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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2020~~2021


☐			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)


Maryland						13-2764867
(State of incorporation)						(I.R.S. Employer Identification No.)
452 Fifth Avenue, New York, New York						10018
(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 Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
$100,000,000 Zero Coupon Callable Accreting Notes due January 15, 2043	HBA/43	New York Stock Exchange
$50,000,000 Zero Coupon Callable Accreting Notes due January 29, 2043	HBA/43A	New 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 ☒ No ☐

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 ☒ No ☐

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 filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☐

Emerging growth company

☐

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October ~~23, 2020,~~22, 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 I		Page
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	98
	Notes to the Consolidated Financial Statements	109

















Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations:
	Forward-Looking Statements	8681
	Executive Overview	8883
	Basis of Reporting	9488
	~~Critical Accounting Policies and Estimates~~	95
	Balance Sheet Review	9690
	Results of Operations	~~101~~95
	Segment Results - Group Reporting Basis	~~112~~105
	Credit Quality	~~120~~114
	Liquidity and Capital Resources	~~129~~122
	Off-Balance Sheet Arrangements, Credit Derivatives and Other Contractual Obligations	~~134~~126
	Fair Value	~~135~~127
	Risk Management	~~137~~128

	Consolidated Average Balances and Interest Rates	~~143~~134
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	~~145~~136



Item 4.	Controls and Procedures	~~145~~136







Part II
Item 1.	Legal Proceedings	~~145~~136
~~Item 1A.~~	~~Risk Factors~~	~~145~~
Item 5.	Other Information	~~147~~136
Item 6.	Exhibits	~~149~~138

Signatures			~~150~~139


HSBC USA Inc.

PART I

Item 1. Financial Statements

CONSOLIDATED STATEMENT OF INCOME (LOSS) (UNAUDITED)


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2021		2020		2021		2020
		(in millions)															(in millions)
Interest income:	Interest income:									Interest income:
Loans	Loans	$	511	$	733	$	1,729	$	2,192	Loans	$	416	$	511	$	1,308	$	1,729
Securities	Securities	202		296		707		898		Securities	154		202		491		707
Trading securities	Trading securities	64		85		192		215		Trading securities	60		64		162		192
Short-term investments	Short-term investments	16		136		126		485		Short-term investments	24		16		57		126
Other	Other	11		23		35		61		Other	4		11		17		35
Total interest income	Total interest income	804		1,273		2,789		3,851		Total interest income	658		804		2,035		2,789
Interest expense:	Interest expense:									Interest expense:
Deposits	Deposits	135		408		656		1,121		Deposits	60		135		210		656
Short-term borrowings	Short-term borrowings	7		79		62		209		Short-term borrowings	4		7		13		62
Long-term debt	Long-term debt	111		277		471		895		Long-term debt	70		111		230		471
Other	Other	3		6		10		21		Other	4		3		8		10
Total interest expense	Total interest expense	256		770		1,199		2,246		Total interest expense	138		256		461		1,199
Net interest income	Net interest income	548		503		1,590		1,605		Net interest income	520		548		1,574		1,590
Provision for credit losses	Provision for credit losses	(105)		94		840		198		Provision for credit losses	(81)		(105)		(537)		840
Net interest income after provision for credit losses	Net interest income after provision for credit losses	653		409		750		1,407		Net interest income after provision for credit losses	601		653		2,111		750
Other revenues:	Other revenues:									Other revenues:
Credit card fees, net	Credit card fees, net	10		18		30		48		Credit card fees, net	—		10		23		30
Trust and investment management fees	Trust and investment management fees	34		34		98		95		Trust and investment management fees	26		34		81		98
Other fees and commissions	Other fees and commissions	144		155		425		464		Other fees and commissions	160		144		496		425
Trading revenue		49		178		255		434
Trading revenue (expense)										Trading revenue (expense)	(42)		49		1		255

Other securities gains, net	Other securities gains, net	52		46		111		76		Other securities gains, net	4		52		51		111
Servicing and other fees from HSBC affiliates	Servicing and other fees from HSBC affiliates	79		88		255		257		Servicing and other fees from HSBC affiliates	79		79		232		255
Gain (loss) on instruments designated at fair value and related derivatives		15		(19)		15		(45)
Gain on instruments designated at fair value and related derivatives										Gain on instruments designated at fair value and related derivatives	8		15		33		15

Other income (loss)	Other income (loss)	(27)		(14)		18		(17)		Other income (loss)	7		(27)		13		18
Total other revenues	Total other revenues	356		486		1,207		1,312		Total other revenues	242		356		930		1,207
Operating expenses:	Operating expenses:									Operating expenses:
Salaries and employee benefits	Salaries and employee benefits	193		195		590		626		Salaries and employee benefits	151		193		509		590
Support services from HSBC affiliates	Support services from HSBC affiliates	391		394		1,162		1,185		Support services from HSBC affiliates	389		391		1,148		1,162
Occupancy expense, net	Occupancy expense, net	44		41		222		134		Occupancy expense, net	27		44		175		222
Goodwill impairment (Note 8)		0		365		784		365
Goodwill impairment (Note 9)										Goodwill impairment (Note 9)	—		—		—		784
Other expenses	Other expenses	157		111		359		320		Other expenses	99		157		318		359
Total operating expenses	Total operating expenses	785		1,106		3,117		2,630		Total operating expenses	666		785		2,150		3,117
Income (loss) before income tax	Income (loss) before income tax	224		(211)		(1,160)		89		Income (loss) before income tax	177		224		891		(1,160)
Income tax expense (benefit)	Income tax expense (benefit)	36		39		(72)		109		Income tax expense (benefit)	40		36		222		(72)

Net income (loss)	Net income (loss)	$	188	$	(250)	$	(1,088)	$	(20)	Net income (loss)	$	137	$	188	$	669	$	(1,088)

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


HSBC USA Inc.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2021		2020		2021		2020
		(in millions)															(in millions)
Net income (loss)	Net income (loss)	$	188	$	(250)	$	(1,088)	$	(20)	Net income (loss)	$	137	$	188	$	669	$	(1,088)
Net change in unrealized gains (losses), net of tax:	Net change in unrealized gains (losses), net of tax:									Net change in unrealized gains (losses), net of tax:
Investment securities	Investment securities	56		86		924		485		Investment securities	(86)		56		(664)		924
Fair value option liabilities attributable to our own credit spread	Fair value option liabilities attributable to our own credit spread	(40)		(3)		106		(107)		Fair value option liabilities attributable to our own credit spread	9		(40)		9		106
Derivatives designated as cash flow hedges	Derivatives designated as cash flow hedges	(10)		(10)		83		9		Derivatives designated as cash flow hedges	(7)		(10)		(28)		83
Pension and post-retirement benefit plans	Pension and post-retirement benefit plans	(2)		(1)		(2)		(4)		Pension and post-retirement benefit plans	—		(2)		1		(2)
Total other comprehensive income		4		72		1,111		383
Total other comprehensive income (loss)										Total other comprehensive income (loss)	(84)		4		(682)		1,111
Comprehensive income (loss)	Comprehensive income (loss)	$	192	$	(178)	$	23	$	363	Comprehensive income (loss)	$	53	$	192	$	(13)	$	23

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


HSBC USA Inc.

CONSOLIDATED BALANCE SHEET (UNAUDITED)


		September 30, 2020		December 31, 2019			September 30, 2021		December 31, 2020
		(in millions, except share data)							(in millions, except share data)
Assets⁽¹⁾	Assets⁽¹⁾					Assets(1)
Cash and due from banks	Cash and due from banks	$	1,352	$	1,744	Cash and due from banks	$	1,018	$	1,302
Interest bearing deposits with banks	Interest bearing deposits with banks	16,126		2,038		Interest bearing deposits with banks	62,140		14,353
Federal funds sold and securities purchased under agreements to resell	Federal funds sold and securities purchased under agreements to resell	25,579		17,838		Federal funds sold and securities purchased under agreements to resell	7,480		35,746
Trading assets (includes $3.7 billion and $336 million pledged to creditors at September 30, 2020 and December 31, 2019, respectively)		33,754		28,452
Securities available-for-sale (includes $1.7 billion and NaN pledged to creditors at September 30, 2020 and December 31, 2019, respectively, and an allowance for credit losses of $2 million at September 30, 2020)		41,328		35,663
Securities held-to-maturity, net of allowance for credit losses of $2 million at September 30, 2020 (fair value of $10.6 billion and $13.4 billion at September 30, 2020 and December 31, 2019, respectively)		10,224		13,293
Loans (includes $34 million designated under fair value option at September 30, 2020)		66,409		68,553
Trading assets (includes $2.1 billion and $1.3 billion pledged to creditors at September 30, 2021 and December 31, 2020, respectively)						Trading assets (includes $2.1 billion and $1.3 billion pledged to creditors at September 30, 2021 and December 31, 2020, respectively)	21,985		27,284
Securities available-for-sale (includes amortized cost of $36.4 billion and $39.6 billion at September 30, 2021 and December 31, 2020, respectively, an allowance for credit losses of $1 million at both September 30, 2021 and December 31, 2020, and $2.2 billion and $2.1 billion pledged to creditors at September 30, 2021 and December 31, 2020, respectively)						Securities available-for-sale (includes amortized cost of $36.4 billion and $39.6 billion at September 30, 2021 and December 31, 2020, respectively, an allowance for credit losses of $1 million at both September 30, 2021 and December 31, 2020, and $2.2 billion and $2.1 billion pledged to creditors at September 30, 2021 and December 31, 2020, respectively)	36,507		40,672
Securities held-to-maturity, net of allowance for credit losses of $1 million and $2 million at September 30, 2021 and December 31, 2020, respectively (fair value of $6.1 billion and $9.4 billion at September 30, 2021 and December 31, 2020, respectively)						Securities held-to-maturity, net of allowance for credit losses of $1 million and $2 million at September 30, 2021 and December 31, 2020, respectively (fair value of $6.1 billion and $9.4 billion at September 30, 2021 and December 31, 2020, respectively)	5,866		8,981
Loans (includes $27 million and $32 million designated under fair value option at September 30, 2021 and December 31, 2020, respectively)						Loans (includes $27 million and $32 million designated under fair value option at September 30, 2021 and December 31, 2020, respectively)	55,526		62,088
Less – allowance for credit losses	Less – allowance for credit losses	1,084		637		Less – allowance for credit losses	475		1,015
Loans, net	Loans, net	65,325		67,916		Loans, net	55,051		61,073
Loans held for sale (includes $41 million and $178 million designated under fair value option at September 30, 2020 and December 31, 2019, respectively)		282		289
Loans held for sale (includes $63 million and $36 million designated under fair value option at September 30, 2021 and December 31, 2020, respectively, and $2,610 million related to branch disposal group held for sale at September 30, 2021)						Loans held for sale (includes $63 million and $36 million designated under fair value option at September 30, 2021 and December 31, 2020, respectively, and $2,610 million related to branch disposal group held for sale at September 30, 2021)	4,927		337
Properties and equipment, net	Properties and equipment, net	148		177		Properties and equipment, net	65		144
Goodwill	Goodwill	458		1,242		Goodwill	458		458
Other assets, net of allowance for credit losses of $3 million at September 30, 2020		6,370		6,723

Other branch related assets held for sale						Other branch related assets held for sale	244		—
Other assets, net of allowance for credit losses of $2 million at both September 30, 2021 and December 31, 2020						Other assets, net of allowance for credit losses of $2 million at both September 30, 2021 and December 31, 2020	5,409		6,084

Total assets	Total assets	$	200,946	$	175,375	Total assets	$	201,150	$	196,434
Liabilities⁽¹⁾	Liabilities⁽¹⁾					Liabilities(1)
Debt:	Debt:					Debt:
Domestic deposits:	Domestic deposits:					Domestic deposits:
Noninterest bearing	Noninterest bearing	$	33,706	$	24,132	Noninterest bearing	$	43,228	$	32,428
Interest bearing (includes $4.7 billion and $7.2 billion designated under fair value option at September 30, 2020 and December 31, 2019, respectively)		110,879		90,766
Foreign deposits:
Noninterest bearing		0		137
Interest bearing		5,743		4,658
Interest bearing (includes $3.0 billion and $4.2 billion designated under fair value option at September 30, 2021 and December 31, 2020, respectively)						Interest bearing (includes $3.0 billion and $4.2 billion designated under fair value option at September 30, 2021 and December 31, 2020, respectively)	92,588		107,427

Foreign deposits - interest bearing						Foreign deposits - interest bearing	7,231		5,295
Deposits held for sale						Deposits held for sale	9,321		—
Total deposits	Total deposits	150,328		119,693		Total deposits	152,368		145,150
Short-term borrowings (includes NaN and $373 million designated under fair value option at September 30, 2020 and December 31, 2019, respectively)		5,515		3,659
Long-term debt (includes $9.8 billion and $10.3 billion designated under fair value option at September 30, 2020 and December 31, 2019, respectively)		20,048		26,697
Short-term borrowings						Short-term borrowings	6,377		4,952
Long-term debt (includes $9.7 billion and $10.7 billion designated under fair value option at September 30, 2021 and December 31, 2020, respectively)						Long-term debt (includes $9.7 billion and $10.7 billion designated under fair value option at September 30, 2021 and December 31, 2020, respectively)	18,105		19,979
Total debt	Total debt	175,891		150,049		Total debt	176,850		170,081
Trading liabilities	Trading liabilities	3,517		3,235		Trading liabilities	2,670		5,397
Other branch related liabilities held for sale						Other branch related liabilities held for sale	160		—
Interest, taxes and other liabilities	Interest, taxes and other liabilities	3,198		3,835		Interest, taxes and other liabilities	3,233		2,665

Total liabilities	Total liabilities	182,606		157,119		Total liabilities	182,913		178,143
Equity	Equity					Equity
Preferred stock (0 par value; 40,999,000 shares authorized; 1,265 shares issued and outstanding at both September 30, 2020 and December 31, 2019)		1,265		1,265
Preferred stock (no par value; 40,999,000 shares authorized; 1,265 shares issued and outstanding at both September 30, 2021 and December 31, 2020)						Preferred stock (no par value; 40,999,000 shares authorized; 1,265 shares issued and outstanding at both September 30, 2021 and December 31, 2020)	1,265		1,265
Common equity:	Common equity:					Common equity:
Common stock ($5 par; 150,000,000 shares authorized; 714 shares issued and outstanding at both September 30, 2020 and December 31, 2019)		0		0
Common stock ($5 par; 150,000,000 shares authorized; 714 shares issued and outstanding at both September 30, 2021 and December 31, 2020)						Common stock ($5 par; 150,000,000 shares authorized; 714 shares issued and outstanding at both September 30, 2021 and December 31, 2020)	—		—
Additional paid-in capital	Additional paid-in capital	15,750		15,736		Additional paid-in capital	15,743		15,746
Retained earnings	Retained earnings	491		1,534		Retained earnings	1,232		601
Accumulated other comprehensive income (loss)	Accumulated other comprehensive income (loss)	834		(279)		Accumulated other comprehensive income (loss)	(3)		679
Total common equity	Total common equity	17,075		16,991		Total common equity	16,972		17,026
Total equity	Total equity	18,340		18,256		Total equity	18,237		18,291
Total liabilities and equity	Total liabilities and equity	$	200,946	$	175,375	Total liabilities and equity	$	201,150	$	196,434

⁽¹⁾The following table summarizes assets and liabilities related to our consolidated variable interest entities ("VIEs") at September 30, ~~2020~~2021 and December 31, ~~2019.~~2020. Assets and liabilities exclude intercompany balances that eliminate in consolidation. See Note ~~17,~~18, "Variable Interest Entities," for additional information.


HSBC USA Inc.


		September 30, 2020		December 31, 2019			September 30, 2021		December 31, 2020
		(in millions)							(in millions)
Assets	Assets					Assets

Loans						Loans	$	7	$	10
Other assets	Other assets	$	82	$	98	Other assets	64		79
Total assets	Total assets	$	82	$	98	Total assets	$	71	$	89
Liabilities	Liabilities					Liabilities

Interest, taxes and other liabilities	Interest, taxes and other liabilities	$	19	$	38	Interest, taxes and other liabilities	$	18	$	10
Total liabilities	Total liabilities	$	19	$	38	Total liabilities	$	18	$	10

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


HSBC USA Inc.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)


Three Months Ended September 30,	Three Months Ended September 30,	2020		2019		Three Months Ended September 30,	2021		2020
		(in millions)							(in millions)
Preferred stock	Preferred stock					Preferred stock

Balance at beginning and end of period	Balance at beginning and end of period	$	1,265	$	1,265	Balance at beginning and end of period	$	1,265	$	1,265
Common stock	Common stock					Common stock
Balance at beginning and end of period	Balance at beginning and end of period	0		0		Balance at beginning and end of period	—		—
Additional paid-in capital	Additional paid-in capital					Additional paid-in capital
Balance at beginning of period	Balance at beginning of period	15,746		15,734		Balance at beginning of period	15,743		15,746

Employee benefit plans	Employee benefit plans	4		2		Employee benefit plans	—		4
Balance at end of period	Balance at end of period	15,750		15,736		Balance at end of period	15,743		15,750
Retained earnings	Retained earnings					Retained earnings
Balance at beginning of period	Balance at beginning of period	303		1,690		Balance at beginning of period	1,095		303

Net income (loss)		188		(250)
Net income						Net income	137		188

Balance at end of period	Balance at end of period	491		1,440		Balance at end of period	1,232		491
Accumulated other comprehensive income (loss)	Accumulated other comprehensive income (loss)					Accumulated other comprehensive income (loss)
Balance at beginning of period	Balance at beginning of period	830		(55)		Balance at beginning of period	81		830

Other comprehensive income, net of tax		4		72
Other comprehensive income (loss), net of tax						Other comprehensive income (loss), net of tax	(84)		4
Balance at end of period	Balance at end of period	834		17		Balance at end of period	(3)		834
Total common equity	Total common equity	17,075		17,193		Total common equity	16,972		17,075
Total equity	Total equity	$	18,340	$	18,458	Total equity	$	18,237	$	18,340

Nine Months Ended September 30,						Nine Months Ended September 30,	2021		2020
							(in millions)
Preferred stock						Preferred stock
Balance at beginning and end of period						Balance at beginning and end of period	$	1,265	$	1,265

Common stock						Common stock
Balance at beginning and end of period						Balance at beginning and end of period	—		—
Additional paid-in capital						Additional paid-in capital
Balance at beginning of period						Balance at beginning of period	15,746		15,736

Employee benefit plans						Employee benefit plans	(3)		14
Balance at end of period						Balance at end of period	15,743		15,750
Retained earnings						Retained earnings
Balance at beginning of period						Balance at beginning of period	601		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						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						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 (loss) of cumulative effect adjustment to initially apply new accounting guidance for measuring credit losses on securities available-for-sale, net of tax						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)

Balance at beginning of period, adjusted						Balance at beginning of period, adjusted	601		1,618
Net income (loss)						Net income (loss)	669		(1,088)
Cash dividends declared on preferred stock						Cash dividends declared on preferred stock	(38)		(39)
Balance at end of period						Balance at end of period	1,232		491
Accumulated other comprehensive income (loss)						Accumulated other comprehensive income (loss)
Balance at beginning of period						Balance at beginning of period	679		(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						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, adjusted						Balance at beginning of period, adjusted	679		(277)
Other comprehensive income (loss), net of tax						Other comprehensive income (loss), net of tax	(682)		1,111
Balance at end of period						Balance at end of period	(3)		834
Total common equity						Total common equity	16,972		17,075
Total equity						Total equity	$	18,237	$	18,340

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


HSBC USA Inc.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Continued) (UNAUDITED)
Nine Months Ended September 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 0 0
Additional paid-in capital
Balance at beginning of period 15,736 18,136
Return of capital to parent 0 (2,400)
Employee benefit plans 14 0
Balance at end of period 15,750 15,736
Retained earnings
Balance at beginning of period 1,534 1,471
Cumulative effect adjustment to initially apply new accounting guidance for measuring credit losses on financial assets measured at amortized cost, net of 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 (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, adjusted 1,618 1,498
Net loss (1,088) (20)
Cash dividends declared on preferred stock (39) (38)
Balance at end of period 491 1,440
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 tax 2 —
Balance at beginning of period, adjusted (277) (366)
Other comprehensive income, net of tax 1,111 383
Balance at end of period 834 17
Total common equity 17,075 17,193
Total equity $ 18,340 $ 18,458
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)


Nine Months Ended September 30,	2021		2020
	(in millions)
Cash flows from operating activities
Net income (loss)	$	669	$	(1,088)


Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization	206		204

Goodwill impairment	—		784


Provision for credit losses	(537)		840


Net realized gains on securities available-for-sale	(51)		(111)

Net change in other assets and liabilities	1,475		(1,719)
Net change in loans held for sale:
Originations and purchases of loans held for sale	(2,049)		(2,401)
Sales and collections of loans held for sale	2,204		2,467
Net change in trading assets and liabilities	2,572		(5,020)
Lower of amortized cost or fair value adjustments on loans held for sale	5		25
Gain on instruments designated at fair value and related derivatives	(33)		(15)


Net cash provided by (used in) operating activities	4,461		(6,034)
Cash flows from investing activities
Net change in federal funds sold and securities purchased under agreements to resell	28,266		(7,741)
Securities available-for-sale:
Purchases of securities available-for-sale	(14,444)		(20,749)
Proceeds from sales of securities available-for-sale	7,422		10,258
Proceeds from paydowns and maturities of securities available-for-sale	9,864		7,006
Securities held-to-maturity:
Purchases of securities held-to-maturity	—		(515)
Proceeds from sales of securities held-to-maturity	—		340
Proceeds from paydowns and maturities of securities held-to-maturity	3,094		3,193
Change in loans:
Collections, net of originations	414		1,216
Loans sold to third parties	1,282		656

Net cash used for acquisitions of properties and equipment	(2)		(5)

Other, net	108		(198)


Net cash provided by (used in) investing activities	36,004		(6,539)

Cash flows from financing activities
Net change in deposits	7,250		25,575
Debt:
Net change in short-term borrowings	1,425		1,856
Issuance of long-term debt	6,861		7,250
Repayment of long-term debt	(8,402)		(8,387)




Other increases (decreases) in capital surplus	(3)		14
Dividends paid	(38)		(39)


Net cash provided by financing activities	7,093		26,269
Net change in cash and due from banks and interest bearing deposits with banks	47,558		13,696
Cash and due from banks and interest bearing deposits with banks at beginning of period	15,655		3,782
Cash and due from banks and interest bearing deposits with banks at end of period(1)	$	63,213	$	17,478

(1)Includes $55 million of cash which is reported in other branch related assets held for sale on the consolidated balance sheet at September 30, 2021.

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


HSBC USA Inc.

~~CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)~~

Nine Months Ended September 30, 2020 2019
(in millions)
Cash flows from operating activities
Net loss $ (1,088) $ (20)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 204 98
Goodwill impairment 784 365
Provision for credit losses 840 198
Net realized gains on securities available-for-sale (111) (76)
Net change in other assets and liabilities (1,719) 1,677
Net change in loans held for sale:
Originations and purchases of loans held for sale (2,401) (2,181)
Sales and collections of loans held for sale 2,467 1,894
Net change in trading assets and liabilities (5,020) (7,175)
Lower of amortized cost or fair value adjustments on loans held for sale 25 (1)
Loss (gain) on instruments designated at fair value and related derivatives (15) 45
Net cash used in operating activities (6,034) (5,176)
Cash flows from investing activities
Net change in federal funds sold and securities purchased under agreements to resell (7,741) 1,905
Securities available-for-sale:
Purchases of securities available-for-sale (20,749) (21,323)
Proceeds from sales of securities available-for-sale 10,258 7,083
Proceeds from maturities of securities available-for-sale 7,006 5,989
Securities held-to-maturity:
Purchases of securities held-to-maturity (515) (683)
Proceeds from sales of securities held-to-maturity 340 0
Proceeds from maturities of securities held-to-maturity 3,193 1,974
Change in loans:
Originations, net of collections 1,216 (2,724)
Loans sold to third parties 656 589
Net cash used for acquisitions of properties and equipment (5) (31)
Net inflow related to the sale of certain private banking client relationships 0 1
Other, net (198) 117
Net cash used in investing activities (6,539) (7,103)
Cash flows from financing activities
Net change in deposits 25,575 8,429
Debt:
Net change in short-term borrowings 1,856 4,768
Issuance of long-term debt 7,250 3,691
Repayment of long-term debt (8,387) (6,706)
Return of capital to parent 0 (2,400)
Other increases (decreases) in capital surplus 14 0
Dividends paid (39) (38)
Net cash provided by financing activities 26,269 7,744
Net change in cash and due from banks and interest bearing deposits with banks 13,696 (4,535)
Cash and due from banks and interest bearing deposits with banks at beginning of period 3,782 17,214
Cash and due from banks and interest bearing deposits with banks at end of period $ 17,478 $ 12,679

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


~~HSBC USA Inc.~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Note	Note		Page	Note		Page	Note		Page	Note		Page
1	1	Organization and Presentation	10	12	Pension and Other Postretirement Benefits	50	1	Organization and Presentation	9	12	Accumulated Other Comprehensive Income (Loss)	48
2	2	Strategic Initiatives	11	13	Fee Income from Contracts with Customers	51	2	Strategic Initiatives	10	13	Pension and Other Postretirement Benefits	50
3	3	Trading Assets and Liabilities	12	14	Related Party Transactions	52	3	Branch Assets and Liabilities Held for Sale	12	14	Fee Income from Contracts with Customers	50
4	4	Securities	13	15	Business Segments	54	4	Trading Assets and Liabilities	14	15	Related Party Transactions	51
5	5	Loans	19	16	Retained Earnings and Regulatory Capital Requirements	58	5	Securities	15	16	Business Segments	53
6	6	Allowance for Credit Losses	30	17	Variable Interest Entities	59	6	Loans	19	17	Retained Earnings and Regulatory Capital Requirements	55
7	7	Loans Held for Sale	36	18	Guarantee Arrangements, Pledged Assets and Repurchase Agreements	62	7	Allowance for Credit Losses	33	18	Variable Interest Entities	57
8	8	Goodwill and Other Long-Lived Assets	37	19	Fair Value Measurements	67	8	Loans Held for Sale	37	19	Guarantee Arrangements, Pledged Assets and Repurchase Agreements	59
9	9	Derivative Financial Instruments	38	20	Litigation and Regulatory Matters	83	9	Goodwill	38	20	Fair Value Measurements	64
10	10	Fair Value Option	44	21	New Accounting Pronouncements	84	10	Derivative Financial Instruments	38	21	Litigation and Regulatory Matters	80
11	11	Accumulated Other Comprehensive Income (Loss)	48				11	Fair Value Option	45	22	New Accounting Pronouncements	80

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, ~~2019~~2020 (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.

109


HSBC USA Inc.

2. Strategic Initiatives

As discussed in our ~~2019~~2020 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 ~~streamline~~includes streamlining our functional and operations support model by removing duplication and ~~reduce~~reducing 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-~~$520-$~~400~~590 million ($~~265-~~390-$~~305~~450 million after-tax). ~~In addition, during~~As a result of the ~~second quarter~~May 2021 decision to further reposition our Wealth and Personal Banking business, along with the identification of ~~2020,~~additional restructuring activities primarily relating to further simplifying our wholesale operations and support service functions as well as additional investments in systems infrastructure and new technologies, we determined we would incur additional pre-tax charges of approximately ~~$60-~~$380-$80410 million ($~~45-~~290-$60310 million after-tax) as. We currently expect we ~~continued to progress~~will incur our ~~Restructuring Plan.~~remaining estimated pre-tax charges through 2022. 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							Expected Charges in Connection with Restructuring Plan
		Minimum		Maximum			Minimum		Maximum
		(in millions)							(in millions)
Wealth and Personal Banking	Wealth and Personal Banking	$	24	$	28	Wealth and Personal Banking	$	160	$	180
Commercial Banking	Commercial Banking	8		10		Commercial Banking	25		35
Global Banking and Markets	Global Banking and Markets	90		110		Global Banking and Markets	115		130
Corporate Center⁽¹⁾	Corporate Center⁽¹⁾	288		332		Corporate Center(1)	600		655
Total	Total	$	410	$	480	Total	$	900	$	1,000

⁽¹⁾Includes restructuring charges primarily related to lease impairment and other related costs, ~~as well as~~support service project costs and severance costs associated with certain centralized activities and functions.

~~Our restructuring plan is moving forward,~~Throughout 2020 and into the third quarter of 2021, we continued to progress our Restructuring Plan, including simplification of our support service functions, the exit or transfer of certain derivative contracts and consolidation of our wholesale and retail middle and back office functions, each under a single operations ~~structure, simplification~~structure. The consolidation of our ~~support service~~wholesale middle and back office functions was completed in the second quarter of 2021. As noted above, during the second quarter of 2021, we made the decision to exit our mass market retail banking business, including the sale or ~~transfer~~closure of certain ~~derivative contracts,~~branches, and transferred certain assets and liabilities to held for sale. See Note 3, "Branch Assets and Liabilities Held for Sale," for additional information. During the three and nine months ended September 30, 2021, we recorded pre-tax charges in connection with our Restructuring Plan totaling $47 million and $183 million, respectively. In 2020, we also completed the initial consolidation of our retail branch network and the creation of our Wealth and Personal Banking ~~business both of which were completed in the second quarter.~~business. During the three and nine months ended September 30, 2020, we recorded pre-tax charges in connection with our Restructuring Plan totaling $84 million and $244 million, respectively. ~~While~~In total, we have recorded $463 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 coronavirus ("COVID-19") pandemic continue to develop. We continue to re-assess our strategic plan and may take additional actions in future periods.business.


HSBC USA Inc.

The following table summarizes the changes in the liability associated with our Restructuring Plan during the three and nine months ended September 30, 2021 and 2020:


		Severance and Other Employee Costs⁽¹⁾		Lease Termination and Associated Costs⁽²⁾		Total			Severance and Other Employee Costs(1)		Lease Termination and Associated Costs(2)		Other(3)		Total
									(in millions)
Three Months Ended September 30, 2021								Three Months Ended September 30, 2021
Restructuring liability at beginning of period								Restructuring liability at beginning of period	$	6	$	46	$	—	$	52
Restructuring costs accrued during the period								Restructuring costs accrued during the period	3		2		3		8
Restructuring costs paid during the period								Restructuring costs paid during the period	(2)		(2)		(3)		(7)
Restructuring liability at end of period								Restructuring liability at end of period	$	7	$	46	$	—	$	53
		(in millions)
Three Months Ended September 30, 2020	Three Months Ended September 30, 2020							Three Months Ended September 30, 2020
Restructuring liability at beginning of period	Restructuring liability at beginning of period	$	22	$	23	$	45	Restructuring liability at beginning of period	$	22	$	23	$	—	$	45
Restructuring costs accrued during the period	Restructuring costs accrued during the period	13		4		17		Restructuring costs accrued during the period	13		4		—		17
Restructuring costs paid during the period	Restructuring costs paid during the period	(12)		(3)		(15)		Restructuring costs paid during the period	(12)		(3)		—		(15)
Restructuring liability at end of period	Restructuring liability at end of period	$	23	$	24	$	47	Restructuring liability at end of period	$	23	$	24	$	—	$	47

Nine Months Ended September 30, 2021								Nine Months Ended September 30, 2021
Restructuring liability at beginning of period								Restructuring liability at beginning of period	$	10	$	23	$	—	$	33
Restructuring costs accrued during the period								Restructuring costs accrued during the period	8		32		9		49
Restructuring costs paid during the period								Restructuring costs paid during the period	(11)		(9)		(9)		(29)
Restructuring liability at end of period								Restructuring liability at end of period	$	7	$	46	$	—	$	53

Nine Months Ended September 30, 2020	Nine Months Ended September 30, 2020							Nine Months Ended September 30, 2020
Restructuring liability at beginning of period	Restructuring liability at beginning of period	$	0	$	0	$	0	Restructuring liability at beginning of period	$	—	$	—	$	—	$	—
Restructuring costs accrued during the period	Restructuring costs accrued during the period	35		28		63		Restructuring costs accrued during the period	35		28		—		63
Restructuring costs paid during the period	Restructuring costs paid during the period	(12)		(4)		(16)		Restructuring costs paid during the period	(12)		(4)		—		(16)
Restructuring liability at end of period	Restructuring liability at end of period	$	23	$	24	$	47	Restructuring liability at end of period	$	23	$	24	$	—	$	47

⁽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 Wealth and Personal Banking and the Corporate Center business ~~segment.~~segments.

(3)


~~HSBC USA Inc.~~Primarily includes professional fees and other staff costs, which are included in other expenses in the consolidated statement of income (loss).

In ~~connection with~~addition to the restructuring costs reflected in the table above, during the second quarter of 2021, as part of our decision to exit our mass market retail banking business we determined that we would exit approximately 30 branches. As a result, we recorded impairment charges during the second quarter of 2021 to write-off the assets associated with these branches, including $29 million of lease right-of-use ("ROU") assets, $18 million of leasehold improvement assets and $3 million of equipment assets. During the three and nine months ended September 30, 2021, we also recorded impairment charges of $4 million and $9 million, respectively, to write-down the lease ROU assets and leasehold improvement assets primarily associated with certain office space that we determined we would exit.

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~~half of 2020 to ~~write down~~write-down the lease ~~right-of-use ("ROU")~~ROU assets, net of estimated sublease income, by ~~$52~~$46 million ~~(which was reduced by $6 million during the second quarter of 2020)~~ and to ~~write down~~write-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. During the third quarter of 2020, we recorded additional impairment charges of $7 million to write-down the lease ROU assets associated with certain office space that we determined we would exit. ~~These~~Lease impairment charges are reflected in occupancy expense, net in the consolidated statement of income (loss) and were reported in the Wealth and Personal Banking and the Corporate Center business ~~segment.~~segments.

In addition, during the three and nine months ended September 30, ~~2020,~~2021, we recorded ~~$47~~$22 million and ~~$57~~$32 million, respectively, of trading losses associated with the continued exit of certain derivative contracts as part of our Restructuring ~~Plan.~~Plan


HSBC USA Inc.

compared with trading losses of $47 million and $57 million during the three and nine months ended September 30, 2020, respectively. These losses are included in trading revenue (expense) in the consolidated statement of income (loss) and were reported in the Global Banking and Markets and the Corporate Center business ~~segment.~~segments. During the ~~third quarter~~first nine months of ~~2020,~~2021, as part of our Restructuring Plan, we also ~~began~~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 ~~$38.1~~$20.4 billion were completed during the ~~third quarter~~first nine months of ~~2020 with the~~2021. The remainder of these contracts, with a current notional value of ~~up to $174.2~~approximately $33.9 billion, not transferred by December 31, 2021 are expected to be ~~largely completed during the fourth quarter of 2020.~~retained as a run-off portfolio. 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 support service project costs and severance costs, which are reflected in support services from HSBC affiliates in the consolidated statement of income (loss). During the three and nine months ended September 30, ~~2020,~~2021, we recorded $13 million and ~~$55~~$43 million, respectively, of allocated costs from HTSU ~~primarily severance~~related to restructuring activities compared with $13 million and $55 million of allocated costs ~~as well as contract cancellation, equipment removal~~during the three and ~~other costs associated with the office space consolidation and branch exits discussed above.~~nine months ended September 30, 2020, respectively. These costs were reported in the Corporate Center business segment.

HSBC Group Restructuring Separate from the charges related to our Restructuring Plan as detailed above, during the three and nine months ended September 30, 2021, we also recorded $14 million and $32 million, respectively, 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.

3. Branch Assets and Liabilities Held for Sale

In May 2021, as part of our Restructuring Plan we announced that we would take further actions to strategically reposition our Wealth and Personal Banking business to focus on the banking and wealth management needs of globally-connected affluent and high net worth clients through our Premier, Jade and Private Banking propositions. We will exit our mass market retail banking business, including our Personal and Advance propositions as well as retail business banking, and will rebrand approximately 20-25 of our retail branches into international wealth centers to serve our Premier and Jade customers. In conjunction with the execution of this strategy, we have entered into definitive sale agreements with third parties to sell approximately 90 of our retail branches along with substantially all residential mortgage, unsecured and retail business banking loans and all deposits in our branch network not associated with our Premier, Jade and Private Banking customers. Certain assets under management associated with our mass market retail banking operations which are managed by an affiliate will also be transferred. The remaining branches not sold or rebranded will be closed. As a result of entering into these sale agreements, assets and liabilities with an aggregate carrying value of approximately $2.9 billion and $10.1 billion, respectively, were transferred to held for sale during the second quarter of 2021. The lower of amortized cost or fair value adjustment upon transferring these assets to held for sale was not material.

Although the disposal group will be sold in multiple transactions that are expected to be completed by the first quarter of 2022, the actual time to complete these sales depends on many factors, including regulatory approval. The sales are expected to result in a gain upon completion. Revenues (net interest income and other revenues) associated with the disposal group represented approximately 7 percent of total consolidated revenues for both the three and nine months ended September 30, 2021, respectively. Income before tax associated with the disposal group was not material.


HSBC USA Inc.

3.The following table summarizes the assets and liabilities in the disposal group classified as held for sale at September 30, 2021 in our consolidated balance sheet:


	September 30, 2021
	(in millions)
Loans held for sale(1)	$	2,610
Other branch related assets held for sale:
Lease ROU assets(2)	149
Properties and equipment, net	40
Cash and other assets	55
Total other branch related assets held for sale	244
Total branch assets held for sale(3)	$	2,854

Deposits held for sale	$	9,321
Other branch related liabilities held for sale:
Lease liabilities(2)	151
Other liabilities	9
Total other branch related liabilities held for sale	160
Total branch liabilities held for sale(3)	$	9,481

(1)Includes $99 million of commercial loans, $1,952 million of residential mortgage loans, $235 million of home equity mortgage loans, $182 million of credit card loans and $142 million of other consumer loans.

(2)At September 30, 2021, our lease ROU assets and lease liabilities, excluding the amounts transferred to held for sale, totaled $225 million and $325 million, respectively.

(3)The sale of this disposal group is expected to result in a net cash payment as the liabilities being assumed are greater than the assets being purchased.

In addition, mass market retail banking loans that will not be purchased in the transaction described above, including our remaining retail credit card portfolio, which collectively totaled $1.1 billion, were also transferred to held for sale during the second quarter of 2021 as we did not intend to hold these loans for the foreseeable future. The lower of amortized cost or fair value adjustment upon transferring these assets to held for sale was not material. See Note 8, "Loans Held for Sale," for additional details.

Releases of the allowance for credit losses on the loans transferred to held for sale discussed above during the second quarter of 2021 resulted in a reduction to the provision for credit losses of approximately $101 million ($100 million of which related to consumer loans) during the second quarter of 2021. See Note 7, "Allowance for Credit Losses," for additional details.


HSBC USA Inc.

4. Trading Assets and Liabilities

Trading assets and liabilities consisted of the following:


		September 30, 2020		December 31, 2019			September 30, 2021		December 31, 2020
		(in millions)							(in millions)
Trading assets:	Trading assets:					Trading assets:
U.S. Treasury	U.S. Treasury	$	5,603	$	6,763	U.S. Treasury	$	2,352	$	5,145
U.S. Government agency issued or guaranteed	U.S. Government agency issued or guaranteed	16		18		U.S. Government agency issued or guaranteed	45		—
U.S. Government sponsored enterprises	U.S. Government sponsored enterprises	177		20		U.S. Government sponsored enterprises	246		192

Asset-backed securities	Asset-backed securities	147		168		Asset-backed securities	—		143
Corporate and foreign bonds		9,190		10,826
Foreign bonds						Foreign bonds	768		7,971
Equity securities	Equity securities	6,169		5,693		Equity securities	13,287		6,043
Precious metals	Precious metals	9,536		1,909		Precious metals	3,316		4,989
Derivatives, net	Derivatives, net	2,916		3,055		Derivatives, net	1,971		2,801
Total trading assets	Total trading assets	$	33,754	$	28,452	Total trading assets	$	21,985	$	27,284
Trading liabilities:	Trading liabilities:					Trading liabilities:
Securities sold, not yet purchased	Securities sold, not yet purchased	$	695	$	1,182	Securities sold, not yet purchased	$	947	$	727
Payables for precious metals	Payables for precious metals	0		124		Payables for precious metals	90		2,312
Derivatives, net	Derivatives, net	2,822		1,929		Derivatives, net	1,633		2,358
Total trading liabilities	Total trading liabilities	$	3,517	$	3,235	Total trading liabilities	$	2,670	$	5,397

At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the fair value of derivatives included in trading assets is net of ~~$4,284~~$2,310 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 September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the fair value of derivatives included in trading liabilities is net of ~~$3,308~~$1,518 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 9,10, "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 $44 million and $108 million during the three and nine months ended September 30, 2021, respectively, compared with $21 million and $50 million during the three and nine months ended September 30, 2020, respectively. Trading security positions are held as economic hedges of derivative products issued to our clients.

1314


HSBC USA Inc.

4.5. Securities

Our securities available-for-sale and securities held-to-maturity portfolios consisted of the following:


September 30, 2020		Amortized Cost		Allowance for Credit Losses⁽¹⁾		Unrealized Gains		Unrealized Losses		Fair Value
September 30, 2021												September 30, 2021	Amortized Cost		Allowance for Credit Losses		Unrealized Gains		Unrealized Losses		Fair Value
		(in millions)																			(in millions)
Securities available-for-sale:	Securities available-for-sale:											Securities available-for-sale:
U.S. Treasury	U.S. Treasury	$	16,729	$	0	$	688	$	(65)	$	17,352	U.S. Treasury	$	12,510	$	—	$	216	$	(90)	$	12,636
U.S. Government sponsored enterprises:	U.S. Government sponsored enterprises:											U.S. Government sponsored enterprises:
Mortgage-backed securities	Mortgage-backed securities	5,318		0		292		(1)		5,609		Mortgage-backed securities	7,735		—		154		(94)		7,795
Collateralized mortgage obligations	Collateralized mortgage obligations	1,014		0		16		(8)		1,022		Collateralized mortgage obligations	1,831		—		9		(37)		1,803
Direct agency obligations	Direct agency obligations	1,376		0		15		0		1,391		Direct agency obligations	1,449		—		19		—		1,468
U.S. Government agency issued or guaranteed:	U.S. Government agency issued or guaranteed:											U.S. Government agency issued or guaranteed:
Mortgage-backed securities	Mortgage-backed securities	8,143		0		175		(2)		8,316		Mortgage-backed securities	7,172		—		30		(41)		7,161
Collateralized mortgage obligations	Collateralized mortgage obligations	2,318		0		31		(5)		2,344		Collateralized mortgage obligations	2,989		—		11		(24)		2,976
Direct agency obligations	Direct agency obligations	305		0		3		(1)		307		Direct agency obligations	280		—		7		—		287

Asset-backed securities collateralized by:	Asset-backed securities collateralized by:											Asset-backed securities collateralized by:

Home equity	Home equity	29		(2)		0		0		27		Home equity	21		(1)		—		—		20

Other	Other	115		0		0		(15)		100		Other	108		—		—		(7)		101

Foreign debt securities⁽²⁾⁽¹⁾	Foreign debt securities⁽²⁾⁽¹⁾	4,854		0		6		0		4,860		Foreign debt securities⁽²⁾⁽¹⁾	2,257		—		3		—		2,260
Total available-for-sale securities	Total available-for-sale securities	$	40,201	$	(2)	$	1,226	$	(97)	$	41,328	Total available-for-sale securities	$	36,352	$	(1)	$	449	$	(293)	$	36,507
Securities held-to-maturity:	Securities held-to-maturity:											Securities held-to-maturity:
U.S. Government sponsored enterprises:	U.S. Government sponsored enterprises:											U.S. Government sponsored enterprises:
Mortgage-backed securities	Mortgage-backed securities	$	1,293	$	0	$	49	$	0	$	1,342	Mortgage-backed securities	$	735	$	—	$	30	$	—	$	765
Collateralized mortgage obligations	Collateralized mortgage obligations	902		0		59		(1)		960		Collateralized mortgage obligations	550		—		35		—		585
U.S. Government agency issued or guaranteed:	U.S. Government agency issued or guaranteed:											U.S. Government agency issued or guaranteed:
Mortgage-backed securities	Mortgage-backed securities	2,267		0		71		0		2,338		Mortgage-backed securities	1,250		—		39		—		1,289
Collateralized mortgage obligations	Collateralized mortgage obligations	5,752		0		240		0		5,992		Collateralized mortgage obligations	3,322		—		126		—		3,448
Obligations of U.S. states and political subdivisions	Obligations of U.S. states and political subdivisions	10		(1)		1		0		10		Obligations of U.S. states and political subdivisions	9		—		—		—		9
Asset-backed securities collateralized by residential mortgages	Asset-backed securities collateralized by residential mortgages	2		(1)		1		0		2		Asset-backed securities collateralized by residential mortgages	1		(1)		1		—		1

Total held-to-maturity securities	Total held-to-maturity securities	$	10,226	$	(2)	$	421	$	(1)	$	10,644	Total held-to-maturity securities	$	5,867	$	(1)	$	231	$	—	$	6,097

1415


HSBC USA Inc.


December 31, 2019		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
December 31, 2020										December 31, 2020	Amortized Cost		Allowance for Credit Losses		Unrealized Gains		Unrealized Losses		Fair Value
		(in millions)															(in millions)
Securities available-for-sale:	Securities available-for-sale:									Securities available-for-sale:
U.S. Treasury	U.S. Treasury	$	16,219	$	128	$	(269)	$	16,078	U.S. Treasury	$	16,087	$	—	$	608	$	(47)	$	16,648
U.S. Government sponsored enterprises:	U.S. Government sponsored enterprises:									U.S. Government sponsored enterprises:
Mortgage-backed securities	Mortgage-backed securities	3,358		57		(13)		3,402		Mortgage-backed securities	5,986		—		280		(2)		6,264
Collateralized mortgage obligations	Collateralized mortgage obligations	345		3		(1)		347		Collateralized mortgage obligations	1,676		—		19		(2)		1,693
Direct agency obligations	Direct agency obligations	1,382		21		0		1,403		Direct agency obligations	1,236		—		17		—		1,253
U.S. Government agency issued or guaranteed:	U.S. Government agency issued or guaranteed:									U.S. Government agency issued or guaranteed:
Mortgage-backed securities	Mortgage-backed securities	10,009		29		(41)		9,997		Mortgage-backed securities	6,993		—		152		—		7,145
Collateralized mortgage obligations	Collateralized mortgage obligations	741		10		(4)		747		Collateralized mortgage obligations	2,093		—		22		(11)		2,104
Direct agency obligations	Direct agency obligations	254		6		0		260		Direct agency obligations	296		—		5		—		301

Asset-backed securities collateralized by:	Asset-backed securities collateralized by:									Asset-backed securities collateralized by:

Home equity	Home equity	34		0		(2)		32		Home equity	28		(1)		—		—		27

Other	Other	108		3		0		111		Other	114		—		—		(10)		104

Foreign debt securities⁽²⁾⁽¹⁾	Foreign debt securities⁽²⁾⁽¹⁾	3,282		4		0		3,286		Foreign debt securities⁽²⁾⁽¹⁾	5,127		—		6		—		5,133
Total available-for-sale securities	Total available-for-sale securities	$	35,732	$	261	$	(330)	$	35,663	Total available-for-sale securities	$	39,636	$	(1)	$	1,109	$	(72)	$	40,672
Securities held-to-maturity:	Securities held-to-maturity:									Securities held-to-maturity:
U.S. Government sponsored enterprises:	U.S. Government sponsored enterprises:									U.S. Government sponsored enterprises:
Mortgage-backed securities	Mortgage-backed securities	$	1,632	$	22	$	(1)	$	1,653	Mortgage-backed securities	$	1,137	$	—	$	44	$	—	$	1,181
Collateralized mortgage obligations	Collateralized mortgage obligations	1,418		40		(4)		1,454		Collateralized mortgage obligations	780		—		53		—		833
U.S. Government agency issued or guaranteed:	U.S. Government agency issued or guaranteed:									U.S. Government agency issued or guaranteed:
Mortgage-backed securities	Mortgage-backed securities	3,004		17		0		3,021		Mortgage-backed securities	1,947		—		76		—		2,023
Collateralized mortgage obligations	Collateralized mortgage obligations	7,227		85		(22)		7,290		Collateralized mortgage obligations	5,107		—		212		—		5,319
Obligations of U.S. states and political subdivisions	Obligations of U.S. states and political subdivisions	10		1		0		11		Obligations of U.S. states and political subdivisions	10		—		1		—		11
Asset-backed securities collateralized by residential mortgages	Asset-backed securities collateralized by residential mortgages	2		0		0		2		Asset-backed securities collateralized by residential mortgages	2		(2)		2		—		2

Total held-to-maturity securities	Total held-to-maturity securities	$	13,293	$	165	$	(27)	$	13,431	Total held-to-maturity securities	$	8,983	$	(2)	$	388	$	—	$	9,369

⁽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.~~income (loss). 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;

•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 September 30, ~~2020~~2021 and ~~January 1,~~December 31, 2020, the allowance for credit losses on securities available-for-sale was ~~$2 million and $3 million, respectively.~~$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 September 30, 2021 and December 31, 2020 classified as to the length of time the losses have existed:


		One Year or Less								Greater Than One Year									One Year or Less					Greater Than One Year
September 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)																			Number of Securities		Gross Unrealized Losses	Aggregate Fair Value of Investment	Number of Securities	Gross Unrealized Losses	Aggregate Fair Value of Investment
Securities available-for-sale:
													(dollars are in millions)
At September 30, 2021												At September 30, 2021
U.S. Treasury	U.S. Treasury	0	$	0	$	0	17	$	(65)	$	1,837	U.S. Treasury	17	$	(48)	$	2,416	9	$	(42)	$	752
U.S. Government sponsored enterprises	U.S. Government sponsored enterprises	12	(8)		1,031		10	(1)		48		U.S. Government sponsored enterprises	60	(127)		5,879		11	(4)		185
U.S. Government agency issued or guaranteed	U.S. Government agency issued or guaranteed	19	(8)		1,854		2	0		7		U.S. Government agency issued or guaranteed	38	(56)		7,274		11	(9)		495

Asset-backed securities	Asset-backed securities	3	(15)		100		2	0		0		Asset-backed securities	—	—		—		5	(7)		101

Foreign debt securities	Foreign debt securities	9	0		1,550		5	0		241		Foreign debt securities	5	—		508		1	—		25
Securities available-for-sale	Securities available-for-sale	43	$	(31)	$	4,535	36	$	(66)	$	2,133	Securities available-for-sale	120	$	(231)	$	16,077	37	$	(62)	$	1,558
At December 31, 2020												At December 31, 2020
U.S. Treasury												U.S. Treasury	5	$	(5)	$	751	13	$	(42)	$	1,271
U.S. Government sponsored enterprises												U.S. Government sponsored enterprises	15	(3)		715		8	(1)		46
U.S. Government agency issued or guaranteed												U.S. Government agency issued or guaranteed	13	(11)		1,482		3	—		8

Asset-backed securities												Asset-backed securities	3	(10)		104		2	—		—

Foreign debt securities												Foreign debt securities	6	—		766		5	—		241
Securities available-for-sale												Securities available-for-sale	42	$	(29)	$	3,818	31	$	(43)	$	1,566

Gross unrealized losses ~~improved~~increased as compared with December 31, ~~2019~~2020 due primarily to ~~decreasing~~increasing yields on U.S. ~~Treasury and~~Government sponsored mortgage-backed, U.S. Government agency mortgage-backed and U.S. Treasury 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 September 30, ~~2020,~~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. Treasury 22 $ (61) $ 4,034 28 $ (208) $ 4,962
U.S. Government sponsored enterprises 18 (8) 772 83 (6) 672
U.S. Government agency issued or guaranteed 27 (4) 1,961 50 (41) 2,508
Asset-backed securities 0 0 0 5 (2) 33
Foreign debt securities 11 0 1,238 5 0 292
Securities available-for-sale 78 $ (73) $ 8,005 171 $ (257) $ 8,467
Securities held-to-maturity:
U.S. Government sponsored enterprises 15 $ 0 $ 63 76 $ (5) $ 522
U.S. Government agency issued or guaranteed 46 (3) 887 274 (19) 1,705
Obligations of U.S. states and political subdivisions 1 0 0 1 0 0
Securities held-to-maturity 62 $ (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~~ September 30, ~~2020~~2021 and ~~January 1,~~December 31, 2020, the allowance for credit losses on securities held-to-maturity was $1 million and $2 ~~million.~~million, respectively.


HSBC USA Inc.

At September 30, 2021 and December 31, 2020, ~~NaN~~none 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 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 profile~~At September 30, 2021 and December 31, 2020, all of our securities held-to-maturity ~~portfolio:~~were investment grade.

At September 30, 2020 Investment Grade Non-Investment Grade Total
(in millions)
U.S. Government sponsored enterprises $ 2,195 $ 0 $ 2,195
U.S. Government agency issued or guaranteed 8,019 0 8,019
Obligations of U.S. states and political subdivisions 10 0 10
Asset-backed securities collateralized by residential mortgages 2 0 2
Total securities held-to-maturity $ 10,226 $ 0 $ 10,226


~~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 September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in millions)
Gross realized gains $ 53 $ 64 $ 140 $ 107
Gross realized losses (1) (18) (29) (31)
Net realized gains $ 52 $ 46 $ 111 $ 76

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.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(in millions)
Gross realized gains	$	21	$	53	$	109	$	140
Gross realized losses	(17)		(1)		(58)		(29)
Net realized gains	$	4	$	52	$	51	$	111

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 September 30, ~~2020~~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 September 30, ~~2020,~~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 September 30, ~~2020.~~2021.

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 $ 1,123 .44 % $ 3,824 1.75 % $ 6,546 1.40 % $ 5,236 1.87 %
U.S. Government sponsored enterprises 30 4.48 762 1.77 3,244 2.45 3,672 1.94
U.S. Government agency issued or guaranteed 0 0 98 1.82 1 7.87 10,667 2.19
Asset-backed securities 0 0 0 0 62 4.83 82 3.11
Foreign debt securities 3,203 .29 1,651 .95 0 0 0 0
Total amortized cost $ 4,356 .35 % $ 6,335 1.55 % $ 9,853 1.77 % $ 19,657 2.06 %
Total fair value $ 4,362 $ 6,478 $ 10,425 $ 20,063
Held-to-maturity:
U.S. Government sponsored enterprises $ 59 2.72 % $ 360 2.64 % $ 481 2.25 % $ 1,295 3.16 %
U.S. Government agency issued or guaranteed 0 0 11 3.97 14 4.67 7,994 2.60
Obligations of U.S. states and political subdivisions 0 0 6 3.59 4 4.49 0 0
Asset-backed securities 0 0 0 0 0 0 2 7.01
Total amortized cost $ 59 2.72 % $ 377 2.70 % $ 499 2.34 % $ 9,291 2.68 %
Total fair value $ 59 $ 390 $ 514 $ 9,681


	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	$	772	4.07	%	$	3,910	.95	%	$	3,666	1.36	%	$	4,162	1.93	%
U.S. Government sponsored enterprises	31		2.75		1,316		1.78		2,194		2.35		7,474		1.64
U.S. Government agency issued or guaranteed	71		.24		23		1.25		1		6.13		10,346		1.75

Asset-backed securities	—		—		—		—		58		5.13		71		3.52

Foreign debt securities	1,104		.43		1,153		.57		—		—		—		—
Total amortized cost	$	1,978	1.88	%	$	6,402	1.05	%	$	5,919	1.77	%	$	22,053	1.75	%
Total fair value	$	1,981			$	6,513			$	6,052			$	21,961
Held-to-maturity:
U.S. Government sponsored enterprises	$	—	—	%	$	184	2.65	%	$	327	2.26	%	$	774	3.30	%
U.S. Government agency issued or guaranteed	3		3.83		—		—		8		5.14		4,561		2.56
Obligations of U.S. states and political subdivisions	3		3.43		4		3.00		2		4.25		—		—
Asset-backed securities	—		—		—		—		—		—		1		7.53

Total amortized cost	$	6	3.78	%	$	188	2.66	%	$	337	2.34	%	$	5,336	2.67	%
Total fair value	$	6			$	192			$	350			$	5,549


HSBC USA Inc.

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


		September 30, 2020		December 31, 2019			September 30, 2021		December 31, 2020
		(in millions)							(in millions)
Equity securities carried at fair value	Equity securities carried at fair value	$	283	$	283	Equity securities carried at fair value	$	289	$	284
Equity securities without readily determinable fair values	Equity securities without readily determinable fair values	14		12		Equity securities without readily determinable fair values	16		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 of ~~2020,~~2021, we ~~determined that~~recorded an impairment loss of $3 million associated with certain equity securities without readily determinable fair values that we determined 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, NaN~~ compared with recording an impairment loss of ~~our equity securities without readily determinable fair values were determined to be impaired.~~$2 million during the second quarter of 2020.

Also included in other assets were investments in Federal Home Loan Bank ("FHLB") stock and Federal Reserve Bank stock of ~~$304~~$110 million and ~~$559~~$558 million, respectively, at September 30, ~~2020~~2021 and ~~$110~~$259 million and $559 million, respectively, at December 31, ~~2019.~~2020.

5.6. Loans

Loans consisted of the following:


		September 30, 2020		December 31, 2019			September 30, 2021		December 31, 2020
		(in millions)							(in millions)
Commercial loans:	Commercial loans:					Commercial loans:
Real estate, including construction	Real estate, including construction	$	11,283	$	11,501	Real estate, including construction	$	8,250	$	10,464
Business and corporate banking⁽¹⁾	Business and corporate banking⁽¹⁾	15,164		13,479		Business and corporate banking(1)	12,788		13,479
Global banking⁽²⁾	Global banking⁽²⁾	15,505		17,915		Global banking(2)	11,440		13,519
Other commercial:	Other commercial:					Other commercial:
Affiliates⁽³⁾	Affiliates⁽³⁾	1,180		2,343		Affiliates(3)	2,857		1,100
Other	Other	2,651		2,973		Other	3,579		3,037
Total other commercial	Total other commercial	3,831		5,316		Total other commercial	6,436		4,137
Total commercial	Total commercial	45,783		48,211		Total commercial	38,914		41,599
Consumer loans:	Consumer loans:					Consumer loans:
Residential mortgages	Residential mortgages	18,439		17,801		Residential mortgages	16,093		18,377
Home equity mortgages	Home equity mortgages	765		853		Home equity mortgages	369		727
Credit cards	Credit cards	1,107		1,405		Credit cards	—		1,066
Other consumer⁽⁴⁾	Other consumer⁽⁴⁾	315		283		Other consumer(4)	150		319
Total consumer(5)	Total consumer(5)	20,626		20,342		Total consumer(5)	16,612		20,489
Total loans	Total loans	$	66,409	$	68,553	Total loans	$	55,526	$	62,088

⁽¹⁾Includes loans funded under the Paycheck Protection Program ("PPP") which totaled ~~$1,186~~$437 million and $1,043 million at September 30, ~~2020.~~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,~~15, "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 ~~$34~~$27 million and $32 million at September 30, ~~2020.~~2021 and December 31, 2020, respectively. See Note ~~10,~~11, "Fair Value Option," for further details.

(5)The decrease in loans at September 30, 2021 includes the impact of our decision to exit our mass market retail banking business as well as our remaining retail credit card portfolio which resulted in the transfer of certain loans to held for sale during the second quarter of 2021. See Note 8, "Loans Held for Sale," for additional information.

Net deferred origination costs totaled ~~$46~~$36 million and ~~$79~~$57 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, we had a net unamortized premium on our loans of $9$6 million and $3$9 million, respectively.


HSBC USA Inc.

~~COVID-19~~Coronavirus ("COVID-19") Loan Forbearance Initiatives We have implemented various loan modification programs to provide borrowers relief from the economic impacts of the COVID-19 pandemic. In ~~March~~ 2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law, which ~~provides~~provided financial institutions with the option to temporarily suspend certain requirements under U.S. GAAP related to troubled debt restructurings ("TDR Loans") ~~from~~beginning March 1, ~~2020~~2020. This TDR Loan guidance can be applied until the earlier of ~~December 31, 2020~~January 1, 2022 or 60 days following the termination of the presidentially declared national emergency. ~~During the third quarter of 2020, we~~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 ~~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 TDR Loans. Borrowers that do not meet the criteria in the CARES Act or the Interagency Statement are assessed for TDR Loan classification in accordance with our accounting policies.

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 ~~impacted~~affected 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 for~~of six months or less. For consumer mortgage loans, when a borrower ~~requests and is provided with extended relief in the form of~~utilizes 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 September 30, ~~2020~~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 ~~impacted~~affected during the deferral period.


		Past Due						Total Past Due 30 Days or More									Past Due						Total Past Due 30 Days or More
		30 - 89 Days		90+ Days						Current⁽¹⁾			Total Loans			30 - 89 Days			90+ Days			Total Past Due 30 Days or More			Current(1)			Total Loans
		(in millions)																								(in millions)
At September 30, 2020
At September 30, 2021													At September 30, 2021
Commercial loans:													Commercial loans:
Real estate, including construction													Real estate, including construction	$	56		$	5		$	61		$	8,189		$	8,250
Business and corporate banking													Business and corporate banking	124			1			125			12,663			12,788
Global banking													Global banking	—			23			23			11,417			11,440
Other commercial													Other commercial	16			—			16			6,420			6,436
Total commercial													Total commercial	196			29			225			38,689			38,914
Consumer loans:													Consumer loans:
Residential mortgages													Residential mortgages	203			264			467			15,626			16,093
Home equity mortgages													Home equity mortgages	5			19			24			345			369
Credit cards													Credit cards	—			—			—			—			—
Other consumer													Other consumer	3			3			6			144			150
Total consumer(2)													Total consumer(2)	211			286			497			16,115			16,612
Total loans													Total loans	$	407		$	315		$	722		$	54,804		$	55,526
At December 31, 2020													At December 31, 2020
Commercial loans:	Commercial loans:												Commercial loans:
Real estate, including construction	Real estate, including construction	$	47	$	0	$	47	$	11,236		$	11,283	Real estate, including construction	$	78		$	—		$	78		$	10,386		$	10,464
Business and corporate banking	Business and corporate banking	21		50		71		15,093			15,164		Business and corporate banking	126			19			145			13,334			13,479
Global banking	Global banking	0		7		7		15,498			15,505		Global banking	—			60			60			13,459			13,519
Other commercial	Other commercial	70		0		70		3,761			3,831		Other commercial	24			—			24			4,113			4,137
Total commercial	Total commercial	138		57		195		45,588			45,783		Total commercial	228			79			307			41,292			41,599
Consumer loans:	Consumer loans:												Consumer loans:
Residential mortgages	Residential mortgages	364		349		713		17,726			18,439		Residential mortgages	435			311			746			17,631			18,377
Home equity mortgages	Home equity mortgages	10		28		38		727			765		Home equity mortgages	11			22			33			694			727
Credit cards	Credit cards	16		19		35		1,072			1,107		Credit cards	23			19			42			1,024			1,066
Other consumer	Other consumer	6		5		11		304			315		Other consumer	7			6			13			306			319
Total consumer	Total consumer	396		401		797		19,829			20,626		Total consumer	476			358			834			19,655			20,489
Total loans	Total loans	$	534	$	458	$	992	$	65,417		$	66,409	Total loans	$	704		$	437		$	1,141		$	60,947		$	62,088
At December 31, 2019
Commercial loans:
Real estate, including construction		$	7	$	1	$	8	$	11,493		$	11,501
Business and corporate banking		60		35		95		13,384			13,479
Global banking		0		0		0		17,915			17,915
Other commercial		22		0		22		5,294			5,316
Total commercial		89		36		125		48,086			48,211
Consumer loans:
Residential mortgages		342		272		614		17,187			17,801
Home equity mortgages		10		24		34		819			853
Credit cards		24		24		48		1,357			1,405
Other consumer		5		5		10		273			283
Total consumer		381		325		706		19,636			20,342
Total loans		$	470	$	361	$	831	$	67,722		$	68,553

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

(2)The decrease in past due loans at September 30, 2021 includes the impact of our decision to exit our mass market retail banking business as well as our remaining retail credit card portfolio which resulted in the transfer of certain loans to held for sale during the second quarter of 2021, including $115 million of consumer loans which were past due 30 days or more.


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			Nonaccrual Loans		Accruing Loans Contractually Past Due 90 Days or More		Nonaccrual Loans With No Allowance For Credit Losses
		(in millions)											(in millions)
At September 30, 2020
At September 30, 2021								At September 30, 2021
Commercial:	Commercial:							Commercial:
Real estate, including construction	Real estate, including construction	$	13	$	0	$	2	Real estate, including construction	$	128	$	—	$	35
Business and corporate banking	Business and corporate banking	225		1		10		Business and corporate banking	139		1		73
Global banking	Global banking	363		0		115		Global banking	132		—		90

Total commercial	Total commercial	601		1		127		Total commercial	399		1		198
Consumer:	Consumer:							Consumer:
Residential mortgages^(1)(2)(3)	Residential mortgages^(1)(2)(3)	553		0		207		Residential mortgages(1)(2)(3)	785		—		214
Home equity mortgages⁽¹⁾⁽²⁾	Home equity mortgages⁽¹⁾⁽²⁾	42		0		31		Home equity mortgages(1)(2)	47		—		26
Credit cards	Credit cards	0		19		0		Credit cards	—		—		—
Other consumer	Other consumer	0		2		0		Other consumer	—		—		—
Total consumer(4)	Total consumer(4)	595		21		238		Total consumer(4)	832		—		240
Total nonperforming loans	Total nonperforming loans	$	1,196	$	22	$	365	Total nonperforming loans	$	1,231	$	1	$	438
At December 31, 2019
At December 31, 2020								At December 31, 2020
Commercial:	Commercial:							Commercial:
Real estate, including construction	Real estate, including construction	$	6	$	0	$	3	Real estate, including construction	$	44	$	—	$	31
Business and corporate banking	Business and corporate banking	82		1		19		Business and corporate banking	163		—		1
Global banking	Global banking	149		0		117		Global banking	337		—		93

Total commercial	Total commercial	237		1		139		Total commercial	544		—		125
Consumer:	Consumer:							Consumer:
Residential mortgages^(1)(2)(3)	Residential mortgages^(1)(2)(3)	381		0		257		Residential mortgages(1)(2)(3)	1,079		—		241
Home equity mortgages⁽¹⁾⁽²⁾	Home equity mortgages⁽¹⁾⁽²⁾	46		0		32		Home equity mortgages(1)(2)	63		—		34
Credit cards	Credit cards	0		24		0		Credit cards	—		19		—
Other consumer	Other consumer	0		5		0		Other consumer	—		2		—
Total consumer	Total consumer	427		29		289		Total consumer	1,142		21		275
Total nonperforming loans	Total nonperforming loans	$	664	$	30	$	428	Total nonperforming loans	$	1,686	$	21	$	400

⁽¹⁾At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, nonaccrual consumer mortgage loans include ~~$324~~$323 million and ~~$289~~$375 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 September 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. At September 30, 2021 and December 31, 2020, nonaccrual consumer mortgage loans also ~~include $24~~included $367 million and $590 million, respectively, of loans under COVID-19 related payment deferral programs where the borrowers ~~were provided with extended~~utilized a payment deferral ~~relief~~ 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.

(4)The decrease in nonperforming loans at September 30, 2021 includes the impact of our decision to exit our mass market retail banking business as well as our remaining retail credit card portfolio which resulted in the transfer of certain loans to held for sale during the second quarter of 2021, including $206 million of nonperforming consumer loans, of which $21 million were accruing loans contractually 90 days or more past due.


HSBC USA Inc.

The following table provides additional information on our nonaccrual loans:


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2021		2020		2021		2020
		(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	Interest income that would have been recorded if the nonaccrual loans had been current in accordance with contractual terms during the period	$	10	$	10	$	29	$	26	Interest income that would have been recorded if the nonaccrual loans had been current in accordance with contractual terms during the period	$	11	$	10	$	44	$	29
Interest income that was recorded on nonaccrual loans and included in interest income during the period	Interest income that was recorded on nonaccrual loans and included in interest income during the period	2		4		8		10		Interest income that was recorded on nonaccrual loans and included in interest income during the period	6		2		31		8

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 September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, we had collateral-dependent residential mortgage loans totaling ~~$805~~$623 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 September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, we had collateral-dependent commercial loans totaling ~~$480~~$358 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 nine months ended September 30, 2021 and 2020, there were 0no commercial loans ~~removed from TDR Loan classification. During the second quarter of 2019, a $12 million commercial loan~~that met this criteria and ~~was~~were 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 September 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. 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/or extend the term of the loan which would result in the loan being classified as a TDR Loan.


HSBC USA Inc.

The following table summarizes our TDR Loans at September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


		September 30, 2020		December 31, 2019			September 30, 2021			December 31, 2020
		(in millions)							(in millions)
Commercial loans:	Commercial loans:					Commercial loans:

Business and corporate banking	Business and corporate banking	$	120	$	36	Business and corporate banking	$	40		$	94
Global banking	Global banking	35		68		Global banking	37			74

Total commercial⁽¹⁾⁽²⁾	Total commercial⁽¹⁾⁽²⁾	155		104		Total commercial(1)(2)	77			168
Consumer loans:	Consumer loans:					Consumer loans:
Residential mortgages⁽³⁾⁽⁴⁾	Residential mortgages⁽³⁾⁽⁴⁾	553		580		Residential mortgages(3)(4)	384			582
Home equity mortgages⁽³⁾⁽⁴⁾	Home equity mortgages⁽³⁾⁽⁴⁾	31		32		Home equity mortgages(3)(4)	17			31
Credit cards	Credit cards	5		4		Credit cards	—			5

Total consumer(5)	Total consumer(5)	589		616		Total consumer(5)	401			618
Total TDR Loans⁽⁵⁾⁽⁶⁾	Total TDR Loans⁽⁵⁾⁽⁶⁾	$	744	$	720	Total TDR Loans⁽⁵⁾⁽⁶⁾	$	478		$	786

⁽¹⁾Additional commitments to lend to commercial borrowers whose loans have been modified in TDR Loans totaled ~~$99~~$13 million and ~~$222~~$107 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

⁽²⁾Not included in the table at September 30, 2021 and December 31, 2020 are ~~$1,103~~$352 million and $924 million, respectively, of commercial loans that were exempted from TDR assessment due to our CARES Act election.

⁽³⁾At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the carrying value of consumer mortgage TDR Loans includes ~~$490~~$339 million and ~~$557~~$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 September 30, 2021 and December 31, 2020 are ~~$24~~$404 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.

⁽⁵⁾The decrease in TDR Loans at September 30, 2021 includes the impact of our decision to exit our mass market retail banking business as well as our remaining retail credit card portfolio which resulted in the transfer of certain loans to held for sale during the second quarter of 2021, including $159 million of consumer TDR Loans.

(6)At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the carrying value of TDR Loans includes ~~$359~~$317 million and ~~$230~~$463 million, respectively, of loans which are classified as nonaccrual.

The following table presents information about loans which were modified during the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020 and as a result of this action became classified as TDR Loans:


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2021		2020		2021		2020
		(in millions)															(in millions)
Commercial loans:	Commercial loans:									Commercial loans:

Business and corporate banking	Business and corporate banking	$	41	$	0	$	45	$	0	Business and corporate banking	$	—	$	41	$	26	$	45
Global banking	Global banking	0		0		44		0		Global banking	—		—		15		44

Total commercial	Total commercial	41		0		89		0		Total commercial	—		41		41		89
Consumer loans:	Consumer loans:									Consumer loans:
Residential mortgages	Residential mortgages	20		2		27		3		Residential mortgages	1		20		33		27
Home equity mortgages	Home equity mortgages	0		0		2		0		Home equity mortgages	—		—		1		2
Credit cards	Credit cards	1		1		3		3		Credit cards	—		1		1		3
Total consumer	Total consumer	21		3		32		6		Total consumer	1		21		35		32
Total	Total	$	62	$	3	$	121	$	6	Total	$	1	$	62	$	76	$	121

The weighted-average contractual rate reduction for consumer loans which became classified as TDR Loans during the three and nine months ended September 30, ~~2020~~2021 was 3.13 percent and 2.08 percent, respectively, compared with 1.80 percent and 2.14 ~~percent, respectively, compared with 3.12 percent and 2.53~~ percent during the three and nine months ended September 30, ~~2019,~~2020, respectively. The weighted-average contractual rate reduction for commercial loans was not significant in either the number of loans or rate.


HSBC USA Inc.

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 nine months ended September 30, ~~2020~~2021 and ~~2019:~~2020:


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2021		2020		2021		2020
		(in millions)															(in millions)

Consumer loans:	Consumer loans:									Consumer loans:
Residential mortgages	Residential mortgages	$	2	$	0	$	3	$	3	Residential mortgages	$	1	$	2	$	4	$	3

Total consumer	Total consumer	$	2	$	0	$	3	$	3	Total consumer	$	1	$	2	$	4	$	3

During the three and nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, there were 0no commercial TDR Loans which were classified as TDR Loans during the previous 12 months which subsequently became 90 days or greater contractually delinquent.

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.


HSBC USA Inc.

The following table summarizes our criticized commercial loans, including a disaggregation of the loans by year of origination as of September 30, ~~2020~~2021 and ~~in total as of~~ December 31, ~~2019:~~2020:


		2020		2019		2018		2017		2016		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total at Sep. 30, 2020		Total at Dec. 31, 2019			2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total at Sep. 30, 2021
		(in millions)																																							(in millions)
Real estate, including construction:	Real estate, including construction:																					Real estate, including construction:
Special mention	Special mention	$	0	$	290	$	244	$	81	$	45	$	312	$	0	$	0	$	972	$	516	Special mention	$	—	$	—	$	352	$	361	$	110	$	225	$	—	$	—	$	1,048
Substandard	Substandard	0		130		0		122		0		52		0		0		304		203		Substandard	—		—		706		312		357		552		21		11		1,959
Doubtful	Doubtful	0		0		0		0		0		25		0		0		25		0		Doubtful	—		—		81		2		0		11		—		—		94
Total real estate, including construction	Total real estate, including construction	0		420		244		203		45		389		0		0		1,301		719		Total real estate, including construction	—		—		1,139		675		467		788		21		11		3,101
Business and corporate banking:	Business and corporate banking:																					Business and corporate banking:
Special mention	Special mention	1		91		39		13		43		489		736		59		1,471		467		Special mention	—		1		94		64		28		206		226		10		629
Substandard	Substandard	0		71		25		23		1		124		442		1		687		386		Substandard	—		19		40		9		3		250		459		8		788
Doubtful	Doubtful	0		0		0		0		0		31		125		0		156		23		Doubtful	—		—		—		20		—		30		16		—		66
Total business and corporate banking	Total business and corporate banking	1		162		64		36		44		644		1,303		60		2,314		876		Total business and corporate banking	—		20		134		93		31		486		701		18		1,483
Global banking:	Global banking:																					Global banking:
Special mention	Special mention	0		0		0		0		0		128		486		0		614		184		Special mention	8		39		—		—		—		39		54		—		140
Substandard	Substandard	0		0		62		0		0		1		79		0		142		196		Substandard	19		—		—		—		—		106		266		—		391
Doubtful	Doubtful	0		0		0		0		0		137		101		0		238		15		Doubtful	—		—		—		—		—		—		31		—		31
Total global banking	Total global banking	0		0		62		0		0		266		666		0		994		395		Total global banking	27		39		—		—		—		145		351		—		562
Other commercial:	Other commercial:																					Other commercial:
Special mention	Special mention	0		0		0		0		0		55		40		0		95		11		Special mention	—		—		—		—		—		8		—		—		8
Substandard	Substandard	0		0		0		0		0		70		0		0		70		0		Substandard	—		—		—		—		—		70		40		—		110
Doubtful	Doubtful	0		0		0		0		0		0		0		0		0		0		Doubtful	—		—		—		—		—		—		—		—		—
Total other commercial	Total other commercial	0		0		0		0		0		125		40		0		165		11		Total other commercial	—		—		—		—		—		78		40		—		118
Total commercial:	Total commercial:																					Total commercial:
Special mention	Special mention	1		381		283		94		88		984		1,262		59		3,152		1,178		Special mention	8		40		446		425		138		478		280		10		1,825
Substandard	Substandard	0		201		87		145		1		247		521		1		1,203		785		Substandard	19		19		746		321		360		978		786		19		3,248
Doubtful	Doubtful	0		0		0		0		0		193		226		0		419		38		Doubtful	—		—		81		22		—		41		47		—		191
Total commercial	Total commercial	$	1	$	582	$	370	$	239	$	89	$	1,424	$	2,009	$	60	$	4,774	$	2,001	Total commercial	$	27	$	59	$	1,273	$	768	$	498	$	1,497	$	1,113	$	29	$	5,264


HSBC USA Inc.


	2020		2019		2018		2017		2016		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total at Dec. 31, 2020
	(in millions)
Real estate, including construction:
Special mention	$	—	$	306	$	115	$	171	$	85	$	437	$	—	$	—	$	1,114
Substandard	—		186		—		169		—		86		—		—		441
Doubtful	—		—		—		—		—		—		—		—		—
Total real estate, including construction	—		492		115		340		85		523		—		—		1,555
Business and corporate banking:
Special mention	17		71		43		32		10		390		600		48		1,211
Substandard	1		44		25		23		31		181		435		1		741
Doubtful	—		—		—		—		—		41		57		—		98
Total business and corporate banking	18		115		68		55		41		612		1,092		49		2,050
Global banking:
Special mention	—		—		—		—		—		142		98		—		240
Substandard	—		—		48		—		—		131		477		—		656
Doubtful	—		—		—		—		—		82		160		—		242
Total global banking	—		—		48		—		—		355		735		—		1,138
Other commercial:
Special mention	—		—		—		—		—		44		40		—		84
Substandard	—		—		—		—		—		70		—		—		70
Doubtful	—		—		—		—		—		—		—		—		—
Total other commercial	—		—		—		—		—		114		40		—		154
Total commercial:
Special mention	17		377		158		203		95		1,013		738		48		2,649
Substandard	1		230		73		192		31		468		912		1		1,908
Doubtful	—		—		—		—		—		123		217		—		340
Total commercial	$	18	$	607	$	231	$	395	$	126	$	1,604	$	1,867	$	49	$	4,897


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 September 30, ~~2020~~2021 and ~~in total as of~~ December 31, ~~2019:~~2020:


		2020		2019		2018		2017		2016		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total at Sep. 30, 2020		Total at Dec. 31, 2019			2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total at Sep. 30, 2021
		(in millions)																																							(in millions)
Real estate, including construction:	Real estate, including construction:																					Real estate, including construction:
Performing loans	Performing loans	$	549	$	3,909	$	3,114	$	1,413	$	267	$	1,915	$	81	$	22	$	11,270	$	11,495	Performing loans	$	7	$	635	$	2,999	$	2,217	$	783	$	1,416	$	49	$	16	$	8,122
Nonaccrual loans	Nonaccrual loans	0		0		0		0		1		12		0		0		13		6		Nonaccrual loans	—		—		81		26		—		21		—		—		128
Accruing loans contractually past due 90 days or more	Accruing loans contractually past due 90 days or more	0		0		0		0		0		0		0		0		0		0		Accruing loans contractually past due 90 days or more	—		—		—		—		—		—		—		—		—
Total real estate, including construction	Total real estate, including construction	549		3,909		3,114		1,413		268		1,927		81		22		11,283		11,501		Total real estate, including construction	7		635		3,080		2,243		783		1,437		49		16		8,250
Business and corporate banking:	Business and corporate banking:																					Business and corporate banking:
Performing loans	Performing loans	1,182		647		252		295		166		4,324		7,721		351		14,938		13,396		Performing loans	304		647		527		210		217		4,842		5,645		256		12,648
Nonaccrual loans	Nonaccrual loans	0		15		13		59		0		18		119		1		225		82		Nonaccrual loans	—		4		14		30		54		1		36		—		139
Accruing loans contractually past due 90 days or more	Accruing loans contractually past due 90 days or more	0		0		0		0		0		0		1		0		1		1		Accruing loans contractually past due 90 days or more	—		—		—		—		—		—		1		—		1
Total business and corporate banking	Total business and corporate banking	1,182		662		265		354		166		4,342		7,841		352		15,164		13,479		Total business and corporate banking	304		651		541		240		271		4,843		5,682		256		12,788
Global banking:	Global banking:																					Global banking:
Performing loans	Performing loans	283		724		203		100		105		6,681		7,046		0		15,142		17,766		Performing loans	403		674		327		217		234		4,630		4,823		—		11,308
Nonaccrual loans	Nonaccrual loans	0		0		4		131		0		0		228		0		363		149		Nonaccrual loans	—		—		—		—		—		42		90		—		132
Accruing loans contractually past due 90 days or more	Accruing loans contractually past due 90 days or more	0		0		0		0		0		0		0		0		0		0		Accruing loans contractually past due 90 days or more	—		—		—		—		—		—		—		—		—
Total global banking	Total global banking	283		724		207		231		105		6,681		7,274		0		15,505		17,915		Total global banking	403		674		327		217		234		4,672		4,913		—		11,440
Other commercial:	Other commercial:																					Other commercial:
Performing loans	Performing loans	52		424		241		112		118		700		2,184		0		3,831		5,316		Performing loans	214		450		420		205		100		1,141		3,906		—		6,436
Nonaccrual loans	Nonaccrual loans	0		0		0		0		0		0		0		0		0		0		Nonaccrual loans	—		—		—		—		—		—		—		—		—
Accruing loans contractually past due 90 days or more	Accruing loans contractually past due 90 days or more	0		0		0		0		0		0		0		0		0		0		Accruing loans contractually past due 90 days or more	—		—		—		—		—		—		—		—		—
Total other commercial	Total other commercial	52		424		241		112		118		700		2,184		0		3,831		5,316		Total other commercial	214		450		420		205		100		1,141		3,906		—		6,436
Total commercial:	Total commercial:																					Total commercial:
Performing loans	Performing loans	2,066		5,704		3,810		1,920		656		13,620		17,032		373		45,181		47,973		Performing loans	928		2,406		4,273		2,849		1,334		12,029		14,423		272		38,514
Nonaccrual loans	Nonaccrual loans	0		15		17		190		1		30		347		1		601		237		Nonaccrual loans	—		4		95		56		54		64		126		—		399
Accruing loans contractually past due 90 days or more	Accruing loans contractually past due 90 days or more	0		0		0		0		0		0		1		0		1		1		Accruing loans contractually past due 90 days or more	—		—		—		—		—		—		1		—		1
Total commercial	Total commercial	$	2,066	$	5,719	$	3,827	$	2,110	$	657	$	13,650	$	17,380	$	374	$	45,783	$	48,211	Total commercial	$	928	$	2,410	$	4,368	$	2,905	$	1,388	$	12,093	$	14,550	$	272	$	38,914

2728


HSBC USA Inc.


	2020		2019		2018		2017		2016		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total 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 loans	—		—		24		—		—		20		—		—		44
Accruing loans contractually past due 90 days or more	—		—		—		—		—		—		—		—		—
Total real estate, including construction	545		3,775		2,799		1,368		264		1,614		79		20		10,464
Business and corporate banking:
Performing loans	1,079		606		253		275		151		3,485		7,145		322		13,316
Nonaccrual loans	1		15		12		60		1		3		71		—		163
Accruing loans contractually past due 90 days or more	—		—		—		—		—		—		—		—		—
Total business and corporate banking	1,080		621		265		335		152		3,488		7,216		322		13,479
Global banking:
Performing loans	507		495		190		231		104		6,023		5,632		—		13,182
Nonaccrual loans	—		—		—		—		—		127		210		—		337
Accruing loans contractually past due 90 days or more	—		—		—		—		—		—		—		—		—
Total global banking	507		495		190		231		104		6,150		5,842		—		13,519
Other commercial:
Performing loans	378		431		215		105		119		630		2,259		—		4,137
Nonaccrual loans	—		—		—		—		—		—		—		—		—
Accruing loans contractually past due 90 days or more	—		—		—		—		—		—		—		—		—
Total other commercial	378		431		215		105		119		630		2,259		—		4,137
Total commercial:
Performing loans	2,509		5,307		3,433		1,979		638		11,732		15,115		342		41,055
Nonaccrual loans	1		15		36		60		1		150		281		—		544
Accruing loans contractually past due 90 days or more	—		—		—		—		—		—		—		—		—
Total commercial	$	2,510	$	5,322	$	3,469	$	2,039	$	639	$	11,882	$	15,396	$	342	$	41,599


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 ~~shows~~summarizes the credit risk profile of our commercial loan portfolio, including a disaggregation of the loans by year of origination as of September 30, ~~2020~~2021 and ~~in total as of~~ December 31, ~~2019:~~2020:


		2020		2019		2018		2017		2016		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total at Sep. 30, 2020		Total at Dec. 31, 2019			2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total at Sep. 30, 2021
		(in millions)																																							(in millions)
Real estate, including construction:	Real estate, including construction:																					Real estate, including construction:
Investment grade	Investment grade	$	357	$	1,368	$	1,216	$	529	$	180	$	832	$	6	$	0	$	4,488	$	6,332	Investment grade	$	6	$	318	$	563	$	809	$	129	$	238	$	15	$	—	$	2,078
Non-investment grade	Non-investment grade	192		2,541		1,898		884		88		1,095		75		22		6,795		5,169		Non-investment grade	1		317		2,517		1,434		654		1,199		34		16		6,172
Total real estate, including construction	Total real estate, including construction	549		3,909		3,114		1,413		268		1,927		81		22		11,283		11,501		Total real estate, including construction	7		635		3,080		2,243		783		1,437		49		16		8,250
Business and corporate banking:	Business and corporate banking:																					Business and corporate banking:
Investment grade	Investment grade	346		267		44		49		27		1,795		2,415		73		5,016		6,029		Investment grade	31		263		196		42		23		2,308		2,524		69		5,456
Non-investment grade	Non-investment grade	836		395		221		305		139		2,547		5,426		279		10,148		7,450		Non-investment grade	273		388		345		198		248		2,535		3,158		187		7,332
Total business and corporate banking	Total business and corporate banking	1,182		662		265		354		166		4,342		7,841		352		15,164		13,479		Total business and corporate banking	304		651		541		240		271		4,843		5,682		256		12,788
Global banking:	Global banking:																					Global banking:
Investment grade	Investment grade	218		691		49		231		29		4,769		5,228		0		11,215		12,981		Investment grade	331		666		298		202		234		3,683		4,112		—		9,526
Non-investment grade	Non-investment grade	65		33		158		0		76		1,912		2,046		0		4,290		4,934		Non-investment grade	72		8		29		15		—		989		801		—		1,914
Total global banking	Total global banking	283		724		207		231		105		6,681		7,274		0		15,505		17,915		Total global banking	403		674		327		217		234		4,672		4,913		—		11,440
Other commercial:	Other commercial:																					Other commercial:
Investment grade	Investment grade	45		142		126		105		110		603		1,821		0		2,952		4,649		Investment grade	43		368		178		204		76		805		3,739		—		5,413
Non-investment grade	Non-investment grade	7		282		115		7		8		97		363		0		879		667		Non-investment grade	171		82		242		1		24		336		167		—		1,023
Total other commercial	Total other commercial	52		424		241		112		118		700		2,184		0		3,831		5,316		Total other commercial	214		450		420		205		100		1,141		3,906		—		6,436
Total commercial:	Total commercial:																					Total commercial:
Investment grade	Investment grade	966		2,468		1,435		914		346		7,999		9,470		73		23,671		29,991		Investment grade	411		1,615		1,235		1,257		462		7,034		10,390		69		22,473
Non-investment grade	Non-investment grade	1,100		3,251		2,392		1,196		311		5,651		7,910		301		22,112		18,220		Non-investment grade	517		795		3,133		1,648		926		5,059		4,160		203		16,441
Total commercial	Total commercial	$	2,066	$	5,719	$	3,827	$	2,110	$	657	$	13,650	$	17,380	$	374	$	45,783	$	48,211	Total commercial	$	928	$	2,410	$	4,368	$	2,905	$	1,388	$	12,093	$	14,550	$	272	$	38,914


	2020		2019		2018		2017		2016		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total at Dec. 31, 2020
	(in millions)
Real estate, including construction:
Investment grade	$	339	$	1,123	$	817	$	318	$	179	$	640	$	6	$	—	$	3,422
Non-investment grade	206		2,652		1,982		1,050		85		974		73		20		7,042
Total real estate, including construction	545		3,775		2,799		1,368		264		1,614		79		20		10,464
Business and corporate banking:
Investment grade	342		147		37		34		23		1,486		2,499		47		4,615
Non-investment grade	738		474		228		301		129		2,002		4,717		275		8,864
Total business and corporate banking	1,080		621		265		335		152		3,488		7,216		322		13,479
Global banking:
Investment grade	464		477		46		231		30		4,618		4,281		—		10,147
Non-investment grade	43		18		144		—		74		1,532		1,561		—		3,372
Total global banking	507		495		190		231		104		6,150		5,842		—		13,519
Other commercial:
Investment grade	372		163		117		105		116		525		1,932		—		3,330
Non-investment grade	6		268		98		—		3		105		327		—		807
Total other commercial	378		431		215		105		119		630		2,259		—		4,137
Total commercial:
Investment grade	1,517		1,910		1,017		688		348		7,269		8,718		47		21,514
Non-investment grade	993		3,412		2,452		1,351		291		4,613		6,678		295		20,085
Total commercial	$	2,510	$	5,322	$	3,469	$	2,039	$	639	$	11,882	$	15,396	$	342	$	41,599


HSBC USA Inc.

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 September 30, ~~2020~~2021 and ~~in total as of~~ December 31, ~~2019:~~2020:


		2020		2019		2018		2017		2016		Prior		Revolving Loans		Total at Sep. 30, 2020		Total at Dec. 31, 2019			2021		2020		2019		2018		2017		Prior		Revolving Loans		Total at Sep. 30, 2021
		(in millions)																																	(in millions)
Residential mortgages⁽¹⁾⁽²⁾	Residential mortgages⁽¹⁾⁽²⁾	$	7	$	20	$	21	$	24	$	25	$	334	$	0	$	431	$	350	Residential mortgages(1)(2)	$	—	$	4	$	12	$	7	$	19	$	268	$	—	$	310
Home equity mortgages⁽¹⁾⁽²⁾	Home equity mortgages⁽¹⁾⁽²⁾	0		0		0		0		0		31		0		31		25		Home equity mortgages(1)(2)	—		—		—		—		—		20		—		20
Credit cards	Credit cards													25		25		34		Credit cards	—		—		—		—		—		—		—		—
Other consumer	Other consumer	1		0		0		0		0		4		2		7		7		Other consumer	—		—		—		—		—		4		—		4
Total consumer	Total consumer	$	8	$	20	$	21	$	24	$	25	$	369	$	27	$	494	$	416	Total consumer	$	—	$	4	$	12	$	7	$	19	$	292	$	—	$	334


	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total at Dec. 31, 2020
	(in millions)
Residential mortgages(1)(2)	$	3	$	15	$	13	$	25	$	19	$	329	$	—	$	404
Home equity mortgages(1)(2)	—		—		—		—		—		25		—		25
Credit cards	—		—		—		—		—		—		28		28
Other consumer	1		1		—		—		—		4		2		8
Total consumer	$	4	$	16	$	13	$	25	$	19	$	358	$	30	$	465

⁽¹⁾At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, consumer mortgage loan delinquency includes ~~$283~~$252 million and ~~$256~~$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 September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, consumer mortgage loans include ~~$115~~$91 million and ~~$142~~$109 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 September 30, ~~2020~~2021 and ~~in total as of~~ December 31, ~~2019:~~2020:


		2020		2019		2018		2017		2016		Prior		Revolving Loans		Total at Sep. 30, 2020		Total at Dec. 31, 2019			2021		2020		2019		2018		2017		Prior		Revolving Loans		Total at Sep. 30, 2021
		(in millions)																																	(in millions)
Residential mortgages:	Residential mortgages:																			Residential mortgages:
Performing loans	Performing loans	$	3,526	$	2,603	$	1,504	$	1,751	$	2,053	$	6,449	$	0	$	17,886	$	17,420	Performing loans	$	3,574	$	3,527	$	1,677	$	885	$	1,016	$	4,629	$	—	$	15,308
Nonaccrual loans	Nonaccrual loans	20		35		27		38		31		402		0		553		381		Nonaccrual loans	6		39		74		66		60		540		—		785

Total residential mortgages	Total residential mortgages	3,546		2,638		1,531		1,789		2,084		6,851		0		18,439		17,801		Total residential mortgages	3,580		3,566		1,751		951		1,076		5,169		—		16,093
Home equity mortgages:	Home equity mortgages:																			Home equity mortgages:
Performing loans	Performing loans	42		54		39		37		48		503		0		723		807		Performing loans	12		34		28		19		19		210		—		322
Nonaccrual loans	Nonaccrual loans	0		0		1		0		0		41		0		42		46		Nonaccrual loans	—		—		1		—		—		46		—		47

Total home equity mortgages	Total home equity mortgages	42		54		40		37		48		544		0		765		853		Total home equity mortgages	12		34		29		19		19		256		—		369
Credit cards:	Credit cards:																			Credit cards:
Performing loans	Performing loans	0		0		0		0		0		0		1,088		1,088		1,381		Performing loans	—		—		—		—		—		—		—		—

Accruing loans contractually past due 90 days or more	Accruing loans contractually past due 90 days or more	0		0		0		0		0		0		19		19		24		Accruing loans contractually past due 90 days or more	—		—		—		—		—		—		—		—
Total credit cards	Total credit cards	0		0		0		0		0		0		1,107		1,107		1,405		Total credit cards	—		—		—		—		—		—		—		—
Other consumer:	Other consumer:																			Other consumer:
Performing loans	Performing loans	73		45		1		0		5		132		57		313		278		Performing loans	6		13		5		1		1		122		2		150

Accruing loans contractually past due 90 days or more	Accruing loans contractually past due 90 days or more	0		0		0		0		0		0		2		2		5		Accruing loans contractually past due 90 days or more	—		—		—		—		—		—		—		—
Total other consumer	Total other consumer	73		45		1		0		5		132		59		315		283		Total other consumer	6		13		5		1		1		122		2		150
Total consumer:	Total consumer:																			Total consumer:
Performing loans	Performing loans	3,641		2,702		1,544		1,788		2,106		7,084		1,145		20,010		19,886		Performing loans	3,592		3,574		1,710		905		1,036		4,961		2		15,780
Nonaccrual loans	Nonaccrual loans	20		35		28		38		31		443		0		595		427		Nonaccrual loans	6		39		75		66		60		586		—		832
Accruing loans contractually past due 90 days or more	Accruing loans contractually past due 90 days or more	0		0		0		0		0		0		21		21		29		Accruing loans contractually past due 90 days or more	—		—		—		—		—		—		—		—
Total consumer	Total consumer	$	3,661	$	2,737	$	1,572	$	1,826	$	2,137	$	7,527	$	1,166	$	20,626	$	20,342	Total consumer	$	3,598	$	3,613	$	1,785	$	971	$	1,096	$	5,547	$	2	$	16,612


HSBC USA Inc.


	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total at Dec. 31, 2020
	(in millions)
Residential mortgages:
Performing loans	$	4,491	$	2,369	$	1,338	$	1,572	$	1,852	$	5,676	$	—	$	17,298
Nonaccrual loans	38		107		93		86		78		677		—		1,079

Total residential mortgages	4,529		2,476		1,431		1,658		1,930		6,353		—		18,377
Home equity mortgages:
Performing loans	50		51		33		34		45		451		—		664
Nonaccrual loans	—		—		1		1		2		59		—		63

Total home equity mortgages	50		51		34		35		47		510		—		727
Credit cards:
Performing loans	—		—		—		—		—		—		1,047		1,047

Accruing loans contractually past due 90 days or more	—		—		—		—		—		—		19		19
Total credit cards	—		—		—		—		—		—		1,066		1,066
Other consumer:
Performing loans	87		39		—		1		8		128		54		317

Accruing loans contractually past due 90 days or more	—		—		—		—		—		—		2		2
Total other consumer	87		39		—		1		8		128		56		319
Total consumer:
Performing loans	4,628		2,459		1,371		1,607		1,905		6,255		1,101		19,326
Nonaccrual loans	38		107		94		87		80		736		—		1,142
Accruing loans contractually past due 90 days or more	—		—		—		—		—		—		21		21
Total consumer	$	4,666	$	2,566	$	1,465	$	1,694	$	1,985	$	6,991	$	1,122	$	20,489

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 September 30, ~~2020~~2021 and ~~in total as of~~ December 31, ~~2019:~~2020:


		2020		2019		2018		2017		2016		Prior		Revolving Loans		Total at Sep. 30, 2020		Total at Dec. 31, 2019			2021		2020		2019		2018		2017		Prior		Revolving Loans		Total at Sep. 30, 2021
		(in millions)																																	(in millions)
Residential mortgages	Residential mortgages	$	0	$	2	$	2	$	1	$	2	$	546	$	0	$	553	$	580	Residential mortgages	$	—	$	1	$	3	$	6	$	1	$	373	$	—	$	384
Home equity mortgages	Home equity mortgages	0		0		0		0		0		31		0		31		32		Home equity mortgages	—		—		—		—		—		17		—		17
Credit cards	Credit cards	0		0		0		0		0		0		5		5		4		Credit cards	—		—		—		—		—		—		—		—

Total consumer	Total consumer	$	0	$	2	$	2	$	1	$	2	$	577	$	5	$	589	$	616	Total consumer	$	—	$	1	$	3	$	6	$	1	$	390	$	—	$	401


	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total at Dec. 31, 2020
	(in millions)
Residential mortgages	$	3	$	5	$	6	$	3	$	2	$	563	$	—	$	582
Home equity mortgages	—		—		—		—		—		31		—		31
Credit cards	—		—		—		—		—		—		5		5

Total consumer	$	3	$	5	$	6	$	3	$	2	$	594	$	5	$	618

Concentration of Credit Risk At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, our loan portfolios included interest-only residential mortgage and home equity mortgage loans totaling ~~$3,473~~$3,736 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.

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6.7. 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~~We utilize a minimum of 3 forward-looking economic scenarios to calculate 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.

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. Multiple forward-looking economic forecasts are formulated and incorporated into the 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 under~~exposures. 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 a minimum of 3 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, ~~in most economic environments, unless determined otherwise. See~~ ~~Updates to Economic Scenarios and Other Changes During~~with the ~~Nine Months Ended September 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


~~HSBC USA Inc.~~

~~between the Central scenario and the Upside and Downside scenarios is held constant with that observed at the last full scenario generation.~~

~~We recognize that the Consensus Economic Scenario approach using three scenarios~~Scenario. 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 change~~made to the weighting assigned to the three scenarios or ~~the inclusion of~~ additional ~~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 Downside~~ 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 nine months 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 percent~~included 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 Nine Months Ended September 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~~


~~HSBC USA Inc.~~

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 3 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 was deemed appropriate for the estimation of lifetime ECL under conditions at that time.

~~During the second quarter of 2020, economic conditions remained weak and~~significant economic uncertainty caused by the COVID-19 pandemic, ~~continued to remain high. As a result, we updated our Upside and Downside scenarios,~~beginning in ~~addition to updating our Central scenario, to reflect management's current view~~the second quarter 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 uncertainty,~~2020, we developed and utilized a ~~4th~~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 Nine Months Ended September 30, 2021 Although economic conditions improved during the first half of 2021, the impact of the COVID-19 pandemic continued 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 view of forecasted economic conditions and utilized the 4 updated scenarios for estimating lifetime ECL at March 31, 2021 and June 30, 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 conditions~~ at ~~that~~the time.

During the third quarter of ~~2020,~~2021, economic conditions ~~rebounded partially while economic uncertainty caused by~~continued to improve, although at a slower pace than during the first half of the year. However, the impact of the COVID-19 pandemic ~~continued~~continues to ~~remain high.~~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 September 30, ~~2020.~~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 September 30, ~~2020.~~2021. The economic assumptions described in this section have been formed specifically for the purpose of calculating ECL.

In the Central scenario, ~~GDP continues to expand~~Gross Domestic Product ("GDP") maintains its strong recovery path in ~~the fourth quarter of 2020~~2021 and ~~through 2021~~carries its expansion into 2022, under the assumption ofthat economic activities continue to recover while impact from new COVID-19 infections subsides as more people are vaccinated, and high fiscal support boosts near-term economic growth. With a ~~phased re-opening of the economy. With the~~strong economic recovery, the unemployment rate ~~gradually declines after peaking in~~continues on its downward trend, while demand for housing, combined with limited supply, continues to drive the ~~second quarter of 2020. The~~ residential housing market ~~continues~~to carry its growth momentum into ~~the fourth quarter~~2022. Commercial real estate prices also start to appreciate, after a period of ~~2020,~~sluggish growth driven by ~~low interest rates and demand from people who need more space to work from home.~~pandemic induced adjustments. In the financial markets, growth in financial asset prices remains moderate, the federal funds rate remains at the ~~lowest~~current near-zero level ~~for an extended period~~until the beginning of ~~time~~2023, and the 10-year U.S. Treasury yield, ~~slowly climbs.~~which has experienced some increase since the start of 2021, continues to rise.

In the Upside scenario, the ~~re-opening of the~~ economy is ~~expected~~assumed to ~~proceed~~grow at a faster pace than in the Central scenario. As a result, the ~~economy rebounds stronger and the~~ unemployment rate falls ~~faster. Home price appreciation gradually picks up reaching its pre-COVID-19 level~~faster than in ~~late 2021.~~the Central scenario and, with increasing mobility, commercial real estate prices start to accelerate. In this scenario, the equity price index ~~returns~~climbs with strong momentum, and overall optimism allows the Federal Reserve Board ("FRB") to ~~its pre-COVID-19 level by the end of 2020, but~~start normalizing monetary policy earlier than currently anticipated, which consequently drives the 10-year U.S. Treasury yield ~~stays at~~to a ~~low~~ level ~~during~~that is significantly higher than in the ~~next two years.~~Central Scenario.

In the Downside scenario, the ~~re-opening of~~economy drops into a mild recession, with the ~~economy is delayed due to~~unemployment rate reversing its downward trend and remaining at a ~~rapid rise of COVID-19 cases.~~higher level. In this scenario, the ~~economic recovery is quite anemic, with the unemployment rate staying at double digits through the third quarter of 2021. The~~ residential housing market slowly loses its momentum in 2022 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 than~~about half of its value by the ~~end~~middle of ~~2022,~~2023, driven by ~~disappointing corporate earnings,~~an overall erosion of consumer and business sentiments, which also results in a lower 10-year U.S. Treasury yield than in the Central Scenario, and the ~~FRB keeps its policy~~federal funds rate remains at the lowest level for the next two years.

In the Alternative Downside scenario~~economic recessions re-emerge~~, the U.S. economy re-enters into a recession in ~~both 2021~~early 2022 and ~~2022, under the assumption that no vaccine or effective treatment for COVID-19 can be broadly distributed.~~stays in until early 2023, followed by a very anemic recovery thereafter. 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. At~~while at the same time, contracting corporate activities and rising unemployment pushes the commercial real estate market into a severe downturn. ~~Volatility~~In this scenario, financial markets experience a major sell-off and volatility in the financial markets remains extremely high ~~until~~over the ~~end of 2021,~~next year, widening corporate credit spreads ~~substantially. Flight~~substantially, and flight to safe haven assets pushes the 10-year U.S. Treasury yield ~~to negative territory in 2021 in this scenario~~lower.

In addition to the updates to the economic scenarios, during the three months ended September 30, 2020, we increased our management judgment allowance for risk factors associated with higher risk client and industry exposures in our commercial loan portfolio that are not fully captured in the models. This increase was partially offset by a decrease in our management judgment allowance for risk factors associated with large loan exposures in our commercial loan portfolio, reflecting the partial rebound in economic conditions. In the year-to-date period, we increased our management judgment allowance for risk factors associated with higher risk client and industry exposures as well as large loan exposures in our commercial loan portfolio, reflecting an overall increase in projected lifetime large loan defaults. In addition, we recorded a management judgment allowance during the three months ending September 30, 2020 for risk factors associated with forbearance accounts in our consumer loan portfolio that are not fully captured in the models.

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The following table presents the forecasted key macroeconomic variables in our Central scenarios used for estimating lifetime ECL at September 30, 2021, June 30, 2021 and December 31, 2020:


	For the Quarter Ended
	December 31, 2021		June 30, 2022		December 31, 2022
Unemployment rate (quarterly average):
Forecast at September 30, 2021	4.7	%	4.3	%	4.2	%
Forecast at June 30, 2021	4.8		4.4		4.1
Forecast at December 31, 2020	6.2		5.9		5.4
GDP growth rate (year-over-year):
Forecast at September 30, 2021	6.8		4.9		2.3
Forecast at June 30, 2021	6.3		4.7		2.3
Forecast at December 31, 2020	5.3		3.1		1.8

In addition to the updates to the economic scenarios, during the three and nine months ended September 30, 2021, we decreased the management judgment allowance on our commercial loan portfolio for risk factors associated with higher risk client and industry exposures and, in the year-to-date period, economic uncertainty relating to the impact of COVID-19 that are not fully captured in the models. The decrease for risk factors associated with higher risk industry exposures reflects the transfer of certain commercial real estate loans to held for sale during the third quarter of 2021, which resulted in the reversal of the existing allowance for credit losses on these loans totaling $24 million. During the three and nine months ended September 30, 2021, we also decreased the management judgment allowance on our consumer loan portfolio for risk factors associated with economic uncertainty and, in the year-to-date period, forbearance accounts that are not fully captured in the models. The decrease in the management judgment allowance on our consumer loan portfolio in the year-to-date period reflects the transfer of certain loans to held for sale. As previously disclosed, during the second quarter of 2021, we made the decision to exit our mass market retail banking business as well as our remaining retail credit card portfolio which resulted in the transfer of certain loans to held for sale and the reversal or charge-off of the existing allowances for credit losses on these loans which collectively totaled $157 million.

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 loans~~Commercial 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 our credit risk policies. In assigning the credit ratings to a particular loan, among the risk factors considered are the obligor's debt capacity and financial position, the level of earnings, the amount and sources for repayment, the level of contingencies, management strength and the industry or geography in which the obligor operates. We utilize a consistent methodology 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. 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 loans~~For pools of homogeneous consumer loans and certain small business 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


~~HSBC USA Inc.~~

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 modeledAllowance for ~~mortgage portfolios by forecasting future loan-to-value ("LTV") profiles~~Credit Losses / Liability 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 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 exposures~~Off-Balance Sheet Credit Exposures A 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.~~

The following table summarizes our allowance for credit losses and the liability for off-balance sheet credit exposures:


		September 30, 2020		January 1, 2020		December 31, 2019			September 30, 2021		December 31, 2020
		(in millions)									(in millions)
Allowance for credit losses:	Allowance for credit losses:							Allowance for credit losses:
Loans	Loans	$	1,084	$	467	$	637	Loans	$	475	$	1,015
Securities held-to-maturity⁽¹⁾	Securities held-to-maturity⁽¹⁾	2		2		0		Securities held-to-maturity(1)	1		2
Other financial assets measured at amortized cost⁽²⁾	Other financial assets measured at amortized cost⁽²⁾	3		3		0		Other financial assets measured at amortized cost(2)	2		2
Securities available-for-sale⁽¹⁾	Securities available-for-sale⁽¹⁾	2		3		0		Securities available-for-sale(1)	1		1
Total allowance for credit losses	Total allowance for credit losses	$	1,091	$	475	$	637	Total allowance for credit losses	$	479	$	1,020

Liability for off-balance sheet credit exposures	Liability for off-balance sheet credit exposures	$	225	$	158	$	104	Liability for off-balance sheet credit exposures	$	110	$	237

⁽¹⁾See Note 4,5, "Securities," for additional information regarding the allowance for credit losses associated with our security portfolios.

⁽²⁾Primarily includes accrued interest receivables and customer acceptances.


HSBC USA Inc.

The following table summarizes the changes in the allowance for credit losses on loans by product or line of business during the three and nine months ended September 30, 2021 and 2020:


	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 September 30, 2021
Allowance for credit losses – beginning of period	$	117	$	284	$	131	$	6	$	(6)	$	15	$	—	$	—	$	547
Provision charged (credited) to income(1)	(2)		(38)		(9)		(2)		(9)		(2)		(1)		(1)		(64)
Charge-offs(1)	—		(13)		—		—		—		(3)		—		—		(16)
Recoveries	—		1		—		—		4		1		1		1		8
Net (charge-offs) recoveries	—		(12)		—		—		4		(2)		1		1		(8)

Allowance for credit losses – end of period	$	115	$	234	$	122	$	4	$	(11)	$	11	$	—	$	—	$	475

Three Months Ended September 30, 2020
Allowance for credit losses – beginning of period	$	120	$	434	$	424	$	5	$	(19)	$	16	$	190	$	22	$	1,192
Provision charged (credited) to income	43		(36)		(103)		3		12		(1)		(2)		9		(75)
Charge-offs	(12)		(2)		(1)		—		(1)		(1)		(23)		(4)		(44)
Recoveries	—		5		—		—		3		1		2		—		11
Net (charge-offs) recoveries	(12)		3		(1)		—		2		—		(21)		(4)		(33)

Allowance for credit losses – end of period	$	151	$	401	$	320	$	8	$	(5)	$	15	$	167	$	27	$	1,084

Nine Months Ended September 30, 2021
Allowance for credit losses – beginning of period	$	145	$	375	$	287	$	7	$	(9)	$	22	$	161	$	27	$	1,015


Provision charged (credited) to income(1)	(30)		(115)		(153)		(3)		(3)		(10)		(78)		(18)		(410)
Charge-offs(1)	—		(29)		(12)		—		(10)		(5)		(88)		(11)		(155)
Recoveries	—		3		—		—		11		4		5		2		25
Net (charge-offs) recoveries	—		(26)		(12)		—		1		(1)		(83)		(9)		(130)

Allowance for credit losses – end of period	$	115	$	234	$	122	$	4	$	(11)	$	11	$	—	$	—	$	475

Nine Months Ended September 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(2)	(112)		(60)		51		(5)		(86)		7		32		3		(170)
Allowance for credit losses – beginning of period, adjusted	41		179		157		4		(74)		13		137		10		467
Provision charged (credited) to income	122		283		183		3		62		1		96		24		774
Charge-offs	(12)		(69)		(20)		—		(1)		(3)		(71)		(8)		(184)
Recoveries	—		8		—		1		8		4		5		1		27
Net (charge-offs) recoveries	(12)		(61)		(20)		1		7		1		(66)		(7)		(157)

Allowance for credit losses – end of period	$	151	$	401	$	320	$	8	$	(5)	$	15	$	167	$	27	$	1,084

(1)For loans that are transferred to held for sale, the existing allowance for credit losses at the time of transfer are recognized as a charge-off to the extent fair value is less than amortized cost and attributable to credit. Any remaining allowance for credit losses is released as a reduction to the provision for credit losses.

During the third quarter of 2021, we transferred certain commercial real estate loans to held for sale and, as a result, we released $24 million of the existing allowance for credit losses as a reduction to the provision for credit losses.

During the second quarter of 2021, we made the decision to exit our mass market retail banking business as well as our remaining retail credit card portfolio which resulted in the transfer of certain loans to held for sale. As a result of transferring these loans to held for sale, during the nine months ended September 30, 2021, we recognized $56 million of the existing allowance for credit losses on consumer loans as charge-offs, primarily related to non-performing credit cards, and released $100 million of the existing allowance for credit losses on consumer loans as reductions to the provision for credit losses, primarily related to credit cards. The existing commercial allowance for credit losses on the retail business banking loan portfolio transferred to held for sale was not material. See Note 3, "Branch Assets and Liabilities Held for Sale."

(2)See Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," in our 2020 ~~and 2019:~~

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 September 30, 2020
Allowance for credit losses – beginning of period $ 120 $ 434 $ 424 $ 5 $ (19) $ 16 $ 190 $ 22 $ 1,192
Provision charged (credited) to income 43 (36) (103) 3 12 (1) (2) 9 (75)
Charge-offs (12) (2) (1) 0 (1) (1) (23) (4) (44)
Recoveries 0 5 0 0 3 1 2 0 11
Net (charge-offs) recoveries (12) 3 (1) 0 2 0 (21) (4) (33)
Allowance for credit losses – end of period $ 151 $ 401 $ 320 $ 8 $ (5) $ 15 $ 167 $ 27 $ 1,084
Three Months Ended September 30, 2019
Allowance for credit losses – beginning of period $ 149 $ 251 $ 110 $ 9 $ 11 $ 7 $ 71 $ 5 $ 613
Provision charged (credited) to income 27 32 1 0 (1) (1) 34 2 94
Charge-offs 0 (18) 0 0 (1) (1) (17) 0 (37)
Recoveries 0 2 0 0 2 1 1 0 6
Net (charge-offs) recoveries 0 (16) 0 0 1 0 (16) 0 (31)
Allowance for credit losses – end of period $ 176 $ 267 $ 111 $ 9 $ 11 $ 6 $ 89 $ 7 $ 676
Nine Months Ended September 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, adjusted 41 179 157 4 (74) 13 137 10 467
Provision charged (credited) to income 122 283 183 3 62 1 96 24 774
Charge-offs (12) (69) (20) 0 (1) (3) (71) (8) (184)
Recoveries 0 8 0 1 8 4 5 1 27
Net (charge-offs) recoveries (12) (61) (20) 1 7 1 (66) (7) (157)
Allowance for credit losses – end of period $ 151 $ 401 $ 320 $ 8 $ (5) $ 15 $ 167 $ 27 $ 1,084
Nine Months Ended September 30, 2019
Allowance for credit losses – beginning of period $ 116 $ 219 $ 108 $ 15 $ 13 $ 7 $ 58 $ 5 $ 541
Provision charged (credited) to income 60 67 6 (6) (1) (1) 69 4 198
Charge-offs 0 (22) (3) 0 (8) (3) (42) (3) (81)
Recoveries 0 3 0 0 7 3 4 1 18
Net (charge-offs) recoveries 0 (19) (3) 0 (1) 0 (38) (2) (63)
Allowance for credit losses – end of period $ 176 $ 267 $ 111 $ 9 $ 11 $ 6 $ 89 $ 7 $ 676
Form 10-K for additional discussion.


HSBC USA Inc.

The following table summarizes the changes in the liability for off-balance sheet credit exposures during the three and nine months ended September 30, 2021 and 2020:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(in millions)
Balance at beginning of period	$	128	$	253	$	237	$	104
Cumulative effect adjustment to initially apply new accounting guidance for measuring credit losses(1)	—		—		—		54
Balance at beginning of period, adjusted	128		253		237		158
Provision charged (credited) to income	(18)		(28)		(127)		67
Balance at end of period	$	110	$	225	$	110	$	225

(1)See Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," in our 2020 ~~and 2019:~~

Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in millions)
Balance at beginning of period $ 253 $ 90 $ 104 $ 96
Cumulative effect adjustment to initially apply new accounting guidance for measuring credit losses 0 0 54 0
Balance at beginning of period, adjusted 253 90 158 96
Provision charged (credited) to income (28) (1) 67 (7)
Balance at end of period $ 225 $ 89 $ 225 $ 89
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 4,5, "Securities," and Note 5,6, "Loans."

~~September 30, 2020~~

~~(in millions)~~

~~Accrued interest receivables:~~

~~Loans~~

~~152~~

~~Securities held-to-maturity~~

~~Other financial assets measured at amortized cost~~

~~Securities available-for-sale~~

~~104~~

~~Total accrued interest receivables~~

~~283~~

~~Allowance for credit losses~~

~~Accrued interest receivables, net~~

~~281~~


	September 30, 2021		December 31, 2020
	(in millions)
Accrued interest receivables:
Loans	$	125	$	140
Securities held-to-maturity	15		23
Other financial assets measured at amortized cost	2		1
Securities available-for-sale	87		100
Total accrued interest receivables	229		264
Allowance for credit losses	—		2
Accrued interest receivables, net	$	229	$	262

During the three and nine months ended September 30, ~~2020,~~2021, we charged-off accrued interest receivables by reversing interest income for loans of $1 million and $3 million, respectively, compared with $1 million and $5 million during the three and nine months ended September 30, 2020, respectively.


HSBC USA Inc.

8. Loans Held for Sale

Loans held for sale consisted of the following:


		September 30, 2020		December 31, 2019			September 30, 2021		December 31, 2020
		(in millions)							(in millions)
Commercial loans:	Commercial loans:					Commercial loans:
Real estate, including construction	Real estate, including construction	$	10	$	83	Real estate, including construction	$	1,123	$	10
Business and corporate banking	Business and corporate banking	0		35		Business and corporate banking	105		—
Global banking	Global banking	183		94		Global banking	63		119
Total commercial	Total commercial	193		212		Total commercial	1,291		129
Consumer loans:	Consumer loans:					Consumer loans:
Residential mortgages	Residential mortgages	89		77		Residential mortgages	2,449		208

Home equity mortgages						Home equity mortgages	257		—
Credit cards						Credit cards	785		—
Other consumer						Other consumer	145		—
Total consumer	Total consumer	89		77		Total consumer	3,636		208
Total loans held for sale	Total loans held for sale	$	282	$	289	Total loans held for sale	$	4,927	$	337

Commercial LoansDuring the third quarter of 2021, we transferred $1,123 million of certain commercial real estate loans to held for sale as part of an effort to reduce exposure to this sector and improve returns on risk-weighted assets. There was no lower of amortized cost or fair value adjustment recorded upon transferring these loans to held for sale.~~Included~~

During the second quarter of 2021, as part of our Restructuring Plan we made the decision to exit our mass market retail banking business. See Note 3, "Branch Assets and Liabilities Held for Sale," in the accompanying consolidated financial statements for additional information. As a result, during the second quarter of 2021, we transferred our retail business banking loan portfolio to held for sale with a carrying value of $149 million. The lower of amortized cost or fair value adjustment upon transferring these loans to held for sale was not material. At September 30, 2021, the carrying value of these loans was $105 million.

Also 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 ~~$41~~$63 million and ~~$178~~$36 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. See Note ~~10,~~11, "Fair Value Option," for additional information.


~~HSBC USA Inc.~~

~~Commercial~~In addition, at December 31, 2020, commercial loans held for sale ~~also includes~~included certain other loans that we no longer ~~intend~~intended to hold for investment and ~~were~~ transferred to held for sale which totaled ~~$152 million and $34 million~~$93 million. There were none of these loans remaining at September 30, ~~2020 and December 31, 2019, respectively.~~2021. During the three and nine months ended September 30, ~~2020,~~2021, we ~~recorded $16~~reversed $1 million and ~~$25~~recorded $4 million, respectively, of lower of amortized cost or fair value adjustments associated with the write-down of these commercial loans held for sale as a component of other income (loss) in the consolidated statement of income (loss) compared with recording 0$16 million and $25 million of lower of amortized cost or fair value adjustments ~~on commercial loans held for sale~~ during ~~both~~ the three and nine months ended September 30, ~~2019.~~2020, respectively.

Consumer Loans ~~Included~~As discussed above, during the second quarter of 2021, as part of our Restructuring Plan we made the decision to exit our mass market retail banking business as well as our remaining retail credit card portfolio. As a result, during the second quarter of 2021, we transferred certain consumer loans to held for sale, including loans related to the branch disposal group, with a carrying value which collectively totaled $3,616 million, including $2,364 million of residential mortgages, $265 million of home equity mortgages, $829 million of credit cards and $158 million of other consumer loans. There was no lower of amortized cost or fair value adjustment recorded upon transferring these loans to held for sale. At September 30, 2021, the carrying value of these loans collectively totaled $3,584 million, including $2,397 million of residential mortgages (reflecting additional residential mortgage originations to mass market retail banking customers), $257 million of home equity mortgages, $785 million of credit cards and $145 million of other consumer loans.

Also included in residential mortgage loans held for sale are agency-eligible conforming 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).


HSBC USA Inc.

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. Interest rate risk for ~~agency-eligible~~ residential mortgage loans which are originated and 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 ~~NaN~~losses of $1 million and $2 million during the three and nine months ended September 30, 2021, respectively, compared with nil and a loss of $1 million during the three and nine months ended September 30, 2020, ~~respectively, compared with income of $1 million and a loss of $1 million during the three and nine months ended September 30, 2019,~~ respectively.

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 ~~NaN~~$1 million and ~~$2 million~~nil at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The valuation allowance on commercial loans held for sale was ~~$17~~nil and $1 million ~~and NaN~~ at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

8.9. Goodwill ~~and Other Long-Lived Assets~~

Goodwill was $458 million ~~and $1,242 million~~ at both September 30, ~~2020~~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 third 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 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 third quarter of 2020, we completed our annual impairment test of goodwill and determined that the fair value of our Commercial Banking reporting unit exceeded its carrying value, including goodwill.

During the third quarter of 2019, we completed our annual impairment test of goodwill and determined that the fair value of our Commercial Banking and Private Banking reporting units exceeded or approximated their carrying values, including goodwill. However, the cash flow projections for our Retail Banking and Wealth Management reporting unit were significantly lower than previous estimates due to changes in circumstances at that time, in particular changes to the interest rate environment as a result of slowing economic growth along with various revenue headwinds such as increased competition for deposits and a shift


~~HSBC USA Inc.~~

in demand to lower fee wealth products, as well as higher levels of allocated capital which, in conjunction with valuation estimates determined under a market approach, resulted in a fair value that was significantly lower than its book value, including goodwill. As a result, we recorded a non-cash impairment charge of $365 million, representing a portion of the $737 million of goodwill previously allocated to this reporting unit.

~~Other Long-Lived Assets~~ In September 2020, in connection with the development of our 2021 five-year operating plan, we prepared updated cash flow projections for our Wealth and Personal Banking, Commercial Banking and Global Banking and Markets business segments. These updated cash flows reflected a continued decline in forecasted profitability driven by an expected longer-term adverse impact to the business climate as a result of the COVID-19 pandemic. As a result, we tested long-lived assets comprising capitalized software, property, plant and equipment and operating lease right of use assets for impairment at September 30, 2020. The recoverability test was performed at the business segment level which is the lowest level for which cash flows are available. We concluded that the undiscounted cash flow projections based on these business forecasts exceeded carrying value in all cases.

9.10. 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.


HSBC USA Inc.


		September 30, 2020						December 31, 2019							September 30, 2021				December 31, 2020
		Derivative Assets		Derivative Liabilities		Derivative Assets		Derivative Liabilities			Derivative Assets		Derivative Liabilities		Derivative Assets		Derivative Liabilities
		(in millions)															(in millions)
Derivatives accounted for as fair value hedges⁽¹⁾	Derivatives accounted for as fair value hedges⁽¹⁾									Derivatives accounted for as fair value hedges(1)

OTC-cleared⁽²⁾		$	0	$	1	$	0	$	1
Bilateral OTC⁽²⁾		0		6		0		164
Interest rate contracts		0		7		0		165

Interest rate contracts - bilateral OTC(2)										Interest rate contracts - bilateral OTC(2)	$	—	$	16	$	—	$	2

Derivatives accounted for as cash flow hedges⁽¹⁾	Derivatives accounted for as cash flow hedges⁽¹⁾									Derivatives accounted for as cash flow hedges(1)

Foreign exchange contracts - bilateral OTC⁽²⁾	Foreign exchange contracts - bilateral OTC⁽²⁾	11		16		16		20		Foreign exchange contracts - bilateral OTC(2)	6		—		—		53

Interest rate contracts - bilateral OTC⁽²⁾		0		0		0		1

Total derivatives accounted for as hedges	Total derivatives accounted for as hedges	11		23		16		186		Total derivatives accounted for as hedges	6		16		—		55
Trading derivatives not accounted for as hedges⁽³⁾	Trading derivatives not accounted for as hedges⁽³⁾									Trading derivatives not accounted for as hedges(3)
Exchange-traded⁽²⁾	Exchange-traded⁽²⁾	11		8		110		3		Exchange-traded(2)	2		1		14		9
OTC-cleared⁽²⁾	OTC-cleared⁽²⁾	94		0		167		29		OTC-cleared(2)	18		—		—		58
Bilateral OTC⁽²⁾	Bilateral OTC⁽²⁾	7,496		8,041		11,990		13,324		Bilateral OTC(2)	3,068		2,978		6,584		6,555
Interest rate contracts⁽⁴⁾	Interest rate contracts⁽⁴⁾	7,601		8,049		12,267		13,356		Interest rate contracts(4)	3,088		2,979		6,598		6,622
Exchange-traded⁽²⁾	Exchange-traded⁽²⁾	0		1		80		0		Exchange-traded(2)	—		2		—		—
OTC-cleared ⁽²⁾	OTC-cleared ⁽²⁾	0		34		0		0		OTC-cleared (2)	60		—		168		—
Bilateral OTC⁽²⁾	Bilateral OTC⁽²⁾	15,583		14,267		16,440		15,786		Bilateral OTC(2)	11,738		11,542		18,299		18,549
Foreign exchange contracts	Foreign exchange contracts	15,583		14,302		16,520		15,786		Foreign exchange contracts	11,798		11,544		18,467		18,549
Exchange-traded(2)										Exchange-traded(2)	1		4		—		—

Equity contracts - Bilateral OTC⁽²⁾		4,335		4,410		3,753		3,993

Bilateral OTC(2)										Bilateral OTC(2)	885		692		4,009		4,200
Equity contracts										Equity contracts	886		696		4,009		4,200
Exchange-traded⁽²⁾	Exchange-traded⁽²⁾	6		104		71		80		Exchange-traded(2)	4		1		—		28

Bilateral OTC⁽²⁾	Bilateral OTC⁽²⁾	1,834		1,690		1,087		1,309		Bilateral OTC(2)	1,404		951		1,323		1,550
Precious metals contracts	Precious metals contracts	1,840		1,794		1,158		1,389		Precious metals contracts	1,408		952		1,323		1,578

OTC-cleared⁽²⁾		118		0		1		0
Bilateral OTC⁽²⁾		546		626		1,138		1,024
Credit contracts		664		626		1,139		1,024

Credit contracts - bilateral OTC(2)										Credit contracts - bilateral OTC(2)	36		23		367		233

Other non-qualifying derivatives not accounted for as hedges⁽¹⁾	Other non-qualifying derivatives not accounted for as hedges⁽¹⁾									Other non-qualifying derivatives not accounted for as hedges(1)

Interest rate contracts - bilateral OTC⁽²⁾	Interest rate contracts - bilateral OTC⁽²⁾	97		1		128		51		Interest rate contracts - bilateral OTC(2)	55		2		89		1

Foreign exchange contracts - bilateral OTC⁽²⁾	Foreign exchange contracts - bilateral OTC⁽²⁾	0		2		0		0		Foreign exchange contracts - bilateral OTC(2)	—		1		—		1

Equity contracts - bilateral OTC⁽²⁾	Equity contracts - bilateral OTC⁽²⁾	1,023		258		1,354		75		Equity contracts - bilateral OTC(2)	1,469		128		1,607		91

OTC-cleared⁽²⁾	OTC-cleared⁽²⁾	0		7		0		0		OTC-cleared(2)	—		13		—		14
Bilateral OTC⁽²⁾	Bilateral OTC⁽²⁾	1		51		0		44		Bilateral OTC(2)	—		42		—		50
Credit contracts	Credit contracts	1		58		0		44		Credit contracts	—		55		—		64

Other contracts - bilateral OTC⁽²⁾⁽⁵⁾	Other contracts - bilateral OTC⁽²⁾⁽⁵⁾	9		68		10		85		Other contracts - bilateral OTC(2)(5)	5		44		8		67
Total derivatives	Total derivatives	31,164		29,591		36,345		35,989		Total derivatives	18,751		16,440		32,468		31,461
Less: Gross amounts of receivable / payable subject to enforceable master netting agreements⁽⁶⁾⁽⁸⁾	Less: Gross amounts of receivable / payable subject to enforceable master netting agreements⁽⁶⁾⁽⁸⁾	23,315		23,315		29,510		29,510		Less: Gross amounts of receivable / payable subject to enforceable master netting agreements(6)(8)	13,172		13,172		25,537		25,537
Less: Gross amounts of cash collateral received / posted subject to enforceable master netting agreements⁽⁷⁾⁽⁸⁾	Less: Gross amounts of cash collateral received / posted subject to enforceable master netting agreements⁽⁷⁾⁽⁸⁾	4,901		3,308		3,683		4,390		Less: Gross amounts of cash collateral received / posted subject to enforceable master netting agreements(7)(8)	3,577		1,518		4,079		3,377
Net amounts of derivative assets / liabilities presented in the balance sheet	Net amounts of derivative assets / liabilities presented in the balance sheet	2,948		2,968		3,152		2,089		Net amounts of derivative assets / liabilities presented in the balance sheet	2,002		1,750		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 sheet	Less: Gross amounts of financial instrument collateral received / posted subject to enforceable master netting agreements but not offset in the consolidated balance sheet	584		824		891		553		Less: Gross amounts of financial instrument collateral received / posted subject to enforceable master netting agreements but not offset in the consolidated balance sheet	222		74		817		691

Net amounts of derivative assets / liabilities	Net amounts of derivative assets / liabilities	$	2,364	$	2,144	$	2,261	$	1,536	Net amounts of derivative assets / liabilities	$	1,780	$	1,676	$	2,035	$	1,856

⁽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 September 30, ~~2020~~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)


~~HSBC USA Inc.~~

⁽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.

³⁹


HSBC USA Inc.

(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.

See Note ~~18,~~19, "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 September 30, ~~2020~~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												Carrying Amount of Hedged Items(1)				Cumulative Amount of Fair Value Hedging Adjustments Increasing (Decreasing) the Carrying Amount of Hedged Items
						Active		Discontinued				Total	Carrying Amount of Hedged Items(1)							Discontinued			Total
		(in millions)															(in millions)
At September 30, 2020
At September 30, 2021										At September 30, 2021
Securities available-for-sale ("AFS")	Securities available-for-sale ("AFS")	$	9,024	$	963	$	763	$	1,726	Securities available-for-sale ("AFS")	$	7,871		$	(92)			$	1,033		$	941
Deposits⁽²⁾		5,252		252		0		252
Deposits										Deposits	1,621		(11)			132				121
Long-term debt	Long-term debt	2,244		260		(16)		244		Long-term debt	5,646		(12)			158				146
At December 31, 2019
At December 31, 2020										At December 31, 2020
Securities AFS	Securities AFS	7,277		554		428		982		Securities AFS	7,966		681			738				1,419
Deposits										Deposits	5,214		214			—				214
Long-term debt	Long-term debt	10,975		285		(32)		253		Long-term debt	2,227		242			(15)				227

⁽¹⁾The carrying amount of securities AFS represents the amortized cost basis.

⁽²⁾During the first nine months of 2020, $5.0 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 Derivatives		Gain (Loss) on Hedged Items
		Location of Gain (Loss) Recognized in Income	Gain (Loss) on Derivatives		Gain (Loss) on Hedged Items

									(in millions)
Three Months Ended September 30, 2021							Three Months Ended September 30, 2021
Interest rate contracts / Securities AFS							Interest rate contracts / Securities AFS	Net interest income	$	29		$	(4)
Interest rate contracts / Deposits							Interest rate contracts / Deposits	Net interest income	(3)			(13)
Interest rate contracts / Long-term debt							Interest rate contracts / Long-term debt	Net interest income	2			(17)
Total							Total		$	28		$	(34)
			(in millions)
Three Months Ended September 30, 2020	Three Months Ended September 30, 2020						Three Months Ended September 30, 2020
Interest rate contracts / Securities AFS	Interest rate contracts / Securities AFS	Net interest income	$	182	$	(135)	Interest rate contracts / Securities AFS	Net interest income	$	182		$	(135)
Interest rate contracts / Deposits	Interest rate contracts / Deposits	Net interest income	33		(69)		Interest rate contracts / Deposits	Net interest income	33			(69)
Interest rate contracts / Long-term debt	Interest rate contracts / Long-term debt	Net interest income	(56)		32		Interest rate contracts / Long-term debt	Net interest income	(56)			32
Total	Total		$	159	$	(172)	Total		$	159		$	(172)

Three Months Ended September 30, 2019
Nine Months Ended September 30, 2021							Nine Months Ended September 30, 2021
Interest rate contracts / Securities AFS	Interest rate contracts / Securities AFS	Net interest income	$	(327)	$	415	Interest rate contracts / Securities AFS	Net interest income	$	221		$	(144)

Interest rate contracts / Deposits							Interest rate contracts / Deposits	Net interest income	(35)			(5)
Interest rate contracts / Long-term debt	Interest rate contracts / Long-term debt	Net interest income	51		(173)		Interest rate contracts / Long-term debt	Net interest income	(12)			(28)
Total	Total		$	(276)	$	242	Total		$	174		$	(177)

Nine Months Ended September 30, 2020	Nine Months Ended September 30, 2020						Nine Months Ended September 30, 2020
Interest rate contracts / Securities AFS	Interest rate contracts / Securities AFS	Net interest income	$	(962)	$	1,095	Interest rate contracts / Securities AFS	Net interest income	$	(962)		$	1,095
Interest rate contracts / Deposits	Interest rate contracts / Deposits	Net interest income	153		(250)		Interest rate contracts / Deposits	Net interest income	153			(250)
Interest rate contracts / Long-term debt	Interest rate contracts / Long-term debt	Net interest income	171		(258)		Interest rate contracts / Long-term debt	Net interest income	171			(258)
Total	Total		$	(638)	$	587	Total		$	(638)		$	587

Nine Months Ended September 30, 2019
Interest rate contracts / Securities AFS		Net interest income	$	(988)	$	1,253
Interest rate contracts / Long-term debt		Net interest income	288		(662)
Total			$	(700)	$	591

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.~~income (loss). 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 September 30, ~~2020,~~2021, active cash flow hedge relationships extend or mature through ~~March 2023.~~September 2024. During the three and nine months ended September 30, ~~2020,~~2021, respectively, $1$6 million and ~~$11~~$9 million of ~~losses~~gains related to discontinued cash flow hedge relationships were amortized to earnings from AOCI compared with losses of $8$1 million and ~~$27~~$11 million during the three and nine months ended September 30, ~~2019,~~2020, respectively. During the next twelve months, we expect to amortize ~~$11~~$1 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										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				2021			2020		Location of Gain (Loss) Reclassified from AOCI into Income					2021				2020
		(in millions)																					(in millions)
Three Months Ended September 30,	Three Months Ended September 30,														Three Months Ended September 30,
Foreign exchange contracts	Foreign exchange contracts	$	0	$	1	Net interest income	$	0		$	0		Foreign exchange contracts	$	—		$	—					Net interest income			$	—			$	—
Interest rate contracts	Interest rate contracts	(14)		(22)		Net interest income	(1)			(8)			Interest rate contracts	(3)			(14)					Net interest income		6				(1)
Total	Total	$	(14)	$	(21)		$	(1)		$	(8)		Total	$	(3)		$	(14)						$	6			$	(1)

Nine Months Ended September 30,	Nine Months Ended September 30,														Nine Months Ended September 30,
Foreign exchange contracts	Foreign exchange contracts	$	0	$	2	Net interest income	$	0		$	0		Foreign exchange contracts	$	(1)		$	—				Net interest income		$	—			$	—
Interest rate contracts	Interest rate contracts	99		(17)		Net interest income	(11)			(27)			Interest rate contracts	(27)			99					Net interest income		9				(11)
Total	Total	$	99	$	(15)		$	(11)		$	(27)		Total	$	(28)		$	99						$	9			$	(11)

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.~~revenue (expense). 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.~~revenue (expense).

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).

•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,~~19, "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 which are originated and 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). See Note 7,8, "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 September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in millions)
Interest rate contracts Trading revenue $ 773 $ (77) $ 655 $ (192)
Foreign exchange contracts Trading revenue (355) (7) (1,164) 232
Equity contracts Trading revenue (385) 11 683 (139)
Precious metals contracts Trading revenue 67 36 450 89
Credit contracts Trading revenue 16 (179) (606) (446)
Total $ 116 $ (216) $ 18 $ (456)

The significant gains and losses recognized in trading revenue on derivatives during the three and nine months ended September 30, 2020 primarily reflects the impact of market volatility driven by the COVID-19 pandemic.


	Location of Gain (Loss) Recognized in Income on Derivatives	Gain (Loss) Recognized in Income on Derivatives
		Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020
		(in millions)
Interest rate contracts	Trading revenue (expense)	$	45	$	773	$	197	$	655

Foreign exchange contracts	Trading revenue (expense)	(56)		(355)		112		(1,164)
Equity contracts	Trading revenue (expense)	(20)		(385)		(1,000)		683
Precious metals contracts	Trading revenue (expense)	74		67		115		450
Credit contracts	Trading revenue (expense)	(70)		16		101		(606)
Total		$	(27)	$	116	$	(475)	$	18

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																					Location of Gain (Loss) Recognized in Income on Derivatives			Gain (Loss) Recognized in Income on Derivatives
					Three Months Ended September 30,							Nine Months Ended September 30,															Three Months Ended September 30,							Nine Months Ended September 30,
					2020		2019			2020		2019					Location of Gain (Loss) Recognized in Income on Derivatives	2021				2020							2021				2020
			(in millions)																				(in millions)
Interest rate contracts	Interest rate contracts	Gain (loss) on instruments designated at fair value and related derivatives	$	(13)	$	131		$	256	$	467		Interest rate contracts	Gain on instruments designated at fair value and related derivatives	$			$	(13)					$	(62)				$	256
Interest rate contracts	Interest rate contracts	Other income (loss)	0		1			(1)		(1)			Interest rate contracts	Other income (loss)	(1)						—							(2)				(1)
Foreign exchange contracts	Foreign exchange contracts	Gain (loss) on instruments designated at fair value and related derivatives	0		(4)			(2)		(4)			Foreign exchange contracts	Gain on instruments designated at fair value and related derivatives	—			—						—					(2)
Equity contracts	Equity contracts	Gain (loss) on instruments designated at fair value and related derivatives	306		68			(307)		1,306			Equity contracts	Gain on instruments designated at fair value and related derivatives	(62)			306						810					(307)

Credit contracts	Credit contracts	Gain (loss) on instruments designated at fair value and related derivatives	0		0			37		0			Credit contracts	Gain on instruments designated at fair value and related derivatives	—			—						—					37
Credit contracts	Credit contracts	Other income (loss)	(15)		(3)			(2)		(17)			Credit contracts	Other income (loss)	(5)			(15)						(17)					(2)
Other contracts⁽¹⁾	Other contracts⁽¹⁾	Other income (loss)	(2)		(4)			(3)		(13)			Other contracts(1)	Other income (loss)	3			(2)						—					(3)
Total	Total		$	276	$	189		$	(22)	$	1,738		Total		$	(73)			$	276					$	729				$	(22)

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


HSBC USA Inc.

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 September 30, ~~2020~~2021 was ~~$645~~$355 million, for which we had posted collateral of ~~$537~~$117 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, ~~2019~~2020 was ~~$611~~$221 million, for which we had posted collateral of ~~$316~~$67 million. Substantially all of the collateral posted is in the form of cash or securities available-for-sale. See Note ~~18,~~19, "Guarantee Arrangements, Pledged Assets and Repurchase Agreements," for further details.


~~HSBC USA Inc.~~

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 downgrade Two-notch downgrade
(in millions)
Amount of additional collateral to be posted upon downgrade $ 1 $ 89


	One-notch downgrade		Two-notch downgrade
	(in millions)
Amount of additional collateral to be posted upon downgrade	$	20	$	67

Notional Value of Derivative Contracts The following table summarizes the notional values of derivative contracts:


		September 30, 2020		December 31, 2019			September 30, 2021		December 31, 2020
		(in millions)							(in millions)
Interest rate:	Interest rate:					Interest rate:
Futures and forwards	Futures and forwards	$	298,841	$	597,980	Futures and forwards	$	53,008	$	37,098
Swaps	Swaps	1,166,115		2,130,442		Swaps	298,670		406,609
Options written	Options written	53,736		158,861		Options written	11,924		33,269
Options purchased	Options purchased	50,589		164,265		Options purchased	11,825		32,427
		1,569,281		3,051,548
Total interest rate						Total interest rate	375,427		509,403
Foreign exchange:	Foreign exchange:					Foreign exchange:
Swaps, futures and forwards	Swaps, futures and forwards	1,161,461		1,362,959		Swaps, futures and forwards	1,011,881		1,195,449
Options written	Options written	37,854		44,876		Options written	34,689		53,200
Options purchased	Options purchased	38,261		46,085		Options purchased	34,772		53,595
Spot	Spot	46,425		67,060		Spot	62,981		57,040
		1,284,001		1,520,980
Total foreign exchange						Total foreign exchange	1,144,323		1,359,284
Commodities, equities and precious metals:	Commodities, equities and precious metals:					Commodities, equities and precious metals:
Swaps, futures and forwards	Swaps, futures and forwards	63,718		55,678		Swaps, futures and forwards	64,012		54,458
Options written	Options written	33,745		39,035		Options written	2,708		17,078
Options purchased	Options purchased	43,967		49,517		Options purchased	11,613		27,083
		141,430		144,230
Total commodities, equities and precious metals						Total commodities, equities and precious metals	78,333		98,619
Credit derivatives	Credit derivatives	78,645		90,049		Credit derivatives	7,465		52,611
Other contracts⁽¹⁾	Other contracts⁽¹⁾	1,111		1,044		Other contracts(1)	1,238		1,216
Total	Total	$	3,074,468	$	4,807,851	Total	$	1,606,786	$	2,021,133

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


HSBC USA Inc.

~~10.~~11. 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).

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, we~~We 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 rate~~floating-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 summarized in the table below. At September 30, ~~2020~~2021 and December 31, ~~2019, 0~~2020, no 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 Value		Unpaid Principal Balance		Fair Value Over (Under) Unpaid Principal Balance			Fair Value		Unpaid Principal Balance		Fair Value Over (Under) Unpaid Principal Balance
		(in millions)											(in millions)
At September 30, 2020
At September 30, 2021								At September 30, 2021
Student loans held for investment	Student loans held for investment	$	34	$	36	$	(2)	Student loans held for investment	$	27	$	29	$	(2)
Commercial loans held for sale	Commercial loans held for sale	41		48		(7)		Commercial loans held for sale	63		63		—

Fixed rate long-term debt	Fixed rate long-term debt	995		741		254		Fixed rate long-term debt	945		741		204
Hybrid instruments:	Hybrid instruments:							Hybrid instruments:
Structured deposits	Structured deposits	4,723		4,471		252		Structured deposits	2,970		2,706		264
Structured notes	Structured notes	8,793		8,147		646		Structured notes	8,790		7,609		1,181
At December 31, 2019
At December 31, 2020								At December 31, 2020
Student loans held for investment								Student loans held for investment	$	32	$	34	$	(2)
Commercial loans held for sale	Commercial loans held for sale	$	178	$	189	$	(11)	Commercial loans held for sale	36		36		—

Securities sold under repurchase agreements		373		373		0

Fixed rate long-term debt	Fixed rate long-term debt	959		741		218		Fixed rate long-term debt	1,030		741		289
Hybrid instruments:	Hybrid instruments:							Hybrid instruments:
Structured deposits	Structured deposits	7,209		7,491		(282)		Structured deposits	4,155		3,844		311
Structured notes	Structured notes	9,388		8,187		1,201		Structured notes	9,695		8,332		1,363


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 nine months ended September 30, ~~2020~~2021 and ~~2019:~~2020:


		Loans and Loans Held for Sale		Long-Term Debt		Hybrid Instruments		Total			Loans and Loans Held for Sale		Long-Term Debt		Hybrid Instruments		Total
											(in millions)
Three Months Ended September 30, 2021										Three Months Ended September 30, 2021
Interest rate and other components(1)										Interest rate and other components(1)	$	—	$	16	$	62	$	78
Credit risk component(2)										Credit risk component(2)	—		—		—		—
Total mark-to-market on financial instruments designated at fair value										Total mark-to-market on financial instruments designated at fair value	—		16		62		78
Mark-to-market on related derivatives										Mark-to-market on related derivatives	—		(19)		(61)		(80)
Net realized gain on related long-term debt derivatives										Net realized gain on related long-term debt derivatives	—		10		—		10
Gain (loss) on instruments designated at fair value and related derivatives										Gain (loss) on instruments designated at fair value and related derivatives	$	—	$	7	$	1	$	8
		(in millions)
Three Months Ended September 30, 2020	Three Months Ended September 30, 2020									Three Months Ended September 30, 2020
Interest rate and other components⁽¹⁾	Interest rate and other components⁽¹⁾	$	0	$	18	$	(292)	$	(274)	Interest rate and other components(1)	$	—	$	18	$	(292)	$	(274)
Credit risk component⁽²⁾	Credit risk component⁽²⁾	(4)		—		0		(4)		Credit risk component(2)	(4)		—		—		(4)
Total mark-to-market on financial instruments designated at fair value	Total mark-to-market on financial instruments designated at fair value	(4)		18		(292)		(278)		Total mark-to-market on financial instruments designated at fair value	(4)		18		(292)		(278)
Mark-to-market on related derivatives	Mark-to-market on related derivatives	0		(24)		307		283		Mark-to-market on related derivatives	—		(24)		307		283
Net realized gain on related long-term debt derivatives	Net realized gain on related long-term debt derivatives	0		10		0		10		Net realized gain on related long-term debt derivatives	—		10		—		10
Gain (loss) on instruments designated at fair value and related derivatives	Gain (loss) on instruments designated at fair value and related derivatives	$	(4)	$	4	$	15	$	15	Gain (loss) on instruments designated at fair value and related derivatives	$	(4)	$	4	$	15	$	15

Three Months Ended September 30, 2019
Nine Months Ended September 30, 2021										Nine Months Ended September 30, 2021
Interest rate and other components⁽¹⁾	Interest rate and other components⁽¹⁾	$	0	$	(115)	$	(98)	$	(213)	Interest rate and other components(1)	$	—	$	75	$	(791)	$	(716)
Credit risk component⁽²⁾	Credit risk component⁽²⁾	(1)		0		0		(1)		Credit risk component(2)	1		—		—		1
Total mark-to-market on financial instruments designated at fair value	Total mark-to-market on financial instruments designated at fair value	(1)		(115)		(98)		(214)		Total mark-to-market on financial instruments designated at fair value	1		75		(791)		(715)
Mark-to-market on related derivatives	Mark-to-market on related derivatives	0		89		95		184		Mark-to-market on related derivatives	—		(85)		804		719
Net realized gain on related long-term debt derivatives	Net realized gain on related long-term debt derivatives	0		11		0		11		Net realized gain on related long-term debt derivatives	—		29		—		29
Gain (loss) on instruments designated at fair value and related derivatives	Gain (loss) on instruments designated at fair value and related derivatives	$	(1)	$	(15)	$	(3)	$	(19)	Gain (loss) on instruments designated at fair value and related derivatives	$	1	$	19	$	13	$	33

Nine Months Ended September 30, 2020	Nine Months Ended September 30, 2020									Nine Months Ended September 30, 2020
Interest rate and other components⁽¹⁾	Interest rate and other components⁽¹⁾	$	0	$	(114)	$	198	$	84	Interest rate and other components(1)	$	—	$	(114)	$	198	$	84
Credit risk component⁽²⁾⁽³⁾	Credit risk component⁽²⁾⁽³⁾	(53)		0		0		(53)		Credit risk component(2)(3)	(53)		—		—		(53)
Total mark-to-market on financial instruments designated at fair value	Total mark-to-market on financial instruments designated at fair value	(53)		(114)		198		31		Total mark-to-market on financial instruments designated at fair value	(53)		(114)		198		31
Mark-to-market on related derivatives	Mark-to-market on related derivatives	37		126		(203)		(40)		Mark-to-market on related derivatives	37		126		(203)		(40)
Net realized gain on related long-term debt derivatives	Net realized gain on related long-term debt derivatives	0		24		0		24		Net realized gain on related long-term debt derivatives	—		24		—		24
Gain (loss) on instruments designated at fair value and related derivatives	Gain (loss) on instruments designated at fair value and related derivatives	$	(16)	$	36	$	(5)	$	15	Gain (loss) on instruments designated at fair value and related derivatives	$	(16)	$	36	$	(5)	$	15

Nine Months Ended September 30, 2019
Interest rate and other components⁽¹⁾		$	0	$	(284)	$	(1,532)	$	(1,816)
Credit risk component⁽²⁾		2		0		0		2
Total mark-to-market on financial instruments designated at fair value		2		(284)		(1,532)		(1,814)
Mark-to-market on related derivatives		0		225		1,514		1,739
Net realized gain on related long-term debt derivatives		0		30		0		30
Gain (loss) on instruments designated at fair value and related derivatives		$	2	$	(29)	$	(18)	$	(45)

⁽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.~~income (loss).

⁽³⁾During the nine months ended September 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.~~12. 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 September 30,	Three Months Ended September 30,	2020		2019		Three Months Ended September 30,	2021		2020
		(in millions)							(in millions)
Unrealized gains (losses) on investment securities:	Unrealized gains (losses) on investment securities:					Unrealized gains (losses) on investment securities:
Balance at beginning of period	Balance at beginning of period	$	754	$	(120)	Balance at beginning of period	$	172	$	754
Other comprehensive income (loss) for period:	Other comprehensive income (loss) for period:					Other comprehensive income (loss) for period:
Net unrealized gains arising during period, net of tax of $26 million and $38 million, respectively		84		117
Reclassification adjustment for gains realized in net income (loss), net of tax of $(13) million and $(11) million, respectively⁽¹⁾		(39)		(35)
Reversal of provision for credit losses realized in net income (loss), net of tax of less than $(1) million⁽²⁾		(1)		0
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 $4 million and $1 million, respectively⁽³⁾		12		4
Total other comprehensive income for period		56		86
Net unrealized gains (losses) arising during period, net of tax of $(27) million and $26 million, respectively						Net unrealized gains (losses) arising during period, net of tax of $(27) million and $26 million, respectively	(86)		84
Reclassification adjustment for gains realized in net income (loss), net of tax of $(1) million and $(13) million, respectively(1)						Reclassification adjustment for gains realized in net income (loss), net of tax of $(1) million and $(13) million, respectively(1)	(3)		(39)
Reversal of provision for credit losses realized in net income (loss), net of tax of nil and less than $(1) million, respectively(2)						Reversal of provision for credit losses realized in net income (loss), net of tax of nil and less than $(1) million, respectively(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 $4 million, respectively(3)						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 $4 million, respectively(3)	3		12
Total other comprehensive income (loss) for period						Total other comprehensive income (loss) for period	(86)		56
Balance at end of period	Balance at end of period	810		(34)		Balance at end of period	86		810
Unrealized gains (losses) on fair value option liabilities attributable to our own credit spread:	Unrealized gains (losses) on fair value option liabilities attributable to our own credit spread:					Unrealized gains (losses) on fair value option liabilities attributable to our own credit spread:
Balance at beginning of period	Balance at beginning of period	137		197		Balance at beginning of period	15		137
Other comprehensive income (loss) for period:	Other comprehensive income (loss) for period:					Other comprehensive income (loss) for period:
Net unrealized losses arising during the period, net of tax of $(13) million and $(1) million, respectively		(40)		(3)
Net unrealized gains (losses) arising during period, net of tax of $3 million and $(13) million, respectively						Net unrealized gains (losses) arising during period, net of tax of $3 million and $(13) million, respectively	9		(40)

Total other comprehensive income (loss) for period	Total other comprehensive income (loss) for period	(40)		(3)		Total other comprehensive income (loss) for period	9		(40)
Balance at end of period	Balance at end of period	97		194		Balance at end of period	24		97
Unrealized gains (losses) on derivatives designated as cash flow hedges:	Unrealized gains (losses) on derivatives designated as cash flow hedges:					Unrealized gains (losses) on derivatives designated as cash flow hedges:
Balance at beginning of period	Balance at beginning of period	(58)		(140)		Balance at beginning of period	(100)		(58)
Other comprehensive income (loss) for period:	Other comprehensive income (loss) for period:					Other comprehensive income (loss) for period:
Net unrealized losses arising during period, net of tax of $(4) million and $(4) million, respectively		(10)		(17)
Reclassification adjustment for losses realized in net income (loss), net of tax of $1 million and $1 million, respectively⁽⁴⁾		0		7
Net unrealized losses arising during period, net of tax of $(1) million and $(4) million, respectively						Net unrealized losses arising during period, net of tax of $(1) million and $(4) million, respectively	(2)		(10)
Reclassification adjustment for (gains) losses realized in net income (loss), net of tax of $(1) million and $1 million, respectively(4)						Reclassification adjustment for (gains) losses realized in net income (loss), net of tax of $(1) million and $1 million, respectively(4)	(5)		—
Total other comprehensive loss for period	Total other comprehensive loss for period	(10)		(10)		Total other comprehensive loss for period	(7)		(10)
Balance at end of period	Balance at end of period	(68)		(150)		Balance at end of period	(107)		(68)
Pension and postretirement benefit liability:	Pension and postretirement benefit liability:					Pension and postretirement benefit liability:
Balance at beginning of period	Balance at beginning of period	(3)		8		Balance at beginning of period	(6)		(3)
Other comprehensive income (loss) for period:	Other comprehensive income (loss) for period:					Other comprehensive income (loss) for period:
Change in unfunded pension and postretirement liability, net of tax of $(1) million and less than $(1) million, respectively		(2)		(1)
Change in unfunded pension and postretirement liability, net of tax of nil and $(1) million, respectively						Change in unfunded pension and postretirement liability, net of tax of nil and $(1) million, respectively	—		(2)

Total other comprehensive loss for period		(2)		(1)
Total other comprehensive income for period						Total other comprehensive income for period	—		(2)
Balance at end of period	Balance at end of period	(5)		7		Balance at end of period	(6)		(5)
Total accumulated other comprehensive income at end of period		$	834	$	17
Total accumulated other comprehensive income (loss) at end of period						Total accumulated other comprehensive income (loss) at end of period	$	(3)	$	834


HSBC USA Inc.


Nine Months Ended September 30,	Nine Months Ended September 30,	2020		2019		Nine Months Ended September 30,	2021		2020
		(in millions)							(in millions)
Unrealized gains (losses) on investment securities:	Unrealized gains (losses) on investment securities:					Unrealized gains (losses) on investment securities:
Balance at beginning of period	Balance at beginning of period	$	(116)	$	(519)	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⁽⁵⁾	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		0		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	Balance at beginning of period, adjusted	(114)		(519)		Balance at beginning of period, adjusted	750		(114)
Other comprehensive income (loss) for period:	Other comprehensive income (loss) for period:					Other comprehensive income (loss) for period:
Net unrealized gains arising during period, net of tax of $312 million and $166 million, respectively		990		532
Reclassification adjustment for gains realized in net income (loss), net of tax of $(27) million and $(18) million, respectively⁽¹⁾		(84)		(58)
Reversal of provision for credit losses realized in net income (loss), net of tax of less than $(1) million⁽²⁾		(1)		0
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 $6 million and $3 million, respectively⁽³⁾		19		11
Total other comprehensive income for period		924		485
Net unrealized gains (losses) arising during period, net of tax of $(201) million and $312 million, respectively						Net unrealized gains (losses) arising during period, net of tax of $(201) million and $312 million, respectively	(636)		990
Reclassification adjustment for gains realized in net income (loss), net of tax of $(12) million and $(27) million, respectively(1)						Reclassification adjustment for gains realized in net income (loss), net of tax of $(12) million and $(27) million, respectively(1)	(39)		(84)
Reversal of provision for credit losses realized in net income (loss), net of tax of nil and less than $(1) million, respectively(2)						Reversal of provision for credit losses realized in net income (loss), net of tax of nil and less than $(1) million, respectively(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 $3 million and $6 million, respectively(3)						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 $3 million and $6 million, respectively(3)	11		19
Total other comprehensive income (loss) for period						Total other comprehensive income (loss) for period	(664)		924
Balance at end of period	Balance at end of period	810		(34)		Balance at end of period	86		810
Unrealized gains (losses) on fair value option liabilities attributable to our own credit spread:	Unrealized gains (losses) on fair value option liabilities attributable to our own credit spread:					Unrealized gains (losses) on fair value option liabilities attributable to our own credit spread:
Balance at beginning of period	Balance at beginning of period	(9)		301		Balance at beginning of period	15		(9)

Other comprehensive income (loss) for period:						Other comprehensive income (loss) for period:
Net unrealized gains arising during period, net of tax of $3 million and $33 million, respectively						Net unrealized gains arising during period, net of tax of $3 million and $33 million, respectively	9		106

Other comprehensive income (loss) for period:
Net unrealized gains (losses) arising during period, net of tax of $33 million and $(34) million, respectively		106		(107)

Total other comprehensive income (loss) for period		106		(107)
Total other comprehensive income for period						Total other comprehensive income for period	9		106
Balance at end of period	Balance at end of period	97		194		Balance at end of period	24		97
Unrealized gains (losses) on derivatives designated as cash flow hedges:	Unrealized gains (losses) on derivatives designated as cash flow hedges:					Unrealized gains (losses) on derivatives designated as cash flow hedges:
Balance at beginning of period	Balance at beginning of period	(151)		(159)		Balance at beginning of period	(79)		(151)

Other comprehensive income (loss) for period:	Other comprehensive income (loss) for period:					Other comprehensive income (loss) for period:
Net unrealized gains (losses) arising during period, net of tax of $24 million and $(3) million, respectively		75		(12)
Reclassification adjustment for losses realized in net income (loss), net of tax of $3 million and $6 million, respectively⁽⁴⁾		8		21
Total other comprehensive income for period		83		9
Net unrealized gains (losses) arising during period, net of tax of $(7) million and $24 million, respectively						Net unrealized gains (losses) arising during period, net of tax of $(7) million and $24 million, respectively	(21)		75
Reclassification adjustment for (gains) losses realized in net income (loss), net of tax of $(2) million and $3 million, respectively(4)						Reclassification adjustment for (gains) losses realized in net income (loss), net of tax of $(2) million and $3 million, respectively(4)	(7)		8
Total other comprehensive income (loss) for period						Total other comprehensive income (loss) for period	(28)		83
Balance at end of period	Balance at end of period	(68)		(150)		Balance at end of period	(107)		(68)
Pension and postretirement benefit liability:	Pension and postretirement benefit liability:					Pension and postretirement benefit liability:
Balance at beginning of period	Balance at beginning of period	(3)		11		Balance at beginning of period	(7)		(3)

Other comprehensive income (loss) for period:	Other comprehensive income (loss) for period:					Other comprehensive income (loss) for period:
Change in unfunded pension and postretirement liability, net of tax of $(1) million and $(1) million, respectively		(2)		(4)
Change in unfunded pension and postretirement liability, net of tax of less than $1 million and $(1) million, respectively						Change in unfunded pension and postretirement liability, net of tax of less than $1 million and $(1) million, respectively	1		(2)

Total other comprehensive loss for period		(2)		(4)
Total other comprehensive income (loss) for period						Total other comprehensive income (loss) for period	1		(2)
Balance at end of period	Balance at end of period	(5)		7		Balance at end of period	(6)		(5)
Total accumulated other comprehensive income at end of period		$	834	$	17
Total accumulated other comprehensive income (loss) at end of period						Total accumulated other comprehensive income (loss) at end of period	$	(3)	$	834

⁽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~~2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," in our 2020 Form 10-K for additional discussion.


HSBC USA Inc.

~~12.~~13. 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 September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in millions)
Interest cost on projected benefit obligation $ 11 $ 14 $ 35 $ 43
Expected return on plan assets (14) (20) (53) (57)
Amortization of net actuarial loss 0 4 4 16
Administrative costs 1 1 3 3
Pension (income) expense $ (2) $ (1) $ (11) $ 5

As a result of a significant decrease in yields on fixed income securities driven by the COVID-19 pandemic and subsequent reduction in longer term capital market returns, as well as a shift in investment mix that reduced the Plan's exposure to equity investments, HSBC North America decided to reduce its expected long-term rate of return on Plan assets assumption from 5.00 percent to 3.50 percent, effective beginning July 1, 2020.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(in millions)
Interest cost on projected benefit obligation	$	11	$	11	$	32	$	35
Expected return on plan assets	(15)		(14)		(44)		(53)
Amortization of net actuarial loss	—		—		—		4
Administrative costs	1		1		3		3

Pension (income) expense	$	(3)	$	(2)	$	(9)	$	(11)

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 net~~Net periodic postretirement benefit ~~cost:~~cost was less than $1 million during the three and nine months ended September 30, 2021 and 2020.

Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in millions)
Interest cost on accumulated benefit obligation $ 0 $ 0 $ 1 $ 1
Amortization of net actuarial gain 0 0 (1) (1)
Net periodic postretirement benefit cost $ 0 $ 0 $ 0 $ 0


~~HSBC USA Inc.~~

~~13.~~14. 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 nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020. See Note 22, "Fee Income from Contracts with Customers," in our ~~2019~~2020 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 September 30,						Nine Months Ended September 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2021		2020		2021		2020
		(in millions)															(in millions)
Credit card fees, net	Credit card fees, net	$	10	$	18	$	30	$	48	Credit card fees, net	$	—	$	10	$	23	$	30
Trust and investment management fees	Trust and investment management fees	34		34		98		95		Trust and investment management fees	26		34		81		98
Other fees and commissions:	Other fees and commissions:									Other fees and commissions:
Account services	Account services	66		68		185		201		Account services	73		66		216		185
Credit facilities	Credit facilities	67		73		204		223		Credit facilities	76		67		248		204
Other fees	Other fees	11		14		36		40		Other fees	11		11		32		36
Total other fees and commissions	Total other fees and commissions	144		155		425		464		Total other fees and commissions	160		144		496		425
Servicing and other fees from HSBC affiliates	Servicing and other fees from HSBC affiliates	79		88		255		257		Servicing and other fees from HSBC affiliates	79		79		232		255
Insurance⁽¹⁾	Insurance⁽¹⁾	2		3		6		9		Insurance(1)	2		2		5		6
Total fee income from contracts with customers	Total fee income from contracts with customers	269		298		814		873		Total fee income from contracts with customers	267		269		837		814
Other non-fee revenues	Other non-fee revenues	87		188		393		439		Other non-fee revenues	(25)		87		93		393
Total other revenues⁽²⁾	Total other revenues⁽²⁾	$	356	$	486	$	1,207	$	1,312	Total other revenues(2)	$	242	$	356	$	930	$	1,207

⁽¹⁾Included within other income (loss) in the consolidated statement of income (loss).

⁽²⁾See Note ~~15,~~16, "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, net We recognized interchange fees of $24 million and $68 million during the three and nine months ended September 30, 2021, respectively, compared with $18 million and $53 million during the three and nine months ended September 30, 2020, ~~respectively, compared with $25 million and $73 million during the three and nine months ended September 30, 2019,~~ respectively. Credit card rewards program costs totaled $26 million and $50 million during the three and


HSBC USA Inc.

nine months ended September 30, 2021, respectively, compared with $10 million and $28 million during the three and nine months ended September 30, 2020, ~~respectively, compared with $11 million and $33 million during the three and nine months ended September 30, 2019,~~ respectively.

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,~~19, "Guarantee Arrangements, Pledged Assets and Repurchase Agreements," and Note ~~19,~~20, "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$5 million and $2$3 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. 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 ~~2019~~2020 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.~~15. 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:


		September 30, 2020		December 31, 2019			September 30, 2021		December 31, 2020
		(in millions)							(in millions)
Assets:	Assets:					Assets:
Cash and due from banks	Cash and due from banks	$	677	$	850	Cash and due from banks	$	313	$	516
Interest bearing deposits with banks	Interest bearing deposits with banks	26		40		Interest bearing deposits with banks	2		187
Securities purchased under agreements to resell⁽¹⁾	Securities purchased under agreements to resell⁽¹⁾	2,185		4,600		Securities purchased under agreements to resell(1)	873		3,941
Trading assets	Trading assets	470		79		Trading assets	190		314
Loans	Loans	1,180		2,343		Loans	2,857		1,100
Other⁽²⁾	Other⁽²⁾	360		456		Other(2)	289		319
Total assets	Total assets	$	4,898	$	8,368	Total assets	$	4,524	$	6,377
Liabilities:	Liabilities:					Liabilities:
Deposits	Deposits	$	18,397	$	9,000	Deposits	$	15,624	$	15,163
Trading liabilities(3)	Trading liabilities(3)	324		293		Trading liabilities(3)	223		2,375
Short-term borrowings	Short-term borrowings	949		1,166		Short-term borrowings	390		270
Long-term debt	Long-term debt	2,866		7,848		Long-term debt	5,528		2,878
Other⁽²⁾	Other⁽²⁾	194		931		Other(2)	203		268
Total liabilities	Total liabilities	$	22,730	$	19,238	Total liabilities	$	21,968	$	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 September 30, 2021 primarily reflects a decrease in borrowing of gold inventory from HSBC Bank plc to support client activity levels.


HSBC USA Inc.


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2021		2020		2021		2020
		(in millions)															(in millions)
Income (Expense):	Income (Expense):									Income (Expense):
Interest income	Interest income	$	9	$	44	$	47	$	134	Interest income	$	6	$	9	$	20	$	47
Interest expense	Interest expense	(77)		(151)		(276)		(427)		Interest expense	(52)		(77)		(185)		(276)
Net interest expense	Net interest expense	(68)		(107)		(229)		(293)		Net interest expense	(46)		(68)		(165)		(229)
Trading revenue (expense)	Trading revenue (expense)	(1,755)		551		(2,372)		(972)		Trading revenue (expense)	(1,116)		(1,755)		(2,106)		(2,372)
Servicing and other fees from HSBC affiliates:	Servicing and other fees from HSBC affiliates:									Servicing and other fees from HSBC affiliates:
HSBC Bank plc	HSBC Bank plc	43		40		131		121		HSBC Bank plc	44		43		124		131
HSBC Markets (USA) Inc. ("HMUS")	HSBC Markets (USA) Inc. ("HMUS")	27		27		84		84		HSBC Markets (USA) Inc. ("HMUS")	22		27		70		84

Other HSBC affiliates	Other HSBC affiliates	9		21		40		52		Other HSBC affiliates	13		9		38		40
Total servicing and other fees from HSBC affiliates	Total servicing and other fees from HSBC affiliates	79		88		255		257		Total servicing and other fees from HSBC affiliates	79		79		232		255
Gain (loss) on instruments designated at fair value and related derivatives	Gain (loss) on instruments designated at fair value and related derivatives	307		98		(203)		1,518		Gain (loss) on instruments designated at fair value and related derivatives	(62)		307		803		(203)
Support services from HSBC affiliates:	Support services from HSBC affiliates:									Support services from HSBC affiliates:
HTSU	HTSU	(285)		(274)		(820)		(849)		HTSU	(242)		(285)		(754)		(820)
HMUS	HMUS	(17)		(24)		(63)		(74)		HMUS	(26)		(17)		(72)		(63)
Other HSBC affiliates	Other HSBC affiliates	(89)		(96)		(279)		(262)		Other HSBC affiliates	(121)		(89)		(322)		(279)
Total support services from HSBC affiliates	Total support services from HSBC affiliates	(391)		(394)		(1,162)		(1,185)		Total support services from HSBC affiliates	(389)		(391)		(1,148)		(1,162)
Rental income from HSBC affiliates, net⁽¹⁾	Rental income from HSBC affiliates, net⁽¹⁾	13		16		31		40		Rental income from HSBC affiliates, net(1)	12		13		32		31
Stock based compensation expense⁽²⁾	Stock based compensation expense⁽²⁾	(3)		(6)		(16)		(20)		Stock based compensation expense(2)	(1)		(3)		(12)		(16)

⁽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,~~13, "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 September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, long-term debt with affiliates reflected ~~$2.9~~$5.5 billion and ~~$7.8~~$2.9 billion, respectively, of borrowings from HSBC North America. During the first ~~nine months~~quarter of ~~2020, $5.0 billion~~2021, $850 million of these borrowings were recharacterized as time deposits, including $1.5 billion of fixed-rate senior debt which matures in March 2021, $2.0 billion of fixed-rate senior debt which matures in May 2021 and $1.5 billion of fixed-rate senior debt which matures in March 2026.repaid. The remaining outstanding balances ~~include $0.9 billion of floating-rate subordinated debt which matures in May 2025 and $2.0~~include:

•$2.0 billion of fixed-rate senior debt which matures in September 2025;

•$1.5 billion of fixed-rate senior debt which was issued during the first quarter of 2021 and matures in June 2030; and

•$2.0 billion of fixed-rate senior debt which was issued during the second quarter of 2021 and matures in June 2025.

~~At December 31, 2019, we had a $150 million uncommitted line of credit with HSBC North America. During the third quarter of 2020, this credit facility was terminated and replaced by~~We have a $4.0 billion uncommitted line of credit with HSBC North America. The available borrowing capacity under this ~~new~~ 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~~We had 0 outstanding ~~balance~~borrowing under ~~these~~this credit ~~facilities~~facility at either September 30, ~~2020~~2021 or December 31, ~~2019.~~2020.

We have also incurred short-term borrowings with certain ~~affiliates, largely securities sold under repurchase agreements with HSI.~~affiliates. In addition, certain affiliates have also placed deposits with us.

~~Lending and Derivative Related Arrangements Extended to HSBC Affiliates:~~

~~At September 30, 2020 and December 31, 2019, we had the following loan balances outstanding with HSBC affiliates:~~

September 30, 2020 December 31, 2019
(in millions)
HMUS and subsidiaries $ 1,088 $ 2,296
Other short-term affiliate lending 92 47
Total loans $ 1,180 $ 2,343

5352


HSBC USA Inc.

Lending and Derivative Related Arrangements Extended to HSBC Affiliates:

At September 30, 2021 and December 31, 2020, we had the following loan balances outstanding with HSBC affiliates:


	September 30, 2021		December 31, 2020
	(in millions)

HMUS and subsidiaries	$	1,755	$	1,088

HSBC North America	1,000		—



Other short-term affiliate lending	102		12
Total loans	$	2,857	$	1,100

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~~ September 30, ~~2020~~2021 and December 31, ~~2019~~2020, respectively, of which ~~$1.1~~$1.8 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.

HSBC North America Under the $4.0 billion uncommitted fungible line of credit with HSBC North America as discussed above, there was $1.0 billion and nil outstanding at September 30, 2021 and December 31, 2020, respectively. The outstanding balance matures in April 2022.

We have extended lines of credit to various other HSBC affiliates totaling ~~$3.4~~$3.9 billion and $4.7 billion which did 0tnot have any outstanding balances at either September 30, ~~2020~~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 September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, there were ~~$92~~$102 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 ~~$862.7~~$785.1 billion and ~~$1,111.5~~$923.6 billion at September 30, ~~2020~~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 ~~$491~~$215 million and ~~$90~~$66 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. ~~Our Global Banking and Markets business accounts~~We 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 ~~third quarter of 2020,~~three and nine months ended September 30, 2021, we ~~began~~continued to transfer certain interest rate derivative contracts to HSBC Bank plc as part of our Restructuring Plan. In addition, during the third quarter of 2021, we unwound our remaining legacy structured credit products which resulted in the sale of our remaining non-government asset-backed securities held for trading and the termination of the related derivatives. A majority of the securities were sold to HSBC Bank plc and a portion of the related terminated derivatives were total return swaps with HSBC Bank plc. The loss resulting from these unwind related transactions with HSBC Bank plc was not material.

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 ~~2019~~2020 Form 10-K. There have been no significant changes in these activities since December 31, ~~2019.~~2020.

Other Transactions with HSBC Affiliates:

At both September 30, ~~2020~~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 ~~2019~~2020 Form 10-K for additional details.

~~15.~~16. Business Segments

We have 4 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~~As of ~~our Restructuring Plan that we would combine our Retail Banking and Wealth Management ("RBWM") and Private Banking ("PB") businesses to create a single WPB business. During the second quarter of 2020,~~January 1, 2021, we implemented a change to our internal management reporting to ~~begin reporting what was historically RBWM and PB together~~prospectively report assets related to our active branches within ~~a newly created~~our 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 implement a change to our internal management reporting to begin allocating Balance Sheet Management ("BSM"),~~ which ~~was~~were historically reported within ~~the~~our CC ~~segment, to the WPB, CMB and GB&M businesses to better align the revenue and expense to the businesses generating or utilizing this activity.~~segment. As a result, ~~we have aligned~~lease impairment and other related costs associated with these branches is recorded within our WPB segment ~~reporting to reflect~~beginning in 2021. Prior periods were not impacted by this ~~change for all periods presented.~~change.

5453


HSBC USA Inc.

The following table 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 nine months ended September 30, 2019:

As
Previously
Reported After
Reporting
Changes
(in millions)
Segment profit (loss) before tax during the three months ended September 30, 2019:
RBWM $ (275) NR
WPB NR $ (257)
CMB 111 118
GB&M 124 157
PB 0 NR
CC 7 (51)
Segment profit (loss) before tax during the nine months ended September 30, 2019:
RBWM $ (347) NR
WPB NR $ (291)
CMB 332 354
GB&M 355 452
PB (3) NR
CC 23 (155)
Segment total assets at September 30, 2019:
RBWM⁽¹⁾
$ 19,128 NR
WPB NR $ 52,334
CMB 27,734 36,968
GB&M 89,154 130,708
PB⁽¹⁾
7,042 NR
CC 79,457 2,505
Segment total deposits at September 30, 2019:
RBWM $ 34,877 NR
WPB NR $ 43,974
CMB 25,489 25,975
GB&M 32,002 34,015
PB 7,720 NR
CC 3,876 0

⁽¹⁾~~Segment total assets at September 30, 2019 included goodwill that was previously allocated to RBWM and PB of $372 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 ~~2019~~2020 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. BSM~~Markets 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.


~~HSBC USA Inc.~~

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.

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, as~~IASB. 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 ~~2019~~2020 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 ~~2019~~2020 Form 10-K. ~~Other than the changes discussed below, there~~There have been no ~~other~~ significant changes since December 31, ~~2019~~2020 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.

~~Other long-lived assets impairment~~ - Under US GAAP, a long-lived asset group is tested for impairment when events or changes in circumstances indicate that the carrying amount of a long-lived asset group might not be recoverable. If impairment testing is required, long-lived assets are grouped at the lowest level for which there are identifiable cash flows. If the estimated undiscounted cash flows of the long-lived asset group exceed its carrying amount, an impairment is not recognized. However, if the estimated undiscounted cash flows are less than the carrying amount of the long-lived asset group, a second step is performed to determine fair value and an impairment loss is required if the carrying amount of the long-lived asset group exceeds fair value. Under the Group Reporting Basis, there is no separate undiscounted cash flow test and an impairment loss is recognized if the carrying amount of the cash generating unit exceeds the higher of its value in use or fair value less costs to sell.

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																							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)																								WPB		CMB	GBM								CC	Total	Group Reporting Basis Adjustments(1)	Group Reporting Basis Reclassi- fications(2)	U.S. GAAP Consolidated Totals
																			(in millions)
Three Months Ended September 30, 2021																		Three Months Ended September 30, 2021
Net interest income (expense)																		Net interest income (expense)	$	202	$	200	$	74		$	(1)		$	475	$	4	$	41	$	520
Other operating income (expense)																		Other operating income (expense)	57		70		184			(38)			273		4		(35)		242
Total operating income (expense)																		Total operating income (expense)	259		270		258			(39)			748		8		6		762
Expected credit losses / provision for credit losses																		Expected credit losses / provision for credit losses	(35)		24		(31)			—			(42)		(39)		—		(81)
																			294		246		289			(39)			790		47		6		843
Operating expenses																		Operating expenses	279		134		186			55			654		6		6		666
Profit (loss) before income tax																		Profit (loss) before income tax	$	15	$	112	$	103		$	(94)		$	136	$	41	$	—	$	177

Three Months Ended September 30, 2020	Three Months Ended September 30, 2020																					Three Months Ended September 30, 2020
Net interest income		$	200	$	202	$	92	$	(9)	$	485	$	1	$	62	$	548
Net interest income (expense)																		Net interest income (expense)	$	200	$	202	$	92		$	(9)		$	485	$	1	$	62	$	548
Other operating income	Other operating income	110		66		217		40		433		(22)		(55)		356		Other operating income	110		66		217			40			433		(22)		(55)		356
Total operating income	Total operating income	310		268		309		31		918		(21)		7		904		Total operating income	310		268		309			31			918		(21)		7		904
Expected credit losses / provision for credit losses	Expected credit losses / provision for credit losses	12		(21)		(6)		0		(15)		(90)		0		(105)		Expected credit losses / provision for credit losses	12		(21)		(6)			—			(15)		(90)		—		(105)
		298		289		315		31		933		69		7		1,009			298		289		315			31			933		69		7		1,009
Operating expenses	Operating expenses	527		150		251		126		1,054		(276)		7		785		Operating expenses	527		150		251			126			1,054		(276)		7		785
Profit (loss) before income tax	Profit (loss) before income tax	$	(229)	$	139	$	64	$	(95)	$	(121)	$	345	$	0	$	224	Profit (loss) before income tax	$	(229)	$	139	$	64		$	(95)		$	(121)	$	345	$	—	$	224

5654


HSBC USA Inc.


		Group Reporting Basis Consolidated Amounts																							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)																								WPB		CMB	GBM								CC	Total	Group Reporting Basis Adjustments(1)	Group Reporting Basis Reclassi- fications(2)	U.S. GAAP Consolidated Totals
Three Months Ended September 30, 2019
Net interest income		$	253	$	216	$	85	$	(11)	$	543	$	1	$	(41)	$	503
Other operating income		99		66		269		4		438		2		46		486
Total operating income		352		282		354		(7)		981		3		5		989
Expected credit losses / provision for credit losses		52		19		(3)		0		68		25		1		94
		300		263		357		(7)		913		(22)		4		895
Operating expenses		557		145		200		44		946		156		4		1,106
Profit (loss) before income tax		$	(257)	$	118	$	157	$	(51)	$	(33)	$	(178)	$	0	$	(211)

Nine Months Ended September 30, 2020
Net interest income		$	629	$	616	$	304	$	(29)	$	1,520	$	6	$	64	$	1,590
Other operating income		283		176		743		101		1,303		(45)		(51)		1,207
Total operating income		912		792		1,047		72		2,823		(39)		13		2,797
Nine Months Ended September 30, 2021																		Nine Months Ended September 30, 2021
Net interest income (expense)																		Net interest income (expense)	$	616	$	580	$	255		$	(3)		$	1,448	$	17	$	109	$	1,574
Other operating income (expense)																		Other operating income (expense)	215		208		613			(9)			1,027		(2)		(95)		930
Total operating income (expense)																		Total operating income (expense)	831		788		868			(12)			2,475		15		14		2,504
Expected credit losses / provision for credit losses	Expected credit losses / provision for credit losses	188		283		129		0		600		240		0		840		Expected credit losses / provision for credit losses	(36)		(26)		(154)			—			(216)		(321)		—		(537)
		724		509		918		72		2,223		(279)		13		1,957			867		814		1,022			(12)			2,691		336		14		3,041
Operating expenses	Operating expenses	1,888		439		644		324		3,295		(191)		13		3,117		Operating expenses	921		437		573			157			2,088		48		14		2,150
Profit (loss) before income tax	Profit (loss) before income tax	$	(1,164)	$	70	$	274	$	(252)	$	(1,072)	$	(88)	$	0	$	(1,160)	Profit (loss) before income tax	$	(54)	$	377	$	449		$	(169)		$	603	$	288	$	—	$	891
Balances at end of period:	Balances at end of period:																			Balances at end of period:
Total assets	Total assets	$	56,728	$	38,096	$	136,478	$	1,565	$	232,867	$	(31,921)	$	0	$	200,946	Total assets	$	69,021	$	46,226	$	102,543		$	1,611		$	219,401	$	(18,251)	$	—	$	201,150
Total loans, net	Total loans, net	23,821		25,852		14,122		0		63,795		(1,682)		3,212		65,325		Total loans, net	22,046		20,998		11,290			—			54,334		(1,549)		2,266		55,051
Goodwill	Goodwill	0		358		0		0		358		100		0		458		Goodwill	—		358		—			—			358		100		—		458
Total deposits	Total deposits	48,477		39,736		51,566		0		139,779		(5,198)		15,747		150,328		Total deposits	39,762		45,239		52,130			—			137,131		(3,668)		18,905		152,368

Nine Months Ended September 30, 2019
Net interest income		$	791	$	628	$	414	$	(56)	$	1,777	$	10	$	(182)	$	1,605
Nine Months Ended September 30, 2020																		Nine Months Ended September 30, 2020
Net interest income (expense)																		Net interest income (expense)	$	629	$	616	$	304		$	(29)		$	1,520	$	6	$	64	$	1,590
Other operating income	Other operating income	293		187		648		13		1,141		(18)		189		1,312		Other operating income	283		176		743			101			1,303		(45)		(51)		1,207
Total operating income	Total operating income	1,084		815		1,062		(43)		2,918		(8)		7		2,917		Total operating income	912		792		1,047			72			2,823		(39)		13		2,797
Expected credit losses / provision for credit losses	Expected credit losses / provision for credit losses	86		34		(17)		0		103		89		6		198		Expected credit losses / provision for credit losses	188		283		129			—			600		240		—		840
		998		781		1,079		(43)		2,815		(97)		1		2,719			724		509		918			72			2,223		(279)		13		1,957
Operating expenses	Operating expenses	1,289		427		627		112		2,455		174		1		2,630		Operating expenses	1,888		439		644			324			3,295		(191)		13		3,117
Profit (loss) before income tax	Profit (loss) before income tax	$	(291)	$	354	$	452	$	(155)	$	360	$	(271)	$	0	$	89	Profit (loss) before income tax	$	(1,164)	$	70	$	274		$	(252)		$	(1,072)	$	(88)	$	—	$	(1,160)
Balances at end of period:	Balances at end of period:																			Balances at end of period:
Total assets	Total assets	$	52,334	$	36,968	$	130,708	$	2,505	$	222,515	$	(37,755)	$	0	$	184,760	Total assets	$	56,728	$	38,096	$	136,478		$	1,565		$	232,867	$	(31,921)	$	—	$	200,946
Total loans, net	Total loans, net	23,908		26,459		18,808		0		69,175		(1,965)		3,450		70,660		Total loans, net	23,821		25,852		14,122			—			63,795		(1,682)		3,212		65,325
Goodwill	Goodwill	693		358		0		0		1,051		191		0		1,242		Goodwill	—		358		—			—			358		100		—		458
Total deposits	Total deposits	43,974		25,975		34,015		0		103,964		(4,036)		19,873		119,801		Total deposits	48,477		39,736		51,566			—			139,779		(5,198)		15,747		150,328

⁽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.~~17. 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.


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 September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


		September 30, 2020												December 31, 2019												September 30, 2021					December 31, 2020
		Capital Amount		Well-Capitalized Ratio⁽¹⁾			Actual Ratio		Capital Amount		Well-Capitalized Ratio⁽¹⁾			Actual Ratio			Capital Amount		Well-Capitalized Ratio(1)			Actual Ratio		Capital Amount		Well-Capitalized Ratio(1)			Actual Ratio
		(dollars are in millions)																											(dollars are in millions)
Common equity Tier 1 ratio:(4)	Common equity Tier 1 ratio:(4)															Common equity Tier 1 ratio:(4)
HSBC USA	HSBC USA	$	15,808	4.5	%	⁽²⁾	14.2	%	$	15,876	4.5	%	⁽²⁾	13.1	%	HSBC USA	$	16,393	4.5	%	(2)	15.9	%	$	15,891	4.5	%	(2)	14.5	%
HSBC Bank USA	HSBC Bank USA	18,054		6.5			16.5		18,043		6.5			15.2		HSBC Bank USA	18,664		6.5			18.3		18,180		6.5			16.4
Tier 1 capital ratio:(4)	Tier 1 capital ratio:(4)															Tier 1 capital ratio:(4)
HSBC USA	HSBC USA	17,073		6.0			15.3		17,141		6.0			14.1		HSBC USA	17,658		6.0			17.1		17,156		6.0			15.6
HSBC Bank USA	HSBC Bank USA	20,554		8.0			18.8		20,543		8.0			17.3		HSBC Bank USA	21,164		8.0			20.8		20,680		8.0			18.7
Total capital ratio:(4)	Total capital ratio:(4)															Total capital ratio:(4)
HSBC USA	HSBC USA	20,641		10.0			18.5		19,743		10.0			16.3		HSBC USA	19,910		10.0			19.3		20,680		10.0			18.8
HSBC Bank USA	HSBC Bank USA	23,220		10.0			21.2		22,724		10.0			19.2		HSBC Bank USA	23,193		10.0			22.7		23,303		10.0			21.1
Tier 1 leverage ratio:	Tier 1 leverage ratio:															Tier 1 leverage ratio:
HSBC USA	HSBC USA	17,073		4.0		⁽²⁾	8.4		17,141		4.0		⁽²⁾	9.9		HSBC USA	17,658		4.0		(2)	9.1		17,156		4.0		(2)	8.6
HSBC Bank USA	HSBC Bank USA	20,554		5.0			10.2		20,543		5.0			12.0		HSBC Bank USA	21,164		5.0			11.0		20,680		5.0			10.3
Supplementary leverage ratio ("SLR"):	Supplementary leverage ratio ("SLR"):															Supplementary leverage ratio ("SLR"):
HSBC USA	HSBC USA	17,073		3.0		⁽³⁾	7.6		17,141		3.0		⁽³⁾	6.9		HSBC USA	17,658		3.0		(3)	7.0		17,156		3.0		(3)	7.8
HSBC Bank USA	HSBC Bank USA	20,554		3.0		⁽³⁾	9.2		20,543		3.0		⁽³⁾	8.4		HSBC Bank USA	21,164		3.0		(3)	8.5		20,680		3.0		(3)	9.3
Risk-weighted assets:⁽⁴⁾⁽⁵⁾	Risk-weighted assets:⁽⁴⁾⁽⁵⁾															Risk-weighted assets:⁽⁴⁾⁽⁵⁾
HSBC USA	HSBC USA	111,467							121,407							HSBC USA	103,018							109,809
HSBC Bank USA	HSBC Bank USA	109,565							118,618							HSBC Bank USA	101,993							110,682
Adjusted quarterly average assets:⁽⁵⁾⁽⁶⁾	Adjusted quarterly average assets:⁽⁵⁾⁽⁶⁾															Adjusted quarterly average assets:⁽⁵⁾⁽⁶⁾
HSBC USA	HSBC USA	202,252							173,270							HSBC USA	193,984							198,698
HSBC Bank USA	HSBC Bank USA	202,404							170,722							HSBC Bank USA	192,501							200,026
Total leverage exposure:⁽⁶⁾⁽⁷⁾	Total leverage exposure:⁽⁶⁾⁽⁷⁾															Total leverage exposure:⁽⁶⁾⁽⁷⁾
HSBC USA	HSBC USA	225,722							247,590							HSBC USA	252,239							221,216
HSBC Bank USA	HSBC Bank USA	223,754							244,008							HSBC Bank USA	250,003							221,334

⁽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~~maintain capital equal to or in excess of 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.

(2)


~~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⁾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 USA and HSBC Bank USA at December 31, 2020. We have revised December 31, 2020 amounts to conform 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 Reported						As Revised
	HSBC USA			HSBC Bank USA			HSBC USA			HSBC Bank USA
	(in millions)
Common equity Tier 1 ratio	14.7		%	17.2		%	14.5		%	16.4		%
Tier 1 capital ratio	15.9		%	19.6		%	15.6		%	18.7		%
Total capital ratio	19.2		%	22.0		%	18.8		%	21.1		%
Risk-weighted assets	$	107,808		$	105,681		$	109,809		$	110,682


HSBC USA Inc.

(5)Calculated using the generally-applicable Standardized Approach.

⁽⁵⁾(6)Represents the Tier 1 leverage ratio denominator which reflects quarterly average assets adjusted for amounts permitted to be deducted from Tier 1 capital.

⁽⁶⁾(7)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 permitted to opt-out of the requirement to recognize most elements of 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. At December 31, 2019, HSBC North America and HSBC Bank USA were required to include all components of AOCI in regulatory capital.

In response to the COVID-19 pandemic, the federal banking agencies issued a 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 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.

Also in response to the COVID-19 pandemic, the ~~FRB~~federal banking agencies issued a final ~~rule adopting a temporary change to the calculation of the SLR~~rules that ~~permits bank~~permitted 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 is~~The 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. The federal banking agencies have also issued a final rule that permits depository institutions such as HSBC Bank USA to exclude temporarily 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.~~18. 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


~~HSBC USA Inc.~~

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.


HSBC USA Inc.

Consolidated VIEs The following table summarizes assets and liabilities related to our consolidated VIEs at September 30, ~~2020~~2021 and December 31, ~~2019~~2020 which are consolidated on our balance sheet. Assets and liabilities exclude intercompany balances that eliminate in consolidation.


		September 30, 2020						December 31, 2019							September 30, 2021				December 31, 2020
		Consolidated Assets		Consolidated Liabilities		Consolidated Assets		Consolidated Liabilities			Consolidated Assets		Consolidated Liabilities		Consolidated Assets		Consolidated Liabilities
		(in millions)															(in millions)
Low income housing limited liability partnership:	Low income housing limited liability partnership:									Low income housing limited liability partnership:
Other assets	Other assets	$	82	$	—	$	98	$	—	Other assets	$	64	$	—	$	79	$	—

Interest, taxes and other liabilities	Interest, taxes and other liabilities	—		18		—		38		Interest, taxes and other liabilities	—		16		—		9
Subtotal	Subtotal	82		18		98		38		Subtotal	64		16		79		9
Venture debt financing entity:	Venture debt financing entity:									Venture debt financing entity:

Loans										Loans	7		—		10		—

Interest, taxes and other liabilities	Interest, taxes and other liabilities	—		1		—		0		Interest, taxes and other liabilities	—		2		—		1
Subtotal	Subtotal	0		1		0		0		Subtotal	7		2		10		1
Total	Total	$	82	$	19	$	98	$	38	Total	$	71	$	18	$	89	$	10

Low income housing limited liability partnership In 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, we~~We 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 entity~~During 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 ~~typically~~generally early stage and development of the companies, the loans are ~~usually~~typically 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 ~~involvements~~involvement in these VIEs, at September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:

Total Assets Held by Unconsolidated VIEs Carrying Value of Variable Interests Held Reported as Maximum
Exposure
to Loss
Assets Liabilities
(in millions)
At September 30, 2020
Limited partnership investments $ 2,654 $ 594 $ 285 $ 594
At December 31, 2019
Structured note vehicles $ 1,524 $ 510 $ 9 $ 1,515
Limited partnership investments 2,160 561 300 562
Total $ 3,684 $ 1,071 $ 309 $ 2,077


	Total Assets Held by Unconsolidated VIEs		Carrying Value of Variable Interests Held Reported as				Maximum Exposure to Loss
			Assets		Liabilities
	(in millions)
At September 30, 2021

Limited partnership investments	$	4,759	$	737	$	405	$	737


At December 31, 2020

Limited partnership investments	$	4,266	$	629	$	285	$	629


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.

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.

~~Structured note vehicles~~ During the third quarter of 2020, the one remaining structured note vehicle was unwound and our investment in the structured note vehicle along with the related derivatives were terminated, resulting in a net loss on sale that was not significant. At the time of unwind, our investment in the structured note vehicle had a total carrying value of $501 million, which was recorded in trading assets on the consolidated balance sheet. Prior to the third quarter of 2020, we provided derivatives, such as interest rate and currency swaps, to structured note vehicles and, in certain instances, invested in the vehicles' debt instruments. We held variable interests in these structured note vehicles in the form of total return swaps under which we took on the risks and benefits of the structured notes they issued. The same risks and benefits were passed on to third party entities through back-end total return swaps. We earned a spread for facilitating the transaction. Since we did not have the power to direct the activities of the VIE and was not the primary beneficiary, we did not consolidate them. We recorded 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.

Third-party sponsored securitization entities We 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 3,4, "Trading Assets and Liabilities," Note 4,5, "Securities," and Note ~~19,~~20, "Fair Value Measurements," and, therefore, are not disclosed in this note to avoid redundancy.


~~HSBC USA Inc.~~

~~18.~~19. 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 September 30, ~~2020~~2021 and December 31, ~~2019.~~2020. Following the table is a description of the various arrangements.


		September 30, 2020						December 31, 2019							September 30, 2021				December 31, 2020
		Carrying Value		Notional / Maximum Exposure to Loss		Carrying Value		Notional / Maximum Exposure to Loss			Carrying Value		Notional / Maximum Exposure to Loss		Carrying Value		Notional / Maximum Exposure to Loss
		(in millions)															(in millions)
Credit derivatives⁽¹⁾⁽²⁾	Credit derivatives⁽¹⁾⁽²⁾	$	(185)	$	33,657	$	(63)	$	38,739	Credit derivatives(1)(2)	$	8	$	2,063	$	144	$	19,500
Financial standby letters of credit, net of participations⁽³⁾⁽⁴⁾	Financial standby letters of credit, net of participations⁽³⁾⁽⁴⁾	0		6,192		0		5,657		Financial standby letters of credit, net of participations(3)(4)	—		5,364		—		5,703
Performance standby letters of credit, net of participations⁽³⁾⁽⁴⁾	Performance standby letters of credit, net of participations⁽³⁾⁽⁴⁾	0		3,027		0		3,779		Performance standby letters of credit, net of participations(3)(4)	—		2,700		—		2,842
Total	Total	$	(185)	$	42,876	$	(63)	$	48,175	Total	$	8	$	10,127	$	144	$	28,045

⁽¹⁾Includes ~~$15,617~~$1,691 million and ~~$18,391~~$13,550 million of notional issued for the benefit of HSBC affiliates at September 30, ~~2020~~2021 and December 31, ~~2019,~~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 ~~$1,800~~$1,957 million and ~~$1,623~~$1,836 million of both financial and performance standby letters of credit issued for the benefit of HSBC affiliates at September 30, ~~2020~~2021 and December 31, ~~2019,~~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.

Credit-Risk Related Guarantees

Credit derivatives Credit 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


HSBC USA Inc.

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 September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


		September 30, 2020						December 31, 2019							September 30, 2021				December 31, 2020
		Carrying / Fair Value		Notional		Carrying / Fair Value		Notional			Carrying / Fair Value		Notional		Carrying / Fair Value		Notional
		(in millions)															(in millions)
Sell-protection credit derivative positions	Sell-protection credit derivative positions	$	(185)	$	33,657	$	(63)	$	38,739	Sell-protection credit derivative positions	$	8	$	2,063	$	144	$	19,500
Buy-protection credit derivative positions	Buy-protection credit derivative positions	170		44,988		77		51,310		Buy-protection credit derivative positions	(52)		5,402		(74)		33,111
Net position⁽¹⁾	Net position⁽¹⁾	$	(15)	$	11,331	$	14	$	12,571	Net position(1)	$	(44)	$	3,339	$	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.

Standby letters of credit A 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 ~~$44~~$43 million and ~~$52~~$44 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Also included in other liabilities is an allowance for credit losses on unfunded standby letters of credit of ~~$36~~$16 million and ~~$26~~$32 million at September 30, ~~2020~~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 September 30, ~~2020~~2021 as an indicative proxy of payment risk:


		Average Life (in years)	Credit Ratings of the Obligors												Average Life (in years)		Credit Ratings of the Obligors
Notional/Contractual Amounts	Notional/Contractual Amounts				Investment Grade		Non-Investment Grade				Total	Notional/Contractual Amounts	Average Life (in years)				Non-Investment Grade		Total
			(dollars are in millions)														(dollars are in millions)
Sell-protection Credit Derivatives⁽¹⁾	Sell-protection Credit Derivatives⁽¹⁾								Sell-protection Credit Derivatives(1)
Single name credit default swaps ("CDS")	Single name credit default swaps ("CDS")	2.8	$	15,861	$	5,781	$	21,642	Single name credit default swaps ("CDS")	2.3			$	1,232	$	606	$	1,838

Index credit derivatives	Index credit derivatives	4.2	7,540		4,235		11,775		Index credit derivatives	22.5			215		10		225
Total return swaps		0.9	54		186		240

Subtotal	Subtotal		23,455		10,202		33,657		Subtotal				1,447		616		2,063
Standby Letters of Credit⁽²⁾	Standby Letters of Credit⁽²⁾	1.1	7,211		2,008		9,219		Standby Letters of Credit(2)	1.2			6,291		1,773		8,064
Total	Total		$	30,666	$	12,210	$	42,876	Total				$	7,738	$	2,389	$	10,127

⁽¹⁾The credit ratings in the table represent external credit ratings for classification as investment grade and non-investment grade.

⁽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.


HSBC USA Inc.

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.

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


~~HSBC USA Inc.~~

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 litigation In 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 ~~2019~~2020 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 ~~$68~~$44 million and ~~$85~~$67 million at September 30, ~~2020~~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 9,10, "Derivative Financial Instruments," for further information.

Clearing houses and exchanges We 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 ~~2019~~2020 Form 10-K, for a full discussion of our leases, including a maturity analysis of our operating lease liabilities.

Mortgage Loan Repurchase Obligations We originate and sell mortgage loans to third parties and provide various representations and warranties related to, 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.

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~~ September 30, ~~2020~~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 $3$4 million and $4$3 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Our repurchase 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


HSBC USA Inc.

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 0zero and $25 million at September 30, ~~2020.~~2021. This estimated range of reasonably possible losses 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.


~~HSBC USA Inc.~~

Securitization Activity In 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 ~~2019~~2020 Form 10-K for additional discussion of related exposure. The outstanding principal balance on these loans was approximately ~~$3.2~~$2.8 billion and ~~$3.4~~$3.1 billion at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Pledged Assets

Pledged assets included in the consolidated balance sheet consisted of the following:


		September 30, 2020		December 31, 2019			September 30, 2021		December 31, 2020
		(in millions)							(in millions)
Interest bearing deposits with banks⁽¹⁾	Interest bearing deposits with banks⁽¹⁾	$	1,843	$	2,682	Interest bearing deposits with banks(1)	$	773	$	2,158
Trading assets⁽²⁾	Trading assets⁽²⁾	3,652		525		Trading assets(2)	2,053		1,265
Securities available-for-sale⁽³⁾	Securities available-for-sale⁽³⁾	8,171		6,814		Securities available-for-sale(3)	7,470		8,652
Securities held-to-maturity⁽³⁾	Securities held-to-maturity⁽³⁾	1,222		1,688		Securities held-to-maturity(3)	660		1,076
Loans⁽⁴⁾	Loans⁽⁴⁾	14,042		14,342		Loans(4)	18,854		18,146
Other assets⁽⁵⁾	Other assets⁽⁵⁾	3,019		3,517		Other assets(5)	1,340		2,352
Total	Total	$	31,949	$	29,568	Total	$	31,150	$	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.

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 ~~$1,714~~$2,241 million and ~~NaN~~$2,077 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The fair value of trading assets that could be sold or repledged was ~~$3,652~~$2,053 million and ~~$336~~$1,265 million at September 30, ~~2020~~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 ~~$29,716~~$9,702 million and ~~$19,174~~$41,447 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Of this collateral, ~~$29,241~~$8,702 million and ~~$18,199~~$41,047 million could be sold or repledged at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, of which ~~$917~~$128 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 principal amount loaned. The market value of the collateral subject to the resale and repurchase agreements is regularly


HSBC USA Inc.

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 September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


								Gross Amounts Not Offset in the Balance Sheet															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⁾			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)																							(in millions)
At September 30, 2020
At September 30, 2021														At September 30, 2021
Assets:	Assets:													Assets:
Securities purchased under resale agreements	Securities purchased under resale agreements	$	29,714	$	4,135	$	25,579	$	25,566	$	0	$	13	Securities purchased under resale agreements	$	9,720	$	2,240	$	7,480	$	7,480	$	—	$	—
Liabilities:	Liabilities:													Liabilities:
Securities sold under repurchase agreements	Securities sold under repurchase agreements	$	6,320	$	4,135	$	2,185	$	2,148	$	0	$	37	Securities sold under repurchase agreements	$	4,510	$	2,240	$	2,270	$	2,256	$	—	$	14

At December 31, 2019
At December 31, 2020														At December 31, 2020
Assets:	Assets:													Assets:
Securities purchased under resale agreements	Securities purchased under resale agreements	$	19,167	$	1,329	$	17,838	$	17,832	$	0	$	6	Securities purchased under resale agreements	$	41,382	$	5,636	$	35,746	$	35,746	$	—	$	—
Liabilities:	Liabilities:													Liabilities:
Securities sold under repurchase agreements	Securities sold under repurchase agreements	$	2,401	$	1,329	$	1,072	$	1,068	$	0	$	4	Securities sold under repurchase agreements	$	7,401	$	5,636	$	1,765	$	1,762	$	—	$	3

⁽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.

The following table provides the class of collateral pledged and remaining contractual maturity of repurchase agreements accounted for as secured borrowings at September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


		Overnight and Continuous		Up to 30 Days		31 to 90 Days		91 Days to One Year		Greater Than One Year		Total			Overnight and Continuous		Up to 30 Days		31 to 90 Days		91 Days to One Year		Greater Than One Year		Total
		(in millions)																							(in millions)
At September 30, 2020
At September 30, 2021														At September 30, 2021
U.S. Treasury, U.S. Government sponsored and U.S. Government agency securities	U.S. Treasury, U.S. Government sponsored and U.S. Government agency securities	$	923	$	5,096	$	301	$	0	$	0	$	6,320	U.S. Treasury, U.S. Government sponsored and U.S. Government agency securities	$	102	$	2,552	$	1,856	$	—	$	—	$	4,510

At December 31, 2019
At December 31, 2020														At December 31, 2020
U.S. Treasury, U.S. Government sponsored and U.S. Government agency securities	U.S. Treasury, U.S. Government sponsored and U.S. Government agency securities	$	2,401	$	0	$	0	$	0	$	0	$	2,401	U.S. Treasury, U.S. Government sponsored and U.S. Government agency securities	$	4,091	$	2,810	$	500	$	—	$	—	$	7,401

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~~19.~~20. 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 ~~literature~~guidance provides a valuation exception and permits an entity to measure the fair value of a group of financial assets and financial liabilities with offsetting credit risks and/or market risks based on the exit price it would receive or pay to transfer the net risk exposure of a group of assets or liabilities if certain conditions are met. We elected to apply the measurement exception to a group of derivative instruments with offsetting credit risks and market risks, which primarily relate to interest rate, foreign currency, debt and equity price risk, and commodity price risk as of the reporting date.

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

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

Classification within the fair value hierarchy is based on whether the lowest hierarchical level input that is significant to the fair value measurement is observable. As such, the classification within the fair value hierarchy is dynamic and can be transferred to other hierarchy levels in each reporting period.

Where fair value measurements are determined based on information obtained from independent pricing services or brokers, Finance applies appropriate validation procedures to substantiate fair value. For price validation purposes, quotations from at least two independent pricing sources are obtained for each financial instrument, where possible.

The following factors are considered in determining fair values:

•similarities between the asset or the liability under consideration and the asset or liability for which quotation is received;

•collaboration of pricing by referencing to other independent market data such as market transactions and relevant benchmark indices;

•consistency among different pricing sources;

•the valuation approach and the methodologies used by the independent pricing sources in determining fair value;

•the elapsed time between the date to which the market data relates and the measurement date;

•the source of the fair value information; and

•whether the security is traded in an active or inactive market.

Greater weight is given to quotations of instruments with recent market transactions, pricing quotes from dealers who stand ready to transact, quotations provided by market-makers who structured such instrument and market consensus pricing based on inputs from a large number of survey participants. Any significant discrepancies among the external quotations are reviewed and adjustments to fair values are recorded where appropriate. Where the transaction volume of a specific instrument has been reduced and the fair value measurement becomes less transparent, Finance will apply more detailed procedures to understand and challenge the appropriateness of the unobservable inputs and the valuation techniques used by the independent pricing service. Where applicable, Finance will develop a fair value estimate using its own pricing model inputs to test reasonableness. Where fair value measurements are determined using internal valuation models, Finance will validate the fair value measurement by either developing unobservable inputs based on the industry consensus pricing surveys in which we participate or back testing by observing the actual settlements occurring soon after the measurement date.

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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 September 30, ~~2020~~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																							Fair Value Measurements on a Recurring Basis
September 30, 2020		Level 1		Level 2		Level 3		Gross Balance		Netting⁽⁶⁾		Net Balance
September 30, 2021														September 30, 2021	Level 1		Level 2		Level 3		Gross Balance		Netting(6)		Net Balance
		(in millions)																							(in millions)
Assets:	Assets:													Assets:

Trading assets, excluding derivatives:	Trading assets, excluding derivatives:													Trading assets, excluding derivatives:
U.S. Treasury, U.S. Government agencies and sponsored enterprises	U.S. Treasury, U.S. Government agencies and sponsored enterprises	$	5,603	$	193	$	0	$	5,796	$	—	$	5,796	U.S. Treasury, U.S. Government agencies and sponsored enterprises	$	2,352	$	291	$	—	$	2,643	$	—	$	2,643

Asset-backed securities:
Collateralized debt obligations		0		64		0		64		—		64
Residential mortgages		0		0		15		15		—		15
Student loans		0		68		0		68		—		68

Debt securities issued by foreign entities	Debt securities issued by foreign entities	9,175		15		0		9,190		—		9,190		Debt securities issued by foreign entities	606		162		—		768		—		768
Equity securities	Equity securities	6,169		0		0		6,169		—		6,169		Equity securities	13,287		—		—		13,287		—		13,287
Precious metals trading	Precious metals trading	0		9,536		0		9,536		—		9,536		Precious metals trading	—		3,316		—		3,316		—		3,316
Derivatives:⁽¹⁾	Derivatives:⁽¹⁾													Derivatives:(1)
Interest rate contracts	Interest rate contracts	11		7,653		34		7,698		0		7,698		Interest rate contracts	2		3,140		1		3,143		—		3,143
Foreign exchange contracts	Foreign exchange contracts	0		15,594		0		15,594		0		15,594		Foreign exchange contracts	—		11,789		15		11,804		—		11,804
Equity contracts	Equity contracts	0		5,131		227		5,358		0		5,358		Equity contracts	1		2,056		298		2,355		—		2,355
Precious metals contracts	Precious metals contracts	6		1,834		0		1,840		0		1,840		Precious metals contracts	4		1,404		—		1,408		—		1,408
Credit contracts	Credit contracts	0		592		73		665		0		665		Credit contracts	—		36		—		36		—		36
Other contracts⁽²⁾	Other contracts⁽²⁾	0		0		9		9		0		9		Other contracts(2)	—		—		5		5		—		5
Derivatives netting	Derivatives netting	0		0		0		0		(28,216)		(28,216)		Derivatives netting	—		—		—		—		(16,749)		(16,749)
Total derivatives	Total derivatives	17		30,804		343		31,164		(28,216)		2,948		Total derivatives	7		18,425		319		18,751		(16,749)		2,002
Securities available-for-sale:⁽³⁾	Securities available-for-sale:⁽³⁾													Securities available-for-sale:(3)
U.S. Treasury, U.S. Government agencies and sponsored enterprises	U.S. Treasury, U.S. Government agencies and sponsored enterprises	20,393		15,948		0		36,341		—		36,341		U.S. Treasury, U.S. Government agencies and sponsored enterprises	13,734		20,392		—		34,126		—		34,126
Asset-backed securities:	Asset-backed securities:													Asset-backed securities:

Home equity	Home equity	0		0		27		27		—		27		Home equity	—		—		20		20		—		20

Other	Other	0		0		100		100		—		100		Other	—		—		101		101		—		101

Debt securities issued by foreign entities	Debt securities issued by foreign entities	4,823		37		0		4,860		—		4,860		Debt securities issued by foreign entities	2,073		187		—		2,260		—		2,260
Loans⁽⁴⁾	Loans⁽⁴⁾	0		34		0		34		—		34		Loans(4)	—		27		—		27		—		27
Loans held for sale⁽⁴⁾	Loans held for sale⁽⁴⁾	0		41		0		41		—		41		Loans held for sale(4)	—		63		—		63		—		63
Other assets:	Other assets:													Other assets:
Mortgage servicing rights														Mortgage servicing rights	—		—		14		14		—		14
Equity securities	Equity securities	0		149		0		149		—		149		Equity securities	—		145		—		145		—		145
Equity securities measured at net asset value⁽⁵⁾	Equity securities measured at net asset value⁽⁵⁾	0		0		0		134		—		134		Equity securities measured at net asset value(5)	—		—		—		144		—		144
Total assets	Total assets	$	46,180	$	56,889	$	485	$	103,688	$	(28,216)	$	75,472	Total assets	$	32,059	$	43,008	$	454	$	75,665	$	(16,749)	$	58,916
Liabilities:	Liabilities:													Liabilities:
Domestic deposits⁽⁴⁾	Domestic deposits⁽⁴⁾	$	0	$	4,073	$	650	$	4,723	$	—	$	4,723	Domestic deposits(4)	$	—	$	2,454	$	516	$	2,970	$	—	$	2,970
Trading liabilities, excluding derivatives	Trading liabilities, excluding derivatives	695		0		0		695		—		695		Trading liabilities, excluding derivatives	947		90		—		1,037		—		1,037
Derivatives:⁽¹⁾	Derivatives:⁽¹⁾													Derivatives:(1)
Interest rate contracts	Interest rate contracts	9		8,048		0		8,057		0		8,057		Interest rate contracts	2		2,994		1		2,997		—		2,997
Foreign exchange contracts	Foreign exchange contracts	1		14,317		2		14,320		0		14,320		Foreign exchange contracts	2		11,527		16		11,545		—		11,545
Equity contracts	Equity contracts	0		4,507		161		4,668		0		4,668		Equity contracts	4		636		184		824		—		824
Precious metals contracts	Precious metals contracts	104		1,690		0		1,794		0		1,794		Precious metals contracts	1		951		—		952		—		952
Credit contracts	Credit contracts	0		676		8		684		0		684		Credit contracts	—		76		2		78		—		78
Other contracts⁽²⁾	Other contracts⁽²⁾	0		0		68		68		0		68		Other contracts(2)	—		—		44		44		—		44
Derivatives netting	Derivatives netting	0		0		0		0		(26,623)		(26,623)		Derivatives netting	—		—		—		—		(14,690)		(14,690)
Total derivatives	Total derivatives	114		29,238		239		29,591		(26,623)		2,968		Total derivatives	9		16,184		247		16,440		(14,690)		1,750

Long-term debt⁽⁴⁾	Long-term debt⁽⁴⁾	0		9,416		372		9,788		—		9,788		Long-term debt(4)	—		8,252		1,483		9,735		—		9,735
Total liabilities	Total liabilities	$	809	$	42,727	$	1,261	$	44,797	$	(26,623)	$	18,174	Total liabilities	$	956	$	26,980	$	2,246	$	30,182	$	(14,690)	$	15,492

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		Fair Value Measurements on a Recurring Basis																							Fair Value Measurements on a Recurring Basis
December 31, 2019		Level 1		Level 2		Level 3		Gross Balance		Netting⁽⁶⁾		Net Balance
December 31, 2020														December 31, 2020	Level 1		Level 2		Level 3		Gross Balance		Netting(6)		Net Balance
		(in millions)																							(in millions)
Assets:	Assets:													Assets:

Trading assets, excluding derivatives:	Trading assets, excluding derivatives:													Trading assets, excluding derivatives:
U.S. Treasury, U.S. Government agencies and sponsored enterprises	U.S. Treasury, U.S. Government agencies and sponsored enterprises	$	6,763	$	38	$	0	$	6,801	$	—	$	6,801	U.S. Treasury, U.S. Government agencies and sponsored enterprises	$	5,145	$	192	$	—	$	5,337	$	—	$	5,337

Asset-backed securities:	Asset-backed securities:													Asset-backed securities:
Collateralized debt obligations	Collateralized debt obligations	0		71		0		71		—		71		Collateralized debt obligations	—		63		—		63		—		63
Residential mortgages	Residential mortgages	0		0		17		17		—		17		Residential mortgages	—		—		15		15		—		15
Student loans	Student loans	0		80		0		80		—		80		Student loans	—		65		—		65		—		65
Corporate and other domestic debt securities		0		0		510		510		—		510

Debt securities issued by foreign entities	Debt securities issued by foreign entities	10,095		221		0		10,316		—		10,316		Debt securities issued by foreign entities	7,953		18		—		7,971		—		7,971
Equity securities	Equity securities	5,693		0		0		5,693		—		5,693		Equity securities	6,043		—		—		6,043		—		6,043
Precious metals trading	Precious metals trading	0		1,909		0		1,909		—		1,909		Precious metals trading	—		4,989		—		4,989		—		4,989
Derivatives:⁽¹⁾	Derivatives:⁽¹⁾													Derivatives:(1)
Interest rate contracts	Interest rate contracts	110		12,275		10		12,395		0		12,395		Interest rate contracts	15		6,637		35		6,687		—		6,687
Foreign exchange contracts	Foreign exchange contracts	80		16,456		0		16,536		0		16,536		Foreign exchange contracts	—		18,452		15		18,467		—		18,467
Equity contracts	Equity contracts	0		4,922		185		5,107		0		5,107		Equity contracts	—		5,051		565		5,616		—		5,616
Precious metals contracts	Precious metals contracts	70		1,085		3		1,158		0		1,158		Precious metals contracts	—		1,323		—		1,323		—		1,323
Credit contracts	Credit contracts	0		1,060		79		1,139		0		1,139		Credit contracts	—		298		69		367		—		367
Other contracts⁽²⁾	Other contracts⁽²⁾	0		0		10		10		0		10		Other contracts(2)	—		—		8		8		—		8
Derivatives netting	Derivatives netting	0		0		0		0		(33,193)		(33,193)		Derivatives netting	—		—		—		—		(29,616)		(29,616)
Total derivatives	Total derivatives	260		35,798		287		36,345		(33,193)		3,152		Total derivatives	15		31,761		692		32,468		(29,616)		2,852
Securities available-for-sale:⁽³⁾	Securities available-for-sale:⁽³⁾													Securities available-for-sale:(3)
U.S. Treasury, U.S. Government agencies and sponsored enterprises	U.S. Treasury, U.S. Government agencies and sponsored enterprises	17,532		14,702		0		32,234		—		32,234		U.S. Treasury, U.S. Government agencies and sponsored enterprises	22,880		12,528		—		35,408		—		35,408

Asset-backed securities:	Asset-backed securities:													Asset-backed securities:

Home equity	Home equity	0		32		0		32		—		32		Home equity	—		—		27		27		—		27

Other	Other	0		0		111		111		—		111		Other	—		—		104		104		—		104

Debt securities issued by foreign entities	Debt securities issued by foreign entities	3,158		128		0		3,286		—		3,286		Debt securities issued by foreign entities	1,942		3,191		—		5,133		—		5,133
Loans(4)														Loans(4)	—		32		—		32		—		32
Loans held for sale⁽⁴⁾	Loans held for sale⁽⁴⁾	0		178		0		178		—		178		Loans held for sale(4)	—		36		—		36		—		36
Other assets:	Other assets:													Other assets:
Mortgage servicing rights														Mortgage servicing rights	—		—		7		7		—		7
Equity securities	Equity securities	0		147		0		147		—		147		Equity securities	—		149		—		149		—		149
Equity securities measured at net asset value⁽⁵⁾	Equity securities measured at net asset value⁽⁵⁾	0		0		0		136		—		136		Equity securities measured at net asset value(5)	—		—		—		135		—		135

Total assets	Total assets	$	43,501	$	53,304	$	925	$	97,866	$	(33,193)	$	64,673	Total assets	$	43,978	$	53,024	$	845	$	97,982	$	(29,616)	$	68,366
Liabilities:	Liabilities:													Liabilities:
Domestic deposits⁽⁴⁾	Domestic deposits⁽⁴⁾	$	0	$	6,435	$	774	$	7,209	$	—	$	7,209	Domestic deposits(4)	$	—	$	3,509	$	646	$	4,155	$	—	$	4,155
Trading liabilities, excluding derivatives	Trading liabilities, excluding derivatives	1,182		124		0		1,306		—		1,306		Trading liabilities, excluding derivatives	727		2,312		—		3,039		—		3,039
Derivatives:⁽¹⁾	Derivatives:⁽¹⁾													Derivatives:(1)
Interest rate contracts	Interest rate contracts	3		13,570		0		13,573		0		13,573		Interest rate contracts	9		6,615		1		6,625		—		6,625
Foreign exchange contracts	Foreign exchange contracts	0		15,805		1		15,806		0		15,806		Foreign exchange contracts	—		18,597		6		18,603		—		18,603
Equity contracts	Equity contracts	0		3,955		113		4,068		0		4,068		Equity contracts	—		3,845		446		4,291		—		4,291
Precious metals contracts	Precious metals contracts	80		1,306		3		1,389		0		1,389		Precious metals contracts	28		1,550		—		1,578		—		1,578
Credit contracts	Credit contracts	0		1,048		20		1,068		0		1,068		Credit contracts	—		291		6		297		—		297
Other contracts⁽²⁾	Other contracts⁽²⁾	0		0		85		85		0		85		Other contracts(2)	—		—		67		67		—		67
Derivatives netting	Derivatives netting	0		0		0		0		(33,900)		(33,900)		Derivatives netting	—		—		—		—		(28,914)		(28,914)
Total derivatives	Total derivatives	83		35,684		222		35,989		(33,900)		2,089		Total derivatives	37		30,898		526		31,461		(28,914)		2,547
Short-term borrowings⁽⁴⁾		0		373		0		373		—		373

Long-term debt⁽⁴⁾	Long-term debt⁽⁴⁾	0		9,993		354		10,347		—		10,347		Long-term debt(4)	—		10,277		448		10,725		—		10,725
Total liabilities	Total liabilities	$	1,265	$	52,609	$	1,350	$	55,224	$	(33,900)	$	21,324	Total liabilities	$	764	$	46,996	$	1,620	$	49,380	$	(28,914)	$	20,466

⁽¹⁾Includes trading derivative assets of ~~$2,916~~$1,971 million and ~~$3,055~~$2,801 million and trading derivative liabilities of ~~$2,822~~$1,633 million and ~~$1,929~~$2,358 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, as well as derivatives held for hedging and commitments accounted for as derivatives. See Note 9,10, "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.~~income (loss). Changes in the allowance for credit losses on securities available-for-sale are recorded through net income (loss).

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⁽⁴⁾See Note ~~10,~~11, "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.

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 nine months ended September 30, ~~2020~~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.


		Jul. 1, 2020		Total Realized / Unrealized Gains (Losses) Included in						Purch- ases		Issu- ances		Settle- ments		Transfers Into Level 3		Transfers Out of Level 3		Sep. 30, 2020		Current Period Unrealized Gains (Losses) Still Held Included in											Jul. 1, 2021			Total Realized / Unrealized Gains (Losses) Included in						Purch- ases			Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Sep. 30, 2021		Current Period Unrealized Gains (Losses) Still Held Included in
						Earnings		Other Compre- hensive Income																															Issu- ances																				Settle- ments	Transfers Into Level 3	Transfers Out of Level 3	Sep. 30, 2021	Earnings	Other Compre- hensive Income
		(in millions)																																																				(in millions)
Assets:	Assets:																								Assets:
Trading assets, excluding derivatives:⁽¹⁾

Residential mortgage asset-backed securities		$	15	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	15	$	0	$	0

Corporate and other domestic debt securities		501		(4)		0		0		0		(497)		0		0		0		0		0

Derivatives, net:⁽²⁾⁽¹⁾	Derivatives, net:⁽²⁾⁽¹⁾																								Derivatives, net:⁽²⁾⁽¹⁾
Interest rate contracts	Interest rate contracts	33		1		0		0		0		0		0		0		34		1		0			Interest rate contracts		$	8		$	(8)		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Foreign exchange contracts	Foreign exchange contracts	(2)		0		0		0		0		0		0		0		(2)		0		0			Foreign exchange contracts		(1)			—			—			—			—			—			—			—			(1)			—			—
Equity contracts	Equity contracts	92		50		0		0		0		(75)		0		(1)		66		44		0			Equity contracts		(13)			(91)			—			—			—			256			(38)			—			114			(2)			—

Credit contracts	Credit contracts	62		(16)		0		0		0		19		0		0		65		(16)		0			Credit contracts		46			(49)			—			—			—			1			—			—			(2)			—			—
Other contracts⁽³⁾⁽²⁾	Other contracts⁽³⁾⁽²⁾	(64)		(2)		0		0		0		7		0		0		(59)		0		0			Other contracts⁽³⁾⁽²⁾		(48)			3			—			—			—			6			—			—			(39)			—			—
Asset-backed securities available-for-sale⁽⁴⁾⁽³⁾	Asset-backed securities available-for-sale⁽⁴⁾⁽³⁾	117		0		(8)		0		0		(2)		20		0		127		0		(8)			Asset-backed securities available-for-sale⁽⁴⁾⁽³⁾		126			—			(2)			—			—			(3)			—			—			121			—			(2)

Mortgage servicing rights(4)																								Mortgage servicing rights(4)		12			1			—			—			1			—			—			—			14			1			—
Total assets	Total assets	$	754	$	29	$	(8)	$	0	$	0	$	(548)	$	20	$	(1)	$	246	$	29	$	(8)		Total assets		$	130		$	(144)		$	(2)		$	—		$	1		$	260		$	(38)		$	—		$	207		$	(1)		$	(2)
Liabilities:	Liabilities:																								Liabilities:
Domestic deposits⁽⁵⁾	Domestic deposits⁽⁵⁾	$	(672)	$	(10)	$	(3)	$	0	$	0	$	27	$	0	$	8	$	(650)	$	(8)	$	(3)		Domestic deposits(5)		$	(593)		$	9		$	1		$	—		$	—		$	58		$	—		$	9		$	(516)		$	6		$	1
Long-term debt⁽⁵⁾	Long-term debt⁽⁵⁾	(347)		(21)		0		0		(24)		18		(1)		3		(372)		(17)		0			Long-term debt(5)		(919)			33			—			—			(660)			54			(9)			18			(1,483)			34			—
Total liabilities	Total liabilities	$	(1,019)	$	(31)	$	(3)	$	0	$	(24)	$	45	$	(1)	$	11	$	(1,022)	$	(25)	$	(3)		Total liabilities		$	(1,512)		$	42		$	1		$	—		$	(660)		$	112		$	(9)		$	27		$	(1,999)		$	40		$	1

7168


HSBC USA Inc.


		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		Sep. 30, 2020		Current Period Unrealized Gains (Losses) Still Held Included in											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			Sep. 30, 2021		Current Period Unrealized Gains (Losses) Still Held Included in
						Earnings		Other Compre- hensive Income																															Issu- ances																				Settle- ments	Transfers Into Level 3	Transfers Out of Level 3	Sep. 30, 2021	Earnings	Other Compre- hensive Income
		(in millions)																																																				(in millions)
Assets:	Assets:																								Assets:
Trading assets, excluding derivatives:⁽¹⁾⁽⁶⁾	Trading assets, excluding derivatives:⁽¹⁾⁽⁶⁾																								Trading assets, excluding derivatives:⁽¹⁾⁽⁶⁾

Residential mortgage asset-backed securities	Residential mortgage asset-backed securities	$	17	$	(2)	$	0	$	0	$	0	$	0	$	0	$	0	$	15	$	(2)	$	0		Residential mortgage asset-backed securities		$	15		$	9		$	—		$	—		$	—		$	—		$	—		$	(24)		$	��		$	—		$	—

Corporate and other domestic debt securities		510		(13)		0		0		0		(497)		0		0		0		0		0

Derivatives, net:⁽²⁾⁽¹⁾	Derivatives, net:⁽²⁾⁽¹⁾																								Derivatives, net:⁽²⁾⁽¹⁾
Interest rate contracts	Interest rate contracts	10		24		0		0		0		0		0		0		34		24		0			Interest rate contracts		34			(34)			—			—			—			—			—			—			—			(5)			—
Foreign exchange contracts	Foreign exchange contracts	(1)		(1)		0		0		0		0		0		0		(2)		(1)		0			Foreign exchange contracts		9			(10)			—			—			—			—			—			—			(1)			(11)			—
Equity contracts	Equity contracts	72		62		0		0		0		(69)		0		1		66		76		0			Equity contracts		119			(230)			—			—			—			283			(30)			(28)			114			22			—

Credit contracts	Credit contracts	59		10		0		0		0		(4)		0		0		65		(5)		0			Credit contracts		63			(65)			—			—			—			—			—			—			(2)			(2)			—
Other contracts⁽³⁾⁽²⁾	Other contracts⁽³⁾⁽²⁾	(75)		(3)		0		0		0		19		0		0		(59)		0		0			Other contracts⁽³⁾⁽²⁾		(59)			—			—			—			—			20			—			—			(39)			—			—
Asset-backed securities available-for-sale⁽⁴⁾⁽³⁾	Asset-backed securities available-for-sale⁽⁴⁾⁽³⁾	111		0		(10)		0		0		(2)		28		0		127		0		(10)			Asset-backed securities available-for-sale⁽⁴⁾⁽³⁾		131			—			(3)			—			—			(7)			—			—			121			—			(3)

Mortgage servicing rights(4)																								Mortgage servicing rights(4)		7			—			—			—			7			—			—			—			14			—			—
Total assets	Total assets	$	703	$	77	$	(10)	$	0	$	0	$	(553)	$	28	$	1	$	246	$	92	$	(10)		Total assets		$	319		$	(330)		$	(3)		$	—		$	7		$	296		$	(30)		$	(52)		$	207		$	4		$	(3)
Liabilities:	Liabilities:																								Liabilities:
Domestic deposits⁽⁵⁾	Domestic deposits⁽⁵⁾	$	(774)	$	3	$	(1)	$	0	$	(43)	$	109	$	0	$	56	$	(650)	$	(1)	$	(1)		Domestic deposits(5)		$	(646)		$	1		$	2		$	—		$	—		$	146		$	(109)		$	90		$	(516)		$	3		$	2
Long-term debt⁽⁵⁾	Long-term debt⁽⁵⁾	(354)		17		2		0		(162)		107		(1)		19		(372)		5		2			Long-term debt(5)		(448)			10			(1)			—			(1,201)			177			(45)			25			(1,483)			14			(1)
Total liabilities	Total liabilities	$	(1,128)	$	20	$	1	$	0	$	(205)	$	216	$	(1)	$	75	$	(1,022)	$	4	$	1		Total liabilities		$	(1,094)		$	11		$	1		$	—		$	(1,201)		$	323		$	(154)		$	115		$	(1,999)		$	17		$	1

7269


HSBC USA Inc.


		Jul. 1, 2019		Total Realized / Unrealized Gains (Losses) Included in						Purch- ases		Issu- ances		Settle- ments		Transfers Into Level 3		Transfers Out of Level 3		Sep. 30, 2019		Current Period Unrealized Gains (Losses) Still Held Included in											Jul. 1, 2020			Total Realized / Unrealized Gains (Losses) Included in						Purch- ases			Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Sep. 30, 2020		Current Period Unrealized Gains (Losses) Still Held Included in
						Earnings		Other Compre- hensive Income																															Issu- ances																				Settle- ments	Transfers Into Level 3	Transfers Out of Level 3	Sep. 30, 2020	Earnings	Other Compre- hensive Income
		(in millions)																																																				(in millions)
Assets:	Assets:																								Assets:
Trading assets, excluding derivatives:⁽¹⁾⁽⁶⁾	Trading assets, excluding derivatives:⁽¹⁾⁽⁶⁾																								Trading assets, excluding derivatives:⁽¹⁾⁽⁶⁾
Collateralized debt obligations		$	86	$	(1)	$	0	$	0	$	0	$	(1)	$	0	$	0	$	84	$	(1)	$	0

Residential mortgage asset-backed securities	Residential mortgage asset-backed securities	16		1		0		0		0		0		0		0		17		0		0			Residential mortgage asset-backed securities		$	15		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	15		$	—		$	—
Student loan asset-backed securities		90		0		0		0		0		(4)		0		0		86		0		0

Corporate and other domestic debt securities	Corporate and other domestic debt securities	510		0		0		0		0		0		0		0		510		0		0			Corporate and other domestic debt securities		501			(4)			—			—			—			(497)			—			—			—			—			—

Derivatives, net:⁽²⁾⁽¹⁾	Derivatives, net:⁽²⁾⁽¹⁾																								Derivatives, net:⁽²⁾⁽¹⁾
Interest rate contracts	Interest rate contracts	10		18		0		0		0		0		0		0		28		17		0			Interest rate contracts		33			1			—			—			—			—			—			—			34			1			—
Foreign exchange contracts	Foreign exchange contracts	(1)		4		0		0		0		0		(21)		0		(18)		3		0			Foreign exchange contracts		(2)			—			—			—			—			—			—			—			(2)			—			—
Equity contracts	Equity contracts	62		3		0		0		0		(2)		0		4		67		0		0			Equity contracts		92			50			—			—			—			(75)			—			(1)			66			44			—

Credit contracts	Credit contracts	46		(2)		0		0		0		(4)		0		0		40		(2)		0			Credit contracts		62			(16)			—			—			—			19			—			—			65			(16)			—
Other contracts⁽³⁾⁽²⁾	Other contracts⁽³⁾⁽²⁾	(35)		(4)		0		0		0		6		0		0		(33)		0		0			Other contracts⁽³⁾⁽²⁾		(64)			(2)			—			—			—			7			—			—			(59)			—			—

Asset-backed securities available-for-sale⁽⁴⁾⁽³⁾	Asset-backed securities available-for-sale⁽⁴⁾⁽³⁾	113		0		2		0		0		0		0		0		115		0		2			Asset-backed securities available-for-sale⁽⁴⁾⁽³⁾		117			—			(8)			—			—			(2)			20			—			127			—			(8)
Other assets⁽⁶⁾		1		0		0		0		0		(1)		0		0		0		0		0
Mortgage servicing rights(4)																								Mortgage servicing rights(4)		4			—			—			—			2			—			—			—			6			—			—
Total assets	Total assets	$	898	$	19	$	2	$	0	$	0	$	(6)	$	(21)	$	4	$	896	$	17	$	2		Total assets		$	758		$	29		$	(8)		$	—		$	2		$	(548)		$	20		$	(1)		$	252		$	29		$	(8)
Liabilities:	Liabilities:																								Liabilities:
Domestic deposits⁽⁵⁾	Domestic deposits⁽⁵⁾	$	(930)	$	(27)	$	(5)	$	0	$	(30)	$	57	$	(1)	$	83	$	(853)	$	(24)	$	(5)		Domestic deposits(5)		$	(672)		$	(10)		$	(3)		$	—		$	—		$	27		$	—		$	8		$	(650)		$	(8)		$	(3)
Long-term debt⁽⁵⁾	Long-term debt⁽⁵⁾	(441)		16		(2)		0		(27)		73		0		45		(336)		24		(2)			Long-term debt(5)		(347)			(21)			—			—			(24)			18			(1)			3			(372)			(17)			—
Total liabilities	Total liabilities	$	(1,371)	$	(11)	$	(7)	$	0	$	(57)	$	130	$	(1)	$	128	$	(1,189)	$	0	$	(7)		Total liabilities		$	(1,019)		$	(31)		$	(3)		$	—		$	(24)		$	45		$	(1)		$	11		$	(1,022)		$	(25)		$	(3)

7370


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		Sep. 30, 2019		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			Sep. 30, 2020		Current Period Unrealized Gains (Losses) Still Held Included in
						Earnings		Other Compre- hensive Income																															Issu- ances																				Settle- ments	Transfers Into Level 3	Transfers Out of Level 3	Sep. 30, 2020	Earnings	Other Compre- hensive Income
		(in millions)																																																				(in millions)
Assets:	Assets:																								Assets:
Trading assets, excluding derivatives:⁽¹⁾
Collateralized debt obligations		$	100	$	2	$	0	$	0	$	0	$	(18)	$	0	$	0	$	84	$	(11)	$	0
Trading assets, excluding derivatives:(6)																								Trading assets, excluding derivatives:(6)

Residential mortgage asset-backed securities	Residential mortgage asset-backed securities	16		1		0		0		0		0		0		0		17		0		0			Residential mortgage asset-backed securities		$	17		$	(2)		$	—		$	—		$	—		$	—		$	—		$	—		$	15		$	(2)		$	—
Student loan asset-backed securities		92		5		0		0		0		(11)		0		0		86		(2)		0

Corporate and other domestic debt securities	Corporate and other domestic debt securities	1,803		0		0		0		0		(1,293)		0		0		510		0		0			Corporate and other domestic debt securities		510			(13)			—			—			—			(497)			—			—			—			—			—

Derivatives, net:⁽²⁾
Derivatives, net:(1)																								Derivatives, net:(1)
Interest rate contracts	Interest rate contracts	2		31		0		0		0		0		0		(5)		28		25		0			Interest rate contracts		10			24			—			—			—			—			—			—			34			24			—
Foreign exchange contracts	Foreign exchange contracts	(1)		4		0		0		0		0		(21)		0		(18)		3		0			Foreign exchange contracts		(1)			(1)			—			—			—			—			—			—			(2)			(1)			—
Equity contracts	Equity contracts	(52)		113		0		0		0		3		0		3		67		115		0			Equity contracts		72			62			—			—			—			(69)			—			1			66			76			—

Credit contracts	Credit contracts	52		(42)		0		0		0		30		0		0		40		(4)		0			Credit contracts		59			10			—			—			—			(4)			—			—			65			(5)			—
Other contracts⁽³⁾		(35)		(13)		0		0		0		15		0		0		(33)		0		0
Asset-backed securities available-for-sale⁽⁴⁾		107		0		8		0		0		0		0		0		115		0		8
Other assets⁽⁶⁾		4		0		0		0		0		(4)		0		0		0		0		0
Other contracts(2)																								Other contracts(2)		(75)			(3)			—			—			—			19			—			—			(59)			—			—
Asset-backed securities available-for-sale(3)																								Asset-backed securities available-for-sale(3)		111			—			(10)			—			—			(2)			28			—			127			—			(10)
Mortgage servicing rights(4)																								Mortgage servicing rights(4)		4			(2)			—			—			4			—			—			—			6			(2)			—
Total assets	Total assets	$	2,088	$	101	$	8	$	0	$	0	$	(1,278)	$	(21)	$	(2)	$	896	$	126	$	8		Total assets		$	707		$	75		$	(10)		$	—		$	4		$	(553)		$	28		$	1		$	252		$	90		$	(10)
Liabilities:	Liabilities:																								Liabilities:
Domestic deposits⁽⁵⁾	Domestic deposits⁽⁵⁾	$	(925)	$	(91)	$	(8)	$	0	$	(175)	$	166	$	(6)	$	186	$	(853)	$	(156)	$	(8)		Domestic deposits(5)		$	(774)		$	3		$	(1)		$	—		$	(43)		$	109		$	—		$	56		$	(650)		$	(1)		$	(1)
Long-term debt⁽⁵⁾	Long-term debt⁽⁵⁾	(412)		(27)		(4)		0		(91)		106		0		92		(336)		(35)		(4)			Long-term debt(5)		(354)			17			2			—			(162)			107			(1)			19			(372)			5			2
Total liabilities	Total liabilities	$	(1,337)	$	(118)	$	(12)	$	0	$	(266)	$	272	$	(6)	$	278	$	(1,189)	$	(191)	$	(12)		Total liabilities		$	(1,128)		$	20		$	1		$	—		$	(205)		$	216		$	(1)		$	75		$	(1,022)		$	4		$	1

⁽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 $319 million and derivative liabilities of $247 million at September 30, 2021 and derivative assets of $343 million and derivative liabilities of $239 million at September 30, ~~2020 and derivative assets of $436 million and derivative liabilities of $352 million at September 30, 2019.~~2020. Gains (losses) on derivatives, net are predominantly included in trading revenue (expense) and gain ~~(loss)~~ on instruments designated at fair value and related derivatives in the consolidated statement of income (loss).

⁽³⁾(2)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⁾(3)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.~~income (loss).

^{(4)Gain (losses) on mortgage servicing rights are included in other income (loss) in the consolidated statement of 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~~on trading assets, excluding derivatives are included in ~~other income (loss)~~trading revenue (expense) in the consolidated statement of income (loss).

7471


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 September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


September 30, 2020
September 30, 2021								September 30, 2021
Financial Instrument Type	Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs	Weighted Average⁽¹⁾	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	3%	N/A

					Conditional default rates	4%	N/A
					Loss severity rates	70%	N/A
					Discount margin	575bps	N/A

Interest rate derivative contracts	Interest rate derivative contracts	$	34	Market comparable adjusted for probability to fund and, where applicable, discounted cash flows	Probability to fund for rate lock commitments	41% - 100%	79%	Interest rate derivative contracts	$	—	Market comparable adjusted for probability to fund and, where applicable, discounted cash flows or option pricing model	Probability to fund for rate lock commitments	25% - 100%	81%
					Likelihood of transaction being executed	90%	N/A
												Interest rate yield curve	8%	N/A
Foreign exchange derivative contracts⁽²⁾	Foreign exchange derivative contracts⁽²⁾	$	(2)	Option pricing model	Implied volatility of currency pairs	9% - 12%	10%	Foreign exchange derivative contracts(2)	$	(1)	Option pricing model	Implied volatility of currency pairs	16%	N/A
												Cross-currency basis	(40)bps	N/A
Equity derivative contracts⁽²⁾	Equity derivative contracts⁽²⁾	$	66	Option pricing model	Equity / Equity Index volatility	7% - 66%	26%	Equity derivative contracts(2)	$	114	Option pricing model	Equity / Equity Index volatility	8% - 69%	41%
					Equity / Equity and Equity / Index correlation	13% - 78%	51%					Equity / Equity and Equity / Index correlation	41% - 98%	72%
					Equity dividend yields and forward price	(8)% - 5%	(1)%					Equity dividend yields and forward price	(4)% - 1%	0%

Credit derivative contracts	Credit derivative contracts	$	65	Option pricing model and, where applicable, discounted cash flows	Credit default swap spreads	133bps	N/A	Credit derivative contracts	$	(2)	Option pricing model and, where applicable, discounted cash flows	Credit default swap spreads	77bps - 294bps	196bps
Other derivative contracts	Other derivative contracts	$	(59)	Discounted cash flows	Conversion rate	1.6 times	N/A	Other derivative contracts	$	(39)	Discounted cash flows	Conversion rate	1.6 times	N/A
					Expected duration	2 years	N/A					Expected duration	1.2 years	N/A
Asset-backed securities available-for-sale	Asset-backed securities available-for-sale	$	127	Discounted cash flows	Market assumptions related to yields for comparable instruments	4%	N/A	Asset-backed securities available-for-sale	$	121	Discounted cash flows	Market assumptions related to yields for comparable instruments	3% - 4%	3%
Mortgage servicing rights								Mortgage servicing rights	$	14	Discounted cash flows	Constant prepayment rates	10% - 18%	12%
												Discount rate	8% - 13%	8%
												Estimated annualized costs to service	$72 - $93 per account	$75 per account

Domestic deposits (structured deposits)⁽²⁾⁽³⁾	Domestic deposits (structured deposits)⁽²⁾⁽³⁾	$	(650)	Option adjusted discounted cash flows	Implied volatility of currency pairs	9% - 12%	10%	Domestic deposits (structured deposits)(2)(3)	$	(516)	Option adjusted discounted cash flows	Equity / Equity Index volatility	8% - 22%	16%
					Equity / Equity Index volatility	7% - 46%	20%
					Equity / Equity and Equity / Index correlation	44% - 64%	53%					Equity / Equity and Equity / Index correlation	56% - 85%	57%
Long-term debt (structured notes)⁽²⁾⁽³⁾	Long-term debt (structured notes)⁽²⁾⁽³⁾	$	(372)	Option adjusted discounted cash flows	Implied volatility of currency pairs	9% - 12%	10%	Long-term debt (structured notes)(2)(3)	$	(1,483)	Option adjusted discounted cash flows	Implied volatility of currency pairs	16%	N/A
					Equity / Equity Index volatility	7% - 66%	25%					Equity / Equity Index volatility	8% - 61%	25%
					Equity / Equity and Equity / Index correlation	13% - 78%	52%					Equity / Equity and Equity / Index correlation	41% - 98%	73%

7572


HSBC USA Inc.


December 31, 2019
December 31, 2020								December 31, 2020
Financial Instrument Type	Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs	Weighted Average⁽¹⁾	Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs	Weighted Average(1)

Residential mortgage asset-backed securities	Residential mortgage asset-backed securities	$	17	Broker quotes or consensus pricing and, where applicable, discounted cash flows	Prepayment rates	1%	N/A	Residential mortgage asset-backed securities	$	15	Broker quotes or consensus pricing and, where applicable, discounted cash flows	Prepayment rates	10%	N/A
					Conditional default rates	8%	N/A					Conditional default rates	5%	N/A
					Loss severity rates	70%	N/A					Loss severity rates	65%	N/A
					Discount margin	600bps	N/A					Discount margin	500bps	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	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%	Interest rate derivative contracts	$	34	Market comparable adjusted for probability to fund and, where applicable, discounted cash flows or option pricing model	Probability to fund for rate lock commitments	41% - 100%	78%
					Likelihood of transaction being executed	90%	N/A					Likelihood of transaction being executed	90%	N/A
												Interest rate yield curve	4% - 7%	6%
Foreign exchange derivative contracts⁽²⁾	Foreign exchange derivative contracts⁽²⁾	$	(1)	Option pricing model	Implied volatility of currency pairs	6% - 11%	8%	Foreign exchange derivative contracts(2)	$	9	Option pricing model	Implied volatility of currency pairs	9% - 11%	10%
												Cross-currency basis	(9)bps - 40bps	24bps
Equity derivative contracts⁽²⁾	Equity derivative contracts⁽²⁾	$	72	Option pricing model	Equity / Equity Index volatility	7% - 36%	22%	Equity derivative contracts(2)	$	119	Option pricing model	Equity / Equity Index volatility	0% - 67%	27%
					Equity / Equity and Equity / Index correlation	43% - 79%	49%					Equity / Equity and Equity / Index correlation	17% - 62%	30%
					Equity dividend yields	0% - 4%	2%					Equity dividend yields and forward price	(1)% - 0%	0%
Credit derivative contracts	Credit derivative contracts	$	59	Option pricing model and, where applicable, discounted cash flows	Credit default swap spreads	41bps	N/A	Credit derivative contracts	$	63	Option pricing model and, where applicable, discounted cash flows	Credit default swap spreads	150bps	N/A
Other derivative contracts	Other derivative contracts	$	(75)	Discounted cash flows	Conversion rate	1.6 times	N/A	Other derivative contracts	$	(59)	Discounted cash flows	Conversion rate	1.6 times	N/A
					Expected duration	3 years	N/A					Expected duration	2 years	N/A
Asset-backed securities available-for-sale	Asset-backed securities available-for-sale	$	111	Discounted cash flows	Market assumptions related to yields for comparable instruments	0% - 3%	2%	Asset-backed securities available-for-sale	$	131	Discounted cash flows	Market assumptions related to yields for comparable instruments	4%	N/A
Mortgage servicing rights								Mortgage servicing rights	$	7	Discounted cash flows	Constant prepayment rates	17% - 26%	19%
												Discount rate	9% - 10%	9%
												Estimated annualized costs to service	$73 - $157 per account	$76 per account
Domestic deposits (structured deposits)⁽²⁾⁽³⁾	Domestic deposits (structured deposits)⁽²⁾⁽³⁾	$	(774)	Option adjusted discounted cash flows	Implied volatility of currency pairs	6% - 11%	8%	Domestic deposits (structured deposits)(2)(3)	$	(646)	Option adjusted discounted cash flows	Implied volatility of currency pairs	9% - 11%	10%
					Equity / Equity Index volatility	7% - 28%	13%					Equity / Equity Index volatility	0% - 42%	15%
					Equity / Equity and Equity / Index correlation	43% - 49%	46%					Equity / Equity and Equity / Index correlation	43% - 47%	45%
Long-term debt (structured notes)⁽²⁾⁽³⁾	Long-term debt (structured notes)⁽²⁾⁽³⁾	$	(354)	Option adjusted discounted cash flows	Implied volatility of currency pairs	6% - 11%	8%	Long-term debt (structured notes)(2)(3)	$	(448)	Option adjusted discounted cash flows	Implied volatility of currency pairs	9% - 11%	10%
					Equity / Equity Index volatility	7% - 29%	16%					Equity / Equity Index volatility	0% - 67%	23%
					Equity / Equity and Equity / Index correlation	54% - 79%	64%					Equity / Equity and Equity / Index correlation	32% - 62%	52%

⁽¹⁾~~For asset-backed securities available-for-sale, the value shown is the arithmetic average.~~ For foreign exchange derivatives, equity derivatives, credit derivatives, structured deposits and structured notes, weighted averages are calculated based on the fair value of the instruments. For all remaining instrument types, weighted averages are calculated based on the notional value of the instruments.

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

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

N/A Not Applicable

Uncertainty of Level 3 Inputs to Fair Value Measurements

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

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

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

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


~~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.

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


HSBC USA Inc.

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.~~contracts. 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 the~~lower (higher) fair value measurement of the securities.

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

Significant Transfers Into and Out of Level 3 Measurements During the three and nine months ended September 30, 2021, we transferred $9 million and $90 million, respectively, of domestic deposits and $18 million and $25 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 second quarter of 2021, we also transferred $24 million of residential mortgage asset-backed securities and $27 million of equity derivatives from Level 3 to Level 2 as the inputs used to value these securities and derivative contracts have become more observable. During the three and nine months ended September 30, 2021, we transferred nil and $109 million, respectively, of domestic deposits and $9 million and $45 million, respectively, of long-term debt, which we elected to carry at fair value, from Level 2 to Level 3 as a result of a change in the observability of underlying inputs that resulted in the embedded derivative being unobservable. Additionally, during the third quarter of 2021, we transferred $38 million of equity derivatives from Level 2 to Level 3 as the inputs used to value these contracts have become less observable.

During the three and nine months ended September 30, 2020, we transferred $8 million and $56 million, respectively, of domestic deposits and $3 million and $19 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 nine months ended September 30, 2019, we transferred $83 million and $186 million, respectively, of domestic deposits and $45 million and $92 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.

7774


HSBC USA Inc.

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 September 30, ~~2020~~2021 and December 31, ~~2019.~~2020. The gains (losses) during the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020 are also included.


		Non-Recurring Fair Value Measurements at September 30, 2020																Total Gains (Losses) For the Three Months Ended September 30, 2020		Total Gains (Losses) For the Nine Months Ended September 30, 2020	Non-Recurring Fair Value Measurements at September 30, 2021							Total Gains (Losses) For the Three Months Ended September 30, 2021	Total Gains (Losses) For the Nine Months Ended September 30, 2021
		Level 1		Level 2		Level 3		Total								Total Gains (Losses) For the Three Months Ended September 30, 2020					Level 2		Level 3		Total		Total Gains (Losses) For the Three Months Ended September 30, 2021
		(in millions)																							(in millions)
Residential mortgage loans held for sale⁽¹⁾		$	0	$	4	$	0	$	4	$	0	$	0
Consumer loans held for sale(1)														Consumer loans held for sale(1)	$	—	$	9	$	795	$	804	$	(1)	$	(1)
Consumer loans⁽²⁾	Consumer loans⁽²⁾	0		318		0		318		4		11		Consumer loans(2)	—		198		—		198		2		8
Commercial loans held for sale⁽³⁾	Commercial loans held for sale⁽³⁾	0		91		0		91		(16)		(25)		Commercial loans held for sale(3)	—		—		92		92		—		(12)
Commercial loans⁽⁴⁾	Commercial loans⁽⁴⁾	0		0		298		298		6		(164)		Commercial loans(4)	—		—		142		142		(12)		57
Real estate owned⁽⁵⁾		0		1		0		1		0		1
Goodwill⁽⁶⁾		0		0		0		0		0		(784)

Leases⁽⁷⁾⁽⁵⁾	Leases⁽⁷⁾⁽⁵⁾	0		0		24		24		(7)		(69)		Leases⁽⁷⁾⁽⁵⁾	—		—		—		—		(4)		(59)

Total assets at fair value on a non-recurring basis	Total assets at fair value on a non-recurring basis	$	0	$	414	$	322	$	736	$	(13)	$	(1,030)	Total assets at fair value on a non-recurring basis	$	—	$	207	$	1,029	$	1,236	$	(15)	$	(7)


		Non-Recurring Fair Value Measurements at December 31, 2019																Total Gains (Losses) For the Three Months Ended September 30, 2019		Total Gains (Losses) For the Nine Months Ended September 30, 2019	Non-Recurring Fair Value Measurements at December 31, 2020							Total Gains (Losses) For the Three Months Ended September 30, 2020	Total Gains (Losses) For the Nine Months Ended September 30, 2020
		Level 1		Level 2		Level 3		Total								Total Gains (Losses) For the Three Months Ended September 30, 2019					Level 2		Level 3		Total		Total Gains (Losses) For the Three Months Ended September 30, 2020
		(in millions)																							(in millions)
Residential mortgage loans held for sale⁽¹⁾		$	0	$	12	$	0	$	12	$	0	$	0
Consumer loans held for sale(1)														Consumer loans held for sale(1)	$	—	$	4	$	—	$	4	$	—	$	—
Consumer loans⁽²⁾	Consumer loans⁽²⁾	0		14		0		14		(2)		(6)		Consumer loans(2)	—		312		—		312		4		11

Commercial loans held for sale(3)														Commercial loans held for sale(3)	—		68		—		68		(16)		(25)
Commercial loans⁽⁴⁾	Commercial loans⁽⁴⁾	0		0		50		50		1		0		Commercial loans(4)	—		—		270		270		6		(164)
Real estate owned⁽⁵⁾⁽⁶⁾	Real estate owned⁽⁵⁾⁽⁶⁾	0		6		0		6		(1)		(1)		Real estate owned⁽⁵⁾⁽⁶⁾	—		1		—		1		—		1
Goodwill⁽⁶⁾⁽⁷⁾	Goodwill⁽⁶⁾⁽⁷⁾	0		0		372		372		(365)		(365)		Goodwill⁽⁶⁾⁽⁷⁾	—		—		—		—		—		(784)
Leases⁽⁷⁾⁽⁵⁾	Leases⁽⁷⁾⁽⁵⁾	0		0		2		2		0		0		Leases⁽⁷⁾⁽⁵⁾	—		—		3		3		(7)		(69)
Total assets at fair value on a non-recurring basis	Total assets at fair value on a non-recurring basis	$	0	$	32	$	424	$	456	$	(367)	$	(372)	Total assets at fair value on a non-recurring basis	$	—	$	385	$	273	$	658	$	(13)	$	(1,030)

⁽¹⁾At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the fair value of the loans held for sale was below cost. During the second quarter of 2021, certain consumer loans were transferred to held for sale for which significant inputs in estimating fair value were unobservable.

⁽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 September 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⁾At September 30, 2021 and December 31, 2020, the fair value of the loans held for sale was below cost. During the second quarter of 2021, certain commercial loans were transferred to held for sale for which significant inputs in estimating fair value were unobservable.

⁽⁴⁾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.

⁽⁵⁾~~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.~~

⁽⁶⁾During the ~~first~~second quarter of ~~2020,~~2021, we determined that we would exit certain branches and, as a result, the ~~goodwill allocated to our previously separate RBWM~~lease ROU assets, leasehold improvement assets and ~~PB businesses~~equipment assets associated with these branches were ~~both~~ written ~~down to $0 million.~~off. During the ~~third quarter of 2019,~~three and nine months ended September 30, 2021, we also wrote down the ~~goodwill allocated to our previously separate RBWM business was written down to $372 million. See Note 8, "Goodwill~~lease ROU assets and ~~Other Long-Lived Assets," in this Form 10-Q for further discussion of the results of our goodwill impairment testing, including the events and circumstances leading to the impairments.~~

⁽⁷⁾~~Beginning in the fourth quarter of 2019 and into~~leasehold improvement assets primarily associated with certain office space that we determined we would exit. 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. During the third quarter of 2020, we also wrote down the lease ROU assets associated with certain office space that we determined we would exit. See Note 2, "Strategic Initiatives," in this Form 10-Q ~~and Note 10, "Leases" in our 2019 Form 10-K~~ for further discussion.

(6)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.

(7)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 9, "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.


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 September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:

At September 30, 2020

At September 30, 2021

Financial Instrument Type

Fair Value (in millions)

Valuation Technique(s)

Significant Unobservable Inputs

Range of Inputs

Weighted Average⁽¹⁾

Financial Instrument Type

Fair Value (in millions)

Valuation Technique(s)

Significant Unobservable Inputs

Range of Inputs

Weighted Average(1)

Consumer loans held for sale

795

Market comparables and internal assumptions

Adjusted market price

95% - 100%

99%

Commercial loans held for sale

Market comparables and internal assumptions

Adjusted market price

94%

N/A

Commercial loans

298

Valuation of third party appraisal
on underlying collateral

Loss severity rates

9% - 84%

33%

Commercial loans

142

Valuation of third party appraisal
on underlying collateral

Loss severity rates

8% - 78%

30%

At December 31, 2019

At December 31, 2020

Financial Instrument Type

Fair Value (in millions)

Valuation Technique(s)

Significant Unobservable Inputs

Range of Inputs

Weighted Average⁽¹⁾

Financial Instrument Type

Fair Value (in millions)

Valuation Technique(s)

Significant Unobservable Inputs

Range of Inputs

Weighted Average(1)

Commercial loans

Valuation of third party appraisal
on underlying collateral

Loss severity rates

9% - 100%

45%

Commercial loans

270

Valuation of third party appraisal
on underlying collateral

Loss severity rates

0% - 76%

35%

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

N/A Not Applicable

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

Consumer loans held for sale – Consumer loans held for sale are recorded at the lower of amortized cost or fair value. The fair value ~~estimates~~ of consumer loans held for sale ~~are determined primarily~~is estimated 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~~estimated 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. For consumer loans transferred to held for sale during the second quarter of 2021, the fair value measurement processes use significant unobservable inputs to adjust market prices which are specific to the characteristics of the various loan portfolios.

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~~is estimated 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.~~investors or take into account underlying collateral values. For certain commercial loans transferred to held for sale during the second quarter of 2021, the fair value measurement process uses significant unobservable inputs to adjust market prices which are specific to the characteristics of the loan portfolio.

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.


HSBC USA Inc.

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


~~HSBC USA Inc.~~

security or quoted prices for similar securities with adjustments as necessary made using observable inputs which are market corroborated.

•U.S. Government sponsored enterprises – For government sponsored mortgage-backed securities which transact in an active market, fair value measurements are based on quoted prices for the identical security or quoted prices for similar securities with adjustments as necessary made using observable inputs which are market corroborated. For government sponsored mortgage-backed securities which do not transact in an active market, fair value is determined primarily based on pricing information obtained from pricing services and is verified by internal review processes.

•Asset-backed securities ~~including collateralized debt obligations ("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~~Foreign debt securities ~~(corporate~~(government and ~~government)~~corporate) - Government securities transact in an active market and therefore 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 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~~primary 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 ~~$34~~$29 million and ~~$41~~$33 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

The following tables provide additional information relating to our available-for-sale asset-backed securities ~~including CDOs,~~ at September 30, ~~2020:~~

~~Trading asset-backed securities:~~

Rating of Securities:⁽¹⁾
Collateral Type: Level 2 Level 3 Total
(in millions)
AAA - A Collateralized debt obligations $ 39 $ 0 $ 39
Student loans 68 0 68
Total AAA - A 107 0 107
BBB - B Collateralized debt obligations 25 0 25
CCC - Unrated Residential mortgages - Subprime 0 15 15
$ 132 $ 15 $ 147

~~Available-for-sale asset-backed securities:~~2021:

Rating of Securities:⁽¹⁾

Collateral Type:

Level 3

(in millions)

AAA - A

Home equity - Alt A

2720

BBB - B

Other

~~100~~101

~~127~~121

⁽¹⁾We utilize S&P as the primary source of credit ratings in the tables above. If S&P ratings are not available, ratings by Moody's and Fitch are used in that order. ~~Ratings for CDOs represent the ratings associated with the underlying collateral.~~

Derivatives – Derivatives are recorded at fair value. Asset and liability positions in individual derivatives that are covered by legally enforceable master netting agreements, including receivables (payables) for cash collateral posted (received), are offset and presented net in accordance with accounting principles which allow the offsetting of amounts.

Derivatives traded on an exchange are valued using quoted prices. OTC derivatives, which comprise a majority of derivative contract positions, are valued using valuation techniques. The fair value for the majority of our derivative instruments are determined based on internally developed models that utilize independently corroborated market parameters, including interest rate yield curves, option volatilities, and currency rates. For complex or long-dated derivative products where market data is not available, fair value may be affected by the underlying assumptions about, among other things, the timing of cash flows, expected exposure, probability of default and recovery rates. The fair values of certain structured derivative products are


~~HSBC USA Inc.~~

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


HSBC USA Inc.

market funding spreads to the expected future funding exposure of any uncollateralized component of the OTC derivative portfolio. The expected future funding exposure is calculated by a simulation methodology, where available, and is adjusted for events that may terminate the exposure, such as the default of HUSI or the counterparty.

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

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

•Interest Rate Derivatives – Swaps use interest rate curves based on currency that are actively quoted by brokers and other pricing services. Options will also use volatility inputs which are also quoted in the broker market.

•Foreign Exchange ("FX") Derivatives – FX transactions, to the extent possible, use spot and forward FX rates which are quoted in the broker market. Where applicable, we also use implied volatility of currency pairs as inputs.

•Equity Derivatives – Use listed equity security pricing and implied volatilities from equity traded options position.

•Precious Metal Derivatives – Use spot and forward metal rates which are quoted in the broker market.

As discussed earlier, we make fair value adjustments to model valuations in order to ensure that those values represent appropriate estimates of fair value. These adjustments, which are applied consistently over time, are generally required to reflect factors such as bid-ask spreads and counterparty credit risk that can affect prices in arms-length transactions with unrelated third parties. Such adjustments are based on management judgment and may not be observable.

We estimate the counterparty credit risk for financial assets and our own credit standing for financial liabilities (the "credit valuation adjustments") in determining the fair value measurement. For derivative instruments, we calculate the credit valuation adjustment by applying the probability of default of the counterparty to the expected exposure, and multiplying the result by the expected loss given default. We also take into consideration the risk mitigating factors including collateral agreements and master netting agreements in determining credit valuation adjustments. We estimate the implied probability of default based on the credit spread of the specific counterparty observed in the credit default swap market. Where credit default spread of the counterparty is not available, we use the credit default spread of a specific proxy (e.g., the credit default swap spread of the counterparty's parent) or a proxy based on credit default swaps referencing to credit names of similar credit standing.

Real estate owned - Fair value is determined based on third party appraisals obtained at the time we take title to the property and, if less than the carrying amount of the loan, the carrying amount of the loan is adjusted to the fair value. The carrying amount of the property is further reduced, if necessary, at least every 90 days to reflect observable local market data, including local area sales data.

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

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

Long-term debt designated under FVO – We elected to apply FVO accounting to certain of our own debt issuances for which fair value hedge accounting otherwise would have been applied. These own debt issuances elected under FVO are traded in secondary markets and, as such, the fair value is determined based on observed prices for the specific instrument. The observed market price of these instruments reflects the effect of our own credit spreads. The credit spreads applied to these instruments were derived from the spreads at the measurement date.

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Additional Disclosures About the Fair Value of Financial Instruments that are Not Carried at Fair Value on the Consolidated Balance Sheet The fair value estimates set forth below are made solely to comply with disclosures required by generally accepted accounting principles in the United States and should be read in conjunction with the financial statements and notes included in this report.

The carrying amount of certain financial instruments recorded at cost on the consolidated balance sheet is considered to approximate fair value because they are short-term in nature, bear interest rates that approximate market rates, and generally have negligible credit risk. These items include cash and due from banks, interest bearing deposits with banks, customer acceptance assets and liabilities, federal funds sold and purchased, securities purchased and sold under resale and repurchase agreements, deposits with no stated maturity (e.g., demand, savings and certain money market deposits), short-term borrowings and dividends payable.

The following table summarizes the carrying value and estimated fair value of our financial instruments, excluding financial instruments that are carried at fair value on a recurring basis, at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, and their classification within the fair value hierarchy:


September 30, 2020		Carrying Value		Fair Value		Level 1		Level 2		Level 3
September 30, 2021												September 30, 2021	Carrying Value		Fair Value		Level 1		Level 2		Level 3
		(in millions)																			(in millions)
Financial assets:	Financial assets:											Financial assets:
Short-term financial assets, net of allowance for credit losses	Short-term financial assets, net of allowance for credit losses	$	17,492	$	17,492	$	1,352	$	16,126	$	14	Short-term financial assets, net of allowance for credit losses	$	63,204	$	63,204	$	1,018	$	62,140	$	46
Federal funds sold and securities purchased under agreements to resell	Federal funds sold and securities purchased under agreements to resell	25,579		25,579		0		25,579		0		Federal funds sold and securities purchased under agreements to resell	7,480		7,480		—		7,480		—
Securities held-to-maturity, net of allowance for credit losses	Securities held-to-maturity, net of allowance for credit losses	10,224		10,644		0		10,644		0		Securities held-to-maturity, net of allowance for credit losses	5,866		6,097		—		6,097		—
Commercial loans, net of allowance for credit losses	Commercial loans, net of allowance for credit losses	44,903		45,011		0		0		45,011		Commercial loans, net of allowance for credit losses	38,439		39,026		—		—		39,026
Commercial loans held for sale	Commercial loans held for sale	152		152		0		152		0		Commercial loans held for sale	1,228		1,231		—		—		1,231
Consumer loans, net of allowance for credit losses	Consumer loans, net of allowance for credit losses	20,388		19,917		0		0		19,917		Consumer loans, net of allowance for credit losses	16,585		16,140		—		—		16,140

Residential mortgage loans held for sale		89		92		0		92		0

Consumer loans held for sale												Consumer loans held for sale	3,636		3,738		—		53		3,685
Financial liabilities:	Financial liabilities:											Financial liabilities:
Short-term financial liabilities	Short-term financial liabilities	$	5,530	$	5,530	$	0	$	5,515	$	15	Short-term financial liabilities	$	6,425	$	6,425	$	—	$	6,377	$	48
Deposits:
Without fixed maturities		135,941		135,941		0		135,941		0
Fixed maturities		9,664		9,673		0		9,673		0

Deposits												Deposits	140,077		140,072		—		140,072		—
Deposits held for sale												Deposits held for sale	9,321		9,321		—		9,321		—
Long-term debt	Long-term debt	10,260		10,607		0		10,607		0		Long-term debt	8,370		8,878		—		8,878		—

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 resell 17,838 17,838 0 17,838 0
Securities held-to-maturity 13,293 13,431 0 13,431 0
Commercial loans, net of allowance for credit losses 47,704 49,252 0 0 49,252
Commercial loans held for sale 34 34 0 34 0
Consumer loans, net of allowance for credit losses 20,212 19,889 0 0 19,889
Residential mortgage loans held for sale 77 78 0 77 1
Financial liabilities:
Short-term financial liabilities $ 3,304 $ 3,304 $ 0 $ 3,286 $ 18
Deposits:
Without fixed maturities 96,161 96,161 0 96,161 0
Fixed maturities 16,323 16,264 0 16,264 0
Long-term debt 16,350 16,696 0 16,696 0


~~HSBC USA Inc.~~


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

Consumer loans held for sale	208		217		—		217		—


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

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

Lending-related commitments - The fair value of loan commitments, revolving credit facilities and standby letters of credit are not included in the above table. The majority of the lending-related commitments are not carried at fair value on a recurring basis nor are they actively traded. These instruments generate fees, which approximate those currently charged to originate similar commitments, which are recognized over the term of the commitment period. Deferred fees on loan commitments,


HSBC USA Inc.

revolving credit facilities and standby letters of credit totaled ~~$142~~$140 million and ~~$162~~$137 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

~~20.~~21. Litigation and Regulatory Matters

The following supplements, and should be read together with, the disclosure in Note 29, "Litigation and Regulatory Matters," in our ~~2019~~2020 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~~2021 (the ~~"2020~~"2021 First Quarter Form 10-Q") and in Note 21, "Litigation and Regulatory Matters," in our Form 10-Q for the six month period ended June 30, ~~2020~~2021 (the ~~"2020~~"2021 Second Quarter Form 10-Q"). Only those matters with significant updates and new matters since our disclosure in our ~~2019~~2020 Form 10-K, our ~~2020~~2021 First Quarter Form 10-Q and our ~~2020~~2021 Second Quarter Form 10-Q are reported herein.

In addition to the matters described below and in our ~~2019~~2020 Form 10-K, our ~~2020~~2021 First Quarter Form 10-Q and our ~~2020~~2021 Second Quarter Form 10-Q, in the ordinary course of business, we are routinely named as defendants in, or as parties to, various legal actions and proceedings relating to activities of our current and/or former operations. These legal actions and proceedings may include claims for substantial or indeterminate compensatory or punitive damages, or for injunctive relief. In the ordinary course of business, we also are subject to governmental and regulatory examinations, information-gathering requests, investigations and proceedings (both formal and informal), certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. In connection with formal and informal inquiries by these regulators, we receive numerous requests, subpoenas and orders seeking documents, testimony and other information in connection with various aspects of our regulated activities.

Due to the inherent unpredictability of legal matters, including litigation, governmental and regulatory matters, particularly where the damages sought are substantial or indeterminate or when the proceedings or investigations are in the early stages, we cannot determine with any degree of certainty the timing or ultimate resolution of such matters or the eventual loss, fines, penalties or business impact, if any, that may result. We establish reserves for litigation, governmental and regulatory matters when those matters present loss contingencies that are both probable and can be reasonably estimated. Once established, reserves are adjusted from time to time, as appropriate, in light of additional information. The actual costs of resolving litigation and regulatory matters, however, may be substantially higher than the amounts reserved for those matters.

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 ~~2019~~2020 Form 10-K, ~~and~~ in Note 20, "Litigation and Regulatory Matters," in our ~~2020~~2021 First Quarter Form 10-Q and in Note 21, "Litigation and Regulatory Matters," in our ~~2020~~2021 Second Quarter Form 10-Q, as to which a loss in excess of accrued liability is reasonably possible in future periods and for which there is sufficient currently available information on the basis of which management believes it can make a reliable estimate, we believe a reasonable estimate could be as much as $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 ~~2019~~2020 Form 10-K, ~~and~~ in Note 20, "Litigation and Regulatory Matters," in our ~~2020~~2021 First Quarter Form 10-Q and in Note 21, "Litigation and Regulatory Matters," in our ~~2020~~2021 Second Quarter Form 10-Q, it is not practicable at this time for us to determine the terms on which these ongoing investigations will be resolved or the timing of such resolution. As matters progress, it is possible that any fines and/or penalties could be significant.

Given the substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an adverse outcome in certain of these matters could have a material adverse effect on our consolidated financial statements in any particular quarterly or annual period.

Foreign Exchange ("FX") Matters

~~HSBC Bank USA's~~Investigations

In August 2021, the charges deferred by the Department of Justice's three-year deferred prosecution agreement with the California Attorney General's Office to resolve its ongoing investigation was approved by a California state court in September 2020. The full amount of the settlement of $7 million was reserved in the fourth quarter of 2019. This matter will no longer be reported.

~~Precious Metals Fix Matters~~

~~In re Commodity Exchange Inc., Gold Futures and Options Trading Litigation (Gold Fix Litigation)~~ ~~In October 2020, the HSBC defendants reached a settlement in principle with the plaintiffs to resolve the consolidated action. The settlement in~~


~~HSBC USA Inc.~~

~~principle remains subject to definitive documentation and subsequent court approval.HSBC Bank USA is fully reserved for its portion of the settlement.~~

~~Mortgage Securitization Trust Litigation~~ HSBC Bank USA filed motions to dismiss in the actions brought by Park Royal LLC and by VRS Holdings 2 LLC and Reliance Standard Life Insurance Company in New York state court, and those motions were fully briefed in October 2020 and await decision.

~~Shareholder Derivative Action~~ ~~In October 2020, the court granted final approval of the settlement.~~

~~Anti-Terrorism Act Cases~~

~~Mary Zapata, et al. v.~~ HSBC Holdings plc ~~et al.~~ ~~In October 2020 the US Court of Appeals for the Second Circuit affirmed the lower court's decision granting the defendants' motion to dismiss.~~

~~Rigoberto Vasquez and Eva Garcia et al v.Hong Kong and Shanghai Banking Corporation Ltd., HSBC Bank USA, N.A., et al.~~ ~~In September 2020, Plaintiffs filed a notice of appeal of the district court's dismissal of HSBC Bank USA on motion.~~

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.(the "FX DPA") were dismissed.

~~21.~~22. 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 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 balance 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 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


~~HSBC USA Inc.~~

the new guidance, an entity is permitted 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 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 financial results, 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 with which we are able to conduct 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;


~~HSBC USA Inc.~~

•the financial condition of our clients and counterparties and our ability to manage counterparty risk;


HSBC USA Inc.

•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, ~~2019~~2020 (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.

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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 ~~rebounded partially~~continued its recovery during the first nine months of 2021, although the pace of growth slowed in the third quarter ~~of 2020 after deteriorating rapidly into recession during the second quarter~~as stimulus spending abated and a surge in COVID-19 cases driven by the Delta variant weighed on consumer sentiment and job growth. As previously discussed, the COVID-19 pandemic ~~which~~has 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 the duration of the pandemic and its ultimate repercussions 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. ~~Although~~However, these government support measures combined with progress on vaccinations along with the easing and removal of many restrictions by states, have helped speed the economic recovery along considerably while also contributing to higher inflation. U.S. Gross Domestic Product ("GDP") is currently forecast to grow at a slower pace in the third quarter of ~~2020, it is still expected to contract in total for~~2021, while the ~~year~~U.S. economy added over 1.3 million jobs during the first nine months of 2021 and the total unemployment rate ~~of 7.9~~fell to 4.8 percent at September ~~2020 has remained high~~2021 as compared with ~~3.5~~6.7 percent at December 2019. After cutting short-term interest rates by 150 basis points (to near zero) in March 2020 and announcing various other initiatives to enhance liquidity and support the flow of credit to households and businesses,2020. In September 2021, the FRB decided to hold short-term interest rates steady ~~in September 2020 and indicated~~(at near zero) while indicating it expects ~~short-term rates~~ to ~~remain unchanged until it is confident that the economy is far along in~~begin reducing its ~~recovery.~~bond buying program soon.

~~The~~Although the U.S. economy continued to improve in the first nine months of 2021, the impact of the COVID-19 pandemic, including the emergence of new variants, on economic conditions both in the United States and abroad ~~during the first nine months of 2020 has created~~continues to create global uncertainty about the future economic environment, including the ~~length~~pace and ~~depth~~extent of ~~a global recession.~~the 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 ~~2020~~2021 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 ~~operations~~operations. Despite the improvement in economic conditions during the first nine months 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 and an increase to the provision for credit losses on our loan portfolio. 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. 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 accepted treatment becomes widely 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.

~~Our restructuring~~We continue to progress our strategic plan ~~is moving forward, including consolidation of~~to restructure our ~~wholesale and retail middle and back office functions, each under a single~~ operations structure, simplification of our support service functions, the exit or transfer of certain derivative contracts, and the consolidation of our retail branch network and creation of our Wealth and Personal Banking business both of which were completed("Restructuring Plan") as discussed further in Note 2, "Strategic Initiatives," in the ~~second quarter. While we~~accompanying consolidated financial statements. We remain committed to our multi-year strategic plan to re-profile our business.

In May 2021, we announced that we would take further actions to strategically reposition our Wealth and Personal Banking business to focus on the ~~timing~~banking and wealth management needs of globally-connected affluent and high net worth clients through our Premier, Jade and Private Banking propositions. We will exit our mass market retail banking business, including our Personal and Advance propositions as well as retail business banking, and will rebrand approximately 20-25 of our retail branches into international wealth centers to serve our Premier and Jade customers. In conjunction with the ~~strategic actions as outlined~~execution of this strategy, we have entered into definitive sale agreements with third parties to sell approximately 90 of our retail branches along with substantially all residential mortgage, unsecured and retail business banking loans and all deposits in our ~~2019 Form 10-K may~~branch network not associated with our Premier, Jade and Private Banking customers. Certain assets under management associated with our mass market retail banking business which are managed by an affiliate will also be ~~re-sequenced~~transferred. The remaining branches not sold or ~~delayed beyond 24 months~~rebranded will be closed. As a result of entering into these sale agreements, assets and liabilities with an aggregate carrying value of approximately $2.9 billion and $10.1 billion, respectively, were transferred to held for sale during the second quarter of 2021. Although the disposal group will be sold in multiple transactions that are expected to be completed by the first quarter of 2022, the actual time to complete these sales depends on many factors, including regulatory approval. In addition, mass market retail banking loans that will not be purchased in the transaction described above, including our remaining retail credit card portfolio, which collectively totaled $1.1 billion, were also transferred to held for sale during the second quarter of 2021 as we did not intend to hold these loans for 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.~~foreseeable future. See Note ~~2, "Strategic Initiatives,~~3, "Branch Assets and Liabilities Held for Sale," in the accompanying consolidated financial ~~statements.~~statements for additional information.

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HSBC USA Inc.

The following table sets forth selected financial highlights ~~for~~of HUSI on a U.S. GAAP basis for the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020 and at September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


		Three Months Ended September 30,									Nine Months Ended September 30,										Three Months Ended September 30,						Nine Months Ended September 30,
		2020			2019			2020			2019				2021			2020			2021			2020
		(dollars are in millions)																						(dollars are in millions)
Net income (loss)	Net income (loss)	$	188		$	(250)		$	(1,088)		$	(20)		Net income (loss)	$	137		$	188		$	669		$	(1,088)
Rate of return on average:	Rate of return on average:													Rate of return on average:
Total assets	Total assets	.4		%	(.5)		%	(.7)		%	—		%	Total assets	.3		%	.4		%	.5		%	(.7)		%
Risk-weighted assets	Risk-weighted assets	.6			(.8)			(1.2)			—			Risk-weighted assets	.5			.6			.8			(1.2)
Common equity	Common equity	4.4			(5.7)			(8.8)			(.4)			Common equity	3.2			4.4			5.0			(8.8)
Tangible common equity	Tangible common equity	4.5			(6.3)			(9.2)			(.5)			Tangible common equity	3.3			4.5			5.1			(9.2)
Total equity	Total equity	4.1			(5.3)			(7.9)			(.1)			Total equity	3.0			4.1			4.9			(7.9)
Net interest margin	Net interest margin	1.15			1.14			1.13			1.29			Net interest margin	1.13			1.15			1.15			1.13
Efficiency ratio	Efficiency ratio	86.8			111.8			111.4			90.2			Efficiency ratio	87.4			86.8			85.9			111.4
Commercial net charge-off ratio⁽¹⁾	Commercial net charge-off ratio⁽¹⁾	.08			.12			.23			.06			Commercial net charge-off ratio(1)	.12			.08			.13			.23
Consumer net charge-off ratio⁽¹⁾	Consumer net charge-off ratio⁽¹⁾	.45			.30			.43			.28			Consumer net charge-off ratio(1)	(.10)			.45			.66			.43

⁽¹⁾Excludes loans held for sale.


		September 30, 2020			December 31, 2019				September 30, 2021			December 31, 2020
		(dollars are in millions)										(dollars are in millions)
Additional Select Ratios:	Additional Select Ratios:							Additional Select Ratios:
Allowance as a percent of loans⁽¹⁾	Allowance as a percent of loans⁽¹⁾	1.63		%	.93		%	Allowance as a percent of loans(1)	.86		%	1.63		%
Commercial allowance as a percent of loans⁽¹⁾	Commercial allowance as a percent of loans⁽¹⁾	1.92			1.05			Commercial allowance as a percent of loans(1)	1.22			1.96
Consumer allowance as a percent of loans⁽¹⁾	Consumer allowance as a percent of loans⁽¹⁾	.99			.64			Consumer allowance as a percent of loans(1)	—			.98
Consumer two-months-and-over contractual delinquency	Consumer two-months-and-over contractual delinquency	2.40			2.04			Consumer two-months-and-over contractual delinquency	2.01			2.27
Loans to deposits ratio⁽²⁾	Loans to deposits ratio⁽²⁾	51.33			71.60			Loans to deposits ratio(2)	46.51			48.90
Common equity Tier 1 capital to risk-weighted assets(3)	Common equity Tier 1 capital to risk-weighted assets(3)	14.2			13.1			Common equity Tier 1 capital to risk-weighted assets(3)	15.9			14.5
Tier 1 capital to risk-weighted assets(3)	Tier 1 capital to risk-weighted assets(3)	15.3			14.1			Tier 1 capital to risk-weighted assets(3)	17.1			15.6
Total capital to risk-weighted assets(3)	Total capital to risk-weighted assets(3)	18.5			16.3			Total capital to risk-weighted assets(3)	19.3			18.8
Tier 1 leverage ratio	Tier 1 leverage ratio	8.4			9.9			Tier 1 leverage ratio	9.1			8.6
Supplementary leverage ratio	Supplementary leverage ratio	7.6			6.9			Supplementary leverage ratio	7.0			7.8
Total equity to total assets	Total equity to total assets	9.1			10.4			Total equity to total assets	9.1			9.3

Select Balance Sheet Data:	Select Balance Sheet Data:							Select Balance Sheet Data:
Cash and interest bearing deposits with banks	Cash and interest bearing deposits with banks	$	17,478		$	3,782		Cash and interest bearing deposits with banks	$	63,158		$	15,655
Trading assets	Trading assets	33,754			28,452			Trading assets	21,985			27,284
Securities available-for-sale	Securities available-for-sale	41,328			35,663			Securities available-for-sale	36,507			40,672
Loans:	Loans:							Loans:
Commercial loans	Commercial loans	45,783			48,211			Commercial loans	38,914			41,599
Consumer loans	Consumer loans	20,626			20,342			Consumer loans	16,612			20,489
Total loans	Total loans	66,409			68,553			Total loans	55,526			62,088
Deposits(4)	Deposits(4)	150,328			119,693			Deposits(4)	152,368			145,150

⁽¹⁾Excludes loans held for sale.

⁽²⁾Represents period end loans, net of allowance for ~~credit~~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.

(3)Prior period amounts have been revised to conform to the current period presentation. See Note 17, "Retained Earnings and Regulatory Capital Requirements," in the accompanying consolidated financial statements for further discussion.


HSBC USA Inc.

(4)Includes $9.3 billion of deposits held for sale at September 30, 2021.

Net income (loss) was income of $137 million and $669 million during the three and nine months ended September 30, 2021, respectively, compared with income of $188 million and a loss of $1,088 million during the three and nine months ended September 30, 2020, ~~respectively, compared with losses~~respectively. Income (loss) before income tax was income of ~~$250~~$177 million and ~~$20~~$891 million during the three and nine months ended September 30, ~~2019, respectively. Income (loss) before income tax was~~2021, respectively, compared with income of $224 million and a loss of $1,160 million during the three and nine months ended September 30, 2020, ~~respectively, compared with a loss of $211 million and income of $89 million during the three and nine months ended September 30, 2019,~~ respectively. The ~~increase~~decrease in income (loss) before income tax during the three months ended September 30, ~~2020~~2021 was due to lower other revenues driven by lower trading revenue as well as lower net interest income and a higher provision for credit losses. These decreases in the three-month period were partially offset by lower operating expenses. In the year-to-date period, income (loss) before income tax increased due primarily to a lower provision for credit losses driven by improved economic conditions and the impact of our decision to exit our mass market retail banking business as well as our remaining credit card portfolio which resulted in a release of credit loss reserves and a reduction to the provision for credit losses of approximately $101 million during the second quarter of 2021. Also contributing to the increase in the year-to-date period was lower operating expenses driven by the non-recurrence of a ~~$365~~$784 million goodwill impairment charge recorded during the first quarter of 2020. These increases in the ~~prior year~~year-to-date period ~~a lower provision for credit losses reflecting the partial rebound in economic conditions in the third quarter and higher net interest income. These increases~~ were partially offset by lower other ~~revenues. In the year-to-date period, income (loss) before income tax decreased due primarily to a higher provision for credit losses~~revenues driven by the overall deterioration of economic conditions caused by the COVID-19 pandemic, higher operating expenses driven by higher goodwill impairment charges recorded in the current year-to-date period as discussed below and lower ~~other revenues.~~

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. During the third quarter of 2020, we completed our annual impairment test of goodwill and determined that the fair value of our Commercial Banking reporting unit exceeded its carrying value by approximately 110 percent. 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 goodwill impairment testing, see Note 8, "Goodwill and Other Long-Lived Assets," in the accompanying consolidated financial statements.trading revenue.

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 September 30,						Nine Months Ended September 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2021		2020		2021		2020
		(in millions)															(in millions)
Income (loss) before income tax, as reported	Income (loss) before income tax, as reported	$	224	$	(211)	$	(1,160)	$	89	Income (loss) before income tax, as reported	$	177	$	224	$	891	$	(1,160)
Goodwill impairment	Goodwill impairment	—		365		784		365		Goodwill impairment	—		—		—		784

Costs to achieve⁽¹⁾	Costs to achieve⁽¹⁾	84		—		235		—		Costs to achieve(1)	61		84		215		235

Severance costs⁽²⁾		—		6		—		23

Adjusted performance⁽³⁾⁽²⁾	Adjusted performance⁽³⁾⁽²⁾	$	308	$	160	$	(141)	$	477	Adjusted performance⁽³⁾⁽²⁾	$	238	$	308	$	1,106	$	(141)

⁽¹⁾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.~~Plan. Costs to achieve primarily ~~consisted~~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 and nine months ended September 30, 2021 also includes $14 million and $32 million, respectively, of allocated costs from other HSBC affiliates related to the HSBC Group's restructuring activities. The expense during the nine months ended September 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.


~~HSBC USA Inc.~~

Excluding the impact of the items in the table above, our adjusted performance during the three and nine months ended September 30, ~~2020 increased $148~~2021 decreased $70 million and ~~decreased $618~~increased $1,247 million, respectively, compared with the prior year periods. The ~~increase~~decrease in the ~~three month~~three-month period was due to lower other revenues driven by lower trading revenue as well as lower net interest income and a higher provision for credit losses. These decreases in the three-month period were partially offset by lower operating expenses. In the year-to-date period, the increase was due primarily to a lower provision for credit losses ~~reflecting a partial rebound in~~driven by improved economic conditions inand, to a lesser extent, the ~~third quarter~~impact of our decision to exit our mass market retail banking business as well as ~~higher net interest income and~~our remaining credit card portfolio which resulted in a release in credit loss reserves during the second quarter of 2021 as discussed above. Also contributing to the increase in the year-to-date period were lower operating expenses. These increases in the year-to-date period were partially offset by lower other revenues driven by lower trading revenue. In the year-to-date period, the decrease was due primarily to a higher provision for credit losses driven by the overall deterioration of economic conditions caused by the COVID-19 pandemic and lower other revenues driven by lower trading revenue, 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 past~~debt.

In March 2021, ~~when~~ the United Kingdom ("U.K.") Financial Conduct Authority ~~has announced~~("FCA") confirmed that all LIBOR tenors will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021, in the case of the one-week and two-month USD LIBOR tenors and all non-USD LIBOR tenors, and immediately after June 30, 2023,


HSBC USA Inc.

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 mature naturally and significantly aids in reducing the risks associated with transitioning legacy contracts onto replacement rates. Additionally, in September 2021, the FCA confirmed that to avoid a disruption to legacy contracts that reference the one-month, three-month and six-month sterling and Japanese yen LIBOR settings, it will ~~no longer~~ require ~~banks~~the administrator to ~~submit rates~~publish these settings for ~~LIBOR.~~ the duration of 2022. These six settings will be available only for use in some legacy contracts, and are not for use in new business.

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 March 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 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 at the first reset subsequent to June 30, 2023. These announcements provide clarity on the future terms of the many derivative contracts which now incorporate the ISDA fallbacks. In addition, central clearing counterparties amended their rules to incorporate the new ISDA fallback language and adhere to the ISDA fallback protocol for cleared derivative contracts.

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 ~~LIBOR~~LIBOR-based contracts, onto replacement rates. In particular, during the first nine months of ~~2020,~~2021, we:

•implemented ~~risk disclosures~~the capabilities for ~~new sales of LIBOR-based products across all of~~SOFR-based derivatives in our ~~business lines;~~Markets Treasury function and to offer SOFR-based bilateral loans in our Commercial Banking and our Wealth and Personal Banking businesses;

•~~incorporated~~continued to reduce our LIBOR derivative exposures through the ~~new fallback language recommended by the ARRC into new LIBOR-based~~exit or transfer of certain derivative contracts ~~for adjustable rate mortgage loans;~~

•updated the existing ARRC recommended fallback language for syndicated loans and bilateral loans with the revised hardwired fallback language recently published by the ARRC, under which both the trigger events that would cause transition to a new benchmark rate, and a waterfallas part of ~~identified successor rates, are specified;~~our Restructuring Plan; and

•~~sold substantially all~~started to engage our clients to provide alternative products and determine their ability and readiness to transition.

The current focus of our ~~LIBOR-linked variable rate debt securities maturing beyond 2021.~~

While our global businesses continue to develop their capabilities to offer alternative rate products and the supporting processes and systems, the COVID-19 pandemic has impacted the speed at which they are able to develop these capabilities and the readiness of our customers to use alternative rate products. Consequently, the sale of LIBOR-based products with maturities beyond 2021 will continue for longer than initially anticipated andclient transition efforts is ~~likely to increase the volume of legacy~~on those contracts that will ~~need~~be impacted by tenors ceasing or becoming non-representative immediately after December 31, 2021. Such contracts outstanding at September 30, 2021 included contracts for non-derivative financial assets with a carrying value of approximately $667 million, primarily consisting of certain non-USD LIBOR-based commercial loans, and contracts for non-USD LIBOR-based derivatives with a notional value of approximately $2.0 billion. Such contracts for non-derivative financial liabilities were immaterial at September 30, 2021. The ability of HUSI and its clients 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 risk~~is dependent on the ~~transition process, which could potentially increase the level~~availability and market liquidity of ~~conduct and operational risks. We are currently targeting to have pricing and data/workflow requirements related to transitioning legacy contracts onto~~products that reference replacement rates, ~~finalized in~~including SOFR, and on our clients being ready and able to adapt their own processes and systems to accommodate the ~~fourth quarter.~~replacement products. We continue to engage with industry participants, the official sector and our clients to support an orderly transition and the mitigation of 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 ~~2019~~2020 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 ~~provides~~provided 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 ("TDR Loans") ~~from~~beginning March 1, ~~2020~~2020. This TDR Loan guidance can be applied until the earlier of ~~December 31, 2020~~January 1, 2022 or 60 days following the termination of the presidentially declared national emergency. ~~During the third quarter of 2020, we~~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


~~HSBC USA Inc.~~

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~~prohibited 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 December~~expired on July 31, ~~2020.~~2021, although homeowners continued to have protection from eviction due to foreclosure through September 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.


HSBC USA Inc.

We have implemented various loan modification payment deferral programs to provide borrowers relief from the economic impacts of the COVID-19 pandemic. The following table summarizes information about loans under these programs as of September 30, ~~2020.~~2021. Not included in the following table are loans that have exited the programs or have been transferred to held for sale 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.


		September 30, 2020									September 30, 2021
		Number of Loans	Loan Amount		% of Loans with Payment⁽¹⁾	Program Details		Number of Loans	Loan Amount		% of Loans with Payment(1)	Program Details
		(in thousands)	(in millions)					(in thousands)	(in millions)
Commercial:	Commercial:						Commercial:
Real estate, including construction⁽²⁾	Real estate, including construction⁽²⁾	—	$	680	0%	Primarily deferrals of up to twelve months	Real estate, including construction⁽²⁾	—	$	227	0%	Primarily deferrals of up to twenty-four months
Business and corporate banking	Business and corporate banking	0.1	190		0	Primarily deferrals of up to twelve months	Business and corporate banking	—	82		0	Primarily deferrals of up to twenty-four months
Global banking⁽²⁾	Global banking⁽²⁾	—	233		0	Primarily deferrals of up to twelve months	Global banking⁽²⁾	—	39		0	Primarily deferrals of up to twenty-four months
Total commercial		0.1	1,103		0
Other commercial							Other commercial		4		0	Primarily deferrals of up to twenty-four months
Total commercial(2)							Total commercial(2)	—	352		0
Consumer:	Consumer:						Consumer:
Residential mortgages⁽³⁾	Residential mortgages⁽³⁾	1.9	1,016		20	Deferrals of either three or six month increments up to a maximum of twelve months	Residential mortgages(3)	.9	429		33	Deferrals of either three or six month increments up to a maximum of eighteen months
Home equity mortgages⁽³⁾	Home equity mortgages⁽³⁾	0.4	49		29	Deferrals of either three or six month increments up to a maximum of twelve months	Home equity mortgages(3)	.2	23		22	Deferrals of either three or six month increments up to a maximum of eighteen months
Credit cards		17.3	71		45	Deferrals of either four or six months increments up to a maximum of six months
Other consumer		2.5	18		27	Deferrals of either four or six months increments up to a maximum of six months
Total consumer		22.1	1,154		22

Total consumer(4)							Total consumer(4)	1.1	452		33
Total	Total	22.2	$	2,257	11		Total	1.1	$	804	18

⁽¹⁾Represents the percentage of loans under a COVID-19 related payment deferral program at September 30, ~~2020~~2021 for which at least one payment was collected during the third quarter of ~~2020.~~2021.

⁽²⁾~~Number~~Total number of commercial loans is less than ~~50.~~15.

⁽³⁾Includes ~~$24~~$417 million of consumer mortgage loans where the borrowers were provided with extended payment deferral relief of more than six months at September 30, ~~2020 and, as a result, have been placed on nonaccrual status.~~2021. Due to our CARES Act election, $404 million of these loans were exempted from TDR assessment. In addition, $367 million of these loans have been placed on nonaccrual status, because the borrowers utilized a payment deferral of more than six months.

(4)


~~HSBC USA Inc.~~Not included in the table at September 30, 2021 are $117 million of consumer loans under COVID-19 payment deferral programs which were transferred to held for sale during the second quarter of 2021 as part of our decision to exit our mass market retail banking business as well as our remaining retail credit card portfolio.

When the payment relief period ends, 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. 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~~and/or extend the term of the loan which would result in the loan being classified as a TDR Loan. As of September 30, ~~2020, $331~~2021, $1,042 million and ~~$530~~$1,039 million of commercial and consumer loans, respectively, have exited a COVID-19 related payment deferral program, ~~none~~ of which nil and $27 million, respectively, entered into a modification program upon exiting that resulted in the loans being classified as TDR Loans. ~~Included in~~Of the ~~amount of~~commercial and consumer loans that have exited a


HSBC USA Inc.

COVID-19 related payment deferral program, ~~are approximately $78 million~~100 percent and 79 percent, respectively, were current or less than 30 days past due as of ~~consumer mortgage loans that were placed on nonaccrual status and are being evaluated for acceptance into a modification program.~~September 30, 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 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 ~~$1,186~~$437 million at September 30, ~~2020. Under current law, the~~2021. The SBA ~~stopped~~deadline for accepting PPP loan applications from participating lenders expired on ~~August 8, 2020.~~

~~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 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 currently not a participating lender in the MSLP.May 31, 2021.


~~HSBC USA Inc.~~

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, as~~IASB. 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 September 30,						Nine Months Ended September 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2021		2020		2021		2020
		(in millions)															(in millions)
Profit (loss) before tax – U.S. GAAP basis	Profit (loss) before tax – U.S. GAAP basis	$	224	$	(211)	$	(1,160)	$	89	Profit (loss) before tax – U.S. GAAP basis	$	177	$	224	$	891	$	(1,160)
Adjustments:	Adjustments:									Adjustments:
Expected credit losses	Expected credit losses	(73)		26		257		91		Expected credit losses	(41)		(73)		(229)		257
Goodwill impairment		—		156		91		156
Loans held for sale										Loans held for sale	(2)		3		(106)		3
Pension and other postretirement benefit costs										Pension and other postretirement benefit costs	(4)		(4)		(9)		(14)
Loan origination	Loan origination	4		2		13		8		Loan origination	(1)		4		(7)		13
Precious metal loans	Precious metal loans	1		(9)		10		4		Precious metal loans	(4)		1		(2)		10
Leases										Leases	(1)		(1)		4		(10)
Renewable energy tax credit investments	Renewable energy tax credit investments	2		7		9		10		Renewable energy tax credit investments	4		2		13		9
Deposit incentives		—		1		3		10

Leases		(1)		(4)		(10)		(11)
Pension and other postretirement benefit costs		(4)		(3)		(14)		(2)

Other long-lived assets impairment		(277)		—		(277)		—
Other long-lived assets										Other long-lived assets	10		(277)		49		(277)
Goodwill impairment										Goodwill impairment	—		—		—		91
Other	Other	3		2		6		5		Other	(2)		—		(1)		6
Profit (loss) before tax – Group Reporting Basis	Profit (loss) before tax – Group Reporting Basis	$	(121)	$	(33)	$	(1,072)	$	360	Profit (loss) before tax – Group Reporting Basis	$	136	$	(121)	$	603	$	(1,072)

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 ~~2019~~2020 Form 10-K. ~~In addition, see Note 15, "Business Segments," in the accompanying consolidated financial statements for a discussion of~~There have been no significant changes since December 31, ~~2019~~2020 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.

~~Expected~~During the three and nine months ended September 30, 2021, expected credit losses were lower under U.S. GAAP than under the Group Reporting Basis. Under the Group Reporting Basis, a majority of our loans are considered to be in "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. Primarily as a result of the different requirements, releases in credit reserves driven by improved economic conditions, which resulted in improved economic forecasts used to calculate expected credit losses as well as client paydowns, were more pronounced under U.S. GAAP.


HSBC USA Inc.

During the three months ended September 30, 2020, expected credit losses were lower under U.S. GAAP than under the Group Reporting Basis while, in the year-to-date period, expected credit losses were higher 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' (which requires a 12-month expected credit losses estimate), while under U.S. GAAP such loans require a lifetime expected credit losses estimate. Primarily as a result of the different ~~approaches,~~requirements related to stage 1 loans discussed above, during the three months ended September 30, 2020, releases in credit reserves driven by ~~the~~a partial rebound in economic conditions in the third quarter of 2020, which resulted in ~~an improvement in the~~improved economic forecasts used to calculate expected credit losses, as well as releases in credit reserves due to paydowns, including the paydown of a single oil and gas industry client, were more pronounced under U.S. GAAP. In the year-to-date period, loss provisions driven by ~~the~~an overall 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 downgrades reflecting weakness in the financial condition of certain clients, ~~was~~were more pronounced under U.S. GAAP.

During the ~~three and~~ nine months ended September 30, ~~2019,~~2021, we transferred certain loans to held for sale which under U.S. GAAP require the loans to be carried at the lower of amortized cost or fair value which resulted in a release of credit loss ~~estimates were~~reserves on the loans. Under the Group Reporting Basis, loans held for sale continue to be accounted for and credit losses continue to be measured in accordance with IFRS 9, "Financial Instruments," with any gain or loss recorded at the time of sale. In addition, a portion of the loans transferred under U.S. GAAP did not meet the more stringent criteria for held for sale classification under the Group Reporting Basis.

During the nine months ended September 30, 2021, amortization expense for long-lived assets was higher under U.S. GAAP due to the impairment charge recorded under the Group Reporting Basis during the third quarter of 2020 as discussed below. Consequently, the carrying amounts for capitalized software and leasehold improvements are 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~~and, as a result, corresponding amortization expense is higher under U.S. GAAP. In addition, ~~expected credit losses~~during the second quarter of 2021, we determined we would exit certain branches as part of our Restructuring Plan and, as a result, we recorded an impairment charge of $18 million under U.S. GAAP to write-off the leasehold improvements associated with these branches. These leasehold improvements were previously written-off under the Group Reporting Basis in the year-to-date period reflect a release in credit loss reserves due to 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). The higher credit loss estimates under U.S. GAAP in the year-to-date period was partially offset by a release in credit loss reserves under U.S. GAAP for risk factors associated with fraud.as discussed below.


~~HSBC USA Inc.~~

~~Goodwill impairment~~ - During ~~the nine months ended September 30, 2020 and~~ the three and nine months ended September 30, 2019, 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 lower carrying amounts of goodwill and, therefore, lower impairment charges under the Group Reporting Basis.

~~Other long-lived assets impairment~~ ~~- During the third quarter of~~ 2020, we determined that long-lived assets comprising capitalized software, property, plant and equipment and operating lease right-of-use assets may not be recoverable and tested the long-lived asset group for impairment. Under the Group Reporting Basis, we recorded an impairment charge of $277 million to ~~write down~~write-down the long-lived asset group to its estimated fair value, consisting of the write-off of all the capitalized software and a portion of the leasehold improvements primarily associated with our Wealth and Personal Banking business segment. Under U.S. GAAP, the estimated undiscounted cash flows of the long-lived asset group exceeded its carrying amount and no impairment charge was required. ~~See Note 15, "Business Segments," in~~

During the ~~accompanying consolidated financial statements for additional discussion.~~

~~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;

•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 utilize a minimum of three forward-looking economic scenarios to estimate lifetime ECL. In periods with high economic uncertainty, we supplement the lifetime estimate with alternative scenarios, each assigned a weighting based upon management's assessment of the likelihood of occurrence. This was the case beginning in 2020 as the economic conditions caused by the COVID-19 pandemic created significant economic uncertainty. As a result, we developed and utilized a fourth scenario for estimating lifetime ECL, referred to as the "Alternative Downside scenario".

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 atnine months ended September 30, 2020, ~~would have~~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 ~~combined increase to our allowance for credit losses~~lower carrying amount of goodwill and, ~~liability for off-balance sheet credit exposures of approximately $1,180 million. This illustration only represents~~therefore, a lower impairment charge under the ~~effect of changes in the weighting of these scenarios on our existing modeled portfolios and does not consider changes in the allowance related to management judgment that might occur.~~Group Reporting Basis.

9589


HSBC USA Inc.

Balance Sheet Review

The following table provides balance sheet totals at September 30, ~~2020~~2021 and increases (decreases) since December 31, ~~2019:~~2020:


				Increase (Decrease) From									Increase (Decrease) From
				December 31, 2019									December 31, 2020
		September 30, 2020		Amount		%			September 30, 2021		Amount		%
		(dollars are in millions)											(dollars are in millions)
Period end assets:	Period end assets:							Period end assets:
Short-term investments	Short-term investments	$	43,057	$	21,437	99.2	%	Short-term investments	$	70,638	$	19,237	37.4	%
Loans, net	Loans, net	65,325		(2,591)		(3.8)		Loans, net	55,051		(6,022)		(9.9)
Loans held for sale	Loans held for sale	282		(7)		(2.4)		Loans held for sale	4,927		4,590		*
Trading assets	Trading assets	33,754		5,302		18.6		Trading assets	21,985		(5,299)		(19.4)
Securities	Securities	51,552		2,596		5.3		Securities	42,373		(7,280)		(14.7)
All other assets	All other assets	6,976		(1,166)		(14.3)		All other assets	6,176		(510)		(7.6)
		$	200,946	$	25,571	14.6	%		$	201,150	$	4,716	2.4	%
Period end liabilities and equity:	Period end liabilities and equity:							Period end liabilities and equity:
Total deposits	Total deposits	$	150,328	$	30,635	25.6	%	Total deposits	$	152,368	$	7,218	5.0	%
Trading liabilities	Trading liabilities	3,517		282		8.7		Trading liabilities	2,670		(2,727)		(50.5)
Short-term borrowings	Short-term borrowings	5,515		1,856		50.7		Short-term borrowings	6,377		1,425		28.8
Long-term debt	Long-term debt	20,048		(6,649)		(24.9)		Long-term debt	18,105		(1,874)		(9.4)
Interest, taxes and other liabilities	Interest, taxes and other liabilities	3,198		(637)		(16.6)		Interest, taxes and other liabilities	3,393		728		27.3
Total equity	Total equity	18,340		84		.5		Total equity	18,237		(54)		(.3)
		$	200,946	$	25,571	14.6	%		$	201,150	$	4,716	2.4	%

*Percentage change is greater than 100 percent.

Short-Term Investments Short-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, ~~2019~~2020 due to an increase in overall liquidity ~~driven primarily by higher deposits~~ as we ~~actively~~ raised funds in advance of their ~~usage~~usage. The increase in funds was driven by net sales, paydowns and maturities of securities, higher deposits primarily from our ~~customers increased their demand~~commercial clients, net sales of trading security positions and ~~savings deposits~~lower loans as discussed in ~~response to the economic uncertainty caused~~detail below. These increases were partially offset by ~~the COVID-19 pandemic~~repayments of precious metal trading liabilities and ~~the actions taken by the U.S. Government to provide financial support to households and businesses.~~long-term debt.

9690


HSBC USA Inc.

Loans, NetThe following table summarizes our loan balances at September 30, ~~2020~~2021 and increases (decreases) since December 31, ~~2019:~~2020:


				Increase (Decrease) From									Increase (Decrease) From
				December 31, 2019									December 31, 2020
		September 30, 2020		Amount		%			September 30, 2021		Amount		%
		(dollars are in millions)											(dollars are in millions)
Commercial loans:	Commercial loans:							Commercial loans:
Real estate, including construction	Real estate, including construction	$	11,283	$	(218)	(1.9)	%	Real estate, including construction	$	8,250	$	(2,214)	(21.2)	%
Business and corporate banking	Business and corporate banking	15,164		1,685		12.5		Business and corporate banking	12,788		(691)		(5.1)
Global banking⁽¹⁾	Global banking⁽¹⁾	15,505		(2,410)		(13.5)		Global banking(1)	11,440		(2,079)		(15.4)
Other commercial⁽²⁾	Other commercial⁽²⁾	3,831		(1,485)		(27.9)		Other commercial(2)	6,436		2,299		55.6
Total commercial	Total commercial	45,783		(2,428)		(5.0)		Total commercial	38,914		(2,685)		(6.5)
Consumer loans:	Consumer loans:							Consumer loans:
Residential mortgages	Residential mortgages	18,439		638		3.6		Residential mortgages	16,093		(2,284)		(12.4)
Home equity mortgages	Home equity mortgages	765		(88)		(10.3)		Home equity mortgages	369		(358)		(49.2)

Credit cards	Credit cards	1,107		(298)		(21.2)		Credit cards	—		(1,066)		(100.0)
Other consumer	Other consumer	315		32		11.3		Other consumer	150		(169)		(53.0)
Total consumer	Total consumer	20,626		284		1.4		Total consumer	16,612		(3,877)		(18.9)
Total loans	Total loans	66,409		(2,144)		(3.1)		Total loans	55,526		(6,562)		(10.6)
Allowance for credit losses⁽³⁾	Allowance for credit losses⁽³⁾	1,084		447		70.2		Allowance for credit losses(3)	475		(540)		(53.2)
Loans, net	Loans, net	$	65,325	$	(2,591)	(3.8)	%	Loans, net	$	55,051	$	(6,022)	(9.9)	%

⁽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 ~~GB&M~~GBM relationship managers.

⁽²⁾Includes loans to HSBC affiliates which totaled ~~$1,180~~$2,857 million and ~~$2,343~~$1,100 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

⁽³⁾See "Credit Quality" in this MD&A for a discussion of trends in our allowance for credit losses on loans.

Commercial loans decreased compared with December 31, ~~2019~~2020 due primarily to lower demand in global banking reflecting increased capital markets activity by clients coupled with economic uncertainty caused by the COVID-19 pandemic. Also contributing to the decrease was lower loans to affiliates as well as the impact of our efforts to improve returns through disciplined ~~lending.~~lending, paydowns and lower demand from clients reflecting increased capital markets activity. Also contributing to the decrease were transfers of loans to held for sale, including certain commercial real estate loans with a carrying value of $1,123 million which were transferred during the third quarter of 2021 and our retail business banking loan portfolio with a carrying value of $149 million which was transferred during the second quarter of 2021 as discussed below. These decreases were partially offset by ~~loan growth in business and corporate banking largely associated with the Paycheck Protection Program.~~higher loans to affiliates. The decline in commercial non-affiliate loans was primarily in the ~~diversified financial,~~real estate, consumer services, energy, ~~and semiconductor industries, partially offset by growth in the retailing, utility~~chemicals and banking industries.

Consumer loans ~~increased modestly~~decreased compared with December 31, ~~2019 as higher residential mortgage loans which we continue~~2020 due primarily to ~~target towards our Premier and Advance customer relationships were largely offset by paydowns in credit card receivables due to 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~~transfer of certain consumer loans ~~reflects higher personal loans driven by new product promotions.~~with a carrying value of $3,616 million to held for sale during the second quarter of 2021 as discussed below.

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⁾															LTV Ratios(1)(2)
		September 30, 2020						December 31, 2019							September 30, 2021				December 31, 2020
		First Lien		Second Lien		First Lien		Second Lien			First Lien		Second Lien		First Lien		Second Lien
LTV < 80%	LTV < 80%	97.4	%	96.7	%	98.1	%	96.4	%	LTV < 80%	98.3	%	99.0	%	97.6	%	96.8	%
80% < LTV < 90%	80% < LTV < 90%	2.3		2.7		1.6		2.8		80% < LTV < 90%	1.5		.9		2.1		2.7
90% < LTV < 100%	90% < LTV < 100%	.2		.5		.2		.7		90% < LTV < 100%	.1		.1		.2		.4
LTV > 100%	LTV > 100%	.1		.1		.1		.1		LTV > 100%	.1		—		.1		.1
Average LTV for portfolio	Average LTV for portfolio	52.1		46.7		50.1		46.4		Average LTV for portfolio	52.7		45.1		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~~House Price Index ("HPI") at either a Core Based Statistical Area or


~~HSBC USA Inc.~~

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.

⁹¹


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 June 30, ~~2020~~2021 and September 30, ~~2019,~~2020, respectively.

Loans Held for SaleThe following table summarizes loans held for sale at September 30, ~~2020~~2021 and increases (decreases) since December 31, ~~2019:~~2020:


				Increase (Decrease) From									Increase (Decrease) From
				December 31, 2019									December 31, 2020
		September 30, 2020		Amount		%			September 30, 2021		Amount		%
		(dollars are in millions)											(dollars are in millions)
Commercial loans:	Commercial loans:							Commercial loans:
Real estate, including construction	Real estate, including construction	$	10	$	(73)	(88.0)	%	Real estate, including construction	$	1,123	$	1,113	*
Business and corporate banking	Business and corporate banking	—		(35)		(100.0)		Business and corporate banking	105		105		*
Global banking	Global banking	183		89		94.7		Global banking	63		(56)		(47.1)	%
Total commercial	Total commercial	193		(19)		(9.0)		Total commercial	1,291		1,162		*
Consumer loans:	Consumer loans:							Consumer loans:
Residential mortgages	Residential mortgages	89		12		15.6		Residential mortgages	2,449		2,241		*

Home equity mortgages								Home equity mortgages	257		257		*
Credit cards								Credit cards	785		785		*
Other consumer								Other consumer	145		145		*
Total consumer	Total consumer	89		12		15.6		Total consumer	3,636		3,428		*
Total loans held for sale	Total loans held for sale	$	282	$	(7)	(2.4)	%	Total loans held for sale	$	4,927	$	4,590	*

*Percentage change is greater than 100 percent.

Commercial loans held for sale ~~decreased~~increased compared with December 31, ~~2019. Included~~2020. During the third quarter of 2021, we transferred $1,123 million of certain commercial real estate loans to held for sale as part of an effort to reduce exposure to this sector and improve returns on risk-weighted assets.

During the second quarter of 2021, as part of our Restructuring Planwe made the decision to exit our mass market retail banking business. See Note 3, "Branch Assets and Liabilities Held for Sale," in the accompanying consolidated financial statements for additional information. As a result, during the second quarter of 2021, we transferred our retail business banking loan portfolio to held for sale with a carrying value of $149 million. At September 30, 2021, the carrying value of these loans was $105 million.

Also 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 ~~$41~~$63 million and ~~$178~~$36 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Balances will fluctuate from period to period depending on the volume and level of activity.

Consumer loans held for sale increased compared with December 31, ~~2019. Included~~2020. As discussed above, during the second quarter of 2021, as part of our Restructuring Plan we made the decision to exit our mass market retail banking business as well as our remaining retail credit card portfolio. As a result, during the second quarter of 2021, we transferred certain consumer loans to held for sale, including loans related to the branch disposal group, with a carrying value which collectively totaled $3,616 million, including $2,364 million of residential mortgages, $265 million of home equity mortgages, $829 million of credit cards and $158 million of other consumer loans. At September 30, 2021, the carrying value of these loans collectively totaled $3,584 million, including $2397 million of residential mortgages (reflecting additional residential mortgage originations to mass market retail banking customers), $257 million of home equity mortgages, $785 million of credit cards and $145 million of other consumer loans.


HSBC USA Inc.

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 ~~nil~~$1 million and ~~$2 million~~nil at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The valuation allowance on commercial loans held for sale was ~~$17~~nil and $1 million ~~and nil~~ at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.


~~HSBC USA Inc.~~

Trading Assets and LiabilitiesThe following table summarizes trading assets and liabilities at September 30, ~~2020~~2021 and increases (decreases) since December 31, ~~2019:~~2020:


				Increase (Decrease) From									Increase (Decrease) From
				December 31, 2019									December 31, 2020
		September 30, 2020		Amount		%			September 30, 2021		Amount		%
		(dollars are in millions)											(dollars are in millions)
Trading assets:	Trading assets:							Trading assets:
Securities⁽¹⁾	Securities⁽¹⁾	$	21,302	$	(2,186)	(9.3)	%	Securities(1)	$	16,698	$	(2,796)	(14.3)	%
Precious metals	Precious metals	9,536		7,627		*		Precious metals	3,316		(1,673)		(33.5)
Derivatives, net	Derivatives, net	2,916		(139)		(4.5)		Derivatives, net	1,971		(830)		(29.6)
		$	33,754	$	5,302	18.6	%		$	21,985	$	(5,299)	(19.4)	%
Trading liabilities:	Trading liabilities:							Trading liabilities:
Securities sold, not yet purchased	Securities sold, not yet purchased	$	695	$	(487)	(41.2)	%	Securities sold, not yet purchased	$	947	$	220	30.3	%
Payables for precious metals	Payables for precious metals	—		(124)		(100.0)		Payables for precious metals	90		(2,222)		(96.1)
Derivatives, net	Derivatives, net	2,822		893		46.3		Derivatives, net	1,633		(725)		(30.7)
		$	3,517	$	282	8.7	%		$	2,670	$	(2,727)	(50.5)	%

*(1)~~Percentage change is greater than 100 percent.~~

⁽¹⁾See Note 3,4, "Trading Assets and Liabilities," in the accompanying consolidated financial statements for a breakout of trading securities by category.

Trading securities balances were lower compared with December 31, ~~2019~~2020 due ~~primarily~~ to decreases in foreign sovereign and U.S. Treasury ~~and foreign sovereign~~positions, partially offset by an increase in equity 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. Also contributing to the decrease was a decrease in corporate bond positions of $501 million reflecting the unwind of one of our unconsolidated variable interest entities ("VIEs") which resulted in the termination of our investment in the VIE during the third quarter of 2020. Balances of securities sold, not yet purchased were ~~lower~~higher compared with December 31, ~~2019~~2020 driven by ~~a decrease~~an increase in short U.S. Treasury positions related to economic hedges of derivatives in the interest rate trading portfolio.

Precious metals trading assets ~~increased~~decreased compared with December 31, ~~2019~~2020 due primarily to ~~increases~~decreases 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 and an increase in positions held as economic hedges for client derivative activityprimarily silver, as well as ~~higher~~lower spot ~~prices for most metals.~~prices. Payables for precious metals were lower compared with December 31, ~~2019~~2020 reflecting a ~~decline~~decrease 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 decreased compared with December 31, 2019 as lower balances from market movements, reduced positions driven by the exit or transfer of certain derivative contracts as part of our Restructuring Plan and the impact of higher netting of cash collateral posted was partially offset by the impact of lower netting of outstanding positions. Derivative liability balances increased compared with December 31, 2019 as lower balances2020 mainly from market movements and reduced positions driven by the exit or transfer of certain derivative contracts as part of our Restructuring Plan ~~was more than offset by the impact of lower netting of outstanding positions and cash collateral posted. Market movements~~which resulted in lower valuations of foreign exchange, interest rate, ~~foreign exchange~~equity and credit derivatives. Market movements on commodity derivatives ~~partially offset by~~were mixed resulting in higher derivative asset valuations, ~~of commodity and equity derivatives.~~but lower derivative liability valuations.

SecuritiesSecurities include securities available-for-sale and securities held-to-maturity, net. Securities balances were ~~higher~~lower compared with December 31, ~~2019~~2020 driven by net ~~purchases of U.S. Government sponsored mortgage-backed, foreign sovereign~~sales, paydowns and ~~U.S. Treasury securities~~maturities as part of our continuing strategy to maximize returns while balancing the securities portfolio for risk management purposes as well as ~~favorable~~unfavorable market valuations due to ~~decreasing~~increasing yields. ~~These increases were partially offset by net sales~~The decline in securities balances was primarily in U.S. Treasury, foreign sovereign and ~~paydowns of~~ U.S. Government agency mortgage-backed securities ~~as well as the sale~~which was partially offset by net purchases of $340 million of LIBOR-linked variable rate held-to-maturity securities 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, goodwill and ~~goodwill.~~other branch related assets held for sale. All other assets decreased compared with December 31, ~~2019~~2020 due primarily to ~~a goodwill impairment charge of $784 million recorded during~~lower cash collateral posted, lower lease assets and lower investments in Federal Home Loan Bank ("FHLB") stock.

During the ~~first~~third quarter of 2020, ~~representing the entire amount~~we completed a quantitative impairment test of goodwill ~~previously allocated to~~and determined that the fair value of our ~~Retail Banking and Wealth Management and our Private~~Commercial Banking reporting ~~units. Beginning in~~unit exceeded its carrying value, with its fair value being approximately 110 percent of book value, including allocated goodwill. During the ~~second~~fourth quarter of 2020, we changed our ~~Retail Banking and Wealth Management and our Private Banking reporting units are being reported together within a newly created Wealth and Personal~~annual impairment assessment to

9993


HSBC USA Inc.

~~Banking segment for segment reporting purposes. For additional discussion~~be as of October 1. Our fair value calculations are highly sensitive to certain assumptions and estimates used. We will continue to monitor changes to our business forecasts as we continue to perform periodic analyses of the ~~results~~risks and strategies of our ~~goodwill impairment testing, see Note 8, "Goodwill~~business and ~~Other Long-Lived Assets,"~~product offerings. If deterioration in economic and credit conditions, a change in the accompanying consolidated financial statements. Also contributing to the decrease was lower deferred tax assets and lower outstanding clearing receivables from correspondent banks. These decreases were partially offset by increased investments in Federal Home Loan Bank ("FHLB") stock, higher outstanding settlement balances related to security sales andstrategy or performance of our business or product offerings, or an increase in ~~cash collateral posted.~~the capital requirements of our business occurs, interim goodwill impairment tests could be required, which may result in an impairment charge.

Deposits The following table summarizes deposit balances by major depositor categories at September 30, ~~2020~~2021 and increases (decreases) since December 31, ~~2019:~~2020:


				Increase (Decrease) From									Increase (Decrease) From
				December 31, 2019									December 31, 2020
		September 30, 2020		Amount		%			September 30, 2021		Amount		%
		(dollars are in millions)											(dollars are in millions)
Individuals, partnerships and corporations	Individuals, partnerships and corporations	$	131,280	$	23,255	21.5	%	Individuals, partnerships and corporations	$	121,838	$	(10,627)	(8.0)	%
Domestic and foreign banks	Domestic and foreign banks	16,047		7,343		84.4		Domestic and foreign banks	18,568		8,348		81.7
U.S. government and states and political subdivisions	U.S. government and states and political subdivisions	365		4		1.1		U.S. government and states and political subdivisions	320		(1)		(.3)
Foreign governments and official institutions	Foreign governments and official institutions	2,636		33		1.3		Foreign governments and official institutions	2,321		177		8.3

Deposits held for sale(1)								Deposits held for sale(1)	9,321		9,321		*
Total deposits	Total deposits	$	150,328	$	30,635	25.6	%	Total deposits	$	152,368	$	7,218	5.0	%
Total core deposits⁽¹⁾⁽²⁾	Total core deposits⁽¹⁾⁽²⁾	$	127,819	$	32,566	34.2	%	Total core deposits⁽¹⁾⁽²⁾	$	128,961	$	3,375	2.7	%

^{*Percentage change is greater than 100 percent.}

(1)Represents deposits associated with the exit of our mass market retail banking business as part of our Restructuring Plan which were transferred to held for sale during the second quarter of 2021.

(2)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. Balance at September 30, 2021 excludes deposits held for sale.

Total deposits increased compared with December 31, ~~2019~~2020 due primarily to higher commercial demand deposits as ~~we actively raised funds and~~ our ~~customers~~clients increased their ~~demand and savings~~ deposits in response to the economic uncertainty caused by the COVID-19 pandemic, improved economic conditions and the actions taken by the U.S. Government to provide financial support to ~~households and~~ businesses. Also contributing to the increase in deposits ~~was~~were higher savings deposits from a few large private banking clients as well as higher deposits from ~~affiliates which reflects $5.0 billion of long-term debt obligations issued to HSBC North America that were recharacterized as time deposits during the first nine months of 2020 as discussed below.~~affiliates. These increases were partially offset by declines in time deposits and retail savings deposits. A shift in mix of deposits from affiliates resulted in a decline in ~~time deposits.~~deposits from non-bank affiliates, partially offset by an increase in deposits from bank affiliates.

Short-Term BorrowingsShort-term borrowings ~~increased~~were higher compared with December 31, ~~2019~~2020 reflecting ~~higher~~increases in commercial paper outstanding and securities sold under repurchase ~~agreements and, to a lesser extent, higher commercial paper outstanding.~~agreements.

Long-Term DebtLong-term debt decreased compared with December 31, ~~2019~~2020 as the impact of debt issuances, including ~~increased borrowings from~~$3,500 million of senior debt issued to HSBC North America during the ~~FHLB,~~first half of 2021, was more than offset by debt retirements and $5.0 billion of long-term debt obligations issued to HSBC North America that were recharacterized as time deposits during the first nine months of 2020. See Note 14, "Related Party Transactions," for additional information.retirements. Debt issuances during the three and nine months ended September 30, ~~2020~~2021 totaled ~~$900~~$1,544 million and ~~$7,250~~$6,861 million, respectively, of which ~~$50~~$312 million and ~~$4,966~~$507 million, respectively, was issued by HSBC Bank USA.

Incremental issuances from our shelf registration statement with the SEC totaled ~~$2,284~~$2,854 million of senior structured notes during the nine months ended September 30, ~~2020.~~2021. Total long-term debt outstanding under this shelf was ~~$8,992~~$8,209 million and ~~$13,295~~$9,138 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Incremental issuances from the HSBC Bank USA Global Bank Note Program totaled ~~$216~~$507 million during the nine months ended September 30, ~~2020.~~2021. Total debt outstanding under this program was ~~$1,837~~$1,894 million and ~~$2,908~~$1,888 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Borrowings from the FHLB totaled ~~$5,250~~$1,000 million and ~~$1,000~~$4,250 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Interest, Taxes and Other LiabilitiesInterest, taxes and other liabilities ~~were lower~~includes, among other items, other branch related liabilities held for sale. Interest, taxes and other liabilities increased compared with December 31, ~~2019~~2020 due primarily to ~~a decline in accrued interest payable and lower margin requirements~~higher outstanding settlement balances related to ~~futures trading,~~security purchases, partially offset by lower lease liabilities and a ~~higher~~lower liability for off-balance sheet credit exposures.

~~100~~94


HSBC USA Inc.

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:


					2020 Compared to 2019 Increase (Decrease)													2021 Compared to 2020 Increase (Decrease)
Three Months Ended September 30,	Three Months Ended September 30,	2020			Volume		Rate		2019			Three Months Ended September 30,	2021			Volume		Rate		2020
		(dollars are in millions)																		(dollars are in millions)
Interest income:	Interest income:											Interest income:
Short-term investments	Short-term investments	$	16		$	75	$	(195)	$	136		Short-term investments	$	24		$	8	$	—	$	16
Trading securities	Trading securities	64			(13)		(8)		85			Trading securities	60			(16)		12		64
Securities	Securities	202			(5)		(89)		296			Securities	154			(41)		(7)		202
Commercial loans	Commercial loans	335			(34)		(171)		540			Commercial loans	250			(62)		(23)		335
Consumer loans	Consumer loans	176			7		(24)		193			Consumer loans	166			(3)		(7)		176
Other	Other	11			5		(17)		23			Other	4			(5)		(2)		11
Total interest income	Total interest income	804			35		(504)		1,273			Total interest income	658			(119)		(27)		804
Interest expense:	Interest expense:											Interest expense:
Deposits	Deposits	135			85		(358)		408			Deposits	60			(13)		(62)		135
Short-term borrowings	Short-term borrowings	7			(28)		(44)		79			Short-term borrowings	4			(1)		(2)		7
Long-term debt	Long-term debt	111			(56)		(110)		277			Long-term debt	70			(15)		(26)		111
Tax liabilities and other	Tax liabilities and other	3			(2)		(1)		6			Tax liabilities and other	4			2		(1)		3
Total interest expense	Total interest expense	256			(1)		(513)		770			Total interest expense	138			(27)		(91)		256
Net interest income	Net interest income	$	548		$	36	$	9	$	503		Net interest income	$	520		$	(92)	$	64	$	548

Yield on total interest earning assets	Yield on total interest earning assets	1.69		%					2.89		%	Yield on total interest earning assets	1.43		%					1.69		%
Cost of total interest bearing liabilities	Cost of total interest bearing liabilities	.68							2.20			Cost of total interest bearing liabilities	.41							.68
Interest rate spread	Interest rate spread	1.01							.69			Interest rate spread	1.02							1.01
Benefit from net non-interest paying funds⁽¹⁾	Benefit from net non-interest paying funds⁽¹⁾	.14							.45			Benefit from net non-interest paying funds(1)	.11							.14
Net interest margin on average earning assets	Net interest margin on average earning assets	1.15		%					1.14		%	Net interest margin on average earning assets	1.13		%					1.15		%

~~101~~95


HSBC USA Inc.


					2020 Compared with 2019 Increase (Decrease)													2021 Compared with 2020 Increase (Decrease)
Nine Months Ended September 30,	Nine Months Ended September 30,	2020			Volume		Rate		2019			Nine Months Ended September 30,	2021			Volume		Rate		2020
		(dollars are in millions)																		(dollars are in millions)
Interest income:	Interest income:											Interest income:
Short-term investments	Short-term investments	$	126		$	193	$	(552)	$	485		Short-term investments	$	57		$	55	$	(124)	$	126
Trading securities	Trading securities	192			(2)		(21)		215			Trading securities	162			(24)		(6)		192
Securities	Securities	707			59		(250)		898			Securities	491			(116)		(100)		707
Commercial loans	Commercial loans	1,183			33		(464)		1,614			Commercial loans	807			(250)		(126)		1,183
Consumer loans	Consumer loans	546			22		(54)		578			Consumer loans	501			(4)		(41)		546
Other	Other	35			28		(54)		61			Other	17			(20)		2		35
Total interest income	Total interest income	2,789			333		(1,395)		3,851			Total interest income	2,035			(359)		(395)		2,789
Interest expense:	Interest expense:											Interest expense:
Deposits	Deposits	656			238		(703)		1,121			Deposits	210			(16)		(430)		656
Short-term borrowings	Short-term borrowings	62			—		(147)		209			Short-term borrowings	13			(21)		(28)		62
Long-term debt	Long-term debt	471			(163)		(261)		895			Long-term debt	230			(85)		(156)		471
Tax liabilities and other	Tax liabilities and other	10			(8)		(3)		21			Tax liabilities and other	8			3		(5)		10
Total interest expense	Total interest expense	1,199			67		(1,114)		2,246			Total interest expense	461			(119)		(619)		1,199
Net interest income	Net interest income	$	1,590		$	266	$	(281)	$	1,605		Net interest income	$	1,574		$	(240)	$	224	$	1,590

Yield on total interest earning assets	Yield on total interest earning assets	1.99		%					3.09		%	Yield on total interest earning assets	1.49		%					1.99		%
Cost of total interest bearing liabilities	Cost of total interest bearing liabilities	1.09							2.29			Cost of total interest bearing liabilities	.46							1.09
Interest rate spread	Interest rate spread	.90							.80			Interest rate spread	1.03							.90
Benefit from net non-interest paying funds⁽¹⁾	Benefit from net non-interest paying funds⁽¹⁾	.23							.49			Benefit from net non-interest paying funds(1)	.12							.23
Net interest margin on average earning assets	Net interest margin on average earning assets	1.13		%					1.29		%	Net interest margin on average earning assets	1.15		%					1.13		%

⁽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 ~~increased~~decreased during the three months ended September 30, ~~2020 as~~2021 due primarily to lower interest income from interest earning assets ~~due~~driven by the unfavorable impact of lower average interest earning asset balances, primarily tocommercial loans, securities and trading securities, as well as lower yields, primarily on ~~loans, short-term investments and securities~~loans. The decrease in the three-month period was ~~more than~~partially offset by lower interest expense from interest bearing liabilities driven by lower rates paid and ~~a shift in mix to lower cost deposits as well as~~ the favorable impact of ~~higher short-term investment balances.~~lower average interest bearing liability balances, primarily deposits and long-term debt. In the year-to-date period, net interest income decreased ~~modestly as~~due primarily to lower interest income from interest earning assets ~~due primarily to~~driven by lower yields, primarily on loans, short-term investments and securities, as well as the unfavorable impact of ~~higher~~lower average ~~deposit~~interest earning asset balances, primarily commercial loans, securities and trading securities. The decrease in the year-to-date period was ~~largely~~partially offset by lower interest expense from interest bearing liabilities driven by lower rates paid and ~~a shift in mix to lower cost deposits as well as~~ the favorable impact of ~~higher~~lower average interest ~~earning asset balances, primarily short-term investments, securities and loans.~~bearing liability balances.

Short-term investments Interest income ~~decreased~~increased during the three ~~and nine~~ months ended September 30, ~~2020~~2021 due to higher average balances. In the year-to-date period, interest income was lower as the impact of higher average balances was more than offset by lower yields ~~earned on these balances~~ reflecting the impact of lower market ~~rates,~~rates. Higher average balances in both periods were driven by higher deposits with the Federal Reserve Bank, partially offset by ~~higher average balances.~~lower securities purchased under resale agreements.

Trading securities Interest income decreased during the three and nine months ended September 30, ~~2020~~2021 due primarily to lower ~~yields reflecting the impact of lower market rates and lower average balances. The decrease in~~ average balances ~~reflects decreases~~driven by declines in foreign sovereign and U.S. Treasury positions, partially offset by an increase in equity positions. While lower yields reflecting the impact of lower market rates contributed to the decrease in the year-to-date period, a shift in mix to higher yielding equity positions resulted in higher yields overall in the three-month period. 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~~Lower interest income ~~was lower~~ during the three and nine months ended September 30, ~~2020~~2021 was due ~~primarily~~ to lower average balances and lower yields reflecting the impact of lower market rates. ~~The decrease in the year-to-date period was partially offset by higher~~Lower average balances were driven by ~~increases~~declines in U.S.


HSBC USA Inc.

Government agency mortgage-backed, U.S. Treasury and foreign sovereign securities, partially offset by ~~a decline~~an increase in U.S. Government sponsored mortgage-backed securities.

Commercial loans Interest income was lower during the three and nine months ended September 30, ~~2020~~2021 due to lower average balances and lower yields reflecting the impact of lower market rates on variable rate loans. Lower average balances were driven primarily by the impact of our efforts to improve returns through disciplined lending, paydowns and lower demand from clients reflecting increased capital markets activity.

Consumer loans Lower interest income during the three and nine months ended September 30, 2021 was due primarily to lower yields reflecting the impact of lower market rates on ~~variable rate~~residential mortgage loans and, ~~lower rates on newly originated PPP loans. Also contributing to the decrease~~ in the three month period was lower average balances driven by lower demand reflecting increased capital markets activity by clients coupled with economic uncertainty caused by the COVID-19 pandemic as well as

~~102~~


~~HSBC USA Inc.~~

~~lower loans to affiliates and the impact of our efforts to improve returns through disciplined lending. In~~ the year-to-date period, average balances were higher and partially offset the decrease in interest income as the factors described above were more than offset by elevated demand in March as clients drew on their available lines of credit during the deterioration in economic conditions caused by the COVID-19 pandemic. A significant portion of these lines of credit have been repaid.home equity mortgage loans.

~~Consumer loans~~Other Interest income decreased during the three and nine months ended September 30, ~~2020 due to lower yields reflecting the impact of lower market rates, partially offset by higher average balances~~2021 due primarily to ~~growth in residential mortgage loans.~~

~~Other~~ ~~Lower interest income during the three and nine months ended September 30, 2020 was due 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 nine months ended September 30, ~~2020~~2021 due primarily to lower rates paid reflecting the impact of lower market rates and a shift in mix to lower cost deposits. Also contributing to the decrease in interest expense, to a lesser extent, were lower average balances driven by declines in time deposits and deposits from affiliates which were partially offset by ~~higher average balances. Higher average balances were due primarily to~~ growth in savings and demand deposits as ~~we actively raised funds 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.

Short-term borrowings Interest expense decreased during the three and nine months ended September 30, 2021 due to lower rates paid reflecting the impact of lower market rates and lower average borrowings driven by a decline in securities sold under repurchase agreements.

Long-term debtLower interest expense during the three and nine months ended September 30, ~~2020~~2021 was due primarily to lower rates paid reflecting the impact of lower market rates. Also contributing to the decrease in the three month period was lower average borrowings driven by a decrease in securities sold under repurchase agreements.

~~Long-term debt~~ ~~Interest expense decreased during the three and nine months ended September 30, 2020~~ 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 ~~lower~~relatively flat during the three and nine months ended September 30, ~~2020 driven by lower average borrowings in securities sold, not yet repurchased and lower rates paid.~~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)											Increase (Decrease)
Three Months Ended September 30,	Three Months Ended September 30,	2020		2019		Amount		%		Three Months Ended September 30,	2021		2020		Amount		%
		(dollars are in millions)													(dollars are in millions)
Loans:										Loans:
Commercial loans:	Commercial loans:									Commercial loans:
Real estate, including construction	Real estate, including construction	$	43	$	27	$	16	59.3	%	Real estate, including construction	$	(2)	$	43	$	(45)	*
Business and corporate banking	Business and corporate banking	(36)		32		(68)		*		Business and corporate banking	(38)		(36)		(2)		(5.6)
Global banking	Global banking	(103)		1		(104)		*		Global banking	(9)		(103)		94		91.3
Other commercial	Other commercial	3		—		3		*		Other commercial	(2)		3		(5)		*
Total commercial loans	Total commercial loans	(93)		60		(153)		*		Total commercial loans	(51)		(93)		42		45.2
Consumer loans:	Consumer loans:									Consumer loans:
Residential mortgages	Residential mortgages	12		(1)		13		*		Residential mortgages	(9)		12		(21)		*
Home equity mortgages	Home equity mortgages	(1)		(1)		—		—		Home equity mortgages	(2)		(1)		(1)		(100.0)
Credit cards	Credit cards	(2)		34		(36)		*		Credit cards	(1)		(2)		1		50.0

Other consumer	Other consumer	9		2		7		*		Other consumer	(1)		9		(10)		*
Total consumer loans	Total consumer loans	18		34		(16)		(47.1)		Total consumer loans	(13)		18		(31)		*
Total loans	Total loans	$	(75)	$	94	$	(169)	*		Total loans	(64)		(75)		11		14.7

Other financial assets measured at amortized cost	Other financial assets measured at amortized cost	(1)		—		(1)		*		Other financial assets measured at amortized cost	1		(1)		2		*
Securities available-for-sale	Securities available-for-sale	(1)		—		(1)		*		Securities available-for-sale	—		(1)		1		100.0
Off-balance sheet credit exposures⁽¹⁾		(28)		—		(28)		*
Off-balance sheet credit exposures										Off-balance sheet credit exposures	(18)		(28)		10		35.7
Total provision for credit losses	Total provision for credit losses	$	(105)	$	94	$	(199)	*		Total provision for credit losses	$	(81)	$	(105)	$	24	22.9	%

~~103~~97


HSBC USA Inc.


						Increase (Decrease)										Increase (Decrease)
Nine Months Ended September 30,	Nine Months Ended September 30,	2020		2019		Amount		%	Nine Months Ended September 30,	2021		2020		Amount		%
		(dollars are in millions)												(dollars are in millions)
Loans:	Loans:								Loans:
Commercial loans:	Commercial loans:								Commercial loans:
Real estate, including construction	Real estate, including construction	$	122	$	60	$	62	*	Real estate, including construction	$	(30)	$	122	$	(152)	*
Business and corporate banking	Business and corporate banking	283		67		216		*	Business and corporate banking	(115)		283		(398)		*
Global banking	Global banking	183		6		177		*	Global banking	(153)		183		(336)		*
Other commercial	Other commercial	3		(6)		9		*	Other commercial	(3)		3		(6)		*
Total commercial loans	Total commercial loans	591		127		464		*	Total commercial loans	(301)		591		(892)		*
Consumer loans:	Consumer loans:								Consumer loans:
Residential mortgages	Residential mortgages	62		(1)		63		*	Residential mortgages	(3)		62		(65)		*
Home equity mortgages	Home equity mortgages	1		(1)		2		*	Home equity mortgages	(10)		1		(11)		*
Credit cards	Credit cards	96		69		27		39.1	Credit cards	(78)		96		(174)		*

Other consumer	Other consumer	24		4		20		*	Other consumer	(18)		24		(42)		*
Total consumer loans	Total consumer loans	183		71		112		*	Total consumer loans	(109)		183		(292)		*
Total loans	Total loans	774		198		576		*	Total loans	(410)		774		(1,184)		*

Other financial assets measured at amortized cost	Other financial assets measured at amortized cost	—		—		—		—	Other financial assets measured at amortized cost	—		—		—		—	%
Securities available-for-sale	Securities available-for-sale	(1)		—		(1)		*	Securities available-for-sale	—		(1)		1		100.0
Off-balance sheet credit exposures⁽¹⁾	Off-balance sheet credit exposures⁽¹⁾	67		—		67		*	Off-balance sheet credit exposures⁽¹⁾	(127)		67		(194)		*
Total provision for credit losses	Total provision for credit losses	$	840	$	198	$	642	*	Total provision for credit losses	$	(537)	$	840	$	(1,377)	*

*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 ~~decreased $199~~increased $24 million during the three months ended September 30, 2020 due to a lower provision for credit losses on our commercial loan portfolio and, to a lesser extent, a release in the liability for credit losses on off-balance sheet credit exposures recorded in the third quarter of 2020 and a lower provision for credit losses on our consumer loan portfolio. In the year-to-date period, our provision for credit losses increased $642 million2021 due to a higher provision for credit losses on our commercial loan portfolio, ~~and, to~~partially offset by a ~~lesser extent, a higher~~lower provision for credit losses on our consumer loan portfolio and a lower provision for credit losses on off-balance sheet credit ~~exposures recorded in~~exposures. In the ~~first nine months of 2020.~~year-to-date period, our provision for credit losses decreased $1,377 million due to a lower provision for credit losses on both our commercial and consumer loan portfolios as well as a lower provision for credit losses on off-balance sheet credit exposures.

The provision for credit losses on our commercial loan portfolio ~~decreased $153~~increased $42 million during the three months ended September 30, ~~2020 due to~~2021 reflecting a lower release in credit ~~reserves in the current year period compared with a~~ loss ~~provision in the prior year period as discussed below.~~reserves. 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 lifetime ECL and a decline in credit reserves for risk factors associated with higher risk client exposures. Also contributing to the release in credit reserves in the current year period was the transfer of certain commercial real estate loans to held for sale which resulted in a release of credit loss reserves and a reduction to the provision for credit losses of approximately $24 million during the third quarter of 2021, including a release of credit reserves for risk factors associated with higher risk industry exposures. The release in credit reserves in the prior year period was driven by a partial rebound in economic conditions in the third quarter of 2020 which resulted in ~~an improvement in the~~improved economic forecasts ~~we use~~used for calculating lifetime ECL which was more pronounced in the prior year period and a ~~release~~decline in credit reserves for risk factors associated with large loan exposures, as well as releases in credit reserves due to paydowns, including the paydown of a single oil and gas industry ~~client, reflecting the impact of our efforts to improve returns through disciplined lending and reducing higher risk exposures.~~client. These releases in ~~credit reserves~~the prior year period were partially offset by provisions for risk factors associated with higher risk client and industry exposures.

In the ~~year-to-date~~year to-date period, the provision for credit losses on our commercial loan portfolio ~~increased $464 million.~~decreased $892 million reflecting a release in credit loss reserves compared with a loss provision in the prior year-to-date period. The release in credit reserves in the current year-to-date period was driven by improved economic conditions which resulted in improved economic forecasts used for calculating lifetime ECL, improvements in credit conditions associated with certain clients and declines in credit reserves for risk factors associated with higher risk client exposures and economic uncertainty. Client paydowns, loan sales and the release of reserves associated with the transfer of certain commercial real estate loans to held for sale during the third quarter of 2021 as discussed above also contributed to the release in credit reserves in the current year-to-date period. The loss provision in the ~~current~~prior year-to-date period was driven by the overall deterioration of economic conditions caused by the COVID-19 pandemic which resulted in a worsening of the economic forecasts ~~we use~~used for calculating lifetime ECL, downgrades reflecting weakness in the financial condition of certain clients and provisions for risk factors associated with higher risk client and industry exposures, and large loan exposures. In the prior year periods, the loss provisions were due primarily to downgrades reflecting weakness in the financial condition of certain client relationships which were partially offset by releases in credit reserves due to paydowns and, in the year-to-date period, a release in credit reserves for risk factors associated with fraud.


HSBC USA Inc.

The provision for credit losses on our consumer loan portfolio decreased ~~by $16~~$31 million during the three months ended September 30, ~~2020.~~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 lifetime ECL and a decline in credit reserves for risk factors associated with economic uncertainty. The loss provision in the ~~current~~prior year period was driven largely by a provision for risk factors associated with forbearance accounts which was partially offset by releases in credit reserves driven by ~~the~~a partial rebound in economic conditions in the third quarter of 2020 which resulted in ~~an improvement in the~~improved economic forecasts ~~we use~~used for calculating lifetime ECL as well as a decline in credit card balances due to lower customer ~~spending and changes in underwriting criteria driven by the current environment.~~ spending.

In the year-to-date period, the provision for credit losses on our consumer loan portfolio ~~increased $112 million.~~decreased $292 million reflecting a release in credit loss reserves compared with a loss provision in the prior year-to-date period. The ~~loss provision~~release in credit reserves in the current year-to-date period was driven by the impact of our decision to exit our mass market retail banking business as well as our remaining credit card portfolio which resulted in a release of credit loss reserves and a reduction to the provision for credit losses of approximately $100 million during the second quarter of 2021. Also contributing to the release in credit reserves in the current year-to-date period were improved economic conditions which resulted in improved economic forecasts used for calculating lifetime ECL and declines in credit reserves for risk factors associated with economic uncertainty and forbearance accounts. The loss provision in the prior year-to-date period was driven by an overall deterioration of economic conditions

~~104~~


~~HSBC USA Inc.~~

caused by the COVID-19 pandemic which resulted in a worsening of the economic forecasts ~~we use~~used for calculating lifetime ECL and higher dollars of delinquency, as well as provisions for risk factors associated with forbearance accounts and growth in personal loan balances due to new product promotions. These loss provisions in the prior year-to-date period were partially offset by a decline in credit card balances due to lower customer spending and changes in underwriting criteria driven by the current environment. 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 and higher delinquency roll rates.spending.

The provision for credit losses on off-balance sheet credit exposures ~~reflects a release in credit reserves~~increased $10 million during the three months ended September 30, ~~2020 resulting from~~2021 reflecting a lower release in credit loss reserves as the ~~partial rebound~~positive impact of improvements in economic conditions ~~consistent with commercial loans as discussed above, partially offset by~~was more pronounced in the ~~impact of higher outstanding exposure.~~prior year period. In the year-to-date period, the provision for credit losses on off-balance sheet credit exposures ~~reflects~~decreased $194 million reflecting a release in credit loss reserves compared with a loss provision ~~resulting~~in the prior year-to-date period. The release in credit reserves in the current year-to-date period resulted from improved economic conditions consistent with commercial loans as discussed above. The loss provision in the prior year-to-date period resulted from an overall 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.

~~105~~99


HSBC USA Inc.

Other Revenues The following table summarizes the components of other revenues:


						Increase (Decrease)											Increase (Decrease)
Three Months Ended September 30,	Three Months Ended September 30,	2020		2019		Amount		%		Three Months Ended September 30,	2021		2020		Amount		%
		(dollars are in millions)													(dollars are in millions)
Credit card fees, net	Credit card fees, net	$	10	$	18	$	(8)	(44.4)	%	Credit card fees, net	$	—	$	10	$	(10)	(100.0)	%
Trust and investment management fees	Trust and investment management fees	34		34		—		—		Trust and investment management fees	26		34		(8)		(23.5)
Other fees and commissions	Other fees and commissions	144		155		(11)		(7.1)		Other fees and commissions	160		144		16		11.1
Trading revenue		49		178		(129)		(72.5)
Trading revenue (expense)										Trading revenue (expense)	(42)		49		(91)		*

Other securities gains, net	Other securities gains, net	52		46		6		13.0		Other securities gains, net	4		52		(48)		(92.3)
Servicing and other fees from HSBC affiliates	Servicing and other fees from HSBC affiliates	79		88		(9)		(10.2)		Servicing and other fees from HSBC affiliates	79		79		—		—
Gain (loss) on instruments designated at fair value and related derivatives		15		(19)		34		*
Gain on instruments designated at fair value and related derivatives										Gain on instruments designated at fair value and related derivatives	8		15		(7)		(46.7)
Other income (loss):	Other income (loss):									Other income (loss):
Valuation of loans held for sale	Valuation of loans held for sale	(17)		1		(18)		*		Valuation of loans held for sale	—		(17)		17		100.0
Residential mortgage banking revenue	Residential mortgage banking revenue	9		—		9		*		Residential mortgage banking revenue	3		9		(6)		(66.7)
Insurance	Insurance	2		3		(1)		(33.3)		Insurance	2		2		—		—

Miscellaneous income (loss)	Miscellaneous income (loss)	(21)		(18)		(3)		(16.7)		Miscellaneous income (loss)	2		(21)		23		*
Total other income (loss)	Total other income (loss)	(27)		(14)		(13)		(92.9)		Total other income (loss)	7		(27)		34		*
Total other revenues	Total other revenues	$	356	$	486	$	(130)	(26.7)	%	Total other revenues	$	242	$	356	$	(114)	(32.0)	%

						Increase (Decrease)											Increase (Decrease)
Nine Months Ended September 30,	Nine Months Ended September 30,	2020		2019		Amount		%		Nine Months Ended September 30,	2021		2020		Amount		%
		(dollars are in millions)													(dollars are in millions)
Credit card fees, net	Credit card fees, net	$	30	$	48	$	(18)	(37.5)	%	Credit card fees, net	$	23	$	30	$	(7)	(23.3)	%
Trust and investment management fees	Trust and investment management fees	98		95		3		3.2		Trust and investment management fees	81		98		(17)		(17.3)
Other fees and commissions	Other fees and commissions	425		464		(39)		(8.4)		Other fees and commissions	496		425		71		16.7
Trading revenue		255		434		(179)		(41.2)
Trading revenue (expense)										Trading revenue (expense)	1		255		(254)		(99.6)

Other securities gains, net	Other securities gains, net	111		76		35		46.1		Other securities gains, net	51		111		(60)		(54.1)
Servicing and other fees from HSBC affiliates	Servicing and other fees from HSBC affiliates	255		257		(2)		(.8)		Servicing and other fees from HSBC affiliates	232		255		(23)		(9.0)
Gain (loss) on instruments designated at fair value and related derivatives		15		(45)		60		*
Gain on instruments designated at fair value and related derivatives										Gain on instruments designated at fair value and related derivatives	33		15		18		*
Other income (loss):	Other income (loss):									Other income (loss):
Valuation of loans held for sale	Valuation of loans held for sale	(25)		1		(26)		*		Valuation of loans held for sale	(5)		(25)		20		80.0
Residential mortgage banking revenue	Residential mortgage banking revenue	11		—		11		*		Residential mortgage banking revenue	20		11		9		81.8
Insurance	Insurance	6		9		(3)		(33.3)		Insurance	5		6		(1)		(16.7)

Miscellaneous income (loss)	Miscellaneous income (loss)	26		(27)		53		*		Miscellaneous income (loss)	(7)		26		(33)		*
Total other income (loss)	Total other income (loss)	18		(17)		35		*		Total other income (loss)	13		18		(5)		(27.8)
Total other revenues	Total other revenues	$	1,207	$	1,312	$	(105)	(8.0)	%	Total other revenues	$	930	$	1,207	$	(277)	(22.9)	%

*Percentage change is greater than 100 percent.

Credit card fees, net Credit card fees, net ~~declined~~decreased during the three and nine months ended September 30, ~~2020 driven by lower interchange fees~~2021 due to ~~lower customer spending, partially offset by lower~~higher cost estimates associated with our credit rewards ~~program.~~program reflecting an increase in estimated customer redemption rates which was partially offset by higher interchange fees driven by higher customer spending reflecting improved economic conditions compared with the prior year periods.

Trust and investment management fees Trust and investment management fees ~~was flat~~declined during the three and nine months ended September 30, ~~2020 and increased modestly in~~2021 due primarily to higher liquidity fund fee waivers driven by the ~~year-to-period due to~~impact of low market interest rates. The decline was partially offset by higher average assets under ~~management.~~management reflecting new money growth primarily driven by a few large private banking clients as well as positive market performance.

Other fees and commissions Other fees and commissions ~~decreased~~increased during the three and nine months ended September 30, ~~2020~~2021 due primarily to ~~lower~~higher fees from loan ~~commitments, loan~~ syndication and account services reflecting improved economic conditions compared with the prior year periods. Also contributing to the increase in the year-to-date period ~~wire transfers and other account services. These decreases~~ were ~~partially offset by~~ higher fees from ~~guarantees and standby letters of credit.~~wire

100


HSBC USA Inc.

transfers. See Note ~~13,~~14, "Fee Income from Contracts with Customers," in the accompanying consolidated financial statements for additional information including a summary of the components of other fees and commissions.

~~106~~


~~HSBC USA Inc.~~

Trading revenue (expense) Trading revenue (expense) is generated by participation in the foreign exchange, precious metals, rates, credit ~~equities~~ and ~~precious metals~~equities markets. The following table presents trading revenue (expense) 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 ~~are~~is included as a component of other income (loss). During the first quarter of 2021, we changed our presentation for the components of trading revenue (expense) 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 September 30, 2020 2019 Amount %
(dollars are in millions)
Business Activities:
Derivatives⁽¹⁾⁽²⁾
$ (49) $ 96 $ (145) *
Foreign Exchange 42 40 2 5.0
Metals 51 43 8 18.6
Balance Sheet Management (1) (3) 2 66.7
Global Banking 2 — 2 *
Other trading 4 2 2 100.0
Total trading revenue $ 49 $ 178 $ (129) (72.5) %
Increase (Decrease)
Nine Months Ended September 30, 2020 2019 Amount %
(dollars are in millions)
Business Activities:
Derivatives⁽¹⁾⁽²⁾
$ (18) $ 182 $ (200) *
Foreign Exchange 193 123 70 56.9
Metals 107 96 11 11.5
Balance Sheet Management (15) 17 (32) *
Global Banking (3) — (3) *
Other trading (9) 16 (25) *
Total trading revenue $ 255 $ 434 $ (179) (41.2) %


					Increase (Decrease)
Three Months Ended September 30,	2021		2020		Amount		%
	(dollars are in millions)
Business Activities:
Foreign Exchange	$	49	$	46	$	3	6.5	%
Metals	11		51		(40)		(78.4)
Debt Markets	(1)		14		(15)		*
Securities Financing	(42)		(38)		(4)		(10.5)
Markets Treasury	1		(1)		2		*
Legacy structured credit products	(31)		25		(56)		*

Other trading(1)	(29)		(48)		19		39.6
Total trading revenue (expense)	$	(42)	$	49	$	(91)	*

					Increase (Decrease)
Nine Months Ended September 30,	2021		2020		Amount		%
	(dollars are in millions)
Business Activities:
Foreign Exchange	$	145	$	283	$	(138)	(48.8)	%
Metals	39		107		(68)		(63.6)
Debt Markets	—		19		(19)		(100.0)
Securities Financing	(119)		(76)		(43)		(56.6)
Markets Treasury	7		(15)		22		*
Legacy structured credit products	(28)		11		(39)		*
Other trading(1)	(43)		(74)		31		41.9
Total trading revenue (expense)	$	1	$	255	$	(254)	(99.6)	%

*Percentage change is greater than 100 percent.

⁽¹⁾Includes ~~derivative contracts~~trading revenue 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 decreased during the three and nine months ended September 30, 2020 due primarily to lower Derivatives revenue driven by emerging markets rate products and interest rate swaps~~Equities as well as trading ~~losses of $47 million and $57 million recorded during the three and nine months ended September 30, 2020, respectively,~~revenue associated with the exit of certain derivative contracts as part of our Restructuring ~~Plan. Also contributing~~Plan, including trading losses of $22 million and $32 million recorded during the three and nine months ended September 30, 2021, respectively, compared with trading losses of $47 million and $57 million during the three and nine months ended September 30, 2020, respectively.

Trading revenue (expense) decreased during the three and nine months ended September 30, 2021 due to ~~the decrease~~lower revenue in Legacy structured credit products, Metals, Debt Markets and, in the year-to-date period, Foreign Exchange and Securities Financing. Legacy structured credit products revenue was lower ~~Balance Sheet Management~~reflecting the unwind of our remaining business activities, including a loss of approximately $31 million recorded during the third quarter of 2021, as well as the impact of a structured note vehicle that was unwound during the third quarter of 2020 which was a key contributor to the valuation gains recorded in the prior year periods. Revenue was lower in Metals and, in the year-to-date period, Foreign Exchange as market volatility driven by the COVID-19 pandemic resulted in increased trading opportunities in the prior year periods. Lower revenue in Debt Markets and, in the year-to-date period, Foreign Exchange reflects the impact of our decision to exit or transfer certain derivatives as part of our Restructuring Plan which resulted in lower revenue from interest rate swaps and emerging markets rate products. Securities Financing revenue was lower in the year-to-date period due to higher losses related to swaps in prime brokerage. These decreases were partially offset by lower Other trading losses associated with the exit of certain derivative

101


HSBC USA Inc.

contracts as part of our Restructuring Plan and, in the year-to-date period, higher revenue in Markets Treasury due to the ~~unfavorable~~improved performance of economic hedge positions used to manage interest rate risk and lower other trading revenue due primarily to unfavorable funding spread adjustments. Lower trading revenue in the three month period was partially offset by favorable valuation adjustments on legacy structured credit products and higher Metals revenue due primarily to market volatility driven by the COVID-19 pandemic which resulted in increased trading opportunities. In the year-to-date period, lower trading revenue was partially offset by higher Foreign Exchange and Metals revenue due primarily to market volatility driven by the COVID-19 pandemic which resulted in increased trading opportunities as well as 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.risk.

Other securities gains, net We maintain securities portfolios as part of our balance sheet diversification and risk management strategies. During the three and nine months ended September 30, ~~2020,~~2021, we sold ~~$2,359~~$1,252 million and ~~$10,598~~$7,422 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 $2,894~~$2,359 million and ~~$7,083~~$10,598 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 ~~increased~~decreased during the three and nine months ended September 30, ~~2020~~2021 reflecting ~~higher~~lower net gains from the sales of U.S.

~~107~~


~~HSBC USA Inc.~~

Treasury and U.S. Government agency mortgage-backed securities ~~and, in the year-to-date period,~~as well as the impact of ~~higher~~lower sales ~~activity compared with 2019.~~activity. 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 4,5, "Securities," in the accompanying consolidated financial statements.

Servicing and other fees from HSBC affiliates Servicing and other fees from HSBC affiliates ~~decreased~~was flat during the three ~~and nine~~ months ended September 30, ~~2020~~2021 and decreased in the year-to-date period. The decrease in the year-to-date period was due primarily to lower cost reimbursements associated with shared services performed on behalf of other HSBC affiliates, including internal audit, ~~and marketing,~~as well as lower sales commissions from HSBC Bank plc. These decreases were partially offset 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~~was lower during the three months ended September 30, ~~2020~~2021 attributable primarily to unfavorable movements related to the economic hedging of interest rate and other risks within our structured notes. In the year-to-date period, gain on instruments designated at fair value and related derivatives was higher attributable to favorable movements related to the economic hedging of interest rate and other risks within our ~~own debt~~structured notes and ~~structured notes. In~~ the ~~year-to-date period, gain (loss) on instruments designated at fair value and related derivatives increased attributable primarily to favorable movements related to the economic hedging~~non-recurrence of ~~interest rate risk within our own debt, partially offset by~~ unfavorable fair value adjustments recorded in the prior year period on certain commercial loans held for sale which were impacted by the COVID-19 pandemic. These increases in the year-to-date period were partially offset by unfavorable movements related to the economic hedging of interest rate risk within our own debt. See Note ~~10,~~11, "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~~higher during the three months ended September 30, ~~2020~~2021 due primarily to ~~higher~~lower valuation losses on commercial loans held for sale, lower losses associated with credit default swap protection which largely reflects the hedging of a few client relationships and favorable fair value adjustments on equity investments. These increases in the three-month period were partially offset by lower residential mortgage banking revenue driven by lower gains on sales of residential mortgage loans. In the year-to-date period, other income (loss) was lower due primarily to lower income associated with bank owned life insurance, higher losses associated with credit default swap protection which largely reflects the hedging of a few client relationships and ~~unfavorable fair value adjustments on equity investments. These decreases in the three month period were partially offset by~~ the non-recurrence of a $14 million loss on extinguishment of certain repurchase agreements recorded in the third quarter of 2019 and higher residential mortgage banking revenue driven by higher gains on sales of residential mortgage loans. In the year-to-date period, other income (loss) was higher due primarily to lower losses associated with credit default swap protection which largely reflects the hedging of a few client relationships, the non-recurrence of the loss on extinguishment of certain repurchase agreements recorded in the third quarter of 2019 as discussed above, miscellaneous gains recorded ~~during~~in 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, as well as~~properties. These decreases in the year-to-date period were partially offset by lower valuation losses on commercial loans held for sale, higher gains on sales of commercial loans, favorable fair value adjustments on equity investments and higher residential mortgage banking revenue driven by higher gains on sales of residential mortgage loans. ~~These increases in the year-to-date period were partially offset by higher valuation losses on loans held for sale and unfavorable fair value adjustments on equity investments.~~

~~108~~102


HSBC USA Inc.

Operating Expenses The following table summarizes the components of operating expenses:


								Increase (Decrease)													Increase (Decrease)
Three Months Ended September 30,	Three Months Ended September 30,	2020			2019			Amount		%		Three Months Ended September 30,	2021			2020			Amount		%
		(dollars are in millions)																	(dollars are in millions)
Salaries and employee benefits	Salaries and employee benefits	$	193		$	195		$	(2)	(1.0)	%	Salaries and employee benefits	$	151		$	193		$	(42)	(21.8)	%
Support services from HSBC affiliates:	Support services from HSBC affiliates:											Support services from HSBC affiliates:
Fees paid to HSBC Technology & Services (USA) ("HTSU")	Fees paid to HSBC Technology & Services (USA) ("HTSU")	285			274			11		4.0		Fees paid to HSBC Technology & Services (USA) ("HTSU")	242			285			(43)		(15.1)
Fees paid to HSBC Markets (USA) Inc. ("HMUS")	Fees paid to HSBC Markets (USA) Inc. ("HMUS")	17			24			(7)		(29.2)		Fees paid to HSBC Markets (USA) Inc. ("HMUS")	26			17			9		52.9
Fees paid to other HSBC affiliates	Fees paid to other HSBC affiliates	89			96			(7)		(7.3)		Fees paid to other HSBC affiliates	121			89			32		36.0
Total support services from HSBC affiliates	Total support services from HSBC affiliates	391			394			(3)		(.8)		Total support services from HSBC affiliates	389			391			(2)		(.5)
Occupancy expense, net	Occupancy expense, net	44			41			3		7.3		Occupancy expense, net	27			44			(17)		(38.6)
Goodwill impairment		—			365			(365)		(100.0)

Other expenses:	Other expenses:											Other expenses:
Equipment and software	Equipment and software	24			20			4		20.0		Equipment and software	25			24			1		4.2
Marketing	Marketing	12			31			(19)		(61.3)		Marketing	11			12			(1)		(8.3)
Outside services	Outside services	16			15			1		6.7		Outside services	17			16			1		6.3
Professional fees	Professional fees	19			20			(1)		(5.0)		Professional fees	16			19			(3)		(15.8)
Off-balance sheet credit reserves⁽¹⁾		—			(1)			1		100.0

Federal Deposit Insurance Corporation ("FDIC") assessment fees	Federal Deposit Insurance Corporation ("FDIC") assessment fees	22			9			13		*		Federal Deposit Insurance Corporation ("FDIC") assessment fees	15			22			(7)		(31.8)
Expense related to legal matters (excluding attorney's fees)	Expense related to legal matters (excluding attorney's fees)	56			13			43		*		Expense related to legal matters (excluding attorney's fees)	1			56			(55)		(98.2)
Miscellaneous	Miscellaneous	8			4			4		100.0		Miscellaneous	14			8			6		75.0
Total other expenses	Total other expenses	157			111			46		41.4		Total other expenses	99			157			(58)		(36.9)
Total operating expenses	Total operating expenses	$	785		$	1,106		$	(321)	(29.0)	%	Total operating expenses	$	666		$	785		$	(119)	(15.2)	%
Personnel - average number	Personnel - average number	4,296			4,693							Personnel - average number	3,641			4,296
Efficiency ratio	Efficiency ratio	86.8		%	111.8		%					Efficiency ratio	87.4		%	86.8		%

~~109~~103


HSBC USA Inc.


								Increase (Decrease)													Increase (Decrease)
Nine Months Ended September 30,	Nine Months Ended September 30,	2020			2019			Amount		%		Nine Months Ended September 30,	2021			2020			Amount		%
		(dollars are in millions)																	(dollars are in millions)
Salaries and employee benefits	Salaries and employee benefits	$	590		$	626		$	(36)	(5.8)	%	Salaries and employee benefits	$	509		$	590		$	(81)	(13.7)	%
Support services from HSBC affiliates:	Support services from HSBC affiliates:											Support services from HSBC affiliates:
Fees paid to HTSU	Fees paid to HTSU	820			849			(29)		(3.4)		Fees paid to HTSU	754			820			(66)		(8.0)
Fees paid to HMUS	Fees paid to HMUS	63			74			(11)		(14.9)		Fees paid to HMUS	72			63			9		14.3
Fees paid to other HSBC affiliates	Fees paid to other HSBC affiliates	279			262			17		6.5		Fees paid to other HSBC affiliates	322			279			43		15.4
Total support services from HSBC affiliates	Total support services from HSBC affiliates	1,162			1,185			(23)		(1.9)		Total support services from HSBC affiliates	1,148			1,162			(14)		(1.2)
Occupancy expense, net	Occupancy expense, net	222			134			88		65.7		Occupancy expense, net	175			222			(47)		(21.2)
Goodwill impairment	Goodwill impairment	784			365			419		*		Goodwill impairment	—			784			(784)		(100.0)
Other expenses:	Other expenses:											Other expenses:
Equipment and software	Equipment and software	72			60			12		20.0		Equipment and software	81			72			9		12.5
Marketing	Marketing	45			99			(54)		(54.5)		Marketing	29			45			(16)		(35.6)
Outside services	Outside services	44			43			1		2.3		Outside services	52			44			8		18.2
Professional fees	Professional fees	57			49			8		16.3		Professional fees	58			57			1		1.8
Off-balance sheet credit reserves⁽¹⁾		—			(7)			7		100.0

FDIC assessment fees	FDIC assessment fees	55			14			41		*		FDIC assessment fees	48			55			(7)		(12.7)
Expense related to legal matters (excluding attorney's fees)	Expense related to legal matters (excluding attorney's fees)	56			16			40		*		Expense related to legal matters (excluding attorney's fees)	(2)			56			(58)		*
Miscellaneous	Miscellaneous	30			46			(16)		(34.8)		Miscellaneous	52			30			22		73.3
Total other expenses	Total other expenses	359			320			39		12.2		Total other expenses	318			359			(41)		(11.4)
Total operating expenses	Total operating expenses	$	3,117		$	2,630		$	487	18.5	%	Total operating expenses	$	2,150		$	3,117		$	(967)	(31.0)	%
Personnel - average number	Personnel - average number	4,463			4,712							Personnel - average number	3,791			4,463
Efficiency ratio	Efficiency ratio	111.4		%	90.2		%					Efficiency ratio	85.9		%	111.4		%

*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 nine months ended September 30, ~~2020~~2021 due primarily to ~~lower incentive compensation expense, lower pension expense and~~ lower salaries expense driven by staff reductions related to our Restructuring ~~Plan. These decreases were~~Plan as well as lower severance costs. While incentive compensation expense was lower and contributed to the decrease in the three-month period, it was higher and partially offset ~~by higher severance costs and lower health care reimbursements.~~the decrease in the year-to-date period.

Support services from HSBC affiliates Servicing and other fees from HSBC affiliates ~~decreased~~was relatively flat during the three ~~and nine~~ months ended September 30, ~~2020~~2021 as lower cost allocations from our technology and support service functions driven by the execution of our Restructuring Plan were largely offset by higher allocated restructuring related costs from HTSU and other HSBC affiliates. In the year-to-date period, servicing and other fees from HSBC affiliates decreased due primarily to lower cost allocations from our technology ~~risk~~ and ~~compliance~~ support service ~~functions. These decreases were partially offset by higher allocated costs~~functions driven by the execution of our Restructuring Plan, partially offset by higher allocated restructuring related costs from HTSU and other HSBC affiliates. During the three and nine months ended September 30, 2021, we recorded $27 million and $75 million, respectively, of allocated restructuring related costs from HTSU and other HSBC affiliates, primarily support service project costs and severance costs, ~~as well as contract cancellation, equipment removal~~compared with $13 million and ~~other~~$55 million of allocated restructuring related costs ~~associated with~~during the ~~office space consolidation and branch exits discussed below.~~prior year periods. A summary of the services received from various HSBC affiliates is included in Note ~~14,~~15, "Related Party Transactions," in the accompanying consolidated financial statements.

Occupancy expense, net Occupancy expense, net was ~~higher~~lower during the three and nine months ended September 30, ~~2020~~2021 due primarily to lower operating lease costs and depreciation expense driven by the execution of our Restructuring Plan as well as lower lease impairment and other related ~~costs of $11 million and $97 million recorded during~~costs. During the three and nine months ended September 30, ~~2020,~~2021, we recorded $6 million and $88 million, respectively, of lease impairment and other related costs related to the ~~consolidation~~exit of certain office space and, in the year-to-date period, the exit of certain branches as part of our Restructuring Plan. In the prior year periods, we recorded $11 million and $97 million, respectively, of lease impairment and other related costs related to the exit of certain office space and, in the year-to-date period, the initial consolidation of our retail branch ~~network.~~network as part of our Restructuring Plan. See Note 2, "Strategic Initiatives," in the accompanying consolidated financial statements for additional information. ~~These increases were partially offset by lower operating lease costs.~~

Goodwill impairment~~During the first quarter of 2020, we recorded~~ Reflects 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. During the third quarter of 2019, we recorded a goodwill impairment charge of $365 million, representing a portion of the goodwill previously allocated to our Retail Banking and Wealth Management reporting unit. For additional discussion of the results of our goodwill impairment testing, see Note 8, "Goodwill and Other Long-Lived Assets," in the accompanying consolidated financial statements.

~~110~~104


HSBC USA Inc.

Private Banking reporting units. For additional discussion of the results of our goodwill impairment testing, see Note 9, "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 ~~remained higher~~were lower during the three and nine months ended September 30, ~~2020~~2021 due primarily to ~~higher~~lower expense related to legal matters, ~~increased~~lower deposit insurance assessment fees ~~and higher capitalized software amortization expense. These increases were partially offset by lower marketing expense, lower travel expense~~ and, in the year-to-date period, lower ~~losses associated with card fraud.~~marketing expense. These decreases were partially offset by higher levels of expense capitalization related to internally developed software and, in the year-to-date period, higher capitalized software amortization expense and higher outside services expense.

Efficiency ratio Our efficiency ratio ~~improved~~increased during the three months ended September 30, ~~2020~~2021 due to lower other revenues driven by lower trading revenue and lower net interest income, partially offset by lower operating expenses. In the year-to-date period, our efficiency ratio improved due primarily to lower operating expenses driven by the non-recurrence of a goodwill impairment charge recorded in the ~~prior year period and higher net interest income,~~first quarter of 2020, partially offset by lower other revenues ~~as discussed in detail above. In the year-to-date period, our efficiency ratio increased due primarily to higher operating expenses~~ driven by ~~higher goodwill impairment charges recorded in the current year-to-date period~~lower trading revenue and lower ~~other revenues as discussed in detail above.~~net interest income.

Income tax expense (benefit)The following table ~~provides an analysis of the difference between~~summarizes our effective ~~rates~~tax rate based on the provision for income taxes attributable to pretax income (loss):



Three Months Ended September 30,	2021			2020
	(dollars are in millions)
Income before income tax	$	177		$	224
Income tax expense	40			36
Effective tax rate	22.6		%	16.1		%

Nine Months Ended September 30,	2021			2020
	(dollars are in millions)
Income (loss) before income tax	$	891		$	(1,160)
Income tax expense (benefit)	222			(72)
Effective tax rate	24.9		%	(6.2)		%

Income tax expense and the ~~statutory U.S. Federal~~effective tax rate increased during the three months ended September 30, 2021 due primarily to the non-recurrence of a reversal of the tax benefit limitation on interim period ordinary losses under ASC 740 recorded in the second quarter of 2020. In the year-to-date period, income tax ~~rate:~~

Three Months Ended September 30, 2020 2019
(dollars are in millions)
Tax expense (benefit) at the U.S. Federal statutory income tax rate $ 47 21.0 % $ (44) (21.0) %
Increase (decrease) in rate resulting from:
State and local taxes, net of Federal benefit 10 4.5 7 3.3
Non-deductible FDIC assessment fees 4 1.8 1 .5
Non-deductible goodwill impairment⁽¹⁾
— — 77 36.5
Other non-deductible / non-taxable items⁽²⁾
9 4.0 (1) (.5)
Items affecting prior periods⁽³⁾
— — 3 1.4
Low income housing and other tax credit investments (4) (1.8) (4) (1.7)
Other⁽⁴⁾
(30) (13.4) — —
Provision for income taxes $ 36 16.1 % $ 39 18.5 %
Nine Months Ended September 30, 2020 2019
(dollars are in millions)
Tax expense (benefit) at the U.S. Federal statutory income tax rate $ (244) (21.0) % $ 19 21.0 %
Increase (decrease) in rate resulting from:
State and local taxes, net of Federal benefit (5) (.4) 19 21.3
Non-deductible FDIC assessment fees 11 .9 3 3.4
Non-deductible goodwill impairment⁽¹⁾
165 14.2 77 86.5
Other non-deductible / non-taxable items⁽²⁾
9 .8 (1) (1.1)
Items affecting prior periods⁽³⁾
— — 3 3.4
Low income housing and other tax credit investments (10) (.9) (10) (11.2)
Other 2 .2 (1) (.8)
Provision for income taxes $ (72) (6.2) % $ 109 122.5 %

⁽¹⁾~~For 2020,~~expense (benefit) and the ~~amount represents~~effective tax rate increased due to higher pre-tax income and the non-recurrence of non-deductible goodwill impairment recorded in the first quarter of 2020 related to our previously separate Retail Banking and Wealth Management and Private Banking businesses during the first quarter of 2020. For 2019, the amounts represent non-deductible goodwill impairment related to our previously separate Retail Banking and Wealth Management business during the third quarter of 2019.

⁽²⁾~~For 2020, the amounts primarily relate to non-deductible penalties related to legal matters.~~

⁽³⁾~~For 2019, the amounts relate to changes in estimates as a result of filing the 2018 Federal income tax return.~~

⁽⁴⁾For the three months ended September 30, 2020, the amount includes $(25) million related to the reversal of the tax benefit limitation on interim period ordinary losses that was recorded in the second quarter of 2020.

The provision for income taxes for the nine months ended September 30, 2020 has been computed based on tax reporting guidance under ASC 740 for interim period ordinary losses. The provision for income taxes for the three months ended September 30, 2020 represents the difference between the provision for income taxes for the nine months ended September 30, 2020 and the six months ended June 30, 2020. All material tax rate adjustment items are disclosed in the reconciliation table above.businesses.

~~111~~


~~HSBC USA Inc.~~

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 ~~2019~~2020 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.

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 nine months ended September 30, 2019. There have been no additional changes in the basis of our segmentation as compared with the presentation in our ~~2019~~2020 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.

105


HSBC USA Inc.

We report financial information to our parent, HSBC, in accordance with HSBC Group accounting and reporting policies, which apply ~~IFRS~~IFRSs as issued by the ~~IASB and endorsed by the EU, and, as~~IASB. 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 ~~2019~~2020 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 ~~2019~~2020 Form 10-K. ~~In addition, see Note 15, "Business Segments," in the accompanying consolidated financial statements for a discussion of~~There have been no significant changes since December 31, ~~2019~~2020 in the differences between U.S. GAAP and the Group Reporting Basis impacting our results.

~~112~~


~~HSBC USA Inc.~~

Wealth and Personal Banking The following table summarizes the Group Reporting Basis results for our WPB segment:


						Increase (Decrease)											Increase (Decrease)
Three Months Ended September 30,	Three Months Ended September 30,	2020		2019		Amount		%		Three Months Ended September 30,	2021		2020		Amount		%
		(dollars are in millions)													(dollars are in millions)
Net interest income	Net interest income	$	200	$	253	$	(53)	(20.9)	%	Net interest income	$	202	$	200	$	2	1.0	%
Other operating income	Other operating income	110		99		11		11.1		Other operating income	57		110		(53)		(48.2)
Total operating income⁽¹⁾	Total operating income⁽¹⁾	310		352		(42)		(11.9)		Total operating income(1)	259		310		(51)		(16.5)
Expected credit losses	Expected credit losses	12		52		(40)		(76.9)		Expected credit losses	(35)		12		(47)		*
Net operating income	Net operating income	298		300		(2)		(.7)		Net operating income	294		298		(4)		(1.3)
Operating expenses	Operating expenses	527		557		(30)		(5.4)		Operating expenses	279		527		(248)		(47.1)
Loss before tax		$	(229)	$	(257)	$	28	10.9
Profit (loss) before tax										Profit (loss) before tax	$	15	$	(229)	$	244	*

						Increase (Decrease)											Increase (Decrease)
Nine Months Ended September 30,	Nine Months Ended September 30,	2020		2019		Amount		%		Nine Months Ended September 30,	2021		2020		Amount		%
		(dollars are in millions)													(dollars are in millions)
Net interest income	Net interest income	$	629	$	791	$	(162)	(20.5)	%	Net interest income	$	616	$	629	$	(13)	(2.1)	%
Other operating income	Other operating income	283		293		(10)		(3.4)		Other operating income	215		283		(68)		(24.0)
Total operating income⁽¹⁾	Total operating income⁽¹⁾	912		1,084		(172)		(15.9)		Total operating income(1)	831		912		(81)		(8.9)
Expected credit losses	Expected credit losses	188		86		102		*		Expected credit losses	(36)		188		(224)		*
Net operating income	Net operating income	724		998		(274)		(27.5)		Net operating income	867		724		143		19.8
Operating expenses	Operating expenses	1,888		1,289		599		46.5		Operating expenses	921		1,888		(967)		(51.2)
Loss before tax		$	(1,164)	$	(291)	$	(873)	*
Profit (loss) before tax										Profit (loss) before tax	$	(54)	$	(1,164)	$	1,110	95.4	%

*Percentage change is greater than 100 percent.

¹⁰⁶


HSBC USA Inc.

(1)The following table summarizes the impact of key activities on the total operating income of our WPB segment:


						Increase (Decrease)											Increase (Decrease)
Three Months Ended September 30,	Three Months Ended September 30,	2020		2019		Amount		%		Three Months Ended September 30,	2021		2020		Amount		%
		(dollars are in millions)													(dollars are in millions)
Retail banking current accounts, savings and deposits	Retail banking current accounts, savings and deposits	$	118	$	167	$	(49)	(29.3)	%	Retail banking current accounts, savings and deposits	$	102	$	118	$	(16)	(13.6)	%
Retail banking mortgages, credit cards and other personal lending	Retail banking mortgages, credit cards and other personal lending	85		62		23		37.1		Retail banking mortgages, credit cards and other personal lending	70		85		(15)		(17.6)
Wealth and asset management products	Wealth and asset management products	25		23		2		8.7		Wealth and asset management products	20		25		(5)		(20.0)
Private banking	Private banking	45		50		(5)		(10.0)		Private banking	46		45		1		2.2
Retail business banking and other⁽²⁾	Retail business banking and other⁽²⁾	37		50		(13)		(26.0)		Retail business banking and other(2)	21		37		(16)		(43.2)
Total operating income	Total operating income	$	310	$	352	$	(42)	(11.9)	%	Total operating income	$	259	$	310	$	(51)	(16.5)	%

						Increase (Decrease)											Increase (Decrease)
Nine Months Ended September 30,	Nine Months Ended September 30,	2020		2019		Amount		%		Nine Months Ended September 30,	2021		2020		Amount		%
		(dollars are in millions)													(dollars are in millions)
Retail banking current accounts, savings and deposits	Retail banking current accounts, savings and deposits	$	385	$	508	$	(123)	(24.2)	%	Retail banking current accounts, savings and deposits	$	318	$	385	$	(67)	(17.4)	%
Retail banking mortgages, credit cards and other personal lending	Retail banking mortgages, credit cards and other personal lending	226		177		49		27.7		Retail banking mortgages, credit cards and other personal lending	235		226		9		4.0
Wealth and asset management products	Wealth and asset management products	73		70		3		4.3		Wealth and asset management products	59		73		(14)		(19.2)
Private banking	Private banking	133		157		(24)		(15.3)		Private banking	137		133		4		3.0
Retail business banking and other⁽²⁾	Retail business banking and other⁽²⁾	95		172		(77)		(44.8)		Retail business banking and other(2)	82		95		(13)		(13.7)
Total operating income	Total operating income	$	912	$	1,084	$	(172)	(15.9)	%	Total operating income	$	831	$	912	$	(81)	(8.9)	%

⁽²⁾Includes cost reimbursements associated with activities performed on behalf of other HSBC affiliates and allocated ~~BSM~~Markets Treasury revenue.

During the second quarter of 2021, as part of our Restructuring Plan we made the decision to exit our mass market retail banking business, including our Personal and Advance propositions as well as retail business banking, and focus on the banking and wealth management needs of globally-connected affluent and high net worth clients through our Premier, Jade or Private Banking propositions. In conjunction with the execution of this strategy, we have entered into definitive sale agreements with third parties to sell approximately 90 of our retail branches along with substantially all residential mortgage, unsecured and retail business banking loans and all deposits in our branch network not associated with our Premier, Jade and Private Banking customers. Certain assets under management associated with our mass market retail banking business which are managed by an affiliate will also be transferred. Although this disposal group will be sold in multiple transactions that are expected to be completed by the first quarter of 2022, the actual time to complete these sales depends on many factors, including regulatory approval. We will continue to offer deposits and retail loan products to our Premier, Jade and Private Banking customers.

Our WPB segment reported a ~~lower loss~~profit before tax during the three months ended September 30, ~~2020~~2021 compared with a loss before tax in the prior year period due primarily to lower operating expenses and lower expected credit losses, ~~and lower operating expenses,~~ partially offset by lower ~~net interest~~other operating income. In the year-to-date period, our WPB segment reported a ~~higher~~lower loss before tax due ~~primarily~~ to ~~higher~~lower operating expenses and ~~to a lesser extent,~~lower expected credit losses, partially offset by lower other operating income and lower net interest ~~income and higher expected credit losses. Higher~~income. Lower operating expenses in the ~~year-to-date~~three-month period ~~was~~were driven by ~~higher impairment charges, including a goodwill impairment charge~~the non-recurrence of ~~$693 million recorded during the first quarter of 2020, representing the entire amount of remaining goodwill previously recorded, and~~ an impairment charge of $207 million recorded during the third quarter of 2020 related to the write-off of all the capitalized software associated with our WPB business segment. ~~These impairment charges were partially offset in~~In the year-to-date period, lower operating expenses were driven by lower impairment charges as $67 million of lease impairment and other related costs recorded in the ~~non-recurrence~~current year-to-date period primarily related to the exit of certain branches as part of our Restructuring Plan were more than offset by a goodwill

~~113~~


~~HSBC USA Inc.~~

impairment charge of ~~$209~~$693 million recorded during the first quarter of 2020, representing the entire amount of remaining goodwill previously recorded, and the impairment charge recorded during the third quarter of 2019, representing a portion of the goodwill previously recorded. See Note 8, "Goodwill and Other Long-Lived Assets," in the accompanying consolidated financial statements for additional discussion regarding the factors which led2020 related to ~~the impairments.~~capitalized software as discussed above.

Net interest income ~~decreased~~was relatively flat during the three ~~and nine~~ months ended September 30, ~~2020~~2021 and decreased in the year-to-date period. The decrease in the year-to-date period was due ~~primarily~~ to lower deposit spreads reflecting the impact of lower market rates, partially offset by improved ~~loan~~ spreads ~~and higher~~on residential mortgage ~~loan balances.~~loans.

Other operating income ~~increased~~decreased during the three and nine months ended September 30, ~~2020~~2021 due primarily to lower investment management fees driven by higher liquidity fund fee waivers reflecting the impact of low market interest rates, lower credit card fees driven by higher cost estimates associated with our credit rewards program reflecting an increase in estimated customer redemption rates and lower residential mortgage banking revenue driven by ~~higher gains~~unfavorable fair value adjustments on ~~sales of~~ residential mortgage loans held for sale. The decrease in the year-to-date period was partially offset by ~~lower credit card fees due to lower customer spending. In~~ the ~~year-to-date period, other operating income decreased as the higher residential mortgage banking revenue was more than offset by lower credit card fees due to lower customer spending and~~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 common shares.

Expected credit losses ~~were lower~~improved during the three and nine months ended September 30, ~~2020 driven~~2021 reflecting releases in credit loss reserves compared with loss provisions in the prior year periods. The releases in credit reserves in the current year periods were

107


HSBC USA Inc.

due to improved economic conditions which resulted in improved economic forecasts used for calculating ECL as well as lower loss estimates for risk factors associated with economic uncertainty and declines in credit card balances. The loss provision in the prior year three-month period reflects higher loss estimates for risk factors associated with forbearance accounts which was partially offset by ~~the~~a partial rebound in economic conditions in the third quarter of 2020 which resulted in ~~an improvement in the~~improved economic forecasts ~~we use~~used for calculating ECL as well as a decline in credit card balances due to lower customer ~~spending and changes in underwriting criteria~~spending. In the prior year-to-date period, the loss provision was driven by the current environment. These decreases were partially offset by higher loss estimates for risk factors associated with forbearance accounts. In the year-to-date period, expected credit losses increased driven by thean overall 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, as well as higher loss estimates for risk factors associated with forbearance accounts and growth in personal loan balances due to new product promotions. ~~These increases were~~The loss provision in the prior year-to-date period was partially offset by a decline in credit card balances due to lower customer ~~spending and changes in underwriting criteria driven by the current environment.~~spending.

Excluding the impairment charges as discussed above, operating expenses ~~decreased~~remained lower during the three and nine months ended September 30, ~~2020 due to~~2021 driven by the execution of our Restructuring Plan which resulted in lower staff costs, lower operating lease costs, lower marketing expense, lower ~~pension expense~~severance costs and ~~lower salaries expense driven by staff reductions related to our Restructuring Plan as well as~~ lower cost allocations from our technology and ~~risk~~ support service ~~functions and, in~~functions. Also contributing to the ~~year-to-date period,~~decrease were lower ~~losses associated with card fraud. These decreases were partially offset by higher severance costs and higher~~ deposit insurance assessment fees.

Client Assets The following table provides information regarding private banking client assets during the nine months ended September 30, ~~2020~~2021 and ~~2019:~~2020:


Nine Months Ended September 30,	Nine Months Ended September 30,	2020		2019		Nine Months Ended September 30,	2021		2020
		(in millions)							(in millions)
Client assets at beginning of period	Client assets at beginning of period	$	39,295	$	36,017	Client assets at beginning of period	$	44,104	$	39,295
Net new money (outflows)	Net new money (outflows)	(1,750)		1,357		Net new money (outflows)	10,403		(1,750)
Client transfers to UBS Wealth Management Americas ("UBS")⁽¹⁾		—		(26)

Value change	Value change	2,439		2,766		Value change	2,767		2,439
Client assets at end of period	Client assets at end of period	$	39,984	$	40,114	Client assets at end of period	$	57,274	$	39,984

⁽¹⁾~~Reflects~~The increase in client ~~asset transfers associated with~~assets during the ~~sale of certain private banking client relationships to UBS, which concluded in 2019.~~

~~114~~


~~HSBC USA Inc.~~

nine months ended September 30, 2021 reflects new money growth primarily driven by a few large clients as well as positive market performance.

Commercial Banking The following table summarizes the Group Reporting Basis results for our CMB segment:


						Increase (Decrease)											Increase (Decrease)
Three Months Ended September 30,	Three Months Ended September 30,	2020		2019		Amount		%		Three Months Ended September 30,	2021		2020		Amount		%
		(dollars are in millions)													(dollars are in millions)
Net interest income	Net interest income	$	202	$	216	$	(14)	(6.5)	%	Net interest income	$	200	$	202	$	(2)	(1.0)	%
Other operating income	Other operating income	66		66		—		—		Other operating income	70		66		4		6.1
Total operating income⁽¹⁾	Total operating income⁽¹⁾	268		282		(14)		(5.0)		Total operating income(1)	270		268		2		.7
Expected credit losses	Expected credit losses	(21)		19		(40)		*		Expected credit losses	24		(21)		45		*
Net operating income	Net operating income	289		263		26		9.9		Net operating income	246		289		(43)		(14.9)
Operating expenses	Operating expenses	150		145		5		3.4		Operating expenses	134		150		(16)		(10.7)
Profit before tax	Profit before tax	$	139	$	118	$	21	17.8		Profit before tax	$	112	$	139	$	(27)	(19.4)	%

						Increase (Decrease)											Increase (Decrease)
Nine Months Ended September 30,	Nine Months Ended September 30,	2020		2019		Amount		%		Nine Months Ended September 30,	2021		2020		Amount		%
		(dollars are in millions)													(dollars are in millions)
Net interest income	Net interest income	$	616	$	628	$	(12)	(1.9)	%	Net interest income	$	580	$	616	$	(36)	(5.8)	%
Other operating income	Other operating income	176		187		(11)		(5.9)		Other operating income	208		176		32		18.2
Total operating income⁽¹⁾	Total operating income⁽¹⁾	792		815		(23)		(2.8)		Total operating income(1)	788		792		(4)		(.5)
Expected credit losses	Expected credit losses	283		34		249		*		Expected credit losses	(26)		283		(309)		*
Net operating income	Net operating income	509		781		(272)		(34.8)		Net operating income	814		509		305		59.9
Operating expenses	Operating expenses	439		427		12		2.8		Operating expenses	437		439		(2)		(.5)
Profit before tax	Profit before tax	$	70	$	354	$	(284)	(80.2)		Profit before tax	$	377	$	70	$	307	*

*Percentage change is greater than 100 percent.

¹⁰⁸


HSBC USA Inc.

(1)The following table summarizes the impact of key activities on the total operating income of our CMB segment:


						Increase (Decrease)											Increase (Decrease)
Three Months Ended September 30,	Three Months Ended September 30,	2020		2019		Amount		%		Three Months Ended September 30,	2021		2020		Amount		%
		(dollars are in millions)													(dollars are in millions)
Lending and Transaction Management	Lending and Transaction Management	$	123	$	125	$	(2)	(1.6)	%	Lending and Transaction Management	$	121	$	123	$	(2)	(1.6)	%
Global Liquidity and Cash Management, current accounts and savings deposits	Global Liquidity and Cash Management, current accounts and savings deposits	105		115		(10)		(8.7)		Global Liquidity and Cash Management, current accounts and savings deposits	102		105		(3)		(2.9)
Global Trade and Receivables Finance	Global Trade and Receivables Finance	15		14		1		7.1		Global Trade and Receivables Finance	15		15		—		—
Investment banking products and other⁽²⁾	Investment banking products and other⁽²⁾	25		28		(3)		(10.7)		Investment banking products and other(2)	32		25		7		28.0
Total operating		$	268	$	282	$	(14)	(5.0)	%
Total operating income										Total operating income	$	270	$	268	$	2	.7	%

						Increase (Decrease)											Increase (Decrease)
Nine Months Ended September 30,	Nine Months Ended September 30,	2020		2019		Amount		%		Nine Months Ended September 30,	2021		2020		Amount		%
		(dollars are in millions)													(dollars are in millions)
Lending and Transaction Management	Lending and Transaction Management	$	342	$	343	$	(1)	(.3)	%	Lending and Transaction Management	$	338	$	342	$	(4)	(1.2)	%
Global Liquidity and Cash Management, current accounts and savings deposits	Global Liquidity and Cash Management, current accounts and savings deposits	328		343		(15)		(4.4)		Global Liquidity and Cash Management, current accounts and savings deposits	301		328		(27)		(8.2)
Global Trade and Receivables Finance	Global Trade and Receivables Finance	42		39		3		7.7		Global Trade and Receivables Finance	45		42		3		7.1
Investment banking products and other⁽²⁾	Investment banking products and other⁽²⁾	80		90		(10)		(11.1)		Investment banking products and other(2)	104		80		24		30.0
Total operating		$	792	$	815	$	(23)	(2.8)	%
Total operating income										Total operating income	$	788	$	792	$	(4)	(.5)	%

⁽²⁾Includes allocated ~~BSM~~Markets Treasury revenue.

Our CMB segment reported a ~~higher~~lower profit before tax during the three months ended September 30, ~~2020~~2021 due primarily to ~~lower expected~~higher expect credit losses, partially offset by lower ~~net interest income.~~operating expenses. In the year-to-date period, our CMB segment reported a ~~lower~~higher profit before tax due primarily to ~~higher~~lower expected credit losses and, to a lesser extent, higher other operating income. The increase in the year-to-date period was partially offset by lower net interest ~~income, lower other operating income and higher operating expenses.~~income.

Net interest income ~~decreased~~was relatively flat during the three ~~and nine~~ months ended September 30, ~~2020~~2021 and decreased in the year-to-date period. The decrease in the year-to-date period was due to lower deposit spreads reflecting the impact of lower market rates ~~as well as~~and lower average loan balances, partially offset by higher average deposit balances, improved loan spreads ~~reflecting compression~~ and higher ~~liquidity charges.~~earnings on capital.

Other operating income increased during the three and nine months ended September 30, 2021 due primarily to higher fees from loan syndication and account services and, in the year-to-date period, the non-recurrence of a loss recorded on the sale of a loan in the second quarter of 2020. These ~~decreases~~increases were partially offset by ~~higher deposit and average loan balances.~~lower allocated Markets Treasury revenue.

~~Other operating income was flat~~Expected credit losses increased during the three months ended September 30, ~~2020 and decreased~~2021 reflecting a loss provision compared with a release in credit loss reserves in the ~~year-to-date~~prior year period. The loss provision in the current year period ~~due primarily to a loss on sale of a loan and lower fees from loan syndication and commitments.~~

~~115~~


~~HSBC USA Inc.~~

~~Expected credit losses were lower during the three months ended September 30, 2020~~was driven by a higher loss estimate for risk factors associated with real estate industry loan exposures, partially offset by improved economic conditions which resulted in improved economic forecasts used for calculating ECL. The release in credit reserves in the prior year period was driven by a partial rebound in economic conditions in the third quarter of 2020 which resulted in ~~an improvement in the~~improved economic forecasts ~~we use~~used for calculating ECL, partially offset by higher loss estimates for risk factors associated with higher risk client and industry exposures. In the ~~year-to-period,~~year-to-date period, expected credit losses ~~increased~~improved reflecting a release in credit loss reserves compared with a loss provision in the prior year-to-date period. The release in credit reserves in the current year-to-date period was driven by improved economic conditions which resulted in improved economic forecasts used for calculating ECL as well as client paydowns, partially offset by a higher loss estimate for risk factors associated with real estate industry loan exposures. The loss provision in the prior year-to-date period was driven by an overall deterioration of economic conditions caused by the COVID-19 pandemic which resulted in a worsening of the economic forecasts used for calculating ECL, downgrades reflecting weakness in the financial condition of certain clients and higher loss estimates for risk factors associated with higher risk client and industry exposures.

Operating expenses ~~increased~~decreased during the three ~~and nine~~ months ended September 30, ~~2020~~2021 and were relatively flat in the year-to-date period. The decrease in the three-month period was due primarily to ~~higher~~lower salaries and incentive compensation expense, lower branch network costs and ~~severance costs, higher deposit insurance assessment fees and higher~~lower cost allocations from our ~~compliance~~legal and ~~legal~~risk support ~~services~~service functions. ~~These increases were partially offset by lower incentive compensation expense, lower marketing expense and lower travel expense.~~

109


HSBC USA Inc.

Global Banking and Markets The following table summarizes the Group Reporting Basis results for our ~~GB&M~~GBM segment:


						Increase (Decrease)											Increase (Decrease)
Three Months Ended September 30,	Three Months Ended September 30,	2020		2019		Amount		%		Three Months Ended September 30,	2021		2020		Amount		%
		(dollars are in millions)													(dollars are in millions)
Net interest income	Net interest income	$	92	$	85	$	7	8.2	%	Net interest income	$	74	$	92	$	(18)	(19.6)	%
Other operating income	Other operating income	217		269		(52)		(19.3)		Other operating income	184		217		(33)		(15.2)
Total operating income⁽¹⁾	Total operating income⁽¹⁾	309		354		(45)		(12.7)		Total operating income(1)	258		309		(51)		(16.5)
Expected credit losses	Expected credit losses	(6)		(3)		(3)		(100.0)		Expected credit losses	(31)		(6)		(25)		*
Net operating income	Net operating income	315		357		(42)		(11.8)		Net operating income	289		315		(26)		(8.3)
Operating expenses	Operating expenses	251		200		51		25.5		Operating expenses	186		251		(65)		(25.9)
Profit before tax	Profit before tax	$	64	$	157	$	(93)	(59.2)	%	Profit before tax	$	103	$	64	$	39	60.9	%

						Increase (Decrease)											Increase (Decrease)
Nine Months Ended September 30,	Nine Months Ended September 30,	2020		2019		Amount		%		Nine Months Ended September 30,	2021		2020		Amount		%
		(dollars are in millions)													(dollars are in millions)
Net interest income	Net interest income	$	304	$	414	$	(110)	(26.6)	%	Net interest income	$	255	$	304	$	(49)	(16.1)	%
Other operating income	Other operating income	743		648		95		14.7		Other operating income	613		743		(130)		(17.5)
Total operating income⁽¹⁾	Total operating income⁽¹⁾	1,047		1,062		(15)		(1.4)		Total operating income(1)	868		1,047		(179)		(17.1)
Expected credit losses	Expected credit losses	129		(17)		146		*		Expected credit losses	(154)		129		(283)		*
Net operating income	Net operating income	918		1,079		(161)		(14.9)		Net operating income	1,022		918		104		11.3

Operating expenses	Operating expenses	644		627		17		2.7		Operating expenses	573		644		(71)		(11.0)
Profit before tax	Profit before tax	$	274	$	452	$	(178)	(39.4)	%	Profit before tax	$	449	$	274	$	175	63.9	%

*Percentage change is greater than 100 percent.

~~116~~110


HSBC USA Inc.

⁽¹⁾The following table summarizes the impact of key activities on the total operating income of our ~~GB&M~~GBM segment. For purposes of the discussion below the table, total operating income is referred to as revenue.

Increase (Decrease)
Three Months Ended September 30, 2020 2019 Amount %
(dollars are in millions)
Credit $ 3 $ 6 $ (3) (50.0) %
Rates (23) 43 (66) *
Foreign Exchange and Metals 106 57 49 86.0
Equities 7 7 — —
Total Global Markets 93 113 (20) (17.7)
Global Banking⁽²⁾
56 94 (38) (40.4)
Global Liquidity and Cash Management 93 121 (28) (23.1)
Securities Services⁽²⁾
7 6 1 16.7
Global Trade and Receivables Finance 17 15 2 13.3
Credit and funding valuation adjustments 18 (11) 29 *
Other⁽³⁾
25 16 9 56.3
Total operating income $ 309 $ 354 $ (45) (12.7) %
Increase (Decrease)
Nine Months Ended September 30, 2020 2019 Amount %
(dollars are in millions)
Credit $ 8 $ 21 $ (13) (61.9) %
Rates 37 77 (40) (51.9)
Foreign Exchange and Metals 344 157 187 *
Equities 30 20 10 50.0
Total Global Markets 419 275 144 52.4
Global Banking⁽²⁾
210 283 (73) (25.8)
Global Liquidity and Cash Management 304 368 (64) (17.4)
Securities Services⁽²⁾
21 19 2 10.5
Global Trade and Receivables Finance 47 42 5 11.9
Credit and funding valuation adjustments (13) 5 (18) *
Other⁽³⁾
59 70 (11) (15.7)
Total operating income $ 1,047 $ 1,062 $ (15) (1.4) %

⁽²⁾ ~~Beginning in June 2020,~~ During the first quarter of 2021, we changed our presentation for ~~issuer services revenue that was previously reported in Securities Services and began reporting this revenue in Global Banking.~~the components of total operating income to provide a more detailed view. As a result, we have reclassified $9prior year amounts in order to conform to the current year presentation.


					Increase (Decrease)
Three Months Ended September 30,	2021		2020		Amount		%
	(dollars are in millions)
Foreign Exchange and Metals	$	47	$	111	$	(64)	(57.7)	%
Debt Markets	1		13		(12)		(92.3)
Securities Financing	10		6		4		66.7
Equities	20		5		15		*
Securities Services	6		7		(1)		(14.3)
Markets and Securities Services other(2)	1		(46)		47		*
Credit and funding valuation adjustments	(5)		18		(23)		*
Total Markets and Securities Services ("MSS")	80		114		(34)		(29.8)
Global Liquidity and Cash Management ("GLCM")	91		93		(2)		(2.2)
Capital Markets	33		34		(1)		(2.9)
Credit and Lending	24		26		(2)		(7.7)
Global Trade and Receivables Finance ("GTRF")	12		14		(2)		(14.3)
Global Banking other(3)	11		(3)		14		*
Total Global Banking	171		164		7		4.3
GBM other(4)	7		31		(24)		(77.4)
Total operating income	$	258	$	309	$	(51)	(16.5)	%




					Increase (Decrease)
Nine Months Ended September 30,	2021		2020		Amount		%
	(dollars are in millions)
Foreign Exchange and Metals	$	181	$	388	$	(207)	(53.4)	%
Debt Markets	(2)		18		(20)		*
Securities Financing	25		28		(3)		(10.7)
Equities	36		16		20		*
Securities Services	19		21		(2)		(9.5)
Markets and Securities Services other(2)	(9)		(44)		35		79.5
Credit and funding valuation adjustments	12		(13)		25		*
Total MSS	262		414		(152)		(36.7)
GLCM	269		304		(35)		(11.5)
Capital Markets	164		121		43		35.5
Credit and Lending	68		58		10		17.2
GTRF	37		41		(4)		(9.8)
Global Banking other(3)	13		37		(24)		(64.9)
Total Global Banking	551		561		(10)		(1.8)
GBM other(4)	55		72		(17)		(23.6)
Total operating income	$	868	$	1,047	$	(179)	(17.1)	%

(2)Includes revenue associated with the exit of certain derivative contracts as part of our Restructuring Plan, including trading losses of nil and $10 million ~~and $27 million of operating income from Securities Services to Global Banking~~recorded during the three and nine months ended September 30, ~~2019,~~2021, respectively, ~~to conform to~~compared with trading losses of $47 million and$57 million during the ~~current year presentation.~~three and nine months ended September 30, 2020, respectively.

⁽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 ~~BSM~~Markets Treasury revenue and certain corporate funding charges not assigned to products.

Our ~~GB&M~~GBM segment reported a ~~lower~~higher profit before tax during the three and nine months ended September 30, ~~2020~~2021 due to lower expected credit losses and lower operating expenses, partially offset by lower other operating income and ~~higher operating expenses. In the year-to-date period, our GB&M segment reported a lower profit before tax due primarily to higher expected credit losses and~~ lower net interest ~~income, partially offset by higher other operating~~ income.

Credit revenue was relatively flat during the three months ended September 30, 2020 and decreased in the year-to-date period due primarily to lower revenue from structuring and collateralized financing related activity.

~~Rates~~MSS revenue decreased during the three and nine months ended September 30, ~~2020~~2021 due primarily to lower revenue from interest rate swaps as well as trading losses of $47 million and $57 million recorded during the three and nine months ended September 30, 2020, respectively, associated with the exit of certain derivative contracts as part of our Restructuring Plan. While revenue from emerging markets rate products was lower and contributed to the decrease in ~~the three month period, it was higher and partially offset the decrease in the year-to-date period.~~

Foreign Exchange and Metals ~~revenue increased during the three~~ and, ~~nine months ended September 30, 2020 due primarily~~ to a lesser extent, Debt Markets. Revenue was lower in Foreign Exchange and Metals as market volatility driven by the COVID-19 pandemic ~~which~~ resulted in increased trading opportunities ~~and higher~~in the prior year periods. Lower revenue in ~~Metals~~Debt Markets and, in the year-to-date period, Foreign ~~Exchange.~~

~~Equities revenue was flat during~~Exchange and Metals reflects the ~~three months ended September 30, 2020 and increased in the year-to-date period due~~impact of our decision to ~~increased client activity in prime brokerage.~~

~~117~~111


HSBC USA Inc.

~~Global Banking~~exit or transfer certain derivatives as part of our Restructuring Plan which resulted in lower revenue ~~decreased during the three~~from interest rate swaps and ~~nine months ended September 30, 2020~~emerging markets rate products. These decreases were partially offset by improved revenue in MSS other due primarily to lower ~~fees from loan commitments~~trading losses associated with the exit of certain derivatives as part of our Restructuring Plan as well as ~~lower net interest income~~higher revenue in Equities driven by improved revenue from ~~lower loan balances~~cash equities products and higher reimbursements associated with trading activities performed on behalf of HSBC Bank plc. Also contributing to the decrease in the three-month period were unfavorable credit and funding valuation adjustments driven by widening credit spreads. In the year-to-date period, ~~spread compression. Lower loan balances~~credit and funding valuation adjustments were favorable due primarily to compressed credit and funding spreads in the current year-to-date period compared with widening credit spreads on derivative assets driven by ~~lower demand reflecting increased capital markets activity by clients coupled with economic uncertainty~~market volatility caused by the COVID-19 pandemic as well as the impact of ~~our efforts~~lower market rates in the prior year-to-date period.

Global Banking revenue increased during the three months ended September 30, 2021 due to ~~improve returns through disciplined lending. While~~higher revenue in Global Banking other driven by lower losses associated with credit default swap protection which largely reflects the hedging of a few client ~~relationships were higher~~relationships. In the year-to-date period, Global Banking revenue decreased due primarily to lower revenue in GLCM and ~~contributed to the decrease~~Global Banking other. Revenue was lower in ~~the three month period, they are lower and partially offset the decrease~~GLCM in the year-to-date ~~period.~~

~~Global Liquidity and Cash Management revenue decreased during the three and nine months ended September 30, 2020~~period due to lower net interest income driven by lower deposit spreads reflecting the impact of lower market rates, partially offset by the impact of higher average deposit ~~balances.~~balances as well as higher account service fees. Lower revenue in Global Banking other in the year-to-date period was due to higher losses associated with credit default swap protection which largely reflects the hedging of a few client relationships as well as lower earnings on capital. These decreases in the year-to-date period were partially offset by higher revenue in Capital Markets, and Credit and Lending due to higher revenue associated with collections of nonaccrual loans, improved loans spreads and, in Capital Markets, higher loan syndication fees. The higher revenue in Capital Markets, and Credit and Lending in the year-to-date period 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 from clients reflecting increased capital markets activity.

~~Securities Services~~GBM other revenue ~~was relatively flat~~decreased during the three and nine months ended September 30, ~~2020.~~2021 due to lower allocated Markets Treasury revenue, partially offset by lower liquidity charges and, in the year-to-date period, lower corporate funding charges.

~~Global Trade and Receivables Finance revenue was relatively flat~~Expected credit losses improved during the three months ended September 30, ~~2020 and was~~2021 reflecting higher releases in ~~the year-to-date period due to higher fees from standby letters of credit.~~

~~Credit and funding valuation adjustments were favorable during the three months ended September 30, 2020 attributable primarily to favorable~~ credit ~~valuation adjustments on derivatives assets~~loss reserves. The release in credit reserves in the current year period due to narrowing credit spreads. In the year-to-date period, credit and funding valuation adjustments were unfavorable attributable primarily to unfavorable credit valuation adjustments on derivative assets in the current year-to-date period due to deteriorating credit spreadswas driven by ~~market volatility caused by the COVID-19 pandemic~~a lower loss estimate for risk factors associated with oil and gas industry loan exposures as well as improved economic conditions which resulted in improved economic forecasts used for calculating ECL. The release in credit reserves in the ~~impact~~prior year period was driven by a partial rebound in economic conditions in the third quarter of ~~lower market rates.~~

~~Other revenue increased during the three months ended September 30,~~ 2020 ~~due to higher allocated BSM revenue and lower corporate funding charges,~~which resulted in improved economic forecasts used for calculating ECL, partially offset by higher liquidity charges and lower cost reimbursements. In the year-to-date period, other revenue decreased 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 relatively flat during the three months ended September 30, 2020 as~~ higher loss estimates for risk factors associated with higher risk client exposures and downgrades reflecting weakness in the financial condition of certain clients were more than offset by the favorable impact driven by the partial rebound in economic conditions in the third quarter which resulted in an improvement in the economic forecasts we use for calculating ECL.clients. In the year-to-date period, expected credit losses ~~increased~~improved reflecting a release in credit loss reserves compared with a loss provision in the prior year-to-date period. The release in credit reserves in the current year-to-date 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 as well as a lower loss estimate for risk factors associated with oil and gas industry loan exposures. Client paydowns and loan sales also contributed to the release in credit reserves in the current year-to-date period. The loss provision in the prior year-to-date period was driven by an overall deterioration of economic conditions caused by the COVID-19 pandemic which resulted in a worsening of the economic forecasts used for calculating ECL, higher loss estimates for risk factors associated with oil and gas industry loan exposures, higher risk client exposures and downgrades reflecting weakness in the financial condition of certain clients.

Operating expenses ~~were higher~~decreased during the three and nine months ended September 30, ~~2020~~2021 due primarily to ~~higher~~lower expense related to legal matters, ~~higher severance costs~~lower salaries expense and ~~in the three month period, higher deposit insurance assessment fees.~~lower market data costs. These ~~increases~~decreases were partially offset by ~~lower incentive compensation expense and lower~~higher cost allocations from our ~~risk~~ support service ~~function~~functions and, in the year-to-date period, ~~our technology and compliance support service functions.~~higher incentive compensation expense.

~~118~~112


HSBC USA Inc.

Corporate Center The following table summarizes the Group Reporting Basis results for our CC segment:


						Increase (Decrease)											Increase (Decrease)
Three Months Ended September 30,	Three Months Ended September 30,	2020		2019		Amount		%		Three Months Ended September 30,	2021		2020		Amount		%
		(dollars are in millions)													(dollars are in millions)
Net interest expense	Net interest expense	$	(9)	$	(11)	$	2	18.2	%	Net interest expense	$	(1)	$	(9)	$	8	88.9	%
Other operating income		40		4		36		*
Total operating income (expense)⁽¹⁾		31		(7)		38		*
Other operating income (expense)										Other operating income (expense)	(38)		40		(78)		*
Total operating income(1)										Total operating income(1)	(39)		31		(70)		*
Expected credit losses	Expected credit losses	—		—		—		—		Expected credit losses	—		—		—		—
Net operating income (expense)	Net operating income (expense)	31		(7)		38		*		Net operating income (expense)	(39)		31		(70)		*
Operating expenses	Operating expenses	126		44		82		*		Operating expenses	55		126		(71)		(56.3)
Loss before tax	Loss before tax	$	(95)	$	(51)	$	(44)	(86.3)		Loss before tax	$	(94)	$	(95)	$	1	1.1	%

						Increase (Decrease)											Increase (Decrease)
Nine Months Ended September 30,	Nine Months Ended September 30,	2020		2019		Amount		%		Nine Months Ended September 30,	2021		2020		Amount		%
		(dollars are in millions)													(dollars are in millions)
Net interest expense	Net interest expense	$	(29)	$	(56)	$	27	48.2	%	Net interest expense	$	(3)	$	(29)	$	26	89.7	%
Other operating income		101		13		88		*
Total operating income (expense)⁽¹⁾		72		(43)		115		*
Other operating income (expense)										Other operating income (expense)	(9)		101		(110)		*
Total operating income(1)										Total operating income(1)	(12)		72		(84)		*
Expected credit losses	Expected credit losses	—		—		—		—		Expected credit losses	—		—		—		—
Net operating income (expense)	Net operating income (expense)	72		(43)		115		*		Net operating income (expense)	(12)		72		(84)		*
Operating expenses	Operating expenses	324		112		212		*		Operating expenses	157		324		(167)		(51.5)
Loss before tax	Loss before tax	$	(252)	$	(155)	$	(97)	(62.6)	%	Loss before tax	$	(169)	$	(252)	$	83	32.9	%

*Percentage change is greater than 100 percent.

⁽¹⁾The following table summarizes the impact of key activities on the total operating income (expense) of our CC segment:


						Increase (Decrease)										Increase (Decrease)
Three Months Ended September 30,	Three Months Ended September 30,	2020		2019		Amount		%	Three Months Ended September 30,	2021		2020		Amount		%
		(dollars are in millions)												(dollars are in millions)

Legacy structured credit products	Legacy structured credit products	$	24	$	(4)	$	28	*	Legacy structured credit products	$	(31)	$	24	$	(55)	*

Other		7		(3)		10		*
Total operating income		$	31	$	(7)	$	38	*
Other(2)									Other(2)	(8)		7		(15)		*
Total operating income (expense)									Total operating income (expense)	$	(39)	$	31	$	(70)	*

						Increase (Decrease)										Increase (Decrease)
Nine Months Ended September 30,	Nine Months Ended September 30,	2020		2019		Amount		%	Nine Months Ended September 30,	2021		2020		Amount		%
		(dollars are in millions)												(dollars are in millions)

Legacy structured credit products	Legacy structured credit products	$	11	$	(40)	$	51	*	Legacy structured credit products	$	(28)	$	11	$	(39)	*

Other		61		(3)		64		*
Total operating income		$	72	$	(43)	$	115	*
Other(2)									Other(2)	16		61		(45)		(73.8)
Total operating income (expense)									Total operating income (expense)	$	(12)	$	72	$	(84)	*

(2)Includes a trading loss of $22 million recorded in the third quarter of 2021 associated with the exit of certain derivative contracts as part of our Restructuring Plan.

Our CC segment ~~reported a higher~~ loss before tax was flat during the three ~~and nine~~ months ended September 30, ~~2020~~2021 as lower operating expenses and lower net interest expense was offset by lower other operating income (expense). In the year-to-date period, our CC segment reported a lower loss before tax due ~~primarily~~ to ~~higher~~lower operating expenses and lower net interest expense, partially offset by ~~higher~~lower other operating income ~~and, in the year-to-date period, lower net interest expense.~~(expense).

Net interest expense was lower during the three and nine months ended September 30, ~~2020~~2021 driven by ~~improved~~lower retained liquidity charges and lower net interest ~~income~~expense from legacy structured credit ~~products and lower retained liquidity charges.~~products.

Other operating income ~~increased~~decreased during the three and nine months ended September 30, ~~2020~~2021 due to ~~favorable valuation adjustments on~~lower revenue in legacy structured credit products ~~favorable~~reflecting the unwind of our remaining business activities, including a loss of approximately $31 million recorded during the third quarter of 2021, as well as the impact of a structured note vehicle that was unwound during the third quarter of 2020 which was a key contributor to the valuation gains recorded in the prior year periods. Also contributing to the decrease were a trading loss of $22 million recorded in the third quarter of 2021 associated with the exit of certain derivative contracts as part of our Restructuring Plan and, in the year-to-date period, unfavorable movements related to

113


HSBC USA Inc.

the economic hedging of interest rate risk within our own debt, lower cost reimbursements associated with shared services performed on behalf of other HSBC affiliates, including internal audit, and the non-recurrence of a $14 million loss on extinguishment of certain repurchase agreements recorded in the third quarter of 2019. In the year-to-date period, other operating income was higher due to favorable movements related to the economic hedging of interest rate risk within our own debt, 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, the non-recurrence of the loss on extinguishment of certain repurchase agreements recorded in the third quarter of 2019 as discussed above and a $9 million gain recorded during the first quarter of 2020 on the sale of one of our owned retail branch properties.

~~119~~


~~HSBC USA Inc.~~

Operating expenses ~~were higher~~decreased during the three and nine months ended September 30, ~~2020~~2021 due primarily to lower lease impairment and other related costs. During the three and nine months ended September 30, 2021, we recorded lease impairment and other related costs of $5 million and $14 million, respectively, primarily associated with the exit of certain office space. In the prior year periods, we recorded lease impairment and other related costs of $63 million and $155 million, ~~recorded during the three and nine months ended September 30, 2020,~~ respectively, including an impairment charge of $55 million recorded during the third quarter of 2020 related to the write-off of a portion of the leasehold improvements associated with our WPB business as well as the ~~consolidation~~exit of certain ~~office~~ space and, in the year-to-date period, the initial consolidation of our retail branch ~~network.~~network as part of our Restructuring Plan. Also contributing to the ~~increases~~decreases in both periods were higher allocated costs driven by the execution of our Restructuring Plan, primarily severance costs as well as contract cancellation, equipment removal and other costs associated with the office space consolidation and branch exits. These increases in both periods were partially offset by lower cost allocations from our technology ~~risk~~ and ~~compliance~~ support service functions. These decreases were partially offset by higher allocated restructuring related costs from HTSU and other HSBC affiliates, primarily support service project costs and severance costs.

Reconciliation of Segment Results As previously discussed, segment results are reported on a Group Reporting Basis. See Note ~~24,~~16, "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 Initiatives We have implemented various loan modification payment deferral programs to provide borrowers relief from the economic impacts of the COVID-19 pandemic. Substantially all of the loans under these programs are not classified as TDR Loans ~~at September 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 ~~impacted~~affected 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 for~~of six months or less. For consumer mortgage loans, when a borrower ~~requests and is provided with extended relief in the form of~~utilizes 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 nine months 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 ~~2019~~2020 Form 10-K. Our approach toward credit risk management is summarized under the caption "Risk Management" in MD&A in our ~~2019~~2020 Form 10-K.

~~Comparative credit information at January 1, 2020, reflecting~~ There have been no significant revisions to our policies or methodologies during the ~~adoption~~first nine months 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.

~~120~~114


HSBC USA Inc.

The following table summarizes our allowance for credit losses and the liability for off-balance sheet credit exposures:


		September 30, 2020		June 30, 2020		January 1, 2020		December 31, 2019			September 30, 2021		June 30, 2021		December 31, 2020
		(in millions)													(in millions)
Allowance for credit losses:	Allowance for credit losses:									Allowance for credit losses:
Loans:	Loans:									Loans:
Commercial loans	Commercial loans	$	880	$	983	$	381	$	507	Commercial loans	$	475	$	538	$	814
Consumer loans	Consumer loans	204		209		86		130		Consumer loans	—		9		201
Total loans	Total loans	1,084		1,192		467		637		Total loans	475		547		1,015
Securities held-to-maturity	Securities held-to-maturity	2		2		2		—		Securities held-to-maturity	1		2		2
Other financial assets measured at amortized cost⁽¹⁾	Other financial assets measured at amortized cost⁽¹⁾	3		4		3		—		Other financial assets measured at amortized cost(1)	2		1		2
Securities available-for-sale	Securities available-for-sale	2		3		3		—		Securities available-for-sale	1		1		1
Total allowance for credit losses	Total allowance for credit losses	$	1,091	$	1,201	$	475	$	637	Total allowance for credit losses	$	479	$	551	$	1,020

Liability for off-balance sheet credit exposures	Liability for off-balance sheet credit exposures	$	225	$	253	$	158	$	104	Liability for off-balance sheet credit exposures	$	110	$	128	$	237

⁽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.

The total allowance for credit losses at September 30, ~~2020~~2021 decreased ~~$110~~$72 million or 913 percent as compared with June 30, 2021and decreased $541 million or 53 percent as compared with December 31, 2020 due ~~primarily~~ to lower loss estimates on both our commercial ~~loan portfolio. As compared with January 1, 2020, the total allowance for credit losses increased $616 million or 130 percent due primarily to higher loss estimates on our commercial loan portfolio~~ and ~~to a lesser extent, higher loss estimates on our~~ consumer loan ~~portfolio.~~portfolios.

Our commercial allowance for credit losses at September 30, ~~2020~~2021 decreased ~~$103~~$63 million or 1012 percent as compared with June 30, 2021 and decreased $339 million or 42 percent as compared with December 31, 2020 ~~due to a release in credit reserves~~ driven by ~~the partial rebound in~~improved economic conditions ~~in the third quarter~~ which resulted in ~~an improvement in the~~improved economic forecasts ~~we use~~used for calculating lifetime ECL and a ~~release~~decline in credit reserves for risk factors associated with ~~large loan~~higher risk client exposures, as well as the transfer of certain commercial real estate loans to held for sale which resulted in a release of credit loss reserves of approximately $24 million during the third quarter of 2021. Also contributing to the decrease as compared with December 31, 2020 were improvements in credit conditions associated with certain clients, a decline in credit reserves for risk factors associated with economic uncertainty and releases in credit reserves due to client paydowns ~~including the paydown of a single oil~~ and gas industry client, reflecting the impact of our efforts to improve returns through disciplined lending and reducing higher risk exposures. These releases in credit reserves were partially offset by higher loss estimates for risk factors associated with higher risk client and industry exposures. As compared with January 1, 2020, our commercial allowance for credit losses increased $499 million or 131 percent driven by the overall deterioration of economic conditions caused by the COVID-19 pandemic which resulted in a worsening of the economic forecasts we use for calculating lifetime ECL, higher loss estimates for downgrades reflecting weakness in the financial condition of certain clients and for risk factors associated with higher risk client and industry exposures and large loan ~~exposures.~~sales.

Our consumer allowance for credit losses at September 30, ~~2020~~2021 decreased $5$9 million or 2100 percent as compared with June 30, 2021 and decreased $201 million or 100 percent as compared with December 31, 2020 ~~as releases~~driven by improved economic conditions which resulted in improved economic forecasts used for calculating lifetime ECL and a decline in credit reserves ~~driven by~~for risk factors primarily associated with economic uncertainty. Also contributing to the ~~partial rebound in economic conditions in~~decrease as compared with December 31, 2020 was the ~~third quarter~~impact of our decision to exit our mass market retail banking business as well as our remaining credit card portfolio which resulted in ~~an improvement~~a reduction in credit loss reserves on consumer loans of approximately $156 million during the ~~economic forecasts we use for calculating lifetime ECL~~second quarter of 2021 as well as a decline in credit ~~card balances due to lower customer spending and changes in underwriting criteria driven by the current environment were largely offset by higher loss estimates~~reserves for risk factors primarily associated with forbearance accounts. As compared with January 1, 2020, our consumer allowance for credit losses increased $118 million or 137 percent driven by the overall deterioration of economic conditions caused by the COVID-19 pandemic which resulted in a worsening of the economic forecasts we use for calculating lifetime ECL and higher dollars of delinquency, as well as higher loss estimates for risk factors associated with forbearance accounts and growth in personal loan balances due to new product promotions. These increases were partially offset by a decline in credit card balances due to lower customer spending and changes in underwriting criteria driven by the current environment.

The liability for off-balance sheet credit exposures at September 30, ~~2020~~2021 decreased ~~$28~~$18 million or 1114 percent as compared with June 30, 2021 and decreased $127 million or 54 percent as compared with December 31, 2020 resulting from ~~the partial rebound in~~improved economic conditions consistent with commercial loans as discussed above, partially offset by the impact of higher outstanding exposure. As compared with January 1, 2020, the liability for off-balance sheet credit exposures increased $67 million or 42 percent resulting from the overall 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.above.

~~121~~115


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			Amount		% of Loans to Total Loans
		September 30, 2020						June 30, 2020						January 1, 2020								December 31, 2019						September 30, 2021	June 30, 2021				December 31, 2020
		(dollars are in millions)																													(dollars are in millions)
Commercial⁽¹⁾	Commercial⁽¹⁾	$	880	68.9	%	$	983	71.6	%	$	381	70.3	%	$	507	70.3	%	Commercial(1)	$	475	70.1��		%	$	538	69.5	%		$	814	67.0	%
Consumer:	Consumer:																	Consumer:
Residential mortgages	Residential mortgages	(5)		27.8		(19)		25.2		(74)		26.0		12		26.0		Residential mortgages	(11)		29.0			(6)		29.5			(9)		29.6
Home equity mortgages	Home equity mortgages	15		1.2		16		1.1		13		1.2		6		1.2		Home equity mortgages	11		.7			15		.7			22		1.2
Credit cards	Credit cards	167		1.7		190		1.6		137		2.0		105		2.0		Credit cards	—		—			—		—			161		1.7
Other consumer	Other consumer	27		.4		22		.5		10		.4		7		.4		Other consumer	—		.2			—		.3			27		.5
Total consumer	Total consumer	204		31.1		209		28.4		86		29.7		130		29.7		Total consumer	—		29.9			9		30.5			201		33.0
Total	Total	$	1,084	100.0	%	$	1,192	100.0	%	$	467	100.0	%	$	637	100.0	%	Total	$	475	100.0		%	$	547	100.0	%		$	1,015	100.0	%

⁽¹⁾See Note 6,7, "Allowance for Credit Losses," in the accompanying consolidated financial statements for components of the commercial allowance for credit losses.

The following table sets forth key ratios for the allowance for credit losses on loans for the periods indicated:


		September 30, 2020		June 30, 2020		January 1, 2020		December 31, 2019			September 30, 2021		June 30, 2021		December 31, 2020

Ratio of Allowance for credit losses to:	Ratio of Allowance for credit losses to:									Ratio of Allowance for credit losses to:
Loans:⁽¹⁾	Loans:⁽¹⁾									Loans:(1)
Commercial:	Commercial:									Commercial:
Non-affiliates	Non-affiliates	1.97	%	1.95	%	.83	%	1.11	%	Non-affiliates	1.32	%	1.48	%	2.01	%
Affiliates	Affiliates	—		—		—		—		Affiliates	—		—		—
Total commercial	Total commercial	1.92		1.89		.79		1.05		Total commercial	1.22		1.42		1.96
Consumer:	Consumer:									Consumer:
Residential mortgages	Residential mortgages	(.03)		(.10)		(.42)		.07		Residential mortgages	(.07)		(.04)		(.05)
Home equity mortgages	Home equity mortgages	1.96		2.02		1.52		.70		Home equity mortgages	2.98		3.87		3.03
Credit cards	Credit cards	15.09		16.17		9.75		7.47		Credit cards	N/A		N/A		15.10
Other consumer	Other consumer	8.57		7.17		3.53		2.47		Other consumer	—		—		8.46
Total consumer	Total consumer	.99		1.02		.42		.64		Total consumer	—		.05		.98
Total loans	Total loans	1.63		1.64		.68		.93		Total loans	.86		1.01		1.63
Net charge-offs:⁽²⁾	Net charge-offs:⁽²⁾									Net charge-offs:(2)
Commercial⁽³⁾	Commercial⁽³⁾	715	%	596	%	847	%	1,127	%	Commercial(3)	931	%	1,035	%	754	%
Consumer	Consumer	234		249		159		241		Consumer	—		5		251
Total net charge-offs	Total net charge-offs	516		479		472		643		Total net charge-offs	273		222		540
Nonperforming loans:⁽¹⁾⁽⁴⁾	Nonperforming loans:⁽¹⁾⁽⁴⁾									Nonperforming loans:(1)(4)
Commercial	Commercial	146	%	150	%	160	%	213	%	Commercial	119	%	134	%	150	%
Consumer	Consumer	33		42		19		29		Consumer	—		1		17
Total nonperforming loans	Total nonperforming loans	89		103		67		92		Total nonperforming loans	39		42		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 September 30, ~~2020~~2021 and June 30, ~~2020~~2021 reflect year-to-date net charge-offs, annualized. Ratios at ~~January 1, 2020 and~~ December 31, ~~2019~~2020 reflect full year net ~~charge-offs for 2019.~~charge-offs.

⁽³⁾Our commercial net charge-off coverage ratio for the year-to-date periods ended September 30, ~~2020~~2021 and June 30, ~~2020~~2021 and year ended December 31, ~~2019~~2020 was 86112 months, 71124 months and ~~135~~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 commercial net charge-off coverage ratio for January 1, 2020, calculated by dividing the commercial allowance for credit losses at January 1, 2019 by average monthly commercial net charge-offs during 2019, was 102 months.

~~122~~116


HSBC USA Inc.

⁽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.

N/A Not Applicable

See Note 6,7, "Allowance for Credit Losses," in the accompanying consolidated financial statements for a rollforward of credit losses by general loan categories for the three and nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020.

The allowance for credit losses on loans as a percentage of total loans held for investment at September 30, ~~2020 was relatively flat~~2021 decreased as compared with both June 30, 2021 and December 31, 2020 asdue primarily to the decrease in our allowance for credit losses for the reasons discussed ~~above~~above. The decrease in the ratio as compared with December 31, 2020 was ~~largely~~partially offset by a decrease in total loans held for investment driven by lower commercial loans. As compared with January 1, 2020, the allowance for credit losses as a percentage of total loans held for investment increased due primarily to the increase in our allowance for credit losses for the reasons discussed above and, to a lesser extent, a decrease in total loans held for investment driven by lower commercial loans.investment.

The allowance for credit losses on loans as a percentage of net charge-offs at September 30, ~~2020~~2021 increased ~~as compared with both June 30, 2020 and January 1, 2020. The increase~~ as compared with June 30, ~~2020 was~~2021 due to ~~a decrease in~~lower dollars of net charge-offs driven by lower charge-offs in our ~~commercial~~consumer loan portfolio primarily reflecting the impact of the transfer of our credit card loan portfolio to held for sale during the second quarter of 2021, which outpaced the decrease in our allowance for credit losses for the reasons discussed above. As compared with ~~January 1,~~December 31, 2020, the ~~increase was due to~~allowance for credit losses on loans as a percentage of net charge-offs decreased as the ~~increase~~decrease in our allowance for credit losses for the reasons discussed above ~~which~~ outpaced ~~an increase~~a decrease in dollars of net charge-offs driven by lower charge-offs in our commercial loan portfolio due primarily to the deterioration of two corporate banking loans and loan sales in the prior year period. The decrease in dollars of net charge-offs as compared with December 31, 2020 was partially offset by higher charge-offs in ~~both~~ our ~~commercial and~~ consumer loan ~~portfolios.~~portfolio due primarily to the transfer of our credit card loan portfolio to held for sale during the second quarter of 2021.

The allowance for credit losses on loans as a percentage of nonperforming loans held for investment at September 30, ~~2020~~2021 decreased as compared with both June 30, 2021 and December 31, 2020 ~~due primarily to~~as the decrease in the allowance for credit losses for the reasons discussed above and an increase in nonperforming loans driven by higher nonperforming loans in our consumer loan portfolio, partially offset by lower nonperforming loans in our commercial loan portfolio. As compared with January 1, 2020, the allowance for credit losses as a percentage of nonperforming loans held for investment increased as the increase in our allowance for credit losses for the reasons discussed above outpaced ~~an increase~~a decrease in nonperforming loans driven by ~~higher~~lower nonperforming loans in ~~both~~our consumer loan portfolio and, as compared with December 31, 2020, our commercial ~~and consumer~~ loan ~~portfolios.~~portfolio.

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, excluding loans held for sale ("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.


		September 30, 2020						June 30, 2020						December 31, 2019								September 30, 2021		June 30, 2021				December 31, 2020
		Delinquent Loans		Delinquency Ratio		Delinquent Loans		Delinquency Ratio		Delinquent Loans		Delinquency Ratio				Delinquent Loans		Delinquency Ratio		Delinquent Loans		Delinquency Ratio		Delinquent Loans		Delinquency Ratio
		(dollars are in millions)																						(dollars are in millions)

Commercial	Commercial	$	136	.30	%	$	43	.08	%	$	41	.08	%		Commercial	$	108	.28	%	$	33	.09	%	$	109	.26	%
Consumer:	Consumer:														Consumer:
Residential mortgages⁽¹⁾⁽²⁾	Residential mortgages⁽¹⁾⁽²⁾	431		2.34		413		2.26		350		1.96			Residential mortgages(1)(2)	310		1.93		372		2.32		404		2.20
Home equity mortgages⁽¹⁾⁽²⁾	Home equity mortgages⁽¹⁾⁽²⁾	31		4.05		27		3.41		25		2.93			Home equity mortgages(1)(2)	20		5.42		22		5.67		25		3.44
Credit cards	Credit cards	25		2.26		38		3.23		34		2.42			Credit cards	—		N/A		—		N/A		28		2.63
Other consumer	Other consumer	7		2.22		8		2.61		7		2.47			Other consumer	4		2.67		4		2.80		8		2.51
Total consumer	Total consumer	494		2.40		486		2.36		416		2.04			Total consumer	334		2.01		398		2.40		465		2.27
Total	Total	$	630	.95		$	529	.73		$	457	.66			Total	$	442	.80		$	431	.79		$	574	.92

⁽¹⁾At September 30, ~~2020,~~2021, June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, consumer mortgage loan delinquency includes ~~$283~~$252 million, ~~$243~~$289 million and ~~$256~~$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 ("ARM") loans:


		September 30, 2020						June 30, 2020								December 31, 2019			September 30, 2021						June 30, 2021		December 31, 2020
		Delinquent Loan		Delinquency Ratio		Delinquent Loan		Delinquency Ratio		Delinquent Loan		Delinquency Ratio			Delinquent Loans		Delinquency Ratio		Delinquent Loan		Delinquency Ratio		Delinquent Loans		Delinquency Ratio
		(dollars are in millions)																					(dollars are in millions)

Interest-only loans	Interest-only loans	$	40	1.16	%	$	34	1.00	%	$	32	.95	%	Interest-only loans	$	20	.55	%	$	34	.94	%	$	34	.94	%
ARM loans	ARM loans	210		1.62		191		1.48		142		1.14		ARM loans	137		1.14		177		1.49		191		1.46

Compared with June 30, 2020 and December 31, 2019, our two-months-and-over contractual delinquency ratio increased 22 basis points and 29 basis points, respectively, due to higher dollars of delinquency in both our commercial and consumer loan portfolios and, to a lesser extent, lower outstanding loan balances driven by lower commercial loans.

Our commercial loan two-months-and-over contractual delinquency ratio increased 22 basis points compared with both June 30, 2020 and December 31, 2019 due primarily to higher dollars of delinquency driven by the deterioration of economic conditions caused by the COVID-19 pandemic and, to a lesser extent, lower outstanding loan balances.N/A Not Applicable

~~123~~117


HSBC USA Inc.

~~Compared~~Our two-months-and-over contractual delinquency ratio was relatively flat compared with June 30, ~~2020 and~~2021 as higher dollars of delinquency in our commercial loan portfolio were largely offset by lower dollars of delinquency in our consumer loan portfolio. As compared with December 31, ~~2019,~~2020, our two-months-and-over contractual delinquency ratio decreased 12 basis points due to lower dollars of delinquency in our consumer loan portfolio, partially offset by lower outstanding loan balances in both our consumer and commercial loan portfolios.

Our commercial loan two-months-and-over contractual delinquency ratio increased 19 basis points compared with June 30, 2021 and was relatively flat compared with December 31, 2020. The increase in the ratio as compared with June 30, 2021 was due to higher dollars of delinquency driven by a commercial real estate loan and a global banking loan which became 60 days past due in the third quarter.

Our consumer loan two-months-and-over contractual delinquency ratio ~~increased 4~~decreased 39 basis points ~~and 36 basis points, respectively,~~compared with June 30, 2021 due primarily to ~~higher~~lower dollars of delinquency in residential mortgages driven by ~~the deterioration~~improved economic conditions. As compared with December 31, 2020, our consumer loan two-months-and-over contractual delinquency ratio decreased 26 basis points due to lower dollars of delinquency reflecting improved economic conditions ~~caused by~~and the ~~COVID-19 pandemic~~impact of our decision to exit our mass market retail banking business as ~~some customers did not seek forbearance relief or became 60 days~~well as our remaining retail credit card portfolio which resulted in the transfer of certain loans to held for sale during the second quarter of 2021, including $61 million of delinquent ~~prior to seeking forbearance relief.~~consumer loans. The ~~increase~~decrease in the ratio as compared with December 31, 2020 was partially offset by lower ~~dollars of delinquency in credit cards reflecting a decline in balances due to lower customer spending and changes in underwriting criteria driven by the current environment.~~outstanding loan balances.

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 September 30,														Nine Months Ended September 30,																Three Months Ended September 30,					Nine Months Ended September 30,
		2020						2019						2020				2019										2021				2020				2021	2020
		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		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:																		Commercial:
Real estate, including construction	Real estate, including construction	$	12	.42	%	$	—	—	%	$	12	.14	%	$	—	—	%		Real estate, including construction	$	—	—	%	$	12	.42	%	$	—	—	%	$	12	.14	%
Business and corporate banking	Business and corporate banking	(3)		(.07)		16		.44		61		.48		19		.18			Business and corporate banking	12		.38		(3)		(.07)		26		.27		61		.48
Global banking	Global banking	1		.02		—		—		20		.14		3		.02			Global banking	—		—		1		.02		12		.13		20		.14
Other commercial	Other commercial	—		—		—		—		(1)		(.02)		—		—			Other commercial	—		—		—		—		—		—		(1)		(.02)
Total commercial	Total commercial	10		.08		16		.12		92		.23		22		.06			Total commercial	12		.12		10		.08		38		.13		92		.23
Consumer:	Consumer:																		Consumer:
Residential mortgages	Residential mortgages	(2)		(.04)		(1)		(.02)		(7)		(.05)		1		.01			Residential mortgages	(4)		(.10)		(2)		(.04)		(1)		(.01)		(7)		(.05)
Home equity mortgages	Home equity mortgages	—		—		—		—		(1)		(.12)		—		—			Home equity mortgages	2		2.13		—		—		1		.18		(1)		(.12)
Credit cards	Credit cards	21		7.41		16		5.18		66		7.12		38		4.60			Credit cards	(1)		15.88		21		7.41		83		18.71		66		7.12
Other consumer	Other consumer	4		5.62		—		—		7		3.25		2		1.22			Other consumer	(1)		(3.54)		4		5.62		9		5.56		7		3.25
Total consumer	Total consumer	23		.45		15		.30		65		.43		41		.28			Total consumer	(4)		(.10)		23		.45		92		.66		65		.43
Total	Total	$	33	.19		$	31	.17		$	157	.29		$	63	.12			Total	$	8	.06		$	33	.19		$	130	.29		$	157	.29

Our net charge-off ratio as a percentage of average loans ~~increased 2~~decreased 13 basis points during the three months ended September 30, ~~2020~~2021 due to ~~higher levels~~a lower level of net charge-offs in our consumer loan portfolio ~~driven by higher charge-offs in~~primarily reflecting the impact of transferring our credit ~~cards and other consumer loans reflecting deterioration~~card loan portfolio to held for sale during the second quarter of ~~economic conditions and personal loan growth. Also contributing to the increase in the ratio was lower average loan balances overall driven by a decline in the commercial loan portfolio.~~2021. The ~~increase~~decrease in the ratio was partially offset by lower ~~levels of net charge-offs~~average loan balances in both our commercial and consumer loan ~~portfolio associated with managed reductions in certain exposures.~~portfolios.

In the year-to-date period, our net charge-off ratio as a percentage of average loans ~~increased 17 basis points due to higher levels~~was flat as a lower level of net charge-offs were offset by lower average loan balances in both our commercial and consumer loan portfolios. Lower net charge-offs in the year-to-date period were driven by a lower level of net charge-offs in our commercial loan portfolio ~~driven by~~due primarily to the deterioration of two corporate banking loans and loan sales ~~as well as~~in the prior year period which was partially offset by a higher ~~levels~~level of net charge-offs in our consumer loan portfolio ~~driven~~due primarily to the transfer of our credit card loan portfolio to held for sale during the second quarter of 2021 which increased net charge-offs by higher charge-offs in credit cards and other consumer loans reflecting deterioration of economic conditions and loan growth. The increase in the ratio was partially offset by higher average loan balances in both our commercial and consumer loan portfolios.$56 million.

~~124~~118


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, excluding loans held for sale ("nonperforming ratio"):


		September 30, 2020						June 30, 2020								December 31, 2019					September 30, 2021				June 30, 2021		December 31, 2020
		Nonperforming Loans⁽¹⁾		Nonperforming Ratio		Nonperforming Loans⁽¹⁾		Nonperforming Ratio		Nonperforming Loans⁽¹⁾		Nonperforming Ratio			Nonperforming Loans(1)		Nonperforming Ratio		Nonperforming Loans(1)		Nonperforming Ratio		Nonperforming Loans(1)		Nonperforming Ratio
		(dollars are in millions)																							(dollars are in millions)

Commercial	Commercial	$	602	1.31	%	$	656	1.26	%	$	238	.49	%	Commercial	$	400	1.03	%	$	402	1.06	%	$	544	1.31	%
Consumer:	Consumer:													Consumer:
Residential mortgages^(2)(3)(4)	Residential mortgages^(2)(3)(4)	553		3.00		428		2.34		381		2.14		Residential mortgages(2)(3)(4)	785		4.88		844		5.25		1,079		5.87
Home equity mortgages⁽²⁾⁽³⁾	Home equity mortgages⁽²⁾⁽³⁾	42		5.49		38		4.80		46		5.39		Home equity mortgages(2)(3)	47		12.74		50		12.89		63		8.67
Credit Cards		19		1.72		28		2.38		24		1.71
Credit cards														Credit cards	—		N/A		—		N/A		19		1.78
Other consumer	Other consumer	2		.63		3		.98		5		1.77		Other consumer	—		—		—		—		2		.63
Total consumer	Total consumer	616		2.99		497		2.42		456		2.24		Total consumer	832		5.01		894		5.39		1,163		5.68
Total	Total	$	1,218	1.83		$	1,153	1.59		$	694	1.01		Total	$	1,232	2.22		$	1,296	2.38		$	1,707	2.75

Other real estate owned⁽⁵⁾	Other real estate owned⁽⁵⁾	$	3			$	4			$	10			Other real estate owned(5)	$	2			$	2			$	3

⁽¹⁾See Note 5,6, "Loans," in the accompanying consolidated financial statements for a breakout of nonaccrual loans and accruing loans contractually 90 days or more past due. At September 30, ~~2020,~~2021, June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, total nonperforming loans include ~~$22~~$1 million, ~~$34~~$1 million and ~~$30~~$21 million, respectively, of accruing loans contractually 90 days or more past ~~due, primarily credit cards.~~due.

⁽²⁾At September 30, ~~2020,~~2021, June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, nonperforming consumer mortgage loans include ~~$324~~$323 million, ~~$293~~$343 million and ~~$289~~$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 September 30, 2021, June 30, 2021 and December 31, 2020, nonaccrual consumer mortgage loans also ~~include $24~~included $367 million, $384 million and $590 million, respectively, of loans under COVID-19 related payment deferral programs where the borrowers ~~were provided with extended~~utilized a payment deferral ~~relief~~ 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 September 30, ~~2020,~~2021, June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

N/A Not Applicable

Our nonperforming loans ratio ~~increased 24~~decreased 16 basis points compared with June 30, ~~2020~~2021 due primarily to lower ~~outstanding loan balances driven by lower commercial loans and higher~~ nonperforming loans in our consumer ~~loan portfolio, partially offset by lower nonperforming loans in our commercial~~ loan portfolio. As compared with December 31, ~~2019,~~2020, our nonperforming loans ratio ~~increased 82~~decreased 53 basis points due ~~primarily~~ to ~~higher~~lower nonperforming loans in both our consumer and commercial loan portfolios, partially offset by lower outstanding loan balances in both our consumer and ~~consumer~~commercial loan portfolios.

Our commercial nonperforming loans ratio ~~increased 5~~was relatively flat compared with June 30, 2021 and decreased 28 basis points compared with December 31, 2020. The decrease in the ratio as compared with December 31, 2020 was due to lower nonperforming loans driven primarily by paydowns of global banking loans and the sale of a global banking loan, partially offset by the downgrade of a commercial real estate loan. The decrease in the ratio as compared with December 31, 2020 was partially offset by lower outstanding loan balances.

Our consumer nonperforming loans ratio decreased 38 basis points compared with June 30, 2020 due to lower outstanding loan balances, partially offset by lower nonperforming loans. Lower nonperforming loans reflects paydowns, the upgrade of a global banking loan and the transfer of a commercial real estate loan to held for sale which were partially offset by downgrades. As compared with December 31, 2019, our commercial nonperforming loans ratio increased 82 basis points2021 due primarily to ~~higher nonperforming loans reflecting downgrades driven by the deterioration of economic conditions caused by the COVID-19 pandemic.~~

~~Our consumer nonperforming loans ratio increased 57 basis points and 75 basis points compared with June 30, 2020 and December 31, 2019, respectively, due primarily to higher~~lower nonperforming loans in residential mortgages driven by ~~the deterioration of~~improved economic conditions ~~caused by~~as well as the ~~COVID-19 pandemic, including~~impact of customers ~~that did not seek forbearance relief, were placed on nonaccrual status prior to seeking forbearance relief or have exited~~exiting forbearance relief and ~~have been placed on nonaccrual status while their qualification~~returning to accruing status. As compared with December 31, 2020, our consumer nonperforming loans ratio decreased 67 basis points due to lower nonperforming loans reflecting the impact of our decision to exit our mass market retail banking business as well as our remaining retail credit card portfolio which resulted in the transfer of certain loans to held for ~~a modification program is being evaluated.~~sale during the second quarter of 2021, including $206 million of nonperforming consumer loans, of which $21 million were accruing loans contractually 90 days or more past due. Lower nonperforming consumer loans as compared with December 31, 2020 also reflects improved economic conditions as well as the impact of customers exiting forbearance relief and returning to accruing status. The ~~increase~~decrease in the ratio as compared with December 31, 2020 was partially offset by lower ~~nonperforming loans in credit cards reflecting a decline in balances due to lower customer spending and changes in underwriting criteria driven by the current environment.~~outstanding loan balances.

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 ~~2019~~2020 Form ~~10-K, as updated for COVID-19 related loan modifications in Note 5, "Loans," in the accompanying consolidated financial statements.~~10-K.

~~125~~119


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, excluding loans held for sale, and unused commercial commitments by industry are presented in the table below:


	September 30, 2021				December 31, 2020
	Commercial Utilized		Unused Commercial Commitments		Commercial Utilized		Unused Commercial Commitments
	(in millions)
Diversified financials	$	8,089	$	11,999	$	7,644	$	13,058
Real estate	6,996		1,737		8,323		2,163
Consumer services	3,496		3,442		4,619		3,692
Retailing	2,312		5,130		2,286		4,989
Commercial and professional services	2,087		5,454		1,877		5,245
Capital goods	1,495		6,416		1,696		5,884
Chemicals	1,472		3,860		2,012		4,025
Consumer durables and apparel	1,337		3,324		1,457		2,914
Technology hardware and equipment	1,151		7,261		1,329		7,054
Energy	1,089		5,877		1,849		6,123
Utilities	875		1,238		839		1,371
Software and services	838		3,821		823		2,322
Telecommunication services	717		556		367		606
Health care equipment and services	623		3,014		761		1,957
Food, beverage and tobacco	599		2,943		612		3,030
Transportation	571		464		676		398
Pharmaceuticals, biotechnology and life science	497		3,518		605		3,912
Food and staples retailing	494		2,199		522		2,055
Semiconductors & semiconductor equipment	379		1,586		705		1,951
Metals and mining	360		796		455		1,158
Total commercial credit exposure in top 20 industries(1)	35,477		74,635		39,457		73,907
All other industries	580		10,831		1,042		11,493
Total commercial credit exposure(2)	$	36,057	$	85,466	$	40,499	$	85,400

(1)Based on utilization at September 30, 2021.

(2)Excludes commercial credit exposures with affiliates.

120


HSBC USA Inc.

Geographic ConcentrationsThe following table reflects regional exposure at September 30, 2021 and December 31, 2020 for our real estate secured loan portfolios, excluding loans held for sale:


	Commercial Real Estate, including Construction Loans		Residential Mortgages and Home Equity Mortgages
September 30, 2021
New York State	28.9	%	28.3	%
California	19.8		48.6
North Central United States	4.9		1.3
North Eastern United States, excluding New York State	5.2		7.6
Southern United States	33.6		8.7
Western United States, excluding California	7.6		5.5

Total	100.0	%	100.0	%
December 31, 2020
New York State	27.1	%	30.6	%
California	25.6		45.9
North Central United States	3.9		1.4
North Eastern United States, excluding New York State	6.2		7.7
Southern United States	29.8		9.4
Western United States, excluding California	7.4		5.0

Total	100.0	%	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.

•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, excluding mortgages held for sale, at September 30, ~~2020~~2021 and December 31, ~~2019.~~2020. Each category is not mutually exclusive and loans may appear in more than one category below.


		September 30, 2020		December 31, 2019			September 30, 2021		December 31, 2020
		(in millions)							(in millions)

Interest-only residential mortgage and home equity mortgage loans	Interest-only residential mortgage and home equity mortgage loans	$	3,473	$	3,362	Interest-only residential mortgage and home equity mortgage loans	$	3,736	$	3,597
ARM loans⁽¹⁾	ARM loans⁽¹⁾	13,020		12,487		ARM loans(1)	12,003		13,038

⁽¹⁾During the remainder of ~~2020~~2021 and during ~~2021,~~2022, approximately ~~$77~~$91 million and ~~$755~~$374 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~~portfolios, excluding mortgages held for sale, ~~of $89 million and $77 million~~ at September 30, ~~2020~~2021 and December 31, ~~2019, respectively.~~2020:


		September 30, 2020		December 31, 2019			September 30, 2021		December 31, 2020
		(in millions)							(in millions)
Closed end:	Closed end:					Closed end:
First lien	First lien	$	18,439	$	17,801	First lien	$	16,093	$	18,377
Second lien	Second lien	32		35		Second lien	21		31
Revolving⁽¹⁾	Revolving⁽¹⁾	733		818		Revolving(1)	348		696
Total	Total	$	19,204	$	18,654	Total	$	16,462	$	19,104

⁽¹⁾A majority of revolving are second lien mortgages.

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~~Geographic ConcentrationsThe following table reflects regional exposure at September 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
September 30, 2020
New York State 26.4 % 30.4 %
California 24.2 46.1
North Central United States 3.6 1.5
North Eastern United States, excluding New York State 7.3 7.6
Southern United States 31.7 9.4
Western United States, excluding California 6.8 5.0
Total 100.0 % 100.0 %
December 31, 2019
New York State 29.9 % 31.1 %
California 21.6 44.6
North Central United States 3.5 1.8
North Eastern United States, excluding New York State 7.4 7.7
Southern United States 32.2 10.0
Western United States, excluding California 5.4 4.8
Total 100.0 % 100.0 %

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~~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:~~

September 30, 2020 December 31, 2019
Commercial Utilized Unused Commercial Commitments Commercial Utilized Unused Commercial Commitments
(in millions)
Real estate $ 9,250 $ 2,375 $ 9,200 $ 3,115
Diversified financials 7,825 11,431 9,247 12,562
Consumer services 4,793 3,755 4,601 3,347
Retailing 2,837 4,932 2,413 4,143
Energy 2,170 5,969 2,560 6,337
Commercial and professional services 2,161 5,398 2,101 5,072
Chemicals 2,138 3,637 2,197 3,879
Capital goods 2,088 5,633 2,189 9,579
Consumer durables and apparel 1,790 2,730 1,649 3,367
Technology hardware and equipment 1,480 6,962 1,531 6,520
Software and services 1,029 2,047 910 1,861
Utilities 870 1,223 607 812
Health care equipment and services 867 1,865 898 1,780
Food, beverage and tobacco 724 2,863 565 2,884
Semiconductors and semiconductor equipment 720 1,525 991 1,506
Transportation 687 622 447 935
Food and staples retailing 611 2,478 654 2,322
Banks 575 77 320 63
Pharmaceuticals, biotechnology & life science 549 3,820 389 4,812
Metals and mining 487 1,121 517 1,185
Total commercial credit exposure in top 20 industries⁽¹⁾
43,651 70,463 43,986 76,081
All other industries 952 9,777 1,882 10,808
Total commercial credit exposure⁽²⁾
$ 44,603 $ 80,240 $ 45,868 $ 86,889

⁽¹⁾~~Based on utilization at September 30, 2020.~~

⁽²⁾~~Excludes commercial credit exposures with affiliates.~~

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;

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•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.


		September 30, 2020		December 31, 2019			September 30, 2021		December 31, 2020
		(in millions)							(in millions)
Risk associated with derivative contracts:	Risk associated with derivative contracts:					Risk associated with derivative contracts:
Total credit risk exposure	Total credit risk exposure	$	27,186	$	33,076	Total credit risk exposure	$	14,704	$	21,624
Less: collateral held against exposure	Less: collateral held against exposure	7,204		7,704		Less: collateral held against exposure	4,848		5,907
Net credit risk exposure	Net credit risk exposure	$	19,982	$	25,372	Net credit risk exposure	$	9,856	$	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 nine months of ~~2020,~~2021, the COVID-19 pandemic ~~caused disruption~~continued to ~~the financial markets as well as~~impact 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, 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 have been repaid. We continuously monitor

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the impact of market events on our liquidity positions and will continue to adapt our framework as necessary to reflect market events.

Interest Bearing Deposits with Banks totaled ~~$16,126~~$62,140 million and ~~$2,038~~$14,353 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, of which ~~$15,540~~$61,909 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 ~~$25,579~~$7,480 million and ~~$17,838~~$35,746 million at September 30, ~~2020~~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 ~~$21,302~~$16,698 million and ~~$23,488~~$19,494 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on trends.

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Securities includes securities available-for-sale and securities held-to-maturity totaling ~~$51,552~~$42,373 million and ~~$48,956~~$49,653 million at September 30, ~~2020~~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 ~~$5,515~~$6,377 million and ~~$3,659~~$4,952 million at September 30, ~~2020~~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 ~~$150,328~~$152,368 million and ~~$119,693~~$145,150 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, which included ~~$127,819~~$128,961 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 ~~$20,048~~$18,105 million at September 30, ~~2020~~2021 from ~~$26,697~~$19,979 million at December 31, ~~2019.~~2020. The following table presents the maturities of long-term debt at September 30, ~~2020:~~2021:


		(in millions)			(in millions)

2020		$	1,500
2021	2021	6,137		2021	$	1,148
2022	2022	2,277		2022	2,983
2023	2023	1,356		2023	1,543
2024	2024	1,410		2024	1,899
2025				2025	4,650
Thereafter	Thereafter	7,368		Thereafter	5,882
Total	Total	$	20,048	Total	$	18,105

The following table summarizes issuances and retirements of long-term debt during the nine months ended September 30, ~~2020~~2021 and ~~2019:~~2020:


Nine Months Ended September 30,	Nine Months Ended September 30,	2020		2019		Nine Months Ended September 30,	2021		2020
		(in millions)							(in millions)
Long-term debt issued	Long-term debt issued	$	7,250	$	3,691	Long-term debt issued	$	6,861	$	7,250
Long-term debt repaid	Long-term debt repaid	(8,387)		(6,706)		Long-term debt repaid	(8,402)		(8,387)
Net long-term debt repaid		$	(1,137)	$	(3,015)
Net long-term debt issued (repaid)						Net long-term debt issued (repaid)	$	(1,541)	$	(1,137)

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 nine months ended September 30, ~~2020.~~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 quarter 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, ~~2019~~2020 to ~~$25,000~~$20,000 million, of which ~~$16,008~~$11,791 million was available at September 30, ~~2020.~~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 ~~$13,077~~$12,442 million was available at September 30, ~~2020.~~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.

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 September 30, ~~2020,~~2021, long-term debt included ~~$5,250~~$1,000 million of borrowings

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from the FHLB facility. Based upon the amounts pledged as collateral under these facilities, we have additional borrowing capacity of up to ~~$8,056~~$15,963 million.

Preferred Equity See Note 18, "Preferred Stock," in our ~~2019~~2020 Form 10-K for information regarding all outstanding preferred share issues.

Common Equity During the nine months ended September 30, ~~2020,~~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.

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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 September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


		September 30, 2020		December 31, 2019			September 30, 2021		December 31, 2020
Common equity Tier 1 capital to risk-weighted assets(1)	Common equity Tier 1 capital to risk-weighted assets(1)	14.2	%	13.1	%	Common equity Tier 1 capital to risk-weighted assets(1)	15.9	%	14.5	%
Tier 1 capital to risk-weighted assets(1)	Tier 1 capital to risk-weighted assets(1)	15.3		14.1		Tier 1 capital to risk-weighted assets(1)	17.1		15.6
Total capital to risk-weighted assets(1)	Total capital to risk-weighted assets(1)	18.5		16.3		Total capital to risk-weighted assets(1)	19.3		18.8
Tier 1 leverage ratio⁽¹⁾⁽²⁾	Tier 1 leverage ratio⁽¹⁾⁽²⁾	8.4		9.9		Tier 1 leverage ratio⁽¹⁾⁽²⁾	9.1		8.6
Supplementary leverage ratio⁽²⁾⁽⁴⁾	Supplementary leverage ratio⁽²⁾⁽⁴⁾	7.6		6.9		Supplementary leverage ratio⁽²⁾⁽⁴⁾	7.0		7.8

⁽¹⁾Prior period amounts have been revised to conform to the current period presentation. See Note 17, "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.

⁽²⁾(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.

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 the~~The Basel III rule ~~there are two methods available to calculate risk-weighted assets, the generally-applicable Standardized Approach~~establishes minimum capital ratios and ~~the Advanced Approaches, which are required in addition to the Standardized Approach~~overall 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 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 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 under the 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.

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~~As a result, HSBC North America~~standards 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~~calculate their ~~depository institution subsidiaries will also benefit from (i) simpler~~risk-based 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. 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~~solely using 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.

generally-applicable Standardized Approach. For additional discussion of the Basel III ~~final~~ rule requirements, including required minimum capital ratios, as well as further discussion of the Tailoring Rules and other ~~recent~~related regulatory developments and their expected impact see Part I, "Regulation and Competition - Regulatory Capital and Liquidity Requirements," in our ~~2019~~2020 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 ~~IHCs~~certain 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 and is now required to disclose its~~ company-run stress ~~test results~~tests 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 company~~CCAR 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. In August 2020, the FRB announced the SCB requirements for each CCAR firm based on 2020 supervisory stress testing results conducted as part of CCAR. The SCB requirements became effective October 1, 2020. HSBC North America already utilized 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 expected impact~~ see Part I, "Regulation and Competition - Regulatory Capital and Liquidity Requirements," in our ~~2019~~2020 Form ~~10-K and also below under the caption, "Other Regulatory Developments."~~10-K.

HSBC North America submitted its ~~2020~~2021 CCAR capital plan and its ~~2020~~2021 annual company-run DFAST results in April ~~2020.~~2021. In July ~~2020,~~2021, HSBC North America publicly disclosed its ~~2020~~2021 annual DFAST results. In June ~~2020,~~2021, the FRB publicly disclosed its own DFAST and CCAR results ~~along~~and informed HSBC North America that it did not object to HSBC North America's capital plan or the planned capital distributions included in its 2021 CCAR submission. The FRB previously announced that it intended to terminate restrictions on capital distributions put in place in connection with ~~aggregated results of a sensitivity analysis aimed at gauging~~additional stress tests that the ~~ongoing economic~~FRB conducted to assess the impact of the COVID-19 ~~pandemic on~~pandemic. Firms with capital levels above the minimum requirements in the 2021 CCAR ~~firms. The FRB also announced it is prohibiting stock repurchases by CCAR firms and is requiring all CCAR firms to limit their common stock dividends to the lesser of (a) the firm's common stock~~

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dividends last quarter and (b) the average of the firm's net income for the four proceeding calendar quarters. The FRB has announced that these restrictions will continue at least through December 31, 2020 and could be extended. In addition, each CCAR firm,exercise, including HSBC North America, ~~is required~~are no longer subject to ~~resubmit its~~the additional restrictions after June 30, 2021. Under these additional restrictions, CCAR firms were allowed to make certain capital ~~plan later this year based on additional economic scenarios~~distributions in the first two quarters of 2021, provided bythat the FRB in September. HSBC North America will complete its re-submission by November 2, 2020 and any distribution for the fourth quarter remains dependent on the potential extension of distribution restrictions by the FRB and the results of the capital plan re-submission assessment.distributions generally did not exceed net income. 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 company~~BHC regulatory capital compliance is generally performed at the HSBC North America level, and also separately for HSBC Bank USA, as a ~~bank holding company~~BHC 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,~~17, "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 Paper 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 became effective October 1, 2020 and did not have a significant impact 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 amendments in the final rule took effect August 31, 2020, which reduced the amount of IM we need to collect from many of our affiliates and provided greater clarity around the application of certain aspects of the Margin Rules.

~~2020~~2021 Funding Strategy Our current estimate for funding needs and sources for ~~2020~~2021 are summarized in the following table:

Actual January 1 through September 30, 2020 Estimated October 1 through December 31, 2020 Estimated Full Year 2020
(in billions)
Increase (decrease) in funding needs:
Net change in loans $ (3) $ — $ (3)
Net change in short-term investments and securities 24 4 28
Net change in trading and other assets 4 (10) (6)
Total funding needs $ 25 $ (6) $ 19
Increase (decrease) in funding sources:
Net change in deposits $ 31 $ (5) $ 26
Net change in trading and other short-term liabilities 1 — 1
Net change in long-term debt (7) (1) (8)
Total funding sources $ 25 $ (6) $ 19

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Reductions to trading assets estimated during the October 1 through December 31, 2020 period are mainly related to select Fixed Income activities which are being consolidated in and operated from Europe 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. In addition, we will also continue to 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 September 30, 2021		Estimated October 1 through December 31, 2021		Estimated Full Year 2021
	(in billions)
Increase (decrease) in funding needs:
Net change in loans	$	(1)	$	(2)	$	(3)
Net change in short-term investments and securities	12		(2)		10
Net change in trading and other assets	(6)		—		(6)
Total funding needs	$	5	$	(4)	$	1
Increase (decrease) in funding sources:
Net change in deposits	$	7	$	(2)	$	5
Net change in trading and other short-term liabilities	—		(1)		(1)
Net change in long-term debt	(2)		(1)		(3)
Total funding sources	$	5	$	(4)	$	1

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 conforming residential mortgage ~~loan originations~~loans to third parties. The above funding plan assumes that the announced sale of our mass market retail banking business will not be completed in 2021.

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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 ~~2019~~2020 Form 10-K.

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.

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"~~Overview" in our ~~2019~~2020 Form ~~10-K)~~10-K and in this MD&A) will affect our contractual obligations over time, including with respect to credit ~~derivatives.~~derivatives and consumer commitments. As a result, we believe that the contractual amount is not representative of the actual future credit exposure or funding requirements.


		Balance at September 30, 2020																	Balance at September 30, 2021
		One Year or less		Over One through Five Years		Over Five Years		Total		Balance at December 31, 2019			One Year or less		Over One through Five Years		Over Five Years		Total		Balance at December 31, 2020
		(in millions)
Standby letters of credit, net of participations⁽¹⁾	Standby letters of credit, net of participations⁽¹⁾	$	6,959	$	2,117	$	143	$	9,219	$	9,436	Standby letters of credit, net of participations(1)	$	5,951	$	1,947	$	166	$	8,064	$	8,545
Commercial letters of credit	Commercial letters of credit	133		67		—		200		126		Commercial letters of credit	297		71		—		368		197
Credit derivatives⁽²⁾	Credit derivatives⁽²⁾	3,191		29,526		940		33,657		38,739		Credit derivatives(2)	190		1,610		263		2,063		19,500
Other commitments to extend credit:	Other commitments to extend credit:											Other commitments to extend credit:
Commercial⁽³⁾	Commercial⁽³⁾	19,683		60,986		2,046		82,715		88,191		Commercial(3)	18,026		64,093		4,702		86,821		87,875
Consumer	Consumer	7,836		—		—		7,836		7,906		Consumer	8,016		—		—		8,016		8,173
Total	Total	$	37,802	$	92,696	$	3,129	$	133,627	$	144,398	Total	$	32,480	$	67,721	$	5,131	$	105,332	$	124,290

⁽¹⁾Includes ~~$1,800~~$1,957 million and ~~$1,623~~$1,836 million issued for the benefit of HSBC affiliates at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

⁽²⁾Includes ~~$15,617~~$1,691 million and ~~$18,391~~$13,550 million issued for the benefit of HSBC affiliates at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

⁽³⁾Includes ~~$2,475~~$1,355 million and ~~$1,302~~$2,475 million issued for the benefit of HSBC affiliates at September 30, ~~2020~~2021 and December 31, ~~2019,~~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. Commercial commitments comprise primarily those related to secured and unsecured loans and lines of credit. Consumer commitments ~~are comprised of~~comprise 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,

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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.

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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 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

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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 September 30, ~~2020~~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

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unobservable inputs (e.g., volatility or default correlations), certain asset-backed ~~credit default swaps~~securities, individually assessed commercial loans, mortgage servicing rights, interest rate derivatives with certain inputs which are unobservable, certain ~~asset-backed securities, individually assessed commercial loans, derivatives referenced to illiquid assets of less desirable~~ credit ~~quality and~~default swaps, 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 and, at September 30, 2021, certain loans held for sale. At December 31, ~~2019,~~2020, our level 3 measurements also included asset-backed credit default swaps with certain ~~corporate debt securities.~~inputs which were unobservable. See Note ~~19,~~20, "Fair Value Measurements," in the accompanying consolidated financial statements for additional information on Level 3 inputs.

Level 3 Measurements The following table provides information about Level 3 assets/liabilities in relation to total assets/liabilities measured at fair value at September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


		September 30, 2020			December 31, 2019				September 30, 2021			December 31, 2020
		(dollars are in millions)										(dollars are in millions)
Level 3 assets⁽¹⁾⁽²⁾	Level 3 assets⁽¹⁾⁽²⁾	$	807		$	1,349		Level 3 assets(1)(2)	$	1,483		$	1,118
Total assets measured at fair value⁽¹⁾⁽³⁾	Total assets measured at fair value⁽¹⁾⁽³⁾	104,424			98,322			Total assets measured at fair value(1)(3)	76,901			98,640
Level 3 liabilities⁽¹⁾	Level 3 liabilities⁽¹⁾	1,261			1,350			Level 3 liabilities(1)	2,246			1,620
Total liabilities measured at fair value⁽¹⁾	Total liabilities measured at fair value⁽¹⁾	44,797			55,224			Total liabilities measured at fair value(1)	30,182			49,380
Level 3 assets as a percent of total assets measured at fair value	Level 3 assets as a percent of total assets measured at fair value	0.8		%	1.4		%	Level 3 assets as a percent of total assets measured at fair value	1.9		%	1.1		%
Level 3 liabilities as a percent of total liabilities measured at fair value	Level 3 liabilities as a percent of total liabilities measured at fair value	2.8		%	2.4		%	Level 3 liabilities as a percent of total liabilities measured at fair value	7.4		%	3.3		%

⁽¹⁾Presented without netting which allows the offsetting of amounts relating to certain contracts if certain conditions are met.

⁽²⁾Includes ~~$485~~$454 million of recurring Level 3 assets and ~~$322~~$1,029 million of non-recurring Level 3 assets at September 30, ~~2020.~~2021. Includes ~~$925~~$845 million of recurring Level 3 assets and ~~$424~~$273 million of non-recurring Level 3 assets at December 31, ~~2019.~~2020.

⁽³⁾Includes ~~$103,688~~$75,665 million of assets measured on a recurring basis and ~~$736~~$1,236 million of assets measured on a non-recurring basis at September 30, ~~2020.~~2021. Includes ~~$97,866~~$97,982 million of assets measured on a recurring basis and ~~$456~~$658 million of assets measured on a non-recurring basis at December 31, ~~2019.~~2020.

Significant Changes in Fair Value for Level 3 Assets and Liabilities During the second quarter of 2021, we transferred certain loans to held for sale which were determined to be Level 3 assets measured at fair value on a non-recurring basis. See Note ~~19,~~8, "Loans Held for Sale" in the accompanying consolidated financial statements for additional information.

See Note 20, "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 nine months ended September 30, ~~2020~~2021 and ~~2019~~2020 as well as for further details including the classification hierarchy associated with assets and liabilities measured at fair value. During the third quarter of 2020, one of our unconsolidated VIEs was unwound and our investment in the VIE along with the related derivatives were terminated. Our investment in the VIE, which was a level 3 asset measured at fair value on a recurring basis, had a carrying value of $501 million at the time of unwind. See Note 17, "Variable Interest Entities," in the accompanying consolidated financial statements for additional information.

Effect of Changes in Significant Unobservable Inputs The 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 ~~$13~~$2 million or a decrease of the overall fair value measurement of approximately ~~$17~~$2 million at September 30, ~~2020.~~2021. The effect of changes in significant unobservable input parameters are

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primarily driven by the uncertainty in determining the fair value of ~~credit derivatives executed against certain insurers~~mortgage servicing rights and certain ~~deal-contingent forward starting interest rate derivatives.~~asset-backed securities.

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~~oversight of ~~risk.~~risk management. It is advised on risk matters by the Risk Committee of the Board of Directors, ~~and the Compliance and Conduct Committee. In particular, the Risk Committee of the Board of Directors advises the Board of Directors on~~notably risk appetite and its alignment with our strategy, risk governance and

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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. During the third quarter of 2021, the Compliance and Conduct Committee ("CCC") of the Board of Directors was dissolved as part of a global effort to streamline corporate governance forums to enhance efficiency. As a result, the oversight responsibilities of the CCC were allocated amongst the Board of Directors' standing committees. In particular, the Risk Committee of the Board of Directors has assumed responsibilities related to compliance, conduct and values, fiduciary matters, and responsible business practices.

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;

•~~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;

•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 internal~~money 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 ~~2019~~2020 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. ~~There~~Other 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 nine months 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 result~~The impact of ~~market volatility and~~the COVID-19 pandemic continued to create economic uncertainty ~~driven by~~during the ~~COVID-19~~

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~~pandemic, we re-reviewed~~first nine months of 2021. We continue to monitor the ~~credit ratings assigned to substantially all~~performance of our material commercial loans ~~during the first half of 2020. During the third quarter of 2020, we continued to monitor the performance~~ as conditions ~~evolved~~evolve and ~~took~~take necessary credit actions where warranted. See "Risk Management" in MD&A in our ~~2019~~2020 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 performed, 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 share responsibility with the Chief Financial Officer for establishing appropriate levels of allowances for credit losses inherent in our various loan and other portfolios carried at amortized cost.

~~Capital and Liquidity~~Treasury Risk ManagementWe 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 ~~2019~~2020 Form 10-K for a more complete discussion of our approach to ~~capital and liquidity~~treasury 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.

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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 September 30, ~~2020~~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. ~~The~~Under the Tailoring Rules, ~~reduced the U.S.~~an 85 percent LCR requirement ~~for~~applies 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 and~~such 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 liquidity needs for a 30 calendar day liquidity stress scenario. During the nine months ended September 30, ~~2020,~~2021, HSBC Bank USA's LCR under the U.S. LCR rule remained above the 100 percent minimum requirement.

The ~~European~~U.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 ~~Basel~~U.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 September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, HSBC USA's estimated NSFR exceeded 100 percent. A NSFR of 100 percent or more reflects an available

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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 October 2020, U.S. regulators issued a final rule to implement the NSFR in the United States, applicable to certain large banking organizations, including HSBC North America and HSBC Bank ~~USA.~~USA, which took effect July 1, 2021. Consistent with the Tailoring Rules, an 85 percent NSFR requirement ~~will apply~~applies 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 and~~such as HSBC Bank ~~USA, when the final rule becomes effective July 1, 2021.~~USA. As a result, under the 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 ~~the~~a Category III firm's required amount of funding for assets and off-balance sheet exposures. At both September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, HSBC Bank USA's NSFR under the U.S. NSFR rule exceeded 100 percent. The ratio at December 31, 2020 was estimated ~~NSFR,~~ based on our interpretation and understanding of the U.S. NSFR rule ~~exceeded 100 percent.~~at that time.

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 liquidity profiles to support compliance with these ~~rules. HSBC North America~~rules and ~~HSBC Bank USA~~ may need to make changes to their liquidity profiles to support compliance with any future ~~rules and will continue to evaluate the impact of the final U.S. NSFR rule on our operations.~~rules.

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.

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 September 30, ~~2020:~~2021:


	Moody's	S&P	Fitch
HSBC USA:
Short-term borrowings	P-1	A-2	F1+
Long-term/senior debt	A2A1	A-	A+
HSBC Bank USA:
Short-term borrowings	P-1	A-1	F1+
Long-term/senior debt	Aa3	A+	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~~June 2021, Moody's downgraded 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 deposit rating and the adjusted baseline 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~~assessment 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 downgrades to the senior unsecured rating ~~action for~~and the notional baseline credit assessment of 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~~Moody's view that the HSBC Group will ~~not be fully shielded from~~face challenges in restoring

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profitability to levels in line with its main peers in the ~~global economic downturn resulting from~~next 12-18 months, which could reduce the ~~measures taken against~~capacity of HSBC to provide support to HSBC Bank USA in case of need. Concurrently, Moody's affirmed the ~~spread~~standalone baseline credit assessment and the short-term deposit rating of ~~COVID-19~~HSBC Bank USA.

In August 2021, Moody's concluded a review of certain of our credit ratings for potential upgrade and ~~that weaker earnings arising from higher credit charges will be exacerbated~~upgraded the senior debt rating of HSBC USA by ~~low interest rates. In conjunction with these downgrades, S&P revised their~~one notch to A1. Moody's review also resulted in one notch upgrades to the provisional subordinated and preferred stock ratings of HSBC USA and the subordinated debt rating ~~outlooks for~~of HSBC Bank USA. These rating upgrades reflect Moody's expectation that HSBC USA and HSBC Bank USA ~~to stable from negative.~~would be resolved in a unified manner alongside their immediate parent, HSBC North America, and their ultimate parent, HSBC. Concurrently, Moody's affirmed the baseline credit assessment and the adjusted baseline credit assessment for HSBC Bank USA.

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 September 30, ~~2020, there were no pending actions in terms~~2021, none of ~~changes to~~the ratings on the debt of HSBC USA or HSBC Bank USA from any of the rating ~~agencies.~~agencies were under review for potential downgrade.

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.~~

~~139~~


~~HSBC USA Inc.~~

•~~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.

~~The following graph summarizes daily VaR for our trading portfolios at a 99 percent confidence level (in millions):~~

~~The following table summarizes our trading VaR for the nine months ended September 30, 2020:~~

Foreign exchange and commodity Interest rate Credit Spread
Portfolio Diversification⁽¹⁾
Total⁽²⁾
(in millions)
At September 30, 2020 $ 1 $ 8 $ 2 $ (3) $ 8
Nine Months Ended September 30, 2020
Average 2 8 2 (3) 9
Maximum 5 14 4 15
Minimum 1 5 — 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 nine months ended September 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.

~~140~~


~~HSBC USA Inc.~~

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.

~~The following table summarizes our non-trading VaR for the nine months ended September 30, 2020:~~

Interest rate Credit Spread
Portfolio Diversification⁽¹⁾
Total⁽¹⁾
(in millions)
At September 30, 2020 $ 83 $ 69 $ (74) $ 78
Nine Months Ended September 30, 2020
Average 72 65 (63) 74
Maximum 109 106 108
Minimum 29 38 46
At December 31, 2019 $ 37 $ 48 $ (18) $ 67

⁽¹⁾ ~~Refer to the Trading VaR table above for additional information.~~

Non-trading VaR was higher at September 30, 2020 as compared with December 31, 2019 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 ~~2019~~2020 Form 10-K for a more complete discussion of our approach to interest rate risk. Interest rate metrics have been adjusted to reflect the impact of our decision to exit our mass market retail banking business as part of our Restructuring Plan. The risk metrics at September 30, 2021 reflect current assumed transaction dates, with balances reduced at projected sale dates and the associated impacts of those reductions is included in both base and shock scenarios.

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 September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, our EVE remained within risk ~~appetite~~limits for the up 200 and down 200 basis point interest rate shock scenarios.

Net interest income simulation modeling techniques We 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:


		September 30, 2020						December 31, 2019							September 30, 2021				December 31, 2020
		Amount		%		Amount		%			Amount		%		Amount		%
		(dollars are in millions)															(dollars are in millions)
Estimated increase (decrease) in projected net interest income (reflects projected rate movements on October 1, 2020 and January 1, 2020, respectively):
Estimated increase (decrease) in projected net interest income (reflects projected rate movements on October 1, 2021 and January 1, 2021, respectively):										Estimated increase (decrease) in projected net interest income (reflects projected rate movements on October 1, 2021 and January 1, 2021, respectively):
Resulting from a gradual 100 basis point increase in the yield curve	Resulting from a gradual 100 basis point increase in the yield curve	$	190	7	%	$	(18)	(1)	%	Resulting from a gradual 100 basis point increase in the yield curve	$	349	16	%	$	186	7	%
Resulting from a gradual 100 basis point decrease in the yield curve	Resulting from a gradual 100 basis point decrease in the yield curve	(91)		(3)		(25)		(1)		Resulting from a gradual 100 basis point decrease in the yield curve	(216)		(10)		(213)		(8)
Other significant scenarios monitored (reflects projected rate movements on October 1, 2020 and January 1, 2020, respectively):
Other significant scenarios monitored (reflects projected rate movements on October 1, 2021 and January 1, 2021, respectively):										Other significant scenarios monitored (reflects projected rate movements on October 1, 2021 and January 1, 2021, respectively):
Resulting from an immediate 100 basis point increase in the yield curve	Resulting from an immediate 100 basis point increase in the yield curve	308		12		(70)		(3)		Resulting from an immediate 100 basis point increase in the yield curve	499		22		274		11
Resulting from an immediate 100 basis point decrease in the yield curve	Resulting from an immediate 100 basis point decrease in the yield curve	(81)		(3)		(57)		(2)		Resulting from an immediate 100 basis point decrease in the yield curve	(416)		(19)		(379)		(15)

~~141~~


~~HSBC USA Inc.~~

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 September 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.

~~142~~

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HSBC USA Inc.

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, precious metals (i.e., gold, silver, platinum) and credit default swaps.

The following graph summarizes daily VaR for our trading portfolios at a 99 percent confidence level (in millions):

The following table summarizes our trading VaR for the nine months ended September 30, 2021 and at December 31, 2020:


	Foreign exchange and commodity		Interest rate		Credit Spread		Portfolio Diversification(1)		Total(2)
	(in millions)
At September 30, 2021	$	2	$	9	$	1	$	(2)	$	10

Nine Months Ended September 30, 2021
Average	3		8		2		(5)		8
Maximum	5		10		9				12
Minimum	1		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 nine months ended September 30, 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.

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HSBC USA Inc.

Government sponsored mortgage-backed securities. Our non-trading VaR exposure is driven by interest rates and agency spread volatility.

The following table summarizes our non-trading VaR for the nine months ended September 30, 2021 and at December 31, 2020:


	Interest rate		Credit Spread		Portfolio Diversification(1)		Total(1)
	(in millions)
At September 30, 2021	$	113	$	67	$	(46)	$	134

Nine Months Ended September 30, 2021
Average	96		63		(57)		102
Maximum	126		83				143
Minimum	61		51				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 September 30, 2021 as compared with December 31, 2020 due primarily to an increase in yields 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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HSBC USA Inc.

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 nine months ended September 30, ~~2020~~2021 included fees of $20 million and ~~$56~~$68 million, respectively, compared with fees of ~~$21~~$20 million and ~~$59~~$56 million during the three and nine months ended September 30, ~~2019,~~2020, respectively.


Three Months Ended September 30,	Three Months Ended September 30,	2020										2019											Three Months Ended September 30,	2021				2020
		Average Balance		Interest		Rate		Average Balance		Interest		Rate			Average Balance		Interest		Rate		Average Balance			Interest		Rate
		(dollars are in millions)																								(dollars are in millions)
Assets:	Assets:													Assets:
Interest bearing deposits with banks	Interest bearing deposits with banks	$	21,794	$	7	.13	%	$	12,928	$	80	2.46	%	Interest bearing deposits with banks	$	60,700	$	23	.15	%	$	21,794		$	7	.13	%
Federal funds sold and securities purchased under resale agreements	Federal funds sold and securities purchased under resale agreements	18,514		9		.19		6,019		56		3.69		Federal funds sold and securities purchased under resale agreements	865		1		.46		18,514			9		.19
Trading securities	Trading securities	21,538		64		1.18		25,588		85		1.32		Trading securities	16,752		60		1.42		21,538			64		1.18
Securities	Securities	51,902		202		1.55		52,866		296		2.22		Securities	41,097		154		1.49		51,902			202		1.55
Loans:	Loans:													Loans:
Commercial	Commercial	49,575		335		2.69		53,062		540		4.04		Commercial	39,864		250		2.49		49,575			335		2.69
Consumer:	Consumer:													Consumer:
Residential mortgages	Residential mortgages	18,444		146		3.15		17,545		157		3.55		Residential mortgages	18,580		135		2.88		18,444			146		3.15
Home equity mortgages	Home equity mortgages	778		6		3.07		891		11		4.90		Home equity mortgages	638		5		3.11		778			6		3.07
Credit cards	Credit cards	1,134		18		6.31		1,216		19		6.20		Credit cards	793		22		11.01		1,134			18		6.31

Other consumer	Other consumer	285		6		8.38		253		6		9.41		Other consumer	269		4		5.90		285			6		8.38
Total consumer	Total consumer	20,641		176		3.39		19,905		193		3.85		Total consumer	20,280		166		3.25		20,641			176		3.39
Total loans	Total loans	70,216		511		2.90		72,967		733		3.99		Total loans	60,144		416		2.74		70,216			511		2.90
Other	Other	5,379		11		.81		4,225		23		2.16		Other	2,376		4		.67		5,379			11		.81
Total interest earning assets	Total interest earning assets	$	189,343	$	804	1.69	%	$	174,593	$	1,273	2.89	%	Total interest earning assets	$	181,934	$	658	1.43	%	$	189,343		$	804	1.69	%
Allowance for credit losses	Allowance for credit losses	(1,153)						(622)						Allowance for credit losses	(535)						(1,153)
Cash and due from banks	Cash and due from banks	1,194						1,310						Cash and due from banks	1,117						1,194
Other assets	Other assets	15,462						13,159						Other assets	12,684						15,462

Total assets	Total assets	$	204,846					$	188,440					Total assets	$	195,200					$	204,846
Liabilities and Equity:	Liabilities and Equity:													Liabilities and Equity:
Domestic deposits:	Domestic deposits:													Domestic deposits:
Savings deposits	Savings deposits	$	67,282	$	49	.29	%	$	48,561	$	127	1.04	%	Savings deposits	$	63,116	$	23	.14	%	$	67,282		$	49	.29	%
Time deposits	Time deposits	25,473		68		1.06		30,122		209		2.75		Time deposits	10,810		18		.66		25,473			68		1.06
Other interest bearing deposits	Other interest bearing deposits	22,489		18		.32		12,290		63		2.03		Other interest bearing deposits	19,197		15		.31		22,489			18		.32
Foreign deposits:	Foreign deposits:													Foreign deposits:
Foreign banks deposits	Foreign banks deposits	4,785		—		.04		3,889		6		.61		Foreign banks deposits	5,904		—		.03		4,785			—		.04
Other interest bearing deposits	Other interest bearing deposits	342		—		.06		829		3		1.44		Other interest bearing deposits	229		—		—		342			—		.06

Deposits held for sale														Deposits held for sale	8,046		4		.22		—			—		—
Total interest bearing deposits	Total interest bearing deposits	120,371		135		.45		95,691		408		1.69		Total interest bearing deposits	107,302		60		.22		120,371			135		.45
Short-term borrowings	Short-term borrowings	5,848		7		.48		12,460		79		2.52		Short-term borrowings	4,692		4		.34		5,848			7		.48
Long-term debt	Long-term debt	22,606		111		1.95		29,734		277		3.70		Long-term debt	19,282		70		1.44		22,606			111		1.95
Total interest bearing deposits and debt	Total interest bearing deposits and debt	148,825		253		.68		137,885		764		2.20		Total interest bearing deposits and debt	131,276		134		.40		148,825			253		.68
Tax liabilities and other	Tax liabilities and other	594		3		2.01		947		6		2.51		Tax liabilities and other	1,013		4		1.57		594			3		2.01
Total interest bearing liabilities	Total interest bearing liabilities	$	149,419	$	256	.68	%	$	138,832	$	770	2.20	%	Total interest bearing liabilities	$	132,289	$	138	.41	%	$	149,419		$	256	.68	%
Net interest income/Interest rate spread	Net interest income/Interest rate spread			$	548	1.01	%			$	503	.69	%	Net interest income/Interest rate spread			$	520	1.02	%				$	548	1.01	%
Noninterest bearing deposits	Noninterest bearing deposits	29,030						22,273						Noninterest bearing deposits	38,288						29,030
Other liabilities	Other liabilities	8,138						8,656						Other liabilities	6,295						8,138

Total equity	Total equity	18,259						18,679						Total equity	18,328						18,259
Total liabilities and equity	Total liabilities and equity	$	204,846					$	188,440					Total liabilities and equity	$	195,200					$	204,846
Net interest margin on average earning assets	Net interest margin on average earning assets					1.15	%					1.14	%	Net interest margin on average earning assets					1.13	%						1.15	%
Net interest income to average total assets	Net interest income to average total assets					1.06	%					1.06	%	Net interest income to average total assets					1.06	%						1.06	%

~~143~~134


HSBC USA Inc.


Nine Months Ended September 30,	Nine Months Ended September 30,	2020										2019											Nine Months Ended September 30,	2021				2020

		Average Balance		Interest		Rate		Average Balance		Interest		Rate			Average Balance		Interest		Rate		Average Balance			Interest		Rate
		(dollars are in millions)																								(dollars are in millions)
Assets:	Assets:													Assets:
Interest bearing deposits with banks	Interest bearing deposits with banks	$	22,779	$	69	.40	%	$	15,289	$	296	2.59	%	Interest bearing deposits with banks	$	48,003	$	45	.13	%	$	22,779		$	69	.40	%
Federal funds sold and securities purchased under resale agreements	Federal funds sold and securities purchased under resale agreements	11,690		57		.65		6,003		189		4.21		Federal funds sold and securities purchased under resale agreements	9,820		12		.16		11,690			57		.65
Trading securities	Trading securities	21,494		192		1.19		21,733		215		1.32		Trading securities	18,759		162		1.15		21,494			192		1.19
Securities	Securities	52,310		707		1.81		48,923		898		2.45		Securities	42,942		491		1.53		52,310			707		1.81
Loans:	Loans:													Loans:
Commercial	Commercial	52,670		1,183		3.00		51,602		1,614		4.18		Commercial	40,626		807		2.66		52,670			1,183		3.00
Consumer:	Consumer:													Consumer:
Residential mortgages	Residential mortgages	18,244		451		3.30		17,485		469		3.59		Residential mortgages	18,565		408		2.94		18,244			451		3.30
Home equity mortgages	Home equity mortgages	801		20		3.34		925		35		5.06		Home equity mortgages	675		14		2.77		801			20		3.34
Credit cards	Credit cards	1,236		56		6.05		1,108		57		6.88		Credit cards	892		64		9.59		1,236			56		6.05

Other consumer	Other consumer	277		19		9.16		263		17		8.64		Other consumer	282		15		7.11		277			19		9.16
Total consumer	Total consumer	20,558		546		3.55		19,781		578		3.91		Total consumer	20,414		501		3.28		20,558			546		3.55
Total loans	Total loans	73,228		1,729		3.15		71,383		2,192		4.11		Total loans	61,040		1,308		2.86		73,228			1,729		3.15
Other	Other	5,778		35		.81		3,419		61		2.39		Other	2,640		17		.86		5,778			35		.81
Total interest earning assets	Total interest earning assets	$	187,279	$	2,789	1.99	%	$	166,750	$	3,851	3.09	%	Total interest earning assets	$	183,204	$	2,035	1.49	%	$	187,279		$	2,789	1.99	%
Allowance for credit losses	Allowance for credit losses	(891)						(585)						Allowance for credit losses	(773)						(891)
Cash and due from banks	Cash and due from banks	1,186						1,274						Cash and due from banks	1,217						1,186
Other assets	Other assets	13,917						13,084						Other assets	13,266						13,917

Total assets	Total assets	$	201,491					$	180,523					Total assets	$	196,914					$	201,491
Liabilities and Equity:	Liabilities and Equity:													Liabilities and Equity:
Domestic deposits:	Domestic deposits:													Domestic deposits:
Savings deposits	Savings deposits	$	60,308	$	228	.50	%	$	47,143	$	344	.98	%	Savings deposits	$	66,090	$	82	.17	%	$	60,308		$	228	.50	%
Time deposits	Time deposits	28,474		334		1.57		27,196		579		2.85		Time deposits	13,735		76		.74		28,474			334		1.57
Other interest bearing deposits	Other interest bearing deposits	19,077		86		.60		10,924		167		2.04		Other interest bearing deposits	20,939		45		.29		19,077			86		.60
Foreign deposits:	Foreign deposits:													Foreign deposits:
Foreign banks deposits	Foreign banks deposits	4,849		5		.14		4,045		22		.73		Foreign banks deposits	5,753		1		.03		4,849			5		.14
Other interest bearing deposits	Other interest bearing deposits	597		3		.67		799		9		1.51		Other interest bearing deposits	243		—		—		597			3		.67
Deposits held for sale	Deposits held for sale	—		—		—		2		—		.59		Deposits held for sale	3,636		6		.22		—			—		—
Total interest bearing deposits	Total interest bearing deposits	113,305		656		.77		90,109		1,121		1.66		Total interest bearing deposits	110,396		210		.25		113,305			656		.77
Short-term borrowings	Short-term borrowings	9,055		62		.91		9,034		209		3.09		Short-term borrowings	4,874		13		.36		9,055			62		.91
Long-term debt	Long-term debt	24,383		471		2.58		30,820		895		3.88		Long-term debt	19,322		230		1.59		24,383			471		2.58
Total interest bearing deposits and debt	Total interest bearing deposits and debt	146,743		1,189		1.08		129,963		2,225		2.29		Total interest bearing deposits and debt	134,592		453		.45		146,743			1,189		1.08
Tax liabilities and other	Tax liabilities and other	636		10		2.10		1,143		21		2.46		Tax liabilities and other	852		8		1.26		636			10		2.10
Total interest bearing liabilities	Total interest bearing liabilities	$	147,379	$	1,199	1.09	%	$	131,106	$	2,246	2.29	%	Total interest bearing liabilities	$	135,444	$	461	.46	%	$	147,379		$	1,199	1.09	%
Net interest income/Interest rate spread	Net interest income/Interest rate spread			$	1,590	.90	%			$	1,605	.80	%	Net interest income/Interest rate spread			$	1,574	1.03	%				$	1,590	.90	%
Noninterest bearing deposits	Noninterest bearing deposits	27,614						22,880						Noninterest bearing deposits	37,213						27,614
Other liabilities	Other liabilities	8,147						7,694						Other liabilities	6,054						8,147

Total equity	Total equity	18,351						18,843						Total equity	18,203						18,351
Total liabilities and equity	Total liabilities and equity	$	201,491					$	180,523					Total liabilities and equity	$	196,914					$	201,491
Net interest margin on average earning assets	Net interest margin on average earning assets					1.13	%					1.29	%	Net interest margin on average earning assets					1.15	%						1.13	%
Net interest income to average total assets	Net interest income to average total assets					1.05	%					1.19	%	Net interest income to average total assets					1.07	%						1.05	%

~~144~~135


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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 ~~caption~~captions "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 defined in Rule 13a-15(e) under the Exchange Act) 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 September 30, ~~2020~~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,~~21, "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, fiscal, tax and regulatory environments as well as customer and corporate client behavior which could have an adverse impact on our business.

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~~HSBC USA Inc.~~

In the United States, the Federal Government has taken action, and may take further 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, downgrades reflecting weakness in the financial condition of certain clients and provisions for risk factors associated with higher risk client and industry exposures and large loan exposures. See Note 6, "Allowance for Credit Losses," in the accompanying consolidated financial statements for further discussion. In addition, since 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. 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 changes 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 accepted treatment becomes widely 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 December 31, 2020 and could be extended by the FRB. In order to make common stock distributions, HSBC North America must maintain capital levels in excess of its regulatory capital minimums and its stress capital buffer. In addition, the FRB has 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 in September. The FRB will conduct

~~146~~


~~HSBC USA Inc.~~

further stress tests in connection with its review of CCAR firms' resubmitted capital plans but it is unclear whether the FRB will recalculate the SCBs applicable to CCAR firms based on such stress tests.

Federal and state legislative and regulatory developments in relation to COVID-19 have also 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 potential increased fraud risk as well as reputational harm, and may 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.

In addition, 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 Act Section 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 guarantees Between 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 by~~involving 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 third quarter of ~~2020~~2021 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~~No guarantees were cancelled in the third quarter of ~~2020~~2021, and approximately 1615 remain outstanding.

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HSBC USA Inc.

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 third quarter of ~~2020,~~2021, was approximately ~~$645.~~$809.

For the Iranian bank 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.

~~147~~


~~HSBC USA Inc.~~

The HSBC Group currently intends to continue to wind down the ~~activity discussed in this section,~~above activities, to the extent legally permissible, and not enter into any new such activity.

Activity related to U.S. Executive Order 13224 The HSBC Group maintained an account for an individual customer in the Middle East who was designated under Executive Order 13224 in the third quarter of 2021. The account was closed and exited during the third quarter of 2021. The HSBC Group made one nominal local currency domestic payment to return funds to the customer as part of the exit process.

There was no measurable gross revenue or net profit to the HSBC Group during the third quarter of 2021 relating to these transactions.

Other activity The HSBC Group has an insurance company customer in the United Arab Emirates that, during the third quarter of ~~2020,~~2021, made local 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 these payments to the hospital made by its customer.

The HSBC Group has aone customer in the United Arab Emirates that, during the third quarter of ~~2020, received a~~2021, made one local currency ~~check for the reimbursement for food and medicine samples from~~payment to a hospital located in the United Arab Emirates and owned by the Government of Iran. The HSBC Group processed this ~~check from the hospital to its customer.~~payment.

The HSBC Group has aone customer in the United Arab Emirates that, during the third quarter of ~~2020,~~2021, received a small local currency check from an ~~Iranian-owned~~ insurance ~~company.~~company owned by the Government of Iran. The HSBC Group processed this check from the insurance company to its customer.

The HSBC Group has one customer in France that, during the third quarter of 2021, received two local currency payments 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 its customer.

The HSBC Group has an international organization as a customer in France, and during the third quarter of ~~2020,~~2021, that customer received a local currency payment from the Iranian Embassy in Austria for membership fees. The HSBC Group processed this ~~payment~~.payment.

The HSBC Group has a customer in the Middle East that, during the third quarter of 2021, made two local currency credit card payments to an Iranian Consulate for passport and dual citizenship application fees. The HSBC Group processed these payments.

For these activities, there was no measurable gross revenue or net profit to the HSBC Group during the third quarter of ~~2020.~~2021.

Frozen accounts and transactions The 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 third quarter of ~~2020.~~2021. There was no measurable gross revenue or net profit to the HSBC Group during the third quarter of ~~2020~~2021 relating to these frozen accounts.

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HSBC USA Inc.

Item 6. Exhibits


3(i)			Articles of Incorporation and amendments and supplements thereto (incorporated by reference to Exhibit 3(a) to HSBC USA Inc.'s Annual Report on Form 10-K for the year ended December 31, 1999, Exhibit 3 to HSBC USA Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, Exhibit 3.2 to HSBC USA Inc.'s Current Report on Form 8-K filed April 4, 2005, Exhibit 3.3 to HSBC USA Inc.'s Current Report on Form 8-K filed April 4, 2005, Exhibit 3.2 to HSBC USA Inc.'s Current Report on Form 8-K filed October 14, 2005, Exhibit 3.2 to HSBC USA Inc.'s Current Report on Form 8-K filed May 22, 2006 and Exhibit 3.2 to HSBC USA Inc.'s Current Report on Form 8-K filed on May 31, 2016).

3(ii)			Bylaws of HSBC USA Inc., as Amended and Restated effective ~~July 24, 2018~~April 13, 2021 (incorporated by reference to Exhibit 3.2 to HSBC USA Inc.'s Current Report on Form 8-K filed ~~July 26, 2018~~April 14, 2021).















31			Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32			Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS			The instance document does not appear in the interactive data file because its XBRL tags 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⁾

104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

⁽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 September 30, ~~2020,~~2021, formatted in Inline eXtensible Business Reporting Language ("Inline XBRL"): (i) the Consolidated Statement of Income (Loss) for the three and nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, (ii) the Consolidated Statement of Comprehensive Income (Loss) for the three and nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, (iii) the Consolidated Balance Sheet at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, (iv) the Consolidated Statement of Changes in Equity for the three and nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, (v) the Consolidated Statement of Cash Flows for the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, and (vi) the Notes to Consolidated Financial Statements.

~~149~~138


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: October ~~27, 2020~~25, 2021

HSBC USA INC.

By:

/s/ KAVITA MAHTANI

Kavita Mahtani

Senior Executive Vice President and

Chief Financial Officer

~~150~~139



	As Previously Reported		After Reporting Changes
	(in millions)
Segment profit (loss) before tax during the three months ended September 30, 2019:
RBWM	$	(275)	NR
WPB	NR		$	(257)
CMB	111		118
GB&M	124		157
PB	0		NR
CC	7		(51)

Segment profit (loss) before tax during the nine months ended September 30, 2019:
RBWM	$	(347)	NR
WPB	NR		$	(291)
CMB	332		354
GB&M	355		452
PB	(3)		NR
CC	23		(155)

Segment total assets at September 30, 2019:
RBWM⁽¹⁾	$	19,128	NR
WPB	NR		$	52,334
CMB	27,734		36,968
GB&M	89,154		130,708
PB⁽¹⁾	7,042		NR
CC	79,457		2,505

Segment total deposits at September 30, 2019:
RBWM	$	34,877	NR
WPB	NR		$	43,974
CMB	25,489		25,975
GB&M	32,002		34,015
PB	7,720		NR
CC	3,876		0


	Actual January 1 through September 30, 2020		Estimated October 1 through December 31, 2020		Estimated Full Year 2020
	(in billions)
Increase (decrease) in funding needs:
Net change in loans	$	(3)	$	—	$	(3)
Net change in short-term investments and securities	24		4		28
Net change in trading and other assets	4		(10)		(6)
Total funding needs	$	25	$	(6)	$	19
Increase (decrease) in funding sources:
Net change in deposits	$	31	$	(5)	$	26
Net change in trading and other short-term liabilities	1		—		1
Net change in long-term debt	(7)		(1)		(8)
Total funding sources	$	25	$	(6)	$	19


	Interest rate		Credit Spread		Portfolio Diversification⁽¹⁾		Total⁽¹⁾
	(in millions)
At September 30, 2020	$	83	$	69	$	(74)	$	78

Nine Months Ended September 30, 2020
Average	72		65		(63)		74
Maximum	109		106				108
Minimum	29		38				46

At December 31, 2019	$	37	$	48	$	(18)	$	67