Litigation and Regulatory Matters

The following supplements, and should be read together with, the disclosure in Note 28, "Litigation and Regulatory Matters," in our 2013 Form 10-K and our Form 10-Q for the three month period ended March 31, 2014 (the "2014 First Quarter 10-Q") and the six month period ended June 30, 2014 (the "2014 Second Quarter 10-Q"). Only those matters with significant updates and new matters since our disclosure in our 2013 Form 10-K and our 2014 First Quarter and 2014 Second Quarter 10-Q's are reported herein.

In addition to the matters described below, and in our 2013 Form 10-K and our 2014 First Quarter and 2014 Second Quarter 10-Q's, 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.

In view of the inherent unpredictability of litigation 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 litigation and regulatory matters or the eventual loss, fines, penalties or business impact, if any, that may result. We establish reserves for litigation 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 litigation and governmental and regulatory matters disclosed below and in Note 28, "Litigation and Regulatory Matters," in our 2013 Form 10-K and in Note 19 "Litigation and Regulatory Matters" in each of our 2014 First Quarter and Second Quarter 10-Q's 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 $50 million for HUSI and its U.S. affiliates. The litigation and governmental and regulatory matters underlying this estimate of possible loss will change from time to time and actual results may differ significantly from this current estimate.

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 particular quarterly or annual periods.

Litigation

Credit Card Litigation To date, certain groups of opt-out merchants have entered into settlement agreements with the defendants in those actions and certain HSBC entities that, pursuant to the MDL 1720 Sharing Agreements, are responsible for a pro rata portion of any judgment or settlement amount awarded in actions consolidated into MDL 1720.

DeKalb The HSBC defendants filed a motion for summary judgment, which remains pending.

Cook County The HSBC defendants' motion to dismiss the amended complaint is fully submitted and we await a decision.

Lender-Placed Insurance Matters The Southern District of Florida granted final approval of the class settlement in the Diaz v. HSBC Bank USA, N.A., et al. (S.D. Fla 13-CV-21104) action (formerly known as Lopez v. HSBC Bank, USA, N.A., et al.) on October 29, 2014. The settlement pays claims of class members, on a claims made basis, based on a formula, as well as class plaintiffs’ attorneys’ fees and costs of administration, with an overall cap of $32 million for all payments. This settlement does not include claims related to lender-placed flood insurance, such as those asserted in the Montanez, et al. v. HSBC Mortgage Corporation (USA), et al. (E.D. Pa. No. 11-CV-4074) and Weller, et al. v. HSBC Mortgage Services, Inc., et al. (D. Col. No. 13-CV-00185) actions.

Private Mortgage Insurance Matters The stay in the Ba v. HSBC Bank USA, N.A., et al (E.D. Pa. No. 2:13-cv-00072PD) case has been lifted.

Credit Default Swap Litigation On September 4, 2014, the court granted in part and denied in part defendants’ motion to dismiss the second amended, consolidated complaint. Discovery is proceeding.

Foreign Exchange (“FX”) Litigation Defendants’ motion to dismiss the March 31, 2014 amended consolidated complaint has been fully briefed and submitted to the court for determination.

Gold and Silver Fix Litigation

The putative class actions alleging a conspiracy to manipulate the price of gold and gold derivatives have been transferred to and centralized in the U.S. District Court for the Southern District of New York. An amended consolidated class action complaint is expected in December 2014. The putative class actions alleging a conspiracy to manipulate the price of physical silver and silver derivatives, also have been transferred to and centralized in the U.S. District Court for the Southern District of New York.

Madoff Litigation

In December 2008, Bernard L. Madoff ("Madoff") was arrested for running a Ponzi scheme and a trustee was appointed for the liquidation of his firm, Bernard L. Madoff Investment Securities LLC ("Madoff Securities"), an SEC-registered broker-dealer and investment adviser. Various non-U.S. HSBC companies provided custodial, administration and similar services to a number of funds incorporated outside the United States whose assets were invested with Madoff Securities. Plaintiffs (including funds, funds investors and the Madoff Securities trustee) have commenced Madoff-related proceedings against numerous defendants in a multitude of jurisdictions. Various HSBC companies have been named as defendants in suits in the United States, Ireland, Luxembourg and other jurisdictions. Certain suits (which include U.S. putative class actions) allege that the HSBC defendants knew or should have known of Madoff's fraud and breached various duties to the funds and fund investors.

In re Herald, Primeo and Thema Funds Securities Litigation Plaintiffs’ petition for rehearing en banc relating to the dismissal of their claims on forum non conveniens grounds was denied. If plaintiffs do not file a petition for certiorari with the Supreme Court within the required time, the matter will be concluded.

There are many factors that may affect the range of possible outcomes, and the resulting financial impact, of the various Madoff-related proceedings including, but not limited to, the circumstances of the fraud, the multiple jurisdictions in which proceedings have been brought and the number of different plaintiffs and defendants in such proceedings. For these reasons, among others, we are unable to reasonably estimate the aggregate liability or ranges of liability that might arise as a result of these claims but they could be significant. In any event, we consider that we have good defenses to these claims and will continue to defend them vigorously.

Benchmark Rate Litigation In October 2014 HSBC Bank USA, along with the other U.S. dollar Libor panel banks, were named as defendants in a lawsuit filed by the National Credit Union Administration Board (“NCUA”), in its capacity as liquidator for several failed credit unions seeking unspecified damages as a result of alleged artificial suppression of U.S. dollar Libor rates between August 2007 to May 2010 which NCUA alleges resulted in the failed credit unions receiving substantially less interest income in connection with certain investments and interest rate swaps tied to U.S. dollar Libor. This action has been consolidated with the U.S. dollar Libor Multi-District Litigation proceeding pending in the U.S. District Court for the Southern District of New York. HSBC and HSBC Bank plc are defendants in that proceeding as well. This action is subject to a stay imposed by the court.

Mortgage Securitization Activity and Litigation

In addition to the repurchase risk described in Note 17, "Guarantee Arrangements and Pledged Assets," HSBC Bank USA has also been involved as a sponsor/seller of loans used to facilitate whole loan securitizations underwritten by HSI. During 2005-2007, HSBC Bank USA purchased and sold $24 billion of whole loans to HSI which were subsequently securitized and sold by HSI to third parties. The outstanding principal balance on these loans was approximately $5.9 billion and $6.5 billion at September 30, 2014 and December 31, 2013, respectively.

Participants in the U.S. mortgage securitization market that purchased and repackaged whole loans have been the subject of lawsuits and governmental and regulatory investigations and inquiries, which have been directed at groups within the U.S. mortgage market, such as servicers, originators, underwriters, trustees or sponsors of securitizations, and at particular participants within these groups. We expect activity in this area to continue. As a result, we may be subject to additional claims, litigation and governmental and regulatory scrutiny related to our participation in the U.S. mortgage securitization market, either individually or as a member of a group. As the industry's residential mortgage foreclosure issues continue, HSBC Bank USA has taken title to a number of foreclosed homes as trustee on behalf of various securitization trusts. As nominal record owner of these properties, HSBC Bank USA has been sued by municipalities and tenants alleging various violations of law, including laws regarding property upkeep and tenants' rights. While we believe and continue to maintain that the obligations at issue and any related liability are properly those of the servicer of each trust, we continue to receive significant and adverse publicity in connection with these and similar matters, including foreclosures that are serviced by others in the name of "HSBC, as trustee."

Federal Housing Finance Agency, as Conservator for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation v. HSBC North America Holdings Inc. et al. (S.D.N.Y. No. CV 11-6189-LAK) On September 12, 2014 the parties announced that this matter has been resolved by settlement requiring HSBC to pay to the Federal Housing Finance Agency ("FHFA") a total of $550 million. HSBC USA paid $297 million of the total settlement amount of $550 million and took a charge of $108 million during the quarter.

Mortgage Securitization Pool Trust Litigation Additional claims have been filed against HSBC Bank USA ("HBUS") in its role as trustee for certain trusts ("Trusts"). Federal Home Loan Bank of Topeka, along with other investors, filed an action in New York State Supreme Court, New York County against HBUS, as trustee of an unidentified number of Trusts, alleging that the Trusts have sustained losses in collateral value of at least $1.34 billion. The lawsuit seeks unspecified damages resulting from an alleged breach of the Trust Indenture Act, breach of fiduciary duties, and negligence as a result of the alleged failure to address the problem of defective Countrywide loans in the Trusts. Royal Park Investments SA/NV ("RPI") filed an action in the US District Court for the Southern District of New York against HBUS as trustee for three Trusts, alleging that the Trusts have sustained losses in collateral value of at least $1.25 billion. The lawsuit seeks damages resulting from an alleged breach of the Trust Indenture Act, breach of contract, and breach of the common law "duty of trust." These actions, as well as a similar action filed in June 2014 by certain trust investors including BlackRock and PIMCO and previously reported in our Second Quarter 10-Q, are at an early stage.

Shareholder Derivative Action On October 17, 2014, the nominal corporate defendants, HSBC, HSBC Bank USA, HSBC North America and HSBC USA, moved to dismiss the shareholder derivative action, captioned Michael Mason-Mahon v. Douglas J. Flint, et al. (New York State Supreme Court, Nassau County, Index No. 602052/2014) filed by a shareholder of HSBC (who is not a shareholder of HSBC Bank USA, HSBC North America or HSBC USA) purportedly on behalf of HSBC, HSBC Bank USA, HSBC North America and HSBC USA against the directors, certain officers and certain former directors of those HSBC companies. Other defendants who had been served also responded to the complaint.