UNITED STATES SECURITIES AND

EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to

Commission file number 1-7436

HSBC USA Inc.

(Exact name of registrant as specified in its charter)

Maryland (State of Incorporation) 452 Fifth Avenue, New York, New York (Address of principal executive offices)	13-2764867 (I.R.S. Employer Identification No.) 10018 (Zip Code)
(212) 525-5000
Registrant’s telephone number, including area code

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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer x
(Do not check if a smaller reporting company) Smaller reporting company o

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

As of October 31, 2009, there were 712 shares of the registrant’s common stock outstanding, all of which are owned by HSBC North America Inc.

HSBC USA Inc.

Form 10-Q

TABLE OF CONTENTS

		Page
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statement of Income (Loss)		3
	Consolidated Balance Sheet		4
	Consolidated Statement of Changes in Shareholders’ Equity		5
	Consolidated Statement of Cash Flows		6
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Forward-Looking Statements		71
	Executive Overview		71
	Basis of Reporting		78
	Balance Sheet Review		81
	Results of Operations		86
	Segment Results — IFRSs Basis		99
	Credit Quality		109
	Liquidity and Capital Resources		120
	Off-Balance Sheet Arrangements		126
	Fair Value		129
	Risk Management		134
	Average Balances and Interest Rates		142
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		144
Item 4.	Controls and Procedures		144
PART II  OTHER INFORMATION
Item 1.	Legal Proceedings		145
Item 6.	Exhibits		145
Index			146
Signature			148
EX-12
EX-31.1
EX-31.2
EX-32.1
EX-32.2

2

HSBC USA Inc.

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

CONSOLIDATED STATEMENT OF INCOME (LOSS) (UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
	(in millions)
Interest income:
Loans	$	1,370		$	1,423		$	4,378		$	4,270
Securities		233			313			731			943
Trading assets		52			139			162			435
Short-term investments		21			100			68			323
Other		12			54			35			198
Total interest income		1,688			2,029			5,374			6,169
Interest expense:
Deposits		224			575			804			1,956
Short-term borrowings		16			60			51			227
Long-term debt		188			225			634			766
Total interest expense		428			860			1,489			2,949
Net interest income		1,260			1,169			3,885			3,220
Provision for credit losses		1,006			658			3,247			1,762
Net interest income after provision for credit losses		254			511			638			1,458
Other revenues:
Credit card fees		333			215			1,032			653
Other fees and commissions		201			192			652			539
Trust income		30			44			92			114
Trading revenue (loss)		353			(122	)		351			(947	)
Net other-than-temporary impairment losses(1)		(26	)		(180	)		(84	)		(204	)
Other securities gains (losses), net		5			2			299			76
Servicing and other fees from HSBC affiliates		24			30			95			109
Residential mortgage banking revenue		15			13			139			64
Gain (loss) on instruments designated at fair value and related derivatives		44			111			(201	)		121
Other income (loss)		(84	)		(35	)		(154	)		(191	)
Total other revenues		895			270			2,221			334
Operating expenses:
Salaries and employee benefits		280			329			873			971
Support services from HSBC affiliates		387			300			1,228			891
Occupancy expense, net		59			72			211			201
Other expenses		193			268			668			651
Total operating expenses		919			969			2,980			2,714
Income (loss) before income tax expense (benefit)		230			(188	)		(121	)		(922	)
Income tax expense (benefit)		69			(52	)		56			(334	)
Net Income (loss)	$	161		$	(136	)	$	(177	)	$	(588	)

⁽¹⁾ During the three and nine months ended September 30, 2009, $28 million and $188 million, respectively, of gross other-than-temporary impairment (“OTTI”) losses on securities available-for-sale were recognized, of which $2 million and $104 million, respectively, were recognized in accumulated other comprehensive income (loss) (“AOCI”).

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

3

HSBC USA Inc.

CONSOLIDATED BALANCE SHEET (UNAUDITED)

	September 30,			December 31,
	2009			2008
	(in millions)
Assets
Cash and due from banks	$	2,571		$	2,972
Interest bearing deposits with banks		18,504			15,940
Federal funds sold and securities purchased under agreements to resell		4,463			10,813
Trading assets		24,848			31,292
Securities available-for-sale		29,563			24,908
Securities held to maturity (fair value of $2.9 billion at September 30, 2009 and at December 31, 2008)		2,792			2,875
Loans		82,566			81,113
Less – allowance for credit losses		(3,867	)		(2,397	)
Loans, net		78,699			78,716
Loans held for sale (includes $1.1 billion and $1.0 billion designated under fair value option at September 30, 2009 and December 31, 2008, respectively)		2,803			4,431
Properties and equipment, net		531			559
Intangible assets, net		429			374
Goodwill		2,647			2,647
Other assets		7,659			10,042
Total assets	$	175,509		$	185,569
Liabilities
Debt:
Deposits in domestic offices:
Noninterest bearing	$	17,487		$	17,663
Interest bearing (includes $3.9 billion and $2.3 billion designated under fair value option at September 30, 2009 and December 31, 2008, respectively)		69,152			67,903
Deposits in foreign offices:
Noninterest bearing		1,243			922
Interest bearing		27,667			32,550
Total deposits		115,549			119,038
Short-term borrowings		8,259			10,495
Long-term debt (includes $4.6 billion and $2.6 billion designated under fair value option at September 30, 2009 and December 31, 2008, respectively)		21,432			22,089
Total debt		145,240			151,622
Trading liabilities		10,510			16,323
Interest, taxes and other liabilities		4,563			4,907
Total liabilities		160,313			172,852
Shareholders’ equity
Preferred stock		1,565			1,565
Common shareholder’s equity:
Common stock ($5 par; 150,000,000 shares authorized; 712 and 709 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively)		-			-
Additional paid-in capital		13,807			11,694
Retained earnings		28			245
Accumulated other comprehensive loss		(204	)		(787	)
Total common shareholder’s equity		13,631			11,152
Total shareholders’ equity		15,196			12,717
Total liabilities and shareholders’ equity	$	175,509		$	185,569

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

4

HSBC USA Inc.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

Nine Months Ended September 30,	2009			2008
	(in millions)
Preferred stock
Balance at beginning and end of period	$	1,565		$	1,565
Common stock
Balance at beginning and end of period		-			-
Additional paid-in capital
Balance at beginning of period		11,694			8,123
Capital contributions from parent		2,167			1,460
Return of capital on preferred shares issued to CT Financial Services, Inc.		(55	)		-
Employee benefit plans and other		1			11
Balance at end of period		13,807			9,594
Retained earnings
Balance at beginning of period		245			1,901
Adjustment to initially apply fair value measurement and fair value option accounting, net of tax		-			113
Adjustment to initially apply new guidance for other-than-temporary impairment on debt securities, net of tax		15			-
Balance at beginning of period, as adjusted		260			2,014
Net loss		(177	)		(588	)
Cash dividends declared on preferred stock		(55	)		(60	)
Balance at end of period		28			1,366
Accumulated other comprehensive income (loss)
Balance at beginning of period		(787	)		(352	)
Adjustment to initially apply new guidance for other-than-temporary impairment on debt securities, net of tax		(15	)		-
Balance at beginning of period, as adjusted		(802	)		(352	)
Net change in unrealized gains (losses), net of tax on:
Securities available-for-sale not other-than-temporarily impaired		502			(355	)
Other-than-temporarily impaired debt securities available-for-sale (includes $188 million of gross OTTI losses less $84 million of gross losses recognized in other revenues)		(60	)		-
Derivatives classified as cash flow hedges		148			(14	)
Unrecognized actuarial gains, transition obligation and prior service costs relating to pension and post-retirement benefits, net of tax		8			6
Foreign currency translation adjustments, net of tax		-			(2	)
Other comprehensive income (loss), net of tax		598			(365	)
Balance at end of period		(204	)		(717	)
Total shareholders’ equity	$	15,196		$	11,808
Comprehensive income (loss)
Net loss	$	(177	)	$	(588	)
Other comprehensive income (loss), net of tax		598			(365	)
Comprehensive income (loss)	$	421		$	(953	)

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

5

HSBC USA Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

Nine Months Ended September 30,	2009			2008
	(in millions)
Cash flows from operating activities
Net income (loss)	$	(177	)	$	(588	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		253			244
Provision for credit losses		3,247			1,762
Other-than-temporarily impaired available-for-sale securities		84			204
Net change in other assets and liabilities		1,101			(1,249	)
Net change in loans held for sale		1,879			1,702
Loans attributable to tax refund anticipation loans program:
Originations of loans		(9,020	)		(12,628	)
Sales of loans to HSBC Finance, including premium		9,031			12,641
Net change in trading assets and liabilities		1,142			2,991
Mark-to-market on financial instruments designated at fair value and related derivatives		193			(243	)
Net change in fair value of derivatives and hedged items		33			(259	)
Net cash provided by operating activities		7,766			4,577
Cash flows from investing activities
Net change in interest bearing deposits with banks		(2,564	)		848
Net change in federal funds sold and securities purchased under agreements to resell		6,350			(1,928	)
Securities available-for-sale:
Purchases of securities available-for-sale		(32,299	)		(8,273	)
Proceeds from sales of securities available-for-sale		16,911			3,026
Proceeds from maturities of securities available-for-sale		11,215			4,415
Securities held to maturity:
Purchases of securities held to maturity		(152	)		(383	)
Proceeds from maturities of securities held to maturity		235			433
Change in loans:
Originations, net of collections		35,023			13,864
Recurring loan purchases from HSBC Finance		(27,624	)		(17,804	)
Cash paid on bulk purchase of loans from HSBC Finance		(8,821	)		-
Loans sold to third parties		3,997			4,959
Net cash used for acquisitions of properties and equipment		(24	)		(53	)
Other, net		234			(21	)
Net cash provided by (used in) investing activities		2,481			(917	)
Cash flows from financing activities
Net change in deposits		(3,677	)		5,677
Net change in short-term borrowings		(2,236	)		(3,048	)
Change in long-term debt:
Issuance of long-term debt		3,022			3,463
Repayment of long-term debt		(9,396	)		(9,493	)
Debt issued by consolidated VIE		(419	)		-
Capital contribution from parent		2,167			1,460
Return of capital on preferred shares issued to CT Financial Services, Inc.		(55	)		-
Other increases in capital surplus		1			11
Preferred dividends paid		(55	)		(60	)
Net cash used in financing activities		(10,648	)		(1,990	)
Net change in cash and due from banks		(401	)		1,670
Cash and due from banks at beginning of period		2,972			3,567
Cash and due from banks at end of period	$	2,571		$	5,237
Supplemental disclosure of non-cash flow investing activities
Trading securities pending settlement	$	511		$	699
Assumption of indebtedness from HSBC Finance related to the bulk loan purchase	$	6,077		$	-
Transfer of receivables to real estate owned	$	3		$	17

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

6

HSBC USA Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note			Page
	1	Organization and Basis of Presentation		7
	2	Restructuring Activities		8
	3	Trading Assets and Liabilities		8
	4	Securities		9
	5	Loans		17
	6	Allowance for Credit Losses		20
	7	Loans Held for Sale		21
	8	Intangible Assets		22
	9	Goodwill		23
	10	Derivative Financial Assets		24
	11	Fair Value Option		31
	12	Income Taxes		34
	13	Pension and Other Postretirement Benefits		37
	14	Related Party Transactions		38
	15	Business Segments		43
	16	Regulatory Capital		47
	17	Special Purpose Entities		48
	18	Guarantee Arrangements and Pledged Assets		52
	19	Fair Value Measurements		56
	20	New Accounting Pronouncements		68

1.  Organization and Basis of Presentation

HSBC USA Inc. is an indirect wholly owned subsidiary of HSBC North America Holdings Inc. (“HSBC North America”), which is an indirect wholly owned subsidiary of HSBC Holdings plc (“HSBC”). The accompanying unaudited interim consolidated financial statements of HSBC USA Inc. and its subsidiaries (collectively “HUSI”), including its principal subsidiary HSBC Bank USA, National Association (“HSBC Bank USA”), 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 notes 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 presentation of financial position, results of operations and cash flows for the interim periods have been made. HSBC USA Inc. may also be referred to in this Form 10-Q 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, 2008 (the “2008 Form 10-K”). Certain reclassifications have been made to prior period amounts to conform to the current period presentation. Subsequent events have been evaluated through November 10, 2009, the date this Form 10-Q was issued and filed with the U.S. Securities and Exchange Commission.

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.

During the first quarter of 2009, we adopted new disclosure requirements related to derivative instruments, hedging activities and fair value of financial instruments. Additionally, effective January 1, 2009, we early adopted new accounting guidance related to the recognition and presentation of other-than-temporarily impaired debt securities as well as new accounting guidance related to determining fair value when there has been a decrease in the volume and level of market activities and new accounting guidance related to identifying transactions in the marketplace that are not considered to be orderly. See Note 20, “New Accounting Pronouncements” for further details and related impacts.

7

HSBC USA Inc.

2.  Restructuring Activities

We continue to review our expense base in an effort to create a more streamlined organization, reduce expense growth and provide for future business initiatives. This review includes improving workforce management, consolidating certain functions where appropriate and increasing the use of global resourcing initiatives. The following summarizes the changes in the severance accrual relating to these activities during the three and nine months ended September 30, 2009 and 2008:

	2009			2008
	(in millions)
Three months ended September 30:
Balance at beginning of period	$	11		$	6
Costs recorded during the period		-			10
Costs paid during the period		(2	)		(3	)
Balance at end of period	$	9		$	13
Nine months ended September 30:
Balance at beginning of period,	$	19		$	12
Costs recorded during the period		3			16
Costs paid during the period		(13	)		(15	)
Balance at end of period	$	9		$	13

Also in November 2008, we announced that we would exit the wholesale/correspondent channel of our Residential Mortgage business and focus our attention on our retail sales channel. In connection with this decision, we recorded expense of $3 million relating to one-time termination benefits of which approximately $2 million has been paid through September 30, 2009. The remaining $1 million was reversed in the third quarter of 2009. No additional charges relating to this decision are anticipated in future periods.

3.  Trading Assets and Liabilities

Trading assets and liabilities are summarized in the following table.

	September 30,		December 31,
	2009		2008
	(in millions)
Trading assets:
U.S. Treasury	$	266	$	27
U.S. Government agency		22		271
U.S. Government sponsored enterprises(1)		18		521
Asset backed securities		1,684		1,698
Corporate and foreign bonds		1,878		1,614
Other securities		759		982
Precious metals		8,587		4,905
Fair value of derivatives		11,634		21,274
	$	24,848	$	31,292
Trading liabilities:
Securities sold, not yet purchased	$	524	$	406
Payables for precious metals		2,205		1,599
Fair value of derivatives		7,781		14,318
	$	10,510	$	16,323

⁽¹⁾ Includes mortgage backed securities of $14 million and $328 million issued or guaranteed by the Federal National Mortgage Association (FNMA) and mortgage backed securities of $4 million and $193 million issued or guaranteed by the Federal Home Loan Mortgage Corporation (FHLMC) at September 30, 2009 and December 31, 2008, respectively.

8

HSBC USA Inc.

At September 30, 2009 and December 31, 2008, the fair value of derivatives included in trading assets have been reduced by $3.2 billion and $6.1 billion, respectively, relating to amounts recognized for the obligation to return cash collateral received under master netting agreements with derivative counterparties.

At September 30, 2009 and December 31, 2008, the fair value of derivatives included in trading liabilities have been reduced by $7.4 billion and $11.8 billion, respectively, relating to amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties.

4.  Securities

The amortized cost and fair value of the securities available-for-sale and securities held to maturity portfolios are summarized in the following tables.

			Non-Credit
			Loss
			Component of
	Amortized		OTTI			Unrealized		Unrealized			Fair
September 30, 2009	Cost		Securities(5)			Gains(5)		Losses(5)			Value
	(in millions)
Securities available-for-sale:
U.S. Treasury	$	9,058	$	-		$	94	$	(12	)	$	9,140
U.S. Government sponsored enterprises:(1)
Mortgage-backed securities		62		-			-		(3	)		59
Direct agency obligations		303		-			4		(1	)		306
U.S. Government agency issued or guaranteed:
Mortgage-backed securities		4,197		-			140		(3	)		4,334
Collateralized mortgage obligations		6,746		-			111		(9	)		6,848
Direct agency obligations		1,502		-			18		(8	)		1,512
Obligations of U.S. states and political subdivisions		726		-			27		(1	)		752
Asset backed securities collateralized by:
Residential mortgages		1,139		(79	)		1		(151	)		910
Commercial mortgages		986		-			3		(31	)		958
Home equity		665		(25	)		-		(245	)		395
Auto		70		-			-		(1	)		69
Student loans		36		-			-		(5	)		31
Other		23		-			1		-			24
Other domestic debt securities(2)		868		-			10		(14	)		864
Foreign debt securities(2)		2,455		-			45		-			2,500
Equity securities(3)		852		-			9		-			861
Total available-for-sale securities	$	29,688	$	(104	)	$	463	$	(484	)	$	29,563
Securities held to maturity:
U.S. Government sponsored enterprises:(4)
Mortgage-backed securities	$	1,858	$	-		$	129	$	-		$	1,987
U.S. Government agency issued or guaranteed:
Mortgage-backed securities		118		-			14		-			132
Collateralized mortgage obligations		348		-			30		-			378
Obligations of U.S. states and political subdivisions		177		-			9		-			186
Asset backed securities collateralized by:
Residential mortgages		191		-			-		(26	)		165
Foreign debt securities		100		-			-		-			100
Total held-to-maturity securities	$	2,792	$	-		$	182	$	(26	)	$	2,948

9

HSBC USA Inc.

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2008	Cost		Gains		Losses			Value
			(in millions)
Securities available-for-sale:
U.S. Treasury	$	3,544	$	154	$	(12	)	$	3,686
U.S. Government sponsored enterprises(1)		11,271		187		(96	)		11,362
U.S. Government agency issued or guaranteed		5,746		135		(6	)		5,875
Obligations of U.S. states and political subdivisions		699		2		(31	)		670
Asset-backed securities		3,462		-		(987	)		2,475
Other domestic debt securities		144		7		(7	)		144
Foreign debt securities		641		13		(9	)		645
Equity securities(3)		52		-		(1	)		51
Total	$	25,559	$	498	$	(1,149	)	$	24,908
Securities held to maturity:
U.S. Government sponsored enterprises(4)	$	1,892	$	73	$	(7	)	$	1,958
U.S. Government agency issued or guaranteed		495		23		(2	)		516
Obligations of U.S. states and political subdivisions		217		8		(5	)		220
Asset-backed securities		185		1		(31	)		155
Foreign debt securities		86		-		-			86
Total	$	2,875	$	105	$	(45	)	$	2,935

(1)	Includes securities at amortized cost of $40 million and $5.1 billion issued or guaranteed by the Federal National Mortgage Association (“FNMA”) at September 30, 2009 and December 31, 2008, respectively, and $22 million and $5.9 billion issued or guaranteed by Federal Home Loan Mortgage Corporation (“FHLMC”) at September 30, 2009 and December 31, 2008, respectively.
(2)	At September 30, 2009, other domestic debt securities included $452 million of securities at amortized cost fully backed by the Federal Deposit Insurance Corporation (“FDIC”) and foreign debt securities consisted of $2.4 billion of securities fully backed by foreign governments.
(3)	Includes preferred equity securities at amortized cost issued by FNMA of $2 million at September 30, 2009 and December 31, 2008. Balances at September 30, 2009 and December 31, 2008 reflect other-than-temporary impairment charges of $203 million.
(4)	Includes securities at amortized cost of $682 million and $700 million issued or guaranteed by FNMA at September 30, 2009 and December 31, 2008, respectively, and $1.2 billion issued and guaranteed by FHLMC at both September 30, 2009 and December 31, 2008.
(5)	For available for sale debt securities which are other-than-temporarily impaired, the non-credit loss component of OTTI is recorded in accumulated other comprehensive income (loss) beginning in 2009.

10

HSBC USA Inc.

A summary of gross unrealized losses and related fair values as of September 30, 2009 and December 31, 2008, classified as to the length of time the losses have existed follows:

	One Year or Less							Greater Than One Year
	Number		Gross			Aggregate		Number		Gross			Aggregate
	of		Unrealized			Fair Value		of		Unrealized			Fair Value
September 30, 2009	Securities		Losses			of Investment		Securities		Losses			of Investment
	(dollars are in millions)
Securities available-for-sale:
U.S. Treasury		3	$	(12	)	$	216		-	$	-		$	-
U.S. Government sponsored enterprises		12		(1	)		123		37		(3	)		39
U.S. Government agency issued or guaranteed		59		(19	)		3,107		38		(1	)		45
Obligations of U.S. states and political subdivisions		1		-			2		11		(1	)		81
Asset backed securities		3		-			-		124		(433	)		1,737
Other domestic debt securities		1		(8	)		50		2		(6	)		44
Foreign debt securities		2		-			199		2		-			30
Equity securities		1		-			-		-		-			-
Securities available-for-sale		82	$	(40	)	$	3,697		214	$	(444	)	$	1,976
Securities held to maturity:
U.S. Government sponsored enterprises		8		-			21		-		-			-
U.S. Government agency issued or guaranteed		15		-			-		2		-			-
Obligations of U.S. states and political subdivisions		26		-			11		8		-			17
Asset backed securities		1		(1	)		6		12		(25	)		159
Securities held to maturity		50	$	(1	)	$	38		22	$	(25	)	$	176

11

HSBC USA Inc.

	One Year or Less							Greater Than One Year
	Number		Gross			Aggregate		Number		Gross			Aggregate
	of		Unrealized			Fair Value		of		Unrealized			Fair Value
December 31, 2008	Securities		Losses			of Investment		Securities		Losses			of Investment
	(dollars are in millions)
Securities available-for-sale:
U.S. Treasury		5	$	(12	)	$	1,251		-	$	-		$	-
U.S. Government sponsored enterprises		136		(42	)		1,361		101		(54	)		2,295
U.S. Government agency issued or guaranteed		97		(1	)		576		41		(5	)		237
Obligations of U.S. states and political subdivisions		36		(7	)		226		53		(24	)		333
Asset backed securities		51		(419	)		1,099		110		(568	)		1,330
Other domestic debt securities		3		(6	)		71		1		(1	)		4
Foreign debt securities		1		-			5		5		(9	)		97
Equity securities		2		(1	)		-		-		-			-
Securities available-for-sale		331	$	(488	)	$	4,589		311	$	(661	)	$	4,296
Securities held to maturity:
U.S. Government sponsored enterprises		18	$	(2	)	$	113		7	$	(5	)	$	132
U.S. Government agency issued or guaranteed		176		(2	)		105		-		-			-
Obligations of U.S. states and political subdivisions		54		(5	)		48		5		-			3
Asset backed securities		2		(10	)		52		10		(21	)		96
Securities held to maturity		250	$	(19	)	$	318		22	$	(26	)	$	231

Gross unrealized losses within the available-for-sale and held-to-maturity portfolios decreased overall primarily due to a reduction in credit spreads for asset backed securities during the first nine months of 2009 due to improved market conditions. We have reviewed the securities for which there is an unrealized loss in accordance with our accounting policies for other-than-temporary impairment described below. During the nine months ended September 30, 2009, 18 debt securities, six of which were identified in the quarter ended September 30, 2009, were determined to be other-than-temporarily impaired in 2009 in accordance with new accounting guidance related to the recognition of other-than-temporarily impairment associated with debt securities which we early adopted effective January 1, 2009 and is described more fully below. As a result, we recorded other-than-temporary impairment charges of $28 million and $188 million during the three and nine months ended September 30, 2009 on these investments. Consistent with the new accounting guidance described below, the credit loss component of the applicable debt securities totaling $26 million and $84 million respectively, during the three and nine months ended September 30, 2009 was recorded as a component of net other-than-temporary impairment losses in the accompanying consolidated statement of income (loss), while the remaining non-credit portion of the impairment loss was recognized in other comprehensive income (loss).

We do not consider any other securities to be other-than-temporarily impaired as we expect to recover the amortized cost basis of these securities and we neither intend nor expect to be required to sell these securities prior to recovery, even if that equates to holding securities until their individual maturities. However, additional other-than-temporary impairments may occur in future periods if the credit quality of the securities deteriorates.

12

HSBC USA Inc.

On-going Assessment for Other-Than-Temporary Impairment

On a quarterly basis, we perform an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment. Subsequent to the adoption of new accounting principles related to the determination of other-than-temporary impairments on January 1, 2009, a debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. If impaired, we then assess whether the unrealized loss is other-than-temporary. Prior to January 1, 2009, unrealized losses that were determined to be temporary were recorded, net of tax, in other comprehensive income for available-for-sale securities, whereas unrealized losses related to held to maturity securities determined to be temporary were not recognized. Regardless of whether the security was classified as available-for-sale or held to maturity, unrealized losses that were determined to be other-than-temporary were recorded to earnings in their entirety. An unrealized loss was considered other-than-temporary if (i) it was not probable that the holder would collect all amounts due according to the contractual terms of the debt security, or (ii) the fair value was below the amortized cost of the debt security for a prolonged period of time and we did not have the positive intent and ability to hold the security until recovery or maturity.

Under the new accounting principles early adopted effective January 1, 2009, an unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security and, as a result, the credit loss component of an other-than-temporary impairment write-down is recorded in earnings as a component of net other-than-temporary impairment losses in the accompanying consolidated statement of loss, while the remaining portion of the impairment loss is recognized in other comprehensive income (loss), provided we do not intend to sell the underlying debt security and it is “more likely than not” that we will not have to sell the debt security prior to recovery.

For all securities held in the available-for-sale or held to maturity portfolio for which unrealized losses have existed for a period of time, we do not have the intention to sell and believe we will not be required to sell the securities for contractual, regulatory or liquidity reasons as of the reporting date. Debt securities issued by U.S. Treasury, U.S. Government agencies and government sponsored entities accounted for 78 percent of total available-for-sale and held to maturity securities as of September 30, 2009. Our assessment for credit loss was concentrated on private label asset backed securities for which we evaluate for credit losses on a quarterly basis. We considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

•  The length of time and the extent to which the fair value has been less than the amortized cost basis;

•  The level of credit enhancement provided by the structure, which includes but is not limited to credit subordination positions, overcollateralization, protective triggers and financial guarantees provided by monoline wraps;

•  Changes in the near term prospects of the issuer or underlying collateral of a security such as changes in default rates, loss severities given default and significant changes in prepayment assumptions;

•  The level of excessive cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities;

•  Any adverse change to the credit conditions of the issuer, the monoline insurer or the security such as credit downgrades by the rating agencies; and

•  The expected length of time and the extent of continuing financial guarantee to be provided by the monoline insurers after announcement of downgrade or restructure.

We use a standard valuation model to measure the credit loss for available-for-sale and held to maturity securities. The valuation model captures the composition of the underlying collateral and the cash flow structure of the security. Management develops inputs to the model based on external analyst reports and forecasts and internal credit assessments. Significant inputs to the model include delinquencies, collateral types and related contractual

13

HSBC USA Inc.

features, estimated rates of default, loss given default and prepayment assumptions. Using the inputs, the model estimates cash flows generated from the underlying collateral and distributes those cash flows to respective tranches of securities considering credit subordination and other credit enhancement features. The projected future cash flows attributable to the debt security held are discounted using the effective interest rates determined at the original acquisition date if the security bears a fixed rate of return. The discount rate is adjusted for the floating index rate for securities which bear a variable rate of return, such as LIBOR-based instruments.

The excess of amortized cost over the present value of expected future cash flows on our other-than-temporarily impaired debt securities, which represents the credit loss associated with these securities, was $84 million for the nine months ended September 30, 2009. The excess of the present value of expected future cash flows over fair value, which represents the non-credit component of the unrealized loss associated with these securities, was $104 million as of September 30, 2009. Since we do not have the intention to sell the securities and have sufficient capital and liquidity to hold these securities until a full recovery of the fair value occurs, only the credit loss component is reflected in the consolidated statement of income (loss). The non-credit component of the unrealized loss is recorded, net of taxes, in other comprehensive income (loss).

The following table summarizes the roll-forward of credit losses on debt securities held by us for which a portion of an other-than-temporary impairment is recognized in other comprehensive income:

	Three Months Ended		Nine Months Ended
	September 30, 2009		September 30, 2009
	(in millions)
Credit losses at the beginning of the period	$	63	$	5
Credit losses related to securities for which an other-than-temporary impairment was not previously recognized		3		77
Increase in credit losses for which an other-than-temporary impairment was previously recognized		23		7
Ending balance of credit losses on debt securities held for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (loss)	$	89	$	89

At September 30, 2009, we held 170 individual asset-backed securities in the available-for-sale portfolio, of which 33 were also wrapped by a monoline insurance company. The asset backed securities backed by a monoline wrap comprised $471 million of the total aggregate fair value of asset-backed securities of $2.4 billion at September 30, 2009. The gross unrealized losses on these securities was $245 million at September 30, 2009. During the first nine months of 2009, two monoline insurers were downgraded to below investment grade and as a result, we did not take into consideration the financial guarantee from those monoline insurers associated with certain securities. As of September 30, 2009, four of the securities wrapped by the downgraded monoline insurance companies with an aggregate fair value of $43 million were deemed to be other-than-temporarily impaired. In evaluating the extent of our reliance on investment grade monoline insurance companies, consideration is given to our assessment of the creditworthiness of the monocline and other market factors.

At December 31, 2008, we held 161 individual asset-backed securities in the available-for-sale portfolio of which 37 were wrapped by a monoline insurance company. These asset backed securities backed by a monoline wrap comprised $629 million of the total aggregate fair value of asset-backed securities of $2.5 billion at December 31, 2008. The gross unrealized losses on these securities were $404 million at December 31, 2008. As of December 31, 2008, we deemed these securities to be temporarily impaired as our analysis of the structure and our credit analysis of the monoline insurer resulted in the conclusion that it was probable we would receive all contractual cash flows from our investment, including amounts to be paid by the investment grade monoline insurers.

14

HSBC USA Inc.

The following table summarizes realized gains and losses on investment securities transactions attributable to available-for-sale and held to maturity securities.

	Gross		Gross			Net
	Realized		Realized			Realized
	Gains		(Losses)			(Losses) Gains
	(in millions)
Three months ended September 30, 2009:
Securities available-for-sale	$	9	$	(30	)	$	(21	)
Securities held to maturity(1)		-		-			-
	$	9	$	(30	)	$	(21	)
Three months ended September 30, 2008:
Securities available-for-sale	$	15	$	(193	)	$	(178	)
Securities held to maturity(1)		-		-			-
	$	15	$	(193	)	$	(178	)
Nine months ended September 30, 2009:
Securities available-for-sale	$	345	$	(130	)	$	215
Securities held to maturity(1)		-		-			-
	$	345	$	(130	)	$	215
Nine months ended September 30, 2008:
Securities available-for-sale	$	103	$	(231	)	$	(128	)
Securities held to maturity(1)		-		-			-
	$	103	$	(231	)	$	(128	)

⁽¹⁾ Maturities, calls and mandatory redemptions.

15

HSBC USA Inc.

The amortized cost and fair values of securities available-for-sale and securities held to maturity at September 30, 2009, are summarized in the table below by contractual maturity. Expected maturities differ from contractual maturities because borrowers have the right to prepay obligations without prepayment penalties in certain cases. Securities available-for-sale amounts exclude equity securities as they do not have stated maturities. The table below also reflects the distribution of maturities of debt securities held at September 30, 2009, together with the approximate taxable equivalent yield of the portfolio. The yields shown are calculated by dividing annual interest income, including the accretion of discounts and the amortization of premiums, by the amortized cost of securities outstanding at September 30, 2009. Yields on tax-exempt obligations have been computed on a taxable equivalent basis using applicable statutory tax rates.

						After One					After Five
	Within					But Within					But Within					After Ten
	One Year					Five Years					Ten Years					Years
Taxable Equivalent Basis	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
								($ in millions)
Available-for-sale:
U.S. Treasury	$	7,465		.37	%	$	1,494		1.12	%	$	-		-	%	$	99		-	%
U.S. Government sponsored enterprises		-		-			109		2.87			200		3.02			57		1.77
U.S. Government agency issued or guaranteed		-		-			7		4.51			878		1.70			11,559		3.47
Obligations of U.S. states and political subdivisions		-		-			-		-			279		5.03			446		5.01
Asset backed securities		43		2.11			126		5.34			169		3.79			2,476		3.81
Other domestic debt securities		4		.72			762		2.37			-		-			103		6.80
Foreign debt securities		15		1.37			2,431		2.51			10		5.13			-		-
Total amortized cost	$	7,527		.38	%	$	4,929		2.15	%	$	1,536		2.72	%	$	14,740		3.56	%
Total fair value	$	7,598				$	4,995				$	1,567				$	14,542
Held to maturity:
U.S. Government sponsored enterprises	$	-		7.50	%	$	33		5.97	%		8		6.74	%	$	1,817		5.86	%
U.S. Government agency issued or guaranteed		-		7.32			1		7.50			6		8.89			459		6.31
Obligations of U.S. states and political subdivisions		12		5.79			33		4.94			25		4.53			107		5.15
Asset backed securities		-		-			-		-			-		-			191		5.80
Foreign debt securities		100		2.64			-		-			-		-			-		-
Total amortized cost	$	112		3.01	%	$	67		5.48	%	$	39		5.65	%	$	2,574		5.91	%
Total fair value	$	112				$	72				$	44				$	2,720

Investments in FHLB stock, FRB stock, and MasterCard Class B shares of $152 million, $456 million and $0 million, respectively, were included in other assets at September 30, 2009. Investments in FHLB stock, FRB stock and MasterCard Class B shares of $209 million, $349 million and $29 million, respectively, were included in other assets at December 31, 2008.

16

HSBC USA Inc.

5.  Loans

Loans consisted of the following:

	September 30,		December 31,
	2009		2008
	(in millions)
Commercial loans:
Construction and other real estate	$	8,743	$	8,885
Other commercial		23,630		28,544
Total commercial		32,373		37,429
Consumer loans:
HELOC and home equity mortgages		4,362		4,549
Other residential mortgages		14,423		17,948
Private label cards		14,614		17,074
Credit cards		13,326		2,137
Auto finance		1,925		154
Other consumer		1,543		1,822
Total consumer		50,193		43,684
Total loans	$	82,566	$	81,113

Secured financings of $550 million and $2.5 billion at September 30, 2009 are secured by $326 million and $2.9 billion of private label cards and credit cards, respectively, as well as restricted available for sale investments of $292 million and $438 million, respectively. Secured financings of $1.2 billion at December 31, 2008 were secured by $1.6 billion of private label cards.

Purchased Loan Portfolios:

In January 2009, we purchased the General Motors MasterCard receivable portfolio (“GM Portfolio”) and the AFL-CIO Union Plus MasterCard/Visa receivable portfolio (“UP Portfolio”) with an aggregate outstanding principal balance of $6.3 billion and $6.1 billion, respectively from HSBC Finance. The aggregate purchase price for the GM and UP Portfolios was $12.2 billion, which included the transfer of approximately $6.1 billion of indebtedness, resulting in a cash consideration of $6.1 billion. The purchase price was determined based on independent valuation opinions. HSBC Finance retained the customer relationships and by agreement we purchase additional loan originations generated under existing and future accounts from HSBC Finance on a daily basis at fair market value. HSBC Finance continues to service the GM and UP Portfolios for us for a fee.

Purchased loans for which at the time of acquisition there was evidence of deterioration in credit quality since origination and for which it was probable that all contractually required payments would not be collected and that the associated line of credit has been closed were recorded upon acquisition at an amount based upon the cash flows expected to be collected. The difference between these expected cash flows and the purchase price represents accretable yield which is amortized to interest income over the life of the loan. The following table provides details on the loans obtained in connection with the acquisition of these portfolios subject to these accounting requirements (the “Purchased Impaired Loans”):

	GM		UP
	Portfolio		Portfolio
	(in millions)
Outstanding contractual receivable balance at acquisition	$	355	$	399
Cash flows expected to be collected at acquisition		164		167
Basis in acquired receivables at acquisition		122		114

17

HSBC USA Inc.

The carrying amount of the Purchased Impaired Loans, net of credit loss reserves at September 30, 2009 totaled $71 million and $70 million for the GM and UP Portfolios, respectively, and is included in credit card loans. The outstanding contractual balances at September 30, 2009 for these receivables were $89 million and $105 million for the GM and UP Portfolios, respectively. During the three month period ended September 30, 2009, credit loss reserves were reduced by $8 million for the acquired GM and UP receivables primarily due to quarterly charge-off activity, resulting in a total credit loss reserve of $12 million at September 30, 2009. There were no reclassifications to accretable yield from non-accretable difference during the three or nine months ended September 30, 2009. The following summarizes the change in accretable yield associated with the Purchased Impaired Loans:

	Three Months			Nine Months
	Ended			Ended
	September 30, 2009			September 30, 2009
	(in millions)
Accretable yield at beginning of period	$	(50	)	$	(95	)
Accretable yield amortized to interest income during the period		10			39
Reclassification to non-accretable difference		-			16
Accretable yield at end of period	$	(40	)	$	(40	)

In January 2009, we also purchased auto finance loans from HSBC Finance with an aggregate outstanding principal balance of $3.0 billion for a purchase price of $2.8 billion. HSBC Finance continues to service these loans for us for a fee. None of the auto finance loans purchased were delinquent at the time of purchase and as such were not subject to the accounting requirements for purchased impaired loans discussed above.

Troubled Debt Restructurings (“TDR”):

The following tables presents information about our TDR Loans and the related credit loss reserves for TDR Loans:

	September 30,		December 31,
	2009		2008
	(in millions)
TDR Loans(1):
Commercial loans:
Construction and other real estate	$	36	$	26
Other commercial		68		18
Total commercial		104		44
Consumer loans:
Residential mortgages		101		38
Private label cards		204		156
Credit cards		133		13
Auto finance		39		-
Other consumer		-		-
Total consumer		477		207
Total TDR Loans	$	581	$	251

18

HSBC USA Inc.

	September 30,		December 31,
	2009		2008
	(in millions)
Allowance for credit losses for TDR Loans(2):
Commercial loans:
Construction and other real estate	$	3	$	2
Other commercial		2		2
Total commercial		5		4
Consumer loans:
Residential mortgages		15		6
Private label cards		45		29
Credit cards		21		3
Auto finance		9		-
Other consumer		-		-
Total consumer		90		38
Total Allowance for credit losses for TDR Loans	$	95	$	42

(1)	The TDR loan balances above include $8 million of auto finance and $2 million of residential mortgage loans held for sale at September 30, 2009 for which there are no credit loss reserves as these loans are carried at the lower of cost or fair value. There were no held for sale TDR loans at December 31, 2008.
(2)	Included in the allowance for credit losses.

The following tables presents information about average TDR Loan balances and interest income recognized on TDR loans during the three and nine months ended September 30, 2009 and 2008:

Three Months Ended September 30,	2009		2008
	(in millions)
Average balance of TDR Loans	$	524	$	231
Interest income recognized on TDR Loans		8		3

Nine Months Ended September 30,	2009		2008
	(in millions)
Average balance of TDR Loans	$	455	$	217
Interest income recognized on TDR Loans		22		10

Concentrations of Credit Risk:

Our loan portfolio includes the following types of loans:

•  High loan-to-value (“LTV”) loans – Certain residential mortgages on primary residences with LTV ratios equal to or exceeding 90 percent at the time of origination and no mortgage insurance, which could result in the potential inability to recover the entire investment in loans involving foreclosed or damaged properties.

•  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. 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.

•  Adjustable rate mortgage (“ARM”) loans – A loan which allows us to adjust pricing on the loan in line with market movements. A customer’s financial situation and the general interest rate environment at the time of the interest rate reset could affect the customer’s ability to repay or refinance the loan after the adjustment.

19

HSBC USA Inc.

The following table summarizes the balances of high LTV, interest-only and ARM loans in our loan portfolios, including loans held for sale, at September 30, 2009 and December 31, 2008.

	September 30,		December 31,
	2009		2008
	(in billions)
Residential mortgage loans with high LTV and no mortgage insurance(1)	$	1.4	$	1.6
Interest-only residential mortgage loans		2.8		4.2
ARM loans(2)		7.6		10.5

(1)	Residential mortgage loans with high LTV and no mortgage insurance includes both fixed rate and adjustable rate mortgages. Excludes $242 million and $274 million of sub-prime residential mortgage loans held for sale at September 30, 2009 and December 31, 2008, respectively.
(2)	ARM loan balances above exclude $232 million and $342 million of sub-prime residential mortgage loans held for sale September 30, 2009 and December 31, 2008, respectively. For the remainder of 2009 and in 2010, approximately $1.0 billion and $1.0 billion, respectively of ARM loans will experience their first interest rate reset.

Concentrations of first and second liens within the residential mortgage loan portfolio are summarized in the following table. Amounts in the table exclude closed end first lien loans held for sale of $1.3 billion.

	September 30,		December 31,
	2009		2008
	(in millions)
Closed end:
First lien	$	14,423	$	17,948
Second lien		610		756
Revolving:
Second lien		3,752		3,793
Total	$	18,785	$	22,497

6.  Allowance for Credit Losses

An analysis of the allowance for credit losses is presented in the following table:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
	(in millions)
Balance at beginning of period	$	3,740		$	1,796		$	2,397		$	1,414
Provision for credit losses		1,006			658			3,247			1,762
Charge-offs		(954	)		(479	)		(2,433	)		(1,324	)
Recoveries		78			63			230			207
Allowance on loans transferred (to) from held for sale		(4	)		21			(12	)		-
Allowance related to bulk loan purchase from HSBC Finance		-			-			437			-
Other		1			-			1			-
Balance at end of period	$	3,867		$	2,059		$	3,867		$	2,059

Increased provision for credit losses for 2009 includes the impact of the GM, UP and auto finance portfolios which were purchased in January 2009 from HSBC Finance.

20

HSBC USA Inc.

7.  Loans Held for Sale

Loans held for sale consisted of the following:

	September 30,		December 31,
	2009		2008
	(in millions)
Commercial loans	$	1,138	$	874
Consumer loans:
Residential mortgages		1,280		3,512
Auto finance		353		-
Other consumer		32		45
Total consumer		1,665		3,557
Total loans held for sale	$	2,803	$	4,431

We originate commercial loans in connection with our participation in a number of leveraged acquisition finance syndicates. A substantial majority of these loans were originated with the intent of selling them to unaffiliated third parties and are classified as commercial loans held for sale at September 30, 2009. The fair value of commercial loans held for sale under this program were $1.1 billion and $874 million at September 30, 2009 and December 31, 2008, respectively, all of which are recorded at fair value as we have elected to designate these loans under fair value option. During the first nine months of 2009, the market value of these loans increased due to narrowing credit spreads. See Note 11, “Fair Value Option,” of the consolidated financial statements for additional information.

In addition to normal loan sales during the nine months ended September 30, 2009, we sold approximately $4.0 billion of prime adjustable and fixed rate residential mortgage loans. As a result we recorded gains of $67 million during the nine months ended September 30, 2009. Gains and losses from the sale of residential mortgage loans are reflected as a component of residential mortgage banking revenue in the accompanying consolidated statement of income (loss). We retained the servicing rights in relation to the mortgages upon sale.

Residential mortgage loans held for sale include sub-prime residential mortgage loans with a fair value of $855 million and $1.2 billion at September 30, 2009 and December 31, 2008, respectively, which were acquired from unaffiliated third parties and from HSBC Finance with the intent of securitizing or selling the loans to third parties. Also included in residential mortgage loans held for sale are first mortgage loans originated and held for sale primarily to various governmental agencies.

During the nine months ended September 30, 2009, we transferred $353 million of auto finance loans to held for sale. Other consumer loans held for sale consist of student loans.

Excluding the commercial loans designated under fair value option discussed above, loans held for sale are recorded at the lower of cost or fair value. The book value of loans held for sale continued to exceed fair value at September 30, 2009. We continue to experience increases to the valuation allowance primarily due to adverse conditions in the U.S. residential mortgage markets in 2009, although the dollar magnitude of the increases has been slowing. The valuation allowance related to loans held for sale is presented in the following table.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
	(in millions)
Balance at beginning of period	$	(925	)	$	(610	)	$	(869	)	$	(475	)
Increase in allowance for net reductions in market value		(9	)		(94	)		(154	)		(350	)
Releases of valuation allowance for loans sold		45			16			134			137
Balance at end of period	$	(889	)	$	(688	)	$	(889	)	$	(688	)

21

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 interest rate and credit environment. Interest rate risk for residential mortgage loans held for sale is partially mitigated through an economic hedging program to offset changes in the fair value of the mortgage loans held for sale. Trading related revenue associated with this economic hedging program, which are included in net interest income and trading revenue (loss) in the consolidated statement of income (loss), were gains of $3 million and $58 million for the three and nine months ended September 30, 2009, respectively, compared with gains of $4 million and $34 million for the three and nine months ended September 30, 2008, respectively.

8.  Intangible Assets

Intangible assets consisted of the following:

	September 30,		December 31,
	2009		2008
	(in millions)
Mortgage servicing rights	$	400	$	341
Other		29		33
Intangible assets	$	429	$	374

Mortgage Servicing Rights (“MSRs”)

A servicing asset is a contract under which estimated future revenues from contractually specified cash flows, such as servicing fees and other ancillary revenues, are expected to exceed the obligation to service the financial assets. We recognize the right to service mortgage loans as a separate and distinct asset at the time they are acquired or when originated loans are sold.

MSRs are subject to credit, prepayment and interest rate risk, in that their value will fluctuate as a result of changes in these economic variables. Interest rate risk is mitigated through an economic hedging program that uses securities and derivatives to offset changes in the fair value of MSRs. Since the hedging program involves trading activity, risk is quantified and managed using a number of risk assessment techniques, which are addressed in more detail in the 2008 Form 10-K.

Residential Mortgage Servicing Rights

Residential MSRs are initially measured at fair value at the time that the related loans are sold and are remeasured at fair value at each reporting date (the fair value measurement method). Changes in fair value of the asset are reflected in residential mortgage banking revenue in the period in which the changes occur. Fair value is determined based upon the application of valuation models and other inputs. The valuation models incorporate assumptions market participants would use in estimating future cash flows. The reasonableness of these valuation models is periodically validated by reference to external independent broker valuations and industry surveys.

Fair value of residential MSRs is calculated using the following critical assumptions:

	September 30,			December 31,
	2009			2008
Annualized constant prepayment rate (“CPR”)		22.3	%		39.4	%
Constant discount rate		14.1	%		10.3	%
Weighted average life		3.4 years			3.1 years

22

HSBC USA Inc.

Residential MSRs activity is summarized in the following table:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
	(in millions)
Fair value of MSRs:
Beginning balance	$	434		$	546		$	333		$	489
Additions related to loan sales		22			31			87			113
Changes in fair value due to:
Change in valuation inputs or assumptions used in the valuation models		(54	)		(39	)		6			(14	)
Realization of cash flows		(8	)		(16	)		(32	)		(66	)
Ending balance	$	394		$	522		$	394		$	522

Information regarding residential mortgage loans serviced for others, which are not included in the consolidated balance sheet, is summarized in the following table:

	September 30,		December 31,
	2009		2008
	(in millions)
Outstanding principal balances at period end	$	50,533	$	46,215
Custodial balances maintained and included in noninterest bearing deposits at period end	$	827	$	695

Servicing fees collected are included in residential mortgage banking revenue and totaled $33 million and $99 million during the three and nine months ended September 30, 2009, respectively. Servicing fees collected totaled $34 million and $96 million during the three and nine months ended September 30, 2008, respectively.

Commercial Mortgage Servicing Rights

Commercial MSRs, which are accounted for using the lower of cost or fair value method, totaled $6 million and $8 million at September 30, 2009 and December 31, 2008, respectively.

Other Intangible Assets

Other intangible assets, which result from purchase business combinations, are comprised of favorable lease arrangements of $21 million and $24 million at September 30, 2009 and December 31, 2008, respectively, and customer lists of $8 million and $9 million at September 30, 2009 and December 31, 2008, respectively.

9.  Goodwill

Goodwill was $2.6 billion at September 30, 2009 and December 31, 2008. Goodwill is evaluated for impairment annually at the reporting unit level, but impairment may be reviewed earlier if circumstances indicate the carrying amount may not be recoverable. During the third quarter of 2009, we completed our annual impairment test of goodwill. At the testing date, we determined the fair value of all of our reporting units exceeded their carrying values, including goodwill. As a result of the continued deterioration in economic and credit conditions in the U.S., we performed interim impairment tests of the goodwill of our Global Banking and Markets reporting unit during the first, second and third quarters of 2009. Additionally, during the third quarter of 2009, we also performed an interim impairment test of the goodwill of our Private Banking reporting unit. As a result of these tests, the fair value of our Global Banking and Markets and Private Banking reporting units continue to exceed their carrying value including goodwill. Our goodwill impairment testing is, however, highly sensitive to certain assumptions and estimates used.

23

HSBC USA Inc.

In the event that further significant deterioration in the economic and credit conditions beyond the levels already reflected in our cash flow forecasts occur, or changes in the strategy or performance of our business or product offerings occur, additional interim impairment tests will again be required during the fourth quarter of 2009.

10.  Derivative Financial Instruments

In our normal course of business, we enter into derivative contracts for trading and risk management purposes. For financial reporting purposes, a derivative instrument is designated in one of following categories: (a) financial instruments held for trading, (b) hedging instruments designated as a qualifying hedge under derivative accounting principles or (c) a non-qualifying economic hedge. The derivative instruments held are predominantly swaps, futures, options and forward contracts. All freestanding derivatives, including bifurcated embedded derivatives, are stated at fair value. Where we enter into enforceable master netting arrangements with counterparties, the master netting arrangements permit us to net those derivative asset and liability positions and to offset cash collateral held and posted with the same counterparty.

Derivatives Held for Risk Management Purposes

Our risk management policy requires us to identify, analyze and manage risks arising from the activities conducted during our 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 under derivative accounting principles.

Accounting principles for qualifying hedges require detailed documentation that describes the relationship between the hedging instrument and the hedged item, including, but not limited to, the risk management objectives and hedging strategy and the methods to assess the effectiveness of the hedging relationship. 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 cash flows of the hedged item. We discontinue hedge accounting when we determine that a derivative is not expected to be effective going forward or has ceased to be highly effective as a hedge, the hedging instrument is terminated, or when the designation is removed by us.

In the tables that follow below, the fair value disclosed does not include swap collateral that we either receive or deposit with our interest rate swap counterparties. Such swap collateral is recorded on our balance sheet at an amount which approximates fair value and is netted on the balance sheet with the fair value amount recognized for derivative instruments.

Fair Value Hedges In the normal course of business, we hold fixed-rate loans and securities and issue fixed-rate senior and subordinated debt obligations. The fair value of fixed-rate (USD and non-USD denominated) assets and liabilities fluctuates in response to changes in interest rates or foreign currency exchange rates. We utilize interest rate swaps, interest rate forward and futures contracts and foreign currency swaps to minimize the effect on earnings caused by interest rate and foreign currency volatility.

For reporting purposes, changes in fair value of a derivative designated in a qualifying fair value hedge, along with the changes in the fair value of the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. We recognized net losses of $9 million and $6 million for the three and nine months ended September 30, 2009, respectively, reported as other income (loss) in the consolidated statement of income (loss), which represented the ineffective portion of all fair value hedges. We recognized net gains of approximately $5 million in other income (loss) for the three and nine months ended September 30, 2008. The interest accrual related to the derivative contract is recognized in interest income.

The changes in fair value of the hedged item designated in a qualifying hedge are captured as an adjustment to the carrying value of the hedged item (basis adjustment). If the hedging relationship is terminated and the hedged item

24

HSBC USA Inc.

continues to exist, the basis adjustment is amortized over the remaining term of the original hedge. We recorded basis adjustments for active fair value hedges which decreased the carrying value of our debt by $189 million and $53 million for the nine months ended September 30, 2009 and 2008, respectively. We amortized less than $1 million and $2 million of basis adjustments related to terminated and/or re-designated fair value hedge relationships for the three and nine months ended September 30, 2009, respectively. We amortized $1 million and $4 million of basis adjustments related to terminated and/or re-designated fair value hedge relationships for the three and nine months ended September 30, 2008, respectively. The total accumulated unamortized basis adjustment amounted to an increase in the carrying value of our debt of $118 million and $367 million as of September 30, 2009 and December 31, 2008, respectively.

The following table presents the fair value of derivative instruments that are designated and qualifying as fair value hedges and their location on the consolidated balance sheet.

	Derivative Assets(1)						Derivative Liabilities(1)
			Fair Value as of						Fair Value as of
	Balance Sheet		September 30,		December 31,		Balance Sheet		September 30,		December 31,
	Location		2009		2008		Location		2009		2008
	(in millions)
Interest rate contracts		Other assets	$	185	$	372		Interest, taxes and other liabilities	$	37	$	207

⁽¹⁾ The derivative asset and derivative liabilities presented above may be eligible for netting and consequently may be shown net against a different line item on the consolidated balance sheet. Balance sheet categories in the above table represent the location of the assets and liabilities absent the netting of the balances.

The following table presents the gains and losses on derivative instruments designated and qualifying as hedging instruments in fair value hedges and their locations on the consolidated statement of income (loss).

		Amount of Gain or (Loss)
		Recognized in Income on
		Derivatives
	Location of Gain or (Loss)	Three Months Ended					Nine Months Ended
	Recognized in Income on	September 30,					September 30,
	Derivatives	2009			2008		2009			2008
		(in millions)
Interest rate contracts	Other income (loss)	$	15		$	-	$	(71	)	$	(68	)
Interest rate contracts	Interest income		(37	)		8		(106	)		18
Total		$	(22	)	$	8	$	(177	)	$	(50	)

25

HSBC USA Inc.

The following table presents information on gains and losses on the hedged items in fair value hedges and their location on the consolidated statement of income (loss).

							Gain (Loss) on												Gain (Loss) on
	Gain/(Loss) on						Hedged						Gain (Loss) on						Hedged
	Derivative						Items						Derivative						Items
	Interest			Other			Interest			Other			Interest			Other			Interest			Other
	Income			Income			Income			Income			Income			Income			Income			Income
	(Expense)			(Loss)			(Expense)			(Loss)			(Expense)			(Loss)			(Expense)			(Loss)
				2009												2008
	(in millions)
Three Months Ended September 30,
Interest rate contracts/AFS Securities	$	(2	)	$	(54	)	$	27		$	59		$	(1	)	$	3		$	3		$	(3	)
Interest rate contracts/commercial loans		-			-			-			-			-			(3	)		-			2
Interest rate contracts/subordinated debt		(35	)		69			(71	)		(83	)		9			-			(10	)		7
Total	$	(37	)	$	15		$	(44	)	$	(24	)	$	8		$	-		$	(7	)	$	6
Nine Months Ended September 30,
Interest rate contracts/AFS Securities	$	(17	)	$	132		$	65		$	(124	)	$	(1	)	$	(19	)	$	16		$	19
Interest rate contracts/commercial loans		-			(1	)		1			-			3			(2	)		1			1
Interest rate contracts/subordinated debt		(89	)		(202	)		(212	)		189			16			(47	)		(65	)		53
Total	$	(106	)	$	(71	)	$	(146	)	$	65		$	18		$	(68	)	$	(48	)	$	73

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. We also hedge the variability in interest cash flows arising from on-line savings deposits.

Changes in fair value associated with the effective portion of a derivative instrument designated as a qualifying cash flow hedge are recognized initially in accumulated other comprehensive income (loss). When the cash flows for which the derivative is hedging 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) is released into the corresponding income or expense account. If a cash flow hedge of a forecasted transaction is de-designated because it is no longer highly effective, or if the hedge relationship is terminated, the cumulative gain or loss on the hedging derivative will continue to be reported in accumulated other comprehensive income (loss) unless the hedged forecasted transaction is no longer expected to occur, at which time the cumulative gain or loss is released into earnings. For the three and nine months ended September 30, 2009, $10 million and $40 million, respectively, of losses related to terminated and/or re-designated cash flow hedge relationships were amortized to earnings from accumulated other comprehensive income (loss). During the next twelve months, we expect to amortize $10 million of remaining losses to earnings resulting from these terminated and/or re-designated cash flow hedges. For the three and nine months ended September 30, 2008, $17 million and $54 million, respectively, of losses related to

26

HSBC USA Inc.

terminated and/or re-designated cash flow hedge relationships were amortized to earnings from accumulated other comprehensive income (loss). The interest accrual related to the derivative contract is recognized in interest income.

The following table presents the fair value of derivative instruments that are designated and qualifying as cash flow hedges and their location on the consolidated balance sheet.

	Derivative Assets(1)						Derivative Liabilities(1)
			Fair Value as of						Fair Value as of
	Balance Sheet		September 30,		December 31,		Balance Sheet		September 30,		December 31,
	Location		2009		2008		Location		2009		2008
	(in millions)
Interest rate contracts		Other assets	$	-	$	5		Interest, taxes and other liabilities	$	64	$	212

⁽¹⁾ The derivative asset and derivative liabilities presented above may be eligible for netting and consequently may be shown net against a different line item on the consolidated balance sheet. Balance sheet categories in the above table represent the location of the assets and liabilities absent the netting of the balances.

The following table presents information on gains and losses on derivative instruments designated and qualifying as hedging instruments in cash flow hedges and their locations on the consolidated statement of income (loss).

													Location of Gain
							Gain (Loss)						(Loss) Recognized	Gain (Loss)
	Gain (Loss)						Reclassed						in Income on	Reclassed
	Recognized in						from						the Derivative	from
	AOCI						AOCI into						(Ineffective	AOCI
	on Derivative					Location of Gain	Income						Portion and Amount	into Income
	(Effective					(Loss) Reclassified	(Effective						Excluded from	(Ineffective
	Portion)					from AOCI into Income	Portion)						Effectiveness	Portion)
	2009		2008			(Effective Portion)	2009			2008			Testing)	2009			2008
	(in millions)
Three Months Ended September 30,
Interest rate contracts	$	50	$	(3	)	Other income (loss)	$	(10	)	$	(17	)	Other income (loss)	$	(1	)	$	(5	)
Foreign exchange contracts		-		5		Other income (loss)		-			-		Other income (loss)		-			-
Total	$	50	$	2			$	(10	)	$	(17	)		$	(1	)	$	(5	)
Nine Months Ended September 30,
Interest rate contracts	$	141	$	(24	)	Other income (loss)	$	(40	)	$	(54	)	Other income (loss)	$	6		$	(6	)
Foreign exchange contracts		-		-		Other income (loss)		-			-		Other income (loss)		-			-
Total	$	141	$	(24	)		$	(40	)	$	(54	)		$	6		$	(6	)

Trading and Other Derivatives

We enter into derivative instruments for short-term profit taking purposes, to repackage risks and structure trades to facilitate clients’ needs for various risk taking and risk modification purposes. We manage our risk exposure by entering into offsetting derivatives with other financial institutions to mitigate the market risks, in part or in full, arising from our trading activities with our clients. In addition, we also enter into buy protection credit derivatives with other market participants to manage our counterparty credit risk exposure. Where we enter into derivatives for trading purposes, realized and unrealized gains and losses are recognized as trading revenue (loss). Credit losses arising from counterparty risks on over-the-counter derivative instruments and offsetting buy protection credit

27

HSBC USA Inc.

derivative positions are recognized as an adjustment to the fair value of the derivatives and are recorded in trading revenue (loss).

Derivative instruments designated as economic hedges that do not qualify for hedge accounting are recorded in a similar manner as derivative instruments held for trading. Realized and unrealized gains and losses are recognized in other income (loss) while the derivative asset or liability positions are reflected as other assets or other liabilities. As of September 30, 2009, we have entered into credit default swaps which are designated as economic hedges against the credit risks within our loan portfolio and certain own debt issuances. 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). In addition, we also from time to time have designated certain forward purchase or sale of to-be-announced (TBA) securities to economically hedge mortgage servicing rights. Changes in the fair value of TBA positions, which are considered derivatives, are recorded in residential mortgage banking revenue.

The following table presents the fair value of derivative instruments held for trading purposes and their location on the consolidated balance sheet.

	Derivative Assets(1)					Derivative Liabilities(1)
		Fair Value as of					Fair Value as of
	Balance Sheet	September 30,		December 31,		Balance Sheet	September 30,		December 31,
	Location	2009		2008		Location	2009		2008
	(in millions)
Interest rate contracts	Trading assets	$	34,208	$	59,861	Trading Liabilities	$	34,227	$	60,104
Foreign exchange contracts	Trading assets		15,543		24,437	Trading Liabilities		16,058		23,890
Equity contracts	Trading assets		2,581		2,981	Trading Liabilities		2,569		2,848
Precious Metals contracts	Trading assets		1,125		2,667	Trading Liabilities		1,268		2,255
Credit contracts	Trading assets		22,650		64,341	Trading Liabilities		22,302		64,032
Other	Trading assets		29		55	Trading Liabilities		2		7
Total		$	76,136	$	154,342		$	76,426	$	153,136

⁽¹⁾ The derivative asset and derivative liabilities presented above may be eligible for netting and consequently may be shown net against a different line item on the consolidated balance sheet. Balance sheet categories in the above table represent the location of the assets and liabilities absent the netting of the balances.

Derivative assets and liabilities balances from December 31, 2008, were impacted by market volatilities as valuations of foreign exchange, interest rate and credit derivatives all reduced from significant spread tightening in all sectors. Specifically, credit derivatives had a large decrease as a number of transaction unwinds and commutations reduced the outstanding market value as we sought to actively reduce exposure.

28

HSBC USA Inc.

The following table presents the fair value of derivative instruments held for other purposes and their location on the consolidated balance sheet.

	Derivative Assets(1)					Derivative Liabilities(1)
		Fair Value as of					Fair Value as of
	Balance Sheet	September 30,		December 31,		Balance Sheet	September 30,		December 31,
	Location	2009		2008		Location	2009		2008
				(in millions)
Interest rate contracts	Other assets	$	446	$	794	Interest, taxes and other liabilities	$	16	$	6
Foreign exchange contracts	Other assets		28		1	Interest, taxes and other liabilities		19		42
Equity contracts	Other assets		138		2	Interest, taxes and other liabilities		15		244
Credit contracts	Other assets		30		210	Interest, taxes and other liabilities		22		70
Total		$	642	$	1,007		$	72	$	362

⁽¹⁾ The derivative asset and derivative liabilities presented above may be eligible for netting and consequently may be shown net against a different line item on the consolidated balance sheet. Balance sheet categories in the above table represent the location of the assets and liabilities absent the netting of the balances.

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).

		Amount of Gain (Loss) Recognized in
		Income on Derivatives
	Location of Gain	Three Months Ended						Nine Months Ended
	(Loss) Recognized in	September 30,						September 30,
	Income on Derivatives	2009			2008			2009			2008
		(in millions)
Interest rate contracts	Trading revenue (loss)	$	(182	)	$	-		$	(321	)	$	(142	)
Foreign exchange contracts	Trading revenue (loss)		204			(331	)		775			269
Equity contracts	Trading revenue (loss)		24			191			145			534
Precious Metals contracts	Trading revenue (loss)		21			112			49			218
Credit contracts	Trading revenue (loss)		(124	)		1,053			(272	)		1
Other	Trading revenue (loss)		79			-			37			-
Total		$	22		$	1,025		$	413		$	880

29

HSBC USA Inc.

The following table presents information on gains and losses on derivative instruments held for other purposes and their locations on the consolidated statement of income (loss).

		Amount of Gain (Loss) Recognized in
		Income on Derivatives
	Location of Gain	Three Months Ended						Nine Months Ended
	(Loss) Recognized in	September 30,						September 30,
	Income on Derivatives	2009			2008			2009			2008
		(in millions)
Interest rate contracts	Other income (loss)	$	140		$	85		$	(281	)	$	121
Foreign exchange contracts	Other income (loss)		(14	)		(13	)		21			71
Equity contracts	Other income (loss)		201			(179	)		367			(380	)
Credit contracts	Other income (loss)		(54	)		109			(148	)		87
Other	Other income (loss)		-			-			-			-
Total		$	273		$	2		$	(41	)	$	(101	)

Credit-Risk-Related Contingent Features We enter into total return swap, interest rate swap, cross-currency swap and credit default swap contracts, amongst others which 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 products transaction. As of September 30, 2009, HSBC Bank USA was given credit ratings of AA and Aa3 by S&P and Moody’s respectively and was given a short-term debt rating of A-1+ and P-1 by S&P and Moody’s respectively. If our credit ratings were to fall below our current ratings, the counterparties to our derivative instruments could demand additional collateral to be posted with them. The amount of additional collateral required to be posted will depend on whether we are downgraded by one or more notches as well as whether the downgrade is in relation to our long-term or short-term ratings. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position as of September 30, 2009, is $10.4 billion for which we have posted collateral of $9.3 billion.

In the event of a credit downgrade, we do not expect our long-term ratings to go below A2 and A+ and our short-term ratings to go below P-2 and A-1 by Moody’s and S&P, respectively. The following tables summarize our obligation to post additional collateral (from the current collateral level) in certain hypothetical “commercially reasonable” downgrade scenarios. It is not appropriate to accumulate or extrapolate information presented in the table below to determine our total obligation because the information presented to determine our obligation in hypothetical rating scenarios is not mutually exclusive.

Moody’s

	Long-Term Ratings
Short-Term Ratings	Aa3		A1		A2
	(in millions)
P-1	$	-	$	133	$	223
P-2		217		324		406

S&P

	Long-Term Ratings
Short-Term Ratings	AA		AA-		A+
	(in millions)
A-1+	$	-	$	3	$	98
A-1		274		276		372

We would be required to post $488 million of additional collateral on total return swaps if we are not rated by any two of the rating agencies at least A-1 (Moody’s), A+ (Fitch), A+ (S&P), or not rated A (high) by DBRS.

30

HSBC USA Inc.

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

	September 30, 2009		December 31, 2008
	(in billions)
Interest rate:
Futures and forwards	$	228	$	282
Swaps		1,225		1,593
Options written		65		100
Options purchased		77		90
		1,595		2,065
Foreign Exchange:
Swaps, futures and forwards		478		560
Options written		35		31
Options purchased		35		32
Spot		62		36
		610		659
Commodities, equities and precious metals:
Swaps, futures and forwards		30		35
Options written		10		14
Options purchased		15		14
		55		63
Credit derivatives		906		968
Total	$	3,166	$	3,755

11.  Fair Value Option

HSBC complies with International Financial Reporting Standards (IFRSs) for its financial reporting. We have elected to apply fair value option accounting to selected financial instruments to align the measurement attributes of those instruments under U.S. GAAP and IFRSs and to simplify the accounting model applied to those financial instruments. We elected to apply the fair value option (“FVO”) reporting to commercial leveraged acquisition finance loans and related unfunded commitments, certain fixed rate long-term debt issuances and hybrid instruments which include all structured notes and structured deposits. Changes in fair value for these assets and liabilities are reported as gain (loss) on instruments designated at fair value and related derivatives in the consolidated statement of income (loss).

Loans We elected to apply FVO to all commercial leveraged acquisition finance loans and unfunded commitments. The election allows us to account for these loans and commitments at fair value which is consistent with the manner in which the instruments are managed. As of September 30, 2009, commercial leveraged acquisition finance loans and unfunded commitments of $1.1 billion carried at fair value had an aggregate unpaid principal balance of $1.3 billion. As of December 31, 2008, commercial leveraged acquisition finance loans and unfunded commitments of $874 million carried at fair value had an aggregate unpaid principal balance of $1.3 billion. These loans are included in loans held for sale in the consolidated balance sheet. Interest from these loans is recorded as interest income in the consolidated statement of income (loss). Because substantially all of the loans elected for the fair value option are floating rate assets, changes in their fair value are primarily attributable to changes in loan-specific credit risk. The components of gain (loss) related to loans designated at fair value are summarized in the table below.

As of September 30, 2009 and December 31, 2008, no loans for which the fair value option has been elected are 90 days or more past due or are on non-accrual status.

31

HSBC USA Inc.

Long-Term Debt (Own Debt Issuances) We elected to apply FVO for 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 meeting the rigorous hedge accounting requirements. We measure the fair value of the debt issuances based on inputs observed in the secondary market. Changes in fair value of these instruments are attributable to changes of our own credit risk and the interest rate.

Fixed rate debt accounted for under FVO at September 30, 2009 totaled $1.8 billion and had an aggregate unpaid principal balance of $1.8 billion. Fixed rate debt accounted for under FVO at December 31, 2008 totaled $1.7 billion and had an aggregate unpaid principal balance of $1.8 billion. Interest paid on the fixed rate debt elected for FVO is recorded as interest expense in the consolidated statement of income (loss). The components of gain (loss) related to long-term debt designated at fair value are summarized in the table below.

Hybrid Instruments Upon the adoption of accounting guidance related to certain hybrid financial instruments effective January 1, 2006, we elected to measure all hybrid instruments issued after January 1, 2006 that contain embedded derivatives which should be bifurcated from the debt host at fair value. Such election reduced the differences between IFRSs and U.S. GAAP. Fair value option accounting principles effective January 1, 2008 have incorporated accounting requirements similar to those for hybrid financial instruments and because fair value option accounting principles have a broader application than the accounting guidance for certain hybrid financial instruments, we elected to apply fair value option accounting principles to all of our hybrid instruments, inclusive of structured notes and structured deposits, issued after January 1, 2006.

As of September 30, 2009, interest bearing deposits in domestic offices included $3.9 billion of structured deposits accounted for under FVO which had an unpaid principal balance of $3.9 billion. As of December 31, 2008, interest bearing deposits in domestic offices included $2.3 billion of structured deposits accounted for under FVO which had an unpaid principal balance of $2.4 billion. Long-term debt at September 30, 2009 included structured notes of $2.8 billion accounted for under FVO which had an unpaid principal balance of $2.7 billion. Long-term debt at December 31, 2008 included structured notes of $959 million accounted for under FVO which had an unpaid principal balance of $1.2 billion. Interest incurred was recorded as interest expense in the consolidated statement of income (loss). The components of gain (loss) related to hybrid instruments designated at fair value which reflect the instruments described above are summarized in the table below.

32

HSBC USA Inc.

Components of Gain (loss) on instruments designated at fair value and related derivatives Gain (loss) on instruments designated at fair value and related derivatives includes the changes in fair value related to both interest and credit risk as well as the mark-to-market adjustment on derivatives related to the debt designated at fair value and net realized gains or losses on these derivatives. The components of gain (loss) on instruments designated at fair value and related derivatives related to the changes in fair value of fixed rate debt accounted for under FVO are as follows:

	Three Months Ended September 30,
	2009											2008
			Long-												Long-
			Term			Hybrid									Term			Hybrid
	Loans		Debt			Instruments			Total			Loans			Debt			Instruments			Total
	(in millions)
Interest rate component	$	-	$	(57	)	$	(265	)	$	(322	)	$	-		$	(58	)	$	125		$	67
Credit risk component		128		(77	)		(27	)		24			(94	)		176			(1	)		81
Total mark-to-market on financial instruments designated at fair value		128		(134	)		(292	)		(298	)		(94	)		118			124			148
Mark-to-market on the related derivatives		-		71			251			322			-			65			1			66
Net realized gain (loss) on the related derivatives		-		20			-			20			-			16			(119	)		(103	)
Total gain (loss) on related derivatives		-		91			251			342			-			81			(118	)		(37	)
Gain (loss) on instruments designated at fair value and related derivatives	$	128	$	(43	)	$	(41	)	$	44		$	(94	)	$	199		$	6		$	111

	Nine Months Ended September 30,
	2009											2008
			Long-												Long-
			Term			Hybrid									Term			Hybrid
	Loans		Debt			Instruments			Total			Loans			Debt			Instruments			Total
	(in millions)
Interest rate component	$	-	$	198		$	(509	)	$	(311	)	$	-		$	(75	)	$	155		$	80
Credit risk component		258		(291	)		37			4			(196	)		256			181			241
Total mark-to-market on financial instruments designated at fair value		258		(93	)		(472	)		(307	)		(196	)		181			336			321
Mark-to-market on the related derivatives		-		(395	)		509			114			(1	)		77			(154	)		(78	)
Net realized gain (loss) on the related derivatives		-		51			(59	)		(8	)		-			31			(153	)		(122	)
Total gain (loss) on related derivatives		-		(344	)		450			106			(1	)		108			(307	)		(200	)
Gain (loss) on instruments designated at fair value and related derivatives	$	258	$	(437	)	$	(22	)	$	(201	)	$	(197	)	$	289		$	29		$	121

33

HSBC USA Inc.

12.  Income Taxes

The following table presents our effective tax rates.

Three months ended September 30,	2009					2008
	(dollars are in millions)
Statutory federal income taxes and rates	$	80		35.0	%	$	(66	)	(35.0	)%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit and state valuation allowance		4		1.8			3		1.4
Goodwill impairment charge		-		-			19		10.1
Adjustment to valuation allowance on deferred tax assets		16		6.9			-		-
Tax exempt income		(4	)	(1.7	)		(3	)	(2.0	)
Low income housing and other tax credits		(23	)	(10.3	)		(10	)	(5.8	)
Effects of foreign operations		-		-			9		4.8
Uncertain tax provision		(1	)	(.2	)		(1	)	(.2	)
State rate change effect on net deferred tax assets		(1	)	(.6	)		(2	)	(.8	)
Other		(2	)	(1.2	)		(1	)	(.2	)
Effective tax rate	$	69		29.7	%	$	(52	)	(27.7	)%

Nine months ended September 30,	2009					2008
	(dollars are in millions)
Statutory federal income taxes and rates	$	(42	)	(35.0	)%	$	(323	)	(35.0	)%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefits and state valuation allowance		14		11.2			13		1.4
Goodwill impairment charge		-		-			19		2.1
Sale of minority stock interest		74		61.3			-		-
Adjustment to valuation allowance on deferred tax assets		93		76.7			-		-
Tax exempt income		(12	)	(9.5	)		(11	)	(1.2	)
Validation of deferred tax balances		-		-			(8	)	(.8	)
Low income housing and other tax credits		(54	)	(45.1	)		(37	)	(4.0	)
Effects of foreign operations		(1	)	(.4	)		21		2.3
Uncertain tax provision		(1	)	(1.2	)		(4	)	(.4	)
IRS audit effective settlement		(8	)	(6.8	)		-		-
State rate change effect on net deferred tax assets		(1	)	(.5	)		-		-
Other		(6	)	(4.4	)		(4	)	(.6	)
Effective tax rate	$	56		46.3	%	$	(334	)	(36.2	)%

In 2009, the effective tax rate in both periods was significantly impacted by the incremental valuation allowance on deferred tax assets and, in the nine month period, the sale of a minority interest investment as discussed below. The effective tax rate in both years was also impacted by the benefit associated with low income housing and other tax credits and in 2008, the non-deductible impairment of goodwill.

HSBC North America Consolidated Income Taxes

We are included in HSBC North America’s Consolidated Federal income tax return and in various state income tax returns. As such, we have entered into a tax allocation agreement with HSBC North America and its subsidiary

34

HSBC USA Inc.

entities (“the HNAH Group”) included in the consolidated returns which govern the current amount of taxes to be paid or received by the various entities included in the consolidated return filings. As a result, we have looked at the HNAH Group’s consolidated deferred tax assets, and various sources of taxable income, including the impact of HSBC and HNAH Group tax planning strategies, in reaching conclusions on recoverability of deferred tax assets. Where a valuation allowance is determined to be necessary at the HNAH consolidated level, such allowance is allocated to principal subsidiaries within the HNAH Group as described below in a manner that is systematic, rational and consistent with the broad principles of accounting for income taxes.

The HNAH Group evaluates deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences, tax planning strategies and any available carryback capacity.

In evaluating the need for a valuation allowance, the HNAH Group estimates future taxable income based on management approved business plans, future capital requirements and ongoing tax planning strategies, including capital support from HSBC necessary as part of such plans and strategies. The HNAH Group has continued to consider the impact of the economic environment on the North American businesses and the expected growth of the deferred tax assets. This evaluation process involves significant management judgment about assumptions that are subject to change from period to period.

In conjunction with the HNAH Group deferred tax evaluation process, based on our forecasts of future taxable income, which include assumptions about the depth and severity of further home price depreciation and the U.S. economic downturn including unemployment levels and their related impact on credit losses, we currently anticipate that our results of future operations will generate sufficient taxable income to allow us to realize our deferred tax assets. However, since the recent market conditions have created significant downward pressure and volatility on our near-term pre-tax book income, our analysis of the realizability of the deferred tax assets significantly discounts any future taxable income expected from operations and relies to a greater extent on continued capital support from our parent, HSBC, including tax planning strategies implemented in relation to such support. HSBC has indicated they remain fully committed and have the capacity to provide capital as needed to run operations, maintain sufficient regulatory capital, and fund certain tax planning strategies.

Only those tax planning strategies that are both prudent and feasible, and which management has the ability and intent to implement, are incorporated into our analysis and assessment. The primary and most significant strategy is HSBC’s commitment to reinvest excess HNAH Group capital to reduce debt funding or otherwise invest in assets to ensure that it is more likely than not that the deferred tax assets, including net operating loss carryforwards, will be utilized.

Currently, it has been determined that the HNAH Group’s primary tax planning strategy related to capital support from HSBC, in combination with other tax planning strategies, provides support for the realization of net deferred tax assets of approximately $5.9 billion for the HNAH Group. Such determination is based on HSBC’s business forecasts and assessment as to the most efficient and effective deployment of HSBC capital, most importantly including the length of time such capital will need to be maintained in the U.S. for purposes of the tax planning strategy. As it relates to the growth in the HNAH consolidated deferred tax asset, HSBC decided to limit the level and duration of excess HNAH Group capital it will reinvest in the U.S. operations in future years as part of the primary tax planning strategy.

Therefore, although a significant part of the net deferred tax assets are supported by the aforementioned tax planning strategies, it has been determined that for the residual portion of the net deferred tax assets, it is not more-likely-than-not that the expected benefits to be generated by the various tax planning strategies are sufficient to ensure full realization. As such, a valuation allowance has been recorded by the HNAH Group relative to growth in the deferred tax asset in excess of the level discussed above.

The aforementioned HNAH Group valuation allowance recorded has been allocated to its principal subsidiaries, including HSBC USA Inc. The methodology allocates the valuation allowance to the principal subsidiaries based primarily on the entity’s relative contribution to the growth of the HNAH consolidated deferred tax asset against which the valuation allowance is being recorded.

35

HSBC USA Inc.

The HNAH Group expects to record significant additional valuation allowances against further growth in the deferred tax assets through the remainder of 2009 and 2010, and perhaps longer.

If future results differ from the HNAH Group’s current forecasts or the primary tax planning strategy were to change, a valuation allowance against the remaining net deferred tax assets may need to be established which could have a material adverse effect on HSBC USA Inc.’s results of operations, financial condition and capital position.

The HNAH Group will continue to update its assumptions and forecasts of future taxable income and assess the need for such incremental valuation allowances.

Absent the capital support from HSBC and implementation of the related tax planning strategies, the HNAH Group, including HSBC USA Inc., would be required to record an additional valuation allowance against a significant part of the remaining deferred tax assets.

HSBC USA Inc. Income Taxes

We recognize deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax credits and net operating and other losses. Our net deferred tax assets, including deferred tax liabilities and valuation allowances, totaled $1.5 billion and $1.4 billion as of September 30, 2009 and December 31, 2008 respectively. The valuation allowance at September 30, 2009 and December 31, 2008 related primarily to the potential limitation on the utilization of excess foreign and other tax credits as well as foreign losses with limited possibility of recovery.

To the extent that we contribute to the growth in the HNAH Group deferred tax assets in future periods, we expect to be allocated and record a part of any HNAH Group valuation allowances in those periods.

In March 2009, as part of a corporate restructuring within HSBC’s Private Banking business, our 5.24% indirect interest in HSBC Private Bank (Suisse) S.A. (“PBRS”)was sold to HSBC Private Bank Holdings (Suisse) S.A., the majority shareholder, for cash proceeds of $350 million. A gain of $33 million was reported for book purposes during the first quarter of 2009. For U.S. tax purposes, the transaction is treated as a dividend in the amount of the sale proceeds to the extent of PBRS’ earnings and profits.

The Internal Revenue Service’s audit of our 2004 and 2005 federal income tax returns was effectively settled during the first quarter of 2009, resulting in an $8 million decrease in tax expense. We are currently under audit by various state and local tax jurisdictions, and although one or more of these audits may be concluded within the next 12 months, it is not possible to reasonably estimate the impact on our uncertain tax positions at this time. The Internal Revenue Service began its audit of our 2006 and 2007 returns in the second quarter.

36

HSBC USA Inc.

13.   Pensions and other Post-retirement Benefits

The components of pension expense for the domestic defined benefit pension plan reflected in our consolidated statement of income (loss) are shown in the table below and reflect the portion of the pension expense of the combined HSBC North America pension plan which has been allocated to HSBC USA Inc.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
				(in millions)
Service cost – benefits earned during the period	$	6		$	7		$	19		$	23
Interest cost on projected benefit obligation		18			20			55			58
Expected return on assets		(13	)		(22	)		(38	)		(67	)
Recognized losses		10			-			28			1
Partial plan termination		5			-			5			-
Pension expense	$	26		$	5		$	69		$	15

The overall increase in pension expense during 2009 was due to the amortization of a portion of the actuarial losses incurred by the plan and reduced expectations of returns on plan assets as a result of the volatile capital markets that occurred in 2008.

Effective September 30, 2009, HSBC North America voluntarily chose to allow all plan participants whose employment was terminated as a result of the strategic restructuring of its businesses between 2007 and 2009 to become fully vested in their accrued pension benefit, resulting in a partial termination of the plan. In accordance with interpretations of the Internal Revenue Service relating to partial plan terminations, plan participants who voluntarily left the employment of HSBC North America or its subsidiaries during this period will also be deemed to have vested in their accrued pension benefit through the date their employment ended. As a result, incremental pension expense of $5 million, representing our share of the partial plan termination cost, was recognized during the three months ended September 30, 2009.

Components of the net periodic benefit cost for our post-retirement benefits other than pensions are as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2009			2008		2009			2008
	(in millions)
Service cost – benefits earned during the period	$	-		$	1	$	-		$	1
Interest cost		1			1		4			4
Recognized losses		1			-		2			-
Transition amount amortization		(1	)		1		(2	)		2
Net periodic post-retirement benefit cost	$	1		$	3	$	4		$	7

37

HSBC USA Inc.

14.   Related Party Transactions

In the normal course of business, we conduct transactions with HSBC and its subsidiaries. These transactions occur at prevailing market rates and terms. All extensions of credit by HSBC Bank USA to other HSBC affiliates (other than FDIC-insured banks) are legally required to be secured by eligible collateral. The following table presents related party balances and the income and expense generated by related party transactions:

	September 30,		December 31,
	2009		2008
	(in millions)
Assets:
Cash and due from banks	$	296	$	157
Interest bearing deposits with banks		243		138
Federal funds sold and securities purchased under resale agreements		490		346
Trading assets(1)		15,569		32,445
Loans		1,839		2,586
Other		557		733
Total assets	$	18,994	$	36,405
Liabilities:
Deposits	$	8,956	$	10,285
Trading liabilities(1)		20,398		36,589
Short-term borrowings		443		1,831
Other		1,243		162
Total liabilities	$	31,040	$	48,867

⁽¹⁾ Trading assets and liabilities exclude the impact of netting which allow the offsetting of amounts relating to certain contracts if certain conditions are met.

38

HSBC USA Inc.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
			(in millions)
Income/(Expense):
Interest income	$	44	$	51	$	141	$	159
Interest expense		7		43		19		169
Net interest income (loss)	$	37	$	8	$	122	$	(10	)
HSBC affiliate income:
Fees and commissions:
HSBC Finance		2		2		7		8
HSBC Markets (USA) Inc. (“HMUS”)		5		4		14		9
Other HSBC affiliates		15		19		53		65
Gains on sales of refund anticipation loans to HSBC Finance		-		-		11		13
Other HSBC affiliates income		2		5		10		14
Total affiliate income	$	24	$	30	$	95	$	109
Support services from HSBC affiliates:
HSBC Finance	$	175	$	116	$	548	$	353
HMUS		50		54		187		166
HSBC Technology & Services (USA) Inc. (“HTSU”)		106		61		353		187
Other HSBC affiliates		56		69		140		185
Total support services from HSBC affiliates	$	387	$	300	$	1,228	$	891
Stock based compensation expense with HSBC	$	15	$	16	$	48	$	54

Transactions Conducted with HSBC Finance Corporation

•  In January 2009, we purchased the GM and UP Portfolios from HSBC Finance, with an outstanding principal balance of $12.4 billion at the time of sale, at a total net premium of $113 million. Premiums paid are amortized to interest income over the estimated life of the receivables purchased. HSBC Finance retained the customer account relationships associated with these credit card portfolios. On a daily basis we purchase all new credit card loan originations for the GM and UP Portfolios from HSBC Finance. HSBC Finance continues to service these credit card loans for us for a fee. Information regarding these loans is summarized in the table below.

•  In January 2009, we also purchased certain auto finance loans, with an outstanding principal balance of $3.0 billion from HSBC Finance at the time of sale, at a total net discount of $226 million. Discounts are amortized to interest income over the estimated life of the receivables purchased. HSBC Finance continues to service the auto finance loans for us for a fee. Information regarding these loans is summarized in the table below.

•  In July 2004, we sold the account relationships associated with $970 million of credit card receivables to HSBC Finance and on a daily basis, we purchase new originations on these credit card receivables. HSBC Finance continues to service these loans for us for a fee. Information regarding these loans is summarized in the table below.

39

HSBC USA Inc.

•  In December 2004, we purchased the private label credit card receivable portfolio as well as private label commercial and closed end loans from HSBC Finance. HSBC Finance retained the customer account relationships and by agreement we purchase on a daily basis substantially all new private label originations from HSBC Finance. HSBC Finance continues to service these loans for us for a fee. Information regarding these loans is summarized in the table below.

•  In 2003 and 2004, we purchased approximately $3.7 billion of residential mortgage loans from HSBC Finance. HSBC Finance continues to service these loans for us for a fee. Information regarding these loans is summarized in the table below.

The following table summarizes the private label card, private label commercial and closed end loans, credit card (including the GM and UP credit card portfolios), auto finance and real estate secured loans serviced for us by HSBC Finance as well as the daily loans purchased during the three and nine months ended September 30, 2009 and 2008:

	Private Label				Credit Cards
			Commercial and		General		Union				Auto		Residential
	Cards		Closed End Loans(1)		Motors		Privilege		Other		Finance		Mortgage		Total
	(in billions)
Receivables serviced by HSBC Finance:
September 30, 2009	$	14.6	$	.6	$	5.4	$	5.6	$	2.0	$	2.3	$	1.8	$	32.3
December 31, 2008		17.1		.9		-		-		2.1		-		2.1		22.2
Daily receivables purchased from HSBC Finance during the three months ended:
September 30, 2009		3.6		-		3.7		.9		1.1		-		-		9.3
September 30, 2008		4.7		-		-		-		1.2		-		-		5.9
Daily receivables purchased from HSBC Finance during the nine months ended:
September 30, 2009		11.0		-		10.8		2.7		3.2		-		-		27.7
September 30, 2008		14.2		-		-		-		3.6		-		-		17.8

⁽¹⁾ Private label commercial are included in other commercial loans and private label closed end loans are included in other consumer loans in Note 5, “Loans.”

During the three and nine months ended September 30, 2009, fees paid for servicing these loan portfolios totaled $170 million and $530 million, respectively, as compared to $107 million and $330 million during the year-ago periods.

•  Support services from HSBC affiliates include charges by HSBC Finance under various service level agreements for loan origination and servicing, including the servicing of the portfolios previously discussed, as well as other operational and administrative support. Fees paid for these services totaled $175 million and $548 million for the three and nine months ended September 30, 2009, respectively. During the three and nine months ended September 30, 2008, fees paid for these services totaled $116 million and $353 million, respectively.

•  In the second quarter of 2008, HSBC Finance launched a new program with HSBC Bank USA to sell loans originated in accordance with the Federal Home Loan Mortgage Corporation’s (“Freddie Mac”) underwriting criteria to HSBC Bank USA who then sells them to Freddie Mac under its existing Freddie Mac program. During the three months ended March 31, 2009, $51 million of real estate secured loans were purchased by HSBC Bank USA under this program. During the third quarter of 2008, $68 million of real

40

HSBC USA Inc.

estate secured loans were purchased by HSBC Bank USA under this program. This program was discontinued in February 2009 as a result of the decision to discontinue new receivable originations in HSBC Finance’s Consumer Lending business.

•  Our wholly-owned subsidiaries, HSBC Bank USA and HSBC Trust Company (Delaware), N.A. (“HTCD”), are the originating lenders for a federal income tax refund anticipation loan program for clients of third party tax preparers, which are managed by HSBC Finance. By agreement, HSBC Bank USA and HTCD process applications, fund and subsequently sell these loans to HSBC Finance. HSBC Bank USA and HTCD originated approximately $9.0 billion and $12.6 billion of loans during the nine months ended September 30, 2009 and 2008, respectively, that were sold to HSBC Finance. This resulted in gains of $11 million and $13 million during the nine months ended September 30, 2009 and 2008, respectively.

•  Certain of our consolidated subsidiaries have revolving lines of credit totaling $1.0 billion with HSBC Finance. There were no balances outstanding under any of these lines of credit at September 30, 2009 or December 31, 2008.

•  We extended a secured $1.5 billion uncommitted credit facility to HSBC Finance in December 2008. This is a 364 day credit facility and there were no balances outstanding at September 30, 2009 or December 31, 2008.

•  We extended a $1.0 billion committed credit facility to HSBC Bank Nevada, a subsidiary of HSBC Finance, in December 2008. This is a 364 day credit facility and there were no balances outstanding at September 30, 2009 or December 31, 2008.

•  We service a portfolio of residential mortgage loans owned by HSBC Finance with an outstanding principal balance of $1.6 billion and $2.1 billion at September 30, 2009 and December 31 2008, respectively. The related servicing fee income was $1 million and $6 million during the three and nine months ended September 30, 2009, respectively, and $3 million and $10 million during the three and nine months ended September 30, 2008, respectively which is included in residential mortgage banking revenue in the consolidated statement of income (loss).

•  In the third quarter of 2009, we purchased $86 million of Low Income Housing Tax Credit Investment Funds from HSBC Finance.

Transactions Conducted with HMUS and Subsidiaries

We utilize HSBC Securities (USA) Inc. (“HSI”) for broker dealer, debt and preferred stock underwriting, customer referrals, loan syndication and other treasury and traded markets related services, pursuant to service level agreements. Fees charged by HSI for broker dealer, loan syndication services, treasury and traded markets related services are included in support services from HSBC affiliates. Debt underwriting fees charged by HSI are deferred as a reduction of long-term debt and amortized to interest expense over the life of the related debt. Preferred stock issuance costs charged by HSI are recorded as a reduction of capital surplus. Customer referral fees paid to HSI are netted against customer fee income, which is included in other fees and commissions.

We have extended loans and lines, some of them uncommitted, to HMUS and its subsidiaries in the amount of $4.1 billion, of which $1.3 billion and $1.5 billion was outstanding at September 30, 2009 and December 31, 2008, respectively. Interest income on these loans and lines for the three and nine months ended September 30, 2009 totaled $8 million and $28 million, respectively. Interest income for the three and nine months ended September 30, 2008 totaled $12 million and $28 million, respectively.

Other Transactions with HSBC Affiliates

HSBC North America extended a $1.0 billion senior note to us in August 2009. This is a five year floating rate note which matures on August 28, 2014 with interest due quarterly beginning in November 2009.

41

HSBC USA Inc.

In March 2009, we sold an equity investment in HSBC Private Bank (Suisse) SA to another HSBC affiliate for cash, resulting in a gain of $33 million in the first quarter of 2009.

We have an unused line of credit with HSBC Bank plc of $2.5 billion at September 30, 2009 and December 31, 2008.

We have extended loans and lines of credit to various other HSBC affiliates totaling $1.7 billion, of which $550 million and $715 million was outstanding at September 30, 2009 and December 31, 2008, respectively. Interest income on these lines for the three and nine months ended September 30, 2009 totaled $3 million and $9 million, respectively. Interest income for the three and nine months ended September 30, 2008 totaled $6 million and $9 million, respectively.

Historically, we have provided support to several HSBC affiliate sponsored asset backed commercial paper (“ABCP”) conduits by purchasing A-1/P-1 rated commercial paper issued by them. At September 30, 2009 and December 31, 2008, no ABCP was held.

We routinely enter into derivative transactions with HSBC Finance and other HSBC affiliates as part of a global HSBC strategy to offset interest rate or other market risks associated with debt issues and derivative contracts with unaffiliated third parties. The notional value of derivative contracts related to these contracts was approximately $693 billion and $904 billion at September 30, 2009 and December 31, 2008, respectively. The net credit exposure (defined as the recorded fair value of derivative receivables) related to the contracts was approximately $16 billion and $32 billion at September 30, 2009 and December 31, 2008, respectively. Our Global Banking and Markets business accounts 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.

In December 2008, HSBC Bank USA entered into derivative transactions with another HSBC affiliate to offset the risk associated with the contingent “loss trigger” options embedded in certain leveraged super senior (LSS) tranched credit default swaps. These transactions are expected to significantly reduce income volatility for HSBC Bank USA by transferring the volatility to the affiliate. The recorded fair value of derivative assets related to these derivative transactions was approximately $235 million and $1,108 million at September 30, 2009 and December 31, 2008, respectively.