss).
(4)Amount amortized to net income (loss) is included in interest income in our consolidated statement of income (loss). During 2014, we transferred securities from available-for-sale to held-to-maturity. At the date of transfer, AOCI included net pretax unrealized losses related to the transferred securities which are being amortized over the remaining contractual life of each security as an adjustment of yield in a manner consistent with the amortization of any premium or discount.
(5)Amount reclassified to net income (loss) is included in net interest income in our consolidated statement of income (loss).

42

Six Months Ended June 30,2020 2019
 (in millions)
Unrealized gains (losses) on investment securities:   
Balance at beginning of period$(116) $(519)
Cumulative effect adjustment to initially apply new accounting guidance for measuring credit losses on securities available-for-sale, net of tax of $1 million(5)
2
 —
Balance at beginning of period, adjusted(114) (519)
Other comprehensive income (loss) for period:   
Net unrealized gains arising during period, net of tax of $286 million and $128 million, respectively906
 415
Reclassification adjustment for gains realized in net income (loss), net of tax of $(14) million and $(7) million, respectively(1)
(45) (23)
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity realized in net income (loss), net of tax of $2 million and $2 million, respectively(3)
7
 7
Total other comprehensive income for period868
 399
Balance at end of period754
 (120)
Unrealized gains (losses) on fair value option liabilities attributable to our own credit spread:   
Balance at beginning of period(9) 301
Other comprehensive income (loss) for period:   
Net unrealized gains (losses) arising during period, net of tax of $46 million and $(33) million, respectively146
 (104)
Total other comprehensive income (loss) for period146
 (104)
Balance at end of period137
 197
Unrealized gains (losses) on derivatives designated as cash flow hedges:   
Balance at beginning of period(151) (159)
Other comprehensive income (loss) for period:   
Net unrealized gains arising during period, net of tax of $28 million and $1 million, respectively85
 5
Reclassification adjustment for losses realized in net income (loss), net of tax of $2 million and $5 million, respectively(4)
8
 14
Total other comprehensive income for period93
 19
Balance at end of period(58) (140)
Pension and postretirement benefit liability:   
Balance at beginning of period(3) 11
Other comprehensive income (loss) for period:   
Change in unfunded pension and postretirement liability, net of tax of nil and $(1) million, respectively—
 (3)
Total other comprehensive loss for period—
 (3)
Balance at end of period(3) 8
Total accumulated other comprehensive income (loss) at end of period$830
 $(55)

(1)
Amount reclassified to net income (loss) is included in other securities gains, net in our consolidated statement of income (loss).
(2)
Changes in the allowance for credit losses on securities available-for-sale are included in the provision for credit losses in our consolidated statement of income (loss).
(3)
Amount amortized to net income (loss) is included in interest income in our consolidated statement of income (loss). During 2014, we transferred securities from available-for-sale to held-to-maturity. At the date of transfer, AOCI included net pretax unrealized losses related to the transferred securities which are being amortized over the remaining contractual life of each security as an adjustment of yield in a manner consistent with the amortization of any premium or discount.
(4)
Amount reclassified to net income (loss) is included in net interest income in our consolidated statement of income (loss).
(5)
See Note 21, "New Accounting Pronouncements," for additional discussion.


HSBC USA Inc.

12. Pension and Other Postretirement Benefits
Defined Benefit Pension Plan The following table below reflects the portion of pension expense and its related components of the combined HSBC North America Pension Plan (either the "HSBC North America Pension Plan" or the "Plan") which has been allocated to us and is recorded in our consolidated statement of income (loss). We have not been allocated any portion of the Plan's net pension liability.asset.
Three Months Ended March 31,20212020
 (in millions)
Interest cost on projected benefit obligation$10 $12 
Expected return on plan assets(15)(19)
Amortization of net actuarial loss0 2 
Administrative costs1 1 
Pension (income) expense$(4)$(4)
 Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019
 (in millions)
Interest cost on projected benefit obligation$12
 $14
 $24
 $29
Expected return on plan assets(20) (19) (39) (37)
Amortization of net actuarial loss2
 5
 4
 12
Administrative costs1
 1
 2
 2
Pension (income) expense$(5) $1
 $(9) $6
Postretirement Plans Other Than Pensions  Certain employees also participate in plans which provide medical and life insurance benefits to retirees and eligible dependents. These plans cover all eligible employees who meet certain age and vested service requirements. We have instituted dollar limits on payments under the plans to control the cost of future medical benefits. The following table reflects the components of the netNet periodic postretirement benefit cost:cost was less than $1 million during both the three months ended March 31, 2021 and 2020.

 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
 (in millions)
Interest cost on accumulated benefit obligation$1
 $1
 $1
 $1
Amortization of net actuarial gain(1) (1) (1) (1)
Net periodic postretirement benefit cost$—
 $—
 $—
 $—


HSBC USA Inc.

13. Fee Income from Contracts with Customers
The following table summarizes fee income from contracts with customers disaggregated by type of activity, as well as a reconciliation to total other revenues, during the three and six months ended June 30, 2020March 31, 2021 and 2019.2020. See Note 22, "Fee Income from Contracts with Customers," in our 20192020 Form 10-K for a description of the various types of fee-based activities and how revenue associated with these activities is recognized. There have been no significant changes in these activities since December 31, 2019.2020.
 Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019
 (in millions)
Credit card fees, net$9
 $18
 $20
 $30
Trust and investment management fees33
 31
 64
 61
Other fees and commissions:       
Account services58
 68
 119
 133
Credit facilities64
 81
 137
 150
Other fees15
 13
 32
 26
Total other fees and commissions137
 162
 288
 309
Servicing and other fees from HSBC affiliates81
 88
 169
 169
Insurance(1)
2
 4
 4
 6
Total fee income from contracts with customers262
 303
 545
 575
Other non-fee revenues202
 133
 306
 251
Total other revenues(2)
$464
 $436
 $851
 $826
Three Months Ended March 31,20212020
 (in millions)
Credit card fees, net$10 $11 
Trust and investment management fees29 31 
Other fees and commissions:
Account services70 61 
Credit facilities83 73 
Other fees12 17 
Total other fees and commissions165 151 
Servicing and other fees from HSBC affiliates83 88 
Insurance(1)
1 2 
Total fee income from contracts with customers288 283 
Other non-fee revenues96 104 
Total other revenues(2)
$384 $387 
(1)
Included within other income (loss) in the consolidated statement of income (loss).
(2)
See Note 15, "Business Segments," for a reconciliation of total other revenues on a U.S. GAAP basis to other operating income for each business segment under the Group Reporting Basis.
(1)Included within other income in the consolidated statement of income (loss).
(2)See Note 15, "Business Segments," for a reconciliation of total other revenues on a U.S. GAAP basis to other operating income for each business segment under the Group Reporting Basis.
Credit card fees, netWe recognized interchange fees of $13$18 million and $35$22 million during the three and six months ended June 30,March 31, 2021 and 2020, respectively, compared with $26 million and $48 million during the three and six months ended June 30, 2019, respectively. Credit card rewards program costs totaled $5$11 million and $18$13 million during the three and six months ended June 30,March 31, 2021 and 2020, respectively, compared with $10 million and $22 million during the three and six months ended June 30, 2019, respectively.
43

HSBC USA Inc.
Deferred Fee Income
Information related to deferred fee income on loan commitments, revolving credit facilities and standby letters of credit is included in Note 18, "Guarantee Arrangements, Pledged Assets and Repurchase Agreements," and Note 19, "Fair Value Measurements." Excluding these items, we had deferred fee income related to certain account service fees that are paid upfront and recognized over the service period and annual fees on credit cards which collectively was $3 million and $2 million at June 30, 2020both March 31, 2021 and December 31, 2019, respectively.2020. We expect to recognize this revenue over a remaining period of one year or less.
Other than trust and investment management fees as discussed in our 20192020 Form 10-K, we do not use significant judgments in the determination of the amount and timing of fee income from contracts with customers. Additionally, costs to obtain or fulfill contracts with customers were immaterial.



HSBC USA Inc.

14. Related Party Transactions
In the normal course of business, we conduct transactions with HSBC and its subsidiaries. HSBC policy requires that these transactions occur at prevailing market rates and terms and, where applicable, these transactions are compliant with United States banking regulations. All extensions of credit by (and certain credit exposures of) HSBC Bank USA, National Association (together with its subsidiaries, "HSBC Bank USA") to other HSBC affiliates (other than Federal Deposit Insurance Corporation insured banks) are legally required to be secured by eligible collateral. The following tables present related party balances and the income (expense) generated by related party transactions:

June 30, 2020
December 31, 2019
 (in millions)
Assets:   
Cash and due from banks$466
 $850
Interest bearing deposits with banks135
 40
Securities purchased under agreements to resell(1)
2,153
 4,600
Trading assets86
 79
Loans1,565
 2,343
Other(2)
863
 456
Total assets$5,268
 $8,368
Liabilities:   
Deposits$15,790
 $9,000
Trading liabilities53
 293
Short-term borrowings295
 1,166
Long-term debt4,865
 7,848
Other(2)
210
 931
Total liabilities$21,213
 $19,238
March 31, 2021December 31, 2020
 (in millions)
Assets:
Cash and due from banks$607 $516 
Interest bearing deposits with banks104 187 
Securities purchased under agreements to resell(1)
724 3,941 
Trading assets98 314 
Loans1,652 1,100 
Other(2)
402 319 
Total assets$3,587 $6,377 
Liabilities:
Deposits$15,943 $15,163 
Trading liabilities(3)
44 2,375 
Short-term borrowings660 270 
Long-term debt3,528 2,878 
Other(2)
269 268 
Total liabilities$20,444 $20,954 
(1)Reflects purchases of securities under which other HSBC affiliates have agreed to repurchase.
(2)Other assets and other liabilities primarily consist of derivative balances associated with hedging activities and other miscellaneous account receivables and payables.
(3)The decrease in trading liabilities at March 31, 2021 primarily reflects a decrease in borrowing of gold inventory from HSBC Bank plc to support client activity levels.
44

(1)
Reflects purchases of securities under which other HSBC affiliates have agreed to repurchase.USA Inc.
Three Months Ended March 31,20212020
 (in millions)
Income (Expense):
Interest income$7 $26 
Interest expense(73)(120)
Net interest expense(66)(94)
Trading revenue (expense)131 (261)
Servicing and other fees from HSBC affiliates:
HSBC Bank plc48 47 
HSBC Markets (USA) Inc. ("HMUS")22 24 
Other HSBC affiliates13 17 
Total servicing and other fees from HSBC affiliates83 88 
Gain (loss) on instruments designated at fair value and related derivatives468 (1,606)
Support services from HSBC affiliates:
HTSU(244)(263)
HMUS(28)(27)
Other HSBC affiliates(95)(92)
Total support services from HSBC affiliates(367)(382)
Rental income from HSBC affiliates, net(1)
13 12 
Stock based compensation expense(2)
(6)(6)
(2)
Other assets and other liabilities primarily consist of derivative balances associated with hedging activities and other miscellaneous account receivables and payables.

HSBC USA Inc.
(1)We receive rental income from our affiliates, and in some cases pay rental expense to our affiliates, for rent on certain office space. Net rental income from our affiliates is recorded as a component of occupancy expense, net in our consolidated statement of income (loss).

(2)Employees may participate in one or more stock compensation plans sponsored by HSBC. These expenses are included in salaries and employee benefits in our consolidated statement of income (loss). Certain employees are also eligible to participate in a defined benefit pension plan and other postretirement plans sponsored by HSBC North America which are discussed in Note 12, "Pension and Other Postretirement Benefits."
 Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019
 (in millions)
Income (Expense):       
Interest income$12
 $47
 $38
 $90
Interest expense(79) (152) (199) (276)
Net interest expense(67) (105) (161) (186)
Trading revenue (expense)(356) (9) (617) (1,523)
Servicing and other fees from HSBC affiliates:       
HSBC Bank plc41
 46
 88
 81
HSBC Markets (USA) Inc. ("HMUS")26
 27
 50
 57
Other HSBC affiliates14
 15
 31
 31
Total servicing and other fees from HSBC affiliates81
 88
 169
 169
Gain (loss) on instruments designated at fair value and related derivatives1,096
 412
 (510) 1,420
Support services from HSBC affiliates:       
HTSU(272) (298) (535) (575)
HMUS(19) (23) (46) (50)
Other HSBC affiliates(98) (90) (190) (166)
Total support services from HSBC affiliates(389) (411) (771) (791)
Rental income from HSBC affiliates, net(1)
6
 12
 18
 24
Stock based compensation expense(2)
(7) (8) (13) (14)
(1)
We receive rental income from our affiliates, and in some cases pay rental expense to our affiliates, for rent on certain office space. Net rental income from our affiliates is recorded as a component of occupancy expense, net in our consolidated statement of income (loss).
(2)
Employees may participate in one or more stock compensation plans sponsored by HSBC. These expenses are included in salaries and employee benefits in our consolidated statement of income (loss). Certain employees are also eligible to participate in a defined benefit pension plan and other postretirement plans sponsored by HSBC North America which are discussed in Note 12, "Pension and Other Postretirement Benefits."
Funding Arrangements with HSBC Affiliates:
We use HSBC affiliates to fund a portion of our borrowing and liquidity needs.At June 30, 2020March 31, 2021 and December 31, 2019,2020, long-term debt with affiliates reflected $4.9$3.5 billion and $7.8$2.9 billion, respectively, of borrowings from HSBC North America. During the first quarter of 2020, $3.0 billion2021, $850 million of these borrowings were recharacterized as time deposits, including $1.5 billion of fixed-rate senior debt which matures in March 2021 and $1.5 billion of fixed-rate senior debt which matures in March 2026.repaid. The remaining outstanding balances include:
$2.0 billion of fixed-rate senior debt which matures in May 2021;
$0.9 billion of floating-rate subordinated debt which matures in May 2025; and
•$2.0 billion of fixed-rate senior debt which matures in September 2025.2025; and
•$1.5 billion of fixed-rate senior debt which was issued during the first quarter of 2021 and matures in June 2030.
We have a $150 million$4.0 billion uncommitted line of credit with HSBC North America. The available borrowing capacity under this facility is fungible between HSBC USA, HSBC Securities (USA) Inc. ("HSI") and HSBC North America, but total borrowings cannot collectively exceed $4.0 billion at any time. There was no0 outstanding balance under this credit facility at either June 30, 2020March 31, 2021 or December 31, 2019.2020.
We have also incurred short-term borrowings with certain affiliates, largely securities sold under repurchase agreements with HSBC Securities (USA) Inc. ("HSI").affiliates. In addition, certain affiliates have also placed deposits with us.
Lending and Derivative Related Arrangements Extended to HSBC Affiliates:
At June 30, 2020March 31, 2021 and December 31, 2019,2020, we had the following loan balances outstanding with HSBC affiliates:
March 31, 2021December 31, 2020
 (in millions)
HMUS and subsidiaries$1,591 $1,088 
Other short-term affiliate lending61 12 
Total loans$1,652 $1,100 
 June 30, 2020 December 31, 2019
 (in millions)
HMUS and subsidiaries$1,438
 $2,296
Other short-term affiliate lending127
 47
Total loans$1,565
 $2,343

HSBC USA Inc.

HMUS and subsidiaries We have extended loans and lines of credit, some of them uncommitted, to HMUS and its subsidiaries in the amount of $11.6 billion and $12.0 billion at both June 30, 2020March 31, 2021 and December 31, 20192020, respectively, of which $1.4$1.6 billion and $2.3$1.1 billion,, respectively, was outstanding. The maturities of the outstanding balances range from overnight to three months. Each borrowing is re-evaluated prior to its maturity date and either extended or allowed to mature.
45

HSBC USA Inc.
We have extended lines of credit to various other HSBC affiliates totaling $3.9 billion and $4.7 billion which did not0t have any outstanding balances at either June 30, 2020March 31, 2021 or December 31, 2019.2020.
Other short-term affiliate lending In addition to loans and lines extended to affiliates discussed above, from time to time we may extend loans to affiliates which are generally short term in nature. At June 30, 2020March 31, 2021 and December 31, 2019,2020, there were $127$61 million and $47$12 million,, respectively, of these loans outstanding.
Derivative contracts As part of a global HSBC strategy to offset interest rate or other market risks associated with certain securities, debt issues and derivative contracts with unaffiliated third parties, we routinely enter into derivative transactions with HSBC Bank plc and other HSBC affiliates. The notional value of derivative contracts related to these transactions was approximately $912.2$835.0 billion and $1,111.5$923.6 billion at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. The net credit exposure (defined as the net fair value of derivative assets and liabilities, including any collateral received) related to the contracts was approximately $167$110 million and $90$66 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. Our Global Banking and Markets business accountsWe account for these transactions on a mark to market basis, with the change in value of contracts with HSBC affiliates substantially offset by the change in value of related contracts entered into with unaffiliated third parties.
As discussed further in Note 2, "Strategic Initiatives," during the first quarter of 2021, we continued to transfer certain interest rate derivative contracts to HSBC Bank plc as part of our Restructuring Plan.
Services Provided Between HSBC Affiliates:
Under multiple service level agreements, we provide services to and receive services from various HSBC affiliates. These activities are summarized in Note 23, "Related Party Transactions," in our 20192020 Form 10-K. There have been no significant changes in these activities since December 31, 2019.2020.
Other Transactions with HSBC Affiliates:
At both June 30, 2020March 31, 2021 and December 31, 2019,2020, we had $1,265 million of non-cumulative preferred stock issued and outstanding to HSBC North America. See Note 18, "Preferred Stock," in our 20192020 Form 10-K for additional details.


15. Business Segments
We have four4 distinct business segments that we utilize for management reporting and analysis purposes, which are aligned with HSBC's global business strategy: Wealth and Personal Banking ("WPB") which was created in the second quarter of 2020 and is discussed further below, Commercial Banking ("CMB"), Global Banking and Markets ("GB&M"GBM") and a Corporate Center ("CC").
We previously announced as part of our Restructuring Plan that we would combinecombined our Retail Banking and Wealth Management ("RBWM") and Private Banking ("PB") businesses to create a single WPB business. During the second quarter of 2020, we implemented a change to our internal management reporting to begin reportingreport what was historically RBWM and PB together within athe newly created WPB segment and, as a result, we have aligned our segment reporting to reflect this change for all periods presented.
During the second quarter of 2020, we also decided to implementimplemented a change to our internal management reporting to begin allocating Balance Sheet Management ("BSM"),allocate Markets Treasury, which was historically reported within the CC segment, to the WPB, CMB and GB&MGBM businesses to better align the revenue and expense to the businesses generating or utilizing this activity. As a result, we have aligned our segment reporting to reflect this change for all periods presented.

46

HSBC USA Inc.

The following table summarizestables summarize the impact of these changes on reported segment profit (loss) before tax, total assets and total deposits as of and for the three months and six months ended June 30, 2019:March 31, 2020:
 
As
Previously
Reported
 
After
Reporting
Changes
 (in millions)
Segment profit (loss) before tax during the three months ended June 30, 2019:   
RBWM$(26) NR
WPBNR
 $(8)
CMB106
 114
GB&M94
 126
PB(4) NR
CC19
 (43)
    
Segment profit (loss) before tax during the six months ended June 30, 2019:   
RBWM$(72) NR
WPBNR
 $(34)
CMB221
 236
GB&M231
 295
PB(3) NR
CC16
 (104)
    
Segment total assets at June 30, 2019:   
RBWM(1)
$18,907
 NR
WPBNR
 $50,886
CMB26,735
 35,568
GB&M87,114
 126,864
PB(1)
6,952
 NR
CC76,055
 2,445
    
Segment total deposits at June 30, 2019:   
RBWM$33,606
 NR
WPBNR
 $42,942
CMB23,554
 24,299
GB&M29,674
 32,840
PB7,226
 NR
CC6,021
 —
As Previously ReportedAfter Reporting Changes
(in millions)
Segment profit (loss) before tax during the three months ended March 31, 2020:
RBWM$(546)NR
WPBNR$(869)
CMB(3)(2)
GBM43 45 
PB(323)NR
CC(169)(172)
Segment total assets at March 31, 2020:
RBWM$18,954 NR
WPBNR$58,246 
CMB31,540 42,882 
GBM114,802 165,838 
PB7,159 NR
CC97,154 2,643 
Segment total deposits at March 31, 2020:
RBWM$39,083 NR
WPBNR$48,800 
CMB32,309 32,844 
GBM40,417 42,671 
PB8,201 NR
CC4,305 0 
(1)
Segment total assets at June 30, 2019 included goodwill that was previously allocated to RBWM and PB of $581 million and $321 million, respectively.
NR Not Reported
There have been no additional changes in the basis of our segmentation as compared with the presentation in our 20192020 Form 10-K.
Net interest income of each segment represents the difference between actual interest earned on assets and interest incurred on liabilities of the segment, adjusted for a funding charge or credit that includes both interest rate and liquidity components. Segments are charged a cost to fund assets (e.g. customer loans) and receive a funding credit for funds provided (e.g. customer deposits) based on equivalent market rates that incorporate both repricing (interest rate risk) and tenor (liquidity) characteristics. The objective of these charges/credits is to transfer interest rate risk to one centralized unit in BSM. BSMMarkets Treasury. Markets Treasury income statement and balance sheet results are allocated to each of the global businesses based upon tangible equity levels and levels of any surplus liabilities.
Certain other revenue and operating expense amounts are also apportioned among the business segments based upon the benefits derived from this activity or the relationship of this activity to other segment activity. These inter-segment transactions have not been eliminated, and we generally account for them as if they were with third parties.

HSBC USA Inc.

Our segment results are presented in accordance with HSBC Group accounting and reporting policies, which apply IFRSs as issued by the IASB and endorsed by the EU, and, asIASB. As a result, our segment results are prepared and presented using financial information prepared on the Group Reporting Basis as operating results are monitored and reviewed, trends are evaluated and decisions about allocating resources, such as employees, are primarily made on this basis. We continue, however, to monitor capital adequacy and report to regulatory agencies on a U.S. GAAP basis.
There have been no changes in the measurement of segment profit as compared with the presentation in our 20192020 Form 10-K.
A summary of significant differences between U.S. GAAP and the Group Reporting Basis as they impact our results are summarized in Note 24, "Business Segments," in our 20192020 Form 10-K. Other than the changes discussed below, thereThere have been no other significant changes since December 31, 20192020 in the differences between U.S. GAAP and the Group Reporting Basis impacting our results.
Expected credit losses - As discussed further in Note 21, "New Accounting Pronouncements," on January 1, 2020, we adopted new accounting guidance under U.S. GAAP which requires entities to recognize an allowance for credit losses based on lifetime ECL. However, under the Group Reporting Basis for the requirements of IFRS 9, "Financial Instruments" ("IFRS 9"), only financial assets which are considered to have experienced a significant increase in credit risk or for which there is objective evidence of impairment require an allowance based on lifetime ECL. Under the Group Reporting Basis, financial assets which have not experienced a significant increase in credit risk since initial recognition only require an allowance based on expected credit losses resulting from default events that are possible within the next 12 months. Principally as a result of this difference, the allowance for credit losses remains higher under U.S. GAAP than under the Group Reporting Basis. In addition, the new guidance requires inclusion of expected recoveries, limited to the cumulative amount of prior write-offs, when estimating the allowance for credit losses for in scope financial assets (including collateral-dependent assets) under U.S. GAAP, which results in an impact to earnings substantially consistent with the Group Reporting Basis. Prior to January 1, 2020, these expected recoveries were not recognized under U.S. GAAP.
47

HSBC USA Inc.
The following table summarizes the results for each segment on a Group Reporting Basis, as well as provides a reconciliation of total results under the Group Reporting Basis to U.S. GAAP consolidated totals:
 Group Reporting Basis Consolidated Amounts   
WPBCMBGBMCCTotal
Group Reporting Basis
Adjustments(1)
Group Reporting Basis
Reclassi-
fications(2)
U.S. GAAP
Consolidated
Totals
 (in millions)
Three Months Ended March 31, 2021
Net interest income (expense)$209 $190 $95 $(1)$493 $4 $34 $531 
Other operating income87 66 246 11 410 5 (31)384 
Total operating income296 256 341 10 903 9 3 915 
Expected credit losses /
provision for credit losses		(2)(38)(51)0 (91)(136)0 (227)
298 294 392 10 994 145 3 1,142 
Operating expenses287 150 201 31 669 10 3 682 
Profit (loss) before income tax$11 $144 $191 $(21)$325 $135 $0 $460 
Balances at end of period:
Total assets$63,747 $44,170 $110,524 $1,508 $219,949 $(25,093)$0 $194,856 
Total loans, net24,513 22,785 11,676 0 58,974 (1,367)3,066 60,673 
Goodwill0 358 0 0 358 100 0 458 
Total deposits49,578 42,874 48,687 0 141,139 (4,472)11,915 148,582 
Three Months Ended March 31, 2020
Net interest income (expense)$232 $210 $90 $(13)$519 $3 $(18)$504 
Other operating income (expense)74 58 263 (24)371 (4)20 387 
Total operating income (expense)306 268 353 (37)890 (1)2 891 
Expected credit losses /
provision for credit losses		140 123 116 0 379 347 0 726 
166 145 237 (37)511 (348)2 165 
Operating expenses1,035 147 192 135 1,509 94 2 1,605 
Profit (loss) before income tax$(869)$(2)$45 $(172)$(998)$(442)$0 $(1,440)
Balances at end of period:
Total assets$58,246 $42,882 $165,838 $2,643 $269,609 $(64,532)$0 $205,077 
Total loans, net24,478 30,615 23,562 0 78,655 (4,596)6,738 80,797 
Goodwill0 358 0 0 358 100 0 458 
Total deposits48,800 32,844 42,671 0 124,315 (7,066)19,474 136,723 
 Group Reporting Basis Consolidated Amounts      
 WPB CMB GB&M CC Total 
Group Reporting Basis
Adjustments(1)
 
Group Reporting Basis
Reclassi-
fications(2)
 
U.S. GAAP
Consolidated
Totals
 (in millions)
Three Months Ended June 30, 2020            
Net interest income$197
 $204
 $122
 $(7) $516
 $2
 $20
 $538
Other operating income99
 52
 263
 85
 499
 (19) (16) 464
Total operating income296
 256
 385
 78
 1,015
 (17) 4
 1,002
Expected credit losses /
provision for credit losses
36
 181
 19
 —
 236
 (17) —
 219
 260
 75
 366
 78
 779
 —
 4
 783
Operating expenses326
 142
 201
 63
 732
 (9) 4
 727
Profit (loss) before income tax$(66) $(67) $165
 $15
 $47
 $9
 $—
 $56
                
Three Months Ended June 30, 2019            
Net interest income$265
 $206
 $156
 $(17) $610
 $3
 $(73) $540
Other operating income104
 60
 189
 12
 365
 (3) 74
 436
Total operating income369
 266
 345
 (5) 975
 —
 1
 976
Expected credit losses /
provision for credit losses
13
 9
 3
 —
 25
 23
 (2) 46
 356
 257
 342
 (5) 950
 (23) 3
 930
Operating expenses364
 143
 216
 38
 761
 10
 3
 774
Profit (loss) before income tax$(8) $114
 $126
 $(43) $189
 $(33) $—
 $156
                

HSBC USA Inc.
(1)Represents adjustments associated with differences between U.S. GAAP and the Group Reporting Basis.

(2)Represents differences in financial statement presentation between U.S. GAAP and the Group Reporting Basis.

 Group Reporting Basis Consolidated Amounts      
 WPB CMB GB&M CC Total 
Group Reporting Basis
Adjustments(1)
 
Group Reporting Basis
Reclassi-
fications(2)
 
U.S. GAAP
Consolidated
Totals
 (in millions)
Six Months Ended June 30, 2020            
Net interest income$429
 $414
 $212
 $(20) $1,035
 $5
 $2
 $1,042
Other operating income173
 110
 526
 61
 870
 (23) 4
 851
Total operating income602
 524
 738
 41
 1,905
 (18) 6
 1,893
Expected credit losses /
provision for credit losses
176
 304
 135
 —
 615
 330
 —
 945
 426
 220
 603
 41
 1,290
 (348) 6
 948
Operating expenses1,361
 289
 393
 198
 2,241
 85
 6
 2,332
Profit (loss) before income tax$(935) $(69) $210
 $(157) $(951) $(433) $—
 $(1,384)
Balances at end of period:              
Total assets$61,326
 $41,511
 $155,090
 $2,449
 $260,376
 $(47,514) $—
 $212,862
Total loans, net24,059
 28,125
 17,673
 —
 69,857
 (3,931) 5,350
 71,276
Goodwill—
 358
 —
 —
 358
 100
 —
 458
Total deposits49,871
 39,245
 54,414
 —
 143,530
 (4,874) 17,377
 156,033
                
Six Months Ended June 30, 2019            
Net interest income$538
 $412
 $329
 $(45) $1,234
 $9
 $(141) $1,102
Other operating income194
 121
 379
 9
 703
 (20) 143
 826
Total operating income732
 533
 708
 (36) 1,937
 (11) 2
 1,928
Expected credit losses /
provision for credit losses
34
 15
 (14) —
 35
 64
 5
 104
 698
 518
 722
 (36) 1,902
 (75) (3) 1,824
Operating expenses732
 282
 427
 68
 1,509
 18
 (3) 1,524
Profit (loss) before income tax$(34) $236
 $295
 $(104) $393
 $(93) $—
 $300
Balances at end of period:              
Total assets$50,886
 $35,568
 $126,864
 $2,445
 $215,763
 $(31,700) $—
 $184,063
Total loans, net23,683
 25,792
 20,853
 —
 70,328
 (2,340) 3,877
 71,865
Goodwill902
 358
 —
 —
 1,260
 347
 —
 1,607
Total deposits42,942
 24,299
 32,840
 —
 100,081
 (3,434) 20,314
 116,961
(1)
Represents adjustments associated with differences between U.S. GAAP and the Group Reporting Basis.
(2)
Represents differences in financial statement presentation between U.S. GAAP and the Group Reporting Basis.


HSBC USA Inc.

16. Retained Earnings and Regulatory Capital Requirements
Bank dividends are one of the sources of funds used for payment of shareholder dividends and other HSBC USA cash needs. Approval from the Office of the Comptroller of the Currency ("OCC") is required if the total of all dividends HSBC Bank USA declares in any year exceeds the cumulative net income for that year, combined with the net income for the two preceding years reduced by dividends attributable to those years. OCC approval also is required for a reduction of permanent capital of HSBC Bank USA. Under a separate restriction, payment of dividends is prohibited in amounts greater than undivided profits then on hand, after deducting actual losses and bad debts. Bad debts are debts due and unpaid for a period of six months unless well secured, as defined, and in the process of collection.
In March 2020, the FRB announced it had reduced its reserve requirement to zero percent. Prior to the announcement, HSBC Bank USA was required to maintain reserve balances either in the form of vault cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. At December 31, 2019, HSBC Bank USA was required to maintain $2,475 million of reserve balances with the Federal Reserve Bank which were reported within interest bearing deposits with banks on the consolidated balance sheet.
48

HSBC USA Inc.
We are subject to regulatory capital rules issued by U.S. banking regulators including Basel III (the "Basel III rule"). A bank or bank holding company's failure to meet minimum capital requirements can result in certain mandatory actions and possibly additional discretionary actions by its regulators. The following table summarizes the capital amounts and ratios of HSBC USA and HSBC Bank USA, calculated in accordance with the Basel III rule at June 30, 2020March 31, 2021 and December 31, 2019:2020:
 June 30, 2020 December 31, 2019
  
Capital
Amount
 
Well-Capitalized 
Ratio(1)
 
Actual
Ratio
 
Capital
Amount
 
Well-Capitalized
Ratio(1)
 
Actual
Ratio
 (dollars are in millions)
Common equity Tier 1 ratio:           
HSBC USA$15,662
 4.5%
(2) 
13.1% $15,876
 4.5%
(2) 
13.1%
HSBC Bank USA17,913
 6.5
 15.3
 18,043
 6.5
 15.2
Tier 1 capital ratio:           
HSBC USA16,927
 6.0
 14.2
 17,141
 6.0
 14.1
HSBC Bank USA20,413
 8.0
 17.5
 20,543
 8.0
 17.3
Total capital ratio:           
HSBC USA20,820
 10.0
 17.4
 19,743
 10.0
 16.3
HSBC Bank USA23,140
 10.0
 19.8
 22,724
 10.0
 19.2
Tier 1 leverage ratio:           
HSBC USA16,927
 4.0
(2) 
8.1
 17,141
 4.0
(2) 
9.9
HSBC Bank USA20,413
 5.0
 10.0
 20,543
 5.0
 12.0
Supplementary leverage ratio ("SLR"):           
HSBC USA16,927
 3.0
(3) 
7.6
 17,141
 3.0
(3) 
6.9
HSBC Bank USA20,413
 3.0
(3) 
9.4
 20,543
 3.0
(3) 
8.4
Risk-weighted assets:(4)
           
HSBC USA119,380
     121,407
    
HSBC Bank USA116,707
     118,618
    
Adjusted quarterly average assets:(5)
           
HSBC USA208,230
     173,270
    
HSBC Bank USA205,153
     170,722
    
Total leverage exposure:(6)
           
HSBC USA221,490
     247,590
    
HSBC Bank USA217,494
     244,008
    
March 31, 2021December 31, 2020
  
Capital
Amount
Well-Capitalized 
Ratio(1)
 Actual
Ratio		Capital
Amount
Well-Capitalized
Ratio(1)
 Actual
Ratio
 (dollars are in millions)
Common equity Tier 1 ratio:(4)
HSBC USA$16,154 4.5 %(2)15.1 %$15,891 4.5 %(2)14.5 %
HSBC Bank USA18,374 6.5 17.2 18,180 6.5 16.4 
Tier 1 capital ratio:(4)
HSBC USA17,419 6.0 16.2 17,156 6.0 15.6 
HSBC Bank USA20,874 8.0 19.6 20,680 8.0 18.7 
Total capital ratio:(4)
HSBC USA20,080 10.0 18.7 20,680 10.0 18.8 
HSBC Bank USA23,314 10.0 21.8 23,303 10.0 21.1 
Tier 1 leverage ratio:
HSBC USA17,419 4.0 (2)8.8 17,156 4.0 (2)8.6 
HSBC Bank USA20,874 5.0 10.5 20,680 5.0 10.3 
Supplementary leverage ratio ("SLR"):
HSBC USA17,419 3.0 (3)8.3 17,156 3.0 (3)7.8 
HSBC Bank USA20,874 3.0 (3)9.9 20,680 3.0 (3)9.3 
Risk-weighted assets:(4)(5)
HSBC USA107,232 109,809 
HSBC Bank USA106,758 110,682 
Adjusted quarterly average assets:(6)
HSBC USA197,127 198,698 
HSBC Bank USA198,580 200,026 
Total leverage exposure:(7)
HSBC USA209,808 221,216 
HSBC Bank USA210,105 221,334 
(1)
(1)HSBC USA and HSBC Bank USA are categorized as "well-capitalized," as defined by their principal regulators. To be categorized as well-capitalized under regulatory guidelines, a banking institution must have the ratios reflected in the above table, and must not be subject to a directive, order, or written agreement to meet and maintain specific capital levels.

HSBC USA Inc.

(2)
There are no common equity Tier 1 or Tier 1 leverage ratio components in the definition of a well-capitalized bank holding company. The ratios shown are the regulatory minimums.
(3)
There is no SLR component in the definition of a well-capitalized banking institution. The ratios shown are the regulatory minimums.
(4)
Calculated using the generally-applicable Standardized Approach.
(5)
Represents the Tier 1 leverage ratio denominator which reflects quarterly average assets adjusted for amounts permitted to be deducted from Tier 1 capital.
(6)
Represents the SLR denominator which includes adjusted quarterly average assets plus certain off-balance sheet exposures.
In 2019, the FRB and the other federal banking agencies jointly finalized rules to implement the Economic Growth, Regulatory Relief and Consumer Protection Act ("Relief Act") that tailor the application of the enhanced prudential standards for large bank holding companies and foreign banking organizations (the "Tailoring Rules"). Under the Tailoring Rules, Category III firms and their depository institution subsidiaries such as HSBC North America and HSBC Bank USA are permittedcategorized as "well-capitalized," as defined by their principal regulators. To be categorized as well-capitalized under regulatory guidelines, a banking institution must maintain capital equal to opt-outor in excess of the requirementratios reflected in the above table, and must not be subject to recognize most elementsa directive, order, or written agreement to meet and maintain specific capital levels.
(2)There are no common equity Tier 1 or Tier 1 leverage ratio components in the definition of AOCIa well-capitalized bank holding company. The ratios shown are the regulatory minimums.
(3)There is no SLR component in the definition of a well-capitalized banking institution. The ratios shown are the regulatory capital.minimums.
(4)During the first quarter of 2021, it was determined that certain collateral did not qualify for risk-weighted asset reduction purposes under U.S. capital rules. As a result, reported risk-weighted assets were understated and reported Common equity Tier 1 capital, Tier 1 capital and Total capital ratios were overstated at HSBC North AmericaUSA and HSBC Bank USA made a one-time electionat December 31, 2020. We have revised December 31, 2020 amounts to opt-outconform to the current period presentation. The following table summarizes the impact of this change on reported risk-weighted assets and capital ratios as of December 31, 2020:
December 31, 2020
As Previously ReportedAs Revised
HSBC USAHSBC Bank USAHSBC USAHSBC Bank USA
(in millions)
Common equity Tier 1 ratio14.7 %17.2 %14.5 %16.4 %
Tier 1 capital ratio15.9 %19.6 %15.6 %18.7 %
Total capital ratio19.2 %22.0 %18.8 %21.1 %
Risk-weighted assets$107,808 $105,681 $109,809 $110,682 
49

HSBC USA Inc.
(5)Calculated using the requirement to include all components of AOCI (withgenerally-applicable Standardized Approach.
(6)Represents the exception of accumulated net gains and losses on cash flow hedges related to items that are not carried at fair value on the consolidated balance sheet) in common equity Tier 1 capital, effective beginning with March 31, 2020 reporting. At December 31, 2019, HSBC North America and HSBC Bank USA were requiredleverage ratio denominator which reflects quarterly average assets adjusted for amounts permitted to include all components of AOCI in regulatorybe deducted from Tier 1 capital.
(7)Represents the SLR denominator which includes adjusted quarterly average assets plus certain off-balance sheet exposures.
In response to the COVID-19 pandemic, in March 2020, the federal banking agencies issued an interima final rule that provides the option to transition in the regulatory capital impacts of the new current expected credit loss accounting standard over a five-year period. HSBC North America and HSBC Bank USA have elected the five-year transition option and, as a result, beginning in 2020, our capital ratios are reported in accordance with the transition rules in the interim final rule. Accordingly, during 2020 and 2021, we will exclude from regulatory capital the change in retained earnings resulting from adoption of the new accounting standard on January 1, 2020 as well as 25 percent of the change in the allowance for credit losses recognized between January 1, 2020 and December 31, 2021. Beginning January 1, 2022, the excluded impacts will be phased in to regulatory capital over a three-year transition period and will be fully reflected at January 1, 2025.
In addition,Also in April 2020, the FRB issued an interim final rule adopting a temporary changeresponse to the calculation ofCOVID-19 pandemic, the SLRfederal banking agencies issued final rules that permits bankpermitted intermediate holding companies, such as HSBC North America, and depository institutions, such as HSBC Bank USA, to temporarily exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the denominator of their SLR. This change, which took effect April 1, 2020, will remain in place until March 31, 2021 and isThe rules were designed to allow banking institutions to expand their balance sheets to accommodate increased customer deposits while continuing to provide credit to companies and households. In May 2020, the federal banking agencies issued an interim final rule that permits depository institutions such as HSBC Bank USA to exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the denominator of their SLR. This changeThese changes took effect June 1,in 2020 and will remain in place until March 31,expired on April 1, 2021.


17. Variable Interest Entities
In the ordinary course of business, we have organized special purpose entities ("SPEs") primarily to structure financial products to meet our clients' investment needs, to facilitate clients to access and raise financing from capital markets and to securitize financial assets held to meet our own funding needs. For disclosure purposes, we aggregate SPEs based on the purpose, risk characteristics and business activities of the SPEs. An SPE is a VIE if it lacks sufficient equity investment at risk to finance its activities without additional subordinated financial support or, as a group, the holders of the equity investment at risk lack either a) the power through voting or similar rights to direct the activities of the entity that most significantly impacts the entity's economic performance; or b) the obligation to absorb the entity's expected losses, the right to receive the expected residual returns, or both.
Variable Interest EntitiesWe consolidate VIEs in which we hold a controlling financial interest as evidenced by the power to direct the activities of a VIE that most significantly impact its economic performance and the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE and therefore are deemed to be the primary beneficiary. We take into account our entire involvement in a VIE (explicit or implicit) in identifying variable interests that individually or in the aggregate could be significant enough to warrant our designation as the primary beneficiary and hence require us to consolidate the VIE or otherwise require us to make appropriate disclosures. We consider our involvement to be potentially significant where we, among other things, (i) enter into derivative contracts to absorb the risks and benefits from the VIE or from the assets held by the VIE; (ii) provide a financial guarantee that covers assets held or liabilities issued by a VIE; (iii) sponsor the VIE in that we design, organize and structure the transaction; and (iv) retain a financial or servicing interest in the VIE.
We are required to evaluate whether to consolidate a VIE when we first become involved and on an ongoing basis. In almost all cases, a qualitative analysis of our involvement in the entity provides sufficient evidence to determine whether we are the primary beneficiary. In rare cases, a more detailed analysis to quantify the extent of variability to be absorbed by each variable interest holder is required to determine the primary beneficiary.

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Consolidated VIEs  The following table summarizes assets and liabilities related to our consolidated VIEs at June 30, 2020March 31, 2021 and December 31, 20192020 which are consolidated on our balance sheet. Assets and liabilities exclude intercompany balances that eliminate in consolidation.
 March 31, 2021December 31, 2020
  
Consolidated
Assets		Consolidated
Liabilities		Consolidated
Assets		Consolidated
Liabilities
 (in millions)
Low income housing limited liability partnership:
Other assets$75 $— $79 $— 
Interest, taxes and other liabilities— 3 — 9 
Subtotal75 3 79 9 
Venture debt financing entity:
Loans8 — 10 — 
Interest, taxes and other liabilities— 2 — 1 
Subtotal8 2 10 1 
Total$83 $5 $89 $10 
 June 30, 2020 December 31, 2019
  
Consolidated
Assets
 
Consolidated
Liabilities
 
Consolidated
Assets
 
Consolidated
Liabilities
 (in millions)
Low income housing limited liability partnership:       
Other assets$86
 $—
 $98
 $—
Interest, taxes and other liabilities—
 23
 —
 38
Subtotal86
 23
 98
 38
Venture debt financing entity:       
Loans39
 —
 —
 —
Interest, taxes and other liabilities—
 —
 —
 —
Subtotal39
 —
 —
 —
Total$125
 $23
 $98
 $38
Low income housing limited liability partnershipIn 2009, all low income housing investments held by us at the time were transferred to a Limited Liability Partnership ("LLP") in exchange for debt and equity while a third party invested cash for an equity interest that was mandatorily redeemable. The LLP was created in order to ensure the utilization of future tax benefits from these low income housing tax projects. The LLP was deemed to be a VIE as it does not have sufficient equity investment at risk to finance its activities. Upon entering into this transaction, we concluded that we were the primary beneficiary of the LLP due to the nature of our continuing involvement and, as a result, we consolidated the LLP and reported the equity interest issued to the third party investor in long-term debt and the assets of the LLP in other assets on our consolidated balance sheet. The investments held by the LLP represent equity investments in the underlying low income housing partnerships. The LLP does not consolidate the underlying partnerships because it does not have the power to direct the activities of the partnerships that most significantly impact the economic performance of the partnerships. In 2019, the equity interest issued to the third party investor was redeemed.
As a practical expedient, weWe amortize our low income housing investments in proportion to the allocated tax benefits under the proportional amortization method and present the associated tax benefits net of investment amortization in income tax expense (benefit).
Venture debt financing entityDuring 2019, HSBC USA has organized and provided equity financing to HSBC Ventures USA Inc. ("HSBC Ventures"), an entity designed to provide debt financing to venture capital-backed companies generally in the form of term or revolving loans, or loan commitments. Given the typicallygenerally early stage and development of the companies, the loans are usuallytypically collateralized by all of the company's assets and intellectual property, or by specific items such as receivables or equipment. The loan terms may, at times, also include warrants for company stock granting HSBC Ventures a share of the financial returns in case of a positive realization event. HSBC USA also provides debt financing to HSBC Ventures in the form of loans on an as-needed basis. HSBC Ventures is a VIE because it does not have sufficient equity investment at risk to finance its activities. As the sole investor, HSBC USA is considered to be the primary beneficiary because it has the obligation to absorb losses and the right to receive benefits that could be potentially significant to HSBC Ventures. As a result, we consolidate HSBC Ventures and report the third party loans and warrants, if any, on our consolidated balance sheet.

HSBC USA Inc.

Unconsolidated VIEs  We also have variable interests in other VIEs that are not consolidated because we are not the primary beneficiary. The following table provides additional information on these unconsolidated VIEs, including the variable interests held by us and our maximum exposure to loss arising from our involvementsinvolvement in these VIEs, at June 30, 2020March 31, 2021 and December 31, 2019:2020:
Total Assets Held by Unconsolidated VIEsCarrying Value of Variable Interests Held Reported asMaximum
Exposure
to Loss
AssetsLiabilities
 (in millions)
At March 31, 2021
Limited partnership investments$4,713 $676 $330 $676 
At December 31, 2020
Limited partnership investments$4,266 $629 $285 $629 
51
 Total Assets Held by Unconsolidated VIEs Carrying Value of Variable Interests Held Reported as 
Maximum
Exposure
to Loss
  Assets Liabilities 
 (in millions)
At June 30, 2020       
Structured note vehicles$1,557
 $510
 $42
 $1,515
Limited partnership investments2,634
 597
 311
 597
Total$4,191
 $1,107
 $353
 $2,112
At December 31, 2019       
Structured note vehicles$1,524
 $510
 $9
 $1,515
Limited partnership investments2,160
 561
 300
 562
Total$3,684
 $1,071
 $309
 $2,077

HSBC USA Inc.
Information on the types of VIEs with which we are involved, the nature of our involvement and the variable interests held in those entities is presented below.
Structured note vehiclesWe provide derivatives, such as interest rate and currency swaps, to structured note vehicles and, in certain instances, invest in the vehicles' debt instruments. We hold variable interests in these structured note vehicles in the form of total return swaps under which we take on the risks and benefits of the structured notes they issue. The same risks and benefits are passed on to third party entities through back-end total return swaps. We earn a spread for facilitating the transaction. Since we do not have the power to direct the activities of the VIE and are not the primary beneficiary, we do not consolidate them. Our maximum exposure to loss is the notional amount of the derivatives wrapping the structured notes. The maximum exposure to loss of $1,515 million at June 30, 2020 would occur in the unlikely scenario where the value of the structured notes is reduced to zero and, at the same time, the counterparty of the back-end swap defaults with zero recovery. In certain instances, we hold credit default swaps with the structured note vehicles under which we receive credit protection on specified reference assets in exchange for the payment of a premium. Through these derivatives, the vehicles assume the credit risk associated with the reference assets which are then passed on to the holders of the debt instruments they issue. Because they create rather than absorb variability, the credit default swaps we hold are not considered variable interests. We record all investments in, and derivative contracts with, unconsolidated structured note vehicles at fair value on our consolidated balance sheet.
During the first quarter of 2019, one of the structured note vehicles was unwound and our investment in the structured note vehicle along with the related derivatives were terminated. As a result, we recognized a loss of approximately $39 million, reflecting a payment made to the derivative counterparty as a result of the termination. At the time of unwind, our investment in the structured note vehicle had a total carrying value of $1,293 million, which was recorded in trading assets on the consolidated balance sheet.
Limited partnership investmentsWe invest as a limited partner in partnerships that operate qualified affordable housing, renewable energy and community development projects. The returns of these investments are generated primarily from the tax benefits, including Federal tax credits and tax deductions from operating losses in the project companies. In addition, some of the investments also help us comply with the Community Reinvestment Act. Certain limited partnership structures are considered to be VIEs because either (a) they do not have sufficient equity investment at risk or (b) the limited partners with equity at risk do not have substantive kick-out rights through voting rights or substantive participating rights over the general partner. As a limited partner, we are not the primary beneficiary of the VIEs and do not consolidate them. Our investments in these partnerships are recorded in other assets on the consolidated balance sheet. The maximum exposure to loss shown in the table above represents our recorded investments as well as any outstanding funding commitments extended to the partnerships.
Third-party sponsored securitization entitiesWe invest in asset-backed securities issued by third party sponsored securitization entities which may be considered VIEs. The investments are transacted at arm's-length and decisions to invest are based on a credit analysis of the underlying collateral assets or the issuer. We are a passive investor in these issuers and do not have the power to direct the activities of these issuers. As such, we do not consolidate these securitization entities. Additionally, we do not have other involvements in servicing or managing the collateral assets or provide financial or liquidity support to these issuers which potentially give rise to risk of loss exposure. These investments are an integral part of the disclosure in Note 3, "Trading Assets and Liabilities," Note 4, "Securities," and Note 19, "Fair Value Measurements," and, therefore, are not disclosed in this note to avoid redundancy.



HSBC USA Inc.

18. Guarantee Arrangements, Pledged Assets and Repurchase Agreements
Guarantee ArrangementsAs part of our normal operations, we enter into credit derivatives and various off-balance sheet guarantee arrangements with affiliates and third parties. These arrangements arise principally in connection with our lending and client intermediation activities and include standby letters of credit and certain credit derivative transactions. The contractual amounts of these arrangements represent our maximum possible credit exposure in the event that we are required to fulfill the maximum obligation under the contractual terms of the guarantee.
The following table presents total carrying value and contractual amounts of our sell protection credit derivatives and major off-balance sheet guarantee arrangements at June 30, 2020March 31, 2021 and December 31, 2019.2020. Following the table is a description of the various arrangements.
 June 30, 2020 December 31, 2019
  
Carrying
Value
 
Notional / Maximum
Exposure to Loss
 
Carrying
Value
 
Notional / Maximum
Exposure to Loss
 (in millions)
Credit derivatives(1)(2)
$(448) $35,560
 $(63) $38,739
Financial standby letters of credit, net of participations(3)(4)
—
 5,520
 —
 5,657
Performance standby letters of credit, net of participations(3)(4)
—
 3,631
 —
 3,779
Total$(448) $44,711
 $(63) $48,175
 March 31, 2021December 31, 2020
  
Carrying
Value		Notional / Maximum
Exposure to Loss		Carrying
Value		Notional / Maximum
Exposure to Loss
 (in millions)
Credit derivatives(1)(2)
$91 $15,963 $144 $19,500 
Financial standby letters of credit, net of participations(3)(4)
0 5,832 0 5,703 
Performance standby letters of credit, net of participations(3)(4)
0 2,865 0 2,842 
Total$91 $24,660 $144 $28,045 
(1)
(1)Includes $13,448 million and $13,550 million of notional issued for the benefit of HSBC affiliates at March 31, 2021 and December 31, 2020, respectively.
(2)For credit derivatives, the maximum loss is represented by the notional amounts without consideration of mitigating effects from collateral or recourse arrangements.
(3)Includes $1,834 million and $1,836 million of both financial and performance standby letters of credit issued for the benefit of HSBC affiliates at March 31, 2021 and December 31, 2020, respectively.
(4)For standby letters of credit, maximum loss represents losses to be recognized assuming the letters of credit have been fully drawn and the obligors have defaulted with zero recovery.
Includes $16,444 million and $18,391 million of notional issued for the benefit of HSBC affiliates at June 30, 2020 and December 31, 2019, respectively.
(2)
For credit derivatives, the maximum loss is represented by the notional amounts without consideration of mitigating effects from collateral or recourse arrangements.
(3)
Includes $1,698 million and $1,623 million of both financial and performance standby letters of credit issued for the benefit of HSBC affiliates at June 30, 2020 and December 31, 2019, respectively.
(4)
For standby letters of credit, maximum loss represents losses to be recognized assuming the letters of credit have been fully drawn and the obligors have defaulted with zero recovery.
Credit-Risk Related Guarantees
Credit derivativesCredit derivatives are financial instruments that transfer the credit risk of a reference obligation from the credit protection buyer to the credit protection seller who is exposed to the credit risk without buying the reference obligation. We sell credit protection on underlying reference obligations (such as loans or securities) by entering into credit derivatives, primarily in the form of credit default swaps, with various institutions. We account for all credit derivatives at fair value. Where we sell credit protection to a counterparty that holds the reference obligation, the arrangement is effectively a financial
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guarantee on the reference obligation. Under a credit derivative contract, the credit protection seller will reimburse the credit protection buyer upon occurrence of a credit event (such as bankruptcy, insolvency, restructuring or failure to meet payment obligations when due) as defined in the derivative contract, in return for a periodic premium. Upon occurrence of a credit event, we will pay the counterparty the stated notional amount of the derivative contract and receive the underlying reference obligation. The recovery value of the reference obligation received could be significantly lower than its notional principal amount when a credit event occurs.
Certain derivative contracts are subject to master netting arrangements and related collateral agreements. A party to a derivative contract may demand that the counterparty post additional collateral in the event its net exposure exceeds certain predetermined limits and when the credit rating falls below a certain grade. We set the collateral requirements by counterparty such that the collateral covers various transactions and products, and is not allocated to specific individual contracts.

HSBC USA Inc.

We manage our exposure to credit derivatives using a variety of risk mitigation strategies where we enter into offsetting hedge positions or transfer the economic risks, in part or in entirety, to investors through the issuance of structured credit products. We actively manage the credit and market risk exposure in the credit derivative portfolios on a net basis and, as such, retain no or a limited net position at any time. The following table summarizes our net credit derivative positions at June 30, 2020March 31, 2021 and December 31, 2019:2020:
 June 30, 2020 December 31, 2019
  
Carrying / Fair
Value
 Notional 
Carrying / Fair
Value
 Notional
 (in millions)
Sell-protection credit derivative positions$(448) $35,560
 $(63) $38,739
Buy-protection credit derivative positions331
 47,718
 77
 51,310
Net position(1)
$(117) $12,158
 $14
 $12,571
 March 31, 2021December 31, 2020
  
Carrying / Fair
Value		NotionalCarrying / Fair
Value		Notional
 (in millions)
Sell-protection credit derivative positions$91 $15,963 $144 $19,500 
Buy-protection credit derivative positions67 27,424 (74)33,111 
Net position(1)
$158 $11,461 $70 $13,611 
(1)
Positions are presented net in the table above to provide a complete analysis of our risk exposure and depict the way we manage our credit derivative portfolio. The offset of the sell-protection credit derivatives against the buy-protection credit derivatives may not be legally binding in the absence of master netting agreements with the same counterparty. Furthermore, the credit loss triggering events for individual sell protection credit derivatives may not be the same or occur in the same period as those of the buy protection credit derivatives thereby not providing an exact offset.
(1)Positions are presented net in the table above to provide a complete analysis of our risk exposure and depict the way we manage our credit derivative portfolio. The offset of the sell-protection credit derivatives against the buy-protection credit derivatives may not be legally binding in the absence of master netting agreements with the same counterparty. Furthermore, the credit loss triggering events for individual sell protection credit derivatives may not be the same or occur in the same period as those of the buy protection credit derivatives thereby not providing an exact offset.
Standby letters of creditA standby letter of credit is issued to a third party for the benefit of a client and is a guarantee that the client will perform or satisfy certain obligations under a contract. It irrevocably obligates us to pay a specified amount to the third party beneficiary if the client fails to perform the contractual obligation. We issue two types of standby letters of credit: performance and financial. A performance standby letter of credit is issued where the client is required to perform some non-financial contractual obligation, such as the performance of a specific act, whereas a financial standby letter of credit is issued where the client's contractual obligation is of a financial nature, such as the repayment of a loan or debt instrument.
The issuance of a standby letter of credit is subject to our credit approval process and collateral requirements. We charge fees for issuing letters of credit commensurate with the client's credit evaluation and the nature of any collateral. Included in other liabilities are deferred fees on standby letters of credit amounting to $48 million and $52$44 million at June 30, 2020both March 31, 2021 and December 31, 2019, respectively.2020. Also included in other liabilities is an allowance for credit losses on unfunded standby letters of credit of $32$17 million and $26$32 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.
The following table summarizes the credit ratings related to guarantees including the ratings of counterparties against which we sold credit protection and financial standby letters of credit at June 30, 2020March 31, 2021 as an indicative proxy of payment risk:
 
Average
Life
(in years)
 Credit Ratings of the Obligors
Notional/Contractual AmountsInvestment
Grade		 
Non-Investment
Grade
 Total
   (dollars are in millions)
Sell-protection Credit Derivatives(1)
       
Single name credit default swaps ("CDS")3.0 $18,352
 $7,073
 $25,425
Index credit derivatives4.2 4,919
 3,964
 8,883
Total return swaps2.1 1,061
 191
 1,252
Subtotal  24,332
 11,228
 35,560
Standby Letters of Credit(2)
1.2 7,140
 2,011
 9,151
Total  $31,472
 $13,239
 $44,711
 Average
Life
(in years)		Credit Ratings of the Obligors
Notional/Contractual AmountsInvestment
Grade		Non-Investment
Grade		Total
 (dollars are in millions)
Sell-protection Credit Derivatives(1)
Single name credit default swaps ("CDS")2.6$8,767 $2,290 $11,057 
Index credit derivatives3.31,062 3,612 4,674 
Total return swaps5.651 181 232 
Subtotal9,880 6,083 15,963 
Standby Letters of Credit(2)
1.26,479 2,218 8,697 
Total$16,359 $8,301 $24,660 
(1)The credit ratings in the table represent external credit ratings for classification as investment grade and non-investment grade.
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(1)
The credit ratings in the table represent external credit ratings for classification as investment grade and non-investment grade.HSBC USA Inc.
(2)
(2)External ratings for most of the obligors are not available. Presented above are the internal credit ratings which are developed using similar methodologies and rating scale equivalent to external credit ratings for purposes of classification as investment grade and non-investment grade.
External ratings for most of the obligors are not available. Presented above are the internal credit ratings which are developed using similar methodologies and rating scale equivalent to external credit ratings for purposes of classification as investment grade and non-investment grade.
Our internal credit ratings are determined based on HSBC's risk rating systems and processes which assign a credit grade based on a scale which ranks the risk of default of a client. The credit grades are assigned and used for managing risk and determining level of credit exposure appetite based on the client's operating performance, liquidity, capital structure and debt service ability. In addition, we also incorporate subjective judgments into the risk rating process concerning such things as industry trends, comparison of performance to industry peers and perceived quality of management. We compare our internal risk ratings to outside external rating agency benchmarks, where possible, at the time of formal review and regularly monitor whether our risk ratings are comparable to the external ratings benchmark data.

HSBC USA Inc.

A non-investment grade rating of a referenced obligor has a negative impact to the fair value of the credit derivative and increases the likelihood that we will be required to perform under the credit derivative contract. We employ market-based parameters and, where possible, use the observable credit spreads of the referenced obligors as measurement inputs in determining the fair value of the credit derivatives. We believe that such market parameters are more indicative of the current status of payment/performance risk than external ratings by the rating agencies which may not be forward-looking in nature and, as a result, lag behind those market-based indicators.
Non Credit-Risk Related Guarantees and Other Arrangements
Visa covered litigationIn 2008, we received Class B Shares as part of Visa's initial public offering ("IPO"). Pursuant to the IPO, we, along with all the other Class B shareholders, agreed to indemnify Visa for the claims and obligations arising from certain specific covered litigation. The Class B Shares are not eligible to be converted into publicly traded Class A Shares until settlement of the covered litigation described in Note 29, "Litigation and Regulatory Matters" in our 20192020 Form 10-K. Accordingly, the Class B Shares are considered restricted and are only transferable under limited circumstances, which include transfers to other Class B shareholders.
In 2017, we sold substantially all of our remaining Visa Class B Shares to a third party. Under the terms of the sale agreements, we entered into swap agreements with the purchaser to retain the litigation risk associated with the Class B Shares sold until the related litigation is settled and the Class B Shares can be converted into Class A Shares. These swaps had a carrying value of $73$57 million and $85$67 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. The swap agreements we entered into with the purchaser requires us to (a) make periodic payments, calculated by reference to the market price of Class A Shares and (b) make or receive payments based on subsequent changes in the conversion rate of Class B Shares into Class A Shares. We have entered into a total return swap position to economically hedge the periodic payments made under these swap agreements. The payments under the derivative will continue until the Class B Shares are able to be converted into Class A Shares. The fair value of the swap agreements is estimated using a discounted cash flow methodology and is dependent upon the final resolution of the related litigation. Changes in fair value between periods are recognized in other income (loss). See Note 9, "Derivative Financial Instruments," for further information.
Clearing houses and exchangesWe are a member of various exchanges and clearing houses that trade and clear securities and/or derivatives contracts. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, members of a clearing house may be required to contribute to a guaranty fund to backstop members' obligations to the clearing house. As a member, we may be required to pay a proportionate share of the financial obligations of another member who defaults on its obligations to the exchange or the clearing house. Our guarantee obligations would arise only if the exchange or clearing house had exhausted its resources. Any potential contingent liability under these membership agreements cannot be estimated.
Lease ObligationsWe are obligated under a number of noncancellable operating leases for premises and equipment. See Note 10, "Leases"11, "Leases," in our 20192020 Form 10-K, for a full discussion of our leases, including a maturity analysis of our operating lease liabilities.
Mortgage Loan Repurchase ObligationsWe have providedoriginate and sell mortgage loans to third parties and provide various representations and warranties related to, the origination and sale of mortgage loans including, among other things, the ownership of the loans, the validity of the liens, the loan selection and origination process, and the compliance to the origination criteria established by the government agencies. In the event of a breach of our representations and warranties, we may be obligated to repurchase the loans with identified defects or to indemnify the buyers. Our contractual obligation arises only when the breach of representations and warranties are discovered and repurchase is demanded. From 2013 to 2017, we sold agency-eligible mortgage loan originations directly to PHH Mortgage Corporation and they are responsible for origination representations and warranties for all such loans. With the insourcing of our mortgage fulfillment operations, beginning with 2018 applications, we are now responsible for origination representations and warranties for all agency-eligible mortgage loan originations sold to third parties.
In estimating our repurchase liability arising from breaches of representations and warranties, we consider historical losses on residual risks not covered by settlement agreements adjusted for any risk factors not captured in the historical losses as well as the level of outstanding repurchase demands received. Outstanding repurchase demands received were immaterial at both June 30, 2020March 31, 2021 and December 31, 2019.2020.
Our estimated repurchase liability for obligations arising from the breach of representations and warranties associated with mortgage loans sold was $4 million and $3 million and $4 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. Our repurchase
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liability represents our best estimate of the loss that has been incurred, including interest, arising from breaches of representations and warranties associated with mortgage loans sold. Because the level of mortgage loan repurchase losses is dependent upon economic factors, investor demand strategies and other external risk factors such as housing market trends that may change, the level of the liability for mortgage loan repurchase losses requires significant judgment. We continue to evaluate our methods of determining the best estimate of loss based on recent trends. As these estimates are influenced by factors outside our control, there is uncertainty inherent in these estimates making it reasonably possible that they could change. The range of reasonably possible losses in excess of our recorded repurchase liability is between zero0 and $25$25 million at June 30, 2020.March 31, 2021. This estimated range of reasonably possible losses

HSBC USA Inc.

was determined based upon modifying the assumptions utilized in our best estimate of probable losses to reflect what we believe to be reasonably possible adverse assumptions.
Securitization ActivityIn addition to the repurchase risk described above, we have also been involved as a sponsor/seller of loans used to facilitate whole loan securitizations underwritten by our affiliate, HSI. In this regard, we began acquiring residential mortgage loans in 2005 which were warehoused on our balance sheet with the intent of selling them to HSI to facilitate HSI's whole loan securitization program which was discontinued in 2007. During 2005-2007, we purchased and sold $24 billion of such loans to HSI which were subsequently securitized and sold by HSI to third parties. See "Mortgage Securitization Matters" in Note 29, "Litigation and Regulatory Matters," in our 20192020 Form 10-K for additional discussion of related exposure. The outstanding principal balance on these loans was approximately $3.3$3.0 billion and $3.4$3.1 billion at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.
Pledged Assets
Pledged assets included in the consolidated balance sheet consisted of the following:
 June 30, 2020 December 31, 2019
 (in millions)
Interest bearing deposits with banks(1)
$3,509
 $2,682
Trading assets(2)
2,849
 525
Securities available-for-sale(3)
7,967
 6,814
Securities held-to-maturity(3)
1,363
 1,688
Loans(4) 
14,842
 14,342
Other assets(5)
4,293
 3,517
Total$34,823
 $29,568
March 31, 2021December 31, 2020
 (in millions)
Interest bearing deposits with banks(1)
$1,138 $2,158 
Trading assets(2)
1,115 1,265 
Securities available-for-sale(3)
8,781 8,652 
Securities held-to-maturity(3)
917 1,076 
Loans(4)
18,938 18,146 
Other assets(5)
1,566 2,352 
Total$32,455 $33,649 
(1)Represents gross amount of cash on deposit with banks related to derivative collateral-support agreements, of which a majority has been netted against derivative liabilities on the consolidated balance sheet.
(2)Trading assets are primarily pledged against liabilities associated with repurchase agreements.
(3)Securities are primarily pledged against derivatives, public fund deposits, trust deposits and various short-term and long term borrowings, as well as providing capacity for potential secured borrowings from the FHLB and the Federal Reserve Bank of New York.
(4)Loans are primarily residential mortgage loans pledged against current and potential borrowings from the FHLB and the Federal Reserve Bank of New York.
(5)Represents gross amount of cash on deposit with non-banks related to derivative collateral support agreements, of which a majority has been netted against derivative liabilities on the consolidated balance sheet.
(1)
Represents gross amount of cash on deposit with banks related to derivative collateral-support agreements, of which a majority has been netted against derivative liabilities on the consolidated balance sheet.
(2)
Trading assets are primarily pledged against liabilities associated with repurchase agreements.
(3)
Securities are primarily pledged against derivatives, public fund deposits, trust deposits and various short-term and long term borrowings, as well as providing capacity for potential secured borrowings from the FHLB and the Federal Reserve Bank of New York.
(4)
Loans are primarily residential mortgage loans pledged against current and potential borrowings from the FHLB and the Federal Reserve Bank of New York.
(5)
Represents gross amount of cash on deposit with non-banks related to derivative collateral support agreements, of which a majority has been netted against derivative liabilities on the consolidated balance sheet.
Debt securities pledged as collateral under repurchase agreements that can be sold or repledged by the secured party continue to be reported on the consolidated balance sheet. The fair value of securities available-for-sale that could be sold or repledged was $1,701$2,821 million and nil$2,077 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. The fair value of trading assets that could be sold or repledged was $2,849$1,115 million and $336$1,265 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.
The fair value of collateral we accepted under security resale agreements but was not reported on the consolidated balance sheet was $31,917$7,019 million and $19,174$41,447 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. Of this collateral, $31,067$6,619 million and $18,199$41,047 million could be sold or repledged at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, of which $308$1,046 million and $2,062$4,063 million,, respectively, had been sold or repledged as collateral under repurchase agreements or to cover short sales.
Repurchase Agreements
We enter into purchases of securities under agreements to resell (resale agreements) and sales of securities under agreements to repurchase (repurchase agreements) identical or substantially the same securities. Resale and repurchase agreements are accounted for as secured lending and secured borrowing transactions, respectively.
Repurchase agreements may require us to deposit cash or other collateral with the lender. In connection with resale agreements, it is our policy to obtain possession of collateral, which may include the securities purchased, with market value in excess of the
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HSBC USA Inc.
principal amount loaned. The market value of the collateral subject to the resale and repurchase agreements is regularly monitored, and additional collateral is obtained or provided when appropriate, to ensure appropriate collateral coverage of these secured financing transactions.

HSBC USA Inc.

The following table provides information about resale and repurchase agreements that are subject to offset at June 30, 2020March 31, 2021 and December 31, 2019:2020:
       Gross Amounts Not Offset in the Balance Sheet  
 Gross Amounts Recognized 
Gross Amounts Offset in the Balance Sheet(1)
 Net Amounts Presented in the Balance Sheet 
Financial Instruments(2)
 Cash Collateral Received / Pledged 
Net Amount(3)
 (in millions)
At June 30, 2020           
Assets:           
Securities purchased under resale agreements$31,873
 $2,618
 $29,255
 $29,236
 $—
 $19
Liabilities:           
Securities sold under repurchase agreements$4,837
 $2,618
 $2,219
 $2,219
 $—
 $—
            
At December 31, 2019           
Assets:           
Securities purchased under resale agreements$19,167
 $1,329
 $17,838
 $17,832
 $—
 $6
Liabilities:           
Securities sold under repurchase agreements$2,401
 $1,329
 $1,072
 $1,068
 $—
 $4
Gross Amounts Not Offset in the Balance Sheet
Gross Amounts Recognized
Gross Amounts Offset in the Balance Sheet(1)
Net Amounts Presented in the Balance Sheet
Financial Instruments(2)
Cash Collateral Received / Pledged
Net Amount(3)
(in millions)
At March 31, 2021
Assets:
Securities purchased under resale agreements$7,190 $3,430 $3,760 $3,687 $10 $63 
Liabilities:
Securities sold under repurchase agreements$5,147 $3,430 $1,717 $1,654 $62 $1 
At December 31, 2020
Assets:
Securities purchased under resale agreements$41,382 $5,636 $35,746 $35,746 $0 $0 
Liabilities:
Securities sold under repurchase agreements$7,401 $5,636 $1,765 $1,762 $0 $3 
(1)
(1)Represents recognized amount of resale and repurchase agreements with counterparties subject to legally enforceable netting agreements that meet the applicable netting criteria as permitted by generally accepted accounting principles.
(2)Represents securities received or pledged to cover financing transaction exposures.
(3)Represents the amount of our exposure that is not collateralized / covered by pledged collateral.
Represents recognized amount of resale and repurchase agreements with counterparties subject to legally enforceable netting agreements that meet the applicable netting criteria as permitted by generally accepted accounting principles.
(2)
Represents securities received or pledged to cover financing transaction exposures.
(3)
Represents the amount of our exposure that is not collateralized / covered by pledged collateral.
The following table provides the class of collateral pledged and remaining contractual maturity of repurchase agreements accounted for as secured borrowings at June 30, 2020March 31, 2021 and December 31, 2019:2020:
Overnight and ContinuousUp to 30 Days31 to 90 Days91 Days to One YearGreater Than One YearTotal
(in millions)
At March 31, 2021
U.S. Treasury, U.S. Government sponsored and U.S. Government agency securities$324 $1,928 $2,895 $0 $0 $5,147 
At December 31, 2020
U.S. Treasury, U.S. Government sponsored and U.S. Government agency securities$4,091 $2,810 $500 $0 $0 $7,401 

56
 Overnight and Continuous Up to 30 Days 31 to 90 Days 91 Days to One Year Greater Than One Year Total
 (in millions)
At June 30, 2020           
U.S. Treasury, U.S. Government sponsored and U.S. Government agency securities$421
 $2,993
 $1,423
 $—
 $—
 $4,837
            
At December 31, 2019           
U.S. Treasury, U.S. Government sponsored and U.S. Government agency securities$2,401
 $—
 $—
 $—
 $—
 $2,401



HSBC USA Inc.

19. Fair Value Measurements
Accounting principles related to fair value measurements provide a framework for measuring fair value that focuses on the exit price that would be received to sell an asset or paid to transfer a liability in the principal market (or in the absence of the principal market, the most advantageous market) accessible in an orderly transaction between willing market participants (the "Fair Value Framework"). Where required by the applicable accounting standards, assets and liabilities are measured at fair value using the "highest and best use" valuation premise. Fair value measurement guidance clarifies that financial instruments do not have alternative use and, as such, the fair value of financial instruments should be determined using an "in-exchange" valuation premise. However, the fair value measurement literatureguidance 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 AdjustmentsThe 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
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HSBC USA Inc.
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.

HSBC USA Inc.

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.


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HSBC USA Inc.

Assets and Liabilities Recorded at Fair Value on a Recurring BasisThe following table presents information about our assets and liabilities measured at fair value on a recurring basis at June 30, 2020March 31, 2021 and December 31, 2019,2020, 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, 2021Level 1Level 2Level 3Gross
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 $0 $2,695 $— $2,695 
Asset-backed securities:
Collateralized debt obligations0 66 0 66 — 66 
Residential mortgages0 0 24 24 — 24 
Student loans0 63 0 63 — 63 
Debt securities issued by foreign entities8,155 12 0 8,167 — 8,167 
Equity securities7,750 0 0 7,750 — 7,750 
Precious metals trading0 4,497 0 4,497 — 4,497 
Derivatives:(1)
Interest rate contracts7 3,670 3 3,680 0 3,680 
Foreign exchange contracts0 15,752 15 15,767 0 15,767 
Equity contracts0 3,991 466 4,457 0 4,457 
Precious metals contracts14 1,363 0 1,377 0 1,377 
Credit contracts0 289 50 339 0 339 
Other contracts(2)
0 0 7 7 0 7 
Derivatives netting0 0 0 0 (23,001)(23,001)
Total derivatives21 25,065 541 25,627 (23,001)2,626 
Securities available-for-sale:(3)
U.S. Treasury, U.S. Government agencies and sponsored enterprises15,091 16,417 0 31,508 — 31,508 
Asset-backed securities:
Home equity0 0 25 25 — 25 
Other0 0 105 105 — 105 
Debt securities issued by foreign entities2,947 74 0 3,021 — 3,021 
Loans(4)
0 30 0 30 — 30 
Loans held for sale(4)
0 83 0 83 — 83 
Other assets:
Mortgage servicing rights0 0 11 11 — 11 
Equity securities0 145 0 145 — 145 
Equity securities measured at net asset value(5)
0 0 0 137 — 137 
Total assets$36,580 $46,531 $706 $83,954 $(23,001)$60,953 
Liabilities:
Domestic deposits(4)
$0 $3,166 $599 $3,765 $— $3,765 
Trading liabilities, excluding derivatives655 0 0 655 — 655 
Derivatives:(1)
Interest rate contracts5 3,303 1 3,309 0 3,309 
Foreign exchange contracts0 14,678 17 14,695 0 14,695 
Equity contracts0 2,470 424 2,894 0 2,894 
Precious metals contracts0 1,228 0 1,228 0 1,228 
Credit contracts0 222 5 227 0 227 
Other contracts(2)
0 0 57 57 0 57 
Derivatives netting0 0 0 0 (20,594)(20,594)
Total derivatives5 21,901 504 22,410 (20,594)1,816 
Long-term debt(4)
0 9,384 486 9,870 — 9,870 
Total liabilities$660 $34,451 $1,589 $36,700 $(20,594)$16,106 

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HSBC USA Inc.
Fair Value Measurements on a Recurring Basis
Fair Value Measurements on a Recurring Basis
June 30, 2020Level 1 Level 2 Level 3 
Gross
Balance
 
Netting(6)
 
Net
Balance
December 31, 2020December 31, 2020Level 1Level 2Level 3Gross
Balance
Netting(6)
Net
Balance
(in millions) (in millions)
Assets:           Assets:
Trading assets, excluding derivatives:           Trading assets, excluding derivatives:
U.S. Treasury, U.S. Government agencies and sponsored enterprises$6,317
 $42
 $—
 $6,359
 $—
 $6,359
U.S. Treasury, U.S. Government agencies and sponsored enterprises$5,145 $192 $0 $5,337 $— $5,337 
Asset-backed securities:           Asset-backed securities:
Collateralized debt obligations—
 64
 —
 64
 —
 64
Collateralized debt obligations0 63 0 63 — 63 
Residential mortgages—
 —
 15
 15
 —
 15
Residential mortgages0 0 15 15 — 15 
Student loans—
 69
 —
 69
 —
 69
Student loans0 65 0 65 — 65 
Corporate and other domestic debt securities—
 —
 501
 501
 —
 501
Debt securities issued by foreign entities8,693
 108
 —
 8,801
 —
 8,801
Debt securities issued by foreign entities7,953 18 0 7,971 — 7,971 
Equity securities3,178
 —
 —
 3,178
 —
 3,178
Equity securities6,043 0 0 6,043 — 6,043 
Precious metals trading—
 10,139
 —
 10,139
 —
 10,139
Precious metals trading0 4,989 0 4,989 — 4,989 
Derivatives:(1)
           
Derivatives:(1)
Interest rate contracts9
 16,916
 33
 16,958
 —
 16,958
Interest rate contracts15 6,637 35 6,687 0 6,687 
Foreign exchange contracts—
 19,725
 —
 19,725
 —
 19,725
Foreign exchange contracts0 18,452 15 18,467 0 18,467 
Equity contracts—
 4,065
 377
 4,442
 —
 4,442
Equity contracts0 5,051 565 5,616 0 5,616 
Precious metals contracts1
 1,625
 —
 1,626
 —
 1,626
Precious metals contracts0 1,323 0 1,323 0 1,323 
Credit contracts—
 681
 115
 796
 —
 796
Credit contracts0 298 69 367 0 367 
Other contracts(2)
—
 —
 9
 9
 —
 9
Other contracts(2)
0 0 8 8 0 8 
Derivatives netting—
 —
 —
 —
 (40,153) (40,153)Derivatives netting0 0 0 0 (29,616)(29,616)
Total derivatives10
 43,012
 534
 43,556
 (40,153) 3,403
Total derivatives15 31,761 692 32,468 (29,616)2,852 
Securities available-for-sale:(3)
           
Securities available-for-sale:(3)
U.S. Treasury, U.S. Government agencies and sponsored enterprises22,091
 15,230
 —
 37,321
 —
 37,321
U.S. Treasury, U.S. Government agencies and sponsored enterprises22,880 12,528 0 35,408 — 35,408 
Asset-backed securities:           Asset-backed securities:
Home equity—
 20
 8
 28
 —
 28
Home equity0 0 27 27 — 27 
Other—
 —
 109
 109
 —
 109
Other0 0 104 104 — 104 
Debt securities issued by foreign entities4,172
 38
 —
 4,210
 —
 4,210
Debt securities issued by foreign entities1,942 3,191 0 5,133 — 5,133 
Loans(4)
—
 35
 —
 35
 —
 35
Loans(4)
0 32 0 32 — 32 
Loans held for sale(4)
—
 45
 —
 45
 —
 45
Loans held for sale(4)
0 36 0 36 — 36 
Other assets:           Other assets:
Mortgage servicing rightsMortgage servicing rights0 0 7 7 — 7 
Equity securities—
 148
 —
 148
 —
 148
Equity securities0 149 0 149 — 149 
Equity securities measured at net asset value(5)
—
 —
 —
 134
 —
 134
Equity securities measured at net asset value(5)
0 0 0 135 — 135 
Total assets$44,461
 $68,950
 $1,167
 $114,712
 $(40,153) $74,559
Total assets$43,978 $53,024 $845 $97,982 $(29,616)$68,366 
Liabilities:           Liabilities:
Domestic deposits(4)
$—
 $4,723
 $672
 $5,395
 $—
 $5,395
Domestic deposits(4)
$0 $3,509 $646 $4,155 $— $4,155 
Trading liabilities, excluding derivatives637
 19
 —
 656
 —
 656
Trading liabilities, excluding derivatives727 2,312 0 3,039 — 3,039 
Derivatives:(1)
           
Derivatives:(1)
Interest rate contracts12
 19,313
 —
 19,325
 —
 19,325
Interest rate contracts9 6,615 1 6,625 0 6,625 
Foreign exchange contracts—
 18,879
 2
 18,881
 —
 18,881
Foreign exchange contracts0 18,597 6 18,603 0 18,603 
Equity contracts—
 3,641
 285
 3,926
 —
 3,926
Equity contracts0 3,845 446 4,291 0 4,291 
Precious metals contracts99
 1,791
 —
 1,890
 —
 1,890
Precious metals contracts28 1,550 0 1,578 0 1,578 
Credit contracts—
 901
 53
 954
 —
 954
Credit contracts0 291 6 297 0 297 
Other contracts(2)
—
 —
 73
 73
 —
 73
Other contracts(2)
0 0 67 67 0 67 
Derivatives netting—
 —
 —
 —
 (42,282) (42,282)Derivatives netting0 0 0 0 (28,914)(28,914)
Total derivatives111
 44,525
 413
 45,049
 (42,282) 2,767
Total derivatives37 30,898 526 31,461 (28,914)2,547 
Long-term debt(4)
—
 8,974
 347
 9,321
 —
 9,321
Long-term debt(4)
0 10,277 448 10,725 — 10,725 
Total liabilities$748
 $58,241
 $1,432
 $60,421
 $(42,282) $18,139
Total liabilities$764 $46,996 $1,620 $49,380 $(28,914)$20,466 

HSBC USA Inc.
(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).
60

 Fair Value Measurements on a Recurring Basis
December 31, 2019Level 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$6,763
 $38
 $—
 $6,801
 $—
 $6,801
Asset-backed securities:           
Collateralized debt obligations—
 71
 —
 71
 —
 71
Residential mortgages—
 —
 17
 17
 —
 17
Student loans—
 80
 —
 80
 —
 80
Corporate and other domestic debt securities—
 —
 510
 510
 —
 510
Debt securities issued by foreign entities10,095
 221
 —
 10,316
 —
 10,316
Equity securities5,693
 —
 —
 5,693
 —
 5,693
Precious metals trading—
 1,909
 —
 1,909
 —
 1,909
Derivatives:(1)
           
Interest rate contracts110
 12,275
 10
 12,395
 —
 12,395
Foreign exchange contracts80
 16,456
 —
 16,536
 —
 16,536
Equity contracts—
 4,922
 185
 5,107
 —
 5,107
Precious metals contracts70
 1,085
 3
 1,158
 —
 1,158
Credit contracts—
 1,060
 79
 1,139
 —
 1,139
Other contracts(2)
—
 —
 10
 10
 —
 10
Derivatives netting—
 —
 —
 —
 (33,193) (33,193)
Total derivatives260
 35,798
 287
 36,345
 (33,193) 3,152
Securities available-for-sale:(3)
           
U.S. Treasury, U.S. Government agencies and sponsored enterprises17,532
 14,702
 —
 32,234
 —
 32,234
Asset-backed securities:           
Home equity—
 32
 —
 32
 —
 32
Other—
 —
 111
 111
 —
 111
Debt securities issued by foreign entities3,158
 128
 —
 3,286
 —
 3,286
Loans held for sale(4)
—
 178
 —
 178
 —
 178
Other assets:           
Equity securities—
 147
 —
 147
 —
 147
Equity securities measured at net asset value(5)
—
 —
 —
 136
 —
 136
Total assets$43,501
 $53,304
 $925
 $97,866
 $(33,193) $64,673
Liabilities:           
Domestic deposits(4)
$—
 $6,435
 $774
 $7,209
 $—
 $7,209
Trading liabilities, excluding derivatives1,182
 124
 —
 1,306
 —
 1,306
Derivatives:(1)
           
Interest rate contracts3
 13,570
 —
 13,573
 —
 13,573
Foreign exchange contracts—
 15,805
 1
 15,806
 —
 15,806
Equity contracts—
 3,955
 113
 4,068
 —
 4,068
Precious metals contracts80
 1,306
 3
 1,389
 —
 1,389
Credit contracts—
 1,048
 20
 1,068
 —
 1,068
Other contracts(2)
—
 —
 85
 85
 —
 85
Derivatives netting—
 —
 —
 —
 (33,900) (33,900)
Total derivatives83
 35,684
 222
 35,989
 (33,900) 2,089
Short-term borrowings(4)
—
 373
 —
 373
 —
 373
Long-term debt(4)
—
 9,993
 354
 10,347
 —
 10,347
Total liabilities$1,265
 $52,609
 $1,350
 $55,224
 $(33,900) $21,324

(1)
Includes trading derivative assets of $3,283 million and $3,055 million and trading derivative liabilities of $2,562 million and $1,929 million at June 30, 2020 and December 31, 2019, 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 (loss), 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 (loss). Changes in the allowance for credit losses on securities available-for-sale are recorded through net income (loss).

HSBC USA Inc.
(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.
(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 (loss), 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.
(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 liabilitiesThe following table summarizes additional information about changes in the fair value of Level 3 assets and liabilities during the three and six months ended June 30, 2020March 31, 2021 and 2019.2020. 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
EarningsOther Compre-
hensive
Income		EarningsOther Compre-
hensive
Income
 (in millions)
Assets:
Trading assets, excluding derivatives:(1)
Residential mortgage asset-backed securities$15 $9 $0 $0 $0 $0 $0 $0 $24 $9 $0 
Derivatives, net:(2)
Interest rate contracts34 (32)0 0 0 0 0 0 2 (17)0 
Foreign exchange contracts9 (11)0 0 0 0 0 0 (2)(12)0 
Equity contracts119 (22)0 0 0 (54)0 (1)42 (32)0 
Credit contracts63 (17)0 0 0 (1)0 0 45 (19)0 
Other contracts(3)
(59)2 0 0 0 7 0 0 (50)0 0 
Asset-backed securities available-for-sale(4)
131 0 1 0 0 (2)0 0 130 0 1 
Mortgage servicing rights(5)
7 1 0 0 3 0 0 0 11 1 0 
Total assets$319 $(70)$1 $0 $3 $(50)$0 $(1)$202 $(70)$1 
Liabilities:
Domestic deposits(6)
$(646)$4 $0 $0 $0 $28 $0 $15 $(599)$8 $0 
Long-term debt(6)
(448)(3)0 0 (123)89 (2)1 (486)4 0 
Total liabilities$(1,094)$1 $0 $0 $(123)$117 $(2)$16 $(1,085)$12 $0 
61

HSBC USA Inc.
Apr. 1,
2020		 
Total Realized / Unrealized Gains
(Losses) Included in
 
Purch-
ases
 
Issu-
ances
 
Settle-
ments
 
Transfers
Into
Level 3
 
Transfers
Out of
Level 3
 Jun. 30,
2020		 Current Period Unrealized Gains
(Losses) Still Held Included in		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		EarningsOther Compre-
hensive
Income		EarningsOther Compre-
hensive
Income
(in millions)   (in millions)
Assets:                     Assets:
Trading assets, excluding derivatives:(1)
                     
Trading assets, excluding derivatives:(1)
Residential mortgage asset-backed securities$16
 $(1) $—
 $—
 $—
 $—
 $—
 $—
 $15
 $(1) $—
Residential mortgage asset-backed securities$17 $(1)$0 $0 $0 $0 $0 $0 $16 $(1)$0 
Corporate and other domestic debt securities465
 36
 —
 —
 —
 —
 —
 —
 501
 36
 —
Corporate and other domestic debt securities510 (45)0 0 0 0 0 0 465 (45)0 
Derivatives, net:(2)
                     
Derivatives, net:(2)
Interest rate contracts41
 (8) —
 —
 —
 —
 —
 —
 33
 (8) —
Interest rate contracts10 31 0 0 0 0 0 0 41 31 0 
Foreign exchange contracts(3) 1
 —
 —
 —
 —
 —
 —
 (2) 1
 —
Foreign exchange contracts(1)(2)0 0 0 0 0 0 (3)(2)0 
Equity contracts(22) 107
 —
 —
 —
 6
 —
 1
 92
 113
 —
Equity contracts72 (74)0 0 0 6 0 0 4 12 0 
Credit contracts98
 (9) —
 —
 —
 (27) —
 —
 62
 (8) —
Credit contracts59 35 0 0 0 4 0 0 98 35 0 
Other contracts(3)
(58) (12) —
 —
 —
 6
 —
 —
 (64) —
 —
Other contracts(3)
(75)11 0 0 0 6 0 0 (58)0 0 
Asset-backed securities available-for-sale(4)
116
 —
 (7) —
 —
 —
 8
 —
 117
 —
 (7)
Asset-backed securities available-for-sale(4)
111 0 5 0 0 0 0 0 116 0 5 
Mortgage servicing rights(5)
Mortgage servicing rights(5)
4 (1)0 0 1 0 0 0 4 (1)0 
Total assets$653
 $114
 $(7) $—
 $—
 $(15) $8
 $1
 $754
 $133
 $(7)Total assets$707 $(46)$5 $0 $1 $16 $0 $0 $683 $29 $5 
Liabilities:                     Liabilities:
Domestic deposits(5)
$(678) $(13) $(16) $—
 $(7) $27
 $—
 $15
 $(672) $(16) $(16)
Long-term debt(5)
(320) (43) (8) —
 (37) 48
 —
 13
 (347) (41) (8)
Domestic deposits(6)
Domestic deposits(6)
$(774)$1 $18 $0 $(36)$105 $0 $33 $(653)$0 $18 
Long-term debt(6)
Long-term debt(6)
(354)5 10 0 (101)65 0 4 (371)4 10 
Total liabilities$(998) $(56) $(24) $—
 $(44) $75
 $—
 $28
 $(1,019) $(57) $(24)Total liabilities$(1,128)$6 $28 $0 $(137)$170 $0 $37 $(1,024)$4 $28 
                     

HSBC USA Inc.
(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).
62

 
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
 Jun. 30,
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
 $(2) $—
 $—
 $—
 $—
 $—
 $—
 $15
 $(2) $—
Corporate and other domestic debt securities510
 (9) —
 —
 —
 —
 —
 —
 501
 (9) —
Derivatives, net:(2)
                     
Interest rate contracts10
 23
 —
 —
 —
 —
 —
 —
 33
 23
 —
Foreign exchange contracts(1) (1) —
 —
 —
 —
 —
 —
 (2) (1) —
Equity contracts72
 12
 —
 —
 —
 6
 —
 2
 92
 24
 —
Credit contracts59
 26
 —
 —
 —
 (23) —
 —
 62
 27
 —
Other contracts(3)
(75) (1) —
 —
 —
 12
 —
 —
 (64) —
 —
Asset-backed securities available-for-sale(4)
111
 —
 (2) —
 —
 —
 8
 —
 117
 —
 (2)
Total assets$703
 $48
 $(2) $—
 $—
 $(5) $8
 $2
 $754
 $62
 $(2)
Liabilities:                     
Domestic deposits(5)
$(774) $13
 $2
 $—
 $(43) $82
 $—
 $48
 $(672) $7
 $2
Long-term debt(5)
(354) 38
 2
 —
 (138) 89
 —
 16
 (347) 23
 2
Total liabilities$(1,128) $51
 $4
 $—
 $(181) $171
 $—
 $64
 $(1,019) $30
 $4

HSBC USA Inc.

 Apr. 1,
2019		 
Total Realized / Unrealized Gains
(Losses) Included in
 
Purch-
ases
 
Issu-
ances
 
Settle-
ments
 
Transfers
Into
Level 3
 
Transfers
Out of
Level 3
 Jun. 30,
2019		 
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)
                     
Collateralized debt obligations$90
 $2
 $—
 $—
 $—
 $(6) $—
 $—
 $86
 $(4) $—
Residential mortgage asset-backed securities16
 —
 —
 —
 —
 —
 —
 —
 16
 —
 —
Student loan asset-backed securities95
 —
 —
 —
 —
 (5) —
 —
 90
 (5) —
Corporate and other domestic debt securities510
 —
 —
 —
 —
 —
 —
 —
 510
 —
 —
Derivatives, net:(2)
                     
Interest rate contracts7
 8
 —
 —
 —
 —
 —
 (5) 10
 3
 —
Foreign exchange contracts(1) —
 —
 —
 —
 —
 —
 —
 (1) —
 —
Equity contracts24
 39
 —
 —
 —
 1
 —
 (2) 62
 40
 —
Credit contracts53
 (3) —
 —
 —
 (4) —
 —
 46
 (2) —
Other contracts(3)
(37) (3) —
 —
 —
 5
 —
 —
 (35) —
 —
Asset-backed securities available-for-sale(4)
109
 —
 4
 —
 —
 —
 —
 —
 113
 —
 4
Other assets(6)
1
 —
 —
 —
 —
 —
 —
 —
 1
 —
 —
Total assets$867
 $43
 $4
 $—
 $—
 $(9) $—
 $(7) $898
 $32
 $4
Liabilities:                     
Domestic deposits(5)
$(949) $(35) $2
 $—
 $(49) $64
 $(5) $42
 $(930) $(32) $2
Long-term debt(5)
(453) (15) 1
 —
 (33) 20
 —
 39
 (441) (10) 1
Total liabilities$(1,402) $(50) $3
 $—
 $(82) $84
 $(5) $81
 $(1,371) $(42) $3
                      
                      

HSBC USA Inc.

 
Jan. 1,
2019
 
Total Realized / Unrealized Gains
(Losses) Included in
 
Purch-
ases
 
Issu-
ances
 
Settle-
ments
 
Transfers
Into
Level 3
 
Transfers
Out of
Level 3
 Jun. 30,
2019		 
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)
                     
Collateralized debt obligations$100
 $3
 $—
 $—
 $—
 $(17) $—
 $—
 $86
 $(10) $—
Residential mortgage asset-backed securities16
 —
 —
 —
 —
 —
 —
 —
 16
 —
 —
Student loan asset-backed securities92
 5
 —
 —
 —
 (7) —
 —
 90
 (2) —
Corporate and other domestic debt securities1,803
 —
 —
 —
 —
 (1,293) —
 —
 510
 —
 —
Derivatives, net:(2)
                     
Interest rate contracts2
 13
 —
 —
 —
 —
 —
 (5) 10
 8
 —
Foreign exchange contracts(1) —
 —
 —
 —
 —
 —
 —
 (1) —
 —
Equity contracts(52) 110
 —
 —
 —
 5
 —
 (1) 62
 115
 —
Credit contracts52
 (40) —
 —
 —
 34
 —
 —
 46
 (2) —
Other contracts(3)
(35) (9) —
 —
 —
 9
 —
 —
 (35) —
 —
Asset-backed securities available-for-sale(4)
107
 —
 6
 —
 —
 —
 —
 —
 113
 —
 6
Other assets(6)
4
 —
 —
 —
 —
 (3) —
 —
 1
 —
 —
Total assets$2,088
 $82
 $6
 $—
 $—
 $(1,272) $—
 $(6) $898
 $109
 $6
Liabilities:                     
Domestic deposits(5)
$(925) $(64) $(3) $—
 $(145) $109
 $(5) $103
 $(930) $(132) $(3)
Long-term debt(5)
(412) (43) (2) —
 (64) 33
 —
 47
 (441) (59) (2)
Total liabilities$(1,337) $(107) $(5) $—
 $(209) $142
 $(5) $150
 $(1,371) $(191) $(5)

(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 $534 million and derivative liabilities of $413 million at June 30, 2020 and derivative assets of $276 million and derivative liabilities of $194 million at June 30, 2019. 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 (loss) 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 (loss).
(5)
Excluding unrealized gains (losses) on fair value option liabilities attributable to our own credit spread, which are recorded in other comprehensive income (loss), 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).
(6)
Represented contingent consideration receivable associated with the sale of certain private banking client relationships, which concluded in 2019. Gains (losses) associated with this transaction were included in other income (loss) in the consolidated statement of income (loss).

HSBC USA Inc.

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 June 30, 2020March 31, 2021 and December 31, 2019:2020:
March 31, 2021
Financial Instrument TypeFair Value (in millions)Valuation Technique(s)Significant Unobservable InputsRange of Inputs
Weighted Average(1)
Residential mortgage asset-backed securities$24 Broker quotes or consensus pricing and, where applicable, discounted cash flowsPrepayment rates7%N/A
Conditional default rates51%N/A
Loss severity rates34%N/A
Discount margin527bpsN/A
Interest rate derivative contracts$2 Market comparable adjusted for probability to fund and, where applicable, discounted cash flows or option pricing modelProbability to fund for rate lock commitments36% - 100%85%
Likelihood of transaction being executed90%N/A
Interest rate yield curve8%N/A
Foreign exchange derivative contracts(2)
$(2)Option pricing modelImplied volatility of currency pairs8% - 12%10%
Cross-currency basis(4)bpsN/A
Equity derivative contracts(2)
$42 Option pricing modelEquity / Equity Index volatility6% - 87%36%
Equity / Equity and Equity / Index correlation36% - 96%48%
Equity dividend yields and forward price(5)% - 1%0%
Credit derivative contracts$45 Option pricing model and, where applicable, discounted cash flowsCredit default swap spreads96bps - 234bps102bps
Other derivative contracts$(50)Discounted cash flowsConversion rate1.6 timesN/A
Expected duration1.8 yearsN/A
Asset-backed securities available-for-sale$130 Discounted cash flowsMarket assumptions related to yields for comparable instruments2%N/A
Mortgage servicing rights$11 Discounted cash flowsConstant prepayment rates13% - 24%13%
Discount rate9% - 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 flowsImplied volatility of currency pairs8% - 12%10%
Equity / Equity Index volatility8% - 39%17%
Equity / Equity and Equity / Index correlation48% - 66%57%
Long-term debt (structured notes)(2)(3)
$(486)Option adjusted discounted cash flowsImplied volatility of currency pairs8% - 12%10%
Equity / Equity Index volatility8% - 64%26%
Equity / Equity and Equity / Index correlation48% - 96%88%
63

HSBC USA Inc.
December 31, 2020December 31, 2020
Financial Instrument TypeFinancial Instrument TypeFair Value (in millions)Valuation Technique(s)Significant Unobservable InputsRange of Inputs
Weighted Average(1)
June 30, 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 4% N/AResidential mortgage asset-backed securities$15 Broker quotes or consensus pricing and, where applicable, discounted cash flowsPrepayment rates10%N/A
   Conditional default rates 2% N/AConditional default rates5%N/A
   Loss severity rates 70% N/ALoss severity rates65%N/A
   Discount margin 575bps N/ADiscount margin500bpsN/A
Corporate and other domestic debt securities $501
 Discounted cash flows Spread volatility on collateral assets 11% N/A
   Correlation between insurance claim
shortfall and collateral value		 80% N/A
Interest rate derivative contracts $33
 Market comparable adjusted for probability to fund and, where applicable, discounted cash flows Probability to fund for rate lock commitments 41% - 100% 75%Interest rate derivative contracts$34 Market comparable adjusted for probability to fund and, where applicable, discounted cash flows or option pricing modelProbability to fund for rate lock commitments41% - 100%78%
     Likelihood of transaction being executed 90% N/ALikelihood of transaction being executed90%N/A
Interest rate yield curve4% - 7%6%
Foreign exchange derivative contracts(2)
 $(2) Option pricing model Implied volatility of currency pairs 8% - 11% 10%
Foreign exchange derivative contracts(2)
$9 Option pricing modelImplied volatility of currency pairs9% - 11%10%
Cross-currency basis(9)bps - 40bps24bps
Equity derivative contracts(2)
 $92
 Option pricing model Equity / Equity Index volatility 7% - 65% 40%
Equity derivative contracts(2)
$119 Option pricing modelEquity / Equity Index volatility0% - 67%27%
   Equity / Equity and Equity / Index correlation 44% - 78% 52%Equity / Equity and Equity / Index correlation17% - 62%30%
   Equity dividend yields and forward price (27)% - 1% (2)%Equity dividend yields and forward price(1)% - 0%0%
Credit derivative contracts $62
 Option pricing model and, where applicable, discounted cash flows Credit default swap spreads 155bps N/ACredit derivative contracts$63 Option pricing model and, where applicable, discounted cash flowsCredit default swap spreads150bpsN/A
Other derivative contracts $(64) Discounted cash flows Conversion rate 1.6 times N/AOther derivative contracts$(59)Discounted cash flowsConversion rate1.6 timesN/A
   Expected duration 3 years N/AExpected duration2 yearsN/A
Asset-backed securities available-for-sale $117
 Discounted cash flows Market assumptions related to yields for comparable instruments 1% - 4% 3%Asset-backed securities available-for-sale$131 Discounted cash flowsMarket assumptions related to yields for comparable instruments4%N/A
Mortgage servicing rightsMortgage servicing rights$7 Discounted cash flowsConstant prepayment rates17% - 26%19%
Discount rate9% - 10%9%
Estimated annualized costs to service$73 - $157 per account$76 per account
Domestic deposits (structured deposits)(2)(3)
 $(672) Option adjusted discounted cash flows Implied volatility of currency pairs 8% - 11% 10%
Domestic deposits (structured deposits)(2)(3)
$(646)Option adjusted discounted cash flowsImplied volatility of currency pairs9% - 11%10%
   Equity / Equity Index volatility 7% - 47% 21%Equity / Equity Index volatility0% - 42%15%
   Equity / Equity and Equity / Index correlation 44% - 60% 47%Equity / Equity and Equity / Index correlation43% - 47%45%
Long-term debt (structured notes)(2)(3)
 $(347) Option adjusted discounted cash flows Implied volatility of currency pairs 8% - 11% 10%
Long-term debt (structured notes)(2)(3)
$(448)Option adjusted discounted cash flowsImplied volatility of currency pairs9% - 11%10%
   Equity / Equity Index volatility 7% - 41% 25%Equity / Equity Index volatility0% - 67%23%
   Equity / Equity and Equity / Index correlation 48% - 78% 66%Equity / Equity and Equity / Index correlation32% - 62%52%


HSBC USA Inc.
(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.
December 31, 2019
Financial Instrument Type Fair Value (in millions) Valuation Technique(s) Significant Unobservable Inputs Range of Inputs 
Weighted Average(1)
Residential mortgage asset-backed securities $17
 Broker quotes or consensus pricing and, where applicable, discounted cash flows Prepayment rates 1% N/A
      Conditional default rates 8% N/A
      Loss severity rates 70% N/A
      Discount margin 600bps N/A
Corporate and other domestic debt securities $510
 Discounted cash flows Spread volatility on collateral assets 4% N/A
      Correlation between insurance claim shortfall and collateral value 80% N/A
Interest rate derivative contracts $10
 Market comparable adjusted for probability to fund and, where applicable, discounted cash flows Probability to fund for rate lock commitments 42% - 100% 80%
      Likelihood of transaction being executed 90% N/A
Foreign exchange derivative contracts(2)
 $(1) Option pricing model Implied volatility of currency pairs 6% - 11% 8%
Equity derivative contracts(2)
 $72
 Option pricing model Equity / Equity Index volatility 7% - 36% 22%
      Equity / Equity and Equity / Index correlation 43% - 79% 49%
      Equity dividend yields 0% - 4% 2%
Credit derivative contracts $59
 Option pricing model and, where applicable, discounted cash flows Credit default swap spreads 41bps N/A
Other derivative contracts $(75) Discounted cash flows Conversion rate 1.6 times N/A
      Expected duration 3 years N/A
Asset-backed securities available-for-sale $111
 Discounted cash flows Market assumptions related to yields for comparable instruments 0% - 3% 2%
Domestic deposits (structured deposits)(2)(3)
 $(774) Option adjusted discounted cash flows Implied volatility of currency pairs 6% - 11% 8%
      Equity / Equity Index volatility 7% - 28% 13%
      Equity / Equity and Equity / Index correlation 43% - 49% 46%
Long-term debt (structured notes)(2)(3)
 $(354) Option adjusted discounted cash flows Implied volatility of currency pairs 6% - 11% 8%
      Equity / Equity Index volatility 7% - 29% 16%
      Equity / Equity and Equity / Index correlation 54% - 79% 64%
(1)
For other asset-backed securities available-for-sale, the value shown is the arithmetic average. For foreign exchange derivatives, equity 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.
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•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.

HSBC USA Inc.

•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.
Corporate and domestic debt securities - The fair value measurement of certain corporate debt securities is affected by the fair value of the underlying portfolios of investments used as collateral and the make-whole guarantee provided by third party guarantors. The probability that the collateral fair value declines below the collateral call threshold concurrent with the guarantors' failure to perform its make whole obligation is unobservable. Generally, an increase (decrease) in the probability the collateral value falls below the collateral call threshold would have been accompanied by a directionally similar change in default probability of the guarantor and would have resulted in a lower (higher) fair value measurement of the securities.
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 decrease (increase) in thelower (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 MeasurementsDuring the three and six months ended June 30, 2020,March 31, 2021, we transferred $15 million and $48 million, respectively, of domestic deposits and $13$1 million and $16 million, respectively, of long-term debt, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer to maturity and there is more observability in short term volatility.
During the three and six months ended June 30, 2019,March 31, 2020, we transferred $42$33 million and $103 million, respectively, of domestic deposits and $39$4 million and $47 million, respectively, of long-term debt, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer in maturity and there is more observability in short term volatility.

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Assets and Liabilities Recorded at Fair Value on a Non-recurring BasisCertain 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 June 30, 2020March 31, 2021 and December 31, 2019.2020. The gains (losses) during the three and six months ended June 30,March 31, 2021 and 2020 and 2019 are also included.
 Non-Recurring Fair Value Measurements
at March 31, 2021		Total Gains (Losses) For the Three Months Ended March 31, 2021
  
Level 1Level 2Level 3Total
 (in millions)
Residential mortgage loans held for sale(1)
$0 $23 $0 $23 $0 
Consumer loans(2)
0 305 0 305 4 
Commercial loans(3)
0 0 226 226 19 
Real estate owned(4)
0 1 0 1 0 
Total assets at fair value on a non-recurring basis$0 $329 $226 $555 $23 
 Non-Recurring Fair Value Measurements
at June 30, 2020		 Total Gains (Losses) For the Three Months Ended June 30, 2020 Total Gains (Losses) For the Six Months Ended June 30, 2020
  
Level 1 Level 2 Level 3 Total
 (in millions)
Residential mortgage loans held for sale(1)
$—
 $4
 $—
 $4
 $—
 $—
Consumer loans(2)
—
 324
 —
 324
 4
 7
Commercial loans held for sale—
 —
 —
 —
 (9) (9)
Commercial loans(3)
—
 —
 355
 355
 (117) (170)
Real estate owned(4)
—
 2
 —
 2
 1
 1
Goodwill(5)
—
 —
 —
 —
 —
 (784)
Leases(6)
—
 —
 25
 25
 6
 (62)
Total assets at fair value on a non-recurring basis$—
 $330
 $380
 $710
 $(115) $(1,017)
 Non-Recurring Fair Value Measurements
at December 31, 2019		 Total Gains (Losses) For the Three Months Ended June 30, 2019 Total Gains (Losses) For the Six Months Ended June 30, 2019
  
Level 1 Level 2 Level 3 Total
 (in millions)
Residential mortgage loans held for sale(1)
$—
 $12
 $—
 $12
 $—
 $—
Consumer loans(2)
—
 14
 —
 14
 $(2) (4)
Commercial loans(3)
—
 —
 50
 50
 —
 (1)
Real estate owned(4)
—
 6
 —
 6
 —
 —
Goodwill(5)
—
 —
 372
 372
 —
 —
Leases(6)
—
 —
 2
 2
 —
 —
Total assets at fair value on a non-recurring basis$—
 $32
 $424
 $456
 $(2) $(5)
 Non-Recurring Fair Value Measurements
at December 31, 2020		Total Gains (Losses) For the Three Months Ended March 31, 2020
  
Level 1Level 2Level 3Total
 (in millions)
Residential mortgage loans held for sale(1)
$0 $4 $0 $4 $0 
Consumer loans(2)
0 312 0 312 3 
Commercial loans held for sale(5)
0 68 0 68 0 
Commercial loans(3)
0 0 270 270 (53)
Real estate owned(4)
0 1 0 1 0 
Goodwill(6)
0 0 0 0 (784)
Leases(7)
0 0 3 3 (68)
Total assets at fair value on a non-recurring basis$0 $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.
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(1)
At June 30, 2020 and December 31, 2019, 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. The increase at June 30, 2020 reflects the impact of adopting new accounting guidance which requires expected recoveries related to subsequent increases in the fair value of collateral for collateral-dependent loans to be recognized in the allowance for credit losses beginning January 1, 2020. See Note 21, "New Accounting Pronouncements," for additional discussion.
(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)
During the first quarter of 2020, the goodwill allocated to our previously separate RBWM and PB businesses were both written down to $0 million. During the third quarter of 2019, the goodwill allocated to our previously separate RBWM business was written down to $372 million. See Note 8, "Goodwill," in this Form 10-Q and Note 9, "Goodwill" in our 2019 Form 10-K for further discussion of the results of our goodwill impairment testing, including the events and circumstances leading to the impairments.
(6)
Beginning in the fourth quarter of 2019 and into 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 and Note 10, "Leases" in our 2019 Form 10-K for further discussion.


HSBC USA Inc.

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 June 30, 2020March 31, 2021 and December 31, 2019:2020:
At March 31, 2021
Financial Instrument TypeFair Value (in millions)Valuation Technique(s)Significant Unobservable InputsRange of Inputs
Weighted Average(1)
Commercial loans$226 Valuation of third party appraisal
on underlying collateral		Loss severity rates4% - 100%35%
At June 30, 2020          
Financial Instrument Type Fair Value (in millions) Valuation Technique(s) Significant Unobservable Inputs Range of Inputs 
Weighted Average(1)
Commercial loans $355
 Valuation of third party appraisal
on underlying collateral		 Loss severity rates 0% - 97% 29%
At December 31, 2019  
Financial Instrument Type Fair Value (in millions) Valuation Technique(s) Significant Unobservable Inputs Range of Inputs 
Weighted Average(1)
Commercial loans $50
 Valuation of third party appraisal
on underlying collateral		 Loss severity rates 9% - 100% 45%
At December 31, 2020
Financial Instrument TypeFair Value (in millions)Valuation Technique(s)Significant Unobservable InputsRange of Inputs
Weighted Average(1)
Commercial loans$270 Valuation of third party appraisal
on underlying collateral		Loss severity rates0% - 76%35%
(1)
(1)Weighted average is calculated based on the carrying value of the loans.
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.
Securities purchased and sold under resale and repurchase agreements designated under FVO - We elected to apply FVO accounting to certain securities purchased and sold under resale and repurchase agreements at fair value. The fair value of these resale and repurchase agreements is determined using market rates currently offered on comparable transactions with similar underlying collateral and maturities.
Consumer loans designated under FVO – Beginning January 1, 2020, weWe 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

HSBC USA Inc.

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
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sponsored mortgage-backed securities which do not transact in an active market, fair value is determined primarily based on pricing information obtained from pricing services and is verified by internal review processes.
•Asset-backed securities, including collateralized debt obligations ("CDOs")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 $36$32 million and $41$33 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.
The following tables provide additional information relating to our asset-backed securities, including CDOs, at June 30, 2020:March 31, 2021:
Trading asset-backed securities:
Rating of Securities:(1)
Rating of Securities:(1)
Collateral Type:Level 2Level 3Total
 (in millions)
Rating of Securities:(1)
Collateral Type:Level 2 Level 3 Total
 (in millions)
AAA - ACollateralized debt obligations$38
 $—
 $38
AAA - ACollateralized debt obligations$41 $0 $41 
Student loans69
 —
 69
Student loans63 0 63 
Total AAA - A107
 —
 107
Total AAA - A104 0 104 
BBB - BCollateralized debt obligations26
 —
 26
BBB - BCollateralized debt obligations25 0 25 
CCC - UnratedResidential mortgages - Subprime—
 15
 15
CCC - UnratedResidential mortgages - Subprime0 24 24 
 $133
 $15
 $148
$129 $24 $153 
Available-for-sale asset-backed securities:
Rating of Securities:(1)
Collateral Type:Level 2 Level 3 Total
  (in millions)
AAA - AHome equity - Alt A$20
 $8
 $28
BBB - BOther—
 109
 109
  $20
 $117
 $137
Rating of Securities:(1)
We utilize S&P as the primary source of credit ratings Collateral Type:Level 3
(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.millions)
AAA - AHome equity - Alt A$25 
BBB - BOther105 
$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,

HSBC USA Inc.

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
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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 notesand 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 debtdesignated 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.

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Additional Disclosures About the Fair Value of Financial Instruments that are Not Carried at Fair Value on the Consolidated Balance SheetThe 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 June 30, 2020March 31, 2021 and December 31, 2019,2020, and their classification within the fair value hierarchy:
March 31, 2021Carrying
Value		Fair
Value		Level 1Level 2Level 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 resell3,760 3,760 0 3,760 0 
Securities held-to-maturity, net of allowance for credit losses7,837 8,166 0 8,166 0 
Commercial loans, net of allowance for credit losses40,482 41,303 0 0 41,303 
Commercial loans held for sale173 173 0 173 0 
Consumer loans, net of allowance for credit losses20,161 19,508 0 0 19,508 
Residential mortgage loans held for sale95 96 0 96 0 
Financial liabilities:
Short-term financial liabilities$5,256 $5,256 $0 $5,243 $13 
Deposits144,817 144,821 0 144,821 0 
Long-term debt8,309 8,735 0 8,735 0 
June 30, 2020
Carrying
Value
 
Fair
Value
 Level 1 Level 2 Level 3
December 31, 2020December 31, 2020Carrying
Value		Fair
Value		Level 1Level 2Level 3
(in millions) (in millions)
Financial assets:         Financial assets:
Short-term financial assets, net of allowance for credit losses$19,021
 $19,021
 $1,266
 $17,734
 $21
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 resell29,255
 29,255
 —
 29,255
 —
Federal funds sold and securities purchased under agreements to resell35,746 35,746 0 35,746 0 
Securities held-to-maturity, net of allowance for credit losses11,635
 12,106
 —
 12,106
 —
Securities held-to-maturity, net of allowance for credit losses8,981 9,369 0 9,369 0 
Commercial loans, net of allowance for credit losses50,930
 51,922
 —
 —
 51,922
Commercial loans, net of allowance for credit losses40,785 41,417 0 0 41,417 
Commercial loans held for sale58
 58
 —
 58
 —
Commercial loans held for sale93 93 0 93 0 
Consumer loans, net of allowance for credit losses20,311
 19,857
 —
 —
 19,857
Consumer loans, net of allowance for credit losses20,256 19,865 0 0 19,865 
Residential mortgage loans held for sale44
 46
 —
 46
 —
Residential mortgage loans held for sale208 217 0 217 0 
Financial liabilities:         Financial liabilities:
Short-term financial liabilities$6,124
 $6,124
 $—
 $6,102
 $22
Short-term financial liabilities$4,965 $4,965 $0 $4,952 $13 
Deposits:         
Without fixed maturities135,816
 135,816
 —
 135,816
 —
Fixed maturities14,822
 14,850
 —
 14,850
 —
DepositsDeposits140,995 141,001 0 141,001 0 
Long-term debt16,425
 16,729
 —
 16,729
 —
Long-term debt9,254 9,720 0 9,720 0 
December 31, 2019
Carrying
Value
 
Fair
Value
 Level 1 Level 2 Level 3
 (in millions)
Financial assets:         
Short-term financial assets$3,800
 $3,800
 $1,744
 $2,038
 $18
Federal funds sold and securities purchased under agreements to resell17,838
 17,838
 —
 17,838
 —
Securities held-to-maturity13,293
 13,431
 —
 13,431
 —
Commercial loans, net of allowance for credit losses47,704
 49,252
 —
 —
 49,252
Commercial loans held for sale34
 34
 —
 34
 —
Consumer loans, net of allowance for credit losses20,212
 19,889
 —
 —
 19,889
Residential mortgage loans held for sale77
 78
 —
 77
 1
Financial liabilities:         
Short-term financial liabilities$3,304
 $3,304
 $—
 $3,286
 $18
Deposits:         
Without fixed maturities96,161
 96,161
 —
 96,161
 —
Fixed maturities16,323
 16,264
 —
 16,264
 —
Long-term debt16,350
 16,696
 —
 16,696
 —

HSBC USA Inc.

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 $155$139 million and $162$137 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.

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20. Litigation and Regulatory Matters
The following supplements, and should be read together with, the disclosure in Note 29, "Litigation and Regulatory Matters," in our 20192020 Form 10-K and in Note 20, "Litigation and Regulatory Matters," in our Form 10-Q for the three month period ended March 31, 2020 (the "2020 First Quarter Form 10-Q").10-K. Only those matters with significant updates and new matters since our disclosure in our 20192020 Form 10-K and our 2020 First Quarter Form 10-Q are reported herein.
In addition to the matters described below and in our 20192020 Form 10-K, and our 2020 First Quarter Form 10-Q, in the ordinary course of business, we are routinely named as defendants in, or as parties to, various legal actions and proceedings relating to activities of our current and/or former operations. These legal actions and proceedings may include claims for substantial or indeterminate compensatory or punitive damages, or for injunctive relief. In the ordinary course of business, we also are subject to governmental and regulatory examinations, information-gathering requests, investigations and proceedings (both formal and informal), certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. In connection with formal and informal inquiries by these regulators, we receive numerous requests, subpoenas and orders seeking documents, testimony and other information in connection with various aspects of our regulated activities.
Due to the inherent unpredictability of legal matters, including litigation, governmental and regulatory matters, particularly where the damages sought are substantial or indeterminate or when the proceedings or investigations are in the early stages, we cannot determine with any degree of certainty the timing or ultimate resolution of such matters or the eventual loss, fines, penalties or business impact, if any, that may result. We establish reserves for litigation, governmental and regulatory matters when those matters present loss contingencies that are both probable and can be reasonably estimated. Once established, reserves are adjusted from time to time, as appropriate, in light of additional information. The actual costs of resolving litigation and regulatory matters, however, may be substantially higher than the amounts reserved for those matters.
For the legal matters disclosed below, including litigation and governmental and regulatory matters, as well as for the legal matters disclosed in Note 29, "Litigation and Regulatory Matters," in our 20192020 Form 10-K, and in Note 20, "Litigation and Regulatory Matters," in our 2019 First Quarter Form 10-Q, as to which a loss in excess of accrued liability is reasonably possible in future periods and for which there is sufficient currently available information on the basis of which management believes it can make a reliable estimate, we believe a reasonable estimate could be as much as $175$150 million for HUSI. The legal matters underlying this estimate of possible loss will change from time to time and actual results may differ significantly from this current estimate.
In addition, based on the facts currently known for each of the ongoing investigations disclosed in Note 29, "Litigation and Regulatory Matters," in our 20192020 Form 10-K, and in Note 20, "Litigation and Regulatory Matters," in our 2019 First Quarter Form 10-Q, it is not practicable at this time for us to determine the terms on which these ongoing investigations will be resolved or the timing of such resolution. As matters progress, it is possible that any fines and/or penalties could be significant.
Given the substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an adverse outcome in certain of these matters could have a material adverse effect on our consolidated financial statements in any particular quarterly or annual period.
DeKalbMortgage Securitization Matters 
In 2013, Deutsche Bank National Trust Company, as trustee of HASCO 2007-NC1, filed a complaint in New York County et al. v. HSBC North America Holdings Inc., et al. (N.D. Ga. Case No. 12-CV-03640) The court dismissed the case with prejudice in July 2020 following finalizationSupreme Court, State of the settlement. This matter will no longer be reported.
County of Cook v. HSBC North America Holdings Inc., et al. (N.D. Ill. Case No. 1:14-cv-2031) The court dismissed the case with prejudice in July 2020 following finalization of the settlement. This matter will no longer be reported.
Foreign Exchange ("FX") Matters
New York, naming HSBC Bank USA has reached an agreement in principle to resolveas the ongoing investigation bysole defendant. The parties finalized the California Attorney General's Office, subject to final documentation and court approval. The full amountsettlement of the settlement was reservedmatter in the fourth quarter of 2019.
In June 2020, the Competition Commission of South African, having initially referred a complaint for proceedings before the South African Competition Tribunal in February 2017, filed a revised complaint against a total of 28 financial institutions, including HSBC Bank USA, for alleged anti-competitive behavior in the South African foreign exchange market.

HSBC USA Inc.

Precious Metals Fix Matters
PlatinumMarch 2021, and Palladium Fix Litigation Plaintiffs appealed the court's March 2020 order granting the defendants' joint motion to dismiss the third amended complaint.
Madoff Litigation
In the Picard v. HSBC et al action, the US Supreme Court denied the petition for a writ of certiorari filed by certain parties, including a number of foreign affiliates of HSBC Bank USA, seeking review of the Second Circuit Court of Appeals' reversal of the U.S. Bankruptcy Court decision dismissing claims against those entities. The matter is now pendingconcluded.
Mortgage Securitization Trust Litigation The court granted in part and denied in part the US Bankruptcy Court.
The appeal is fully briefedmotion to dismiss in the action brought by the liquidators of Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited (together "Fairfield"), which relates to the US Bankruptcy Court's December 2018 decision that partially granted defendants' motion to dismiss claims by the Fairfield liquidators and granted a motion by the liquidators to file amended complaints. We await a decision from the US District Court for the Southern District of New York, where the appeal is pending. The HSBC defendants also filed motions to dismiss the remaining claims in the US Bankruptcy Court in March 2020.
Benchmark Rate Litigation
Intercontinental Exchange ("ICE") LIBOR: Plaintiffs appealed the court’s March 2020 order granting the defendants' joint motion to dismiss the complaint.
Shareholder Derivative Action In May 2014, a shareholder derivative action was filed by a shareholder of HSBC purportedly on behalf of HSBC, HSBCIKB Bank USA, HSBC North America and HSBC USA (the "Nominal Corporate Defendants")AG in New York State court. A trial has been scheduled for Fall 2022 in the RMBS Recovery Holdings I, LLC case pending in Virginia state court against certain current and former directors and officers of the Nominal Corporate Defendants (the "Individual Defendants"), alleging that the Individual Defendants breached their fiduciary duties to the Nominal Corporate Defendants and caused a waste of corporate assets by allegedly permitting and/or causing the conduct underlying the five-year deferred prosecution agreement with the US Department of Justice entered into in December 2012. In January 2020, the parties reached a resolution in principle of the matter. Thereafter, in June 2020, plaintiffs filed a motion seeking court approval of the settlement reached among the parties and HSBC's directors and officers liability insurance carriers ("D&O carriers") to resolve the action. The settlement terms provide for a payment of $72.5 million by the D&O carriers, which will be paid to HSBC upon final court approval of the settlement and from which HSBC will be required to pay any settlement expenses and plaintiffs' attorneys' fees in an amount as ultimately approved by the court. HSBC also agreed as part of the settlement to continue for a period of time certain corporate governance practices. The court granted preliminary approval of the settlement in July 2020 and scheduled a final settlement approval hearing for October 2020.
Anti-Terrorism Act Cases
Charlotte Freeman,Mary Zapata, et al. v. HSBC Holdings plc, et al.In June 2020, Following the court granted defendants' motion to dismissUS Court of Appeals for the Freeman IISecond Circuit's decision affirming the lower court's dismissal of the action, that was filed in December 2018. Plaintiffs may appeal the decision.matter is now concluded.
Ryan BowmanDana Bernhardt et al. v. HSBC Holdings plc, et al.In June 2020,February 2021, plaintiffs filed an appeal of the court granteddecision granting the HSBC defendants' motion to dismiss. Plaintiffs may appeal
Rigoberto Vasquez and Eva Garcia et al v.Hong Kong and Shanghai Banking Corporation Ltd., HSBC Bank USA, N.A., et al. By agreement among the decision.parties, plaintiffs will dismiss the appeal. The matter is now concluded.
Based on the facts currently known, in respect of each of the above investigations, it is not practicable at this time for us to determine the terms on which these ongoing investigations will be resolved or the timing of such resolution or for us to estimate reliably the amounts, or range of possible amounts, of any fines and/or penalties. As matters progress, it is possible that any fines and/or penalties could be significant.

21. New Accounting Pronouncements
The following new accounting pronouncements were adopted effective January 1, 2020:
Financial Instruments - Credit Losses In June 2016, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update ("ASU") that significantly changes measurement of credit losses. The ASU requires recognition of lifetime ECL for loans, securities held-to-maturity, off-balance sheet credit exposures and certain other financial assets reported at amortized cost. In addition, the new guidance requires inclusion of expected recoveries of amounts previously written off, limited to the cumulative amount of prior write-offs, when estimating the allowance for credit losses for in scope financial assets (including collateral-dependent assets). For available-for-sale debt securities where fair value is less than cost, the ASU requires that credit-related impairment, if any, be recognized through an allowance for credit losses and adjusted each period for changes in credit risk. Modeling and economic forecasting requirements of the ASU are new and extensive, and the ASU's requirements differ significantly from the IFRS credit loss reporting that we implemented in 2018 for reporting to HSBC. The ASU also requires expanded disclosures. See Note 4, "Securities," Note 5, "Loans," and Note 6, "Allowance for Credit Losses," for the new disclosures required by this standard, including further discussion

HSBC USA Inc.

of our accounting policies and methodologies used to estimate ECL beginning in 2020. The adoption of this guidance required a cumulative effect adjustment to retained earnings as of January 1, 2020, which resulted in the following impacts:
◦a decrease in our allowance for credit losses on funded loans of $170 million;
◦an increase in our liability for off-balance sheet credit exposures of $54 million; and
◦including but not limited to the items above, an increase in retained earnings of $82 million, net of tax.
The decrease in our allowance for credit losses on loans was driven by a decrease of approximately $126 million for commercial loans reflecting the impact of their short contractual maturities and the benign credit environment at the time as well as a decrease of approximately $44 million for consumer loans as the impact of their lifetime losses was more than offset by expected recoveries of previous charge-offs of collateral-dependent residential mortgages. The liability for off-balance sheet credit exposures increased reflecting the inclusion of lifetime losses for expected funding over the remaining life of the exposures. The allowance for credit losses established on other financial assets was not material. In accordance with the new guidance, we elected the practical expedients to present accrued interest receivables, net of the related allowance for credit losses, in other assets on the consolidated balance sheet and to exclude accrued interest balances from the amortized cost basis for disclosure purposes. For credit card receivables, accrued interest is recognized in the loan balances as it is billed, with the related allowance recorded in the allowance for credit losses on loans.
In conjunction with our adoption of this guidance, we also elected fair value option on certain student loans held for investment and recorded a separate cumulative effect adjustment to write-up these loans to fair value which resulted in an increase in retained earnings of $2 million, after tax, as of January 1, 2020.
Reference Rate Reform In March 2020, the FASB issued an ASU that provides temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens associated with transitioning away from LIBOR and other interbank offered rates to acceptable alternative rates. Under the new guidance, an entity can elect by accounting topic or industry subtopic to account for the modification of a contract affected by reference rate reform as a continuation of the existing contract, if certain conditions are met. In addition, the new guidance allows an entity to elect on a hedge-by-hedge basis to continue to apply hedge accounting for hedging relationships in which the critical terms change due to reference rate reform, if certain conditions are met. These optional elections generally will cease to apply to contract modifications or existing hedging relationships after December 31, 2022. We elected to adopt this guidance during the second quarter of 2020, which did not have a material impact on our consolidated financial statements. As permitted under the ASU, we elected to sell all of our LIBOR-linked variable rate held-to-maturity securities maturing beyond 2021 during the second quarter of 2020. See Note 4, "Securities," for further discussion.
There have been no additional accounting pronouncements issued that are expected to have or could have a material impact on our consolidated financial statements.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain matters discussed throughout this Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make or approve certain statements in future filings with the United States Securities and Exchange Commission ("SEC"), in press releases, or oral or written presentations by representatives of HSBC USA Inc. ("HSBC USA" and, together with its subsidiaries, "HUSI") that are not statements of historical fact and may also constitute forward-looking statements. Words such as "may," "will," "should," "would," "could," "appears," "believe," "intends," "expects," "estimates," "targeted," "plans," "anticipates," "goal," and similar expressions are intended to identify forward-looking statements but should not be considered as the only means through which these statements may be made. All discussions related to strategy, including the matters discussed under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations - Executive Overview" and discussions of those matters elsewhere in this Form 10-Q are forward-looking statements. These matters or statements will relate to our future structure, operations, strategy, financial condition, economic forecast, results of operations, plans, objectives, performance or business developments and will involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from that which was expressed or implied by such forward-looking statements.
All forward-looking statements are, by their nature, subject to risks and uncertainties, many of which are beyond our control. Our actual future results may differ materially from those set forth in our forward-looking statements. While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those in the forward-looking statements:
•the impact of the coronavirus ("COVID-19") pandemic and subsequent outbreaks, including the economic downturn and recovery, effect on global trade and changes in customer behavior and corporate strategy;
•our ability to effectively implement and deliver on our business strategies, and the effect implementation of our business strategy may have on our operations and relationships with our customers, regulators, employees and other stakeholders;
•uncertainty concerning the future market and economic conditions in the United States and abroad, including but not limited to, changes in interest rates, energy prices and unemployment levels, a decline in housing prices, the availability of credit and liquidity, changes in consumer confidence and consumer spending and behavior, consumer perception as to the continuing availability of credit and price competition in the market segments we serve and the consequences of unexpected geopolitical events, such as trade disputes and the decision by the United Kingdom ("U.K.") to exit the European Union ("EU");disputes;
•compliance with the Chinese National Security Law and the Hong Kong Autonomy Act, which may impact, among other things, individuals or entities thatwith which we are able to conduct business with;business;
•changes in laws and regulatory requirements;
•the potential impact of any legal, regulatory or policy changes affecting financial institutions and the global economy as a result of the current Administration and upcoming elections in the U.S.;new administration;
•the ability to deliver on our regulatory priorities;
•capital and liquidity requirements under Basel guidance, the Federal Reserve Board's ("FRB") Comprehensive Capital Analysis and Review ("CCAR") program, and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank Act" or "Dodd-Frank") stress testing ("DFAST"), including the U.S. FRB requirements for U.S. global systemically important banks ("G-SIBs") and U.S. intermediate holding companies ("IHCs") owned by non-U.S. G-SIBs to issue total loss-absorbing capacity ("TLAC") instruments;
•regulatory requirements in the U.S. and in non-U.S. jurisdictions to facilitate the future orderly resolution of large financial institutions;
•changes in central banks' policies with respect to the provision or removal of liquidity support to financial markets;
•the ability of HSBC Holdings plc ("HSBC" and, together with its subsidiaries, "HSBC Group") and HSBC Bank USA, National Association (together with its subsidiaries, "HSBC Bank USA") to fulfill the requirements imposed by applicable consent orders or guidance from regulators generally;
•the use of us as a conduit for illegal activities without our knowledge by third parties;
•the ability to successfully manage our risks;
•the possibility of the inadequacy of our data management and policies and processes;
•the financial condition of our clients and counterparties and our ability to manage counterparty risk;

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•concentrations of credit and market risk;
•increases in our allowance for credit losses and changes in our assessment of our loan portfolios;
•the ability to successfully implement changes to our operational practices as needed and/or required from time to time;
•damage to our reputation;
•the ability to attract or retain key employees, including foreign workers, and customers;
•the effects of competition in the markets where we operate including increased competition from non-bank financial services companies, including securities firms;
•the effects of operational risks that are inherent in banking operations, including fraudulent and other criminal activities, breakdowns in processes or procedures and systems failure or non-availability;
•disruption in our operations from the external environment arising from events such as natural disasters, climate change, outbreaks of contagious disease, acts of war, terrorist attacks, or essential utility outages;
•a failure in or a breach of our operation or security systems or infrastructure, or those of third party servicers or vendors, including as a result of cyberattacks;
•the ability of third party suppliers, outsourcing vendors, off-shored functions and our affiliates to provide adequate services;
•losses suffered due to the negligence, fraud or misconduct of our employees or the negligence, fraud or misconduct on the part of third parties;
•a failure in our internal controls;
•our ability to meet our funding requirements;
•adverse changes to our credit ratings;
•financial difficulties or credit downgrades of mortgage bond insurers;
our ability to cross-sell our products to existing customers;
•changes in Financial Accounting Standards Board ("FASB") and International Accounting Standards Board ("IASB") accounting standards and their interpretation;
•heightened regulatory and government enforcement scrutiny of financial institutions, including in connection with product governance and sales practices, account opening and closing procedures, customer and employee complaints and sales compensation structures related to such practices;
•possible negative impact of regulatory investigations and legal proceedings related to alleged foreign exchange manipulation;
•changes in the methodology for determining benchmark rates and the implementation of alternative benchmark rates, such as the Secured Overnight Financing Rate ("SOFR");
•heightened regulatory and government enforcement scrutiny of financial markets, with a particular focus on traded asset classes, including foreign exchange;
•the possibility of incorrect assumptions or estimates in our financial statements, including reserves related to litigation, deferred tax assets and the fair value of certain assets and liabilities;
•model limitations or failure;
•the possibility of incorrect interpretations, application of or changes in tax laws to which we and our clients are subject;
•the potential for additional financial contribution requirements to the HSBC North America Holdings Inc. ("HSBC North America") pension plan;
•unexpected and/or increased expenses relating to, among other things, litigation and regulatory matters, remediation efforts, penalties and fines; and
•the other risk factors and uncertainties described under Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 20192020 (the "2019"2020 Form 10-K").
Forward-looking statements are based on our current views and assumptions and speak only as of the date they are made. We undertake no obligation to update any forward-looking statement to reflect subsequent circumstances or events. You should, however, consider any additional disclosures of a forward-looking nature that arise after the date hereof as may be discussed in any of our subsequent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q or Current Reports on Form 8-K.





HSBC USA Inc.
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Executive Overview

HSBC USA Inc.
Executive Overview
HSBC USA is a wholly-owned subsidiary of HSBC North America, which is an indirect wholly-owned subsidiary of HSBC. HUSI may also be referred to in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") as "we," "us" or "our."
Economic EnvironmentThe U.S. economy deterioratedcontinued its recovery during the first quarter of 2021 after deteriorating rapidly into recession during the second quarter of 2020 driven by the COVID-19 pandemic which resulted in disruption to business and economic activity as well as to the capital markets. COVID-19's effects in the U.S. and globally have been extreme, and neither the magnitude nor the duration of the pandemic and its ultimate repercussions is clear.continue to remain unclear. Unprecedented government economic intervention, including additional government support enacted during the first quarter of 2021, has likely dampened the pandemic's effects, but at uncertain long-term cost. However, these government support measures combined with accelerated progress on vaccinations and the easing of restrictions by many states, have helped speed the economic recovery along considerably. U.S. Gross Domestic Product ("GDP") contractedis currently forecast to grow at an estimated annual rate in excess of 32.96.0 percent in the secondfirst quarter of 2020,2021 while the U.S. economy added over 400 thousand jobs during the first quarter of 2021 and the total unemployment rate increased significantlyfell to 11.16.0 percent at JuneMarch 2021 as compared with 6.7 percent at December 2020. After cutting short-term interest rates by 150 basis points (to near zero) inIn March 2020 and announcing various other initiatives to enhance liquidity and support the flow of credit to households and businesses,2021, the FRB decided to hold short-term interest rates steady in June 2020(at near zero) and indicated it expects short-term rates to remain unchanged untillow for some time. The FRB also announced that it is confident thatwill continue to increase its holdings of U.S. Treasury and U.S. Government agency mortgage-backed securities, thereby supporting the flow of credit to households and businesses.
Although the U.S. economy has weathered recent events.
Theimproved in the first quarter of 2021, the impact of the COVID-19 pandemic on economic conditions both in the United States and abroad during the first half of 2020 has createdcontinues to create global uncertainty about the future economic environment, including the lengthpace and depthextent of a global recession.an economic recovery. Concerns over interest rate levels, energy prices, domestic and global policy issues, including civil unrest in the U.S., trade policy in the U.S. and geopolitical events as well as the implications of those events on the markets in general further add to this global uncertainty. Interest rate levels and energy prices, in combination with global economic conditions, fiscal and monetary policy and the level of regulatory and government scrutiny of financial institutions will continue to impact our results in 20202021 and beyond.
Performance, Developments and Trends As mentioned above, the COVID-19 pandemic continues to cause disruption to our customers, vendors and employees. The outbreak of this virus has disrupted global financial markets, and negatively affected supply and demand across a broad range of industries.industries and caused disruption to our customers, vendors and employees. This pandemic has had a significant impact on our business, financial condition and results of operationsoperations. Despite the improvement in economic conditions during the first halfquarter of 2021 as discussed above, the year, including the impairment of goodwill associated with our Retail Banking and Wealth Management and Private Banking reporting units in the first quarter, an increase to the provision for credit losses on our loan portfolio and valuation losses associated with certain financial instruments due to market volatility, which have largely recovered during the second quarter. Additionally, in April 2020, Fitch changed the rating outlook for both HSBC USA and HSBC Bank USA to negative from stable and, in May 2020, Standard and Poor's ("S&P") downgraded the long- and short-term issuer credit ratings of HSBC USA and HSBC Bank USA by one notch, following similar rating actions for HSBC. The circumstances around this pandemic are evolving and will continue to impact our business in future periods as it may not be fully contained for an extended period of time. Should the current economic conditions persist or deteriorate further, we expect that this environment will continue to adversely impact our business which could include, but not be limited to, further impacts on our income due to lower interest rates, lower lending and transaction volumes, higher expected credit losses, lower wealth management revenue due to equity markets volatility and weakness and increased model risk including credit loss models, capital models and asset/liability management models due to the unprecedented impact on economic and market drivers related to the COVID-19 pandemic. Other potential risks include the impact of postponed health screenings on the well-being of our employees, credit rating migration which could negatively impact our risk-weighted assets and capital position, and potential liquidity stress due, among other factors, to increased customer drawdowns, notwithstanding the significant initiatives that the U.S. Government and the FRB have put in place to support funding and liquidity. This matter could have a material adverse effect on our business, prospects, liquidity, financial condition, results of operations and credit ratings in future periods. The extent of such impact will depend on the outcome of certain developments, including but not limited to, the duration of the pandemic given that the pandemic may not be fully contained until a vaccine and/or widely accepted treatment becomes available which might not occur for an extended period of time, as well as its continuing impact on our customers, vendors and employees, all of which are uncertain. See Part II, Item 1A, "Risk Factors - Risks related to the impact of COVID-19"COVID-19," in our 2020 Form 10-K for further discussion.
LateWe continue to progress our strategic plan to restructure our operations ("Restructuring Plan") as discussed further in Note 2, "Strategic Initiatives," in the second quarter of 2020, we decided to lift the pause we had put in place in March on the staff reductions relating to our restructuring plan as COVID-19 restrictions have begun to ease. As a result, we recorded $43 million of severance related costs during the second quarter, including $13 million of direct costs and $30 million of allocated costs from HSBC Technology & Services ("HTSU"). Our restructuring plan is moving forward as planned, including consolidation of our retail branch network and wholesale and retail middle and back office functions, each under a single operations structure, and the creation of our Wealth and Personal Banking business which was completed in the second quarter. While weaccompanying consolidated financial statements. We remain committed to our multi-year strategic plan to re-profile our business, the timing of the strategic actions as outlined in our 2019 Form 10-K may be re-sequenced or delayed beyond 24 months as the circumstances around the COVID-19 pandemicand continue to develop. We continueexplore strategic options with respect to re-assess our strategic planretail operations to focus on our high net worth client base and may take additional actions in future periods. See Note 2, "Strategic Initiatives," in the accompanying consolidated financial statements.wealth management products.


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The following table sets forth selected financial highlights forof HUSI on a U.S. GAAP basis for the three and six months ended June 30,March 31, 2021 and 2020 and 2019 and at June 30, 2020March 31, 2021 and December 31, 2019:2020:
 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
 (dollars are in millions)
Net income (loss)$7
 $121
 $(1,276) $230
Rate of return on average:       
Total assets— % .3% (1.3)% .3%
Risk-weighted assets—
 .4
 (2.1) .4
Common equity(.8) 1.9
 (15.4) 2.2
Tangible common equity(.8) 2.2
 (16.2) 2.4
Total equity.2
 2.6
 (13.9) 2.5
Net interest margin1.10
 1.32
 1.12
 1.37
Efficiency ratio72.6
 79.3
 123.2
 79.0
Commercial net charge-off ratio(1)
.37
 .03
 .31
 .02
Consumer net charge-off ratio(1)
.45
 .24
 .41
 .26
Three Months Ended March 31,20212020
 (dollars are in millions)
Net income (loss)$339 $(1,283)
Rate of return on average:
Total assets.7 %(2.7)%
Risk-weighted assets(1)
1.3 (4.0)
Common equity8.1 (29.9)
Tangible common equity8.4 (32.2)
Total equity7.6 (27.9)
Net interest margin1.17 1.15 
Efficiency ratio74.5 180.1 
Commercial net charge-off ratio(2)
.01 .23 
Consumer net charge-off ratio(2)
.32 .37 
(1)Prior period amount has been revised to conform to the current period presentation. See Note 16, "Retained Earnings and Regulatory Capital Requirements," in the accompanying consolidated financial statements for further discussion.
(2)Excludes loans held for sale.
March 31, 2021December 31, 2020
(dollars are in millions)
Additional Select Ratios:
Allowance as a percent of loans(1)
1.39 %1.63 %
Commercial allowance as a percent of loans(1)
1.63 1.96 
Consumer allowance as a percent of loans(1)
.90 .98 
Consumer two-months-and-over contractual delinquency2.31 2.27 
Loans to deposits ratio(2)
46.50 48.90 
Common equity Tier 1 capital to risk-weighted assets(3)
15.1 14.5 
Tier 1 capital to risk-weighted assets(3)
16.2 15.6 
Total capital to risk-weighted assets(3)
18.7 18.8 
Tier 1 leverage ratio8.8 8.6 
Supplementary leverage ratio8.3 7.8 
Total equity to total assets9.2 9.3 
Select Balance Sheet Data:
Cash and interest bearing deposits with banks$55,054 $15,655 
Trading assets25,822 27,284 
Securities available-for-sale34,659 40,672 
Loans:
   Commercial loans41,152 41,599 
   Consumer loans20,374 20,489 
Total loans61,526 62,088 
Deposits148,582 145,150 
(1)
Excludes loans held for sale.
 June 30, 2020 December 31, 2019
 (dollars are in millions)
Additional Select Ratios:   
Allowance as a percent of loans(1)
1.64% .93%
Commercial allowance as a percent of loans(1)
1.89
 1.05
Consumer allowance as a percent of loans(1)
1.02
 .64
Consumer two-months-and-over contractual delinquency2.36
 2.04
Loans to deposits ratio(2)
55.71
 71.60
Common equity Tier 1 capital to risk-weighted assets13.1
 13.1
Tier 1 capital to risk-weighted assets14.2
 14.1
Total capital to risk-weighted assets17.4
 16.3
Tier 1 leverage ratio8.1
 9.9
Supplementary leverage ratio7.6
 6.9
Total equity to total assets8.5
 10.4
    
Select Balance Sheet Data:   
Cash and interest bearing deposits with banks$19,000
 $3,782
Trading assets32,409
 28,452
Securities available-for-sale41,668
 35,663
Loans:   
   Commercial loans51,913
 48,211
   Consumer loans20,555
 20,342
Total loans72,468
 68,553
Deposits156,033
 119,693
(1)Excludes loans held for sale.
(2)Represents period end loans, net of allowance for loan losses, as a percentage of core deposits as calculated in accordance with Federal Financial Institutions Examination Council guidelines which generally include all domestic demand, money market and other savings accounts, as well as time deposits with balances not exceeding $250,000.
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(1)
Excludes loans held for sale.

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(3)Prior period amounts have been revised to conform to the current period presentation. See Note 16, "Retained Earnings and Regulatory Capital Requirements," in the accompanying consolidated financial statements for further discussion.

(2)
Represents period end loans, net of allowance for credit losses, as a percentage of core deposits as calculated in accordance with Federal Financial Institutions Examination Council guidelines which generally include all domestic demand, money market and other savings accounts, as well as time deposits with balances not exceeding $250,000.
Net income (loss) was income of $7 million and a loss of $1,276$339 million during the three and six months ended June 30, 2020, respectively,March 31, 2021 compared with incomea loss of $121 million and $230$1,283 million during the three and six months ended June 30, 2019, respectively.March 31, 2020. Income (loss) before income tax was income of $56 million and a loss of $1,384$460 million during the three and six months ended June 30, 2020, respectively,March 31, 2021 compared with incomea loss of $156 million and $300$1,440 million during the three and six months ended June 30, 2019, respectively.March 31, 2020. The decreaseincrease in income (loss) before income tax during the three and six months ended June 30, 2020March 31, 2021 was due primarily to a higherlower provision for credit losses driven by the deterioration ofimproved economic conditions caused by the COVID-19 pandemic and in the year-to-date period, higherlower operating expenses driven by the non-recurrence of a $784 million goodwill impairment charge recorded during the first quarter of 2020 as discussed below.and lower occupancy expense. Also contributing to the decrease in the year-to-date periodincrease was lowerhigher net interest income.
During the first quarter of 2020, as a result of the deterioration in economic conditions caused by the COVID-19 pandemic and the amount of headroom calculated in our previous annual impairment test for certain reporting units, we determined that an interim goodwill impairment test should be performed for all of our reporting units as of March 31, 2020 and prepared updated cash flow projections for each reporting unit, resulting in a reduction in the long-term forecasts of profitability for both our Retail Banking and Wealth Management and our Private Banking reporting units as compared to the prior year forecasts. We completed our interim impairment test of goodwill utilizing cash flow projections based on these forecasts under a present value approach and, in conjunction with valuation estimates determined under a market approach, concluded that the fair value of our Commercial Banking reporting unit exceeded its carrying value, including goodwill. However, the cash flow projections for our Retail Banking and Wealth Management and our Private Banking reporting units were significantly lower which, in conjunction with valuation estimates under a market approach and in consideration of a challenging macroeconomic outlook, resulted in a fair value that was significantly lower than their book values, including goodwill. As a result, we recorded a non-cash impairment charge of $784 million in the first quarter of 2020, representing the entire amount of goodwill previously allocated to these reporting units. Beginning in the second quarter of 2020, our Retail Banking and Wealth Management and our Private Banking reporting units are being reported together within a newly created Wealth and Personal Banking segment for segment reporting purposes. As discussed in our 2019 Form 10-K, our goodwill impairment testing is highly sensitive to certain assumptions and estimates used. We will continue to monitor changes to our business forecasts as we continue to perform periodic analysis of the risks and strategies of our business and product offerings. If further deterioration in economic and credit conditions, a change in the strategy or performance of our business or product offerings, or an increase in the capital requirements of our business occurs, interim goodwill impairment tests could again be required, which may result in an impairment charge. For additional discussion of the results of our interim goodwill impairment testing, see Note 8, "Goodwill," in the accompanying consolidated financial statements.
Our reported results in all periods were impacted by certain items management believes to be significant, which affect comparability between periods. Significant items are excluded to arrive at adjusted performance because management would ordinarily identify and consider them separately to better understand underlying business trends. The following table summarizes the impact of these significant items for all periods presented:
 Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019
 (in millions)
Income (loss) before income tax, as reported$56
 $156
 $(1,384) $300
Goodwill impairment—
 —
 784
 —
Costs to achieve(1)
49
 —
 151
 —
Severance costs(2)
—
 16
 —
 17
Adjusted performance(3)
$105
 $172
 $(449) $317
Three Months Ended March 31,20212020
 (in millions)
Income (loss) before income tax, as reported$460 $(1,440)
Goodwill impairment— 784 
Costs to achieve(1)
25 100 
Adjusted performance(2)
$485 $(556)
(1)
(1)Reflects costs related to the delivery of our Restructuring Plan. Costs to achieve primarily consists of lease impairment and other related costs, severance costs, allocated costs from HSBC Technology & Services ("HTSU"), and trading losses associated with the exit of certain derivative contracts. See Note 2, "Strategic Initiatives," in the accompanying consolidated financial statements for a more detailed discussion of these costs. The expense during the three months ended March 31, 2021 also includes $7 million of allocated costs from other HSBC affiliates related to the HSBC Group's restructuring activities. The expense during the three months ended March 31, 2020 also includes a $9 million gain on the sale of one of our owned retail branch properties.
(2)Represents a non-U.S. GAAP financial measure.
Reflects costs related to the delivery of the strategic plan we announced in February 2020 to restructure our operations ("Restructuring Plan") as discussed further in "Executive Overview" in MD&A in our 2019 Form 10-K. Costs to achieve primarily consisted of lease impairment and other related costs, severance costs, allocated costs from HTSU, and trading losses associated with the exit of certain derivative contracts. See Note 2, "Strategic Initiatives," in the accompanying consolidated financial statements for a more detailed discussion of these costs. The expense during the six months ended June 30, 2020 also includes a $9 million gain on the sale of one of our owned retail branch properties.
(2)
Reflects severance costs associated with a 2019 global effort aimed to right-size our cost base.
(3)
Represents a non-U.S. GAAP financial measure.
Excluding the impact of the items in the table above, our adjusted performance during the three and six months ended June 30, 2020 decreased $67 million and $766March 31, 2021 increased $1,041 million compared with the prior year periodsperiod due primarily to a higherlower provision for credit losses

HSBC USA Inc.

driven by improved economic conditions. Also contributing to the deterioration of economic conditions caused by the COVID-19 pandemicincrease was lower operating expenses and in the year-to-date period, lowerhigher net interest income. These decreases were partially offset by lower operating expenses.
See "Results of Operations" for a more detailed discussion of our operating trends. In addition, see "Balance Sheet Review" for further discussion on our asset and liability trends, "Liquidity and Capital Resources" for further discussion on funding and capital and "Credit Quality" for additional discussion on our credit trends.
London Interbank Offered Rate ("LIBOR") Transition Regulators and central banks in various national jurisdictions continue to actively work to help transition from interbank offered rates ("IBORs") to acceptable alternative rates, such as the Secured Overnight Financing Rate ("SOFR") recommended by the Alternative Reference Rates Committee ("ARRC") convened by the FRB. In March 2020, the FASB issued changes to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens associated with this transition. Under the new guidance, an entity can elect by accounting topic or industry subtopic to account for the modification of a contract affected by reference rate reform as a continuation of the existing contract, if certain conditions are met. In addition, the new guidance allows an entity to elect on a hedge-by-hedge basis to continue to apply hedge accounting for hedging relationships in which the critical terms change due to reference rate reform, if certain conditions are met.
We have a considerable number of contracts referencing IBORs, primarily U.S. dollar ("USD") LIBOR, such as loans, derivatives and long-term debt, extending pastdebt.
In March 2021, when the United Kingdom ("U.K.") Financial Conduct Authority has announced it("FCA") confirmed that all LIBOR tenors will either cease to be provided by any administrator or no longer require banksbe representative immediately after December 31, 2021, in the case of the one-week and two-month USD LIBOR tenors, and immediately after June 30, 2023, in the case of the remaining overnight, one-month, three-month, six-month and twelve-month USD LIBOR tenors. The extension of certain USD LIBOR tenors until June 2023 will allow many legacy LIBOR-based contracts to submit ratesmature naturally and significantly aids in reducing the risks associated with transitioning legacy contracts onto replacement rates. Separately, the International Swaps and Derivatives Association ("ISDA") has confirmed that the fallback spread adjustments to be used in its ISDA fallbacks have been fixed as of the date of the FCA announcement. As a result, the ISDA fallbacks (i.e. to the adjusted risk-free rate plus the fixed spread adjustment) will automatically occur for LIBOR. outstanding derivative contracts that incorporate the ISDA fallback language or adhere to the ISDA fallback protocol generally when each LIBOR tenor ceases or becomes non-representative. For all outstanding derivatives referenced to USD LIBOR tenors, the ISDA fallback will occur immediately after June 30, 2023. These announcements provide clarity on the future terms of the many derivative contracts which now incorporate the ISDA fallbacks. In addition, during the first quarter of 2021, central clearing counterparties amended their rules to incorporate the new ISDA fallback language and adhere to the ISDA fallback protocol for cleared derivative contracts.
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We continue to actively participate in HSBC's global transition program with the objective of facilitating an orderly transition of all products, processes, models and curves, as well as all legacy LIBORLIBOR-based contracts, onto replacement rates. In particular, during the first halfquarter of 2020,2021, we:
•implemented risk disclosures for new sales of LIBOR-based products across all of our business lines;
incorporated the new fallback language recommended by the ARRC into new LIBOR-based contracts for adjustable rate mortgage loans; and
sold substantially all of our LIBOR-linked variable rate debt securities maturing beyond 2021.
While our global businesses continue to develop their capabilities to offer alternative rate productsSOFR-based derivatives in our Markets Treasury function and SOFR-based bilateral loans in our Commercial Banking business; and
•continued to reduce our LIBOR derivative exposures through the supporting processes and systems, the COVID-19 pandemic has impacted the speed at which they are able to develop these capabilities and the readinessexit or transfer of certain derivative contracts as part of our customersRestructuring Plan.
The ability of HUSI and its clients to use alternative rate products. Consequently, the sale of LIBOR-based products with maturities beyond 2021 will continue for longer than initially anticipated and is likely to increase the volume of legacy contracts that will need to be transitioned. In addition, the COVID-19 pandemic has likely affected the pace at which many of our customers will have been preparing to use alternative rate products and therefore also to transition their legacy contracts onto replacement rates. Therefore, we expect the transition of legacy contracts onto replacement rates to occur over a shortened time period. In combination with the greater number of legacy contracts requiring transition, this increases the overall level of execution riskis dependent on the transition process, which could potentially increase the levelavailability and market liquidity of conduct and operational risks. We are currently targeting to have pricing and data/workflow requirements related to transitioning legacy contracts ontoproducts that reference replacement rates, finalized inincluding SOFR, and on our clients being ready and able to adapt their own processes and systems to accommodate the third quarterreplacement products. We continue to engage with industry participants, the official sector and our clients to support an orderly transition and the mitigation of 2020.the risks resulting from the transition. For further discussion of our LIBOR transition program and the associated risks, see "Executive Overview" in MD&A in our 20192020 Form 10-K.
Other COVID-19 Related Developments
The COVID-19 pandemic has significantly disrupted economic activity in many countries, including the United States, and the U.S. Government has taken multiple actions to mitigate the magnitude and persistence of the effects of the COVID-19 pandemic. The United States has been operating under a presidentially declared national emergency since March 2020. In March 2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), was signed into law, which providesprovided financial assistance for businesses and individuals and targeted regulatory relief for financial institutions,institutions. In December 2020, the Consolidated Appropriations Act was signed into law.law, which extended many of the CARES Act programs and provided additional financial assistance for businesses and individuals.
Loan Forbearance Initiatives The CARES Act created a forbearance program for federally-backed mortgage loans and provided financial institutions with the option to temporarily suspend certain requirements under U.S. GAAP related to troubled debt restructurings. We have currently not elected this option, becauserestructurings ("TDR Loans") beginning March 1, 2020. This TDR Loan guidance can be applied until the earlier of January 1, 2022 or 60 days following the termination of the accounting treatment otherwise afforded underpresidentially declared national emergency. We elected to adopt the interagency statement on short-termTDR Loan guidance in the CARES Act and are not applying TDR Loan classification to COVID-19 related loan modifications discussed below.in the form of a long-term payment deferral (for commercial loans all payment modifications, including all payment deferrals) granted to borrowers that were current (less than 30 days past due) as of December 31, 2019 which otherwise may have been reported as TDR Loans. The CARES Act also prohibits servicers of federally-backed mortgage loans from initiating any foreclosure action on any residential property that is not vacant or abandoned for a period of 60 days, beginning on March 18, 2020.days. This moratorium has been extended until August 31, 2020.June 30, 2021. In addition to these federal measures, some state governments have taken action to require forbearance with respect to certain loans and fees. We are continuing to monitor federal, state and international regulatory developments in relation to COVID-19 and their potential impact on our operations.
In April 2020, federal banking regulators issued a revised interagency statement on loan modifications and the reporting for financial institutions working with customers affected by the COVID-19 pandemic ("Interagency Statement"). The Interagency Statement confirmed that COVID-19 related short-term loan modifications (e.g., payment deferrals of six months or less) provided to borrowers that were current (less than 30 days past due) at the time the relief was granted are not troubled debt restructurings

HSBC USA Inc.

("TDR Loans"). We are applyingLoans. Borrowers that do not meet the guidancecriteria in the CARES Act or the Interagency Statement. Borrowers that were not current at the time the relief was grantedStatement are assessed for TDR Loan classification in accordance with our accounting policies. TheseThrough March 31, 2021, these loans were not significant at June 30, 2020.significant.
In addition, under the Interagency Statement, for COVID-19 related loan modifications in the form of a payment deferral, the borrower’s past due status will not be impactedaffected during the deferral period and, if the loan was accruing at the time the relief was granted, the loan will generally not be placed on nonaccrual status as long as the borrower utilizes a payment deferral is forof six months or less. For consumer mortgage loans, when a borrower requests and is provided with extended relief in the form ofutilizes a payment deferral of more than six months, the loan will generally be placed on nonaccrual status and, if the loan does not meet the criteria in the CARES Act, assessed for TDR Loan classification. Any accrued interest recorded on these loans is generally not reversed against income and will remain recorded as accrued interest receivable. We have not modified our commercial loan nonaccrual policies as a result of this guidance.
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We have implemented various loan modification payment deferral programs to provide borrowers relief from the economic impacts of COVID-19.the COVID-19 pandemic. The following table summarizes information about loans under these programs as of June 30, 2020.March 31, 2021. Not included in the following table are loans that have exited the programs as well as other forms of relief that we have provided to commercial clients affected by the impact of COVID-19, such as covenant waivers and amendments, and deferrals of financial statement and covenant compliance reporting requirements.
 June 30, 2020  
 Number of Loans Loan Amount Program Details
 (in thousands) (in millions)  
Commercial(1)
0.5
 $1,229
 Primarily deferrals of up to twelve months
Consumer:     
Residential mortgages(2)
2.5
 1,322
 Deferrals of either three or six month increments up to a maximum of twelve months
Home equity mortgages(2)
0.5
 61
 Deferrals of either three or six month increments up to a maximum of twelve months
Credit cards15.9
 70
 Deferrals of either four or six months increments up to a maximum of six months
Other consumer2.3
 18
 Deferrals of either four or six months increments up to a maximum of six months
Total consumer21.2
 1,471
  
Total21.7
 $2,700
  
March 31, 2021
Number of LoansLoan Amount
% of Loans with Payment(1)
Program Details
(in thousands)(in millions)
Commercial:
Real estate, including construction— $499 0%Primarily deferrals of up to eighteen months
Business and corporate banking— 88 0Primarily deferrals of up to eighteen months
Global banking— 190 0Primarily deferrals of up to eighteen months
Other commercial4 0Primarily deferrals of up to eighteen months
Total commercial(2)
— 781 0
Consumer:
Residential mortgages(3)
1.6 749 30Deferrals of either three or six month increments up to a maximum of eighteen months
Home equity mortgages(3)
0.3 38 31Deferrals of either three or six month increments up to a maximum of eighteen months
Credit cards3.1 15 82Currently offering deferrals of up to three months (initially offered deferrals of either three, four or six month increments up to a maximum of nine months)
Other consumer0.4 1 78Currently offering deferrals of up to three months (initially offered deferrals of either three, four or six month increments up to a maximum of nine months)
Total consumer5.4 803 31
Total5.4 $1,584 16
(1)
(1)Represents the percentage of loans under a COVID-19 related payment deferral program at March 31, 2021 for which at least one payment was collected during the first quarter of 2021.
(2)Total number of commercial loans is less than 20.
(3)Includes $675 million of consumer mortgage loans where the borrowers were provided with extended payment deferral relief of more than six months at March 31, 2021. Due to our CARES Act election, $646 million of these loans were exempted from TDR assessment. In addition, $535 million of these loans have been placed on nonaccrual status, because the borrowers utilized a payment deferral of more than six months.
Includes approximately $380 million of commercial loans where the borrowers were provided with extended payment deferral relief of more than six months at June 30, 2020, none of which have been placed on nonaccrual status or classified as TDR Loans.
(2)
Consumer mortgage loans where the borrowers were provided with extended payment deferral relief of more than six months and, as a result, have been placed on nonaccrual status and classified as TDR Loans were not significant at June 30, 2020.
When the payment relief period ends, we expect to offer borrowers have various options, including repaying the deferred payments in full, repaying the deferred payments over an installment period or moving the deferred payments to the end of the loan. Depending on which actions a borrower takes at the end of their relief period, some of these options would result in TDR Loan classification. If a borrower is experiencing financial difficulty when the payment relief period ends, they may enter into a modification program to reduce the interest rate and extend the term of the loan which would result in the loan being classified as a TDR Loan. As of March 31, 2021, $674 million and $978 million of commercial and consumer loans, respectively, have exited a COVID-19 related payment deferral program, of which nil and $33 million, respectively, entered into a modification program upon exiting that resulted in the loans being classified as TDR Loans. Of the commercial and consumer loans that have exited a COVID-19 related payment deferral program, 100 percent and 82 percent, respectively, were current or less than 30 days past due as of March 31, 2021.
Paycheck Protection Program The CARES Act created a new loan guarantee program entitled the Paycheck Protection Program ("PPP") targeted to provide small businesses with support to cover payroll and certain other expenses. Loans made under the PPP are fully guaranteed by the Small Business Administration ("SBA"), whose guarantee is backed by the full faith and credit of the United States. PPP covered loans also afford borrowers forgiveness up to the principal amount of the PPP covered loan, plus accrued interest, if the loan proceeds are used to retain workers and maintain payroll or to make certain mortgage interest, lease and utility payments, and certain other criteria are satisfied. The SBA will reimburse PPP lenders for any amount of a PPP covered loan that is forgiven, and PPP lenders will not be held liable for any representations made by PPP borrowers in connection with their requests for loan forgiveness. Lenders receive pre-determined fees for processing and servicing PPP loans. In addition, PPP loans are risk-weighted at zero percent under the generally-applicable Standardized
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Approach used to calculate risk-weighted assets for regulatory capital purposes. HSBC Bank USA is a PPP participating lender and had loans funded under the PPP which totaled $1,197$1,294 million at June 30, 2020. In July 2020, the Paycheck Protection Program Extension Act was signed into law, establishing August 8, 2020 as the newMarch 31, 2021. The SBA deadline to apply for aaccepting PPP loan.loan applications from participating lenders has been extended until May 31, 2021.
Main Street Lending Program In July 2020, the Main Street Lending Program ("MSLP") became fully operational. The MSLP was established by the FRB under the CARES Act to support lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. The MSLP operates under various facilities depending on the

HSBC USA Inc.

size and other characteristics of the eligible businesses. The Federal Reserve Bank of Boston has set up a special purpose vehicle which will purchase 95 percent of each MSLP loan that is submitted to the program, provided that the required documentation is complete and the transactions are consistent with the relevant MSLP facility's requirements. As such, MSLP lenders will retain only 5 percent of an MSLP loan. We are evaluating whether we will participate in the MSLP.

Basis of Reporting
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP").
Group Reporting Basis We report financial information to HSBC in accordance with HSBC Group accounting and reporting policies, which apply International Financial Reporting Standards ("IFRSs") as issued by the IASB and endorsed by the EU and, asIASB. As a result, our segment results are prepared and presented using financial information prepared on the basis of HSBC Group's accounting and reporting policies ("Group Reporting Basis"). Because operating results on the Group Reporting Basis are used in managing our businesses and rewarding performance of employees, our management also separately monitors profit before tax under this basis of reporting. The following table reconciles our U.S. GAAP versus Group Reporting Basis profit before tax:
Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019
Three Months Ended March 31,Three Months Ended March 31,20212020
(in millions) (in millions)
Profit (loss) before tax – U.S. GAAP basis$56
 $156
 $(1,384) $300
Profit (loss) before tax – U.S. GAAP basis$460 $(1,440)
Adjustments:       Adjustments:
Expected credit losses(17) 23
 330
 65
Expected credit losses(139)347 
Loans held for saleLoans held for sale(8)2 
Pension and other postretirement benefit costsPension and other postretirement benefit costs(4)(5)
Renewable energy tax credit investmentsRenewable energy tax credit investments4 2 
Other long-lived assetsOther long-lived assets10 — 
Goodwill impairment—
 —
 91
 —
Goodwill impairment— 91 
Precious metal loans9
 (1) 9
 13
Loan origination5
 3
 9
 6
Deposit incentives1
 4
 3
 9
Leases(11) (2) (9) (7)
Pension and other postretirement benefit costs(5) 3
 (10) 1
Other9
 3
 10
 6
Other2 5 
Profit (loss) before tax – Group Reporting Basis$47
 $189
 $(951) $393
Profit (loss) before tax – Group Reporting Basis$325 $(998)
The significant differences between U.S. GAAP and the Group Reporting Basis as they impact our results are summarized in Note 24, "Business Segments," in the our 20192020 Form 10-K. In addition, see Note 15, "Business Segments," in the accompanying consolidated financial statements for a discussion ofThere have been no significant changes since December 31, 20192020 in the differences between U.S. GAAP and the Group Reporting Basis impacting our results. Differences in reported profit before tax in the table above that were individually significant for the periods presented are explained below.
During the six months ended June 30, 2020,first quarter of 2021, expected credit losses were higherlower under U.S. GAAP than under the Group Reporting Basis. Under the Group Reporting Basis, a majority of our commercial loans are considered to be in 'stage 1'"stage 1" (which requires a 12-month expected credit losses estimate), while under U.S. GAAP such loans require a lifetime expected credit losses ("lifetime ECL") estimate. AsPrimarily as a result of the different approaches,requirements, releases in credit reserves driven by improved economic conditions, which resulted in improved economic forecasts used to calculate expected credit losses and improvements in credit conditions associated with certain clients, were more pronounced under U.S. GAAP. Client paydowns also contributed to the impacthigher releases in credit reserves under U.S. GAAP.
During the first quarter of 2020, expected credit losses were higher under U.S. GAAP than under the Group Reporting Basis. Primarily as a result of the different requirements related to stage 1 loans discussed above, loss provisions driven by the deterioration of economic conditions caused by the COVID-19 pandemic, which resulted in a worsening of the economic forecasts used to calculate expected credit losses, and provisions for downgrades reflecting weakness in the financial condition of certain clients and loan growth as clients drew on their available lines of credit, waswere more pronounced under U.S. GAAP.
During the six months ended June 30,first quarter of 2020, goodwill impairment charges were lower under the Group Reporting Basis than under U.S. GAAP. Under the Group Reporting Basis, goodwill was amortized until 2005, however goodwill was amortized under U.S. GAAP until 2002, which resulted in a lower carrying amountamounts of goodwill and, therefore, a lower impairment chargecharges under the Group Reporting Basis.
During the three and six months ended June 30, 2019, credit loss estimates were higher under U.S. GAAP than under the Group Reporting Basis due primarily to the impact of downgrades in the commercial loan portfolio, which was more pronounced under U.S. GAAP, partially offset by a release in credit loss reserves under U.S. GAAP for risk factors associated with fraud. In addition, expected credit losses under the Group Reporting Basis in the year-to-date period reflect a release in credit loss reserves due to

HSBC USA Inc.
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the upgrade of a single oil and gas industry client which resulted in reclassification from 'stage 2' (which requires a lifetime expected credit losses estimate) to 'stage 1' (which requires a 12-month expected credit losses estimate).

Critical Accounting Policies and Estimates

Of the significant accounting policies used in the preparation of our consolidated financial statements, we have identified certain items as critical accounting estimates based on the associated degree of judgment and complexity. See "Critical Accounting Policies and Estimates" in MD&A in our 2019 Form 10-K for further discussion.
Determining the allowance for credit losses on loans has historically been identified as a critical accounting estimate. On January 1, 2020, we adopted new accounting guidance which requires entities to estimate and recognize an allowance for lifetime expected credit losses ("lifetime ECL") for loans and other financial assets measured at amortized cost. Previously, an allowance for credit losses on loans was recognized based on probable incurred losses. See Note 6, "Allowance for Credit Losses" in the accompanying consolidated financial statements for further discussion of our accounting policies and methodologies for establishing the allowance for credit losses and liability for off-balance sheet credit exposures.
The accounting estimates relating to the allowance for credit losses remains a "critical accounting estimate" for the following reasons:
Changes in the provision for credit losses can materially affect our financial results;
Estimates relating to the allowance for credit losses require us to project future borrower performance, including cash flows, delinquencies and charge-offs, along with, when applicable, collateral values, based on a reasonable and supportable forecast period utilizing forward-looking economic scenarios in order to estimate probability of default and loss given default; and
The allowance for credit losses is influenced by factors outside of our control such as industry and business trends, geopolitical events and the effects of laws and regulations as well as economic conditions such as trends in housing prices, interest rates, GDP, inflation, energy prices and unemployment; and
Judgment is required to determine whether the models used to generate the allowance for credit losses produce an estimate that is sufficient to encompass the current view of lifetime ECL.
Because our estimates of the allowance for credit losses involve judgment and are influenced by factors outside our control, there is uncertainty inherent in these estimates. Our estimate of lifetime ECL is inherently uncertain because it is highly sensitive to changes in economic conditions and other factors outside of our control. Changes in such estimates could significantly impact our allowance and provision for credit losses.
As discussed further in Note 6, "Allowance for Credit Losses," in the accompanying consolidated financial statements, we use three forward-looking economic scenarios to estimate lifetime ECL. They represent a 'most likely outcome' (the "Central Scenario") and two less likely 'outer' scenarios, referred to as the "Upside scenario" and the "Downside scenario". During the second quarter of 2020, economic conditions remained weak and economic uncertainty caused by the COVID-19 pandemic continued to remain high. Given the high level of economic uncertainty in the current environment, we developed and utilized a fourth scenario for estimating lifetime ECL at June 30, 2020, referred to as the "Alternative Downside scenario", to reflect the possibility that the adverse impact associated with the deterioration in economic conditions could manifest itself over a far longer period of time. Each of the four scenarios were assigned weightings with the majority of the weighting placed on the Central scenario, the second most weighting placed on the Downside scenario and lower equal weights placed on the Upside and Alternative Downside scenarios. This weighting was deemed appropriate for the estimation of lifetime ECL under current conditions.
As an illustration of the effect of changes in estimates relating to the allowance for credit losses, using a 100 percent weighting for the Alternative Downside scenario instead of using the four weighted scenarios as described above at June 30, 2020 would have resulted in a combined increase to our allowance for credit losses and liability for off-balance sheet credit exposures of approximately $1,040 million. This illustration only represents the effect of changes in the weighting of these scenarios on our existing portfolios and does not consider changes in the allowance related to management judgment that might occur.


HSBC USA Inc.

Balance Sheet Review
The following table provides balance sheet totals at June 30, 2020March 31, 2021 and increases (decreases) since December 31, 2019:2020:
  Increase (Decrease) From
  December 31, 2020
  
March 31, 2021Amount%
 (dollars are in millions)
Period end assets:
Short-term investments$58,814 $7,413 14.4 %
Loans, net60,673 (400)(.7)
Loans held for sale351 14 4.2 
Trading assets25,822 (1,462)(5.4)
Securities42,496 (7,157)(14.4)
All other assets6,700 14 .2 
$194,856 $(1,578)(.8)%
Period end liabilities and equity:
Total deposits$148,582 $3,432 2.4 %
Trading liabilities2,319 (3,078)(57.0)
Short-term borrowings5,243 291 5.9 
Long-term debt18,179 (1,800)(9.0)
Interest, taxes and other liabilities2,559 (106)(4.0)
Total equity17,974 (317)(1.7)
$194,856 $(1,578)(.8)%
   Increase (Decrease) From
   December 31, 2019
  
June 30, 2020 Amount %
 (dollars are in millions)
Period end assets:     
Short-term investments$48,255
 $26,635
 *
Loans, net71,276
 3,360
 4.9
Loans held for sale147
 (142) (49.1)
Trading assets32,409
 3,957
 13.9
Securities53,303
 4,347
 8.9
All other assets7,472
 (670) (8.2)
 $212,862
 $37,487
 21.4 %
Period end liabilities and equity:     
Total deposits$156,033
 $36,340
 30.4 %
Trading liabilities3,218
 (17) (.5)
Short-term borrowings6,102
 2,443
 66.8
Long-term debt25,746
 (951) (3.6)
Interest, taxes and other liabilities3,619
 (216) (5.6)
Total equity18,144
 (112) (.6)
 $212,862
 $37,487
 21.4 %
*Percentage change is greater than 100 percent.
Short-Term InvestmentsShort-term investments include cash and due from banks, interest bearing deposits with banks and federal funds sold and securities purchased under agreements to resell. Balances may fluctuate from period to period depending upon our liquidity position at the time and our strategy for deploying liquidity. Short-term investments increased compared with December 31, 20192020 due to an increase in overall liquidity driven primarily by higher deposits as we actively raised funds in advance of their usageusage. The increase in funds was driven by net sales, paydowns and maturities of securities as well as higher deposits as our customers increased their demand and savings deposits in response to the economic uncertainty caused by the COVID-19 pandemic and the actions taken by the U.S. Government to provide financial support to households and businesses. These increases were partially offset by repayments of precious metal trading liabilities and long-term debt.

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HSBC USA Inc.

Loans, NetThe following table summarizes our loan balances at June 30, 2020March 31, 2021 and increases (decreases) since December 31, 2019:2020:
  Increase (Decrease) From
  December 31, 2020
  
March 31, 2021Amount%
 (dollars are in millions)
Commercial loans:
Real estate, including construction$10,087 $(377)(3.6)%
Business and corporate banking13,125 (354)(2.6)
Global banking(1)
13,157 (362)(2.7)
Other commercial(2)
4,783 646 15.6 
Total commercial41,152 (447)(1.1)
Consumer loans:
Residential mortgages18,425 48 .3 
Home equity mortgages698 (29)(4.0)
Credit cards937 (129)(12.1)
Other consumer314 (5)(1.6)
Total consumer20,374 (115)(.6)
Total loans61,526 (562)(.9)
Allowance for credit losses(3)
853 (162)(16.0)
Loans, net$60,673 $(400)(.7)%
   Increase (Decrease) From
   December 31, 2019
  
June 30, 2020 Amount %
 (dollars are in millions)
Commercial loans:     
Real estate, including construction$11,420
 $(81) (.7)%
Business and corporate banking17,345
 3,866
 28.7
Global banking(1)
18,668
 753
 4.2
Other commercial(2)
4,480
 (836) (15.7)
Total commercial51,913
 3,702
 7.7
Consumer loans:     
Residential mortgages18,281
 480
 2.7
Home equity mortgages792
 (61) (7.2)
Credit cards1,175
 (230) (16.4)
Other consumer307
 24
 8.5
Total consumer20,555
 213
 1.0
Total loans72,468
 3,915
 5.7
Allowance for credit losses(3)
1,192
 555
 87.1
Loans, net$71,276
 $3,360
 4.9 %
(1)Represents large multinational firms including globally focused U.S. corporate and financial institutions, U.S. dollar lending to multinational banking clients managed by HSBC on a global basis and complex large business clients supported by GBM relationship managers.
(1)
(2)Includes loans to HSBC affiliates which totaled $1,652 million and $1,100 million at March 31, 2021 and December 31, 2020, respectively.
(3)See "Credit Quality" in this MD&A for a discussion of trends in our allowance for credit losses on loans.
Represents large multinational firms including globally focused U.S. corporate and financial institutions, U.S. dollar lending to multinational banking clients managed by HSBC on a global basis and complex large business clients supported by GB&M relationship managers.
(2)
Includes loans to HSBC affiliates which totaled $1,565 million and $2,343 million at June 30, 2020 and December 31, 2019, respectively.
(3)
See "Credit Quality" in this MD&A for a discussion of trends in our allowance for credit losses on loans.
Commercial loans increaseddecreased compared with December 31, 20192020 due primarily to elevatedthe impact of our efforts to improve returns through disciplined lending, paydowns and lower demand drivenfrom clients reflecting increased capital markets activity. These decreases were partially offset by the deterioration in economic conditions caused by the COVID-19 pandemic as clients drew on their available lines of credithigher loans to affiliates and we funded new loans largely associated with the Paycheck Protection Program.PPP loan originations. The increasedecline in commercial non-affiliate loans was primarily in the consumer services, automobiles, retailing, capital goods,diversified financial, real estate, energy and consumer durables and apparelsemiconductor industries, partially offset by a declinean increase in the diversified financialsbanking industry.
Consumer loans increaseddecreased modestly compared with December 31, 2019 as higher residential mortgage loans were largely offset by2020 due primarily to paydowns in credit card receivables due toreflecting seasonality and lower customer spending and changes in underwriting criteria driven by the current economic environment as well as a continued decline in home equity mortgages. The increase in other consumer loans reflects higher personal loans driven by new product promotions.origination volumes.
The following table presents loan-to-value ("LTV") ratios for our residential mortgage loan portfolio, excluding mortgage loans held for sale:
 
LTV Ratios(1)(2)
 June 30, 2020 December 31, 2019
  
First Lien Second Lien First Lien Second Lien
LTV < 80%97.9% 96.9% 98.1% 96.4%
80% < LTV < 90%
1.8
 2.5
 1.6
 2.8
90% < LTV < 100%
.2
 .5
 .2
 .7
LTV > 100%
.1
 .1
 .1
 .1
Average LTV for portfolio51.1
 46.4
 50.1
 46.4
LTV Ratios(1)(2)
 March 31, 2021December 31, 2020
  
First LienSecond LienFirst LienSecond Lien
LTV < 80%97.8 %97.9 %97.6 %96.8 %
80% < LTV < 90%
2.0 1.8 2.1 2.7 
90% < LTV < 100%
.1 .2 .2 .4 
LTV > 100%
.1 .1 .1 .1 
Average LTV for portfolio52.7 43.2 52.6 46.2 
(1)
LTVs for first liens are calculated using the loan balance as of the reporting date. LTVs for second liens are calculated using the loan balance as of the reporting date plus the senior lien amount at origination. Current estimated property values are derived from the property's appraised value at the time of loan origination updated by the change in the Federal Housing Finance Agency's house pricing index ("HPI") at either a Core Based Statistical Area or state level. The estimated value of the homes could differ from actual fair values due to changes in condition of the underlying property, variations in housing

HSBC USA Inc.

(1)LTVs for first liens are calculated using the loan balance as of the reporting date. LTVs for second liens are calculated using the loan balance as of the reporting date plus the senior lien amount at origination. Current estimated property values are derived from the property's appraised value at the time of loan origination updated by the change in the Federal Housing Finance Agency's House Price Index ("HPI") at either a Core Based Statistical Area or state level. The estimated value of the homes could differ from actual fair values due to changes in condition of the underlying property, variations in housing price changes within metropolitan statistical areas and other factors. As a result, actual property values associated with loans that end in foreclosure may be significantly lower than the estimates used for purposes of this disclosure.
81

(2)
Current estimated property values are calculated using the most current HPIs available and applied on an individual loan basis, which results in an approximate three month delay in the production of reportable statistics. Therefore, the information in the table above reflects current estimated property values using HPIs at March 31, 2020 and September 30, 2019, respectively.HSBC USA Inc.
(2)Current estimated property values are calculated using the most current HPIs available and applied on an individual loan basis, which results in an approximate three month delay in the production of reportable statistics. Therefore, the information in the table above reflects current estimated property values using HPIs at December 31, 2021 and September 30, 2020, respectively.
Loans Held for SaleThe following table summarizes loans held for sale at June 30, 2020March 31, 2021 and increases (decreases) since December 31, 2019:2020:
  Increase (Decrease) From
  December 31, 2020
  
March 31, 2021Amount%
 (dollars are in millions)
Commercial loans:
Real estate, including construction$— $(10)(100.0)%
Global banking256 137 *
Total commercial256 127 98.4 
Consumer loans:
Residential mortgages95 (113)(54.3)
Total consumer95 (113)(54.3)
Total loans held for sale$351 $14 4.2 %
   Increase (Decrease) From
   December 31, 2019
  
June 30, 2020 Amount %
 (dollars are in millions)
Commercial loans:     
Real estate, including construction$—
 $(83) (100.0)%
Business and corporate banking—
 (35) (100.0)
Global banking103
 9
 9.6
Total commercial103
 (109) (51.4)
Consumer loans:     
Residential mortgages44
 (33) (42.9)
Total consumer44
 (33) (42.9)
Total loans held for sale$147
 $(142) (49.1)%
*Percentage change is greater than 100 percent.
Commercial loans held for sale decreasedincreased compared with December 31, 2019.2020. Included in commercial loans held for sale are certain loans that we have elected to designate under the fair value option which consists of loans that we originate in connection with our participation in a number of syndicated credit facilities with the intent of selling them to unaffiliated third parties as well as loans that we purchase from the secondary market and hold as hedges against our exposure to certain total return swaps. The fair value of these loans totaled $45$83 million and $178$36 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. Balances will fluctuate from period to period depending on the volume and level of activity.
Commercial loans held for sale also includes certain loans that we no longer intend to hold for investment and were transferred to held for sale which totaled $58$173 million and $34$93 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.
Consumer loans held for sale decreased compared with December 31, 2019.2020. Included in residential mortgage loans held for sale are agency-eligible residential mortgage loans which are originated and held for sale to third parties, currently on a servicing retained basis. Balances will fluctuate from period to period depending on the volume and level of activity. Gains and losses from the sale of these residential mortgage loans are reflected as a component of other income (loss) in the accompanying consolidated statement of income (loss).
Excluding the commercial loans designated under fair value option discussed above, loans held for sale are recorded at the lower of amortized cost or fair value, with adjustments to fair value being recorded as a valuation allowance through other revenues. The valuation allowance on consumer loans held for sale was $1 million and $2 millionnil at June 30, 2020both March 31, 2021 and December 31, 2019,2020, respectively. The valuation allowance on commercial loans held for sale was $1 million and nil at June 30, 2020both March 31, 2021 and December 31, 2019,2020, respectively.

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HSBC USA Inc.

Trading Assets and LiabilitiesThe following table summarizes trading assets and liabilities at June 30, 2020March 31, 2021 and increases (decreases) since December 31, 2019:2020:
   Increase (Decrease) From
   December 31, 2019
  
June 30, 2020 Amount %
 (dollars are in millions)
Trading assets:     
Securities(1)
$18,987
 $(4,501) (19.2)%
Precious metals10,139
 8,230
 *
Derivatives, net3,283
 228
 7.5
 $32,409
 $3,957
 13.9 %
Trading liabilities:     
Securities sold, not yet purchased$637
 $(545) (46.1)%
Payables for precious metals19
 (105) (84.7)
Derivatives, net2,562
 633
 32.8
 $3,218
 $(17) (0.5)%
  Increase (Decrease) From
  December 31, 2020
  
March 31, 2021Amount%
 (dollars are in millions)
Trading assets:
Securities(1)
$18,765 $(729)(3.7)%
Precious metals4,497 (492)(9.9)
Derivatives, net2,560 (241)(8.6)
$25,822 $(1,462)(5.4)%
Trading liabilities:
Securities sold, not yet purchased$655 $(72)(9.9)%
Payables for precious metals— (2,312)(100.0)
Derivatives, net1,664 (694)(29.4)
$2,319 $(3,078)(57.0)%
*Percentage change is greater than 100 percent.
(1)
(1)See Note 3, "Trading Assets and Liabilities," in the accompanying consolidated financial statements for a breakout of trading securities by category.
See Note 3, "Trading Assets and Liabilities," in the accompanying consolidated financial statements for a breakout of trading securities by category.
Trading securities balances decreasedwere lower compared with December 31, 20192020 due primarily to decreasesa decrease in U.S. Treasury positions, partially offset by an increase in equity and foreign sovereign positions. Trading security positions are held as economic hedges of interest rate, credit and equity derivative products issued to clients of domestic and emerging markets. Balances of securities sold, not yet purchased were lower compared with December 31, 20192020 driven by a decrease in short U.S. Treasury positions related to economic hedges of derivatives in the interest rate trading portfolio.
Precious metals trading assets increaseddecreased compared with December 31, 20192020 due primarily to increasesa decrease in our own gold and silver inventory positions reflecting a redeployment of liquidity in the short term which is economically hedged with derivative positions to protect against changes in market pricing andposition, partially offset by an increase in positions held as economic hedges for client derivative activity as well as higher spot prices.our own palladium inventory position. Payables for precious metals were lower compared with December 31, 20192020 reflecting a declinedecrease in borrowing of gold inventory to support client activity levels. Precious metal positions may not represent our net underlying exposure as we may use derivatives contracts to reduce our risk associated with these positions, the fair value of which would appear in derivatives in the table above.
Derivative asset and liability balances both increaseddecreased compared with December 31, 20192020 mainly from market movements partially offset by a reduction inand reduced positions driven by the exit or transfer of certain derivative contracts as part of our restructuring plan.Restructuring Plan. Market movements resulted in higherlower valuations of interest rate, foreign exchange, equity and credit derivatives. Market movements on commodity derivatives partially offset bywere mixed resulting in higher derivative asset valuations, but lower valuations of credit and equity derivatives.derivative liability valuations.
SecuritiesSecurities include securities available-for-sale and securities held-to-maturity, net. Securities balances were higherlower compared with December 31, 20192020 driven by net purchases of U.S. Treasury, U.S. Government sponsored mortgage-backedsales, paydowns and foreign sovereign securitiesmaturities as part of our continuing strategy to maximize returns while balancing the securities portfolio for risk management purposes and, to a lesser extent, favorableas well as unfavorable market valuations due to decreasingincreasing yields. These increases wereThe decline in securities balances was primarily in U.S. Treasury, U.S. Government agency mortgage-backed and foreign sovereign securities which was partially offset by the salenet purchases of $340 million of LIBOR-linked variable rate securities out of our held-to-maturity portfolio during the second quarter of 2020. See Note 5, "Securities," in the accompanying consolidated financial statements for further discussion.U.S. Government sponsored mortgage-backed securities.
All Other AssetsAll other assets includes, among other items, properties and equipment, net and goodwill. All other assets decreasedwere flat compared with December 31, 2019 due primarily to a goodwill impairment charge of $784 million recorded during2020 as higher tax assets and higher outstanding clearing receivables from correspondent banks were largely offset by lower cash collateral posted.
During the firstthird quarter of 2020, representing the entire amountwe completed a quantitative impairment test of goodwill previouslyand determined that the fair value of our Commercial Banking reporting unit exceeded its carrying value, with its fair value being approximately 110 percent of book value, including allocated goodwill. Our fair value calculations are highly sensitive to certain assumptions and estimates used. We will continue to monitor changes to our Retail Bankingbusiness forecasts as we continue to perform periodic analyses of the risks and Wealth Managementstrategies of our business and our Private Banking reporting units,product offerings. If deterioration in economic and lower deferred tax assets. Beginningcredit conditions, a change in the second quarterstrategy or performance of 2020, our Retail Banking and Wealth Management and our Private Banking reporting units are being reported together within a newly created Wealth and Personal Banking segment for segment reporting purposes. For additional discussion ofbusiness or product offerings, or an increase in the resultscapital requirements of our business occurs, interim goodwill impairment testing, see Note 8, "Goodwill,"tests could again be required, which may result in the accompanying consolidated financial statements. These decreases were partially offset by higher outstanding settlement balances related to security sales and increased investments in Federal Home Loan Bank ("FHLB") stock.an impairment charge.

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HSBC USA Inc.

Deposits  The following table summarizes deposit balances by major depositor categories at June 30, 2020March 31, 2021 and increases (decreases) since December 31, 2019:2020:
   Increase (Decrease) From
   December 31, 2019
  
June 30, 2020 Amount %
 (dollars are in millions)
Individuals, partnerships and corporations$137,055
 $29,030
 26.9%
Domestic and foreign banks14,924
 6,220
 71.5
U.S. government and states and political subdivisions605
 244
 67.6
Foreign governments and official institutions3,449
 846
 32.5
Total deposits$156,033
 $36,340
 30.4%
Total core deposits(1)
$128,198
 $32,945
 34.6%
  Increase (Decrease) From
  December 31, 2020
  
March 31, 2021Amount%
 (dollars are in millions)
Individuals, partnerships and corporations$131,347 $(1,118)(.8)%
Domestic and foreign banks14,299 4,079 39.9 
U.S. government and states and political subdivisions339 18 5.6 
Foreign governments and official institutions2,597 453 21.1 
Total deposits$148,582 $3,432 2.4 %
Total core deposits(1)
$131,230 $5,644 4.5 %
(1)
(1)Core deposits, as calculated in accordance with Federal Financial Institutions Examination Council ("FFIEC") guidelines, generally include all domestic demand, money market and other savings accounts, as well as time deposits with balances not exceeding $250,000.
Core deposits, as calculated in accordance with Federal Financial Institutions Examination Council ("FFIEC") guidelines, generally include all domestic demand, money market and other savings accounts, as well as time deposits with balances not exceeding $250,000.
Total deposits increased compared with December 31, 20192020 as we actively raised funds to support elevated client demand for loans and our customers increased their demand and savings deposits in response to the economic uncertainty caused by the COVID-19 pandemic and the actions taken by the U.S. Government to provide financial support to households and businesses. Also contributing to the increase was higher overall deposits from affiliates. However, a shift in mix resulted in an increase in deposits from bank affiliates, partially offset by a decline in deposits from non-bank affiliates which drove the reduction in deposits from individuals, partnerships and corporations. The increase in deposits was higher deposits from affiliates which reflects $3.0 billion of long-term debt obligations issued to HSBC North America that were recharacterized as time deposits during the first quarter of 2020 as discussed below. These increases were partially offset by a decline in time deposits due in part to early client withdrawals.deposits.
Short-Term BorrowingsShort-term borrowings increased slightly compared with December 31, 20192020 reflecting higher securities sold under repurchase agreements and higher commercial paper outstanding.short-term borrowings from affiliates.
Long-Term DebtLong-term debt decreased compared with December 31, 20192020 as the impact of debt issuances, including increased borrowings from$1,500 million of senior debt issued to HSBC North America during the FHLB,first quarter of 2021, was more than offset by debt retirements, fair value movements on fair value option debt and $3.0 billion of long-term debt obligations issued to HSBC North America that were recharacterized as time deposits during the first quarter of 2020. See Note 14, "Related Party Transactions," for additional information.retirements. Debt issuances during the three and six months ended June 30, 2020March 31, 2021 totaled $506$2,288 million, and $6,350 million, respectively, of which $31$82 million and $4,916 million, respectively, was issued by HSBC Bank USA.
Incremental issuances from our shelf registration statement with the SEC totaled $1,434$706 million of senior structured notes during the sixthree months ended June 30, 2020.March 31, 2021.Total long-term debt outstanding under this shelf was $11,117$8,364 million and $13,295$9,138 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.
Incremental issuances from the HSBC Bank USA Global Bank Note Program totaled $166$82 million during the sixthree months ended June 30, 2020.March 31, 2021. Total debt outstanding under this program was $3,043$1,743 million and $2,908$1,888 million at June 30,March 31, 2021 and December 31, 2020, and December��31, 2019, respectively.
Borrowings from the FHLB totaled $5,750$2,750 million and $1,000$4,250 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.
Interest, Taxes and Other LiabilitiesInterest, taxes and other liabilities were lower compared with December 31, 20192020 due primarily to a lower margin requirements related to futures tradingliability for off-balance sheet credit exposures and a decline inlower accrued interest payable which wereincentive compensation, partially offset by higher outstanding settlement balances related to security purchases and a higher liability for off-balance sheet credit exposures.purchases.

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Results of Operations
Net Interest Income  Net interest income is the total interest income on earning assets less the total interest expense on deposits and borrowed funds. An analysis of consolidated average balances and interest rates is presented in this MD&A under the caption "Consolidated Average Balances and Interest Rates."
The significant components of net interest margin are summarized in the following table:
  2021 Compared
with 2020
Increase (Decrease)		 
Three Months Ended March 31,2021VolumeRate2020
 (dollars are in millions)
Interest income:
Short-term investments$16 $53 $(124)$87 
Trading securities48 (18)(14)80 
Securities177 (21)(45)243 
Commercial loans282 (72)(94)448 
Consumer loans169 1 (22)190 
Other9 (8)(2)19 
Total interest income701 (65)(301)1,067 
Interest expense:
Deposits81 38 (278)321 
Short-term borrowings5 (13)(22)40 
Long-term debt82 (37)(79)198 
Tax liabilities and other2 (1)(1)4 
Total interest expense170 (13)(380)563 
Net interest income$531 $(52)$79 $504 
Yield on total interest earning assets1.54 %2.43 %
Cost of total interest bearing liabilities.49 1.66 
Interest rate spread1.05 .77 
Benefit from net non-interest paying funds(1)
.12 .38 
Net interest margin on average earning assets1.17 %1.15 %
   
2020 Compared to
2019
Increase (Decrease)
  
Three Months Ended June 30,2020 Volume Rate 2019
 (dollars are in millions)
Interest income:       
Short-term investments$23
 $82
 $(232) $173
Trading securities48
 (9) (10) 67
Securities262
 33
 (69) 298
Commercial loans400
 61
 (213) 552
Consumer loans180
 8
 (19) 191
Other5
 11
 (26) 20
Total interest income918
 186
 (569) 1,301
Interest expense:       
Deposits200
 100
 (280) 380
Short-term borrowings15
 25
 (78) 68
Long-term debt162
 (50) (94) 306
Tax liabilities and other3
 (5) 1
 7
Total interest expense380
 70
 (451) 761
Net interest income$538
 $116
 $(118) $540
        
Yield on total interest earning assets1.88%     3.17%
Cost of total interest bearing liabilities.98
     2.37
Interest rate spread.90
     .80
Benefit from net non-interest paying funds(1)
.20
     .52
Net interest margin on average earning assets1.10%     1.32%
        

HSBC USA Inc.
(1)Represents the benefit associated with interest earning assets in excess of interest bearing liabilities. Increased percentages reflect growth in this excess or a higher cost of interest bearing liabilities, while decreased percentages reflect a reduction in this excess or a lower cost of interest bearing liabilities.

   
2020 Compared
with 2019
Increase (Decrease)
  
Six Months Ended June 30,2020 Volume Rate 2019
 (dollars are in millions)
Interest income:       
Short-term investments$110
 $103
 $(342) $349
Trading securities128
 11
 (13) 130
Securities505
 66
 (163) 602
Commercial loans848
 67
 (293) 1,074
Consumer loans370
 15
 (30) 385
Other24
 22
 (36) 38
Total interest income1,985
 284
 (877) 2,578
Interest expense:       
Deposits521
 154
 (346) 713
Short-term borrowings55
 43
 (118) 130
Long-term debt360
 (106) (152) 618
Tax liabilities and other7
 (6) (2) 15
Total interest expense943
 85
 (618) 1,476
Net interest income$1,042
 $199
 $(259) $1,102
        
Yield on total interest earning assets2.14%     3.19%
Cost of total interest bearing liabilities1.30
     2.34
Interest rate spread.84
     .85
Benefit from net non-interest paying funds(1)
.28
     .52
Net interest margin on average earning assets1.12%     1.37%
(1)
Represents the benefit associated with interest earning assets in excess of interest bearing liabilities. Increased percentages reflect growth in this excess or a higher cost of interest bearing liabilities, while decreased percentages reflect a reduction in this excess or a lower cost of interest bearing liabilities.
Net interest income was relatively flatincreased during the three months ended June 30, 2020March 31, 2021 due primarily to lower interest expense from interest bearing liabilities driven by lower rates paid and decreaseda shift in the year-to-date periodmix to lower cost deposits. The increase was partially offset by lower interest income from interest earning assets driven by lower yields on short-term investments, loans and securities as the unfavorable net impact of lower market rates andwell as the unfavorable impact of higher average interest bearing liability balances, primarily deposits, was largely offset in the three-month period and partially offset in the year-to-date period by the favorable impact of higherlower average interest earning asset balances, primarily short-term investments,commercial loans, securities and trading securities.
Short-term investments Interest income decreased during the three and six months ended June 30, 2020March 31, 2021 due to lower yields earned on these balances reflecting the impact of lower market rates, partially offset by higher average balances.
Trading securities Interest income decreased during the three months ended June 30, 2020March 31, 2021 due to lower average balances and lower yields reflecting the impact of lower market rates and lowerrates. The decrease in average balances was driven by decreasesdeclines in U.S. Treasury, foreign sovereign and U.S. Treasury positions. In the year-to-date period, interest income was relatively flat as the impact of lower yields was largelycorporate bond positions, partially offset by higher average balances due primarily to an increase in equity positions. Interest income associated with trading securities was partially offset within trading revenue by the performance of the associated derivatives as discussed further below.
Securities Interest income was lower during the three and six months ended June 30, 2020March 31, 2021 due to lower yields reflecting the impact of lower market rates partially offset by higherand lower average balances. HigherLower average balances were driven by increasesdeclines in U.S. Government agency mortgage-backed and U.S. Treasury and foreign sovereign securities, partially offset by a declinean increase in U.S. Government sponsored mortgage-backed securities.
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Commercial loans Interest income was lower during the three and six months ended June 30, 2020March 31, 2021 due to lower yields reflecting the impact of lower market rates on variable rate loans partially offset by higherand lower rates on newly originated PPP loans. Also contributing to the decrease was lower average balances driven by elevatedthe impact of our efforts to improve returns through disciplined lending, lower demand asfrom clients drew on their available lines of credit in March during the deterioration inreflecting increased capital markets activity coupled with economic conditionsuncertainty caused by the COVID-19 pandemic. A significant portion of the commercial lines of credit that were drawn in March were repaid during the second quarter of 2020.pandemic as well as lower loans to affiliates.

HSBC USA Inc.

Consumer loans Interest income decreased during the three and six months ended June 30, 2020March 31, 2021 due to lower yields reflecting the impact of lower market rates partially offset by higher average balances due to growth inon residential mortgage loans and credit card receivables.home equity mortgage loans.
Other Lower interest income during the three and six months ended June 30, 2020March 31, 2021 was due primarily to lower yields on cash collateral posted reflecting the impact of lower market rates, partially offset by higher average cash collateral balances.
Deposits Interest expense decreased during the three and six months ended June 30, 2020March 31, 2021 due to lower rates paid reflecting the impact of lower market rates, partially offset by higher average balances. Higher average balances were due primarily to growth in savings and demand deposits as we actively raised funds to support elevated client demand for loans and our customers increased their deposits in response to the economic uncertainty caused by the COVID-19 pandemic and the actions taken by the U.S. Government to provide financial support to households and businesses. The increase in balances was partially offset by a decline in time deposits.
Short-term borrowings Lower interest expense during the three and six months ended June 30, 2020March 31, 2021 was due to lower rates paid reflecting the impact of lower market rates partially offset by higherand lower average borrowings primarilydriven by a decline in securities sold under repurchase agreements.
Long-term debt Interest expense decreased during the three and six months ended June 30, 2020March 31, 2021 due to lower rates paid reflecting the impact of lower market rates on variable rate borrowings and lower average borrowings.
Tax liabilities and other Interest expense was lowerrelatively flat during the three and six months ended June 30, 2020 driven by lower average borrowings in securities sold, not yet repurchased.March 31, 2021.
Provision for Credit Losses  As discussed further in Note 21, "New Accounting Pronouncements," in the accompanying consolidated financial statements, beginning January 1, 2020, the provision for credit losses is recognized based on lifetime ECL for loans, off-balance sheet credit exposures, securities held-to-maturity and certain other financial assets measured at amortized cost, as well as credit losses on securities available-for-sale. Prior to January 1, 2020, the provision for credit losses was recognized based on probable incurred losses for loans only while debt securities were assessed for other-than-temporary impairment and credit loss expense for probable incurred losses on off-balance sheet credit exposures was separately recorded as a component of other expense within operating expenses as discussed below. As a result, current period amounts in the table below are not directly comparable to the prior year period.  The following table summarizes the components of the provision for credit losses:
Increase (Decrease)
Three Months Ended March 31,20212020Amount%
 (dollars are in millions)
Loans:
Commercial loans:
Real estate, including construction$(25)$51 $(76)*
Business and corporate banking(53)213 (266)*
Global banking(65)110 (175)*
Other commercial— 1 (1)(100.0)
Total commercial loans(143)375 (518)*
Consumer loans:
Residential mortgages(2)30 (32)*
Home equity mortgages(3)3 (6)*
Credit cards(1)95 (96)*
Other consumer4 9 (5)(55.6)
Total consumer loans(2)137 (139)*
Total loans(145)512 (657)*
Other financial assets measured at amortized cost— 2 (2)(100.0)
Securities available-for-sale— (1)1 100.0 
Off-balance sheet credit exposures(82)213 (295)*
Total provision for credit losses$(227)$726 $(953)*
     Increase (Decrease)
Three Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Commercial loans:       
Real estate, including construction$28
 $30
 $(2) (6.7)%
Business and corporate banking106
 13
 93
 *
Global banking176
 (9) 185
 *
Other commercial(1) (6) 5
 83.3
Total commercial loans309
 28
 281
 *
Consumer loans:       
Residential mortgages20
 1
 19
 *
Home equity mortgages(1) (1) —
 —
Credit cards3
 19
 (16) (84.2)
Other consumer6
 (1) 7
 *
Total consumer loans28
 18
 10
 55.6
Total loans$337
 $46
 $291
 *
Other financial assets measured at amortized cost(1) —
 (1) *
Securities available-for-sale1
 —
 1
 *
Off-balance sheet credit exposures(1)
(118) —
 (118) *
Total provision for credit losses$219
 $46
 $173
 *
        

HSBC USA Inc.
*Percentage change is greater than 100 percent.

     Increase (Decrease)
Six Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Loans:       
Commercial loans:       
Real estate, including construction$79
 $33
 $46
 *
Business and corporate banking319
 35
 284
 *
Global banking286
 5
 281
 *
Other commercial—
 (6) 6
 100.0
Total commercial loans684
 67
 617
 *
Consumer loans:       
Residential mortgages50
 —
 50
 *
Home equity mortgages2
 —
 2
 *
Credit cards98
 35
 63
 *
Other consumer15
 2
 13
 *
Total consumer loans165
 37
 128
 *
Total loans849
 104
 745
 *
Other financial assets measured at amortized cost1
 —
 1
 *
Securities available-for-sale—
 —
 —
 —
Off-balance sheet credit exposures(1)
95
 —
 95
 *
Total provision for credit losses$945
 $104
 $841
 *
*Percentage change is greater than 100 percent.
(1)
As discussed below, prior to January 1, 2020, credit loss expense for off-balance sheet credit exposures was recorded in other expense.
Our provision for credit losses increased $173decreased $953 million during the three months ended June 30, 2020March 31, 2021 due primarily to a higherlower provision for credit losses on both our commercial loan portfolio and to a lesser extent, a higher provision for credit losses on our consumer loan portfolio, partially offset byportfolios as well as a release in thelower provision for credit losses on off-balance sheet credit exposures recorded in the second quarter of 2020. In the year-to-date period, our provision for credit losses increased $841 million due to a higher provision for credit losses on our commercial loan portfolio and, to a lesser extent, a higher provision for credit losses on our consumer loan portfolio as well as a provision for credit losses on off-balance sheet credit exposures recorded in the first half of 2020.exposures.
The provision for credit losses on our commercial loan portfolio increased $281 million and $617decreased $518 million during the three and six months ended June 30, 2020, respectively.March 31, 2021 reflecting a release in credit loss reserves compared with a loss provision in the prior year period. The loss provisionsrelease in credit
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HSBC USA Inc.
reserves in the current year periods wereperiod was driven by improved economic conditions which resulted in improved economic forecasts used for calculating lifetime ECL and improvements in credit conditions associated with certain clients as well as a decline in credit reserves for risk factors associated with economic uncertainty. Client paydowns also contributed to the release in credit reserves in the current year period. In the prior year period, the loss provision was driven by the deterioration of economic conditions caused by the COVID-19 pandemic which resulted in a worsening of the economic forecasts we useused for calculating lifetime ECL in 2020 and provisions for risk factors associated with large loan exposures, downgrades reflecting weakness in the financial condition of certain clients and risk factors associated with large loan exposures. While a loss provision associated with loan growth as clients drew on their available lines of credit contributed to the loss provision in the 2020 year-to-date period, a significant portion of commercial lines of credit that were drawn in March were repaid during the second quarter of 2020 resulting in a release of credit loss reserves, partially offsetting the loss provision in the three months ended June 30, 2020. In the prior year periods, the loss provisions were driven by downgrades reflecting weakness in the financial condition of certain client relationships, loan growth and an update to the loss emergence period factors which were partially offset by a release in credit loss reserves for risk factors associated with fraud as well as releases in credit loss reserves due to paydowns.credit.
The provision for credit losses on our consumer loan portfolio was higher by $10 million and $128decreased $139 million during the three and six months ended June 30, 2020, respectively.March 31, 2021 reflecting a modest release in credit loss reserves compared with a loss provision in the prior year period. The loss provisionsrelease in credit reserves in the current year periods wereperiod was driven by improved economic conditions which resulted in improved economic forecasts used for calculating lifetime ECL and a release in credit reserves for risk factors primarily associated with forbearance accounts as well as a release in credit reserves due to a decline in credit card balances. In the prior year period, the loss provision was driven by the deterioration of economic conditions caused by the COVID-19 pandemic which resulted in a worsening of the economic forecasts we useused for calculating lifetime ECL in 2020 andas well as higher dollars of delinquency. Also contributingdelinquency in credit cards and, to the loss provisions in the current year periods wasa lesser extent, growth in personal loan balances due to new product promotions. While loss provisions were recorded for credit cards in the current year periods, the provision in the second quarter of 2020 was not as significant due to lower customer spending and changes in underwriting criteria driven by the current economic environment which resulted in a decline in credit card balances. In the prior year periods, the loss provisions were due primarily to provisions for credit losses on credit cards reflecting growth in balances due to increased customer activity and new product promotions, including higher dollars of delinquency.

HSBC USA Inc.

The provision for credit losses on off-balance sheet credit exposures reflectsdecreased $295 million during the three months ended March 31, 2021 reflecting a release in credit loss reserves duringcompared with a loss provision in the three months ended June 30, 2020prior year period. The release in credit reserves in the current year period resulted from the improved economic conditions consistent with commercial loans as lower outstanding exposure and a lower estimate of expected future draws more than offsetdiscussed above. In the impact ofprior year period, the loss provision resulted from the deterioration of economic conditions caused by the COVID-19 pandemic consistent with commercial loans as discussed above. In the year-to-date period, the provision for credit losses on off-balance sheet credit exposures reflects a loss provision resulting from the deterioration of economic conditions caused by the COVID-19 pandemic consistent with commercial loans as discussed above, partially offset by the impact of lower outstanding exposure.
See "Credit Quality" in this MD&A for additional discussion on the allowance for credit losses and the liability for off-balance sheet credit exposures.associated with our various loan portfolios.
Other Revenues  The following table summarizes the components of other revenues:
     Increase (Decrease)
Three Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Credit card fees, net$9
 $18
 $(9) (50.0)%
Trust and investment management fees33
 31
 2
 6.5
Other fees and commissions137
 162
 (25) (15.4)
Trading revenue192
 123
 69
 56.1
Other securities gains, net31
 23
 8
 34.8
Servicing and other fees from HSBC affiliates81
 88
 (7) (8.0)
Gain (loss) on instruments designated at fair value and related derivatives22
 (17) 39
 *
Other income (loss):    
 

Valuation of loans held for sale(9) —
 (9) *
Residential mortgage banking revenue4
 2
 2
 100.0
Insurance2
 4
 (2) (50.0)
Miscellaneous income (loss)(38) 2
 (40) *
Total other income (loss)(41) 8
 (49) *
Total other revenues$464
 $436
 $28
 6.4 %
        
     Increase (Decrease)
Six Months Ended June 30,2020 2019 Amount %
 (in millions)
Credit card fees, net$20
 $30
 $(10) (33.3)%
Trust and investment management fees64
 61
 3
 4.9
Other fees and commissions288
 309
 (21) (6.8)
Trading revenue206
 256
 (50) (19.5)
Other securities gains, net59
 30
 29
 96.7
Servicing and other fees from HSBC affiliates169
 169
 —
 —
Gain (loss) on instruments designated at fair value and related derivatives—
 (26) 26
 100.0
Other income (loss):    
 

Valuation of loans held for sale(8) —
 (8) *
Residential mortgage banking revenue2
 —
 2
 *
Insurance4
 6
 (2) (33.3)
Miscellaneous income (loss)47
 (9) 56
 *
Total other income (loss)45
 (3) 48
 *
Total other revenues$851
 $826
 $25
 3.0 %
Increase (Decrease)
Three Months Ended March 31,20212020Amount%
 (dollars are in millions)
Credit card fees, net$10 $11 $(1)(9.1)%
Trust and investment management fees29 31 (2)(6.5)
Other fees and commissions165 151 14 9.3 
Trading revenue41 14 27 *
Other securities gains, net29 28 1 3.6 
Servicing and other fees from HSBC affiliates83 88 (5)(5.7)
Gain (loss) on instruments designated at fair value and related derivatives18 (22)40 *
Other income:
Valuation of loans held for sale— 1 (1)(100.0)
Residential mortgage banking revenue (expense)16 (2)18 *
Insurance1 2 (1)(50.0)
Miscellaneous income (loss)(8)85 (93)*
Total other income9 86 (77)(89.5)
Total other revenues$384 $387 $(3)(.8)%
*Percentage change is greater than 100 percent.
*Percentage change is greater than 100 percent.
Credit card fees, net  Credit card fees, net declinedwere relatively flat during the three and six months ended June 30, 2020 driven byMarch 31, 2021 as lower interchange fees due to lower customer spending partiallywere largely offset by lower cost estimates associated with our credit rewards program.

HSBC USA Inc.

Trust and investment management fees  Trust and investment management fees increaseddecreased modestly during the three and six months ended June 30, 2020 dueMarch 31, 2021 reflecting a shift in mix to higher average assets under management.products with lower management fees.
Other fees and commissions Other fees and commissions decreasedincreased during the three and six months ended June 30, 2020March 31, 2021 due primarily to lowerhigher fees from loan syndication, loan commitments, wire transfers and other account services. These increases were partially offset by lower debit card fees. See Note 13, "Fee Income from Contracts with Customers," in the accompanying
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HSBC USA Inc.
consolidated financial statements for additional information including a summary of the components of other fees and commissions.
Trading revenue  Trading revenue is generated by participation in the foreign exchange, precious metals, rates, credit equities and precious metalsequities markets. The following table presents trading revenue by business activity. Not included in the table below is the impact of net interest income associated with trading securities which is an integral part of trading activities' overall performance. Certain derivatives, such as total return swaps, are economically hedged by holding the underlying interest bearing referenced assets. Net interest income related to trading activities is recorded in net interest income in the consolidated statement of income (loss). Trading revenue related to the mortgage banking business areis included as a component of other income (loss).income. During the first quarter of 2021, we changed our presentation for the components of trading revenue to provide a more detailed view. As a result, we have reclassified prior year amounts in order to conform to the current year presentation.
     Increase (Decrease)
Three Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Business Activities:       
Derivatives(1)(2)
$71
 $58
 $13
 22.4 %
Foreign Exchange45
 39
 6
 15.4
Metals57
 15
 42
 *
Balance Sheet Management—
 9
 (9) (100.0)
Global Banking4
 —
 4
 *
Other trading15
 2
 13
 *
Total trading revenue$192
 $123
 $69
 56.1 %
        
     Increase (Decrease)
Six Months Ended June 30,2020 2019 Amount %
 (in millions)
Business Activities:       
Derivatives(1)(2)
$31
 $86
 $(55) (64.0)%
Foreign Exchange151
 83
 68
 81.9
Metals56
 53
 3
 5.7
Balance Sheet Management(14) 20
 (34) *
Global Banking(5) —
 (5) *
Other trading(13) 14
 (27) *
Total trading revenue$206
 $256
 $(50) (19.5)%
Increase (Decrease)
Three Months Ended March 31,20212020Amount%
 (dollars are in millions)
Business Activities:
Foreign Exchange$60 $163 $(103)(63.2)%
Metals19 (1)20 *
Debt Markets(1)(16)15 93.8 
Securities Financing(35)(18)(17)(94.4)
Markets Treasury2 (14)16 *
Legacy structured credit products2 (74)76 *
Other trading(1)
(6)(26)20 76.9 
Total trading revenue$41 $14 $27 *
(1)
*Percentage change is greater than 100 percent.
(1)Includes trading revenue related to Global Banking and Equities as well as trading revenue associated with the exit or transfer of certain derivative contracts as part of our Restructuring Plan, including trading losses of $4 million recorded during the first quarter of 2021.
Includes derivative contracts related to the Credit, Rates and Equities business activities within Global Markets as well as our legacy structured credit products. Derivative contracts related to the Foreign Exchange and Metals business activities within Global Markets as well as derivative products related to Balance Sheet Management, Global Banking and other trading are reported separately within those respective business activities.
(2)
Derivatives trading revenue in all periods does not reflect associated net interest income as certain derivatives, such as total return swaps, were economically hedged by holding the underlying interest bearing referenced assets.
Trading revenue increased during the three months ended June 30, 2020 asMarch 31, 2021 due primarily to the non-recurrence of valuation losses of approximately $70 million that were recorded in March 2020 due to market volatility caused by the COVID-19 pandemic largely recovered during the second quarter resultingwhich resulted in higher trading revenue primarily in Derivatives and Metals. The recovery of valuation losses in Derivatives was largely attributed to legacy structured credit products.products, Metals, other trading and Markets Treasury. The increase in legacy structured credit products also reflects the impact of a structured note vehicle that was unwound during the third quarter of 2020 which was a key contributor to the loss recorded in the prior year period. Also contributing to the increase was higher revenue in Metals from a higher redeployment of liquidityDebt Markets due to Metalsbetter trading results and increased trading activity.improved risk management in sovereign debt and other debt products. These increases were partially offset by lower revenue in Derivatives from emerging markets rate products and $10 million of trading losses recorded during the second quarter of 2020 associated with the exit of certain derivative contracts as part of our restructuring plan as well as lower Balance Sheet Management revenue due to the unfavorable performance of economic hedge positions used to manage interest rate risk.
In the year-to-date period, trading revenue decreased due primarily to lower Derivatives revenue driven by lower revenue from rate products and interest rate swaps, unfavorable valuation adjustments on legacy structured credit products and $10 million of trading losses recorded during the second quarter of 2020 associated with the exit of certain derivative contracts as part of our restructuring plan. Also contributing to the decrease was lower Balance Sheet Management revenue due to the unfavorable

HSBC USA Inc.

performance of economic hedge positions used to manage interest rate risk as well as lower other trading revenue due primarily to unfavorable funding spread adjustments. These decreases were partially offset by higher Foreign Exchange revenue as higher market volatility driven by the COVID-19 pandemic resulted in increased trading activityopportunities in boththe prior year period as well as the impact of our decision to exit or transfer certain derivative contracts as part of our Restructuring Plan which resulted in lower revenue from emerging markets and G10 currencies, higherrate products. Securities Financing revenue from credit derivative productswas also lower due to increased client activity, and the non-recurrence of a loss of approximately $39 million recorded during the first quarter of 2019higher losses related to the unwind of one of our unconsolidated variable interest entities ("VIEs").swaps in prime brokerage.
Other securities gains, net  We maintain securities portfolios as part of our balance sheet diversification and risk management strategies. During the three and six months ended June 30,March 31, 2021 and 2020, we sold $3,609$3,907 million and $8,239$4,630 million, respectively, of primarily U.S. Treasury, U.S. Government agency mortgage-backed and U.S. Government sponsored mortgage-backed securities compared with sales of $2,044 million and $4,189 million during the prior year periods as part of a continuing strategy to maximize returns while balancing the securities portfolio for risk management purposes. Other securities gains, net increasedwas relatively flat during the three and six months ended June 30, 2020 reflecting the impact of higher sales activity compared with 2019.March 31, 2021. The gross realized gains and losses from sales of securities, which are included as a component of other securities gains, net above, are summarized in Note 4, "Securities," in the accompanying consolidated financial statements.
Servicing and other fees from HSBC affiliates Servicing and other fees from HSBC affiliates were lowerdecreased during the three months ended June 30, 2020 and were relatively flat in the year-to-date period asMarch 31, 2021 due primarily to lower cost reimbursements associated with shared services performed on behalf of other HSBC affiliates, including internal audit, was partially offset in the three-month period and offset in the year-to-date period by higher cost reimbursements associated with trading activities performed on behalf of HSBC Bank plc and higher sales commissions paid by HSBC Bank plc.
Gain (loss) on instruments designated at fair value and related derivatives  We have elected to apply fair value option accounting to certain commercial loans held for sale, certain securities purchased and sold under resale and repurchase agreements,student loans held for investment, certain of our own fixed-rate debt issuances and all of our hybrid instruments issued, including structured notes and deposits, and, beginning January 1, 2020, certain student loans held for investment.deposits. We also use derivatives to economically hedge the interest rate and other risks associated with certain financial assets and liabilities for which fair value option accounting has been elected. Gain (loss) on instruments designated at fair value and related derivatives increased during
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HSBC USA Inc.
the three months ended June 30, 2020March 31, 2021 attributable primarily to favorable movements related to the economic hedging of interest rate and other risks within our own debtstructured notes and structured notes. In the year-to-date period, gain (loss) on instruments designated atnon-recurrence of unfavorable fair value and related derivatives increased attributable primarily to favorableadjustments recorded in the prior year period on certain commercial loans held for sale which were impacted by the COVID-19 pandemic. These increases were partially offset by unfavorable movements related to the economic hedging of interest rate risk within our own debt, partially offset by unfavorable fair value adjustments on certain commercial loans held for sale which were impacted by the COVID-19 pandemic.debt. See Note 10, "Fair Value Option," in the accompanying consolidated financial statements for additional information including a breakout of these amounts by individual component.
Other income (loss)  Other income (loss) was lower during the three months ended June 30, 2020 due primarily to higher losses associated with credit default swap protection which largely reflects the hedging of a few client relationships and a valuation loss on a loan held for sale in the current year period. In the year-to-date period, other income (loss) was higherMarch 31, 2021 due primarily to a gainloss of $6 million in the current year periodfirst quarter of 2021 associated with credit default swap protection which largely reflects the hedging of a few client relationships compared with a lossgain of $51 million in the prior year period, as well asperiod. Also contributing to the decrease was lower income associated with bank owned life insurance and the non-recurrence of miscellaneous gains recorded duringin the first quarter of 2020, including a $12 million gain on extinguishment of time deposits reflecting early client withdrawals and a $9 million gain on the sale of one of our owned retail branch properties. These increasesdecreases were partially offset by a valuation losshigher residential mortgage banking revenue driven by higher gains on a loan held for sale in the current year period.sales of residential mortgage loans.

HSBC USA Inc.

Operating Expenses  The following table summarizes the components of operating expenses:
     Increase (Decrease)
Three Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Salaries and employee benefits$190
 $221
 $(31) (14.0)%
Support services from HSBC affiliates:       
Fees paid to HSBC Technology & Services (USA) ("HTSU")272
 298
 (26) (8.7)
Fees paid to HSBC Markets (USA) Inc. ("HMUS")19
 23
 (4) (17.4)
Fees paid to other HSBC affiliates98
 90
 8
 8.9
Total support services from HSBC affiliates389
 411
 (22) (5.4)
Occupancy expense, net38
 48
 (10) (20.8)
Other expenses:    
 

Equipment and software27
 21
 6
 28.6
Marketing16
 32
 (16) (50.0)
Outside services14
 12
 2
 16.7
Professional fees21
 18
 3
 16.7
Off-balance sheet credit reserves(1)
—
 1
 (1) (100.0)
Federal Deposit Insurance Corporation ("FDIC") assessment fees26
 (3) 29
 *
Miscellaneous6
 13
 (7) (53.8)
Total other expenses110
 94
 16
 17.0
Total operating expenses$727
 $774
 $(47) (6.1)%
Personnel - average number4,523
 4,708
    
Efficiency ratio72.6% 79.3%    
        
     Increase (Decrease)
Six Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Salaries and employee benefits$397
 $431
 $(34) (7.9)%
Support services from HSBC affiliates:       
Fees paid to HTSU535
 575
 (40) (7.0)
Fees paid to HMUS46
 50
 (4) (8.0)
Fees paid to other HSBC affiliates190
 166
 24
 14.5
Total support services from HSBC affiliates771
 791
 (20) (2.5)
Occupancy expense, net178
 93
 85
 91.4
Goodwill impairment784
 —
 784
 *
Other expenses:    
 

Equipment and software48
 40
 8
 20.0
Marketing33
 68
 (35) (51.5)
Outside services28
 28
 —
 —
Professional fees38
 29
 9
 31.0
Off-balance sheet credit reserves(1)
—
 (6) 6
 100.0
FDIC assessment fees33
 5
 28
 *
Miscellaneous22
 45
 (23) (51.1)
Total other expenses202
 209
 (7) (3.3)
Total operating expenses$2,332
 $1,524
 $808
 53.0 %
Personnel - average number4,544
 4,715
    
Efficiency ratio123.2% 79.0%    
Increase (Decrease)
Three Months Ended March 31,20212020Amount%
 (dollars are in millions)
Salaries and employee benefits$176 $207 $(31)(15.0)%
Support services from HSBC affiliates:
Fees paid to HSBC Technology & Services (USA) ("HTSU")244 263 (19)(7.2)
Fees paid to HSBC Markets (USA) Inc. ("HMUS")28 27 1 3.7 
Fees paid to other HSBC affiliates95 92 3 3.3 
Total support services from HSBC affiliates367 382 (15)(3.9)
Occupancy expense, net30 140 (110)(78.6)
Goodwill impairment— 784 (784)(100.0)
Other expenses:
Equipment and software23 21 2 9.5 
Marketing9 17 (8)(47.1)
Outside services17 14 3 21.4 
Professional fees19 17 2 11.8 
Federal Deposit Insurance Corporation ("FDIC") assessment fees18 7 11 *
Miscellaneous23 16 7 43.8 
Total other expenses109 92 17 18.5 
Total operating expenses$682 $1,605 $(923)(57.5)%
Personnel - average number3,943 4,576 
Efficiency ratio74.5 %180.1 %

*Percentage change is greater than 100 percent.
HSBC USA Inc.

*Percentage change is greater than 100 percent.
(1)
As discussed above, beginning January 1, 2020, credit loss expense for off-balance sheet credit exposures is recorded in the provision for credit losses.
Salaries and employee benefits  Salaries and employee benefits expense decreased during the three and six months ended June 30, 2020 driven by lower incentive compensation expense and lower pension expense, partially offset by higher severance costs. While continued cost management efforts, including targetedMarch 31, 2021 due primarily to staff reductions to optimize staffing and improve efficiency throughout 2019 as well as reductions in staff related to the consolidation of our retail branch networkRestructuring Plan and, restructuring plan, resulted into a decline in the average number of personnel, salaries expense was flat as the impact of these reductions was offset by the addition of higher cost personnel associated with growth initiatives in certain businesses.lesser extent, lower severance costs.
Support services from HSBC affiliates  Servicing and other fees from HSBC affiliates decreased during the three and six months ended June 30, 2020March 31, 2021 due primarily to lower cost allocations from our technology risk, compliance and finance support service functions.functions driven by the execution of our Restructuring Plan. These decreases were partially offset by higher allocated restructuring related costs driven by the execution of our restructuring plan,from HTSU and other HSBC affiliates, primarily severance costs and insupport service project costs. During the year-to-date period, contract cancellationfirst quarter of 2021, we recorded $19 million of allocated restructuring related costs from HTSU and equipment removal charges associatedother HSBC affiliates compared with $8 million of allocated costs during the branch exits discussed above.prior year period. A summary of the services received from various HSBC affiliates is included in Note 14, "Related Party Transactions," in the accompanying consolidated financial statements.
Occupancy expense, net  Occupancy expense, net was lower during the three months ended June 30, 2020March 31, 2021 due primarily to lower operating lease costs driven by the consolidationnon-recurrence of our retail branch network. In the year-to-date period, occupancy expense, net increased due to$92 million of lease impairment and other related costs of $86 millionthat were recorded duringin the first halfquarter of 2020 related to the consolidation of our retail branch network.network as part of our Restructuring Plan. See Note 2, "Strategic Initiatives," in the
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accompanying consolidated financial statements for additional information. Also contributing to the decrease was lower operating lease costs driven by the execution of our Restructuring Plan.
Goodwill impairmentReflects a goodwill impairment charge of $784 million recorded during the first quarter of 2020 representing the entire amount of goodwill previously allocated to our previously separate Retail Banking and Wealth Management and our Private Banking reporting units. Beginning in the second quarter of 2020, our Retail Banking and Wealth Management and our Private Banking reporting units are being reported together within a newly created Wealth and Personal Banking segment for segment reporting purposes. For additional discussion of the results of our interim goodwill impairment testing, see Note 8, "Goodwill," in the accompanying consolidated financial statements.
Other expenses  Excluding the impact of off-balance sheet credit reserves recorded in the prior year periods, other  Other expenses remainedwere higher during the three months ended June 30, 2020March 31, 2021 due primarily to lower levels of expense capitalization related to internally developed software and remained lower in the year-to-date period as higherincreased deposit insurance assessment fees driven primarily by lower unsecured debt balances. These increases were partially offset in the three-month period and more than offset in the year-to-date period by lower marketing expense. Also contributing to the decrease in the year-to-date period wasexpense and lower losses associated with card fraud.travel expense.
Efficiency ratio  Our efficiency ratio improved during the three months ended June 30, 2020March 31, 2021 due primarily to lower operating expenses and higher other revenues as discussed in detail above. Indriven by the year-to-date period, our efficiency ratio increased due primarily to higher operating expenses driven bynon-recurrence of a goodwill impairment charge recorded duringin the first quarter of 2020 as discussed in detail above.

HSBC USA Inc.

Income tax expense (benefit)The following table provides an analysis of the difference betweensummarizes our effective ratestax rate based on the provision for income taxes attributable to pretax income (loss) and the statutory U.S. Federal income:
Three Months Ended March 31,20212020
 (dollars are in millions)
Income (loss) before income tax$460 $(1,440)
Income tax expense (benefit)121 (157)
Effective tax rate26.3 %(10.9)%
Income tax rate:
Three Months Ended June 30,2020 2019
 (dollars are in millions)
Tax expense at the U.S. Federal statutory income tax rate$12
 21.0 % $33
 21.0 %
Increase (decrease) in rate resulting from:       
State and local taxes, net of Federal benefit4
 7.1
 7
 4.5
Non-deductible FDIC assessment fees5
 8.9
 —
 —
Low income housing and other tax credit investments(4) (7.1) (3) (1.9)
Other(2)
32
 57.6
 (2) (1.2)
Provision for income taxes$49
 87.5 % $35
 22.4 %
        
Six Months Ended June 30,2020 2019
 (dollars are in millions)
Tax expense (benefit) at the U.S. Federal statutory income tax rate$(291) (21.0)% $63
 21.0 %
Increase (decrease) in rate resulting from:       
State and local taxes, net of Federal benefit(15) (1.1) 12
 4.0
Non-deductible FDIC assessment fees7
 .5
 2
 .7
Non-deductible goodwill impairment(1)
165
 11.9
 —
 —
Low income housing and other tax credit investments(6) (.4) (6) (2.0)
Other(2)
32
 2.3
 (1) (.4)
Provision for income taxes$(108) (7.8)% $70
 23.3 %
(1)
Represents non-deductible goodwill impairment related to our previously separate Retail Banking and Wealth Management and Private Banking businessesexpense (benefit) increased during the first quarter of 2020.
(2)
For 2020, the amounts include $25 million related to the tax benefit limitation on interim period ordinary losses.
The provision for income taxes for the six months ended June 30, 2020 has been computed based on tax reporting guidance under ASC 740 for interim period ordinary losses. The year to date tax benefit reported above has been limited to not exceed the anticipated full year tax benefit from the ordinary losses. The provision for income taxes for the three months ended June 30, 2020 represents the difference between the provision for income taxes for the six months ended June 30, 2020 and the three months ended March 31, 2020. All material2021 driven by higher income. The income tax benefit for the three months ended March 31, 2020 was computed as a discrete period actual tax calculation and the lower effective tax benefit rate was related primarily to a non-deductible goodwill impairment related to our previously separate Retail Banking and Wealth Management and Private Banking businesses.
In April 2021, the New York State legislature approved comprehensive tax legislation as part of the State’s fiscal year 2022 budget which, among other things, will increase the entire net income tax rate adjustment items are disclosed infrom 6.5 percent to 7.25 percent and reinstate the reconciliation table above.capital tax with a $5 million cap. Given HSBC North America’s current tax position, we do not anticipate that these tax law changes will have a material impact on our current or deferred taxes or results of operations.


Segment Results – Group Reporting Basis
We have four distinct business segments that we utilize for management reporting and analysis purposes, which are aligned with HSBC's global business strategy: Wealth and Personal Banking ("WPB") which was created in the second quarter of 2020 and is discussed further below, Commercial Banking ("CMB"), Global Banking and Markets ("GB&M"GBM") and a Corporate Center ("CC"). See Item 1, "Business," in our 20192020 Form 10-K for a description of our segments at December 31, 2019, which are based upon our global businesses, including a discussion of the main business activities of the segments and a summary of their products and services.
We previously announced as part of our Restructuring Plan that we would combinecombined our Retail Banking and Wealth Management ("RBWM") and Private Banking ("PB") businesses to create a single WPB business. During the second quarter of 2020, we implemented a change to our internal management reporting to begin reportingreport what was historically RBWM and PB together within athe newly created WPB segment and, as a result, we have aligned our segment reporting to reflect this change for all periods presented.
During the second quarter of 2020, we also decided to implementimplemented a change to our internal management reporting to begin allocating Balance Sheet Management ("BSM"),allocate Markets Treasury, which was historically reported within the CC segment, to the WPB, CMB and GB&MGBM businesses to better align the revenue and expense to the businesses generating or utilizing this activity. As a result, we have aligned our segment reporting to reflect this change for all periods presented.

HSBC USA Inc.

See Note 15, "Business Segments," in the accompanying consolidated financial statements for a table that summarizes the impact of these changes on reported segment profit (loss) before tax, total assets and total deposits as of and for the three months and six months ended June 30, 2019.March 31, 2020. There have been no additional changes in the basis of our segmentation as compared with the presentation in our 20192020 Form 10-K. We are currently reviewing the financial information used to manage our GBM business, including the scope and content of the financial data being reported to our management and our Board of Directors. We will evaluate any impact such changes may have on our segment reporting once completed.
Net interest income of each segment represents the difference between actual interest earned on assets and interest incurred on liabilities of the segment, adjusted for a funding charge or credit that includes both interest rate and liquidity components.
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HSBC USA Inc.
Segments are charged a cost to fund assets (e.g. customer loans) and receive a funding credit for funds provided (e.g. customer deposits) based on equivalent market rates that incorporate both repricing (interest rate risk) and tenor (liquidity) characteristics. The objective of these charges/credits is to transfer interest rate risk to one centralized unit in BSM. BSMMarkets Treasury. Markets Treasury income statement and balance sheet results are allocated to each of the global businesses based upon tangible equity levels and levels of any surplus liabilities.
Certain other revenue and operating expense amounts are also apportioned among the business segments based upon the benefits derived from this activity or the relationship of this activity to other segment activity. These inter-segment transactions have not been eliminated, and we generally account for them as if they were with third parties.
We report financial information to our parent, HSBC, in accordance with HSBC Group accounting and reporting policies, which apply IFRSIFRSs as issued by the IASB and endorsed by the EU, and, asIASB. As a result, our segment results are prepared and presented using financial information prepared on the Group Reporting Basis as operating results are monitored and reviewed, trends are evaluated and decisions about allocating resources, such as employees, are primarily made on this basis. We continue, however, to monitor capital adequacy and report to regulatory agencies on a U.S. GAAP basis.
There have been no changes in the measurement of segment profit as compared with the presentation in our 20192020 Form 10-K.
The significant differences between U.S. GAAP and the Group Reporting Basis as they impact our results are summarized in Note 24, "Business Segments," in our 20192020 Form 10-K. In addition, see Note 15, "Business Segments," in the accompanying consolidated financial statements for a discussion ofThere have been no significant changes since December 31, 20192020 in the differences between U.S. GAAP and the Group Reporting Basis impacting our results.
Wealth and Personal Banking  The following table summarizes the Group Reporting Basis results for our WPB segment:
     Increase (Decrease)
Three Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Net interest income$197
 $265
 $(68) (25.7)%
Other operating income99
 104
 (5) (4.8)
Total operating income(1)
296
 369
 (73) (19.8)
Expected credit losses36
 13
 23
 *
Net operating income260
 356
 (96) (27.0)
Operating expenses326
 364
 (38) (10.4)
Loss before tax$(66) $(8) $(58) *
        
     Increase (Decrease)
Six Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Net interest income$429
 $538
 $(109) (20.3)%
Other operating income173
 194
 (21) (10.8)
Total operating income(1)
602
 732
 (130) (17.8)
Expected credit losses176
 34
 142
 *
Net operating income426
 698
 (272) (39.0)
Operating expenses1,361
 732
 629
 85.9
Loss before tax$(935) $(34) $(901) *
Increase (Decrease)
Three Months Ended March 31,20212020Amount%
 (dollars are in millions)
Net interest income$209 $232 $(23)(9.9)%
Other operating income87 74 13 17.6 
Total operating income(1)
296 306 (10)(3.3)
Expected credit losses(2)140 (142)*
Net operating income298 166 132 79.5 
Operating expenses287 1,035 (748)(72.3)
Profit (loss) before tax$11 $(869)$880 *
*Percentage change is greater than 100 percent.

*Percentage change is greater than 100 percent.
HSBC USA Inc.
(1)The following table summarizes the impact of key activities on the total operating income of our WPB segment:

(1)
The following table summarizes the impact of key activities on the total operating income of our WPB segment:
Increase (Decrease)
Three Months Ended March 31,20212020Amount%
 (dollars are in millions)
Retail banking current accounts, savings and deposits$110 $148 $(38)(25.7)%
Retail banking mortgages, credit cards and other personal lending88 67 21 31.3 
Wealth and asset management products20 23 (3)(13.0)
Private banking45 47 (2)(4.3)
Retail business banking and other(2)
33 21 12 57.1 
Total operating income$296 $306 $(10)(3.3)%
     Increase (Decrease)
Three Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Retail banking current accounts, savings and deposits$119
 $168
 $(49) (29.2)%
Retail banking mortgages, credit cards and other personal lending74
 63
 11
 17.5
Wealth and asset management products25
 24
 1
 4.2
Private banking41
 54
 (13) (24.1)%
Retail business banking and other(2)
37
 60
 (23) (38.3)
Total operating income$296
 $369
 $(73) (19.8)%
        
     Increase (Decrease)
Six Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Retail banking current accounts, savings and deposits$267
 $341
 $(74) (21.7)%
Retail banking mortgages, credit cards and other personal lending141
 115
 26
 22.6
Wealth and asset management products48
 47
 1
 2.1
Private banking88
 107
 (19) (17.8)
Retail business banking and other(2)
58
 122
 (64) (52.5)
Total operating income$602
 $732
 $(130) (17.8)%
(2)Includes cost reimbursements associated with activities performed on behalf of other HSBC affiliates and allocated Markets Treasury revenue.
(2)
Includes cost reimbursements associated with activities performed on behalf of other HSBC affiliates and allocated BSM revenue.
Our WPB segment reported a higher lossprofit before tax during the three months ended June 30, 2020March 31, 2021 compared with a loss before tax in the prior year period due primarily to lower net interest income and higher expected credit losses, partially offset by lower operating expenses. In the year-to-date period, our WPB segment reported a higher loss before tax due to higher operating expenses driven by the non-recurrence of a goodwill impairment charge of $693 million recorded during the first quarter of 2020, representing the entire amount of remaining goodwill previously recorded, as well as higherrecorded. Also contributing to the improvement was lower expected credit losses and, to a lesser extent, higher other operating income, partially offset by lower net interest income and lower other operating income. See Note 8, "Goodwill," in the accompanying consolidated financial statements for additional discussion regarding the factors which led to the impairment.
Net interest income decreased during the three and six months ended June 30, 2020March 31, 2021 due primarily to lower deposit spreads reflecting the impact of lower market rates, partially offset by improved residential mortgage loan spreads and higher loan balances in residential mortgages and credit cards.spreads.
Other operating income decreasedincreased during the three and six months ended June 30, 2020March 31, 2021 due to higher residential mortgage banking revenue driven by lower credit card fees due to lower customer spending and, inhigher gains on sales of residential mortgage loans as well as the year-to-date period,non-recurrence of a loss of $7 million recorded during the first quarter of 2020 related to extending the maturity of the total return swap position used to economically hedge the periodic payments made under the swap agreements entered into in conjunction with the sales of Visa Inc. Class B
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HSBC USA Inc.
common shares. These increases were partially offset by lower credit card fees due to lower customer spending and lower investment management fees reflecting a shift in mix to products with lower management fees.
Expected credit losses were higherimproved during the three and six months ended June 30, 2020March 31, 2021 reflecting a modest release in credit loss reserves compared with a loss provision in the prior year period. The release in credit reserves in the current year period was driven by improved economic conditions which resulted in improved economic forecasts used for calculating ECL as well as a release in credit reserves due to a decline in credit card balances. In the prior year period, the loss provision was driven by the deterioration of economic conditions caused by the COVID-19 pandemic which resulted in a worsening of the economic forecasts used for calculating ECL as well as higher dollars of delinquency in credit cards and, to a lesser extent, growth in personal loan balances due to new product promotions.
Excluding the goodwill impairment charge discussed above, operating expenses remained lower during the three months ended March 31, 2021 driven by the execution of our Restructuring Plan which resulted in lower staff costs, lower operating lease costs, lower marketing expense, lower fraud losses, lower severance costs and lower cost allocations from our technology support service function. These decreases were partially offset by higher deposit insurance assessment fees.
Client Assets The following table provides information regarding private banking client assets during the three months ended March 31, 2021 and 2020:
Three Months Ended March 31,20212020
(in millions)
Client assets at beginning of period$44,104 $39,295 
Net new money5,524 937 
Value change16 (2,440)
Client assets at end of period$49,644 $37,792 
Commercial Banking  The following table summarizes the Group Reporting Basis results for our CMB segment:
Increase (Decrease)
Three Months Ended March 31,20212020Amount%
 (dollars are in millions)
Net interest income$190 $210 $(20)(9.5)%
Other operating income66 58 8 13.8 
Total operating income(1)
256 268 (12)(4.5)
Expected credit losses(38)123 (161)*
Net operating income294 145 149 *
Operating expenses150 147 3 2.0 
Profit (loss) before tax$144 $(2)$146 *
*Percentage change is greater than 100 percent.
(1)The following table summarizes the impact of key activities on the total operating income of our CMB segment:
Increase (Decrease)
Three Months Ended March 31,20212020Amount%
 (dollars are in millions)
Lending and Transaction Management$106 $118 $(12)(10.2)%
Global Liquidity and Cash Management, current accounts and savings deposits99 110 (11)(10.0)
Global Trade and Receivables Finance14 14 — — 
Investment banking products and other(2)
37 26 11 42.3 
Total operating income$256 $268 $(12)(4.5)%
(2)Includes allocated Markets Treasury revenue.
Our CMB segment reported a profit before tax during the three months ended March 31, 2021 compared with a loss before tax in the prior year period due primarily to lower expected credit losses and, to a lesser extent, higher other operating income. The improvement was partially offset by lower net interest income and higher operating expenses.
Net interest income decreased during the three months ended March 31, 2021 due to lower deposit spreads reflecting the impact of lower market rates and lower average loan balances, partially offset by higher average deposit balances.
Other operating income increased during the three months ended March 31, 2021 due primarily to higher allocated Markets Treasury revenue and higher account service fees, partially offset by lower loan syndication fees.
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HSBC USA Inc.
Expected credit losses improved during the three months ended March 31, 2021 reflecting a release in credit loss reserves compared with a loss provision in the prior year period. The release in credit reserves in the current year period was driven by improved economic conditions which resulted in improved economic forecasts used for calculating ECL and client paydowns. In the prior year period, the loss provision was driven by the deterioration of economic conditions caused by the COVID-19 pandemic which resulted in a worsening of the economic forecasts used for calculating ECL and higher dollars of delinquency. Also contributing to the increases was growth in personal loan balances due to new product promotions. While ECL in credit cards was higher and contributed to the increaseprovisions for downgrades reflecting weakness in the year-to-date period, lower customer spendingfinancial condition of certain clients and changes in underwriting criteria driven by the current economic environment resulted in a decline in credit card balances and lower ECL in the three-month period.loan growth as clients drew on their available lines of credit.
Excluding the goodwill impairment as discussed above, operatingOperating expenses decreasedincreased during the three and six months ended June 30, 2020March 31, 2021 due primarily to lower marketing expense, lowerhigher deposit insurance assessment fees and higher incentive compensation expense, partially offset by lower salaries expense, lower travel expense and lower cost allocations from our technology and risk support service functions, primarily branch network costs.
Global Banking and in the year-to-date period, lower losses associated with card fraud. These decreases were partially offset by higher severance costs and higher deposit insurance assessment fees.

HSBC USA Inc.

Client Assets The following table provides information regarding private banking client assets during the six months ended June 30, 2020 and 2019:
Six Months Ended June 30,2020 2019
 (in millions)
Client assets at beginning of period$39,295
 $36,017
Net new money (outflows)(1,437) (286)
Client transfers to UBS Wealth Management Americas ("UBS")(1)
—
 (25)
Value change232
 2,316
Client assets at end of period$38,090
 $38,022
(1)
Reflects client asset transfers associated with the sale of certain private banking client relationships to UBS, which concluded in 2019.
Commercial Banking  Markets  The following table summarizes the Group Reporting Basis results for our CMBGBM segment:
     Increase (Decrease)
Three Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Net interest income$204
 $206
 $(2) (1.0)%
Other operating income52
 60
 (8) (13.3)
Total operating income(1)
256
 266
 (10) (3.8)
Expected credit losses181
 9
 172
 *
Net operating income75
 257
 (182) (70.8)
Operating expenses142
 143
 (1) (.7)
Profit (loss) before tax$(67) $114
 $(181) *
        
     Increase (Decrease)
Six Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Net interest income$414
 $412
 $2
 .5 %
Other operating income110
 121
 (11) (9.1)
Total operating income(1)
524
 533
 (9) (1.7)
Expected credit losses304
 15
 289
 *
Net operating income220
 518
 (298) (57.5)
Operating expenses289
 282
 7
 2.5
Profit (loss) before tax$(69) $236
 $(305) *
Increase (Decrease)
Three Months Ended March 31,20212020Amount%
 (dollars are in millions)
Net interest income$95 $90 $5 5.6 %
Other operating income246 263 (17)(6.5)
Total operating income(1)
341 353 (12)(3.4)
Expected credit losses(51)116 (167)*
Net operating income392 237 155 65.4 
Operating expenses201 192 9 4.7 
Profit before tax$191 $45 $146 *
*Percentage change is greater than 100 percent.
(1)The following table summarizes the impact of key activities on the total operating income of our GBM segment. For purposes of the discussion below the table, total operating income is referred to as revenue. During the first quarter of 2021, we changed our presentation for the components of total operating income to provide a more detailed view. As a result, we have reclassified prior year amounts in order to conform to the current year presentation.
Increase (Decrease)
Three Months Ended March 31,20212020Amount%
 (dollars are in millions)
Foreign Exchange and Metals$86 $136 $(50)(36.8)%
Debt Markets(2)(15)13 86.7 
Securities Financing9 5 4 80.0 
Equities16 8 8 100.0 
Securities Services6 7 (1)(14.3)
Markets and Securities Services other(2)
(4)7 (11)*
Credit and funding valuation adjustments18 (40)58 *
Total Markets and Securities Services ("MSS")129 108 21 19.4 
Global Liquidity and Cash Management ("GLCM")87 109 (22)(20.2)
Capital Markets67 40 27 67.5 
Credit and Lending18 18 — — 
Global Trade and Receivables Finance ("GTRF")12 13 (1)(7.7)
Global Banking other(3)
4 60 (56)(93.3)
Total Global Banking188 240 (52)(21.7)
GBM other(4)
24 5 19 *
Total operating income$341 $353 $(12)(3.4)%
(2)Includes revenue associated with the exit or transfer of certain derivative contracts as part of our Restructuring Plan, including trading losses of $4 million recorded during the first quarter of 2021.
(3)Includes net interest income on capital held in the business and not assigned to products as well as revenue associated with credit default swap protection and loan sales.
(4)Includes cost reimbursements associated with activities performed on behalf of other HSBC affiliates, allocated Markets Treasury revenue and certain corporate funding charges not assigned to products.
93

*Percentage change is greater than 100 percent.

HSBC USA Inc.

(1)
The following table summarizes the impact of key activities on the total operating income of our CMB segment:
     Increase (Decrease)
Three Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Lending and Transaction Management$101
 $108
 $(7) (6.5)%
Global Liquidity and Cash Management, current accounts and savings deposits113
 112
 1
 .9
Global Trade and Receivables Finance13
 13
 —
 —
Investment banking products and other(2)
29
 33
 (4) (12.1)
Total operating$256
 $266
 $(10) (3.8)%
        
     Increase (Decrease)
Six Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Lending and Transaction Management$219
 $218
 $1
 .5 %
Global Liquidity and Cash Management, current accounts and savings deposits223
 228
 (5) (2.2)
Global Trade and Receivables Finance27
 25
 2
 8.0
Investment banking products and other(2)
55
 62
 (7) (11.3)
Total operating$524
 $533
 $(9) (1.7)%
(2)
Includes allocated BSM revenue.
Our CMBGBM segment reported a losshigher profit before tax during the three and six months ended June 30, 2020 compared withMarch 31, 2021 due primarily to lower expected credit losses, partially offset by lower other operating income and higher operating expenses.
MSS revenue increased during the three months ended March 31, 2021 due primarily to a profit before taxgain from credit and funding valuation adjustments in the current year period due to compressed credit and funding spreads as well as widening interest rate spreads. In the prior year period, credit and funding valuation adjustments was a loss due to tightening interest rate spreads as well as widening credit spreads on derivative assets driven by market volatility caused by the COVID-19 pandemic. Also contributing to the increase was higher revenue in Debt Markets due to better trading results and improved risk management, higher revenue in Equities due to improved trading in structured derivatives and higher revenue in Securities Financing due to stronger revenue in short-term lending. The increase in MSS revenue was partially offset by lower Foreign Exchange and Metals revenue as market volatility driven by the COVID-19 pandemic resulted in increased trading opportunities in Foreign Exchange in the prior year periodsperiod as well as lower other revenue reflecting the impact of our decision to exit or transfer certain derivative contracts as part of our Restructuring Plan, including trading losses of $4 million recorded during the first quarter of 2021.
Global Banking revenue decreased during the three months ended March 31, 2021 due primarily to higher expectedlower revenue in Global Banking other due to lower revenue associated with credit losses and,default swap protection which largely reflects the hedging of a few client relationships. Also contributing to a lesser extent,the decrease was lower other operating income.
NetGLCM revenue due to lower net interest income was relatively flat during the three and six months ended June 30, 2020 as the favorable impact of higher loan and deposit balances was partially offset in the year-to-date period and more than offset in the three-month perioddriven by lower deposit spreads reflecting the impact of lower market rates, lowerpartially offset by the impact of higher average deposit balances. The decrease in Global Banking revenue was partially offset by increased Capital Markets revenue due to higher loan spreads reflecting compressionsyndication fees and higher liquidity recharges.revenue associated with the collection of a nonaccrual loan during the first quarter of 2021. The increase in Capital Markets revenue was partially offset by lower net interest income from lower average loan balances driven by the impact of our efforts to improve returns through disciplined lending as well as lower demand reflecting increased capital markets activity by clients coupled with economic uncertainty caused by the COVID-19 pandemic.
Other operating income decreasedGBM other revenue increased during the three and six months ended June 30, 2020March 31, 2021 due primarily to a loss on sale of a loanhigher allocated Markets Treasury revenue, lower corporate funding charges and lower fees from loan commitments.liquidity charges, partially offset by lower cost reimbursements.
Expected credit losses were higherimproved during the three and six months ended June 30, 2020March 31, 2021 reflecting a release in credit loss reserves compared with a loss provision in the prior year period. The release in credit reserves in the current year period was driven by improved economic conditions which resulted in improved economic forecasts used for calculating ECL and improvements in credit conditions associated with certain clients. Client paydowns also contributed to the release in credit reserves in the current year period. In the prior year period, the loss provision was driven by the deterioration of economic conditions caused by the COVID-19 pandemic which resulted in a worsening of the economic forecasts used for calculating ECL and higher loss estimatesprovisions for risk factors associated with oil and gas industry loan exposures, downgrades reflecting weakness in the financial condition of certain clients. Also contributing to the increase in the year-to-date period was a higher loss estimate forclients and loan growth as clients drew on their available lines of credit.
Operating expenses were relatively flat during the three months ended June 30, 2020 as lower incentive compensation expense, lower marketing expense and lower cost allocations from our technology and finance support service functions was largely offset by higher deposit insurance assessment fees. In the year-to-date period, operating expenses increased as lower incentive compensation expense and lower marketing expense was more than offset by higher deposit insurance assessment fees and higher cost allocations from our compliance support service function.

HSBC USA Inc.

Global Banking and Markets  The following table summarizes the Group Reporting Basis results for our GB&M segment:
     Increase (Decrease)
Three Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Net interest income$122
 $156
 $(34) (21.8)%
Other operating income263
 189
 74
 39.2
Total operating income(1)
385
 345
 40
 11.6
Expected credit losses19
 3
 16
 *
Net operating income366
 342
 24
 7.0
Operating expenses201
 216
 (15) (6.9)
Profit before tax$165
 $126
 $39
 31.0 %
        
     Increase (Decrease)
Six Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Net interest income$212
 $329
 $(117) (35.6)%
Other operating income526
 379
 147
 38.8
Total operating income(1)
738
 708
 30
 4.2
Expected credit losses135
 (14) 149
 *
Net operating income603
 722
 (119) (16.5)
Operating expenses393
 427
 (34) (8.0)
Profit before tax$210
 $295
 $(85) (28.8)%
*Percentage change is greater than 100 percent.

HSBC USA Inc.

(1)
The following table summarizes the impact of key activities on the total operating income of our GB&M segment. For purposes of the discussion below the table, total operating income is referred to as revenue.
     Increase (Decrease)
Three Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Credit$5
 $6
 $(1) (16.7)%
Rates46
 14
 32
 *
Foreign Exchange and Metals121
 35
 86
 *
Equities9
 10
 (1) (10.0)
Total Global Markets181
 65
 116
 *
Global Banking(2)
39
 107
 (68) (63.6)
Global Liquidity and Cash Management102
 121
 (19) (15.7)
Securities Services(2)
7
 6
 1
 16.7
Global Trade and Receivables Finance15
 12
 3
 25.0
Credit and funding valuation adjustments9
 3
 6
 *
Other(3)
32
 31
 1
 3.2
Total operating income$385
 $345
 $40
 11.6 %
        
     Increase (Decrease)
Six Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Credit$5
 $15
 $(10) (66.7)%
Rates60
 34
 26
 76.5
Foreign Exchange and Metals238
 100
 138
 *
Equities23
 13
 10
 76.9
Total Global Markets326
 162
 164
 *
Global Banking(2)
154
 189
 (35) (18.5)
Global Liquidity and Cash Management211
 247
 (36) (14.6)
Securities Services(2)
14
 13
 1
 7.7
Global Trade and Receivables Finance30
 27
 3
 11.1
Credit and funding valuation adjustments(31) 16
 (47) *
Other(3)
34
 54
 (20) (37.0)
Total operating income$738
 $708
 $30
 4.2 %
(2)
Beginning in June 2020, we changed our presentation for issuer services revenue that was previously reported in Securities Services and began reporting this revenue in Global Banking. As a result, we have reclassified $9 million and $18 million of operating income from Securities Services to Global Banking during the three and six months ended June 30, 2019, respectively, to conform to the current year presentation.
(3)
Includes cost reimbursements associated with activities performed on behalf of other HSBC affiliates, allocated BSM revenue and certain corporate funding charges not assigned to products.
Our GB&M segment reported a higher profit before tax during the three months ended June 30, 2020 due to higher other operating income and lower operating expenses, partially offset by lower net interest income and higher expected losses. In the year-to-date period, our GB&M segment reported a lower profit before tax due to higher expected credit losses and lower net interest income, partially offset by higher other operating income and lower operating expenses.
Credit revenue was relatively flat during the three months ended June 30, 2020 and decreased in the year-to-date period due to lower revenue from structuring and collateralized financing related activity.
Rates revenue increased during the three and six months ended June 30, 2020 due to higher revenue from emerging markets rate products and interest rate swaps, partially offset by $10 million of trading losses recorded during the second quarter of 2020 associated with the exit of certain derivative contracts as part of our restructuring plan. In addition, while hedging activities resulted in higher revenue and contributed to the increase in the three-month period, they resulted in lower revenue and partially offset the increase in the year-to-date period.
Foreign Exchange and Metals revenue increased during the three months ended June 30, 2020March 31, 2021 due primarily to higher Metals revenue as valuation losses that were recorded in March 2020 due to market volatility caused by the COVID-19 pandemic largely recovered during the second quarter. In the year-to-date period, Foreign Exchange and Metals revenue increased due to higher Foreign Exchange revenue as market volatility driven by the COVID-19 pandemic resulted in increased trading activity in both emerging market and G10 currencies. Also contributing to the increase in both periods was higher revenue in Metals from a higher redeployment of liquidity to Metals and increased trading activity.

HSBC USA Inc.

Equities revenue was relatively flat during the three months ended June 30, 2020 and increased in the year-to-date period due to increased client activity in prime brokerage.
Global Banking revenue decreased during the three months ended June 30, 2020 due primarily to lower net interest income from spread compression, lower fees from loan syndication and loan commitments and higher losses associated with credit default swap protection which largely reflects the hedging of a few client relationships. In the year to date period, Global Banking revenue decreased due primarily to lower net interest income from spread compression and lower fees from loan syndication and loan commitments, partially offset by a gain in the current year period associated with credit default swap protection which largely reflects the hedging of a few client relationships compared with a loss in the prior year period.
Global Liquidity and Cash Management revenue decreased during the three and six months ended June 30, 2020 due to lower net interest income driven by lower deposit spreads reflecting the impact of lower market rates, partially offset by higher deposit balances.
Securities Services revenue was relatively flat during the three and six months ended June 30, 2020.
Global Trade and Receivables Finance revenue was higher during the three and six months ended June 30, 2020 due to higher fees from standby letters of credit.
Credit and funding valuation adjustments resulted in gains during the three months ended June 30, 2020 as valuation losses recovered as market volatility improved during the second quarter. In the year-to-date period, credit and funding valuation adjustments resulted in losses attributable primarily to unfavorable credit valuation adjustments on derivative assets due to deteriorating credit spreads driven by market volatility caused by the COVID-19 pandemic as well as the impact of lower market rates. In the prior year periods, credit and funding valuation adjustments resulted in gains attributable primarily to favorable movements in our own credit spreads within our derivative liability balances.
Other revenue was relatively flat during the three months ended June 30, 2020 and decreased in the year-to-date period due to higher liquidity charges, lower cost reimbursements and lower allocated BSM revenue which were partially offset by lower corporate funding charges.
Expected credit losses were higher during the three and six months ended June 30, 2020 driven by the deterioration of economic conditions caused by the COVID-19 pandemic which resulted in a worsening of the economic forecasts used for calculating ECL and higher loss estimates for risk factors associated with oil and gas industry loan exposures and downgrades reflecting weakness in the financial condition of certain clients.
Operating expenses were lower during the three and six months ended June 30, 2020 due to lower incentive compensation expense and lower cost allocations from our technology, finance, legal, risk and compliance support service functions, partially offset by higher severance costsincentive compensation expense and higher deposit insurance assessment fees.fees, partially offset by lower salaries expense.

HSBC USA Inc.

Corporate Center  The following table summarizes the Group Reporting Basis results for our CC segment:
    Increase (Decrease)
Three Months Ended June 30,2020 2019 Amount %
Increase (Decrease)
Three Months Ended March 31,Three Months Ended March 31,20212020Amount%
(dollars are in millions) (dollars are in millions)
Net interest expense$(7) $(17) $10
 58.8 %Net interest expense$(1)$(13)$12 92.3 %
Other operating income85
 12
 73
 *
Other operating income (expense)Other operating income (expense)11 (24)35 *
Total operating income (expense)(1)
78
 (5) 83
 *
Total operating income (expense)(1)
10 (37)47 *
Expected credit losses—
 —
 —
 —
Expected credit losses— — — — 
Net operating income (expense)78
 (5) 83
 *
Net operating income (expense)10 (37)47 *
Operating expenses63
 38
 25
 65.8
Operating expenses31 135 (104)(77.0)
Profit (loss) before tax$15
 $(43) $58
 *
       
    Increase (Decrease)
Six Months Ended June 30,2020 2019 Amount %
(dollars are in millions)
Net interest expense$(20) $(45) $25
 55.6 %
Other operating income61
 9
 52
 *
Total operating income (expense)(1)
41
 (36) 77
 *
Expected credit losses—
 —
 —
 —
Net operating income (expense)41
 (36) 77
 *
Operating expenses198
 68
 130
 *
Profit (loss) before tax$(157) $(104) $(53) (51.0)%
Loss before taxLoss before tax$(21)$(172)$151 87.8 %
*Percentage change is greater than 100 percent.
94

*Percentage change is greater than 100 percent.HSBC USA Inc.
(1)
The following table summarizes the impact of key activities on the total operating income of our CC segment:
     Increase (Decrease)
Three Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Legacy structured credit products$61
 $(5) $66
 *
Other17
 —
 17
 *
Total operating income$78
 $(5) $83
 *
        
     Increase (Decrease)
Six Months Ended June 30,2020 2019 Amount %
 (dollars are in millions)
Legacy structured credit products$(13) $(36) $23
 63.9%
Other54
 —
 54
 *
Total operating income$41
 $(36) $77
 *
(1)The following table summarizes the impact of key activities on the total operating income (expense) of our CC segment:
Increase (Decrease)
Three Months Ended March 31,20212020Amount%
 (dollars are in millions)
Legacy structured credit products$3 $(74)$77 *
Other7 37 (30)(81.1)
Total operating income (expense)$10 $(37)$47 *
Our CC segment reported a profitlower loss before tax during the three months ended June 30, 2020 compared with a loss before tax in the prior year periodMarch 31, 2021 due to higher otherlower operating income and lower net interest expense, partially offset by higher operating expenses. In the year-to-date period, our CC segment reported a higher loss before tax due to higher operating expenses, partially offset by higher other operating income and lower net interest expense.
Net interest expense was lower during the three and six months ended June 30, 2020March 31, 2021 driven by improvedlower retained liquidity charges and lower net interest incomeexpense from legacy structured credit products and lower retained liquidity charges.products.
Other operating income increased during the three months ended June 30, 2020March 31, 2021 due primarily to favorablethe non-recurrence of valuation adjustmentslosses on legacy structured credit products as valuation losses that were recorded in March 2020 due to market volatility caused by the COVID-19 pandemic largely recoveredpandemic. The increase in legacy structured credit products also reflects the impact of a structured note vehicle that was unwound during the secondthird quarter as well as favorable movements relatedof 2020 which was a key contributor to the economic hedging of interest rate risk within our own debt. Inloss recorded in the year-to-date period, other operating income was higher due to favorableprior year period. These increases were partially offset by unfavorable movements related to the economic hedging of interest rate risk within our own debt and the non-recurrence of a loss of approximately $39 million recorded during the first quarter of 2019 related to the unwind of one of our unconsolidated VIEs and, in the year-to-date period,

HSBC USA Inc.

a $9 million gain recorded during the first quarter of 2020 on the sale of one of our owned retail branch properties. These increases were partially offset by unfavorable valuation adjustments on legacy structured credit products.
Operating expenses were higherlower during the three and six months ended June 30, 2020March 31, 2021 due primarily to higher allocatedthe non-recurrence of $97 million of lease impairment and other related costs driven by the execution of our restructuring plan, primarily severance costs and,that were recorded in the year-to-date period, contract cancellation and equipment removal charges associated with the branch exits. The increase in the year-to-date period also reflects costs recorded during the first quarter of 2020 related to the consolidation of our retail branch network including lease impairment and other related costsas part of $97 million. These increases in both periods were partially offset byour Restructuring Plan. Also contributing to the decrease was lower cost allocations from our technology risk, compliance and finance support service functions. These decreases were partially offset by higher allocated restructuring related costs from HTSU and other HSBC affiliates, primarily severance costs and support service project costs.
Reconciliation of Segment Results  As previously discussed, segment results are reported on a Group Reporting Basis. See Note 24,15, "Business Segments," in the accompanying consolidated financial statements for a reconciliation of our Group Reporting Basis segment results to U.S. GAAP consolidated totals.


Credit Quality
In the normal course of business, we enter into a variety of transactions that involve both on and off-balance sheet credit risk. Principal among these activities is lending to various commercial, institutional, governmental and individual customers. We participate in lending activity throughout the United States and, on a limited basis, internationally.
COVID-19 Loan Forbearance InitiativesWe have implemented various loan modification payment deferral programs to provide borrowers relief from the economic impacts of COVID-19.the COVID-19 pandemic. Substantially all of the loans under these programs are not classified as TDR Loans at June 30, 2020 due to our election to suspend TDR Loan classification under the CARES Act or their short-term nature as discussed under the Interagency Statement. In addition, under the Interagency Statement, for COVID-19 related loan modifications in the form of a payment deferral, the borrower’s past due status will not be impactedaffected during the deferral period and, if the loan was accruing at the time the relief was granted, the loan will generally not be placed on nonaccrual status as long as the borrower utilizes a payment deferral is forof six months or less. For consumer mortgage loans, when a borrower requests and is provided with extended relief in the form ofutilizes a payment deferral of more than six months, the loan will generally be placed on nonaccrual status and, if the loan does not meet the criteria in the CARES Act, assessed for TDR Loan classification. We have not modified our commercial loan nonaccrual policies as a result of this guidance. These COVID-19 related payment deferral programs could delay the recognition of delinquencies, nonaccrual status, and net charge-offs for those customers who may have otherwise moved into past due or nonaccrual status had such relief not been offered. See "Executive Overview," in this MD&A for additional information.
Allowance for Credit Losses / Liability for Off-Balance Sheet Credit Exposures As discussed further in Note 21, "New Accounting Pronouncements," in the accompanying consolidated financial statements, beginning January 1, 2020, an allowance for credit losses is recognized based on lifetime ECL for loans, securities held-to-maturity and certain other financial assets measured at amortized cost, and an allowance for credit losses is also recognized for securities available-for-sale. Prior to January 1, 2020, an allowance for credit losses was recognized based on probable incurred losses for loans only while debt securities were assessed for other-than-temporary impairment. In addition, beginning January 1, 2020, the liability for off-balance sheet credit exposures is recognized based on lifetime ECL while, prior to January 1, 2020, it was recognized based on probable incurred losses. The new guidance also requires inclusion of expected recoveries of amounts previously written off, limited to the cumulative amount of prior write-offs, when estimating the allowance for credit losses for in scope financial assets (including collateral-dependent assets). Prior to January 1, 2020, these expected recoveries were not recognized. See Note 6, "Allowance for Credit Losses," in the accompanying consolidated financial statements for a full discussion of our accounting policies and methodologies used to estimate ECL beginning in 2020. There have been no additional significant changes to our policies or methodologies during the first half of 2020.
Our accounting policies and methodologies related to the allowance for credit losses and liability for off-balance sheet credit exposures in prior periods are presented under the caption "Critical Accounting Policies and Estimates" in MD&A and in Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," in our 20192020 Form 10-K. Our approach toward credit risk management is summarized under the caption "Risk Management" in MD&A in our 20192020 Form 10-K.
Comparative credit information at January 1, 2020, reflecting There have been no significant revisions to our policies or methodologies during the adoptionfirst quarter of the new accounting guidance, has been included in the tables below where available. Comparative credit information at December 31, 2019, which is not comparable as it does not reflect the adoption of the new accounting guidance, has been retained as previously reported.2021.

95

HSBC USA Inc.

The following table summarizes our allowance for credit losses and the liability for off-balance sheet credit exposures:
June 30, 2020 March 31, 2020 January 1, 2020 December 31, 2019March 31, 2021December 31, 2020
(in millions) (in millions)
Allowance for credit losses:       Allowance for credit losses:
Loans:       Loans:
Commercial loans$983
 $727
 $381
 $507
Commercial loans$670 $814 
Consumer loans209
 204
 86
 130
Consumer loans183 201 
Total loans1,192
 931
 467
 637
Total loans853 1,015 
Securities held-to-maturity2
 2
 2
 —
Securities held-to-maturity2 2 
Other financial assets measured at amortized cost(1)
4
 5
 3
 —
Other financial assets measured at amortized cost(1)
2 2 
Securities available-for-sale3
 2
 3
 —
Securities available-for-sale1 1 
Total allowance for credit losses$1,201
 $940
 $475
 $637
Total allowance for credit losses$858 $1,020 
       
Liability for off-balance sheet credit exposures$253
 $371
 $158
 $104
Liability for off-balance sheet credit exposures$155 $237 
(1)
(1)Primarily includes accrued interest receivables and customer acceptances
See Note 21, "New Accounting Pronouncements," in the accompanying consolidated financial statements for a discussion of the changes in our allowance for credit losses and liability for off-balance sheet credit exposures at January 1, 2020 as compared with December 31, 2019.customer acceptances.
The total allowance for credit losses at June 30, 2020 increased $261March 31, 2021 decreased $162 million or 2816 percent as compared with MarchDecember 31, 2020 and increased $726 million or 153 percent as compared with January 1, 2020 due primarily to higherlower loss estimates on our commercial loan portfolio and, to a lesser extent, higher loss estimates on our consumer loan portfolio.
Our commercial allowance for credit losses at June 30, 2020 increased $256March 31, 2021 decreased $144 million or 3518 percent as compared with MarchDecember 31, 2020 and increased $602 million or 158 percent as compared with January 1, 2020 driven by the deterioration ofimproved economic conditions caused by the COVID-19 pandemic which resulted in a worsening of theimproved economic forecasts we useused for calculating lifetime ECL and improvements in 2020 and higher loss estimates for downgrades reflecting weakness in the financial condition ofcredit conditions associated with certain clients andas well as a decline in credit reserves for risk factors associated with large loan exposures. While higher loss estimates associated with loan growth as clients drew on their available lines of credit contributedeconomic uncertainty. Also contributing to the increase as compared with January 1, 2020, a significant portion of commercial lines of credit thatdecrease were drawn in March were repaid during the second quarter of 2020 resulting in a release of credit loss reserves, partially offsetting the increase as compared with March 31, 2020.client paydowns.
Our consumer allowance for credit losses at June 30, 2020 increased $5March 31, 2021 decreased $18 million or 29 percent as compared with MarchDecember 31, 2020 and increased $123 million or 143 percent as compared with January 1, 2020due primarily to a lower allowance for credit losses in credit cards driven by the deterioration ofimproved economic conditions caused by the COVID-19 pandemic which resulted in a worsening of theimproved economic forecasts we useused for calculating lifetime ECL and a release in 2020 and higher dollars of delinquency.credit reserves for risk factors primarily associated with forbearance accounts. Also contributing to the increasesdecrease was a higher allowance forrelease in credit losses on other consumer loans reflecting growth in personal loan balancesreserves due to new product promotion. While a higher allowance for credit losses on credit cards contributed to the increase as compared with January 1, 2020, lower customer spending and changes in underwriting criteria driven by the current economic environment resulted in a decline in credit card balances reflecting seasonality and a lower allowance for credit losses on credit cards as compared with March 31, 2020.origination volumes.
The liability for off-balance sheet credit exposures at June 30, 2020March 31, 2021 decreased $118$82 million or 3235 percent as compared with MarchDecember 31, 2020 as a lower estimate of expected future draws more than offsetresulting from the impact of the deterioration ofimproved economic conditions caused by the COVID-19 pandemic consistent with commercial loans as discussed above. As compared with January 1, 2020, the liability for off-balance sheet credit exposures increased $95 million or 60 percent resulting from the deterioration of economic conditions caused by the COVID-19 pandemic consistent with commercial loans as discussed above, partially offset by the impact of lower outstanding exposure.

HSBC USA Inc.

Summary of Credit Loss Experience for Loans
The following table presents the allowance for credit losses on loans by major loan categories:
Amount 
% of
Loans to
Total
Loans
 Amount 
% of
Loans to
Total
Loans
 Amount 
% of
Loans to
Total
Loans
 Amount 
% of
Loans to
Total
Loans
Amount% of
Loans 
to
Total
Loans		Amount% of
Loans 
to
Total
Loans
June 30, 2020 March 31, 2020 January 1, 2020 December 31, 2019March 31, 2021December 31, 2020
(dollars are in millions) (dollars are in millions)
Commercial(1)
$983
 71.6% $727
 74.9% $381
 70.3% $507
 70.3%
Commercial(1)
$670 66.9 %$814 67.0 %
Consumer:               Consumer:
Residential mortgages(19) 25.2
 (41) 22.1
 (74) 26.0
 12
 26.0
Residential mortgages(9)29.9 (9)29.6 
Home equity mortgages16
 1.1
 16
 1.0
 13
 1.2
 6
 1.2
Home equity mortgages21 1.1 22 1.2 
Credit cards190
 1.6
 212
 1.6
 137
 2.0
 105
 2.0
Credit cards144 1.5 161 1.7 
Other consumer22
 .5
 17
 .4
 10
 .5
 7
 .5
Other consumer27 .6 27 .5 
Total consumer209
 28.4
 204
 25.1
 86
 29.7
 130
 29.7
Total consumer183 33.1 201 33.0 
Total$1,192
 100.0% $931
 100.0% $467
 100.0% $637
 100.0%Total$853 100.0 %$1,015 100.0 %
(1)See Note 6, "Allowance for Credit Losses," in the accompanying consolidated financial statements for components of the commercial allowance for credit losses.
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(1)
See Note 6, "Allowance for Credit Losses," in the accompanying consolidated financial statements for components of the commercial allowance for credit losses.HSBC USA Inc.
The following table sets forth key ratios for the allowance for credit losses on loans for the periods indicated:

June 30, 2020 March 31, 2020 January 1, 2020 December 31, 2019
Ratio of Allowance for credit losses to:       
Loans:(1)
       
Commercial:       
Non-affiliates1.95 % 1.25 % .83 % 1.11%
Affiliates—
 —
 —
 —
Total commercial1.89
 1.19
 .79
 1.05
Consumer:       
Residential mortgages(.10) (.23) (.42) .07
Home equity mortgages2.02
 1.97
 1.52
 .70
Credit cards16.17
 16.31
 9.75
 7.47
Other consumer7.17
 5.09
 3.53
 2.47
Total consumer1.02
 1.00
 .42
 .64
Total loans1.64
 1.14
 .68
 .93
Net charge-offs:(2)
       
Commercial(3)
596 % 621 % 847 % 1,127%
Consumer249
 268
 159
 241
Total net charge-offs479
 482
 472
 643
Nonperforming loans:(1)(4)
       
Commercial150 % 283 % 160 % 213%
Consumer42
 47
 19
 29
Total nonperforming loans103
 134
 67
 92
March 31, 2021December 31, 2020
Ratio of Allowance for credit losses to:
Loans:(1)
Commercial:
Non-affiliates1.70 %2.01 %
Affiliates— — 
Total commercial1.63 1.96 
Consumer:
Residential mortgages(.05)(.05)
Home equity mortgages3.01 3.03 
Credit cards15.37 15.10 
Other consumer8.60 8.46 
Total consumer.90 .98 
Total loans1.39 1.63 
Net charge-offs:(2)
Commercial(3)
16,750 %754 %
Consumer282 251 
Total net charge-offs1,236 540 
Nonperforming loans:(1)(4)
Commercial140 %150 %
Consumer15 17 
Total nonperforming loans51 59 
(1)
Ratios exclude loans held for sale as these loans are carried at the lower of amortized cost or fair value.
(2)
Ratios at June 30, 2020 and March 31, 2020 reflect year-to-date net charge-offs, annualized. Ratios at January 1, 2020 and December 31, 2019 reflect full year net charge-offs for 2019.
(3)
Our commercial net charge-off coverage ratio for the year-to-date periods ended June 30, 2020 and March 31, 2020 and year ended December 31, 2019 was 71 months, 75 months and 135 months, respectively. The net charge-off coverage ratio represents the commercial allowance for credit losses at period end

(1)Ratios exclude loans held for sale as these loans are carried at the lower of amortized cost or fair value.
HSBC USA Inc.
(2)Ratios at March 31, 2021 reflect year-to-date net charge-offs, annualized. Ratios at December 31, 2020 reflect full year net charge-offs.

(3)Our commercial net charge-off coverage ratio for the quarter ended March 31, 2021 and year ended December 31, 2020 was 2,010 months and 90 months, respectively. The net charge-off coverage ratio represents the commercial allowance for credit losses at period end divided by average monthly commercial net charge-offs during the period. Our
(4)Represents our commercial net charge-off coverage ratio for January 1, 2020, calculated by dividing the commercialand consumer allowance for credit losses, at January 1, 2019as appropriate, divided by average monthly commercial net charge-offs during 2019, was 102 months.the corresponding outstanding balance of total nonperforming loans held for investment. Nonperforming loans include accruing loans contractually past due 90 days or more.
(4)
Represents our commercial and consumer allowance for credit losses, as appropriate, divided by the corresponding outstanding balance of total nonperforming loans held for investment. Nonperforming loans include accruing loans contractually past due 90 days or more.
See Note 6, "Allowance for Credit Losses," in the accompanying consolidated financial statements for a rollforward of credit losses by general loan categories for the three and six months ended June 30, 2020March 31, 2021 and 2019.2020.
The allowance for credit losses on loans as a percentage of total loans held for investment at June 30, 2020 increasedMarch 31, 2021 decreased as compared with MarchDecember 31, 2020 due to the increase in our allowance for credit losses for the reasons discussed above and a decrease in total loans held for investment driven primarily by lower commercial loans as a significant portion of commercial lines of credit that were drawn in March were repaid during the second quarter of 2020. As compared with January 1, 2020, the allowance for credit losses as a percentage of total loans held for investment increased as the increasedecrease in our allowance for credit losses for the reasons discussed above outpaced an increasea decrease in total loans held for investment driven primarily by higher commercial loans.investment.
The allowance for credit losses on loans as a percentage of net charge-offs at June 30, 2020 was relatively flatMarch 31, 2021 increased as compared with both MarchDecember 31, 2020 and January 1, 2020 as the increase in our allowance for credit losses for the reasons discussed above was offset by an increasea decrease in dollars of net charge-offs driven by higherlower charge-offs in our commercial loan portfolio and, to a lesser extent, our consumer loan portfolio.
The allowance for credit losses as a percentage of nonperforming loans held for investment at June 30, 2020 decreased as compared with March 31, 2020 as an increase in nonperforming loans driven by higher nonperforming loans in our commercial loan portfolio and, to a lesser extent, our consumer loan portfolio outpaced the increasedecrease in our allowance for credit losses for the reasons discussed above. As compared with January 1, 2020, the
The allowance for credit losses on loans as a percentage of nonperforming loans held for investment increasedat March 31, 2021 decreased as compared with December 31, 2020 as the increasedecrease in our allowance for credit losses for the reasons discussed above outpaced an increasea decrease in nonperforming loans driven by higherlower nonperforming loans in our commercial loan portfolio, and to a lesser extent,partially offset by higher nonperforming loans in our consumer loan portfolio.
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HSBC USA Inc.
Delinquency  The following table summarizes dollars of two-months-and-over contractual delinquency and two-months-and-over contractual delinquency as a percentage of total loans ("delinquency ratio"):. For COVID-19 related loan modifications in the form of a payment deferral, the borrower's past due status will not be affected during the deferral period.
 June 30, 2020 March 31, 2020 December 31, 2019
  
Delinquent Loans Delinquency Ratio Delinquent Loans Delinquency Ratio Delinquent Loans Delinquency Ratio
 (dollars are in millions)
Commercial$43
 .08% $27
 .04% $41
 .08%
Consumer:           
Residential mortgages(1)(2)
413
 2.26
 364
 2.02
 350
 1.96
Home equity mortgages(1)(2)
27
 3.41
 26
 3.19
 25
 2.93
Credit cards38
 3.23
 39
 3.00
 34
 2.42
Other consumer8
 2.61
 7
 2.10
 7
 2.47
Total consumer486
 2.36
 436
 2.13
 416
 2.04
Total$529
 .73
 $463
 .57
 $457
 .66
 March 31, 2021December 31, 2020
  
Delinquent LoansDelinquency RatioDelinquent LoansDelinquency Ratio
 (dollars are in millions)
Commercial$194 .47 %$109 .26 %
Consumer:
Residential mortgages(1)(2)
400 2.17 404 2.20 
Home equity mortgages(1)(2)
25 3.58 25 3.44 
Credit cards36 3.84 28 2.63 
Other consumer9 2.87 8 2.51 
Total consumer470 2.31 465 2.27 
Total$664 1.08 $574 .92 
(1)
(1)At June 30, 2020, March 31, 2020 and December 31, 2019, consumer mortgage loan delinquency includes $243 million, $249 million and $256 million, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less costs to sell.
(2)
The following table reflects dollars of contractual delinquency and delinquency ratios for interest-only loans and adjustable rate mortgage loans:
 June 30, 2020 March 31, 2020 December 31, 2019
 Delinquent Loan Delinquency Ratio Delinquent Loan Delinquency Ratio Delinquent Loan Delinquency Ratio
 (dollars are in millions)
Interest-only loans$34
 1.00% $33
 .99% $32
 .95%
ARM loans191
 1.48
 149
 1.17
 142
 1.14
Compared with March 31, 20202021 and December 31, 2019, our2020, consumer mortgage loan delinquency includes $273 million and $281 million, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less costs to sell.
(2)The following table reflects dollars of contractual delinquency and delinquency ratios for interest-only loans and adjustable rate mortgage loans:
 March 31, 2021December 31, 2020
Delinquent LoanDelinquency RatioDelinquent LoanDelinquency Ratio
 (dollars are in millions)
Interest-only loans$33 .89 %$34 .94 %
ARM loans201 1.54 191 1.46 
Our two-months-and-over contractual delinquency ratio increased 16 basis points and 7 basis points, respectively,compared with December 31, 2020 due primarily to higher dollars of delinquency in our consumercommercial loan portfolio. While dollars of delinquency in our commercial loan portfolio were higher and contributed to the increase compared with March 31, 2020, they were relatively flat compared with December 31, 2019.
Our commercial loan two-months-and-over contractual delinquency ratio increased 421 basis points compared with MarchDecember 31, 2020 and was flat compared with December 31, 2019. The increase compared with March 31, 2020 was due primarily to higher dollars

HSBC USA Inc.

of delinquency driven by the deteriorationa global banking client and a commercial real estate client, both of economic conditions caused by the COVID-19 pandemic and, to a lesser extent, lower outstanding loan balances as a significant portion of lines of credit that were drawn in March were repaidwhich became 60 days delinquent during the second quarterfirst quarter. The increase in commercial loan dollars of 2020.delinquency was partially offset by collections on several corporate banking loans.
Compared with March 31, 2020 and December 31, 2019, ourOur consumer loan two-months-and-over contractual delinquency ratio increased 23 basis points and 32 basis points, respectively, due primarily to higherslightly compared with December 31, 2020 as an increase in dollars of delinquency in credit cards driven by customers that exited forbearance relief was partially offset by lower dollars of delinquency in residential mortgages driven by the deterioration of economic conditions caused by the COVID-19 pandemic as some customers did not seek forbearance relief or became 60 days delinquent prior to seeking forbearance relief.mortgages.
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HSBC USA Inc.
Net Charge-offs of Loans  The following table summarizes net charge-off (recovery) dollars as well as the net charge-off (recovery) of loans for the period annualized, as a percentage of average loans, excluding loans held for sale, ("net charge-off ratio"):
Three Months Ended March 31,
Three Months Ended June 30, Six Months Ended June 30,20212020
2020 2019 2020 2019Net
Charge-off
Dollars		Net
Charge-off
Ratio		Net
Charge-off
Dollars		Net
Charge-off
Ratio
Net
Charge-off
Dollars
 
Net
Charge-off
Ratio
 
Net
Charge-off
Dollars
 
Net
Charge-off
Ratio
 
Net
Charge-off
Dollars
 
Net
Charge-off
Ratio
 
Net
Charge-off
Dollars
 
Net
Charge-off
Ratio
 (dollars are in millions)
(dollars are in millions)
Commercial:               Commercial:
Business and corporate banking$54
 1.10 % $1
 .03% $64
 .75 % $3
 .04%Business and corporate banking$1 .03 %$10 .27 %
Global banking—
 —
 3
 .06
 19
 .19
 3
 .03
Global banking— — 19 .42 
Other commercial(1) (.08) —
 —
 (1) (.04) —
 —
Total commercial53
 .37
 4
 .03
 82
 .31
 6
 .02
Total commercial1 .01 29 .23 
Consumer:               Consumer:
Residential mortgages(2) (.04) —
 —
 (5) (.06) 2
 .02
Residential mortgages(2)(.04)(3)(.07)
Home equity mortgages(1) (.50) —
 —
 (1) (.25) —
 —
Home equity mortgages(2)(1.12)— — 
Credit cards25
 8.30
 11
 4.06
 45
 6.99
 22
 4.18
Credit cards16 6.57 20 5.89 
Other consumer1
 1.40
 1
 1.53
 3
 2.20
 2
 1.65
Other consumer4 5.51 2 3.05 
Total consumer23
 .45
 12
 .24
 42
 .41
 26
 .26
Total consumer16 .32 19 .37 
Total$76
 .39
 $16
 .09
 $124
 .33
 $32
 .09
Total$17 .11 $48 .27 
Our net charge-off ratio as a percentage of average loans increased 30 basis points and 24decreased 16 basis points during the three and six months ended June 30, 2019, respectively,March 31, 2021 due primarily to higher levelsa lower level of net charge-offs in our commercial loan portfolio driven by the deterioration of two corporate banking loans and, in the year-to-date period, the sale of a global banking loan duringand deterioration of a corporate banking loan in the first quarter of 2020.prior year period. Also contributing to the increasesdecrease, to a lesser extent, was higher levelsa lower level of net charge-offs in our consumer loan portfolio due primarily to higherlower charge-offs in credit cards reflecting growtha decline in credit card balances. The decrease in our net charge-off ratio was partially offset by lower average loan balances due to increased customer activity and product promotions.driven by a decline in the commercial loan portfolio.

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HSBC USA Inc.

Nonperforming Loans  The following table summarizes nonperforming loans, including nonaccrual loans and accruing loans contractually 90 days or more past due, as well as nonperforming loans as a percentage of total loans ("nonperforming ratio"):
 June 30, 2020 March 31, 2020 December 31, 2019

Nonperforming
Loans(1)
 
Nonperforming
Ratio
 
Nonperforming
Loans(1)
 
Nonperforming
Ratio
 
Nonperforming
Loans(1)
 
Nonperforming
Ratio
 (dollars are in millions)
Commercial$656
 1.26% $257
 .42% $238
 .49%
Consumer:           
Residential mortgages(2)(3)(4)
428
 2.34
 370
 2.05
 381
 2.14
Home equity mortgages(2)(3)
38
 4.80
 38
 4.67
 46
 5.39
Credit Cards28
 2.38
 28
 2.15
 24
 1.71
Other consumer3
 .98
 2
 .60
 5
 1.77
Total consumer497
 2.42
 438
 2.14
 456
 2.24
Total$1,153
 1.59
 $695
 .85
 $694
 1.01
            
Other real estate owned(5)
$4
   $6
   $10
  
March 31, 2021December 31, 2020
Nonperforming
Loans(1)
Nonperforming
Ratio
Nonperforming
Loans(1)
Nonperforming
Ratio
 (dollars are in millions)
Commercial$478 1.16 %$544 1.31 %
Consumer:
Residential mortgages(2)(3)(4)
1,101 5.98 1,079 5.87 
Home equity mortgages(2)(3)
64 9.17 63 8.67 
Credit cards28 2.99 19 1.78 
Other consumer3 .96 2 .63 
Total consumer1,196 5.87 1,163 5.68 
Total$1,674 2.72 $1,707 2.75 
Other real estate owned(5)
$2 $3 
(1)
(1)See Note 5, "Loans," in the accompanying consolidated financial statements for a breakout of nonaccrual loans and accruing loans contractually 90 days or more past due. At March 31, 2021 and December 31, 2020, total nonperforming loans include $31 million and $21 million, respectively, of accruing loans contractually 90 days or more past due, primarily credit cards and other consumer loans.
(2)At March 31, 2021 and December 31, 2020, nonperforming consumer mortgage loans include $371 million and $375 million, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.
(3)Nonperforming consumer mortgage loans held for investment include all loans which are 90 or more days contractually delinquent as well as loans discharged under Chapter 7 bankruptcy and not re-affirmed and second lien loans where the first lien loan that we own or service is 90 or more days contractually delinquent. At March 31, 2021 and December 31, 2020, nonaccrual consumer mortgage loans also included $535 million and $590 million, respectively, of loans under COVID-19 related payment deferral programs where the borrowers utilized a payment deferral of more than six months and, as a result, have been placed on nonaccrual status.
(4)Nonperforming consumer mortgage loans for all periods does not include guaranteed loans purchased from the Government National Mortgage Association. Repayment of these loans is predominantly insured by the Federal Housing Administration and as such, these loans have different risk characteristics from the rest of our customer loan portfolio.
(5)Includes $1 million or less of commercial other real estate owned at March 31, 2021 and December 31, 2020.
See Note 5, "Loans," in the accompanying consolidated financial statements for a breakout of nonaccrual loans and accruing loans contractually 90 days or more past due. At June 30, 2020, March 31, 2020 and December 31, 2019, total nonperforming loans include $34 million, $32 million and $30 million, respectively, of accruing loans contractually 90 days or more past due, primarily credit cards.
(2)
At June 30, 2020, March 31, 2020 and December 31, 2019, nonperforming consumer mortgage loans include $293 million, $286 million and $289 million respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.
(3)
Nonperforming consumer mortgage loans held for investment include all loans which are 90 or more days contractually delinquent as well as loans discharged under Chapter 7 bankruptcy and not re-affirmed and second lien loans where the first lien loan that we own or service is 90 or more days contractually delinquent.
(4)
Nonperforming consumer mortgage loans for all periods does not include guaranteed loans purchased from the Government National Mortgage Association. Repayment of these loans is predominantly insured by the Federal Housing Administration and as such, these loans have different risk characteristics from the rest of our customer loan portfolio.
(5)
Includes $1 million or less of commercial other real estate owned at June 30, 2020, March 31, 2020 and December 31, 2019.
Our nonperforming loanloans ratio increased 74 basis points and 58decreased 3 basis points compared with MarchDecember 31, 2020 and December 31, 2019, respectively, due primarily to higher nonperforming loans driven by higherlower nonperforming loans in our commercial loan portfolio, and to a lesser extent,partially offset by higher nonperforming loans in our consumer loan portfolio.
Compared with March 31, 2020 and December 31, 2019, our Our commercial nonperforming loanloans ratio increased 84decreased 15 basis points and 77 basis points, respectively, due primarily to higher nonperforming loans reflecting downgrades driven by the deterioration of economic conditions caused by the COVID-19 pandemic. While outstanding loan balances were lower as a significant portion of lines of credit that were drawn in March were repaid during the second quarter of 2020 and contributed to the increase compared with March 31, 2020, they were higher and partially offset the increase compared with December 31, 2019.
2020 due to lower nonperforming loans driven by the paydown of two global banking loans, partially offset by downgrades. Our consumer nonperforming loanloans ratio increased 28 basis points and 1819 basis points compared with MarchDecember 31, 2020 and December 31, 2019, respectively, due primarily to higher nonperforming loans in residential mortgages reflecting an increase in customers that utilized a forbearance relief payment deferral of more than six months and, to a lesser extent, higher nonperforming loans in credit cards driven by the deterioration of economic conditions caused by the COVID-19 pandemic as some customers did not seek forbearance relief or were placed on nonaccrual status prior to seekingthat exited forbearance relief.
Our policies and practices for problem loan management and placing loans on nonaccrual status are summarized in Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," in our 20192020 Form 10-K, as updated for COVID-19 related loan modifications in Note 5, "Loans," in the accompanying consolidated financial statements.10-K.
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HSBC USA Inc.
Concentration of Credit Risk  A concentration of credit risk is defined as a significant credit exposure with an individual or group engaged in similar activities or affected similarly by economic conditions. We enter into a variety of transactions in the normal course of business that involve both on and off-balance sheet credit risk. Principal among these activities is lending to various commercial, institutional, governmental and individual customers throughout the United States and internationally. We manage the varying degrees of credit risk associated with on and off-balance sheet transactions through specific credit policies and procedures which provide for a strict approval, monitoring and reporting process. It is our policy to require collateral when it is deemed appropriate. Varying degrees and types of collateral are secured depending upon management's credit evaluation.
Commercial Credit ExposureOur commercial credit exposure is diversified across a broad range of industries. Commercial loans outstanding and unused commercial commitments by industry are presented in the table below:
March 31, 2021December 31, 2020
Commercial UtilizedUnused Commercial CommitmentsCommercial UtilizedUnused Commercial Commitments
 (in millions)
Real estate$7,995 $2,293 $8,323 $2,163 
Diversified financials6,878 12,571 7,644 13,058 
Consumer services4,895 3,645 4,619 3,692 
Retailing2,255 5,565 2,286 4,989 
Chemicals2,028 3,887 2,012 4,025 
Commercial and professional services1,954 5,407 1,877 5,245 
Capital goods1,764 5,880 1,696 5,884 
Energy1,543 5,978 1,849 6,123 
Consumer durables and apparel1,315 2,920 1,457 2,914 
Technology hardware and equipment1,110 7,207 1,329 7,054 
Banks922 311 476 187 
Utilities862 813 839 1,371 
Software and services825 2,307 823 2,322 
Health care equipment and services680 2,048 761 1,957 
Telecommunication services655 578 367 606 
Pharmaceuticals, biotechnology and life science598 3,660 605 3,912 
Food, beverage and tobacco581 2,876 612 3,030 
Transportation581 526 676 398 
Food and staples retailing469 2,173 522 2,055 
Metals and mining462 1,148 455 1,158 
Total commercial credit exposure in top 20 industries(1)
38,372 71,793 39,228 72,143 
All other industries1,128 12,865 1,271 13,257 
Total commercial credit exposure(2)
$39,500 $84,658 $40,499 $85,400 
(1)Based on utilization at March 31, 2021.
(2)Excludes commercial credit exposures with affiliates.
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HSBC USA Inc.
Geographic ConcentrationsThe following table reflects regional exposure at March 31, 2021 and December 31, 2020 for our real estate secured loan portfolios:
Commercial
Real Estate, including Construction Loans		Residential
Mortgages and
Home Equity
Mortgages
March 31, 2021
New York State27.4 %30.4 %
California23.8 46.3 
North Central United States4.0 1.3 
North Eastern United States, excluding New York State6.4 7.6 
Southern United States30.7 9.3 
Western United States, excluding California7.7 5.1 
Total100.0 %100.0 %
December 31, 2020
New York State27.1 %30.6 %
California25.6 45.9 
North Central United States3.9 1.4 
North Eastern United States, excluding New York State6.2 7.7 
Southern United States29.8 9.4 
Western United States, excluding California7.4 5.0 
Total100.0 %100.0 %
Residential Mortgage LoansOur consumer loan portfolio includes the following types of loans:
•Interest-only loans – A loan which allows a customer to pay the interest-only portion of the monthly payment for a period of time which results in lower payments during the initial loan period.

HSBC USA Inc.

•Adjustable rate mortgage ("ARM") loans – A loan which allows us to adjust pricing on the loan in line with market movements.
The following table summarizes the balances of interest-only and ARM loans in our loan portfolios at June 30, 2020March 31, 2021 and December 31, 2019.2020. Each category is not mutually exclusive and loans may appear in more than one category below.

June 30, 2020 December 31, 2019
 (in millions)
Interest-only residential mortgage and home equity mortgage loans$3,448
 $3,362
ARM loans(1)
12,915
 12,487
March 31, 2021December 31, 2020
 (in millions)
Interest-only residential mortgage and home equity mortgage loans$3,703 $3,597 
ARM loans(1)
13,083 13,038 
(1)During the remainder of 2021 and during 2022, approximately $465 million and $651 million, respectively, of the ARM loans will experience their first interest rate reset.
(1)
During the remainder of 2020 and during 2021, approximately $201 million and $851 million, respectively, of the ARM loans will experience their first interest rate reset.
The following table summarizes the concentrations of first and second liens within the outstanding residential mortgage and home equity mortgage portfolios. Amounts in the table exclude residential mortgage loans held for sale of $44$95 million and $77$208 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.

June 30, 2020
December 31, 2019
 (in millions)
Closed end:   
First lien$18,281
 $17,801
Second lien32
 35
Revolving(1)
760
 818
Total$19,073
 $18,654
March 31, 2021December 31, 2020
 (in millions)
Closed end:
First lien$18,425 $18,377 
Second lien35 31 
Revolving(1)
663 696 
Total$19,123 $19,104 
(1)A majority of revolving are second lien mortgages.

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(1)
A majority of revolving are second lien mortgages.
Geographic ConcentrationsThe following table reflects regional exposure at June 30, 2020 and December 31, 2019 for our real estate secured loan portfolios:
 
Commercial
Real Estate, including Construction Loans
 
Residential
Mortgages and
Home Equity
Mortgages
June 30, 2020   
New York State27.7% 30.5%
California23.2
 45.6
North Central United States3.6
 1.6
North Eastern United States, excluding New York State7.6
 7.7
Southern United States31.2
 9.6
Western United States, excluding California6.7
 5.0
Total100.0% 100.0%
December 31, 2019   
New York State29.9% 31.1%
California21.6
 44.6
North Central United States3.5
 1.8
North Eastern United States, excluding New York State7.4
 7.7
Southern United States32.2
 10.0
Western United States, excluding California5.4
 4.8
Total100.0% 100.0%

HSBC USA Inc.

Commercial Credit ExposureOur commercial credit exposure is diversified across a broad range of industries. Commercial loans outstanding and unused commercial commitments by industry are presented in the table below:
 June 30, 2020 December 31, 2019
 Commercial Utilized Unused Commercial Commitments Commercial Utilized Unused Commercial Commitments
 (in millions)
Real estate$9,586
 $2,457
 $9,200
 $3,115
Diversified financials8,360
 12,070
 9,247
 12,562
Consumer services5,349
 3,551
 4,601
 3,347
Retailing2,970
 4,758
 2,413
 4,143
Energy2,804
 6,567
 2,560
 6,337
Capital goods2,663
 5,898
 2,189
 9,579
Commercial and professional services2,548
 4,669
 2,101
 5,072
Chemicals2,175
 3,632
 2,197
 3,879
Consumer durables and apparel2,111
 2,539
 1,649
 3,367
Technology hardware and equipment1,581
 6,270
 1,531
 6,520
Software and services1,185
 1,505
 910
 1,861
Health care equipment and services1,035
 1,684
 898
 1,780
Automobiles and components1,023
 465
 454
 1,183
Semiconductors and semiconductor equipment925
 1,387
 991
 1,506
Construction materials809
 436
 442
 1,070
Utilities776
 1,475
 607
 812
Food and staples retailing766
 2,344
 654
 2,322
Transportation711
 607
 447
 935
Food, beverage and tobacco667
 2,755
 565
 2,884
Metals and mining662
 903
 517
 1,185
Total commercial credit exposure in top 20 industries(1)
48,706
 65,972
 44,173
 73,459
All other industries1,642
 13,052
 1,695
 13,430
Total commercial credit exposure(2)
$50,348
 $79,024
 $45,868
 $86,889
(1)
Based on utilization at June 30, 2020.
(2)
Excludes commercial credit exposures with affiliates.














HSBC USA Inc.

Credit Risks Associated with Derivative Contracts  Credit risk associated with derivatives is measured as the net replacement cost of derivative contracts in a receivable position in the event the counterparties of such contracts fail to perform under the terms of those contracts. In managing derivative credit risk, both the current exposure, which is the replacement cost of contracts on the measurement date, as well as an estimate of the potential change in value of contracts over their remaining lives are considered. Counterparties to our derivative activities include financial institutions, central clearing parties, foreign and domestic government agencies, corporations, funds (mutual funds, hedge funds, etc.), insurance companies and private clients as well as other HSBC entities. These counterparties are subject to regular credit review by the credit risk management department. To minimize credit risk, we may enter into legally enforceable master netting agreements which reduce risk by permitting the closeout and netting of transactions with the same counterparty upon occurrence of certain events. In addition, we reduce credit risk by obtaining collateral from counterparties. The determination of the need for and the levels of collateral will differ based on an assessment of the credit risk of the counterparty and/or regulatory requirements.
The total risk in a derivative contract is a function of a number of variables, such as:
•volatility of interest rates, currencies, equity or corporate reference entity used as the basis for determining contract payments;
•current market events or trends;
•country risk;
•maturity and liquidity of contracts;
•creditworthiness of the counterparties in the transaction;
•the existence of a master netting agreement among the counterparties; and
•existence and value of collateral received from counterparties to secure exposures.
The table below presents total credit risk exposure calculated using the general risk-based capital rules of the Basel III Standardized Approach which includes the net positive mark-to-market of the derivative contracts plus any adjusted potential future exposure as measured in reference to the notional amount. The regulatory capital rules recognize that bilateral netting agreements reduce credit risk and, therefore, allow for reductions of risk-weighted assets when netting requirements have been met and collateral exists. As a result, risk-weighted amounts for regulatory capital purposes are a portion of the original gross exposures. Furthermore, many contracts contain provisions that allow us to close out the transaction if the counterparty fails to post required collateral. In addition, many contracts give us the right to break the transactions earlier than the final maturity date. As a result, these contracts have potential future exposures that are often much smaller than the future exposures derived from the regulatory capital rules.

June 30, 2020 December 31, 2019
 (in millions)
Risk associated with derivative contracts:   
Total credit risk exposure$29,160
 $33,076
Less: collateral held against exposure6,903
 7,704
Net credit risk exposure$22,257
 $25,372

March 31, 2021December 31, 2020
 (in millions)
Risk associated with derivative contracts:
Total credit risk exposure$19,073 $21,624 
Less: collateral held against exposure6,060 5,907 
Net credit risk exposure$13,013 $15,717 

Liquidity and Capital Resources
Effective liquidity management is defined as ensuring we can meet customer loan requests, customer deposit maturities/withdrawals and other cash commitments efficiently under both normal operating conditions and under unpredictable circumstances of industry or market stress. To achieve this objective, we have guidelines that require sufficient liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets. Guidelines are set for the consolidated balance sheet of HSBC USA to ensure that it is a source of strength for our regulated, deposit-taking banking subsidiary, as well as to address the more limited sources of liquidity available to it as a holding company. Similar guidelines are set for HSBC Bank USA to ensure that it can meet its liquidity needs in various stress scenarios. Cash flow analysis, including stress testing scenarios, forms the basis for liquidity management and contingency funding plans.
During the first halfquarter of 2020,2021, the COVID-19 pandemic caused disruptioncontinued to the financial markets as well asimpact business and economic activity. We continue to actively monitor and control our liquidity and funding risk in accordance with HSBC policy. To date, we have not experienced any significant impact to our liquidity or funding capabilities as a result of the pandemic. See "Risk Management" in this MD&A for further discussion of our approach towards liquidity and funding risk management, including information regarding the key measures employed to define, monitor and control our liquidity and funding risk. To date, we have not experienced any significant impact to our liquidity or funding capabilities as a result of this disruption. While there was elevated commercial loan demand in March as clients drew on their available lines of credit during the deterioration in economic conditions,

HSBC USA Inc.

we actively raised deposits, short-term borrowings in the form of securities sold under repurchase agreements, and borrowed from the FHLB in order to support the elevated client demand for loans while maintaining adequate liquidity and increasing cash. In addition, a significant portion of the commercial lines of credit that were drawn in March were repaid during the second quarter of 2020. We continuously monitor the impact of market events on our liquidity positions and will continue to adapt our framework as necessary to reflect market events.
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Interest Bearing Deposits with Banks totaled $17,734$53,607 million and $2,038$14,353 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, of which $17,440$53,404 million and $1,801$13,895 million, respectively, were held with the Federal Reserve Bank. Balances may fluctuate from period to period depending upon our liquidity position at the time and our strategy for deploying liquidity. Surplus interest bearing deposits with the Federal Reserve Bank may be deployed into securities purchased under agreements to resell or other investments depending on market conditions and the opportunity to maximize returns.
Federal Funds Sold and Securities Purchased under Agreements to Resell totaled $29,255$3,760 million and $17,838$35,746 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. Balances may fluctuate from period to period depending upon our liquidity position at the time and our strategy for deploying liquidity.
Trading Assets includes securities totaling $18,987$18,765 million and $23,488$19,494 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on trends.
Securities includes securities available-for-sale and securities held-to-maturity totaling $53,303$42,496 million and $48,956$49,653 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on trends.
Short-Term Borrowings totaled $6,102$5,243 million and $3,659$4,952 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on short-term borrowing trends.
Deposits totaled $156,033$148,582 million and $119,693$145,150 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, which included $128,198$131,230 million and $95,253$125,586 million, respectively, of core deposits as calculated in accordance with FFIEC guidelines. See "Balance Sheet Review" in this MD&A for further analysis and discussion on deposit trends.
Long-Term Debt decreased to $25,746$18,179 million at June 30, 2020March 31, 2021 from $26,697$19,979 million at December 31, 2019.2020. The following table presents the maturities of long-term debt at June 30, 2020:March 31, 2021:
(in millions)
(in millions)
2020$4,413
20216,072
2021$4,286 
20225,276
20222,870 
20231,272
20231,452 
20241,395
20241,506 
202520252,743 
Thereafter7,318
Thereafter5,322 
Total$25,746
Total$18,179 
The following table summarizes issuances and retirements of long-term debt during the sixthree months ended June 30, 2020March 31, 2021 and 2019:2020:
Six Months Ended June 30,2020 2019
Three Months Ended March 31,Three Months Ended March 31,20212020
(in millions) (in millions)
Long-term debt issued$6,350
 $2,928
Long-term debt issued$2,288 $5,844 
Long-term debt repaid(3,656) (4,294)Long-term debt repaid(4,071)(2,864)
Net long-term debt issued (repaid)$2,694
 $(1,366)Net long-term debt issued (repaid)$(1,783)$2,980 
See "Balance Sheet Review" in this MD&A for further analysis and discussion on long-term debt trends, including additional information on debt issued and repaid during the sixthree months ended June 30, 2020.March 31, 2021.
Under our shelf registration statement on file with the SEC, we may issue certain securities including debt securities and preferred stock. We satisfy the eligibility requirements for designation as a "well-known seasoned issuer," which allows us to file a registration statement that does not have a limit on issuance capacity. The ability to issue under the registration statement is limited by the authority granted by the Board of Directors. During the first halfquarter of 2020,2021, due to an anticipated decrease in utilization of the shelf registration statement, the Board of Directors approved a reduction in the amount we are authorized to issue from $30,000$25,000 million at December 31, 20192020 to $25,000$20,000 million, of which $13,883$11,636 million was available at June 30, 2020.March 31, 2021. HSBC Bank USA has a $40,000 million Global Bank Note Program that provides for the issuance of subordinated and senior notes, of which $13,127$12,867 million was available at June 30, 2020.March 31, 2021. We anticipate using the Global Bank Note Program more in the future as part of our efforts designed to minimize overall funding costs while accessing diverse funding channels.

HSBC USA Inc.

As a member of the FHLB and the Federal Reserve Bank of New York, we have secured borrowing facilities which are collateralized by loans and investment securities. At June 30, 2020,March 31, 2021, long-term debt included $5,750$2,750 million of borrowings from the FHLB facility. Based upon the amounts pledged as collateral under these facilities, we have additional borrowing capacity of up to $8,448$14,392 million.
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Preferred Equity  See Note 18, "Preferred Stock," in our 20192020 Form 10-K for information regarding all outstanding preferred share issues.
Common Equity  During the six months ended June 30, 2020,first quarter of 2021, HSBC USA did not receive any cash capital contributions from its parent, HSBC North America, and did not make any capital contributions to its subsidiary, HSBC Bank USA.
Capital Ratios  In managing capital, we develop targets for common equity Tier 1 capital to risk-weighted assets, Tier 1 capital to risk-weighted assets, total capital to risk-weighted assets, Tier 1 capital to adjusted quarterly average assets (i.e., the "Tier 1 leverage ratio") and Tier 1 capital to total leverage exposure (i.e., the "supplementary leverage ratio" or "SLR"). Capital targets are reviewed at least semi-annually to ensure they reflect our business mix and risk profile, as well as real-time conditions and circumstances. The following table summarizes HSBC USA's Basel III capital ratios calculated as of June 30, 2020March 31, 2021 and December 31, 2019:2020:
 June 30, 2020 December 31, 2019
Common equity Tier 1 capital to risk-weighted assets13.1% 13.1%
Tier 1 capital to risk-weighted assets14.2
 14.1
Total capital to risk-weighted assets17.4
 16.3
Tier 1 leverage ratio(1)
8.1
 9.9
Supplementary leverage ratio(2)
7.6
 6.9
March 31, 2021December 31, 2020
Common equity Tier 1 capital to risk-weighted assets(1)
15.1 %14.5 %
Tier 1 capital to risk-weighted assets(1)
16.2 15.6 
Total capital to risk-weighted assets(1)
18.7 18.8 
Tier 1 leverage ratio(2)
8.8 8.6 
Supplementary leverage ratio(3)(4)
8.3 7.8 
(1)
(1)Prior period amounts have been revised to conform to the current period presentation. See Note 16, "Retained Earnings and Regulatory Capital Requirements," in the accompanying consolidated financial statements for further discussion.
(2)Adjusted quarterly average assets, the Tier 1 leverage ratio denominator, reflects quarterly average assets adjusted for amounts permitted to be deducted from Tier 1 capital.
(3)Total leverage exposure, the SLR denominator, includes adjusted quarterly average assets plus certain off-balance sheet exposures.
(4)As discussed further below, the rules that permitted banking institutions to temporarily exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the denominator of their SLR expired on April 1, 2021. As a result, HSBC USA's SLR decreased to approximately 6.7 percent at April 1, 2021.
Adjusted quarterly average assets, the Tier 1 leverage ratio denominator, reflects quarterly average assets adjusted for amounts permitted to be deducted from Tier 1 capital.
(2)
Total leverage exposure, the SLR denominator, includes adjusted quarterly average assets plus certain off-balance sheet exposures.
In response to the COVID-19 pandemic, in March 2020, the federal banking agencies issued an interima final rule that provides the option to transition in the regulatory capital impacts of the new current expected credit loss accounting standard over a five-year period. HSBC North America and HSBC Bank USA have elected the five-year transition option and, as a result, beginning in 2020, our capital ratios are reported in accordance with the transition rules in the interim final rule. Accordingly, during 2020 and 2021, we will exclude from regulatory capital the change in retained earnings resulting from adoption of the new accounting standard on January 1, 2020 as well as 25 percent of the change in the allowance for credit losses recognized between January 1, 2020 and December 31, 2021. Beginning January 1, 2022, the excluded impacts will be phased in to regulatory capital over a three-year transition period and will be fully reflected at January 1, 2025.
In addition,Also in April 2020, the FRB issued an interim final rule adopting a temporary changeresponse to the calculation ofCOVID-19 pandemic, the SLRfederal banking agencies issued final rules that permits bankpermitted intermediate holding companies, such as HSBC North America, and depository institutions, such as HSBC Bank USA, to temporarily exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the denominator of their SLR. This change, which took effect April 1, 2020, will remain in place until March 31, 2021 and isThe rules were designed to allow banking institutions to expand their balance sheets to accommodate increased customer deposits while continuing to provide credit to companies and households. In May 2020, the federal banking agencies issued an interim final rule that permits depository institutions such as HSBC Bank USA to exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the denominator of their SLR. This changeThese changes took effect June 1,in 2020 and will remain in place until March 31,expired on April 1, 2021.
We manage capital in accordance with HSBC Group policy. The HSBC North America Internal Capital Adequacy Assessment Process ("ICAAP") works in conjunction with the HSBC Group's ICAAP. The HSBC North America ICAAP applies to HSBC Bank USA and evaluates regulatory capital adequacy and capital adequacy under various stress scenarios. Our approach is to meet our capital needs for these stress scenarios locally through activities which reduce risk. To the extent that local alternatives are insufficient, as a wholly-owned subsidiary of HSBC, we would seek support from our ultimate parent. Regulatory capital requirements are based on the amount of capital required to be held, plus applicable capital buffers, as defined by regulations, and the amount of risk-weighted assets and leverage exposure, also calculated based on regulatory definitions.
We are subject to regulatory capital rules issued by U.S. banking regulators including Basel III (the "Basel III rule"). Under theThe Basel III rule there are two methods available to calculate risk-weighted assets, the generally-applicable Standardized Approachestablishes minimum capital ratios and the Advanced Approaches, which are required in addition to the Standardized Approachoverall capital adequacy standards for large banking organizations that meet certain thresholds.banks and bank holding companies ("BHCs"). In 2019, the FRB and the other federal banking agencies jointly finalized rules to implement the Economic Growth, Regulatory Relief and Consumer Protection Act ("Relief Act") that tailor the application of the enhanced prudential standards for large bank holding companies ("BHCs")BHC and foreign banking organizations (the "Tailoring Rules"). The Tailoring Rules assign each BHC and IHC with $50 billion or more in total U.S. assets into one of five classifications (Categories I through

HSBC USA Inc.

IV, and 'other firms') based on its size and four risk-based indicators. Under the Tailoring Rules, HSBC North America and HSBC Bank USA are subject to Category III standards beginning January 1, 2020 and are no longer considered "Advanced Approaches banking organizations." However, HSBC North America and HSBC Bank USA remain subject to certain other capital requirements that were previously applicable only to Advanced Approaches banking organizations, including the SLR and the countercyclical capital buffer. Prior to adoption of the Tailoring Rules, HSBC North America and HSBC Bank USA had requested and received regulatory approval to opt out of the Advanced Approaches and therefore have previously calculated and will continue to calculate their risk-based capital requirements for credit risk solely underusing the generally-applicable Standardized Approach. The Tailoring Rules also permit Category III firms and their depository institution subsidiaries to opt-out of the requirement to recognize most elements of accumulated other comprehensive income ("AOCI") in regulatory capital. As a result, HSBC North America and HSBC Bank USA, made a one-time election to opt-out of the requirement to include all components of AOCI (with the exception of accumulated net gains and losses on cash flow hedges related to items that are not carried at fair value on the consolidated balance sheet) in common equity Tier 1 capital, effective beginning with March 31, 2020 reporting.
Category III firms and their depository institution subsidiaries will also benefit from (i) simpler capital requirements for mortgage servicing assets, certain deferred tax assets, and investments in the capital of unconsolidated financial institutions, and (ii) a simplified treatment for the amount of capital issued by consolidated subsidiaries to third parties (generally known as minority interests) which can be included in regulatory capital. These simplifying amendments were adopted in a separate rulemaking finalized by the federal banking agencies in 2019 and became effective beginning April 1, 2020 although firms may choose to apply the simplifications as early as January 1, 2020. As such, HSBC North America and HSBC Bank USA implemented both the Tailoring Rules and the simplifying amendments beginning with March 31, 2020 reporting. In 2019, the federal banking agencies also jointly amended the Basel III rule to implement a provision of the Relief Act by reducing the risk weighting applicable to high-volatility commercial real estate exposures and also finalized a rule to include a revised standardized approach for measuring counterparty credit risk ("SA-CCR") to calculate total risk-weighted asset amounts for derivative transactions in addition to the existing current exposure method ("CEM"). These changes also became effective beginning April 1, 2020. The Tailoring Rules clarify that Category III firms and their depository institution subsidiaries are not required to use SA-CCR to measure their derivative exposure. Instead, they have the option to use either SA-CCR or CEM for their risk-based capital ratios and the SLR. As such, HSBC North America and HSBC Bank USA have elected not to use SA-CCR at this time, but will continue to evaluate the impact of adopting SA-CCR in the future.
For additional discussion of the Basel III final rule requirements, including required minimum capital ratios, as well
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as further discussion of the Tailoring Rules and other recentrelated regulatory developments and their expected impact see Part I, "Regulation and Competition - Regulatory Capital and Liquidity Requirements," in our 20192020 Form 10-K and also below under the caption, "Other Regulatory Developments."10-K. We continue to review the composition of our capital structure and capital buffers in light of these developments.
Capital Planning and Stress Testing The FRB requires IHCscertain U.S. top-tier BHCs and BHCs,IHCs, including HSBC North America, to comply with the FRB's capital plan rule and CCAR program, as well as the annual supervisory stress tests conducted by the FRB, and annual company-run stress tests as required under Dodd-Frank (collectively, "DFAST"), as amended by. Disclosure of the Relief Act. Under the Tailoring Rules, HSBC North America as a Category III firm, is no longer subject to a mid-cycle stress testing requirement beginning January 1, 2020 and is now required to disclose its company-run stress test resultstests is required only every other year. The company-run stress tests are forward looking exercises to assess the impact of hypothetical macroeconomic baseline and severely adverse scenarios provided by the FRB and(and internally developed scenarios for the company-run exercises,exercises) on the financial condition and capital adequacy of a bank-holding companyCCAR firm over a nine quarter planning horizon.
In March 2020, the FRB adopted a final rule on the stress capital buffer ("SCB") which will, among other things, replace the current fixed 2.5 percent capital conservation buffer with a dynamic, institution-specific risk-based SCB. It is expected that the SCB will vary in size throughout the economic cycle depending on a firm’s risk exposures and the severity of its stress scenarios. Under the final rule, the SCB would be recalibrated annually based on the sum of: (i) a firm’s projected losses under the severely adverse scenario in supervisory stress tests and (ii) four quarters of a firm’s planned future dividends. If HSBC North America's risk-based capital ratios were to fall to levels within the SCB, it would become subject to increasing restrictions on their capital distributions and discretionary bonus payments. The final rule also eliminates the quantitative objection component of CCAR, and instead relies on the capital rule’s automatic restrictions on capital distributions that are triggered if a firm breaches its buffer requirements. The SCB will be officially set for each CCAR firm by August 31, 2020 based on 2020 supervisory stress testing results conducted as part of CCAR, and will become effective October 1, 2020. HSBC North America already utilizes an internal capital assessment approach that is analogous to the SCB and will continue to review the composition of its capital structures and capital buffers in light of the final rule. The SCB applies only to HSBC North America; HSBC USA and HSBC Bank USA remain subject to a static 2.5 percent capital conservation buffer.
For further discussion onof capital planning and stress testing, including detail regarding the FRB's supervisory assessment as part of the CCAR process, as well as further discussion of the Tailoring Rules and other recent regulatory developments and their

HSBC USA Inc.

expected impact see Part I, "Regulation and Competition - Regulatory Capital and Liquidity Requirements," in our 20192020 Form 10-K and also below under10-K.
In March 2021, the caption, "Other Regulatory Developments."FRB announced that it intends to terminate restrictions on capital distributions put in place in connection with additional stress tests that the FRB conducted to assess the impact of the COVID-19 pandemic. These additional restrictions on CCAR firms' distributions will remain in place through the second quarter of 2021, but will terminate for firms with capital levels above the minimum requirements in the 2021 CCAR exercise, the results of which will be made public on or before June 30, 2021. Under these additional restrictions, CCAR firms may make certain capital distributions in the first two quarters of 2021, provided that the distributions generally do not exceed net income.
HSBC North America submitted its latest2021 CCAR capital plan and its latest2021 annual company-run DFAST results in April 2020. In July 2020,2021. HSBC North America will publicly disclosed itsdisclose their latest annual DFAST results. In June 2020,results, as required, within 15 days of the FRB disclosing the results of its own DFAST results. The FRB will publicly discloseddisclose its own DFAST and CCAR results along with aggregated results of a sensitivity analysis aimed at gauging the ongoing economic impact of the COVID-19 pandemic on CCAR firms. The FRB also announced it will prohibit stock repurchases by CCAR firms and will require all CCAR firms to limit their common stock dividends to the lesser of (a) the firm's common stock dividends last quarter and (b) the average of the firm's net income for the four proceeding calendar quarters. These restrictions will continue at least through Septemberor before June 30, 2020 and could be extended by the FRB quarter-by-quarter. In addition, each CCAR firm, including HSBC North America, is required to resubmit its capital plan later this year based on additional economic scenarios provided by the FRB.2021. Stress testing results are based solely on hypothetical adverse stress scenarios and should not be viewed or interpreted as forecasts of expected outcomes or capital adequacy or of the actual financial condition of HSBC North America. Capital planning and stress testing for HSBC North America may impact our future capital and liquidity.
While bank holding companyBHC regulatory capital compliance is generally performed at the HSBC North America level, and also separately for HSBC Bank USA, as a bank holding companyBHC we are required to meet minimum capital requirements imposed by the FRB. We present our capital ratios, together with HSBC Bank USA's in Note 16, "Retained Earnings and Regulatory Capital Requirements," in the accompanying consolidated financial statements.
Other Regulatory Developments
FRB Liquidity Facilities The FRB announced the creation of several facilities aimed at stabilizing the markets, addressing immediate liquidity concerns, and facilitating lending and other assistance to businesses and individuals affected by shutdowns due to COVID-19. These programs include, among others, the Money Market Mutual Fund Liquidity Facility, the Term Asset-Backed Securities Loan Facility, the Commercial Paper2021 Funding Facility, the Primary Market Corporate Credit Facility and the Paycheck Protection Program Liquidity Facility. We have currently not utilized any of these facilities.
The Volcker Rule The "Volcker Rule" limits the ability of banking entities such as HUSI to sponsor or invest in certain private equity or hedge funds, or engage in certain types of proprietary trading. See Part I, "Regulation and Competition - The "Volcker Rule"," in our 2019 Form 10-K. In June 2020, the five regulatory agencies responsible for implementing the Volcker Rule approved a final rule that makes significant revisions to the "covered funds" provisions of the current implementing regulations. These revisions include (i) new exclusions for credit funds, venture capital funds, family wealth management vehicles, and client facilitation vehicles, and an expanded scope for the public welfare fund exclusion; and (ii) revisions to address practical obstacles to reliance on the existing exclusions for loan securitizations, foreign public funds, and small business investment companies. These amendments to the Volcker Rule will become effective October 1, 2020. We continue to assess the impact of the amendments on our operations.
Uncleared Swap Margin Also in June 2020, the U.S. banking regulators approved a final rule that makes significant amendments to their margin requirements for non-cleared swaps and security-based swaps (together, "swaps") for swap dealers, security-based swap dealers, major swap participants and major security-based swap participants regulated by the agencies ("Swap Entities") (the "Margin Rules"). The final rule (1) mostly exempts Swap Entities from needing to collect initial margin ("IM") for swaps with affiliates; (2) preserves legacy status for swaps that are amended to replace certain interest rate provisions or due to technical amendments, notional reductions, or portfolio compression exercises; (3) clarifies the time at which IM trading documentation must be in place; and (4) adds a new compliance phase for IM requirements. The final rule will take effect August 31, 2020. We are continuing to assess the amendments and their impact on our operations.

HSBC USA Inc.

2020 Funding Strategy  Our current estimate for funding needs and sources for 20202021 are summarized in the following table:
                                                                                                                                                          Actual January 1 through June 30, 2020 Estimated July 1 through December 31, 2020 Estimated Full Year 2020
  (in billions)
Increase (decrease) in funding needs:     
Net change in loans$3
 $(5) $(2)
Net change in short-term investments and securities31
 17
 48
Net change in trading and other assets3
 (22) (19)
Total funding needs$37
 $(10) $27
Increase (decrease) in funding sources:     
Net change in deposits$36
 $(7) $29
Net change in trading and other short-term liabilities2
 3
 5
Net change in long-term debt(1) (6) (7)
Total funding sources$37
 $(10) $27
Reductions to trading assets estimated during the July 1 through December 31, 2020 period are mainly related to select Fixed Income activities which will be consolidated in and operated from Europe to better utilize HSBC's global scale, which allows us to record revenue as a business introducer and hold fewer assets on our balance sheet. In addition, we will also exit certain derivative contracts as part of our restructuring plan. As previously discussed, the timing of our strategic actions may be re-sequenced or delayed. In light of COVID-19, we continue to reassess our strategic plan and may take additional actions in future periods.
Actual January 1 through March 31, 2021Estimated April 1 through December 31, 2021Estimated Full Year 2021
  (in billions)
Increase (decrease) in funding needs:
Net change in loans$— $3 $3 
Net change in short-term investments and securities— (4)(4)
Net change in trading and other assets(2)— (2)
Total funding needs$(2)$(1)$(3)
Increase (decrease) in funding sources:
Net change in deposits$3 $3 $6 
Net change in trading and other short-term liabilities(3)(2)(5)
Net change in long-term debt(2)(2)(4)
Total funding sources$(2)$(1)$(3)
The above table reflects a long-term funding strategy. Daily balances fluctuate as we accommodate customer needs, while ensuring that we have liquidity in place to support the balance sheet maturity funding profile. Should market conditions deteriorate, we have contingency plans to generate additional liquidity through the sales of assets or financing transactions. We remain confident in our ability to access the market for long-term debt funding needs in the current market environment. We continue to seek well-priced and stable customer deposits. We also continue to sell new agency-eligible mortgage loan originations to third parties.
HSBC Bank USA is subject to significant restrictions imposed by federal law on extensions of credit to, and certain other 'covered transactions' with HSBC USA and other affiliates. For further discussion, see Part I, "Regulation and Competition - Affiliate Transaction Restrictions," in our 20192020 Form 10-K.
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See "Risk Management" in this MD&A for further discussion relating to our liquidity contingency plans and our approach to liquidity and funding risk management.



HSBC USA Inc.

Off-Balance Sheet Arrangements, Credit Derivatives and Other Contractual Obligations
As part of our normal operations, we enter into credit derivatives and various off-balance sheet arrangements with affiliates and third parties. These arrangements arise principally in connection with our lending and client intermediation activities and involve primarily extensions of credit and, in certain cases, guarantees.
As a financial services provider, we routinely extend credit through loan commitments and lines and letters of credit and provide financial guarantees, including derivative transactions having characteristics of a guarantee. The contractual amounts of these financial instruments represent our maximum possible credit exposure in the event that a counterparty draws down the full commitment amount or we are required to fulfill our maximum obligation under a guarantee.
The following table provides maturity information related to our credit derivatives and off-balance sheet arrangements. Many of these commitments and guarantees expire unused or without default. In addition, implementation of our business strategy (as described under the heading "Executive Overview - 2020 Business Update"Events" in our 20192020 Form 10-K) will affect our contractual obligations over time, including with respect to credit derivatives. As a result, we believe that the contractual amount is not representative of the actual future credit exposure or funding requirements.
 Balance at June 30, 2020  
  
One Year or less Over One through Five Years                      Over Five Years Total Balance at December 31, 2019
 (in millions)
Standby letters of credit, net of participations(1)
$6,661
 $2,369
 $121
 $9,151
 $9,436
Commercial letters of credit192
 21
 10
 223
 126
Credit derivatives(2)
5,003
 29,411
 1,146
 35,560
 38,739
Other commitments to extend credit:         
Commercial(3)
20,330
 59,096
 2,023
 81,449
 88,191
Consumer8,288
 —
 —
 8,288
 7,906
Total$40,474
 $90,897
 $3,300
 $134,671
 $144,398
 Balance at March 31, 2021
  
One Year or lessOver One through Five YearsOver Five YearsTotalBalance at December 31, 2020
 
Standby letters of credit, net of participations(1)
$6,476 $2,070 $151 $8,697 $8,545 
Commercial letters of credit240 66 — 306 197 
Credit derivatives(2)
2,117 12,960 886 15,963 19,500 
Other commitments to extend credit:
Commercial(3)
19,017 64,250 2,943 86,210 87,875 
Consumer8,337 — — 8,337 8,173 
Total$36,187 $79,346 $3,980 $119,513 $124,290 
(1)
Includes $1,698 million and $1,623 million issued for the benefit of HSBC affiliates at June 30, 2020 and December 31, 2019, respectively.
(2)
Includes $16,444 million and $18,391 million issued for the benefit of HSBC affiliates at June 30, 2020 and December 31, 2019, respectively.
(3)
Includes $2,425 million and $1,302 million issued for the benefit of HSBC affiliates at June 30, 2020 and December 31, 2019, respectively.
(1)Includes $1,834 million and $1,836 million issued for the benefit of HSBC affiliates at March 31, 2021 and December 31, 2020, respectively.
(2)Includes $13,448 million and $13,550 million issued for the benefit of HSBC affiliates at March 31, 2021 and December 31, 2020, respectively.
(3)Includes $1,552 million and $2,475 million issued for the benefit of HSBC affiliates at March 31, 2021 and December 31, 2020, respectively.
Other Commitments to Extend Credit  Other commitments to extend credit include arrangements whereby we are contractually obligated to extend credit in the form of loans, participations in loans, lease financing receivables, or similar transactions. Consumer commitments are comprised ofcomprise certain unused MasterCard/Visa credit card lines, where we have the right to change terms or conditions upon notification to the customer, and commitments to extend credit secured by residential properties, where we have the right to change terms or conditions, for cause, upon notification to the customer. Commercial commitments comprise primarily those related to secured and unsecured loans and lines of credit.
In addition to the above, we have established and manage a number of constant net asset value ("CNAV") money market funds that invest in shorter-dated highly-rated money market securities to provide investors with a highly liquid and secure investment. These funds price the assets in their portfolio on an amortized cost basis, which enables them to create and liquidate shares at a constant price. The funds, however, are not permitted to price their portfolios at amortized cost if that amount varies by more than 50 basis points from the portfolio's market value. In that case, the fund would be required to price its portfolio at market value and consequently would no longer be able to create or liquidate shares at a constant price. We do not consolidate the CNAV funds because we do not absorb the majority of the expected future risk associated with the fund's assets, including interest rate, liquidity, credit and other relevant risks that are expected to affect the value of the assets.



Fair Value
HSBC USA Inc.

Fair Value
Fair Value Hierarchy  Fair value measurement accounting principles establish a fair value hierarchy structure that prioritizes the inputs to determine the fair value of an asset or liability (the "Fair Value Framework"). The Fair Value Framework distinguishes between inputs that are based on observed market data and unobservable inputs that reflect market participants' assumptions. It emphasizes the use of valuation methodologies that maximize observable market inputs. For financial
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instruments carried at fair value, the best evidence of fair value is a quoted price in an actively traded market (Level 1). Where the market for a financial instrument is not active, valuation techniques are used. The majority of our valuation techniques use market inputs that are either observable or indirectly derived from and corroborated by observable market data for substantially the full term of the financial instrument (Level 2). Because Level 1 and Level 2 instruments are determined by observable inputs, less judgment is applied in determining their fair values. In the absence of observable market inputs, the financial instrument is valued based on valuation techniques that feature one or more significant unobservable inputs (Level 3). The determination of the level of fair value hierarchy within which the fair value measurement of an asset or a liability is classified often requires judgment and may change over time as market conditions evolve. We consider the following factors in developing the fair value hierarchy:
•whether the asset or liability is transacted in an active market with a quoted market price;
•the level of bid-ask spreads;
•a lack of pricing transparency due to, among other things, complexity of the product and market liquidity;
•whether only a few transactions are observed over a significant period of time;
•whether the pricing quotations differ substantially among independent pricing services;
•whether inputs to the valuation techniques can be derived from or corroborated with market data; and
•whether significant adjustments are made to the observed pricing information or model output to determine the fair value.
Level 1 inputs are unadjusted quoted prices in active markets that the reporting entity has the ability to access for identical assets or liabilities. A financial instrument is classified as a Level 1 measurement if it is listed on an exchange or is an instrument actively traded in the over-the-counter ("OTC") market where transactions occur with sufficient frequency and volume. We regard financial instruments such as debt securities, equity securities and derivative contracts listed on the primary exchanges of a country to be actively traded. Non-exchange-traded instruments classified as Level 1 assets include securities issued by the U.S. Treasury, to-be-announced securities, non-callable securities issued by U.S. Government sponsored enterprises and certain foreign government-backed debt.
Level 2 inputs are those that are observable either directly or indirectly but do not qualify as Level 1 inputs. We classify mortgage pass-through securities, agency and certain non-agency mortgage collateralized obligations, non-exchange-traded derivative contracts, asset-backed securities, obligations of U.S. states and political subdivisions, corporate debt securities, certain foreign government-backed debt, preferred securities, securities purchased and sold under resale and repurchase agreements, precious metals, certain loans held for sale, certain student loans held for investment, residential mortgage loans whose carrying amount was reduced based on the fair value of the underlying collateral and real estate owned and, beginning January 1, 2020, certain student loans held for investment as Level 2 measurements. Where possible, at least two quotations from independent sources are obtained based on transactions involving comparable assets and liabilities to validate the fair value of these instruments. We have established a process to understand the methodologies and inputs used by the third party pricing services to ensure that pricing information meets the fair value objective and, where appropriate, this pricing data is back-tested to market trade executions. Where significant differences arise among the independent pricing quotes and the internally determined fair value, we investigate and reconcile the differences. If the investigation results in a significant adjustment to the fair value, the instrument will be classified as Level 3 within the fair value hierarchy. In general, we have observed that there is a correlation between the credit standing and the market liquidity of a non-derivative instrument.
Level 2 derivative instruments are generally valued based on discounted future cash flows or an option pricing model adjusted for counterparty credit risk and market liquidity. The fair value of certain derivative products is determined using valuation techniques based on inputs derived from observable indices traded in the OTC market. Appropriate control processes and procedures have been applied to ensure that the derived inputs are applied to value only those instruments that share similar risks to the relevant benchmark indices and therefore demonstrate a similar response to market factors.
Level 3 inputs are unobservable estimates that management expects market participants would use to determine the fair value of the asset or liability. That is, Level 3 inputs incorporate market participants' assumptions about risk and the risk premium required by market participants in order to bear that risk. We develop Level 3 inputs based on the best information available in the circumstances. At June 30, 2020March 31, 2021 and December 31, 2019,2020, our Level 3 measurements included the following: certain structured deposits and structured notes for which the embedded credit, foreign exchange or equity derivatives that have significant unobservable inputs (e.g., volatility or default correlations), asset-backed credit default swaps with certain inputs which are unobservable, certain corporate debt securities, certain asset-backed securities, individually assessed commercial loans, mortgage servicing rights, derivatives

HSBC USA Inc.

referenced to illiquid assets of less desirable credit quality and swap agreements entered into in conjunction with the sales of Visa Class B Shares for which the fair value is dependent upon the final resolution of the related litigation. See Note 19, "Fair Value Measurements," in the accompanying consolidated financial statements for additional information on Level 3 inputs.
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Level 3 Measurements  The following table provides information about Level 3 assets/liabilities in relation to total assets/liabilities measured at fair value at June 30, 2020March 31, 2021 and December 31, 2019:2020:

June 30, 2020 December 31, 2019
 (dollars are in millions)
Level 3 assets(1)(2)
$1,547
 $1,349
Total assets measured at fair value(1)(3)
115,422
 98,322
Level 3 liabilities(1)
1,432
 1,350
Total liabilities measured at fair value(1)
60,421
 55,224
Level 3 assets as a percent of total assets measured at fair value1.3% 1.4%
Level 3 liabilities as a percent of total liabilities measured at fair value2.4% 2.4%
March 31, 2021December 31, 2020
 (dollars are in millions)
Level 3 assets(1)(2)
$932 $1,118 
Total assets measured at fair value(1)(3)
84,509 98,640 
Level 3 liabilities(1)
1,589 1,620 
Total liabilities measured at fair value(1)
36,700 49,380 
Level 3 assets as a percent of total assets measured at fair value1.1 %1.1 %
Level 3 liabilities as a percent of total liabilities measured at fair value4.3 %3.3 %
(1)
Presented without netting which allows the offsetting of amounts relating to certain contracts if certain conditions are met.
(2)
Includes $1,167 million of recurring Level 3 assets and $380 million of non-recurring Level 3 assets at June 30, 2020. Includes $925 million of recurring Level 3 assets and $424 million of non-recurring Level 3 assets at December 31, 2019.
(3)
Includes $114,712 million of assets measured on a recurring basis and $710 million of assets measured on a non-recurring basis at June 30, 2020. Includes $97,866 million of assets measured on a recurring basis and $456 million of assets measured on a non-recurring basis at December 31, 2019.
(1)Presented without netting which allows the offsetting of amounts relating to certain contracts if certain conditions are met.
(2)Includes $706 million of recurring Level 3 assets and $226 million of non-recurring Level 3 assets at March 31, 2021. Includes $845 million of recurring Level 3 assets and $273 million of non-recurring Level 3 assets at December 31, 2020.
(3)Includes $83,954 million of assets measured on a recurring basis and $555 million of assets measured on a non-recurring basis at March 31, 2021. Includes $97,982 million of assets measured on a recurring basis and $658 million of assets measured on a non-recurring basis at December 31, 2020.
Significant Changes in Fair Value for Level 3 Assets and Liabilities See Note 19, "Fair Value Measurements," in the accompanying consolidated financial statements for information on additions to and transfers into (out of) Level 3 measurements during the three and six months ended June 30,March 31, 2021 and 2020 and 2019 as well as for further details including the classification hierarchy associated with assets and liabilities measured at fair value.
Effect of Changes in Significant Unobservable InputsThe fair value of certain financial instruments is measured using valuation techniques that incorporate pricing assumptions not supported by, derived from or corroborated by observable market data. The resultant fair value measurements are dependent on unobservable input parameters which can be selected from a range of estimates and may be interdependent. Changes in one or more of the significant unobservable input parameters may change the fair value measurements of these financial instruments. For the purpose of preparing the financial statements, the final valuation inputs selected are based on management's best judgment that reflect the assumptions market participants would use in pricing similar assets or liabilities.
The unobservable input parameters selected are subject to the internal valuation control processes and procedures. When we perform a test of all the significant input parameters to the extreme values within the range at the same time, it could result in an increase of the overall fair value measurement of approximately $28$11 million or a decrease of the overall fair value measurement of approximately $11$10 million at June 30, 2020.March 31, 2021. The effect of changes in significant unobservable input parameters are primarily driven by the uncertainty in determining the fair value of credit derivatives executed against certain insurers and certain deal-contingent forward starting interest rate derivatives.


Risk Management
Overview  Managing risk effectively is fundamental to the delivery of our strategic priorities.
We use a comprehensive risk management framework across the organization and across all risk types underpinned by our risk culture. This framework fosters continuous monitoring, promotes risk awareness and encourages sound operational and strategic decision-making. It also ensures a consistent approach to identifying, assessing, managing and reporting the risks we accept and incur in our activities.
Our Board of Directors has the ultimate responsibility for effective management of risk. It is advised on risk matters by the Risk Committee of the Board of Directors and the Compliance and Conduct Committee.Committee of the Board of Directors. In particular, the Risk Committee of the Board of Directors advises the Board of Directors on risk appetite and its alignment with our strategy, risk governance and internal controls as well as high-level risk related matters. Robust risk governance and accountability are embedded throughout our business through an established framework that helps to ensure appropriate oversight of and accountability for the effective management of risk.
Our material risksThe principal risks associated with our operations include the following:
•Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract;

HSBC USA Inc.

Capital and liquidity•Treasury risk is the risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfy regulatory requirements, including pension risk;risk. Treasury risk also includes the risk to our earnings due to changes in market interest rates;
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•Market risk is the risk that movements in market factors, such as foreign exchange rates, interest rates, credit spreads, equity prices and commodity prices, will reduce our income or the value of our portfolios;
•Resilience risk is the risk that we are unable to provide critical services to our customers, affiliates and counterparties as a result of sustained and significant operational disruption;
•Regulatory compliance risk is the risk that we fail to observe the letter and spirit of relevant laws, codes, rules, regulations and standards of good market practice, which as a consequence incur fines and penalties and suffer damage to our business;
•Financial crime and fraud risk is the risk that we knowingly or unknowingly help parties to commit or to further potentially illegal activity, including both internalmoney laundering, fraud, bribery and external fraud;
corruption, tax evasion, sanctions breaches, and terrorist and proliferation financing;
•Strategic risk is the risk that the business will fail to identify, execute and react appropriately to opportunities and/or threats arising from changes in the market, some of which may emerge over a number of years such as changing economic and political circumstances, customer requirements, demographic trends, regulatory developments or competitor action;
and
•Model riskis the potential for adverse consequences from business decisions informed by models, which can be exacerbated by errors in methodology, design or the way they are used.
In the course of our regular risk management activities, we use models to help quantify the risk we are taking. We believe that the assumptions used in these models are reasonable within the parameters for which the models have been built and calibrated to operate, but events may unfold differently than what is assumed in the models. Consequently, actual results may differ significantly from model projections. The severe projections of macroeconomic variables during the current COVID-19 pandemic represent events outside the parameters for which the models have been built. As a result, adjustments to model outputs to reflect consideration of management judgment are used with stringent governance in place to ensure appropriate results. Where models do not require adjustments, enhanced model monitoring confirms models are performing as intended.
See "Risk Management" in MD&A in our 20192020 Form 10-K for a more complete discussion of the objectives of our risk management system as well as our risk management policies and practices. ThereOther than the change to financial crime risk management discussed below, there have been no material changes to our approach to risk management since December 31, 2019. However, during the first half of 2020, we continued to enhance our risk management by further simplifying our approach and articulation of risk management through combining our Enterprise Risk Management Framework and our Operational Risk Management Framework to create a single simplified Risk Management Framework.2020.
Credit Risk Management Credit risk is managed through a robust risk identification and control framework which outlines clear and consistent policies, principles and guidance for risk managers. Credit risk is monitored using various internal risk management measures and within limits approved by individuals within a framework of delegated authorities. Our credit risk management procedures are designed for all stages of economic and financial cycles, including challenging periods of market volatility and economic uncertainty. As a resultThe impact of market volatility and economic uncertainty driven by the COVID-19 pandemic we re-reviewedcontinued to create economic uncertainty during the credit ratings assignedfirst quarter of 2021. We continue to substantially allmonitor the performance of our material commercial loans during the first half of 2020.as conditions evolve and take necessary credit actions where warranted. See "Risk Management" in MD&A in our 20192020 Form 10-K for a more complete discussion of our approach to credit risk.
ASU 2016-13 process On January 1, 2020, we adopted the requirements of ASU 2016-13, "Financial Instruments - Credit Losses" ("ASU 2016-13"). The implementation of ASU 2016-13 represents a significant challenge to our Risk and Finance functions. The ASU introduces new concepts and measures such as lifetime ECL. Some of these new concepts and measures differ significantly from the IFRS 9, "Financial Instruments" ("IFRS 9") credit loss reporting that we implemented in 2018 for segment reporting under the Group Reporting Basis. As a result of ASU 2016-13 adoption, management has additional insight and measures not previously utilized which, over time, may influence our risk appetite and risk management processes. The ASU 2013-16 process comprises three main areas:
Modeling - The Risk function had pre-existing models developed in conjunction with our IFRS 9 reporting to HSBC. These models were enhanced or supplemented to address the requirements of ASU 2016-13 such as incorporating forward economic guidance for a reasonable and supportable forecast period, reversion to historical losses, the expectation for zero losses under certain conditions, and lifetime ECL for undrawn credit exposures, with the appropriate governance and independent review. The models vary in complexity and inputs depending upon the size of the portfolio, the amount of data available and the sophistication of the market concerned.
Implementation - A centralized impairment engine has been implemented to perform the lifetime ECL calculation. The impairment engine receives data, which is subject to a number of validation checks and enhancements, from a variety of client, finance and risk systems. Once the lifetime ECL calculation has been calculated, there are further data analysis checks and review and challenge of the results prior to commencing formal governance. Risk and Finance work closely together throughout the execution of this process.
Governance - A Management Review Committee has been established in order to review and approve the results of the lifetime ECL calculation. The Management Review Committee has representatives from Credit Risk and Finance and is responsible for final approval of our lifetime ECL for the period. The Chief Credit Officer and the WPB Chief Risk Officer

HSBC USA Inc.

share responsibility with the Chief Financial Officer for establishing appropriate levels of allowances for credit losses inherent in various loan and other portfolios carried at amortized cost.
Capital and LiquidityTreasury Risk Management  Although our overall approach to capital and liquidity risk management has not changed, weWe continuously monitor our capital ratios and the impact of market events on our liquidity positions and will continue to adapt our frameworks as necessary to reflect market events and the evolving regulatory landscape and view as to best practices. See "Risk Management" in MD&A in our 20192020 Form 10-K for a more complete discussion of our approach to capital and liquiditytreasury risk.
Capital riskSee "Liquidity and Capital Resources" in this MD&A for a discussion of our approach to capital risk management, including our capital ratios and regulatory capital requirements.
Liquidity and funding riskAs part of our approach towards liquidity and funding risk management, we employ the measures discussed below to define, monitor and control our liquidity and funding risk in accordance with HSBC policy.
The Basel Committee based Liquidity Coverage Ratio ("LCR") is designed to be a short-term liquidity measure to ensure banks have sufficient High Quality Liquid Assets ("HQLA") to cover net stressed cash outflows over the next 30 days. At both June 30, 2020March 31, 2021 and December 31, 2019,2020, HSBC USA's LCR under the European LCR rule exceeded 100 percent. A LCR of 100 percent or higher reflects an unencumbered HQLA balance that is equal to or exceeds liquidity needs for a 30 calendar day liquidity stress scenario. HQLA consists of cash or assets that can be converted into cash at little or no loss of value in private markets. HSBC North America and HSBC Bank USA are also subject to the U.S. LCR rule and are required to report their LCR to U.S. regulators on a daily basis. TheUnder the Tailoring Rules, reduced the U.S.an 85 percent LCR requirement forapplies to Category III firms with weighted short-term wholesale funding under $75 billion, including HSBC North America, and their depository institution subsidiaries, including HSBC North America andsuch as HSBC Bank USA, from 100 to 85 percent beginning January 1, 2020. As a result, under the U.S. LCR rule, a LCR of 100 percent or higher reflects an unencumbered HQLA balance that is equal to or exceeds 85 percent of a Category III firm's
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liquidity needs for a 30 calendar day liquidity stress scenario. During the sixthree months ended June 30, 2020,March 31, 2021, HSBC Bank USA's LCR under the U.S. LCR rule remained above the 100 percent minimum requirement.
The EuropeanU.K. calibration of the Basel Committee based Net Stable Funding Ratio ("NSFR"), which is a longer term liquidity measure with a 12-month time horizon to ensure a sustainable maturity structure of assets and liabilities, is still pending. Therefore, our calculation of NSFR is based on our current interpretation and understanding of the Basel Committee NSFR guidance, which may differ in future periods depending on completion of the European calibration and further implementation guidance from regulators.U.K. calibration. The BaselU.K. NSFR guidance has been interpreted in certain instances to include expected changes from the Capital Requirements Directive and Regulation, commonly referred to as "CRR2". Our calculation of NSFR will fully follow the CRR2 reporting rules when they are expected to become effective in June 2021.January 2022. At both June 30, 2020March 31, 2021 and December 31, 2019,2020, HSBC USA's estimated NSFR exceeded 100 percent. A NSFR of 100 percent or more reflects an available stable funding balance from liabilities and capital over the next 12 months that is equal to or exceeds the required amount of funding for assets and off-balance sheet exposures. In April 2016,October 2020, U.S. regulators issued for public comment a proposalfinal rule to implement the NSFR in the United States, applicable to certain large banking organizations, including HSBC North America and HSBC Bank USA. TheUSA, that will take effect July 1, 2021. Consistent with the Tailoring Rules, also indicate that an 85 percent NSFR requirement will apply to Category III firms with weighted short-term wholesale funding under $75 billion, including HSBC North America, and their depository institution subsidiaries, including HSBC North America andsuch as HSBC Bank USA, oncewhen the NSFR is finalized.final rule becomes effective July 1, 2021. As a result, under the proposed U.S. NSFR rule, a NSFR of 100 percent or more reflects an available stable funding balance from liabilities and capital over the next 12 months that is equal to or exceeds 85 percent of thea Category III firm's required amount of funding for assets and off-balance sheet exposures. At both June 30, 2020March 31, 2021 and December 31, 2019,2020, HSBC Bank USA's estimated NSFR, based on our current interpretation and understanding of the proposed U.S. NSFR rule, exceeded 100 percent.
As a Category III firm, HSBC North America remains subject to liquidity stress testing on a monthly basis and related liquidity buffer and liquidity risk management requirements. HSBC North America and HSBC Bank USA have adjusted their liquidity profiles to support compliance with these rules. HSBC North America and HSBC Bank USA may need to make further changes to their liquidity profiles to support compliance with any future rules.rules and will continue to evaluate the impact of the final U.S. NSFR rule on our operations.
Our liquidity and funding risk management approach includes deposits, supplemented by wholesale borrowing to fund our balance sheet, and using security sales or secured borrowings for liquidity stress situations in our liquidity contingency plans. In addition, regulations require banks to retain a portfolio of HQLA. As such, we are maintaining a large portfolio of high quality sovereign and sovereign guaranteed securities.

HSBC USA Inc.

Our ability to regularly attract wholesale funds at a competitive cost is enhanced by strong ratings from the major credit ratings agencies. The following table reflects the short and long-term credit ratings of HSBC USA and HSBC Bank USA at June 30, 2020:
March 31, 2021:
Moody'sS&PFitch
HSBC USA:
Short-term borrowingsP-1A-2F1+
Long-term/senior debtA2A-A+
HSBC Bank USA:
Short-term borrowingsP-1A-1F1+
Long-term/senior debtAa3A+AA-
Rating agencies continue to evaluate economic and geopolitical trends, regulatory developments, future profitability, risk management practices and legal matters, all of which could lead to adverse ratings actions.
In April 2020, Fitch changed the rating outlook for both HSBC USA and HSBC Bank USA to negative from stable following a similar change in outlook to negative from stable for HSBC. The outlook change reflects the economic disruption driven by the COVID-19 pandemic. While the outlook changed, Fitch affirmed the long-term credit rating for HSBC USA. Concurrently, Fitch upgraded the long-term credit rating for HSBC Bank USA by one notch to AA- following a review of HSBC's resolution plan.
In May 2020, S&P downgraded the long- and short-term issuer credit ratings of HSBC USA and HSBC Bank USA by one notch following a similar rating action for HSBC. The long- and short-term issuer credit ratings of HSBC USA were downgraded to A- and A-2, respectively, from A and A-1, respectively, while the long- and short-term issuer credit ratings of HSBC Bank USA were downgraded to A+ and A-1, respectively, from AA- and A-1+, respectively. These rating downgrades reflect S&P's view that the HSBC Group will not be fully shielded from the global economic downturn resulting from the measures taken against the spread of COVID-19 and that weaker earnings arising from higher credit charges will be exacerbated by low interest rates. In conjunction with these downgrades, S&P revised their rating outlooks for HSBC, HSBC USA and HSBC Bank USA to stable from negative.
While these rating actions by Fitch and S&P did not have a material financial impact on our borrowing costs or liquidity, any future actions could have such an impact. Although we closely monitor and strive to manage factors influencing our credit ratings, there is no assurance that our credit ratings will not change in the future. At June 30, 2020,March 31, 2021, there were no pending actions in terms of changes to ratings on the debt of HSBC USA or HSBC Bank USA from any of the rating agencies.
See "Liquidity and Capital Resources" in this MD&A for further discussion of our liquidity position, including additional information regarding our outstanding borrowings, the remaining availability of our debt issuance programs and our funding strategy.
Market Risk Management  Exposure to market risk is separated into two portfolios:
Trading portfolios comprise positions arising from market-making and warehousing of client-derived positions.
Non-trading portfolios comprise positions that primarily arise from the interest rate management of our retail and commercial banking assets and liabilities and financial investments classified as available-for-sale and held-to-maturity.
We apply similar risk management policies and measurement techniques to both trading and non-trading portfolios. Our objective
is to manage and control market risk exposures to optimize return on risk while maintaining a market profile consistent with our established risk appetite. See "Risk Management" in MD&A in our 2019 Form 10-K for a more complete discussion of our approach to market risk.
Value at Risk ("VaR") VaR is a technique for estimating potential losses on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. The use of VaR is integrated into market risk management and calculated for all trading positions regardless of how we capitalize them. In addition, we calculate VaR for non-trading portfolios to have a complete picture of risk. VaR measures are calculated to a 99 percent confidence level and use a one-day holding period.
Trading portfolios Trading VaR generates from the Global Markets unit of the GB&M business segment. Portfolios are mainly comprised of foreign exchange products, interest rate swaps, credit default swaps and precious metals (i.e., gold, silver, platinum) in both North America and emerging markets.

HSBC USA Inc.

The following graph summarizes daily VaR for our trading portfolios at a 99 percent confidence level (in millions):
hsbcusatradingvar20200630.jpg
The following table summarizes our trading VaR for the six months ended June 30, 2020:
 Foreign exchange and commodity Interest rate Credit Spread 
Portfolio Diversification(1)
 
Total(2)
 (in millions)
At June 30, 2020$1
 $9
 $4
 $(4) $10
          
Six Months Ended June 30, 2020         
Average2
 9
 2
 (4) 9
Maximum5
 14
 4
   15
Minimum1
 5
 1
   6
          
At December 31, 2019$1
 $6
 $1
 $(2) $6
(1)
Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction in unsystematic market risk that occurs when combining a number of different risk types, for example, foreign exchange, interest rate and credit spread, together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum and minimum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures.
(2)
The total VaR is non-additive across risk types due to diversification effects. For presentation purposes, portfolio diversification of the VaR for trading portfolios includes VaR-based risk-not-in-VaR.
Back-testing We routinely validate the accuracy of our VaR models by back-testing them against hypothetical profit and loss that excludes non-modeled items such as fees, commissions and revenues of intra-day transactions from the actual reported profit and loss. We would expect, under stable market conditions, to see two or three losses in excess of VaR at the 99 percent confidence level over a one-year period. However, in periods of unstable market conditions, we could see an increase in the number of back-testing exceptions.
During the six months ended June 30, 2020, we experienced eight loss back-testing exceptions. One loss exception in January was mainly driven by palladium volatility. Five loss exceptions in March and two loss exceptions in April were primarily due to intensified market volatility as a consequence of the COVID-19 pandemic.
Despite the high number of loss exceptions, performance of the VaR model was in line with expectations when considered in the context of the extraordinary market movements observed in March 2020. During the period, market risk continued to be managed using a complementary set of exposure measures and limits, including stress and scenario analysis.
Non-trading portfolios Non-trading VaR predominantly relates to BSM and represents the potential negative changes in the investment portfolio market value (which includes available-for-sale and held-to-maturity assets) and associated hedges. Our investment portfolio holdings are mainly comprised of U.S. Treasury, U.S. Government agency mortgage-backed and U.S. Government sponsored mortgage-backed securities. Our non-trading VaR exposure is driven by interest rates and agency spread volatility.

HSBC USA Inc.

The following table summarizes our non-trading VaR for the six months ended June 30, 2020:
 Interest rate Credit Spread 
Portfolio Diversification(1)
 
Total(1)
 (in millions)
At June 30, 2020$85
 $71
 $(75) $81
        
Six Months Ended June 30, 2020       
Average66
 63
 (57) 72
Maximum109
 106
   108
Minimum29
 38
   46
        
At December 31, 2019$37
 $48
 $(18) $67
(1)
Refer to the Trading VaR table above for additional information.
The increase in non-trading VaR at June 30, 2020 was due primarily to an increase in volatility of interest rates and U.S. Government agency credit spreads driven by the COVID-19 pandemic.
Non-trading VaR also includes the interest rate risk of non-trading financial assets and liabilities held by the global businesses and transfer priced into BSM which has the mandate to centrally manage and hedge it. See below for a broader discussion on how interest rate risk is managed.
Interest rate risk Various techniques are utilized to quantify and monitor risks associated with the repricing characteristics of our assets, liabilities and derivative contracts. See "Risk Management" in MD&A in our 20192020 Form 10-K for a more complete discussion of our approach to interest rate risk.
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Economic value of equity ("EVE") EVE represents the present value of the banking book cash flows that could be provided to our equity holder under a managed run-off scenario. An EVE sensitivity represents the change in EVE due to a defined movement in interest rates. We manage to an immediate parallel upward shock of 200 basis points and an immediate parallel downward shock of 200 basis points to the market implied interest rates. At both June 30, 2020March 31, 2021 and December 31, 2019,2020, our EVE remained within risk appetite for the up 200 and down 200 basis point interest rate shock scenarios.
Net interest income simulation modeling techniquesWe utilize simulation modeling to monitor a number of interest rate scenarios for their impact on projected net interest income. These techniques simulate the impact on projected net interest income under various scenarios, such as rate shock scenarios which assume immediate market rate movements by 100 basis points, as well as scenarios in which rates gradually rise or fall by 100 basis points over a twelve month period. In the gradual scenarios, 25 percent of the interest rate movement occurs at the beginning of each quarter. The following table reflects the impact on our projected net interest income of the scenarios utilized by these modeling techniques:
March 31, 2021December 31, 2020
Amount%Amount%
 (dollars are in millions)
Estimated increase (decrease) in projected net interest income (reflects projected rate movements on April 1, 2021 and January 1, 2021, respectively):
Resulting from a gradual 100 basis point increase in the yield curve$241 10 %$186 7 %
Resulting from a gradual 100 basis point decrease in the yield curve(261)(11)(213)(8)
Other significant scenarios monitored (reflects projected rate movements on April 1, 2021 and January 1, 2021, respectively):
Resulting from an immediate 100 basis point increase in the yield curve361 15 274 11 
Resulting from an immediate 100 basis point decrease in the yield curve(485)(20)(379)(15)
 June 30, 2020 December 31, 2019
 Amount % Amount %
 (dollars are in millions)
Estimated increase (decrease) in projected net interest income (reflects projected rate movements on July 1, 2020 and January 1, 2020, respectively):       
Resulting from a gradual 100 basis point increase in the yield curve$285
 12 % $(18) (1)%
Resulting from a gradual 100 basis point decrease in the yield curve(102) (4) (25) (1)
Other significant scenarios monitored (reflects projected rate movements on July 1, 2020 and January 1, 2020, respectively):       
Resulting from an immediate 100 basis point increase in the yield curve427
 18
 (70) (3)
Resulting from an immediate 100 basis point decrease in the yield curve(92) (4) (57) (2)
Changes in the sensitivities since December 31, 2019 have been primarily driven by the addition of pay-fixed positions and the acceleration of expected mortgage prepayments as a result of the significant drop in interest rates. In addition, the sensitivities in the 'down-shock' scenarios at June 30, 2020 reflect no floors to the shocked market rates. This is a change from the methodology published in our 2019 Form 10-K, where previously market rates would have been floored to zero when applicable. However, customer product specific rate floors continue to be recognized where appropriate. The projections do not take into consideration possible complicating factors such as the effect of changes in interest rates on the credit quality, size and composition of the balance sheet. Therefore, although this provides a reasonable estimate of interest rate sensitivity, actual results will differ from these estimates, possibly by significant amounts.
Market Risk Management  Exposure to market risk is separated into two portfolios:

•Trading portfolios comprise positions arising from market-making and warehousing of client-derived positions.
•Non-trading portfolios comprise positions that primarily arise from the interest rate management of our retail and commercial banking assets and liabilities and financial investments classified as available-for-sale and held-to-maturity.
We apply similar risk management policies and measurement techniques to both trading and non-trading portfolios. Our objective is to manage and control market risk exposures to optimize return on risk while maintaining a market profile consistent with our established risk appetite. See "Risk Management" in MD&A in our 2020 Form 10-K for a more complete discussion of our approach to market risk.
Value at risk ("VaR") VaR is a technique for estimating potential losses on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. The use of VaR is integrated into market risk management and calculated for all trading positions regardless of how we capitalize them. In addition, we calculate VaR for non-trading portfolios to have a complete picture of risk. VaR measures are calculated to a 99 percent confidence level and use a one-day holding period.
Trading portfolios Trading VaR generates primarily from the Markets and Securities Services unit of our GBM business segment. Portfolios comprise mainly foreign exchange products, interest rate swaps, credit default swaps and precious metals (i.e., gold, silver, platinum) in both North America and emerging markets.
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The following graph summarizes daily VaR for our trading portfolios at a 99 percent confidence level (in millions):
hsbcusa-20210331_g1.jpg
The following table summarizes our trading VaR for the three months ended March 31, 2021 and at December 31, 2020:
Foreign exchange and commodityInterest rateCredit Spread
Portfolio Diversification(1)
Total(2)
 (in millions)
At March 31, 2021$3 $8 $1 $(2)$10 
Three Months Ended March 31, 2021
Average3 7 1 (3)8 
Maximum5 10 2 12 
Minimum1 6 — 6 
At December 31, 2020$3 $7 $2 $(5)$7 
(1)Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction in unsystematic market risk that occurs when combining a number of different risk types, for example, foreign exchange, interest rate and credit spread, together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum and minimum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures.
(2)The total VaR is non-additive across risk types due to diversification effects. For presentation purposes, portfolio diversification of the VaR for trading portfolios includes VaR-based risk-not-in-VaR.
Back-testing We routinely validate the accuracy of our VaR models by back-testing them against hypothetical profit and loss that excludes non-modeled items such as fees, commissions and revenues of intra-day transactions from the actual reported profit and loss. We would expect, under stable market conditions, to see two or three losses in excess of VaR at the 99 percent confidence level over a one-year period. However, in periods of unstable market conditions, we could see an increase in the number of back-testing exceptions.
During the first quarter of 2021, we experienced no loss back-testing exceptions.
Non-trading portfolios Non-trading VaR predominantly relates to Markets Treasury and represents the potential negative changes in the investment portfolio market value (which includes available-for-sale and held-to-maturity assets) and associated hedges. Our investment portfolio holdings comprise mainly U.S. Treasury, U.S. Government agency mortgage-backed and U.S. Government sponsored mortgage-backed securities. Our non-trading VaR exposure is driven by interest rates and agency spread volatility.
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HSBC USA Inc.
The following table summarizes our non-trading VaR for the three months ended March 31, 2021 and at December 31, 2020:

Interest rateCredit Spread
Portfolio Diversification(1)
Total(1)
 (in millions)
At March 31, 2021$120 $64 $(59)$125 
Three Months Ended March 31, 2021
Average85 74 (61)98 
Maximum126 83 128 
Minimum61 64 72 
At December 31, 2020$69 $66 $(66)$69 
(1)    Refer to the Trading VaR table above for additional information.
Non trading VaR was higher at March 31, 2021 as compared with December 31, 2021 due primarily to an increase in volatility of interest rates and spread volatility on U.S. Treasury and U.S. Government agency mortgage-backed securities.
Non-trading VaR also includes the interest rate risk of non-trading financial assets and liabilities held by the global businesses and transfer priced into Markets Treasury which has the mandate to centrally manage and hedge it. See "Treasury Risk Management" above for a broader discussion on how interest rate risk is managed.
Financial Crime Risk Management The Financial Crime Risk Management Committee ("FCRMC"), chaired by the U.S. Head of Financial Crime and Bank Secrecy Act/Anti-Money Laundering Compliance Officer, served as the principal financial crime governance forum, responsible for the management of financial crime risk. As a reflection of the growing maturity and effectiveness of financial crime risk management, the functions of the FCRMC were integrated into the Risk Management Meeting ("RMM") during the first quarter of 2021. With this change, the RMM now oversees the risk management of both regulatory compliance and financial crime. There have been no other material changes to our approach to financial crime risk management since December 31, 2020.

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CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES
The following table summarizes the quarter-to-date and year-to-date average daily balances of the principal components of assets, liabilities and equity together with their respective interest amounts and rates earned or paid. Net interest margin is calculated by dividing net interest income by the average interest earning assets from which interest income is earned. Loan interest for the three and six months ended June 30,March 31, 2021 and 2020 included fees of $19$20 million and $36$17 million, respectively, compared with fees of $21 million and $38 million during the three and six months ended June 30, 2019, respectively.
Three Months Ended March 31,20212020
Average BalanceInterestRateAverage BalanceInterestRate
 (dollars are in millions)
Assets:
Interest bearing deposits with banks$29,184 $7 .10 %$17,688 $54 1.23 %
Federal funds sold and securities purchased under resale agreements24,652 9 .15 5,364 33 2.47 
Trading securities18,956 48 1.03 25,206 80 1.28 
Securities46,798 177 1.53 51,534 243 1.90 
Loans:
Commercial41,443 282 2.76 50,525 448 3.57 
Consumer:
Residential mortgages18,552 138 3.02 18,018 155 3.46 
Home equity mortgages712 5 2.85 821 9 4.41 
Credit cards989 21 8.61 1,358 20 5.92 
Other consumer291 5 6.97 262 6 9.21 
Total consumer20,544 169 3.34 20,459 190 3.74 
Total loans61,987 451 2.95 70,984 638 3.61 
Other2,879 9 1.27 5,545 19 1.38 
Total interest earning assets$184,456 $701 1.54 %$176,321 $1,067 2.43 %
Allowance for credit losses(991)(457)
Cash and due from banks1,304 1,245 
Other assets14,322 11,881 
Total assets$199,091 $188,990 
Liabilities and Equity:
Domestic deposits:
Savings deposits$68,118 $31 .18 %$51,334 $108 .85 %
Time deposits17,507 34 .79 29,971 164 2.20 
Other interest bearing deposits22,229 16 .29 13,482 43 1.28 
Foreign deposits:
Foreign banks deposits5,401 — .03 4,625 4 .35 
Other interest bearing deposits271 — — 761 2 1.06 
Total interest bearing deposits113,526 81 .29 100,173 321 1.29 
Short-term borrowings5,700 5 .36 10,558 40 1.52 
Long-term debt19,659 82 1.69 25,097 198 3.17 
Total interest bearing deposits and debt138,885 168 .49 135,828 559 1.66 
Tax liabilities and other684 2 1.19 820 4 1.96 
Total interest bearing liabilities$139,569 $170 .49 %$136,648 $563 1.66 %
Net interest income/Interest rate spread$531 1.05 %$504 .77 %
Noninterest bearing deposits35,190 25,689 
Other liabilities6,126 8,131 
Total equity18,206 18,522 
Total liabilities and equity$199,091 $188,990 
Net interest margin on average earning assets1.17 %1.15 %
Net interest income to average total assets1.08 %1.07 %

115
Three Months Ended June 30,2020 2019
 Average Balance Interest Rate Average Balance Interest Rate
 (dollars are in millions)
Assets:           
Interest bearing deposits with banks$28,866
 $8
 .11% $15,870
 $102
 2.58%
Federal funds sold and securities purchased under resale agreements11,117
 15
 .54
 5,743
 71
 4.96
Trading securities17,738
 48
 1.09
 20,704
 67
 1.30
Securities53,497
 262
 1.97
 47,832
 298
 2.50
Loans:           
Commercial57,944
 400
 2.78
 51,675
 552
 4.28
Consumer:
 
 
 

 

 

Residential mortgages18,267
 150
 3.30
 17,459
 155
 3.56
Home equity mortgages804
 5
 2.50
 925
 12
 5.20
Credit cards1,217
 18
 5.95
 1,085
 19
 7.02
Other consumer285
 7
 9.88
 261
 5
 7.68
Total consumer20,573
 180
 3.52
 19,730
 191
 3.88
Total loans78,517
 580
 2.97
 71,405
 743
 4.17
Other6,415
 5
 .31
 3,129
 20
 2.56
Total interest earning assets$196,150
 $918
 1.88% $164,683
 $1,301
 3.17%
Allowance for credit losses(1,060)     (593)    
Cash and due from banks1,119
     1,213
    
Other assets14,390
     12,793
    
Total assets$210,599
     $178,096
    
Liabilities and Equity:           
Domestic deposits:           
Savings deposits$62,230
 $71
 .46% $46,341
 $115
 1.00%
Time deposits30,012
 121
 1.62
 27,769
 200
 2.89
Other interest bearing deposits21,223
 6
 .11
 10,335
 53
 2.06
Foreign deposits:           
Foreign banks deposits5,137
 1
 .08
 4,122
 9
 .88
Other interest bearing deposits691
 1
 .58
 805
 3
 1.49
Deposits held for sale—
 —
 —
 1
 —
 .60
Total interest bearing deposits119,293
 200
 .67
 89,373
 380
 1.71
Short-term borrowings10,795
 15
 .56
 6,977
 68
 3.91
Long-term debt25,466
 162
 2.56
 31,341
 306
 3.92
Total interest bearing deposits and debt155,554
 377
 .97
 127,691
 754
 2.37
Tax liabilities and other496
 3
 2.43
 1,329
 7
 2.11
Total interest bearing liabilities$156,050
 $380
 .98% $129,020
 $761
 2.37%
Net interest income/Interest rate spread

 $538
 .90% 

 $540
 .80%
Noninterest bearing deposits28,106
     22,747
    
Other liabilities8,169
     7,955
    
Total equity18,274
     18,374
    
Total liabilities and equity$210,599
     $178,096
    
Net interest margin on average earning assets    1.10%     1.32%
Net interest income to average total assets    1.02%     1.22%
            


HSBC USA Inc.

Six Months Ended June 30,2020
2019
 Average Balance Interest Rate Average Balance Interest Rate
 (dollars are in millions)
Assets:           
Interest bearing deposits with banks$23,277
 $62
 .54% $16,489
 $216
 2.64%
Federal funds sold and securities purchased under resale agreements8,241
 48
 1.17
 5,995
 133
 4.47
Trading securities21,472
 128
 1.20
 19,773
 130
 1.33
Securities52,516
 505
 1.93
 46,919
 602
 2.59
Loans:           
Commercial54,234
 848
 3.14
 50,860
 1,074
 4.26
Consumer:           
Residential mortgages18,143
 305
 3.38
 17,454
 312
 3.60
Home equity mortgages813
 14
 3.46
 942
 24
 5.14
Credit cards1,288
 38
 5.93
 1,053
 38
 7.28
Other consumer273
 13
 9.58
 268
 11
 8.28
Total consumer20,517
 370
 3.63
 19,717
 385
 3.94
Total loans74,751
 1,218
 3.28
 70,577
 1,459
 4.17
Other5,980
 24
 .81
 3,009
 38
 2.55
Total interest earning assets$186,237
 $1,985
 2.14% $162,762
 $2,578
 3.19%
Allowance for credit losses(758)     (567)    
Cash and due from banks1,182
     1,255
    
Other assets13,134
     13,049
    
Total assets$199,795
     $176,499
    
Liabilities and Equity:           
Domestic deposits:           
Savings deposits$56,782
 $179
 .63% $46,422
 $217
 .94%
Time deposits29,992
 285
 1.91
 25,709
 370
 2.90
Other interest bearing deposits17,353
 49
 .57
 10,230
 104
 2.05
Foreign deposits:           
Foreign banks deposits4,881
 5
 .21
 4,125
 16
 .78
Other interest bearing deposits726
 3
 .83
 784
 6
 1.54
Deposits held for sale—
 —
 —
 3
 —
 .59
Total interest bearing deposits109,734
 521
 .95
 87,273
 713
 1.65
Short-term borrowings10,676
 55
 1.04
 7,293
 130
 3.59
Long-term debt25,282
 360
 2.86
 31,371
 618
 3.97
Total interest bearing deposits and debt145,692
 936
 1.29
 125,937
 1,461
 2.34
Tax liabilities and other658
 7
 2.14
 1,243
 15
 2.43
Total interest bearing liabilities$146,350
 $943
 1.30% $127,180
 $1,476
 2.34%
Net interest income/Interest rate spread  $1,042
 .84%   $1,102
 .85%
Noninterest bearing deposits26,898
     23,189
    
Other liabilities8,149
     7,204
    
Total equity18,398
     18,926
    
Total liabilities and equity$199,795
     $176,499
    
Net interest margin on average earning assets    1.12%     1.37%
Net interest income to average total assets    1.05%     1.26%


HSBC USA Inc.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk
Information required by this Item is included within Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in the Risk Management section under the captioncaptions "Treasury Risk Management - Interest Rate Risk" and "Market Risk Management."


Item 4.    Controls and Procedures
Evaluation of Disclosure Controls and Procedures We maintain a system of disclosure controls and procedures designed to ensure that information required to be disclosed by HSBC USA in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported on a timely basis. Our Board of Directors, operating through its Audit Committee, which is composed entirely of independent non-executive directors, provides oversight to our financial reporting process.
We conducted an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report so as to alert them in a timely fashion to material information required to be disclosed in reports we file under the Exchange Act.
Changes in Internal Control over Financial Reporting There has been no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2020March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


PART II

Item 1. Legal Proceedings
See Note 20, "Litigation and Regulatory Matters," in the accompanying consolidated financial statements for our legal proceedings disclosure, which is incorporated herein by reference.


Item 1A. Risk Factors
The following discussion supplements the discussion of risk factors affecting us as set forth in Part I, Item 1A. Risk Factors, on pages 15 - 29 of our 2019 Annual Report on Form 10-K. The discussion of risk factors, as so supplemented, provides a description of some of the important risk factors that could affect our actual results and could cause our results to vary materially from those expressed in public statements or documents. However, other factors besides those included in the discussion of risk factors, as so supplemented, or discussed elsewhere in other of our reports filed with or furnished to the SEC could affect our business or results. The readers should not consider any description of such factors to be a complete set of all potential risks that we may face.
Risks relating to the impact of COVID-19
The COVID-19 pandemic has had, and continues to have, a material impact on businesses around the world and the economic environments in which they operate. In March 2020, the United States declared a federal state of emergency in response to the COVID-19 pandemic, which continues to spread throughout the United States. The outbreak of this virus has disrupted global financial markets and negatively affected supply and demand across a broad range of industries. There are a number of factors associated with the outbreak and its impact on global economies including the United States that have had and could continue to have a material adverse effect on (among other things) the profitability, capital and liquidity of financial institutions such as HUSI. The circumstances around this pandemic are evolving and will continue to impact our business in future periods.
The COVID-19 pandemic has caused disruption to our customers, suppliers and staff. A number of states in which we operate have implemented restrictions on the movement of their respective populations, with a resultant significant impact on economic activity in those states. The pandemic resulted in sheltering in place requirements in many states and municipalities and the temporary closure of many businesses which only recently have begun to ease as governments have started to lift restrictions. As a result, the demand for our products and services has been and may continue to be significantly impacted and could vary by region or industry sector. Furthermore, it is unclear how the macroeconomic business environment or societal norms may be impacted after the pandemic. The post-COVID-19 environment may undergo unexpected developments or changes in the financial markets,

HSBC USA Inc.

fiscal, tax and regulatory environments as well as customer and corporate client behavior which could have an adverse impact on our business.
In the United States, the Federal Government has taken action to provide financial support to parts of the economy most impacted by the COVID-19 pandemic. The details of how these actions will impact our customers and therefore the impact on HUSI continues to remain uncertain. Furthermore, it is unclear how these actions will ultimately impact the future economic environment, including inflation, interest rates and foreign exchange and our business. The actions taken by the U.S. Government and the FRB may indicate a view on the potential severity of a downturn and post recovery environment, which from a commercial, regulatory and risk perspective could be significantly different to past crises and persist for a prolonged period. An immediate financial impact in 2020 has been higher lifetime ECL driven by a worsening in the economic scenarios used to calculate ECL as well as higher provisions for risk factors associated with large loan exposures, downgrades reflecting weakness in the financial condition of certain clients and loan growth as clients drew on their available lines of credit. See Note 6, "Allowance for Credit Losses," in the accompanying consolidated financial statements for further discussion. In addition, we have provided temporary payment relief to borrowers who are experiencing short-term financial problems as a result of COVID-19, a risk exists that these short-term financial problems may become long-term, increasing our risk of credit losses.
Unprecedented movement in economic and market drivers related to the COVID-19 pandemic, dramatically impact the performance of financial models including retail and wholesale credit loss models, capital models, traded risk models and models used in the asset/liability management process.  This has required additional monitoring and more frequent testing of models, particularly for credit loss models. It also has resulted in the use of mitigants for model limitations, such as adjustments to model outputs to reflect consideration of management judgment. The performance and usage of models has been and will continue to be impacted significantly by the consequences of the COVID-19 pandemic. While it is too early to be entirely certain of the magnitude of change required for our models, it is likely that capital, credit risk and other models will need to be recalibrated or replaced. The effectiveness of our models will depend in large part on the depth and length of the economic downturn.
The pandemic has led to a weakening in gross domestic product and significantly higher unemployment in the United States, which officially entered recession in the second quarter of 2020. In addition, as a result of deteriorating economic conditions, we performed an interim goodwill impairment test as of March 31, 2020 which resulted in the impairment of the goodwill previously allocated to our RBWM and PB reporting units. This matter has also resulted in valuation losses associated with certain financial instruments due to market volatility, which have largely recovered during the second quarter. See "Management's Discussion and Analysis of Financial Position and Results of Operations." Additionally, in April 2020, Fitch changed the rating outlook for both HSBC USA and HSBC Bank USA to negative from stable, and in May 2020, Standard & Poor's downgraded the long-term and short-term issuer credit ratings of HSBC USA and HSBC Bank USA by one notch, following similar ratings actions for HSBC. These change reflect the economic disruption driven by the COVID-19 pandemic, with Standard & Poor's also noting the HSBC Group's restructuring plan. See "Management's Discussion and Analysis of Financial Position and Results of Operations - Risk Management."
The pandemic may not be fully contained until a vaccine and/or widely accepted treatment becomes available, which might not occur for an extended period of time. Should the current economic conditions persist or deteriorate further, we expect that this environment will continue to adversely impact our business which could include, but not be limited to, further impacts on our income due to lower lending and transaction volumes and lower wealth management revenue due to equity markets volatility and weakness as well as additional credit losses. Other potential risks include the impact of postponed health screenings on the well-being of our employees, credit rating migration which could negatively impact our risk-weighted assets and capital position, and potential liquidity stress due, among other factors, to increased customer drawdowns, notwithstanding the significant initiatives that the U.S. Government and the FRB have put in place to support funding and liquidity. Additionally, interest rates have been reduced since the start of the COVID-19 pandemic, which has and may continue to compress our margins and reduce our net interest income. Further, while we have continued to progress our program for transitioning away from interbank offered rates, including LIBOR, the COVID-19 pandemic is affecting our progress as well as the progress of other market participants. See "Management's Discussion and Analysis of Financial Position and Results of Operations - Executive Overview."
Central bank and government actions and support measures taken in response to the COVID-19 pandemic may create restrictions in relation to capital. These may limit management’s flexibility in managing the business and taking action in relation to capital distribution and capital allocation. In June 2020, the FRB publicly disclosed bank-specific CCAR and DFAST supervisory stress testing results along with aggregated results of a sensitivity analysis aimed at gauging the ongoing economic impact of the COVID-19 pandemic on CCAR firms. The FRB also announced that it will prohibit stock repurchases by CCAR firms and will require all CCAR firms to limit their common stock dividends to the lesser of (a) the firm's common stock dividends last quarter and (b) the average of the firm's net income for the four preceding calendar quarters. These restrictions will continue at least through September 30, 2020 and could be extended by the FRB quarter-by-quarter. In order to make common stock distributions, HSBC North America must maintain capital level in excess of its regulatory capital minimums and its stress capital buffer. In addition, the FRB has also announced that each CCAR firm, including HSBC North America, must resubmit its capital plan later this year based on additional economic scenarios provided by the FRB. It is unclear if the FRB will conduct further stress tests in

HSBC USA Inc.

connection with its review of CCAR firms' resubmitted capital plans or if the FRB would recalculate the SCB applicable to CCAR firms based on such stress tests.
In addition, federal and state legislative and regulatory developments in relation to COVID-19 have impacted and may continue to impact our business and operations by, for example, requiring forbearance on loans, suspensions of foreclosure sales and imposing restrictions on our ability to charge certain fees. Our participation in these and other measures taken by governments and regulatory authorities could result in reputational harm and has resulted in, and may continue to result in, litigation, including class actions, or regulatory and government actions and proceedings. Such actions may result in judgments, settlements, penalties and fines adverse to HUSI.
Late in the second quarter of 2020, we decided to lift the pause we had put in place in March on the staff reductions relating to our restructuring plan as COVID-19 restrictions have begun to ease and some businesses began to re-open. Our restructuring plan is moving forward as planned, including consolidation of our retail branch network and wholesale and retail middle and back office functions, each under a single operations structure, and the creation of our Wealth and Personal Banking business which was completed in the second quarter. While we remain committed to our multi-year strategic plan to re-profile our business, the timing of the strategic actions as outlined in our 2019 Form 10-K may be re-sequenced or delayed beyond 24 months as the circumstances around the COVID-19 pandemic continue to develop. We continue to re-assess our strategic plan and may take additional actions in future periods.
Any and all such events mentioned above could have or continue to have a material adverse effect on our business, financial condition, results of operations, prospects, liquidity, capital position and credit ratings (including further credit rating agency changes of outlooks or ratings). The extent of such impact will depend on the outcome of certain developments, including but not limited to, the duration and the ability to control the spread of the pandemic as well as its continuing impact on our customers, vendors and employees, all of which are uncertain. To the extent the COVID-19 pandemic continues to adversely affect our business, results of operations and financial condition, it could also have the effect of increasing the likelihood of many of the other risks described in Risk Factors in our 2019 Annual Report on Form 10-K.

Item 5.    Other Information
Disclosures pursuant to Section 13(r) of the Securities Exchange ActSection 13(r) of the Securities Exchange Act requires each issuer registered with the SEC to disclose in its annual or quarterly reports whether it or any of its affiliates have knowingly engaged in specified activities or transactions with persons or entities targeted by U.S. sanctions programs relating to Iran, terrorism, or the proliferation of weapons of mass destruction, even if those activities are not prohibited by U.S. law and are conducted outside the U.S. by non-U.S. affiliates in compliance with local laws and regulations.
To comply with this requirement, HSBC has requested relevant information from its affiliates globally. During the period covered by this Form 10-Q, HUSI did not engage in activities or transactions requiring disclosure pursuant to Section 13(r) other than those activities related to frozen accounts and transactions permitted under relevant U.S. sanctions programs described under "Frozen Accounts and Transactions" below. The following activities conducted by our affiliates are disclosed in response to Section 13(r):
Legacy contractual obligations related to guaranteesBetween 1996 and 2007, the HSBC Group provided guarantees to a number of its non-Iranian customers in Europe and the Middle East for various business activities in Iran. In a number of cases, the HSBC Group issued counter indemnities in support of guarantees issued byinvolving Iranian banks as the Iranian beneficiaries of the guarantees required that they be backed directly by Iranian banks. The Iranian banks to which the HSBC Group provided counter indemnities included Bank Tejarat, Bank Melli, and the Bank of Industry and Mine.
There was no measurable gross revenue in the secondfirst quarter of 20202021 under those guarantees and counter indemnities. The HSBC Group does not allocate direct costs to fees and commissions and, therefore, has not disclosed a separate net profit measure. The HSBC Group is seeking to cancel all relevant guarantees and counter indemnities, and does not currently intend to provide any new guarantees or counter indemnities involving Iran. None were cancelled in the secondfirst quarter of 20202021 and approximately 1617 remain outstanding.
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Other relationships with Iranian banks Activity related to U.S.-sanctioned Iranian banks not covered elsewhere in this disclosure includes the matter described below.
The HSBC Group acts as the trustee and administrator for a pension scheme involving eight employees of a U.S.-sanctioned Iranian bank in Hong Kong. Under the rules of this scheme, the HSBC Group accepts contributions from the Iranian bank each month and allocates the funds into the pension accounts of the Iranian bank’s employees. The HSBC Group runs and operates this pension scheme in accordance with Hong Kong laws and regulations. Estimated gross revenue, which includes fees and/or commissions, generated by this pension scheme during the secondfirst quarter of 20202021, was approximately $577.$632.

HSBC USA Inc.

For the Iranianbank related-activity discussed above, the HSBC Group does not allocate direct costs to fees and commissions and, therefore, has not disclosed a separate net profit measure.
The HSBC Group has been holding a safe custody box for the Central Bank of Iran. For a number of years, the box has not been accessed by the Central Bank of Iran, and no fees have been charged to the Central Bank of Iran.
The HSBC Group currently intends to continue to wind down the activity discussed in this section, to the extent legally permissible, and not enter into any new such activity.
Activity related to U.S. Executive Order 13224 During the second quarter of 2020, the HSBC Group processed a number of small local currency payments on behalf of U.K. customers to a U.K.-registered charity that is designated under Executive Order 13224, but that is not sanctioned by the U.K., EU, or the United Nations Security Council.
There was no measurable gross revenue or net profit generated from these transactions.
Other activity The HSBC Group has an insurance company customer in the United Arab Emirates that, during the secondfirst quarter of 2020,2021, made a paymentlocal currency payments for the reimbursement of medical treatment to a hospital located in the United Arab Emirates and owned by the Government of Iran. The HSBC Group processed this paymentthese payments to the hospital made by its customer.
The HSBC Group exitedhas a customer relationship with the Iranian Embassy in the U.K. in 2013. InUnited Arab Emirates that, during the secondfirst quarter of 2020,2021, received a local currency check from a hospital located in the United Arab Emirates and owned by the Government of Iran. The HSBC Group made two domesticprocessed this check from the hospital to its customer.
The HSBC Group has a customer in the United Arab Emirates that, during the first quarter of 2021, received a local currency check from an Iranian-owned insurance company. The HSBC Group processed this check from the insurance company to its customer.
The HSBC Group has two customers in France that, during the first quarter of 2021, each received a local currency payment from an Iranian-owned bank in relation to management charges for property owned by the Iranian-owned bank. The HSBC Group processed these payments to return funds relatedits customers.
The HSBC Group has a customer in Hong Kong that, during the first quarter of 2021, received local currency salary payments from an Iranian-owned bank. The HSBC Group processed these payments to this legacy customer relationship that were being held in an unclaimed balance account.its customer.
For these activities, there was no measurable gross revenue or net profit to the HSBC Group during the secondfirst quarter of 2020.2021.
Frozen accounts and transactionsThe HSBC Group and HSBC Bank USA (a subsidiary of HUSI) maintain several accounts that are frozen as a result of relevant sanctions programs, and safekeeping boxes and other similar custodial relationships, for which no activity, except as licensed or otherwise authorized, took place during the secondfirst quarter of 2020.2021. There was no measurable gross revenue or net profit to the HSBC Group during the secondfirst quarter of 20202021 relating to these frozen accounts.



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Item 6. Exhibits
3(i)
3(ii)
Bylaws of HSBC USA Inc., as Amended and Restated effective July 24, 2018April 13, 2021 (incorporated by reference to Exhibit 3.2 to HSBC USA Inc.'s Current Report on Form 8-K filed July 26, 2018April 14, 2021).
31
32
101.INS
The instance document does not appear in the interactive data file because its XBRL Instance Documenttags are embedded within the Inline XBRL document(1)
101.SCH
Inline XBRL Taxonomy Extension Schema Document(1)
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document(1)
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document(1)
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document(1)
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document(1)
(1)
104		Pursuant to Rule 405 of Regulation S-T, includes the following financial information includedCover Page Interactive Data File (formatted as Inline XBRL and contained in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in eXtensible Business Reporting Language ("XBRL") interactive data files: (i) the Consolidated Statement of Income (Loss) for the three and six months ended June 30, 2020 and 2019, (ii) the Consolidated Statement of Comprehensive Income (Loss) for the three and six months ended June 30, 2020 and 2019, (iii) the Consolidated Balance Sheet at June 30, 2020 and December 31, 2019, (iv) the Consolidated Statement of Changes in Equity for the three and six months ended June 30, 2020 and 2019, (v) the Consolidated Statement of Cash Flows for the six months ended June 30, 2020 and 2019, and (vi) the Notes to Consolidated Financial Statements.Exhibit 101)


HSBC USA Inc.
(1)Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline eXtensible Business Reporting Language ("Inline XBRL"): (i) the Consolidated Statement of Income (Loss) for the three months ended March 31, 2021 and 2020, (ii) the Consolidated Statement of Comprehensive Loss for the three months ended March 31, 2021 and 2020, (iii) the Consolidated Balance Sheet at March 31, 2021 and December 31, 2020, (iv) the Consolidated Statement of Changes in Equity for the three months ended March 31, 2021 and 2020, (v) the Consolidated Statement of Cash Flows for the three months ended March 31, 2021 and 2020, and (vi) the Notes to Consolidated Financial Statements.

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Signatures

HSBC USA Inc.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, HSBC USA Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 3, 2020

April 27, 2021
HSBC USA INC.
HSBC USA INC.
By:
By:/s/ KAVITA MAHTANI
Kavita Mahtani
Senior Executive Vice President and
Chief Financial Officer



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