HSBC Finance Corp - FORM 10-Q

Attached files

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EX-32 - EXHIBIT 32 - HSBC Finance Corp	hbio63017ex32.htm
EX-31 - EXHIBIT 31 - HSBC Finance Corp	hbio63017ex31.htm
EX-12 - EXHIBIT 12 - HSBC Finance Corp	hbio63017ex12.htm

UNITED STATES SECURITIES AND

EXCHANGE COMMISSION

Washington, D.C. 20549

___________________

FORM 10-Q

___________________

(Mark One)



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

For the quarterly period ended June 30, 2017



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

For the transition period from to

Commission file number 001-08198

___________________

HSBC FINANCE CORPORATION

(Exact name of registrant as specified in its charter)



Delaware		86-1052062
(State of incorporation)		(I.R.S. Employer Identification No.)
1421 W. Shure Drive, Suite 100, Arlington Heights, IL		60004
(Address of principal executive offices)		(Zip Code)

(224) 880-7000

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 ý No ¨

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 ý No ¨

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



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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

At July 28, 2017, there were 68 shares of the registrant’s common stock outstanding, all of which are owned by HSBC North America Holdings Inc.

HSBC Finance Corporation

Form 10-Q

TABLE OF CONTENTS



Part/Item No
Part I		Page
Item 1.	Financial Statements (Unaudited):
	Consolidated Statement of Income (Loss)	3
	Consolidated Statement of Comprehensive Income (Loss)	4
	Consolidated Balance Sheet	5
	Consolidated Statement of Changes in Equity	6
	Consolidated Statement of Cash Flows	7
	Notes to Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations:
	Forward-Looking Statements	32
	Executive Overview	33
	Balance Sheet Review	36
	Results of Operations	36
	Credit Quality	43
	Liquidity and Capital Resources	47
	Fair Value	49
	Risk Management	50
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 4.	Controls and Procedures	54

Part II		Page
Item 1.	Legal Proceedings	54
Item 5.	Other Information	54
Item 6.	Exhibits, Financial Statement Schedules	56
Signatures		57

HSBC Finance Corporation

PART I

Item 1. Financial Statements.

CONSOLIDATED STATEMENT OF INCOME (LOSS) (UNAUDITED)



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in millions)
Interest income	$	86		$	286		$	193		$	628
Interest expense on debt held by:
Non-affiliates	58			94			120			201
HSBC affiliates	11			52			39			105
Interest expense	69			146			159			306
Net interest income	17			140			34			322
Provision for credit losses	—			12			—			49
Net interest income after provision for credit losses	17			128			34			273
Other revenues:
Derivative related income (expense)	1			3			3			(112		)
Gain on debt designated at fair value and related derivatives	4			16			16			40
Servicing and other fees from (to) HSBC affiliates	—			2			(27		)	6
Lower of amortized cost or fair value adjustment on receivables held for sale	58			(56		)	171			(111		)
Gain (loss) on sale of real estate secured receivables	(2		)	423			615			423
Other income	2			4			9			13
Total other revenues	63			392			787			259
Operating expenses:
Salaries and employee benefits	10			34			36			72
Occupancy and equipment expenses, net	5			4			7			10
Real estate owned expenses	—			2			1			5
Support services from HSBC affiliates	21			38			44			80
Provision for securities litigation liability	—			575			—			575
Other expenses	25			60			40			109
Total operating expenses	61			713			128			851
Income (loss) from continuing operations before income tax	19			(193		)	693			(319		)
Income tax expense (benefit)	2			(63		)	258			(119		)
Income (loss) from continuing operations	17			(130		)	435			(200		)
Discontinued operations:
Income (loss) from discontinued operations before income tax	(3		)	(2		)	3			(9		)
Income tax expense (benefit)	(1		)	2			1			(1		)
Income (loss) from discontinued operations	(2		)	(4		)	2			(8		)
Net income (loss)	$	15		$	(134	)	$	437		$	(208	)

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

HSBC Finance Corporation

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in millions)
Net income (loss)	$	15		$	(134	)	$	437		$	(208	)
Other comprehensive income (loss), net of tax:
Net change in unrealized gains (losses), net of tax, on:
Fair value option debt attributable to credit spread	—			—			(5		)	—
Derivatives designated as cash flow hedges	—			7			—			15
Pension and postretirement benefit plan adjustments	(9		)	(2		)	(10		)	(3		)
Other comprehensive income (loss), net of tax	(9		)	5			(15		)	12
Total comprehensive income (loss)	$	6		$	(129	)	$	422		$	(196	)

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

HSBC Finance Corporation

CONSOLIDATED BALANCE SHEET (UNAUDITED)



	June 30, 2017			December 31, 2016
	(in millions, except share data)
Assets
Cash	$	50		$	128
Interest bearing deposits with banks	—			1,500
Securities purchased under agreements to resell	5,269			2,392
Receivables held for sale (including $428 million and $750 million at June 30, 2017 and December 31, 2016, respectively, collateralizing long-term debt)	1,346			5,674
Real estate owned	19			31
Deferred income taxes, net	1,662			2,897
Bank owned life insurance	823			817
Other assets	1,149			427
Assets of discontinued operations	1			16
Total assets	$	10,319		$	13,882
Liabilities
Debt:
Due to affiliates (including $487 million and $485 million at June 30, 2017 and December 31, 2016, respectively, carried at fair value)	$	799		$	3,300
Long-term debt (including $250 million and $1.3 billion at June 30, 2017 and December 31, 2016, respectively, carried at fair value and $191 million and $404 million at June 30, 2017 and December 31, 2016, respectively, collateralized by receivables)	3,071			4,340
Total debt	3,870			7,640
Derivative related liabilities	—			12
Liability for postretirement benefits	127			129
Other liabilities	473			610
Liabilities of discontinued operations	34			57
Total liabilities	4,504			8,448
Equity
Redeemable preferred stock:
Series C ($0.01 par value, 1,000 shares authorized; 1,000 shares issued and outstanding at June 30, 2017 and December 31, 2016)	1,000			1,000
Common equity:
Common stock ($0.01 par value, 100 shares authorized; 68 shares issued and outstanding at June 30, 2017 and December 31, 2016)	—			—
Additional paid-in capital	23,093			23,138
Accumulated deficit	(18,268		)	(18,728		)
Accumulated other comprehensive income (loss)	(10		)	24
Total common equity	4,815			4,434
Total equity	5,815			5,434
Total liabilities and equity	$	10,319		$	13,882

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

HSBC Finance Corporation

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)



Six Months Ended June 30,	2017			2016
	(in millions)
Preferred stock
Balance at beginning of period	$	1,000		$	1,575
Redemption of Series B preferred stock	—			(575		)
Balance at end of period	1,000			1,000
Common equity
Common stock
Balance at beginning and end of period	—			—
Additional paid-in capital
Balance at beginning of period	23,138			23,245
Dividends on preferred stock	(43		)	(63		)
Employee benefit plans, including transfers and other	(2		)	1
Balance at end of period	23,093			23,183
Accumulated deficit
Balance at beginning of period, as previously reported	(18,728		)	(18,199		)
Reclassification to accumulated other comprehensive income (loss) of cumulative effect adjustment to initially apply new accounting guidance for fair value option debt, net of tax	19			—
Cumulative effect adjustment to initially apply new accounting guidance for previously unrecognized tax benefits on share based plans, net of tax	4			—
Balance at beginning of period, adjusted	(18,705		)	(18,199		)
Net income (loss)	437			(208		)
Balance at end of period	(18,268		)	(18,407		)
Accumulated other comprehensive income (loss)
Balance at beginning of period, as previously reported	24			14
Reclassification from accumulated deficit of cumulative effect adjustment to initially apply new accounting guidance for fair value option debt, net of tax	(19		)	—
Balance at beginning of period, adjusted	5			14
Other comprehensive income (loss)	(15		)	12
Balance at end of period	(10		)	26
Total common equity at end of period	4,815			4,802
Total equity at end of period	$	5,815		$	5,802

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

HSBC Finance Corporation

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

Six Months Ended June 30,	2017			2016
	(in millions)
Cash flows from operating activities
Net income (loss)	$	437		$	(208	)
Income (loss) from discontinued operations	2			(8		)
Income (loss) from continuing operations	435			(200		)
Adjustments to reconcile income (loss) from continuing operations to net cash used in operating activities:
Provision for credit losses	—			49
Lower of amortized cost or fair value adjustment on receivables held for sale	(171		)	111
Gain on sale of real estate secured receivables	(615		)	(423		)
Provision for securities litigation liability	—			575
Mark-to-market on debt designated at fair value and related derivatives	—			(13		)
Foreign exchange and derivative movements on long-term debt and net change in non-fair value option related derivative assets and liabilities	42			114
Net change in other assets	513			(102		)
Net change in other liabilities	(137		)	(28		)
Other, net	20			8
Cash provided by operating activities – continuing operations	87			91
Cash used in operating activities – discontinued operations	(6		)	(26		)
Cash provided by operating activities	81			65
Cash flows from investing activities
Net change in securities purchased under agreements to resell	(2,877		)	(47		)
Net change in interest bearing deposits with banks	1,500			—
Receivables:
Net collections	231			962
Proceeds from sales of receivables	4,863			4,667
Proceeds from sales of real estate owned	29			74
Sales of properties and equipment, net	—			2
Cash provided by investing activities – continuing operations	3,746			5,658
Cash provided by investing activities – discontinued operations	—			—
Cash provided by investing activities	3,746			5,658

HSBC Finance Corporation

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (Continued)

Six Months Ended June 30,	2017			2016
	(in millions)
Cash flows from financing activities
Debt:
Net change in due to affiliates	(2,503		)	(501		)
Long-term debt retired	(1,332		)	(4,439		)
Debt prepayment fees	(28		)	—
Redemption of preferred stock	—			(575		)
Dividends	(43		)	(63		)
Cash used in financing activities – continuing operations	(3,906		)	(5,578		)
Cash used in financing activities – discontinued operations	—			—
Cash used in financing activities	(3,906		)	(5,578		)
Net change in cash	(79		)	145
Cash at beginning of period⁽¹⁾	135			136
Cash at end of period⁽²⁾	$	56		$	281
Supplemental Noncash Investing and Capital Activities:
Fair value of properties added to real estate owned	$	16		$	44
Transfer of receivables to held for sale	—			293


⁽¹⁾	Cash at beginning of period includes $7 million and $12 million for discontinued operations at January 1, 2017 and 2016, respectively.


⁽²⁾	Cash at end of period includes $6 million and $10 million for discontinued operations at June 30, 2017 and 2016, respectively.

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

HSBC Finance Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



Note		Page	Note		Page
1	Organization and Basis of Presentation	9	8	Pension and Other Postretirement Benefits	20
2	Receivables Held for Sale	10	9	Related Party Transactions	21
3	Troubled Debt Restructures and Nonperforming Receivables	13	10	Variable Interest Entities	24
4	Credit Loss Reserves	14	11	Fair Value Measurements	24
5	Fair Value Option	15	12	Litigation and Regulatory Matters	29
6	Derivative Financial Instruments	16	13	New Accounting Pronouncements	30
7	Accumulated Other Comprehensive Income (Loss)	19


1.	Organization and Basis of Presentation

HSBC Finance Corporation is a wholly owned subsidiary of HSBC North America Holdings Inc. ("HSBC North America"), which is an indirect, wholly-owned subsidiary of HSBC Holdings plc ("HSBC" and, together with its subsidiaries, "HSBC Group"). The accompanying unaudited interim consolidated financial statements of HSBC Finance Corporation and its subsidiaries 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. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods have been made. HSBC Finance Corporation and its subsidiaries 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, 2016 (the "2016 Form 10-K"). Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

The consolidated financial statements have been prepared on the basis that we will continue as a going concern. Such assertion contemplates our receivable sales program, the significant losses recognized in recent years and the challenges we anticipate to our operating results under prevailing and forecasted economic and business conditions. HSBC continues to be fully committed and has the capacity to continue to provide the necessary capital and liquidity to fund continuing operations.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. At June 30, 2017, our consolidated balance sheet was impacted by a reclassification associated with an out of period adjustment that was recorded in the first quarter of 2017 which increased our current tax asset and reduced our deferred tax asset balance by $36 million. There was no impact to our consolidated statement of income (loss).

Unless otherwise noted, information included in these notes to the consolidated financial statements relates to continuing operations for all periods presented. See Note 3, "Discontinued Operations," in our 2016 Form 10-K for further details of our discontinued operations. Interim results should not be considered indicative of results in future periods.

We have one segment, Consumer, which consists of the run-off real estate secured receivable portfolio of our Consumer Lending and Mortgage Services businesses. As there are no reporting differences between our consolidated results and our segment results, we do not separately report segment results.

In June 2017, we received an interest payment from the Internal Revenue Service ("IRS") of $37 million related to the resolution of an IRS appeals matter involving the netting of under-payments and over-payments for tax years 1995 through 2009. The interest payment was recorded in the second quarter of 2017 as a component of interest income.

HSBC Finance Corporation


2.	Receivables Held for Sale

As discussed in prior filings, we established a receivable sales program in 2013 and have been engaged in an on-going evaluation of our operations as we seek to optimize our risk profile and cost structure as well as our liquidity, capital and funding requirements. As part of this on-going evaluation, in September 2016, we transferred all remaining real estate secured receivables classified as held for investment to held for sale. As a result, at June 30, 2017 and December 31, 2016, our entire receivable portfolio is classified as held for sale. Receivables held for sale, which are carried at the lower of amortized cost or fair value, are comprised of the following:



	June 30, 2017		December 31, 2016
	(in millions)
Real estate secured receivables held for sale:
First lien	$	1,302	$	4,699
Second lien	44		975
Total real estate secured receivables held for sale⁽¹⁾⁽²⁾	$	1,346	$	5,674

⁽¹⁾

At June 30, 2017 and December 31, 2016, receivables held for sale includes $428 million and $750 million, respectively, of closed-end real estate secured receivables which are part of a collateralized funding transaction. These receivables will be sold when they are contractually released as collateral under the public trust and become available for sale. See Note 10, "Variable Interest Entities," for further discussion of our collateralized funding transactions.


⁽²⁾	At June 30, 2017 and December 31, 2016, contractually delinquent real estate secured receivables held for sale includes $172 million and $235 million, respectively, that are in the process of foreclosure.

We continue to make progress in our strategy to run-off and sell our real estate secured receivable portfolio. The following table summarizes receivables sold to third party investors during the three and six months ended June 30, 2017 and 2016.



	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017		2016
	(in millions)
Unpaid principal balance at the time of sale	$	621		$	4,722	$	4,984	$	4,722

Aggregate cash consideration received	$	556		$	4,667	$	4,863	$	4,667
Aggregate carrying value at the time of sale	554			4,219		4,219		4,219
Transaction costs	4			25		29		25
Gain (loss) on sale of real estate secured receivables	$	(2	)	$	423	$	615	$	423

HSBC Finance Corporation

The following table summarizes the activity in receivables held for sale during the three and six months ended June 30, 2017 and 2016:



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in millions)
Real estate secured receivables held for sale at beginning of period	$	1,911		$	8,185		$	5,674		$	8,265
Transfer of real estate secured receivables into held for sale at the lower of amortized cost or fair value⁽¹⁾⁽²⁾	—			63			—			293
Real estate secured receivable sales	(554		)	(4,219		)	(4,219		)	(4,219		)
Lower of amortized cost or fair value adjustment on real estate secured receivables held for sale subsequent to initial transfer to held for sale	58			(54		)	171			(105		)
Carrying value of real estate secured receivables held for sale transferred to real estate owned ("REO")	(6		)	(20		)	(17		)	(34		)
Carrying value of real estate secured receivables held for sale settled through short sale	(7		)	(10		)	(15		)	(18		)
Change in real estate secured receivable balance, including collections	(56		)	(149		)	(248		)	(386		)
Real estate secured receivables held for sale at end of period⁽³⁾	$	1,346		$	3,796		$	1,346		$	3,796


⁽¹⁾	During the three and six months ended June 30, 2016, the initial lower of amortized cost or fair value adjustment recorded on receivables transferred into held for sale totaled $8 million and $25 million, respectively.


⁽²⁾	Amount includes any accrued interest associated with the receivable.


⁽³⁾	Real estate secured receivables held for sale in the table above are presented net of the valuation allowance.

During the three and six months ended June 30, 2016, we transferred real estate secured receivables to held for sale with an unpaid principal balance (excluding accrued interest) of approximately $76 million and $358 million, respectively, at the time of transfer. The carrying value of these receivables prior to transfer after considering the fair value of the property less cost to sell was approximately $75 million and $342 million, respectively, including accrued interest. Credit loss reserves associated with these receivables totaled $4 million and $24 million, respectively, at the time of transfer to held for sale. During the three and six months ended June 30, 2016, we recorded an initial lower of amortized cost or fair value adjustment of $8 million and $25 million, respectively. Of this amount, $6 million and $19 million, respectively, were attributed to credit factors and recorded as a component of the provision for credit losses in the consolidated statement of income (loss) and $2 million and $6 million, respectively, were attributable to non-credit factors and recorded as a component of other revenues in the consolidated statement of income (loss).

The following table provides a rollforward of our valuation allowance for the three and six months ended June 30, 2017 and 2016. See Note 11, "Fair Value Measurements," for a discussion of the factors impacting the fair value of these receivables.



	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017			2016
	(in millions)
Balance at beginning of period	$	61		$	86	$	174		$	13
Initial valuation allowance for real estate secured receivables transferred to held for sale during the period	—			2		—			6
Increase (decrease) in valuation allowance resulting from changes in fair value	(55		)	62		(163		)	130
Change in valuation allowance for collections, charged-off, transferred to REO or short sale	(3		)	—		(8		)	1
Balance at end of period	$	3		$	150	$	3		$	150

HSBC Finance Corporation

The following table summarizes the components of the lower of amortized cost or fair value adjustment during the three and six months ended June 30, 2017 and 2016:



	Lower of Amortized Cost or Fair Value Adjustments Associated With
(Income)/Expense	Fair Value			Settlement⁽¹⁾			Total
	(in millions)
Three Months Ended June 30, 2017:
Lower of amortized cost or fair value adjustment recorded through other revenues⁽²⁾	$	(55	)	$	(3	)	$	(58	)
Total lower of amortized cost or fair value adjustment	$	(55	)	$	(3	)	$	(58	)
Three Months Ended June 30, 2016:
Lower of amortized cost or fair value adjustments recorded as a component of:
Provision for credit losses⁽³⁾	$	6		$	—		$	6
Other revenues:
Initial lower of amortized cost or fair value adjustment⁽⁴⁾	2			—			2
Subsequent to initial transfer to held for sale	62			(8		)	54
Lower of amortized cost or fair value adjustment recorded through other revenues	64			(8		)	56
Total lower of amortized cost or fair value adjustment	$	70		$	(8	)	$	62
Six Months Ended June 30, 2017:
Lower of amortized cost or fair value adjustment recorded through other revenues⁽²⁾	$	(163	)	$	(8	)	$	(171	)
Total lower of amortized cost or fair value adjustment	$	(163	)	$	(8	)	$	(171	)
Six Months Ended June 30, 2016:
Lower of amortized cost or fair value adjustments recorded as a component of:
Provision for credit losses⁽³⁾	$	19		$	—		$	19
Other revenues:
Initial lower of amortized cost or fair value adjustment⁽⁴⁾	6			—			6
Subsequent to initial transfer to held for sale	130			(25		)	105
Lower of amortized cost or fair value adjustment recorded through other revenues	136			(25		)	111
Total lower of amortized cost or fair value adjustment	$	155		$	(25	)	$	130


⁽¹⁾	Reflects receivable settlements due to either receivable payoffs (including short sales) or transfers of receivables to REO and reflects either a reversal of the non-credit fair value adjustment previously recorded on these receivables or an additional lower of amortized cost or fair value adjustment required at the time of settlement.


⁽²⁾	As all of our receivables are classified as held for sale at June 30, 2017 and December 31, 2016, for the three and six months ended June 30, 2017 and for all future periods, any lower of amortized cost or fair value adjustments will relate to either changes in fair value subsequent to classification as held for sale or settlements of receivables as discussed above.


⁽³⁾	Represents the portion of the initial lower of amortized cost or fair value adjustment attributable to credit factors which are recorded as provision for credit losses in the consolidated statement of income (loss).


⁽⁴⁾	Represents the portion of the initial lower of amortized cost or fair value adjustment attributable to non-credit factors which are recorded as a component of total other revenues in the consolidated statement income (loss) as it reflects the impact on value caused by current marketplace conditions including changes in interest rates.

During the three and six months ended June 30, 2017, we reversed $55 million and $163 million, respectively, of the lower of amortized cost or fair value adjustment recorded in prior periods related to changes in fair value which was reflected as a component of total other revenues in the consolidated statement of income (loss). This reversal of the lower of amortized cost or fair value adjustment recorded in prior periods reflects fair value changes resulting from aggregating all receivables held for sale into pools based on the marketing strategy for the remainder of 2017 as well as improvements in the fair value of these receivables during the first half of 2017. The fair value of receivables held for sale is determined based on an aggregation of receivables into pools either by similar risk characteristics or by receivable pools being marketed.

During the three and six months ended June 30, 2016, we recorded an additional lower of amortized cost or fair value adjustment of $62 million and $130 million, respectively, related to changes in fair value as a result of a change in the estimated pricing on specific pools of receivables.

HSBC Finance Corporation


3.	Troubled Debt Restructures and Nonperforming Receivables

Troubled Debt Restructurings We report substantially all loans modified as a result of a financial difficulty as troubled debt restructurings ("TDR Loans"), regardless of whether the modification was permanent or temporary, including all modifications with trial periods. Additionally, we report as TDR Loans all re-ages, except first time early stage delinquency re-ages where the customer has not been granted a prior re-age or modification. TDR Loans also include loans discharged under Chapter 7 bankruptcy and not re-affirmed. TDR Loans are considered to be impaired loans regardless of their accrual status.

Modifications for real estate secured receivables include changes to the terms of the loan and have historically included, but were not limited to, a change in interest rate, an extension of the amortization period, a reduction in payment amount, partial forgiveness or deferment of principal or other loan covenants. Beginning May 1, 2017, we revised our modification program to only include changes in interest rates. Interest rate reductions lower the amount of interest income we are contractually entitled to receive for a period of time in future periods. By lowering the interest rate, we believe we are able to increase the amount of cash flow that we expect to ultimately collect from the loan, given the borrower's financial condition. Re-aging is an account management action that results in the resetting of the contractual delinquency status of an account to current which generally requires the receipt of two qualifying payments.

The following table presents information about our TDR Loans at June 30, 2017 and December 31, 2016. As all of our TDR Loans are classified as held for sale as of June 30, 2017 and December 31, 2016 and carried at the lower of amortized cost or fair value, there are no credit loss reserves associated with TDR Loans.



	June 30, 2017		December 31, 2016
	(in millions)
Carrying value	$	794	$	1,691
Unpaid principal balance⁽¹⁾	973		2,323


⁽¹⁾	At June 30, 2017 and December 31, 2016, the unpaid principal balance reflected above includes $160 million and $271 million, respectively, which have received a reduction in the unpaid principal balance as part of an account management action.

The following table provides additional information about the average balance and interest income recognized on TDR Loans.



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(in millions)
Average balance of TDR Loans	$	1,046	$	5,654	$	1,250	$	6,589
Interest income recognized on TDR Loans	13		93		33		250

Nonperforming Receivables The following table summarizes the status of receivables held for sale.



	Accruing Receivables		Nonaccrual Receivables⁽¹⁾		Total
	(in millions)
At June 30, 2017	$	1,099	$	247	$	1,346
At December 31, 2016	5,293		381		5,674

⁽¹⁾

Nonaccrual receivables are all receivables which are 90 or more days contractually delinquent as well as second lien receivables (regardless of delinquency status) where the first lien receivable that we own or service is 90 or more days contractually delinquent. Nonaccrual receivables do not include receivables which have made qualifying payments and have been re-aged such that the contractual delinquency status has been reset to current. If a re-aged receivable subsequently experiences payment default and becomes 90 or more days contractually delinquent, it will be reported as nonaccrual. Nonaccrual receivables do not include receivables totaling $183 million and $252 million at June 30, 2017 and December 31, 2016, respectively, which are less than 90 days contractually delinquent and not accruing interest.

HSBC Finance Corporation

The following table provides additional information on nonaccrual receivables:



Six Months Ended June 30,	2017		2016
	(in millions)
Interest income that would have been recorded if the nonaccrual receivable had been current in accordance with contractual terms during the period	$	14	$	41
Interest income that was recorded on nonaccrual receivables during the period	2		9


4.	Credit Loss Reserves

As discussed in prior filings, subsequent to the third quarter of 2016, all of our receivables are classified as held for sale and carried at the lower of amortized cost or fair value. As a result, we did not have any credit loss reserves during the three and six months ended June 30, 2017. The table below summarizes the changes in credit loss reserves for real estate secured receivables held for investment and the related receivable balance during the three and six months ended June 30, 2016.



	Real Estate Secured
	First Lien			Second Lien			Total
	(in millions)
Three Months Ended June 30, 2016:
Credit loss reserve rollforward:
Credit loss reserve balances at beginning of period	$	109		$	163		$	272
Provision for credit losses⁽¹⁾	9			3			12
Net charge-offs:
Charge-offs⁽¹⁾⁽²⁾	(16		)	(16		)	(32		)
Recoveries	—			2			2
Total net charge-offs	(16		)	(14		)	(30		)
Credit loss reserve balance at end of period	$	102		$	152		$	254

Six Months Ended June 30, 2016:
Credit loss reserve rollforward:
Credit loss reserve balance at beginning of period	$	137		$	174		$	311
Provision for credit losses⁽¹⁾	32			17			49
Net charge-offs:
Charge-offs⁽¹⁾⁽²⁾	(69		)	(42		)	(111		)
Recoveries	2			3			5
Total net charge-offs	(67		)	(39		)	(106		)
Credit loss reserve balance at end of period	$	102		$	152		$	254

Reserve components:
Collectively evaluated for impairment	$	35		$	27		$	62
Individually evaluated for impairment⁽³⁾	57			125			182
Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell	10			—			10
Total credit loss reserves	$	102		$	152		$	254

Receivables held for investment:
Collectively evaluated for impairment	$	5,735		$	1,048		$	6,783
Individually evaluated for impairment⁽³⁾	511			598			1,109
Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell	240			28			268
Total receivables held for investment	$	6,486		$	1,674		$	8,160

HSBC Finance Corporation

⁽¹⁾

The provision for credit losses and charge-offs for real estate secured receivables during the three and six months ended June 30, 2016 included $6 million and$19 million, respectively, related to the initial lower of amortized cost or fair value adjustment attributable to credit factors for receivables transferred to held for sale. See Note 2, "Receivables Held for Sale," for additional information.

⁽²⁾

For collateral dependent receivables that were transferred to held for sale, existing credit loss reserves at the time of transfer were recognized as a charge-off. We transferred to held for sale certain real estate secured receivables during the three and six months ended June 30, 2016 and, accordingly, we recognized the existing credit loss reserves on these receivables as additional charge-off totaling $4 million and $24 million, respectively.

⁽³⁾

These amounts represent TDR Loans for which we evaluated reserves using a discounted cash flow methodology. Each loan was individually identified as a TDR Loan and then grouped together with other TDR Loans with similar characteristics. The discounted cash flow impairment analysis was then applied to these groups of TDR Loans. The receivable balance above excluded TDR Loans held for investment that were carried at the lower of amortized cost or fair value of the collateral less cost to sell which totaled $213 million at June 30, 2016. The reserve component above excluded credit loss reserves totaling $9 million at June 30, 2016 for TDR Loans held for investment that were carried at the lower of amortized cost or fair value of the collateral less cost to sell.


5.	Fair Value Option

We have elected the fair value option ("FVO") for certain issuances of our fixed rate debt in order to align our accounting treatment with that of HSBC under International Financial Accounting Standards ("IFRSs"). Electing FVO accounting for the same issuances of fixed rate debt under U.S. GAAP and IFRSs, allows us to simplify the accounting model applied to these fixed rate debt issuances. The following table summarizes fixed rate debt issuances accounted for under FVO:



	June 30, 2017		December 31, 2016
	(in millions)
Fixed rate debt accounted for under FVO reported in:
Long-term debt	$	250	$	1,317
Due to affiliates	487		485
Total fixed rate debt accounted for under FVO	$	737	$	1,802

Unpaid principal balance of fixed rate debt accounted for under FVO⁽¹⁾	$	665	$	1,712


⁽¹⁾	Balance includes a foreign currency translation adjustment relating to our foreign denominated FVO debt which decreased the debt balance by $11 million at June 30, 2017 and decreased the debt balance by $310 million at December 31, 2016.

We determine the fair value of the fixed rate debt accounted for under FVO through the use of a third party pricing service. Such fair value represents the full market price (including credit and interest rate impacts) based on observable market data for the same or similar debt instruments. See Note 11, "Fair Value Measurements," for a description of the methods and significant assumptions used to estimate the fair value of our fixed rate debt accounted for under FVO.

The following table summarizes the components of the gain on debt designated at fair value and related derivatives reflected in the consolidated statement of income (loss) for the three and six months ended June 30, 2017 and 2016:



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in millions)
Mark-to-market on debt designated at fair value⁽¹⁾:
Interest rate component	$	8		$	12		$	26		$	18
Credit risk component⁽²⁾	—			8			—			19
Total mark-to-market on debt designated at fair value	8			20			26			37
Mark-to-market on the related derivatives⁽¹⁾⁽³⁾	(11		)	(15		)	(26		)	(24		)
Net realized gains on the related derivatives⁽¹⁾	7			11			16			27
Gain on debt designated at fair value and related derivatives	$	4		$	16		$	16		$	40


⁽¹⁾	The derivatives associated with debt designated at fair value are economic hedges but do not qualify for hedge accounting. See Note 6, "Derivative Financial Instruments," for additional discussion of these non-qualifying hedges.

HSBC Finance Corporation

⁽²⁾

As discussed below and more fully in Note 13, "New Accounting Pronouncements," beginning January 1, 2017, the fair value movement on fair value option debt attributable to our credit spreads is recorded in common equity as a component of other comprehensive income (loss). For the three and six months ended June 30, 2017, the fair value movement on fair value option debt attributable to our credit spreads was a gain of less than $1 million and loss of $8 million, respectively.

⁽³⁾

Mark-to-market on debt designated at fair value and related derivatives excludes market value changes due to fluctuations in foreign currency exchange rates. Foreign currency translation gains (losses) recorded in derivative related income (expense) associated with debt designated at fair value was a loss of $51 million and a gain of $20 million for the three months ended June 30, 2017 and 2016, respectively, and a loss of $72 million and a loss of $46 million for the six months ended June 30, 2017 and 2016, respectively. Offsetting gains (losses) recorded in derivative related income (expense) associated with the related derivatives was a gain of $51 million and a loss of $20 million for the three months ended June 30, 2017 and 2016, respectively and a gain of $72 million and a gain of $46 million for the six months ended June 30, 2017 and 2016, respectively.

Prior to January 1, 2017, changes in the fair value of fair value option debt and the value of the related derivatives, including changes in fair value related to interest rates, credit and other risks as well as any realized gains or losses on those derivatives, were reported in gain on debt designated at fair value and related derivatives in the consolidated statement of income (loss). As discussed more fully in Note 13, "New Accounting Pronouncements," beginning January 1, 2017, the fair value movement on fair value debt attributable to our credit spreads is recorded in common equity as a component of other comprehensive income.

Differences arise between the movement in the fair value of the debt and the fair value of the related derivative due to the different credit characteristics and differences in the calculation of fair value for debt and derivatives. The size and direction of the accounting consequences of such changes can be volatile from period to period but do not alter the cash flows intended as part of our interest rate management strategy. On a cumulative basis, we have recorded fair value option adjustments which increased the value of our long-term debt and due to affiliates balances in total by $72 million and $90 million at June 30, 2017 and December 31, 2016, respectively.


6.	Derivative Financial Instruments

Our business activities involve analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Accordingly, we have comprehensive risk management policies to address potential financial risks, which include credit risk, liquidity risk, market risk, and operational risks. Our risk management policy is designed to identify and analyze these risks, to set appropriate limits and controls, and to monitor the risks and limits continually by means of reliable and up-to-date administrative and information systems. Our risk management policies are primarily carried out in accordance with practice and limits set by the HSBC Group Management Board. The HSBC North America Asset Liability Committee ("HSBC North America ALCO") meets regularly to review risks and approve appropriate risk management strategies within the limits established by the HSBC Group Management Board. Additionally, the Risk Committee of our Board of Directors receives regular reports on our interest rate and liquidity risk positions in relation to the established limits. In accordance with the policies and strategies established by HSBC North America ALCO, in the normal course of business, we historically entered into various transactions involving derivative financial instruments. These derivative financial instruments primarily are used as economic hedges to manage risk.

Objectives for Holding Derivative Financial Instruments Market risk (which includes interest rate and foreign currency exchange risks) is the possibility that a change in underlying market rate inputs will cause a financial instrument to decrease in value or become more costly to settle. Prior to our ceasing originations in our Consumer Lending business and ceasing loan purchase activities in our Mortgage Services business, customer demand for our loan products shifted between fixed rate and floating rate products, based on market conditions and preferences. These shifts in loan products resulted in different funding strategies and produced different interest rate risk exposures. Additionally, the mix of receivables on our balance sheet and the corresponding market risk is changing as we manage the liquidation of our receivable portfolio. We maintain an overall risk management strategy that utilizes derivative financial instruments to mitigate our exposure to fluctuations caused by changes in currency exchange rates related to our debt liabilities. We manage our exposure to foreign currency exchange risk primarily through the use of cross currency interest rate swaps. Historically, we managed our exposure to interest rate risk through the use of interest rate swaps with the main objective of managing the interest rate volatility due to a mismatch in the duration of our assets and liabilities.

We have entered into currency swaps to convert both principal and interest payments on debt issued in one currency to the appropriate functional currency. Interest rate swaps are contractual agreements between two counterparties for the exchange of periodic interest payments generally based on a notional principal amount and agreed-upon fixed or floating rates. The majority of our interest rate swaps were used to manage our exposure to changes in interest rates by converting floating rate debt to fixed rate or by converting fixed rate debt to floating rate.

To manage our exposure to changes in interest rates, we entered into currency swaps and historically interest rate swap agreements which have been designated as cash flow hedges under derivative accounting principles, or are treated as non-qualifying hedges. We currently utilize the long-haul method to assess effectiveness of all derivatives designated as hedges.

HSBC Finance Corporation

We do not manage credit risk or the changes in fair value due to the changes in credit risk by entering into derivative financial instruments such as credit derivatives or credit default swaps.

Credit Risk of Derivatives By utilizing derivative financial instruments, we are exposed to counterparty credit risk. Counterparty credit risk is the risk that the counterparty to a transaction fails to perform according to the terms of the contract. We manage the counterparty credit (or repayment) risk in derivative instruments through established credit approvals, risk control limits, collateral, and ongoing monitoring procedures. We utilize HSBC affiliates as the provider of our derivatives. We have never suffered a loss due to counterparty credit failure.

At June 30, 2017 and December 31, 2016, we had derivative contracts for our continuing operations with a notional amount of $419 million and $1.8 billion, respectively, which are outstanding with HSBC Bank USA, National Association (together with its subsidiaries, "HSBC Bank USA"). Derivative financial instruments are generally expressed in terms of notional principal or contract amounts which are much larger than the amounts potentially at risk for nonpayment by counterparties. Derivative agreements require that payments be made to, or received from, the counterparty when the fair value of the agreement reaches a certain level. When the fair value of our agreements with the affiliate counterparty requires the posting of collateral, it is provided in either the form of cash and recorded on the balance sheet, consistent with third party arrangements, or in the form of securities which are not recorded on our balance sheet. The fair value of our agreements with the affiliate counterparty required us to provide collateral to the affiliate of $50 million at June 30, 2017 and $317 million at December 31, 2016, all of which was provided in cash. These amounts are offset against the fair value amount recognized for derivative instruments that have been offset under the same master netting arrangement and recorded in our balance sheet as derivative financial assets or derivative related liabilities which are included as a component of other assets and other liabilities, respectively.

The following table presents the fair value of derivative contracts by major product type on a gross basis. Gross fair values exclude the effects of both counterparty netting and collateral, and therefore are not representative of our exposure. The table below also presents the amounts of counterparty netting and cash collateral that have been offset in the consolidated balance sheet.



	June 30, 2017						December 31, 2016
	Derivative Financial Assets			Derivative Financial Liabilities			Derivative Financial Assets			Derivative Financial Liabilities
	(in millions)
Derivatives⁽¹⁾
Derivatives accounted for as cash flow hedges associated with debt:
Currency swaps	$	—		$	(47	)	$	—		$	(58	)
Cash flow hedges	—			(47		)	—			(58		)

Non-qualifying hedge activities:
Derivatives associated with debt carried at fair value:
Cross currency interest rate swaps	18			(16		)	15			(286		)
Derivatives associated with debt carried at fair value	18			(16		)	15			(286		)
Total derivatives	18			(63		)	15			(344		)
Less: Gross amounts offset in the balance sheet⁽²⁾	(18		)	63			(15		)	332
Net amounts of derivative financial assets and liabilities presented in the balance sheet⁽³⁾	$	—		$	—		$	—		$	(12	)


⁽¹⁾	All of our derivatives are bilateral over-the-counter derivatives.


⁽²⁾	Represents the netting of derivative receivable and payable balances for the same counterparty under an enforceable netting agreement. Gross amounts offset in the balance sheet includes cash collateral paid of $50 million at June 30, 2017 and $317 million at December 31, 2016. At June 30, 2017 and December 31, 2016, we did not have any financial instrument collateral received/posted.


⁽³⁾	At June 30, 2017 and December 31, 2016, we had not received any cash not subject to an enforceable master netting agreement.

Fair Value Hedges At June 30, 2017 and December 31, 2016, we do not have any active fair value hedges. We recorded fair value adjustments to the carrying value of our debt for terminated fair value hedges which decreased the debt balance by $14 million at June 30, 2017 and $15 million at December 31, 2016.

HSBC Finance Corporation

Cash Flow Hedges Cash flow hedges include currency swaps to convert debt issued from one currency into U.S. dollar fixed rate debt and have historically also included interest rate swaps to convert our variable rate debt to fixed rate debt by fixing future interest rate resets of floating rate debt. Gains and losses on derivative instruments designated as cash flow hedges are reported in accumulated other comprehensive income (loss) and totaled losses of less than $1 million at both June 30, 2017 and December 31, 2016. We expect less than $1 million of currently unrealized net losses will be reclassified to earnings within one year. However, these reclassified unrealized losses will be offset by decreased interest expense associated with the variable cash flows of the hedged items and will result in no significant impact to our earnings.

The following table provides the gain or loss recorded on our cash flow hedging relationships.



	Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)					Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Gain (Loss) Reclassed From AOCI into Income (Effective Portion)					Location of Gain (Loss) Recognized in Income on the Derivative(Ineffective Portion)	Gain (Loss) Recognized In Income on Derivative (Ineffective Portion)
	2017		2016				2017		2016				2017		2016
	(in millions)						(in millions)						(in millions)
Three Months Ended June 30,
Interest rate swaps	$	—	$	7		Interest expense	$	—	$	—		Derivative related income (expense)	$	—	$	—
Currency swaps	—		(1		)	Interest expense	—		(4		)	Derivative related income (expense)	1		1
Total	$	—	$	6			$	—	$	(4	)		$	1	$	1

Six Months Ended June 30,
Interest rate swaps	$	—	$	18		Interest expense	$	—	$	—		Derivative related income (expense)	$	—	$	—
Currency swaps	—		(1		)	Interest expense	—		(7		)	Derivative related income (expense)	3		5
Total	$	—	$	17			$	—	$	(7	)		$	3	$	5

Non-Qualifying Hedging Activities As discussed in prior filings, during 2016 we terminated all of the interest rate swaps in our portfolio of non-qualifying hedges which we had previously used to minimize our exposure to changes in interest rates. Accordingly, there was no derivative related income (expense) for the three or six months ended June 30, 2017. Derivative related expense for interest rate contracts for the three and six months ended June 30, 2016 was a gain of $2 million and a loss of $117 million, respectively.

We have elected the fair value option for certain issuances of our fixed rate debt and have entered into currency swaps and historically interest rate swaps related to debt carried at fair value. The currency swaps and historically the interest rate swaps associated with this debt are non-qualifying hedges but are considered economic hedges and realized gains and losses are reported as gain on debt designated at fair value and related derivatives within other revenues. The derivatives related to fair value option debt are included in the notional amount of derivative contracts table below.

The following table provides the gain or loss recorded on the derivatives related to fair value option debt. See Note 5, "Fair Value Option," for further discussion.



	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Derivative Related Income (Expense)
		Three Months Ended June 30,						Six Months Ended June 30,
		2017			2016			2017			2016
		(in millions)
Cross currency interest rate contracts	Gain on debt designated at fair value and related derivatives	$	(4	)	$	(4	)	$	(10	)	$	3
Total		$	(4	)	$	(4	)	$	(10	)	$	3

HSBC Finance Corporation

Notional Amount of Derivative Contracts The following table provides the notional amounts of derivative contracts.



	June 30, 2017		December 31, 2016
	(in millions)
Derivatives designated as hedging instruments:
Currency swaps	$	203	$	203
Non-qualifying hedges:
Derivatives associated with debt carried at fair value:
Cross currency interest rate swaps	216		1,562
Total	$	419	$	1,765


7.	Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) ("AOCI") includes certain items that are reported directly within a separate component of equity. The following table presents changes in accumulated other comprehensive income (loss) balances.



	2017			2016
	(in millions)
Three Months Ended June 30,
Unrealized gains (losses) on fair value option debt attributable to credit:
Balance at beginning and end of period	$	(24	)	$	—
Unrealized gains (losses) on cash flow hedging instruments:
Balance at beginning of period	—			(7		)
Other comprehensive income for period:
Net gains arising during period, net of tax of $- million and $2 million, respectively	—			4
Reclassification adjustment for losses realized in net income, net of tax of $- million and $1 million, respectively⁽¹⁾	—			3
Total other comprehensive income for period	—			7
Balance at end of period	—			—
Pension and postretirement benefit plan liability:
Balance at beginning of period	23			28
Other comprehensive income for period:
Reclassification adjustment for gains realized in net income, net of tax of $(5) million and $- million, respectively⁽²⁾	(9		)	(2		)
Total other comprehensive income for period	(9		)	(2		)
Balance at end of period	14			26
Total accumulated other comprehensive income (loss) at end of period	$	(10	)	$	26

HSBC Finance Corporation



	2017			2016
	(in millions)
Six Months Ended June 30,
Unrealized gains (losses) on fair value option debt attributable to credit:
Balance at beginning of period, as previously reported	$	—		$	—
Cumulative effect adjustment to initially apply new accounting guidance for fair value option debt attributable to credit, net of tax of $(11) million and $- million, respectively⁽³⁾	(19		)	—
Balance at beginning of period, adjusted	(19		)	—
Other comprehensive loss for period:
Net loss arising during period, net of tax of $(3) million and $- million, respectively	(5		)	—
Total other comprehensive loss for period	(5		)	—
Balance at end of period	(24		)	—
Unrealized gains (losses) on cash flow hedging instruments:
Balance at beginning of period	—			(15		)
Other comprehensive income for period:
Net gains arising during period, net of tax of $- million and $6 million, respectively	—			11
Reclassification adjustment for losses realized in net income, net of tax of $- million and $3 million, respectively⁽¹⁾	—			4
Total other comprehensive income for period	—			15
Balance at end of period	—			—
Pension and postretirement benefit plan liability:
Balance at beginning of period	24			29
Other comprehensive income for period:
Reclassification adjustment for (gains) losses realized in net income, net of tax of $(6) million and $(1) million, respectively⁽²⁾	(10		)	(3		)
Total other comprehensive income for period	(10		)	(3		)
Balance at end of period	14			26
Total accumulated other comprehensive income (loss) at end of period	$	(10	)	$	26


⁽¹⁾	The amounts reclassified relate to currency swaps and are included as a component of interest expense in our consolidated statement of income (loss).


⁽²⁾	The amounts reclassified are included as a component of salaries and employee benefits in our consolidated statement of income (loss).


⁽³⁾	For information on the adoption of new accounting guidance related to fair value option debt attributable to our credit spreads, see Note 13, "New Accounting Pronouncements."


8.	Pension and Other Postretirement Benefits

Defined Benefit Pension Plan The table below reflects the portion of pension expense and its related components of the HSBC North America Pension Plan which has been allocated to us and is recorded in our consolidated statement of income (loss). We have not been allocated any portion of the Plan's net pension liability.



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in millions)
Interest cost on projected benefit obligation	$	12		$	12		$	24		$	24
Expected return on plan assets	(14		)	(14		)	(28		)	(28		)
Amortization of net actuarial loss	5			5			11			12
Administrative costs	1			1			2			2
Pension expense	$	4		$	4		$	9		$	10

HSBC Finance Corporation

Postretirement Plans Other Than Pensions Our employees also participate in plans which provide medical and life insurance benefits to retirees and eligible dependents. These plans cover substantially all employees who meet certain age and vested service requirements. We have instituted dollar limits on our payments under the plans to control the cost of future medical benefits.

The components of our net postretirement benefit cost are as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in millions)
Interest cost	$	1		$	1		$	2		$	2
Amortization of reduction in liability resulting from plan amendment	(1		)	(1		)	(3		)	(3		)
Gain from curtailment	(13		)	—			(13		)	—
Net periodic postretirement benefit cost	$	(13	)	$	—		$	(14	)	$	(1	)

Substantially all of our postretirement benefit plans which provide medical insurance for post-65 retirees were amended in 2015 to provide a monthly payment for the retiree to purchase individual health care coverage in lieu of providing medical insurance on a self-insured basis. This amendment resulted in a reduction to our postretirement benefit obligation in 2015 of $46 million which is being amortized over the remaining service period of those affected. Due to the continued reduction in our staffing levels in the first half of 2017, a curtailment gain of $13 million (representing the acceleration of a portion of the remaining deferred gain) was recognized during the three and six months ended June 30, 2017.


9.	Related Party Transactions

In the normal course of business, we conduct transactions with HSBC and its subsidiaries. HSBC policy requires that these transactions occur at prevailing market rates and terms and include funding arrangements, derivatives, servicing arrangements, information technology, centralized support services, item and statement processing services, banking and other miscellaneous services. The following tables and discussions below present the more significant related party balances and the income (expense) generated by related party transactions for continuing operations:



	June 30, 2017		December 31, 2016
	(in millions)
Assets:
Cash	$	50	$	128
Interest bearing deposits with banks	—		1,500
Securities purchased under agreements to resell⁽¹⁾	5,269		2,392
Other assets	98		114
Total assets	$	5,417	$	4,134
Liabilities:
Due to affiliates⁽²⁾	$	799	$	3,300
Other liabilities	31		41
Total liabilities	$	830	$	3,341


⁽¹⁾	Securities under an agreement to resell are purchased from HSBC Securities (USA) Inc. and generally have terms of 120 days or less. The collateral underlying the securities purchased under agreements to resell, however, is with an unaffiliated third party. Interest income recognized on these securities is reflected as interest income from HSBC affiliate in the table below.


⁽²⁾	Due to affiliates includes amounts owed to HSBC and its subsidiaries as a result of direct debt issuances and excludes preferred stock.

HSBC Finance Corporation



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in millions)
Income/(Expense):
Interest income from HSBC affiliates	$	11		$	2		$	20		$	3
Interest expense paid to HSBC affiliates⁽¹⁾	(12		)	(69		)	(41		)	(144		)
Net interest income (expense)	$	(1	)	$	(67	)	$	(21	)	$	(141	)
Gain (loss) on FVO debt with affiliate	$	(1	)	$	12		$	2		$	12
Servicing and other fees from (to) HSBC affiliates	—			2			(27		)	6
Support services from HSBC affiliates	(21		)	(38		)	(44		)	(80		)
Stock based compensation income (expense) with HSBC⁽²⁾	—			(1		)	(1		)	—


⁽¹⁾	Includes interest expense paid to HSBC affiliates for debt held by HSBC affiliates as well as net interest paid to or received from HSBC affiliates on risk management hedges related to non-affiliated debt.

⁽²⁾

Employees may participate in one or more stock compensation plans sponsored by HSBC. These expenses are included in Salaries and employee benefits in our consolidated statement of income (loss). Certain employees are also eligible to participate in a defined benefit pension plan and other postretirement benefit plans sponsored by HSBC North America which are discussed in Note 8, "Pension and Other Postretirement Benefits."

Funding Arrangements with HSBC Affiliates:

All of our ongoing funding requirements have been integrated into the overall HSBC North America funding plans with any future funding requirements to be sourced primarily through HSBC USA Inc. ("HSBC USA") or HSBC North America. Due to affiliates consists of the following:



	June 30, 2017		December 31, 2016
	(in millions)
HSBC USA Inc.	$	—	$	2,500
HSBC Holdings plc (includes $487 million and $485 million at June 30, 2017 and December 31, 2016 carried at fair value, respectively)	799		800
Due to affiliates	$	799	$	3,300

HSBC USA Inc. - We have a $5.0 billion, 364-day uncommitted unsecured revolving credit agreement with HSBC USA, which will expire during the fourth quarter of 2017. The credit agreement allows for borrowings with maturities of up to 5 years. In March 2017, we prepaid the entire outstanding balance on this credit agreement of $2.5 billion and incurred a loss on extinguishment of debt of $28 million which is included as a component of servicing and other fees from (to) HSBC affiliates in our consolidated statement of income (loss).

HSBC Holdings plc - We have a public subordinated debt issue with a carrying amount of $3.0 billion which matures in 2021. Of this amount, HSBC Holdings plc holds $799 million at June 30, 2017 and $800 million at December 31, 2016.

We have a $1.0 billion, 364-day uncommitted revolving credit facility with HSBC North America, which expires in January 2018. At June 30, 2017 and December 31, 2016, there are no outstanding balances under this credit facility.

As previously discussed, we maintain an overall risk management strategy that utilizes interest rate and currency derivative financial instruments to mitigate our exposure to fluctuations caused by changes in interest rates and currency exchange rates related to third party debt liabilities. HSBC Bank USA is our counterparty in these derivative transactions. The notional amount of the derivative contracts outstanding with HSBC Bank USA totaled $419 million and $1.8 billion at June 30, 2017 and December 31, 2016, respectively. The fair value of our agreements with HSBC Bank USA required us to provide collateral to HSBC Bank USA of $50 million at June 30, 2017 and $317 million at December 31, 2016, all of which was provided in cash. See Note 6, "Derivative Financial Instruments," for additional information about our derivative portfolio.

In addition to the lending arrangements discussed above, our parent company holds 1,000 shares of Series C Preferred Stock. Dividends paid on the Series C Preferred Stock totaled $21 million and $43 million during the three and six months ended June 30, 2017, respectively, compared with $21 million and $43 million during the three and six months ended June 30, 2016, respectively.

HSBC Finance Corporation

During periods in which there is an accumulated deficit, dividends on the Series C preferred stock are paid from additional paid-in capital.

At December 31, 2016, we had a deposit totaling $1,500 million with HSBC Bank USA at current market rates. We did not have any deposits with HSBC Bank USA at June 30, 2017. Interest income earned on deposits with HSBC Bank USA was included in interest income from HSBC affiliates in the table above and was insignificant during three and six months ended June 30, 2017 and 2016.

Services Provided Between HSBC Affiliates:

Under multiple service level agreements, we provide services to and receive services from various HSBC affiliates. The following summarizes these activities:

•

HSBC Securities (USA) Inc. ("HSI") provides transaction assistance for our receivable sales program, including receivable valuation and other transaction related activities. We pay HSI a fee for these services for each sales transaction based on the unpaid principal balance of the receivables sold. Fees paid to HSI for these services were less than $1 million during the three months ended June 30, 2017 and totaled $5 million during the six months ended June 30, 2017. Fees paid to HSI totaled $2 million during both the three and six months ended June 30, 2016. The fees paid to HSI for these services are reported as a component of Gain (loss) on sale of real estate secured receivables.

•

Servicing activities for real estate secured receivables across North America are performed both by us and HSBC Bank USA. As a result, we receive servicing fees from HSBC Bank USA for services performed on their behalf and pay servicing fees to HSBC Bank USA for services performed on our behalf. The fees we receive from HSBC Bank USA are reported in Servicing and other fees from (to) HSBC affiliates. This includes fees received for servicing real estate secured receivables (with a carrying amount of $70 million and $559 million at June 30, 2017 and December 31, 2016, respectively) that we sold to HSBC Bank USA in 2003 and 2004. Fees we pay to HSBC Bank USA are reported in Support services from HSBC affiliates.


•	We also provide various services to HSBC Bank USA, including processing activities and other operational and administrative support. Fees received for these services are included in Servicing and other fees from (to) HSBC affiliates.

•

HSBC North America's technology and certain centralized support services including human resources, corporate affairs, risk management, legal, compliance, tax, finance and other shared services are centralized within HSBC Technology & Services (USA) Inc. ("HTSU"). HTSU also provides certain item processing and statement processing activities for us. The fees we pay HTSU for the centralized support services and processing activities are included in Support services from HSBC affiliates. We also receive fees from HTSU for providing certain administrative services to them as well as receiving rental revenue from HTSU for certain office space. The fees and rental revenue we receive from HTSU are included in Servicing and other fees from (to) HSBC affiliates.


•	We use HSBC Global Services Limited, an HSBC affiliate located outside of the United States, to provide various support services to our operations including among other areas, customer service, systems, collection and accounting functions. The expenses related to these services are included in Support services from HSBC affiliates.


•	Banking services and other miscellaneous services are provided by other subsidiaries of HSBC, including HSBC Bank USA, which are included in Support services from HSBC affiliates.

Transactions with HSBC Affiliates involving our Discontinued Operations:

In December 2016, we sold our Visa Class B Shares ("Class B Shares"). The Class B Shares are currently considered restricted and are transferable under limited circumstances until certain credit card litigation is settled. Any settlement will be indemnified by Visa members, including us. Simultaneously, our affiliate, HSBC USA also sold Class B Shares to the same purchaser. Under the terms of the sale agreement, HSBC USA entered into a derivative instrument with the purchaser to retain the litigation risk associated with all of the Class B Shares sold by both us and HSBC USA until the credit card litigation is settled. Immediately following the execution of the sale agreement, we entered into a derivative instrument with HSBC USA to retain the litigation risk associated with our portion of the Class B Shares sold to the purchaser.

At June 30, 2017 and December 31, 2016, the notional amount of this derivative contract totaled $61 million and $50 million, respectively. The fair value of this derivative is estimated using a discounted cash flow methodology and is dependent upon the final resolution of the credit card litigation. The fair value of the derivative related liability with HSBC USA Inc. was $6 million and $5 million at June 30, 2017 and December 31, 2016, respectively. Derivative related expense was less than $1 million during the three months ended June 30, 2017 and $1 million during the year-to-date period which was recorded as a component of income (loss) from discontinued operations. See Note 3, "Discontinued Operations," in our 2016 Form 10-K for additional information about the sale of the Visa Class B Shares and this derivative instrument.

HSBC Finance Corporation


10.	Variable Interest Entities

We consolidate variable interest entities ("VIE") in which we hold a controlling financial interest as evidenced by the power to direct the activities of a VIE that most significantly impact its economic performance and the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE and therefore are deemed to be the primary beneficiary. See Note 17, "Variable Interest Entities," in our 2016 Form 10-K for additional information regarding VIEs.

Consolidated VIEs Historically, we have organized special purpose entities primarily to meet our funding needs through collateralized funding transactions. As part of these transactions, we transferred certain receivables to these trusts which in turn issued debt instruments collateralized by the transferred receivables. The entities used in these transactions are VIEs. As we are the servicer of the assets of these trusts and have retained the benefits and risks, we determined that we are the primary beneficiary of these trusts. Accordingly, we consolidate these entities and report the debt securities issued by them as secured financings in long-term debt. As a result, all receivables transferred in these secured financings remained and continue to remain on our balance sheet and the debt securities issued by them have remained and continue to be included in long-term debt. As all of our ongoing funding requirements have been integrated into the overall HSBC North America funding plans, we no longer use collateralized funding transactions to meet our funding needs.

The assets and liabilities of the consolidated secured financing VIEs consisted of the following at June 30, 2017 and December 31, 2016:



	June 30, 2017					December 31, 2016
	Consolidated Assets		Consolidated Liabilities			Consolidated Assets		Consolidated Liabilities
	(in millions)
Real estate collateralized funding vehicles:
Receivables held for sale	$	428	$	—		$	750	$	—
Other liabilities	—		(6		)	—		(11		)
Long-term debt	—		191			—		404
Total	$	428	$	185		$	750	$	393

The assets of the consolidated VIEs serve as collateral for the obligations of the VIEs. The holders of the debt securities issued by these vehicles have no recourse to our general assets.

Unconsolidated VIEs We do not have any unconsolidated VIEs.


11.	Fair Value Measurements

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

Fair Value Adjustments The best evidence of fair value is quoted market price in an actively traded market, where available. In the event listed price or market quotes are not available, valuation techniques that incorporate relevant transaction data and market parameters reflecting the attributes of the asset or liability under consideration are applied. Where applicable, fair value adjustments are made to ensure the financial instruments are appropriately recorded at fair value. The fair value adjustments reflect the risks associated with the products, contractual terms of the transactions, and the liquidity of the markets in which the transactions occur.

Credit Risk Adjustment The credit risk adjustment is an adjustment to a group of financial assets or financial liabilities to reflect the credit quality of the parties to the transaction in arriving at fair value. A credit valuation adjustment to a financial asset is required to reflect the default risk of the counterparty. Where applicable, we take into consideration the credit risk mitigating arrangements including collateral agreements and master netting arrangements in estimating the credit risk adjustments.

Valuation Control Framework A control framework has been established which is designed to ensure that fair values are validated by a function independent of the risk-taker. To that end, the ultimate responsibility for the measurement of fair values rests with

HSBC Finance Corporation

the HSBC U.S. Valuation Committee. The HSBC U.S. Valuation Committee establishes policies and procedures to ensure appropriate valuations. Fair values for long-term debt for which we have elected fair value option are measured by a third party valuation source (pricing service) by reference to external quotations on the identical or similar instruments. Once fair values have been obtained from the third party valuation source, an independent price validation process is performed and reviewed by the HSBC U.S. Valuation Committee. For price validation purposes, we obtain quotations from at least one other independent pricing source for each financial instrument, where possible. We consider the following factors in determining fair values:


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


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


Ÿ	whether the security is traded in an active or inactive market;


Ÿ	consistency among different pricing sources;


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


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


Ÿ	the manner in which the fair value information is sourced.

Greater weight is given to quotations of instruments with recent market transactions, pricing quotes from dealers who stand ready to transact, quotations provided by market-makers who originally underwrote such instruments, and market consensus pricing based on inputs from a large number of participants. Any significant discrepancies among the external quotations are reviewed by management and adjustments to fair values are recorded where appropriate.

Fair values for derivatives are determined by management using valuation techniques, valuation models and inputs that are developed, reviewed, validated and approved by the Markets Independent Model Review Team of an HSBC affiliate. The models used apply appropriate control processes and procedures to ensure that the derived inputs are used to value only those instruments that share similar risk to the relevant benchmark indexes and therefore demonstrate a similar response to market factors.

We have various controls over our valuation process and procedures for receivables held for sale. As these fair values are generally determined using value estimates from third party and affiliate valuation specialists, the controls may include analytical reviews of quarterly value trends, corroboration of inputs by observable market data, direct discussion with potential investors and results of actual sales of such receivable, all of which are submitted to the HSBC U.S. Valuation Committee for review.

Fair Value of Financial Instruments The fair value estimates, methods and assumptions set forth below for our financial instruments, including those financial instruments carried at cost, are made solely to comply with disclosures required by generally accepted accounting principles in the United States and should be read in conjunction with the financial statements and notes included in this Form 10-Q. The following table summarizes the carrying value and estimated fair value of our financial instruments at June 30, 2017 and December 31, 2016.



	June 30, 2017
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Cash	$	50	$	50	$	50	$	—	$	—
Securities purchased under agreements to resell	5,269		5,269		—		5,269		—
Real estate secured receivables held for sale	1,346		1,478		—		—		1,478
Due from affiliates	98		98		—		98		—
Financial liabilities:
Due to affiliates carried at fair value	487		487		—		487		—
Due to affiliates not carried at fair value	312		337		—		337		—
Long-term debt carried at fair value	250		250		—		250		—
Long-term debt not carried at fair value	2,821		3,166		—		3,166		—

HSBC Finance Corporation



	December 31, 2016
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Cash	$	128	$	128	$	128	$	—	$	—
Interest bearing deposits with banks	1,500		1,500		1,500		—		—
Securities purchased under agreements to resell	2,392		2,392		—		2,392		—
Real estate secured receivables held for sale	5,674		6,129		—		—		6,129
Due from affiliates	114		114		—		114		—
Financial liabilities:
Due to affiliates carried at fair value	485		485		—		485		—
Due to affiliates not carried at fair value	2,815		2,875		—		2,875		—
Long-term debt carried at fair value	1,317		1,317		—		1,317		—
Long-term debt not carried at fair value	3,023		3,359		—		3,359		—
Derivative financial liabilities	12		12		—		12		—

Assets and Liabilities Recorded at Fair Value on a Recurring Basis The following table presents information about our assets and liabilities measured at fair value on a recurring basis at June 30, 2017 and December 31, 2016, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Netting⁽¹⁾			Total of Assets (Liabilities) Measured at Fair Value
	(in millions)
June 30, 2017:
Derivative financial assets:
Currency swaps	$	—	$	18		$	—	$	—		$	18
Derivative netting	—		—			—		(18		)	(18		)
Total derivative financial assets	—		18			—		(18		)	—
Total assets	$	—	$	18		$	—	$	(18	)	$	—
Due to affiliates carried at fair value	$	—	$	(487	)	$	—	$	—		$	(487	)
Long-term debt carried at fair value	—		(250		)	—		—			(250		)
Derivative related liabilities:
Currency swaps	—		(63		)	—		—			(63		)
Derivative netting	—		—			—		63			63
Total derivative related liabilities	—		(63		)	—		63			—
Total liabilities	$	—	$	(800	)	$	—	$	63		$	(737	)
December 31, 2016:
Derivative financial assets:
Currency swaps	$	—	$	15		$	—	$	—		$	15
Derivative netting	—		—			—		(15		)	(15		)
Total derivative financial assets	—		15			—		(15		)	—
Total assets	$	—	$	15		$	—	$	(15	)	$	—
Due to affiliates carried at fair value	$	—	$	(485	)	$	—	$	—		$	(485	)
Long-term debt carried at fair value	—		(1,317		)	—		—			(1,317		)
Derivative related liabilities:
Currency swaps	—		(344		)	—		—			(344		)
Derivative netting	—		—			—		332			332
Total derivative related liabilities	—		(344		)	—		332			(12		)
Total liabilities	$	—	$	(2,146	)	$	—	$	332		$	(1,814	)

HSBC Finance Corporation


⁽¹⁾	Represents counterparty and swap collateral netting which allow the offsetting of amounts relating to certain contracts when certain conditions are met.

Significant Transfers Between Level 1 and Level 2 There were no transfers between Level 1 and Level 2 for assets and liabilities recorded at fair value on a recurring basis during the three and six months ended June 30, 2017 and 2016.

Information on Level 3 Assets and Liabilities There were no assets or liabilities recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three and six months ended June 30, 2017 and 2016. Transfers between leveling categories are assessed, determined and recognized at the end of each reporting period.

Assets and Liabilities Recorded at Fair Value on a Non-recurring Basis The following table presents information about our assets and liabilities measured at fair value on a non-recurring basis at June 30, 2017 and 2016, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. Certain of the fair values in the table below were not obtained as of June 30, 2017 or 2016 but during the periods then ended. See Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," in our 2016 Form 10-K as well as the summary of our valuation techniques below for discussion of our policy in measuring fair value.



	Non-Recurring Fair Value Measurements June 30, 2017								Total Gains (Losses) for the Three Months Ended June 30, 2017			Total Gains (Losses) for the Six Months Ended June 30, 2017
	Level 1		Level 2		Level 3		Total					Total Gains (Losses) for the Six Months Ended June 30, 2017
	(in millions)
Receivables held for sale	$	—	$	—	$	1,346	$	1,346	$	58		$	171
Real estate owned⁽¹⁾	—		20		—		20		(1		)	(3		)
Total assets at fair value on a non-recurring basis	$	—	$	20	$	1,346	$	1,366	$	57		$	168



	Non-Recurring Fair Value Measurements June 30, 2016								Total Gains (Losses) for the Three Months Ended June 30, 2016			Total Gains (Losses) for the Six Months Ended June 30, 2016
	Level 1		Level 2		Level 3		Total					Total Gains (Losses) for the Six Months Ended June 30, 2016
	(in millions)
Receivables held for sale	$	—	$	707	$	3,089	$	3,796	$	(62	)	$	(130	)
Receivables held for investment carried at the lower of amortized cost or fair value of the collateral less cost to sell⁽²⁾	—		268		—		268		(5		)	(31		)
Real estate owned⁽¹⁾	—		69		—		69		(5		)	(10		)
Total assets at fair value on a non-recurring basis	$	—	$	1,044	$	3,089	$	4,133	$	(72	)	$	(171	)


⁽¹⁾	Real estate owned is required to be reported on the balance sheet net of transactions costs. The real estate owned amounts in the table above reflect the fair value of the underlying asset unadjusted for transaction costs.


⁽²⁾	Total gains (losses) for the three and six months ended June 30, 2016 include amounts recorded on receivables that were subsequently transferred to held for sale.

Significant Transfers Between Level 1 and Level 2 There were no transfers between Level 1 and Level 2 for assets and liabilities recorded at fair value on a non-recurring basis during the three and six months ended June 30, 2017 and 2016.

Significant Transfers Between Level 2 and Level 3 We transferred real estate secured receivables held for sale from Level 3 to Level 2 prior to the sale of these receivables totaling $554 million and $4,219 million during the three and six months ended June 30, 2017, respectively, compared with $3,627 million and $4,926 million during the three and six months ended June 30, 2016, respectively. Receivables held for sale are reclassified from Level 3 to Level 2 upon acceptance of a final offer from a third party to purchase a distinct pool of receivables for a specified purchase price on a specific date.

HSBC Finance Corporation

The following table presents quantitative information about non-recurring fair value measurements of assets and liabilities classified as Level 3 in the fair value hierarchy at June 30, 2017 and December 31, 2016:



	Fair Value						Range of Inputs
Financial Instrument Type	June 30, 2017		Dec. 31, 2016		Valuation Technique	Significant Unobservable Inputs	June 30, 2017				December 31, 2016
	(in millions)
Receivables held for sale	$	1,346	$	5,674	Third party appraisal valuation based on	Collateral loss severity rates⁽¹⁾	0	%	-	100%	0	%	-	100%
					estimated loss severities, including collateral values, cash flows and	Expenses incurred through collateral disposition	5	%	-	10%	5	%	-	10%
					market discount rate	Market discount rate	4	%	-	14%	4	%	-	14%


⁽¹⁾	At June 30, 2017 and December 31, 2016, the weighted average collateral loss severity rate was 44 percent and 51 percent, respectively, taking into consideration both expected net cash flows as well as current collateral values.

Valuation Techniques The following summarizes the valuation methodologies used for assets and liabilities recorded at fair value on both a recurring and non-recurring basis and for estimating fair value for financial instruments not recorded at fair value but for which fair value disclosures are required.

Cash: Carrying amount approximates fair value due to the liquid nature of cash.

Interest bearing deposits with banks and securities purchased under agreements to resell: The fair value of interest bearing deposits with banks and securities purchased under agreements to resell approximates carrying amount due to the short-term maturity of the agreements.

Receivables held for sale: The estimated fair value of our receivables held for sale is determined by developing an approximate range of value from a mix of various sources appropriate for the respective pools of assets aggregated either by similar risk characteristics or by pools of receivables being marketed. These sources include recently observed over-the-counter transactions where available and fair value estimates obtained from an HSBC affiliate and a third party valuation specialist for distinct pools of receivables. These fair value estimates are based on discounted cash flow models using assumptions we believe are consistent with those that would be used by market participants in valuing such receivables and trading inputs from other market participants which includes observed primary and secondary trades. In certain cases, the estimated fair value for a pool of receivables being marketed may be based on bids received from third parties interested in purchasing the pool of receivables.

Valuation inputs include estimates of future interest rates, prepayment speeds, default and loss curves, estimated collateral values (including expenses to be incurred to maintain the collateral) and market discount rates reflecting management's estimate of the rate of return that would be required by investors in the current market given the specific characteristics and inherent credit risk. Some of these inputs are influenced by collateral value changes and unemployment rates. We perform analytical reviews of fair value changes on a quarterly basis and periodically validate our valuation methodologies and assumptions based on the results of actual sales of such receivables. We also may hold discussions on value directly with potential investors. Since some receivables pools may have features which are unique, the fair value measurement processes use significant unobservable inputs which are specific to the performance characteristics of the various receivable portfolios.

Real estate owned: Fair value is determined based on third party valuations obtained at the time we take title to the property and, if less than the carrying amount of the receivable, the carrying amount of the receivable is adjusted to the fair value less estimated cost to sell. The carrying amount of the property is further reduced, if necessary, at least every 45 days to reflect observable local market data, including local area sales data.

Due from affiliates: Carrying amount approximates fair value because the interest rates on these receivables adjust with changing market interest rates.

Long-term debt and Due to affiliates: Fair value is primarily determined by a third party valuation source. The pricing services source fair value from quoted market prices and, if not available, expected cash flows are discounted using the appropriate interest rate for the applicable duration of the instrument adjusted for our own credit risk (spread). The credit spreads applied to these instruments are derived from the spreads recognized in the secondary market for similar debt as of the measurement date. Where available, relevant trade data is also considered as part of our validation process.

HSBC Finance Corporation

Derivative financial assets and liabilities: Derivative values are defined as the amount we would receive or pay to extinguish the contract using a market participant at the reporting date. The values are determined by management using a pricing system maintained by HSBC Bank USA. In determining these values, HSBC Bank USA uses quoted market prices, when available. For non-exchange traded contracts, such as interest rate swaps, fair value is determined using discounted cash flow modeling techniques. Valuation models calculate the present value of expected future cash flows based on models that utilize independently-sourced market parameters, including interest rate yield curves, option volatilities, and currency rates. Valuations may be adjusted in order to ensure that those values represent appropriate estimates of fair value. These adjustments are generally required to reflect factors such as market liquidity and counterparty credit risk that can affect prices in arms-length transactions with unrelated third parties. Finally, other transaction specific factors such as the variety of valuation models available, the range of unobservable model inputs and other model assumptions can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss recorded for a particular position.

Counterparty credit risk is considered in determining the fair value of a financial asset. The Fair Value Framework specifies that the fair value of a liability should reflect the entity's non-performance risk and accordingly, the effect of our own credit risk (spread) has been factored into the determination of the fair value of our financial liabilities, including derivative instruments. In estimating the credit risk adjustment to the derivative assets and liabilities, we take into account the impact of netting and/or collateral arrangements that are designed to mitigate counterparty credit risk.

12. Litigation and Regulatory Matters

The following supplements, and should be read together with, the disclosure in Note 20, "Litigation and Regulatory Matters," in our 2016 Form 10-K and in Note 12, "Litigation and Regulatory Matters," in our Form 10-Q for the three months ended March 31, 2017 (the "2017 First Quarter Form 10-Q"). Only matters with significant updates and new matters since our disclosure in our 2016 Form 10-K and 2017 First Quarter Form 10-Q are reported herein.

In addition to the matters described below and in our 2016 Form 10-K and 2017 First Quarter Form 10-Q, in the ordinary course of business, we are routinely named as defendants in, or as parties to, various legal actions and proceedings relating to activities of our current and/or former operations. These legal actions and proceedings may include claims for substantial or indeterminate compensatory or punitive damages, or for injunctive relief. In the ordinary course of business, we also are subject to governmental and regulatory examinations, information-gathering requests, investigations and proceedings (both formal and informal), certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. In connection with formal and informal inquiries by these regulators, we receive numerous requests, subpoenas and orders seeking documents, testimony and other information in connection with various aspects of our regulated activities.

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

For the legal matters disclosed below, including litigation, governmental and regulatory matters, as well as for the legal matters discussed in Note 20, "Litigation and Regulatory Matters," in our 2016 Form 10-K and in Note 12, "Litigation and Regulatory Matters," in the 2017 First Quarter Form 10-Q as to which a loss in excess of accrued liability is reasonably possible in future periods and for which there is sufficient currently available information on the basis of which we believe we can make a reliable estimate, we believe a reasonable estimate could be as much as $400 million for HSBC Finance Corporation. The legal matters underlying this estimate of possible loss will change from time to time and actual results may differ significantly from this current estimate.

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

HSBC Finance Corporation

Litigation - Continuing Operations

Mortgage Securitization Activity

DeKalb County, et al. v. HSBC North America Holdings Inc., et al. In May 2017, the U.S. Supreme Court issued its decision in the City of Miami case, affirming the Eleventh Circuit’s finding that a municipal plaintiff can be within the zone of interest conceivably protected by the Fair Housing Act. The court did not determine whether the injuries alleged by the city met the proximate cause test, but provided guidance for the lower courts in employing that test in further proceedings. This matter remains stayed pending direction from the Eleventh Circuit in the City of Miami matter.

County of Cook. v. HSBC North America Holdings Inc., et al. In May 2017, the U.S. Supreme Court issued its decision in the City of Miami case, affirming the Eleventh Circuit’s finding that a municipal plaintiff can be within the zone of interest conceivably protected by the Fair Housing Act. The court did not determine whether the injuries alleged by the city met the proximate cause test, but provided guidance for the lower courts in employing that test in further proceedings. Subsequent to the decision, the stay was lifted and a scheduling order entered. An amended complaint was filed in July 2017.

As noted previously, discussions are ongoing with the U.S. Department of Justice regarding liability under the Financial Industry Reform, Recovery, and Enforcement Act in connection with certain residential mortgage-backed securities securitizations from 2005 to 2007.

Litigation - Discontinued Operations

Salveson v. JPMorgan Chase et al. In April 2017, the U.S. Supreme Court denied plaintiff’s petition for a writ of certiorari and the matter is now concluded.


13.	New Accounting Pronouncements

The following new accounting pronouncements were adopted effective January 1, 2017:

•

Financial Instruments - Classification and Measurement of Financial Liabilities Measured Under the Fair Value Option In January 2016, the Financial Accounting Standards Board ("FASB") issued an Accounting Standard Update ("ASU") which, for financial liabilities measured under the fair value option, requires recognizing the change in fair value attributable to our own credit in other comprehensive income (loss). We elected to early adopt this guidance, which required a cumulative effect adjustment to the consolidated balance sheet, resulting in a reclassification from retained earnings to accumulated other comprehensive income (loss) of an after tax loss of $19 million as of January 1, 2017. The adoption of this guidance did not require financial statements for periods prior to 2017 to be restated.

•

Compensation - Stock Compensation In March 2016, the FASB issued an ASU that requires all excess tax benefits and tax deficiencies for share-based payment awards to be recorded within income tax expense (benefit) in the consolidated statement of income (loss) rather than directly to additional paid-in capital and for excess tax benefits to be classified as an operating activity in the consolidated statement of cash flows. The adoption of the guidance related to excess tax benefits for share-based payment awards resulted in a cumulative effect adjustment of $4 million which decreased the accumulated deficit as of January 1, 2017.

The following are accounting pronouncements which will be adopted in future periods:

•

Financial Instruments - Classification and Measurement (Excluding Financial Liabilities Measured Under the Fair Value Option) In January 2016, the FASB issued an ASU which changes aspects of its guidance on classification and measurement of financial instruments. The ASU requires equity investments (except those accounted for under the equity method or those that result in consolidation) to be measured at fair value with changes in fair value recognized in net income. Under a practicability exception, entities may measure equity investments that do not have readily determinable fair values at cost adjusted for changes in observable prices minus impairment. Under this exception, a qualitative assessment for impairment will be required and, if impairment exists, the carrying amount of the investments must be adjusted to their fair value and an impairment loss recognized in net income. Additionally, the ASU requires new disclosure related to equity investments and modifies certain disclosure requirements related to the fair value of financial instruments. The ASU is effective for all annual and interim periods beginning January 1, 2018 and the guidance should be applied by recording a cumulative effect adjustment to the balance sheet or, as it relates to equity investments without readily determinable fair values, prospectively. We currently do not expect the adoption of this guidance will have a material impact on our financial position or results of operations.


•	Leases In February 2016, the FASB issued an ASU which requires a lessee to recognize a lease liability and a right-of-use asset on its balance sheet for all leases, including operating leases, with a term greater than 12 months. Lease classification

HSBC Finance Corporation

will determine whether a lease is reported as a financing transaction in the income statement and statement of cash flows. The ASU does not substantially change lessor accounting, but it does make certain changes related to leases for which collectability of the lease payments is uncertain or there are significant variable payments. Additionally, the ASU makes several other targeted amendments including a) revising the definition of lease payments to include fixed payments by the lessee to cover lessor costs related to ownership of the underlying asset such as for property taxes or insurance; b) narrowing the definition of initial direct costs which an entity is permitted to capitalize to include only those incremental costs of a lease that would not have been incurred if the lease had not been obtained; c) requiring seller-lessees in a sale-leaseback transaction to recognize the entire gain from the sale of the underlying asset at the time of sale rather than over the leaseback term; and d) expanding disclosures to provide quantitative and qualitative information about lease transactions. The ASU is effective for all annual and interim periods beginning January 1, 2019 and is required to be applied retrospectively to the earliest period presented at the date of initial application, with early adoption permitted. While we are evaluating the impact the new guidance will have on our financial position and results of operations, we currently expect a gross-up of our balance sheet as a result of recognizing lease liabilities and right-of-use assets. The extent of such gross-up remains to be determined once we complete a review of our existing lease contracts and service contracts which may contain embedded leases. As we have not yet completed our review, it is not practicable to quantify the impact of adopting the ASU at this time.

•

Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments In August 2016, the FASB issued an ASU that clarifies how certain cash receipts and cash payments should be classified in the statement of cash flows. Under the ASU, cash proceeds from the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities. The ASU is effective for all annual and interim periods beginning January 1, 2018 and is required to be applied retrospectively to all periods presented. The new guidance will result in a change in the classification in the statement of cash flows which we do not expect to be significant and will not have any impact on our financial position and results of operations.

•

Compensation - Retirement Benefits In March 2017, the FASB issued an ASU that requires the service cost component of net periodic pension and postretirement benefit costs to be reported in the same line item as other employee compensation costs while the other components of net periodic pension and postretirement benefit costs are required to be reported in the statement of income separately from the service cost component. The ASU is effective for all annual and interim periods beginning January 1, 2018 and is required to be applied retrospectively. We currently do not expect the adoption of this guidance will have a material impact on our financial position or results of operations.

There have been no additional accounting pronouncements issued that are expected to have or could have a material impact on our financial position or results of operations.

HSBC Finance Corporation

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Certain matters discussed throughout this Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make or approve certain statements in future filings with the United States Securities and Exchange Commission, in press releases, or oral or written presentations by representatives of HSBC Finance Corporation that are not statements of historical fact and may also constitute forward-looking statements. Words such as "may", "will", "should", "would", "could", "appears", "believe", "intends", "expects", "estimates", "targeted", "plans", "anticipates", "goal", and similar expressions are intended to identify forward-looking statements but should not be considered as the only means through which these statements may be made. These matters or statements will relate to our future financial condition, economic forecast, results of operations, plans, objectives, performance or business developments and will involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from that which was expressed or implied by such forward-looking statements.

All forward-looking statements are, by their nature, subject to risks and uncertainties, many of which are beyond our control. Our actual future results may differ materially from those set forth in our forward-looking statements. While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those in the forward-looking statements:

•

uncertain market and economic conditions, a decline in housing prices, unemployment levels, tighter credit conditions, changes in interest rates or a prolonged period of low or negative interest rates, the availability of liquidity, unexpected geopolitical events, changes in consumer confidence and consumer spending, and consumer perception as to the continuing availability of credit and price competition in the market segments we serve;


•	changes in laws and regulatory requirements;


•	the ability to deliver on our regulatory priorities;


•	extraordinary government actions as a result of market turmoil;


•	capital and liquidity requirements under Basel III, and Comprehensive Capital Analysis and Review ("CCAR");


•	changes in central banks' policies with respect to the provision of liquidity support to financial markets;


•	disruption in our operations from the external environment arising from events such as natural disasters, terrorist attacks, global pandemics, or essential utility outages;


•	a failure in or a breach of our operation or security systems or infrastructure, or those of third party servicers or vendors, including as a result of cyberattacks;


•	the ability to successfully manage our risks;


•	the ability to successfully implement changes to our operational practices as needed and/or required from time to time;


•	damage to our reputation;


•	the ability to retain key employees;


•	losses suffered due to the negligence or misconduct of our employees or the negligence or misconduct on the part of employees of third parties;


•	a failure in our internal controls;


•	our ability to meet our funding requirements;


•	adverse changes to our or our affiliates' credit ratings;


•	changes to our mortgage servicing and foreclosure practices;


•	continued heightened regulatory scrutiny with respect to residential mortgage servicing practices, with particular focus on loss mitigation, foreclosure prevention and outsourcing;


•	heightened regulatory and government enforcement scrutiny of financial institutions;

HSBC Finance Corporation


•	changes in bankruptcy laws to allow for principal reductions or other modifications to mortgage loan terms;


•	our ability to wind down substantially all of our real estate secured receivable portfolio in a timely manner;


•	adverse changes in factors which impact the fair value of receivables held for sale, such as home prices, default rates, estimated costs to obtain properties and investors' required returns;


•	additional costs and expenses due to representations and warranties made in connection with receivable sale transactions that may require us to repurchase the loans and/or indemnify private investors for losses due to breaches of these representations and warranties;


•	the possibility of incorrect assumptions or estimates in our financial statements, including reserves related to litigation, deferred tax assets and the fair value of certain assets and liabilities;


•	the possibility of incorrect interpretations, application of or changes in tax laws to which we are subject;


•	additional financial contribution requirements to the HSBC North America Holdings Inc. ("HSBC North America") pension plan;


•	the potential impact of legal, regulatory and policy changes effecting financial institutions and the global economy as a result of the new Administration in the U.S.; and


•	the other risk factors and uncertainties described under Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016 (the "2016 Form 10-K").

Forward-looking statements are based on our current views and assumptions and speak only as of the date they are made. We undertake no obligation to update any forward-looking statement to reflect subsequent circumstances or events. You should, however, consider any additional disclosures of a forward-looking nature that arise after the date hereof as may be discussed in any of our subsequent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q or Current Reports on Form 8-K.

Executive Overview

Organization and Basis of Reporting HSBC Finance Corporation and its subsidiaries are wholly owned subsidiaries of HSBC North America, which is an indirect, wholly owned subsidiary of HSBC Holdings plc ("HSBC" and, together with its subsidiaries, "HSBC Group"). HSBC Finance Corporation and its subsidiaries may also be referred to in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") as "we", "us" or "our."

The following discussion of our financial condition and results of operations excludes the results of our discontinued operations unless otherwise noted. See Note 3, "Discontinued Operations," in our 2016 Form 10-K for further discussion of these operations.

Economic Environment The U.S. economy continued to grow during the first half of 2017. U.S. Gross Domestic Product ("GDP") grew at an estimated annual rate of 2.6 percent in the second quarter of 2017, higher than 2016's GDP annual growth rate, while inflation in the second quarter of 2017 averaged near the Federal Reserve Board's ("FRB") 2.0 percent target inflation rate. In June 2017, the FRB increased short-term interest rates by 25 basis points, the second such rate increase this year and the third since December 2016, and it is currently anticipated that the FRB will increase short-term interest rates further during 2017. Consumer sentiment remained optimistic based on current economic conditions. The U.S. economy added approximately 1.1 million jobs during the first half of 2017 and the total unemployment rate fell to 4.4 percent at June 2017 as compared with 4.7 percent at December 2016. However, a significant number of part-time workers continue to seek full-time work and the number of discouraged people who have stopped looking for work remains elevated, as evidenced by the U.S. Bureau of Labor Statistics' U-6 unemployment rate of 8.6 percent at June 2017 as compared with a rate of 9.2 percent at December 2016.

Despite the continued improvement of the U.S. economy, economic uncertainty remains and the new Administration in the U.S. as well as other geopolitical events further adds to this uncertainty. The sustainability of the economic recovery will be determined by numerous variables including consumer sentiment, energy prices, credit market volatility, employment levels and housing market conditions, which will impact corporate earnings and the capital markets. These conditions in combination with global economic conditions, fiscal and monetary policy, geopolitical concerns and the regulatory and government scrutiny of financial institutions will continue to impact our results in 2017 and beyond.

HSBC Finance Corporation

2017 Events

As discussed in prior filings, our entire receivable portfolio is classified as held for sale and we continue to execute on our receivable sales program. During the three and six months ended June 30, 2017, we sold real estate secured receivables with an unpaid principal balance of $621 million (aggregate carrying value of $554 million) and $4,984 million (aggregate carrying value of $4,219 million), respectively, at the time of sale to third party investors. Aggregate cash consideration received totaled $556 million and $4,863 million during the three and six months ended June 30, 2017, respectively. We realized a loss of $2 million and gain of $615 million, net of transaction costs, during the three and six months ended June 30, 2017, respectively.

At June 30, 2017, the aggregate carrying value of real estate secured receivables held for sale totaled $1.3 billion. While we expect that substantially all of these receivables will be sold in multiple transactions through 2017, the actual time to complete these sales and ultimate earnings impact depends on many factors, including future market conditions. We also continue to evaluate various options corresponding to the remaining other assets and liabilities. The ultimate resolution and timing is dependent on several factors and, therefore, remains uncertain.

In March 2017, we prepaid a credit agreement with an HSBC affiliate of $2.5 billion and incurred a loss on extinguishment of debt of $28 million which is included as a component of servicing and other fees from (to) HSBC affiliates in our consolidated statement of income (loss).

Performance, Developments and Trends The following table sets forth selected financial highlights of HSBC Finance Corporation for the three and six months ended June 30, 2017 and 2016.



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(dollars are in millions)
Income (loss) from continuing operations	$	17		$	(130	)	$	435		$	(200	)
Return on average assets, annualized	.7		%	(2.5		)%	7.3		%	(1.9		)%
Return on average common equity, annualized	(.3		)	(13.5		)	16.5			(10.9		)
Net interest margin, annualized⁽¹⁾	.91			3.17			.75			3.51
Efficiency ratio⁽¹⁾⁽²⁾	76.3			134.0			15.6			146.5


⁽¹⁾	See "Results of Operations" for a detailed discussion of trends in our net interest margin.


⁽²⁾	Ratio of total costs and expenses from continuing operations to net interest income and other revenues from continuing operations.

We reported net income of $15 million and $437 million during the three and six months ended June 30, 2017, respectively, compared with a net loss of $134 million and $208 million during the three and six months ended June 30, 2016, respectively.

Income from continuing operations was $17 million and $435 million during the three and six months ended June 30, 2017, respectively, compared with a loss from continuing operations of $130 million and $200 million during the three and six months ended June 30, 2016, respectively. We reported income from continuing operations before income tax of $19 million and $693 million during the three and six months ended June 30, 2017, respectively, compared with a loss from continuing operations before income tax of $193 million and $319 million during the three and six months ended June 30, 2016, respectively. The improvement in income from continuing operations before income tax during the three and six months ended June 30, 2017 was driven by lower operating expenses, a lower provision for credit losses and, for the year-to-date period, higher other revenues, partially offset by lower net interest income. During the three months ended June 30, 2017, the improvement was partially offset by lower other revenues.

HSBC Finance Corporation

Our reported results in all periods were impacted by certain items management believes to be significant, which distort comparability between periods. Significant items are excluded to arrive at adjusted performance because management would ordinarily identify and consider them separately to better understand underlying business trends. The following table summarizes the impact of these significant items for all periods presented:



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in millions)
Income (loss) from continuing operations before income tax, as reported	$	19		$	(193	)	$	693		$	(319	)
Fair value movement on fair value option debt attributable to credit spread⁽¹⁾	—			(8		)	—			(19		)
Impact of non-qualifying hedge portfolio	—			(2		)	—			117
Interest income related to the resolution of an IRS appeal matter	(37		)	—			(37		)	—
File review costs associated with the receivable sales program	8			16			16			38
Provision for securities litigation liability	—			575			—			575
Adjusted performance from continuing operations before income tax⁽²⁾	$	(10	)	$	388		$	672		$	392


⁽¹⁾	As discussed more fully in Note 13, "New Accounting Pronouncements," in the accompanying consolidated financial statements, beginning January 1, 2017, the fair value movement on fair value option debt attributable to our credit spreads is recorded in common equity as a component of other comprehensive income.


⁽²⁾	Represents a non-U.S. GAAP financial measure.

Excluding the impact of the items presented in the table above, adjusted performance from continuing operations before income tax declined by $398 million during the three months ended June 30, 2017 and improved by $280 million during the six months ended June 30, 2017 compared with the year-ago periods. The decline during the three months ended June 30, 2017 was driven by lower other revenues reflecting a loss on receivable sales during the current quarter compared with gains during the year-ago quarter, partially offset by reversals in the current quarter of lower of amortized cost or fair value adjustments recorded in prior periods compared with additional lower of amortized cost or fair value adjustments recorded during the year-ago quarter. The improvement during the year-to-date period was driven by higher other revenues reflecting higher gains on receivable sales during the six months ended June 30, 2017 as well as reversals in the current quarter of lower of amortized cost or fair value adjustments recorded in prior periods compared with additional lower of amortized cost or fair value adjustments recorded during the year-ago period.

See "Results of Operations" for a more detailed discussion of our operating trends. In addition, see "Balance Sheet Review" for further discussion on our receivables held for sale, deferred income taxes, net and other asset trends. See "Liquidity and Capital Resources" for further discussion on funding and capital, including short-term investments, due to affiliates and long-term debt. See "Credit Quality" for additional discussion on our credit trends.

Funding and Capital During the six months ended June 30, 2017 and 2016, we did not receive any capital contributions. During the six months ended June 30, 2017 and 2016, we retired or called $1,332 million and $4,439 million, respectively, of term debt. Our cash requirements during the six months ended June 30, 2017 were met from proceeds of sales of real estate secured receivables, cash generated from operations, including receivable payments and pay-offs, and real estate owned ("REO") sale proceeds. For the remainder of 2017, we expect that proceeds from sales of real estate secured receivables and other balance sheet attrition will generate the liquidity necessary to meet our maturing debt obligations. However, as we continue to execute our receivable sales program, cash flows subsequent to 2017 may not provide sufficient cash to fully repay maturing debt in future periods. As we continue to liquidate our receivable portfolio, HSBC's continued support may be required to properly manage our business operations and maintain appropriate levels of capital. HSBC has historically provided significant capital in support of our operations and has indicated that it is fully committed and has the capacity and willingness to continue that support.

HSBC Finance Corporation

Balance Sheet Review

Unless noted otherwise, the following discusses changes in amounts reported in our consolidated balance sheet for continuing operations. See "Liquidity and Capital Resources" for discussion regarding changes in short-term investments, due to affiliates and long-term debt.

Receivables Held for Sale The following table summarizes receivables held for sale at June 30, 2017 and decreases since March 31, 2017 and December 31, 2016:



			Decrease from
			March 31, 2017					December 31, 2016
	June 30, 2017		$			%		$			%
	(dollars are in millions)
First lien real estate secured receivable	$	1,302	$	(558	)	(30.0	)%	$	(3,397	)	(72.3	)%
Second lien real estate secured receivable	44		(7		)	(13.7	)	(931		)	(95.5	)
Total receivables held for sale	$	1,346	$	(565	)	(29.6	)%	$	(4,328	)	(76.3	)%

The decrease in receivables held for sale since March 31, 2017 and December 31, 2016 reflects the impact of receivable sales during the three and six months ended June 30, 2017 with a carrying value of $554 million and $4,219 million, respectively. The decrease also reflects the impact of continued liquidation in the portfolio, partially offset by a reversal of lower of amortized cost or fair value adjustments recorded in prior periods.

See Note 2, "Receivables Held for Sale," in the accompanying consolidated financial statements for additional discussion of receivables held for sale, including a rollforward of the receivables held for sale balance for the three and six months ended June 30, 2017 and 2016.

Deferred Income Taxes, Net Deferred income taxes, net, totaled $1,662 million at June 30, 2017 compared with $2,897 million at December 31, 2016. Deferred income taxes, net, decreased due to utilization of our deferred net operating loss carryforwards by the consolidated HSBC North America tax group (the "HNAH Tax Group") during the six months ended June 30, 2017 as well as the impact of the receivable sales during the first half of 2017 which resulted in a reclassification between the deferred tax asset and current taxes receivable.

Other Assets Other assets totaled $1,149 million at June 30, 2017 compared with $427 million at December 31, 2016. The increase in other assets reflects a higher current tax receivable, partially offset by lower receivables from affiliates based on timing of payments received from affiliates. The higher current tax receivable reflects utilization of our deferred net operating loss carryforwards by the HNAH Tax Group during the first half of 2017 as well as the reclassification of deferred tax assets to current tax receivable resulting from the receivable sales during the first half of 2017. The increase was partially offset by settlements during the second quarter of 2017 in accordance with the tax allocation agreement with the HNAH Tax Group.

Results of Operations

As we continue to make progress in our strategy to sell substantially all of our receivable portfolio in 2017, the decrease in interest income for receivables has outpaced the decrease in interest expense and will continue to do so in future periods. Decreases in operating expenses may not necessarily decline in line with the sale of our receivable portfolio as a result of certain fixed costs. Accordingly, net income (loss) for the six months ended June 30, 2017 or any prior periods should not be considered indicative of the results for any future periods.

Unless noted otherwise, the following discusses amounts from continuing operations as reported in our consolidated statement of income (loss).

HSBC Finance Corporation

Net Interest Income The following table summarizes net interest income and net interest margin for the three and six months ended June 30, 2017 and 2016.



	2017		%⁽¹⁾		2016		%⁽¹⁾
	(dollars are in millions)
Three Months Ended June 30,
Interest income	$	86	4.41	%	$	286	6.48	%
Interest expense	69		3.50		146		3.31
Net interest income	$	17	.91	%	$	140	3.17	%

Six Months Ended June 30,
Interest income	$	193	4.27	%	$	628	6.85	%
Interest expense	159		3.52		306		3.34
Net interest income	$	34	.75	%	$	322	3.51	%


⁽¹⁾	% Columns: comparison to average interest-earning assets.

Interest income during the three and six months ended June 30, 2017 was impacted by receipt of an interest payment from the IRS in June 2017 of $37 million related to the resolution of an IRS appeals matter involving the netting of under-payments and over-payments for tax years 1995 through 2009. Excluding the impact of this item, net interest income would have been negative (net interest expense) during the three and six months ended June 30, 2017, as the decrease in interest income outpaced the decrease in interest expense as discussed below.


Ÿ	Average receivable levels decreased during the three and six months ended June 30, 2017 as a result of receivable sales and continued liquidation of the receivable portfolio.


Ÿ	Interest expense decreased during the three and six months ended June 30, 2017 as a result of lower average borrowings, partially offset by the impact of higher average rates due to the maturing of certain lower rate long-term borrowings and rate increases on certain variable rate debt since June 2016.

Overall yields on total average interest earning assets decreased during the three and six months ended June 30, 2017 driven by a significant shift in mix of total average interest earning assets to a higher percentage of short-term investments, which have significantly lower yields than our receivable portfolio, as a result of receivable sales, partially offset during the six months ended June 30, 2017 by the impact of higher receivable yields due to lower levels of nonaccrual receivables. Receivable yields were lower during the three months ended June 30, 2017 as nonaccrual receivables represented a significantly larger portion of our receivable portfolio as compared to the year-ago period as a result of receivable sales.

Net interest margin was .91 percent and .75 percent for the three and six months ended June 30, 2017, respectively, compared with 3.17 percent and 3.51 percent for the three and six months ended June 30, 2016, respectively. Excluding the impact of the interest payment received from the IRS in June 2017 as discussed above, net interest margin would have been negative during the three and six months ended June 30, 2017 reflecting the impact of lower overall yields on total average interest earning assets and the impact of higher average rates on borrowings during the three and six months ended June 30, 2017 as discussed above.

HSBC Finance Corporation

The following table summarizes the significant trends affecting the comparability of net interest income and net interest margin:



	Three Months Ended June 30, 2017					Six Months Ended June 30, 2017
	(dollars are in millions)
Net interest income/net interest margin from prior year period	$	140		3.17	%	$	322		3.51	%
Impact to net interest income resulting from:
Lower asset levels	(157		)			(316		)
Receivable yields	(3		)			4
Asset mix	(86		)			(175		)
Interest income related to the resolution of an IRS appeals matter	37					37
Investment income	9					17
Cost of funds (rate and volume)	77					147
Other	—					(2		)
Net interest income/net interest margin for current year period	$	17		.91	%	$	34		.75	%

The varying maturities and repricing frequencies of both our assets and liabilities expose us to interest rate risk. When the various risks inherent in both the asset and the debt do not meet our desired risk profile, we historically used derivative financial instruments to manage these risks to acceptable interest rate risk levels. See "Risk Management" for additional information regarding interest rate risk and derivative financial instruments.

Provision for Credit Losses As previously discussed, at June 30, 2017 and December 31, 2016 all of our receivables are classified as held for sale and no longer have any associated credit loss reserves. Accordingly, no provision for credit losses was recorded during the three or six months ended June 30, 2017.

During the three months ended June 30, 2016, the provision for credit losses totaled $12 million, of which $6 million related to the initial lower of amortized cost or fair value adjustment related to credit factors for receivables transferred to held for sale during the second quarter of 2016. During the six months ended June 30, 2016, the provision for credit losses totaled $49 million, of which $19 million related to the initial lower of amortized cost or fair value adjustment related to credit factors for receivables transferred to held for sale during the first half of 2016.

HSBC Finance Corporation

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



							Increase (Decrease)
	2017			2016			Amount			%
	(dollars are in millions)
Three Months Ended June 30,
Derivative related income (expense)	$	1		$	3		$	(2	)	(66.7	)%
Gain on debt designated at fair value and related derivatives	4			16			(12		)	(75.0	)
Servicing and other fees from (to) HSBC affiliates	—			2			(2		)	(100.0	)
Lower of amortized cost or fair value adjustment on receivables held for sale	58			(56		)	114			*
Gain (loss) on sale of real estate secured receivables	(2		)	423			(425		)	*
Other income	2			4			(2		)	(50.0	)
Total other revenues	$	63		$	392		$	(329	)	(83.9	)%

Six Months Ended June 30,
Derivative related income (expense)	$	3		$	(112	)	$	115		*
Gain on debt designated at fair value and related derivatives	16			40			(24		)	(60.0	)
Servicing and other fees from (to) HSBC affiliates	(27		)	6			(33		)	*
Lower of amortized cost or fair value adjustment on receivables held for sale	171			(111		)	282			*
Gain (loss) on sale of real estate secured receivables	615			423			192			45.4
Other income	9			13			(4		)	(30.8	)
Total other revenues	$	787		$	259		$	528		*


*	Not meaningful

Derivative related income (expense) for the three and six months ended June 30, 2017 reflects ineffectiveness primarily related to our cross currency cash flow hedges which are qualifying hedges and are approaching maturity. As discussed in prior filings, in May 2016 we terminated a portfolio of interest rate swaps which had been used to minimize our exposure to changes in interest rates. Prior to the termination of this portfolio of interest rate swaps, derivative related income (expense) during the three and six months ended June 30, 2016 reflected realized and unrealized gains and losses on this portfolio of interest rate swaps as they did not qualify as effective hedges under hedge accounting principles as well as ineffectiveness on derivatives which are qualifying hedges.

The following table summarizes derivative related income (expense) for the three and six months ended June 30, 2017 and 2016:



	Three Months Ended June 30,					Six Months Ended June 30,
	2017		2016			2017		2016
	(in millions)
Net realized losses	$	—	$	(8	)	$	—	$	(26	)
Mark-to-market on derivatives in our non-qualifying hedge portfolio	—		10			—		(91		)
Hedge accounting ineffectiveness	1		1			3		5
Total derivative related income (expense)	$	1	$	3		$	3	$	(112	)

Net income volatility in future periods has been reduced as a result of the elimination of our non-qualifying hedge portfolio in May 2016. Derivative related income (expense) for the six months ended June 30, 2017 or any prior periods should not be considered indicative of the results for any future periods.

HSBC Finance Corporation

Gain on debt designated at fair value and related derivatives reflects fair value changes on our fixed rate debt accounted for under fair value option as well as the fair value changes and realized gains (losses) on the related derivatives associated with debt designated at fair value. Beginning January 1, 2017, the fair value movement on fair value option liabilities attributable to our credit spreads is recorded in other comprehensive income (loss). Excluding the impact of this item, which resulted in a gain of $8 million and $19 million during the three and six months ended June 30, 2016, respectively, the gain on debt designated at fair value and related derivatives was lower during the three and six months ended June 30, 2017 as compared with the year-ago periods. See Note 5, "Fair Value Option," in the accompanying consolidated financial statements for additional information, including a break out of the components of the gain on debt designated at fair value and related derivatives.

Net income volatility resulting from fair value movements on fair value option debt impacts the comparability of our reported results between periods. The gain on debt designated at fair value and related derivatives for the six months ended June 30, 2017 should not be considered indicative of the results for any future periods.

Servicing and other fees from (to) HSBC affiliates have historically represented revenue received under service level agreements under which we service real estate secured receivables and rental revenue from HSBC Technology & Services (USA) Inc. ("HTSU") for certain office and administrative costs. Servicing and other fees from (to) HSBC affiliates also includes costs incurred due to the early termination of affiliate debt. For the six months ended June 30, 2017, servicing and other fees from (to) HSBC affiliates primarily reflects a loss on extinguishment of debt of $28 million as a result of prepaying a $2.5 billion credit agreement with an affiliate in March 2017. As a result of the significant decrease in the levels of receivables we service for affiliates and facility closings subsequent to June 30, 2016 as well as lower administrative costs with affiliates reflecting the continuing reduced scope of our business operations, servicing and other fees received from affiliates during the three and six months ended June 30, 2017 does not reflect any other significant activity.

Lower of amortized cost or fair value adjustment on receivables held for sale during the three and six months ended June 30, 2017 and 2016 is summarized in the following table:



	Three Months Ended June 30,					Six Months Ended June 30,
	2017		2016			2017		2016
	(in millions)
Income (expense)
Initial lower of amortized cost or fair value adjustment recorded on receivables transferred to held for sale during the period	$	—	$	(2	)	$	—	$	(6	)
Lower of amortized cost or fair value adjustment subsequent to the initial transfer to held for sale	58		(54		)	171		(105		)
Lower of amortized cost or fair value adjustment	$	58	$	(56	)	$	171	$	(111	)

During the three and six months ended June 30, 2017, we reversed $58 million and $171 million, respectively, of the lower of amortized cost or fair value adjustment recorded in prior periods. Of this amount $55 million and $163 million during the three and six months ended June 30, 2017, respectively, reflects reversals attributable to fair value changes resulting from aggregating all receivables held for sale into pools based on the marketing strategy for the remainder of 2017 as well as improvements in the fair value of these receivables during the first half of 2017. The fair value of receivables held for sale is determined based on an aggregation of receivables into pools either by similar risk characteristics or by receivable pools being marketed. These amounts also include reversals attributable to the impact of settlements totaling $3 million and $8 million, respectively. Settlements reflect either receivable payoffs (including short sales) or transfers of receivables to REO.

During the three and six months ended June 30, 2016, we recorded an additional lower of amortized cost or fair value adjustment on receivables held for sale totaling $54 million and $105 million, respectively. Of this amount, $62 million and $130 million during the three and six months ended June 30, 2016, respectively, reflects additional adjustments attributable to fair value changes as a result of establishing separate pools for receivables being marketed and $8 million and $25 million, respectively, of reversals related to settlements as described above.

We did not record an initial lower of amortized cost or fair value adjustment during the three or six months ended June 30, 2017 as no new receivables were transferred to held for sale during the first half of 2017 as a result of classifying our entire portfolio of receivables as held for sale in September 2016. During the three and six months ended June 30, 2016, we recorded an initial lower of amortized cost or fair value adjustment on receivables transferred to held for sale totaling $8 million and $25 million, respectively, of which $2 million and $6 million, respectively, was attributable to non-credit factors and recorded as a component of other revenues in the consolidated statement of income (loss). The remainder of the total initial lower of amortized cost or fair

HSBC Finance Corporation

value adjustment for the three and six months ended June 30, 2016 of $6 million and $19 million, respectively, was attributed to credit factors and recorded as a component of the provision for credit losses.

See Note 2, "Receivables Held for Sale," in the accompanying consolidated financial statements for additional discussion.

Gain (loss) on sale of real estate secured receivables The following table summarizes receivables sold during the three and six months ended June 30, 2017 and 2016.



	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017		2016
	(in millions)
Unpaid principal balance at the time of sale	$	621		$	4,722	$	4,984	$	4,722

Aggregate cash consideration received	$	556		$	4,667	$	4,863	$	4,667
Aggregate carrying value at the time of sale	554			4,219		4,219		4,219
Transaction costs	4			25		29		25
Gain (loss) on sale of real estate secured receivables	$	(2	)	$	423	$	615	$	423

Other income decreased during the three and six months ended June 30, 2017. The six months ended June 30, 2016 was impacted by a release in the reserve for repurchase liabilities. Excluding the impact of this item, other income was essentially flat during the three and six months ended June 30, 2017.

Our reserve for potential repurchase liability represents our best estimate of the loss that has been incurred resulting from various representations and warranties in the contractual provisions of our receivable sales. Because the level of receivable repurchase losses are dependent upon strategies for bringing claims or pursuing legal action for losses incurred, the level of the liability for receivables repurchase losses requires significant judgment. As such, there is uncertainty inherent in these estimates making it reasonably possible that they could change. The following table summarizes the changes in our reserve for potential repurchase liability related to our receivable sales:



	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017			2016
	(in millions)
Balance at beginning of period	$	63		$	31	$	53		$	36
Increase in liability recorded through earnings⁽¹⁾	2			12		13			7
Realized losses	(3		)	—		(4		)	—
Balance at end of period	$	62		$	43	$	62		$	43


⁽¹⁾	The portion of the increase in the reserve for repurchase liabilities arising at the time of a receivable sale transaction are included as a component of gain (loss) on sale of real estate secured receivables and are not reflected in other income.

HSBC Finance Corporation

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



					Increase (Decrease)
	2017		2016		Amount			%
	(dollars are in millions)
Three Months Ended June 30,
Salaries and employee benefits	$	10	$	34	$	(24	)	(70.6	)%
Occupancy and equipment expenses, net	5		4		1			25.0
Real estate owned expenses	—		2		(2		)	(100.0	)
Support services from HSBC affiliates	21		38		(17		)	(44.7	)
Provision for securities litigation liability	—		575		(575		)	(100.0	)
Other expenses	25		60		(35		)	(58.3	)
Total operating expenses	$	61	$	713	$	(652	)	(91.4	)%

Six Months Ended June 30,
Salaries and employee benefits	$	36	$	72	$	(36	)	(50.0	)%
Occupancy and equipment expenses, net	7		10		(3		)	(30.0	)
Real estate owned expenses	1		5		(4		)	(80.0	)
Support services from HSBC affiliates	44		80		(36		)	(45.0	)
Provision for securities litigation liability	—		575		(575		)	(100.0	)
Other expenses	40		109		(69		)	(63.3	)
Total operating expenses	$	128	$	851	$	(723	)	(85.0	)%

Salaries and employee benefits decreased during the three and six months ended June 30, 2017 due to the impact of the continuing reduced scope of our business operations and the impact of entity-wide initiatives to reduce costs. The decrease also reflects a gain on curtailment of $13 million related to our postretirement plans. See Note 8, "Pension and Other Postretirement Benefits," in the accompanying consolidated financial statements for additional information.

Occupancy and equipment expenses, net were essentially flat during the three months ended June 30, 2017 and decreased during the six months ended June 30, 2017. The decrease during the year-to-date period reflects lower repair and utility costs reflecting the impact of the continuing reduced scope of our business operations.

Real estate owned expenses decreased during the three and six months ended June 30, 2017 driven by fewer average numbers of REO properties held during the year.

Support services from HSBC affiliates decreased during the three and six months ended June 30, 2017 due to lower technology and centralized support services provided by HTSU reflecting the reduced scope of our business operations. To a lesser extent, the decrease in support services from affiliates during the three and six months ended June 30, 2017 also reflects lower fees for the servicing of receivables by HSBC affiliates as a result of receivable sales subsequent to June 30, 2016.

Provision for securities litigation liability As discussed more fully in Note 20, "Litigation and Regulatory Matters," in our 2016 Form 10-K, in June 2016, we agreed to pay $1,575 million to settle all claims of the outstanding securities litigation. As a result, we recorded a provision for securities litigation liability of $575 million during the second quarter of 2016.

Other expenses decreased during the three and six months ended June 30, 2017 reflecting lower litigation costs, lower file review costs related to our receivable sales program and lower third party collection costs. For the six months ended June 30, 2017, the decrease also reflects a reduction of an accrual related to mortgage servicing matters. The decrease in both periods also reflects the continuing reduction in the scope of our business operations and the impact of entity-wide initiatives to reduce costs.

HSBC Finance Corporation

Income taxes The following table provides an analysis of the difference between effective rates based on the total income tax provision attributable to pretax income and the statutory U.S. Federal income tax rate:



	2017					2016
	(dollars are in millions)
Three Months Ended June 30,
Tax expense (benefit) at the U.S. Federal statutory income tax rate	$	7		35.0	%	$	(68	)	(35.0	)%
Increase (decrease) in rate resulting from:
State and local taxes, net of Federal benefit	2			*		(5		)	(2.6	)
Adjustment with respect to tax for prior periods⁽¹⁾	—			—		4			2.1
Uncertain tax positions	(2		)	*		6			2.9
Other non-deductible/non-taxable items	(3		)	*		(1		)	(.5	)
Other	(2		)	*		1			.5
Total income tax expense (benefit)	$	2		10.5	%	$	(63	)	(32.6	)%

Six Months Ended June 30,
Tax expense (benefit) at the U.S. Federal statutory income tax rate	$	243		35.0	%	$	(112	)	(35.0	)%
Increase (decrease) in rate resulting from:
State and local taxes, net of Federal benefit	20			3.0		(8		)	(2.5	)
Adjustment with respect to tax for prior periods⁽¹⁾	—			—		22			6.9
Uncertain tax positions⁽²⁾	(2		)	(.3	)	(12		)	(3.8	)
Other non-deductible/non-taxable items	(5		)	(.7	)	(3		)	(.9	)
Other	2			.2		(6		)	(2.0	)
Total income tax expense (benefit)	$	258		37.2	%	$	(119	)	(37.3	)%


*	Due to the small tax adjustments as well as the low level of income from continuing operations before tax, the percentages are not meaningful for the three months ended June 30, 2017.


⁽¹⁾	For the three and six months ended June 30, 2016, the amount includes a $7 million adjustment related to the Federal audit of the 2013 tax year. The amount for the six months ended June 30, 2016, was also impacted by a reversal of approximately $15 million associated with an out of period adjustment to our deferred tax asset balance.


⁽²⁾	For the six months ended June 30, 2017 and June 30, 2016, the amount primarily relates to the conclusion of certain State audits.

Credit Quality

Credit Loss Reserves As discussed in prior filings, subsequent to the third quarter of 2016 all of our receivables are classified as held for sale and no longer have any associated credit loss reserves as they are carried at the lower of amortized cost or fair value.

Delinquency Our policies and practices for the collection of receivables, including our customer account management policies and practices, permit us to modify the terms of receivables, either temporarily or permanently (a "modification"), and/or to reset the contractual delinquency status of an account that is contractually delinquent to current (a "re-age"), based on indicators or criteria which, in our judgment, evidence continued payment probability. Such policies and practices are designed to manage customer relationships, improve collection opportunities and avoid foreclosure or repossession as determined to be appropriate. If a re-aged account subsequently experiences payment defaults, it will again become contractually delinquent and be included in our delinquency ratios.

HSBC Finance Corporation

The table below summarizes dollars of two-months-and-over contractual delinquency and two-months-and-over contractual delinquency as a percent of receivables ("delinquency ratio") for our portfolio of real estate secured receivables, all of which are classified as held for sale at June 30, 2017, March 31, 2017 and December 31, 2016.



	June 30, 2017			March 31, 2017			December 31, 2016
	(dollars are in millions)
Dollars of contractual delinquency⁽¹⁾	$	285		$	361		$	457
Delinquency ratio	21.18		%	18.89		%	8.05		%


⁽¹⁾	The receivables held for sale balances reflect the lower of amortized cost or fair value for the receivable.

Dollars of contractual delinquency for real estate secured receivables held for sale at June 30, 2017 decreased as compared with March 31, 2017 and December 31, 2016 as a result of receivables sold during the first half of 2017, partially offset by the impact of a reversal of lower of amortized cost or fair value adjustments recorded in prior periods.

The delinquency ratio for real estate secured receivables held for sale was 21.18 percent at June 30, 2017 compared with 18.89 percent at March 31, 2017 and 8.05 percent at December 31, 2016. The increase as compared with March 31, 2017 and December 31, 2017 reflects real estate secured receivable sales during the three and six months ended June 30, 2017. A significant portion of the receivables sold during the first half of 2017 were less than 60 days contractually delinquent which results in receivables held for sale decreasing at a faster pace than dollars of delinquency.

See "Customer Account Management Policies and Practices" regarding the delinquency treatment of re-aged and modified accounts.

Net Charge-offs As discussed in prior filings, beginning in September 2016 all of our receivables are classified as held for sale and we no longer record charge-offs on these receivables as they are carried at the lower of amortized cost or fair value. Accordingly, there are no net charge-off dollars to report for the quarterly periods ended June 30, 2017 and March 31, 2017. For the quarterly period ended June 30, 2016, net charge-off dollars totaled $30 million and the net charge-off ratio (net charge-offs for the quarter, annualized, as a percentage of average receivables for the quarter) was 1.44 percent.

Nonperforming Assets Nonperforming assets consisted of the following for the periods presented:



	June 30, 2017		March 31, 2017		December 31, 2016
	(in millions)
Nonaccrual receivables held for sale⁽¹⁾	$	247	$	323	$	381
Real estate owned	19		26		31
Total nonperforming assets	$	266	$	349	$	412

⁽¹⁾

The receivables held for sale balances reflect the lower of amortized cost or fair value for the receivable. Nonaccrual receivables reflect all receivables which are 90 or more days contractually delinquent as well as second lien receivables (regardless of delinquency status) where the first lien receivable that we own or service is 90 or more days contractually delinquent. Nonaccrual receivables do not include receivables totaling $183 million, $197 million and $252 million at June 30, 2017, March 31, 2017 and December 31, 2016, respectively, which are less than 90 days contractually delinquent and not accruing interest. In addition, nonaccrual receivables do not include receivables which have made qualifying payments and have been re-aged and the contractual delinquency status reset to current as such activity, in our judgment, evidences continued payment probability. If a re-aged receivable subsequently experiences payment default and becomes 90 or more days contractually delinquent, it will be reported as nonaccrual.

Nonaccrual receivables held for sale decreased at June 30, 2017 compared with March 31, 2017 and December 31, 2016 as a result of receivables sold during the first half of 2017, partially offset by the impact of a reversal of lower of amortized cost or fair value adjustments recorded in prior periods.

Customer Account Management Policies and Practices Our policies and practices focus on ethical and effective collection and customer account management efforts for each receivable. Our customer account management policies and practices permit us to take action with respect to delinquent or troubled accounts based on criteria which, in our judgment, evidence continued payment probability, as well as a continuing desire for borrowers to stay in their homes. The policies and practices are designed to manage customer relationships, improve collection opportunities and avoid foreclosure as determined to be appropriate. From time to time we re-evaluate these policies and procedures and make changes as deemed appropriate.

HSBC Finance Corporation

Currently, we utilize the following account management actions:

•

Modification – Management action that results in a change to the terms and conditions of the receivable without changing the delinquency status of the receivable. Modifications include changes to the terms of the receivable and have historically included, but were not limited to, a change in interest rate, extension of the amortization period, reduction in payment amount and partial forgiveness or deferment of principal. Beginning May 1, 2017, we revised our modification program to only include changes in interest rates.

•

Collection Re-age – Management action that results in the resetting of the contractual delinquency status of an account to current but does not involve any changes to the original terms and conditions of the receivable. If an account which has been re-aged subsequently experiences a payment default, it will again become contractually delinquent. We use collection re-aging as an account and customer management tool in an effort to increase the cash flow from our account relationships, and accordingly, the application of this tool is subject to complexities, variations and changes from time to time.


•	Modification Re-age – Management action that results in a change to the terms and conditions of the receivable, either temporarily or permanently, and also resets the contractual delinquency status of an account to current as discussed above. If an account which has been re-aged subsequently experiences a payment default, it will again become contractually delinquent.

Our account management programs include certain eligibility criteria, including time since last account management action, minimum qualifying payment required and a maximum number of account management actions during a five year period.

The following table shows the number of real estate secured accounts remaining in our portfolio (all of which are classified as held for sale) as well as the outstanding receivable balance of these accounts as of the period indicated for receivables for which we have taken an account management action by the type of action taken, some of which may have received multiple account management actions.



	Number of Accounts	Outstanding Receivable Balance⁽¹⁾
	(accounts are in thousands)	(dollars are in millions)
June 30, 2017:
Collection re-age only	4.6	$	348
Modification only	.4	24
Modification re-age	5.6	501
Total receivables modified and/or re-aged⁽¹⁾	10.6	$	873
March 31, 2017:
Collection re-age only	8.4	$	539
Modification only	.7	33
Modification re-age	8.7	673
Total receivables modified and/or re-aged⁽¹⁾	17.8	$	1,245
December 31, 2016:
Collection re-age only	24.7	$	991
Modification only	2.1	76
Modification re-age	17.3	957
Total receivables modified and/or re-aged⁽¹⁾	44.1	$	2,024


⁽¹⁾	The receivables balances reflect the lower of amortized cost or fair value for the receivable.

HSBC Finance Corporation

The following table provides information regarding the delinquency status of receivables remaining in the portfolio that were granted modifications of loan terms and/or re-aged as of June 30, 2017, March 31, 2017 and December 31, 2016 in the categories shown above:



	Number of Accounts						Outstanding Receivable Balance
	Current or less than 30-days delinquent		30- to 59-days delinquent		60-days or more delinquent		Current or less than 30-days delinquent		30- to 59-days delinquent		60-days or more delinquent
June 30, 2017	67	%	8	%	25	%	65	%	8	%	27	%
March 31, 2017	71		7		22		70		7		23
December 31, 2016	79		6		15		76		6		18

The following table provides information regarding real estate secured modified and/or re-aged receivables during the three and six months ended June 30, 2017 and 2016:



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in millions)
Balance at beginning of period	$	1,245		$	9,224		$	2,024		$	9,511
Additions due to an account management action⁽¹⁾	6			51			26			126
Payments⁽²⁾	(34		)	(222		)	(79		)	(490		)
Net charge-offs⁽³⁾	—			(18		)	—			(62		)
Transfer to real estate owned	(2		)	(20		)	(10		)	(36		)
Receivables held for sale that have subsequently been sold	(376		)	(3,738		)	(1,172		)	(3,738		)
Change in lower of amortized cost or fair value on receivables held for sale	34			(48		)	84			(82		)
Balance at end of period	$	873		$	5,229		$	873		$	5,229


⁽¹⁾	Includes collection re-age only, modification only, and modification re-ages.


⁽²⁾	Includes amounts received under a short sale whereby the property is sold by the borrower at a price which has been pre-negotiated with us and the borrower is released from further obligation.

⁽³⁾

Amounts include the credit loss reserves existing at the time of transfer of receivables to held for sale during the period which are recognized as charge-off. Amounts also include the lower of amortized cost or fair value adjustment attributable to credit factors for receivables transferred to held for sale during the period. See Note 4, "Credit Loss Reserves," in the accompanying consolidated financial statements for further discussion.

The following table summarizes receivables modified during the six months ended June 30, 2017 and 2016, some of which may have also been re-aged:



	Number of Accounts Modified	Outstanding Receivable Balance at Time of Modification
	(accounts are in thousands, dollars are in millions)
Modifications⁽¹⁾⁽²⁾:
Six months ended June 30, 2017	.7	$	66
Six months ended June 30, 2016	3.2	234


⁽¹⁾	Includes all receivables modified during the six months ended June 30, 2017 and 2016 regardless of whether the receivable was also re-aged.


⁽²⁾	If qualification criteria are met, receivable modification may occur on more than one occasion for the same account. For purposes of the table above, an account is only included in the modification totals once in an annual period and not for each separate modification in an annual period.

HSBC Finance Corporation

Concentration of Credit Risk A concentration of credit risk is defined as a significant credit exposure with an individual or group engaged in similar activities or having similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions.

Our receivable portfolio is comprised of loans to non-prime consumers. Such customers are individuals who have limited credit histories, modest incomes, high debt-to-income ratios or have experienced credit problems evidenced by occasional delinquencies, prior charge-offs, bankruptcy or other credit related actions. The majority of our secured receivables have high loan-to-value ratios.

Because our lending activities were primarily to individual consumers, we do not have receivables from any industry group that equal or exceed 10 percent of total receivables at June 30, 2017 or December 31, 2016. The following table reflects the percentage of receivables by state which individually account for 5 percent or greater of our portfolio.



	Percent of Total Real Estate Secured Receivables
	June 30, 2017		December 31, 2016
New York	10.2	%	9.0	%
Florida	7.5		5.9
Pennsylvania	7.3		5.9
California	6.2		8.7
Virginia	6.0		4.4
Ohio	5.1		5.3

The significant change in the percentage for certain states since December 31, 2016 reflects the impact of receivable sales during the first half of 2017.

Liquidity and Capital Resources

HSBC Related Funding We work with our affiliates under the oversight of HSBC North America to maximize funding opportunities and efficiencies in HSBC's operations in the United States. All of our ongoing funding requirements have been integrated into the overall HSBC North America funding plans with any future funding requirements to be sourced primarily through HSBC USA Inc. ("HSBC USA") or HSBC North America.

Due to affiliates totaled $799 million and $3,300 million at June 30, 2017 and December 31, 2016, respectively. The interest rates on funding from HSBC subsidiaries are market-based and comparable to those available from unaffiliated parties. In March 2017, we prepaid $2.5 billion of the due to affiliates balance and incurred a loss on extinguishment of debt of $28 million. The balance outstanding as of June 30, 2017 matures in 2021.

See Note 9, "Related Party Transactions," in the accompanying consolidated financial statements for further discussion about our funding arrangements with HSBC affiliates, including derivatives.

Short-Term Investments Securities purchased under agreements to resell totaled $5,269 million and $2,392 million at June 30, 2017 and December 31, 2016, respectively. Interest bearing deposits with banks totaled $1,500 million at December 31, 2016 and were with HSBC Bank USA, National Association (together with its subsidiaries, "HSBC Bank USA"). We did not have any interest bearing deposits at June 30, 2017. Short-term investments increased as compared with December 31, 2016 reflecting cash received from receivable sales.

HSBC Finance Corporation

Long-Term Debt (excluding amounts due to affiliates) decreased to $3,071 million at June 30, 2017 from $4,340 million at December 31, 2016. There were no issuances of long-term debt during the six months ended June 30, 2017 and 2016. Repayments of long-term debt totaled $1,332 million and $4,439 million during the six months ended June 30, 2017 and 2016, respectively.

Maturities of long-term debt at June 30, 2017, including secured financings based on the anticipated clean-up date for the collateralized funding transactions, are as follows:



	(in millions)
2017	$	177
2018	254
2019	164
2020	—
2021	2,335
Thereafter	141
Total	$	3,071

Secured financings previously issued under public trusts of $191 million at June 30, 2017 are secured by $428 million of closed-end real estate secured receivables which are classified as receivables held for sale at June 30, 2017. Secured financings previously issued under public trusts of $404 million at December 31, 2016 were secured by $750 million of closed-end real estate secured receivables which are classified as receivables held for sale at December 31, 2016.

In order to eliminate future foreign exchange risk, currency swaps were used at the time of issuance of all foreign-denominated notes to fix the notes in U.S. dollars.

We have used derivatives for managing interest rate and currency risk but we do not otherwise enter into off-balance sheet transactions.

Common Equity During the six months ended June 30, 2017 and 2016, we did not receive any capital contributions.

Equity ratio Common and preferred equity to total assets totaled 56.35 percent at June 30, 2017 compared with 39.14 percent at December 31, 2016.

HSBC North America continues to review the composition of its capital structure following the adoption by the U.S. banking regulators of the final rules implementing the Basel III regulatory capital and liquidity reforms from the Basel Committee on Banking Supervision, which were effective as of January 1, 2014. Upon receipt of regulatory approval, we have replaced instruments whose treatment was less favorable under the new rules with Basel III compliant instruments. Any required funding has been integrated into the overall HSBC North America funding plans with any future funding requirements to be sourced through HSBC USA, HSBC North America, or through direct support from HSBC or its affiliates.

HSBC North America participates in the FRB's CCAR program and submitted its latest CCAR capital plan and annual company-run stress test results in April 2017. In June 2017, the FRB informed HSBC North America that it did not object to HSBC North America's capital plan or the planned capital distributions included in its 2017 CCAR submission. Stress testing results are based solely on hypothetical adverse scenarios and should not be viewed or interpreted as forecasts of expected outcomes or capital adequacy or of the actual financial condition of HSBC North America. Capital planning and stress testing for HSBC North America may impact our future capital and liquidity.

HSBC Finance Corporation

2017 Funding Strategy The following table summarizes our current range of estimates for funding needs and sources for 2017:



	Actual January 1 through June 30, 2017		Estimated July 1 through December 31, 2017 (Minimum-Maximum)					Estimated Full Year 2017 (Minimum-Maximum)
	(in billions)
Funding needs:
Unsecured debt maturities	$	1	$	—	-	$	1	$	1	-	$	2
Exercise call options on debt	2		—		-	—		2		-	2
Short-term investments	1		1		-	2		2		-	3
Total funding needs	$	4	$	1	-	$	3	$	5	-	$	7
Funding sources:
Receivable sales	$	4	$	1	-	$	2	$	5	-	$	6
Other⁽¹⁾	—		—		-	1		—		-	1
Total funding sources	$	4	$	1	-	$	3	$	5	-	$	7


⁽¹⁾	Primarily reflects miscellaneous cash provided by operating activities.

For the remainder of 2017, we expect proceeds from sales of real estate secured receivables and other balance sheet attrition will generate the liquidity necessary to meet our maturing debt obligations.

Fair Value

Control Over Valuation Process and Procedures We have established a control framework which is designed to ensure that fair values are either determined or validated by a function independent of the risk-taker. See Note 11, "Fair Value Measurements," in the accompanying consolidated financial statements for further details on our valuation control framework.

Fair Value Hierarchy Accounting principles related to fair value measurements establish a fair value hierarchy structure that prioritizes the inputs to valuation techniques used to determine the fair value of an asset or liability (the "Fair Value Framework"). The Fair Value Framework distinguishes between inputs that are based on observed market data and unobservable inputs that reflect market participants' assumptions. It emphasizes the use of valuation methodologies that maximize market inputs. For financial instruments carried at fair value, the best evidence of fair value is a quoted price in an actively traded market (Level 1). Where the market for a financial instrument is not active, valuation techniques are used. The majority of valuation techniques use market inputs that are either observable or indirectly derived from and corroborated by observable market data for substantially the full term of the financial instrument (Level 2). Because Level 1 and Level 2 instruments are determined by observable inputs, less judgment is applied in determining their fair values. In the absence of observable market inputs, the financial instrument is valued based on valuation techniques that feature one or more significant unobservable inputs (Level 3). The determination of the level of fair value hierarchy within which the fair value measurement of an asset or a liability is classified often requires judgment. We consider the following factors in developing the fair value hierarchy:


Ÿ	whether the pricing quotations differ substantially among independent pricing services;


Ÿ	whether the instrument is transacted in an active market with a quoted market price that is readily available;


Ÿ	the size of transactions occurring in an active market;


Ÿ	the level of bid-ask spreads;


Ÿ	a lack of pricing transparency due to, among other things, market liquidity;


Ÿ	whether only a few transactions are observed over a significant period of time;


Ÿ	whether the inputs to the valuation techniques can be derived from or corroborated with market data; and


Ÿ	whether significant adjustments are made to the observed pricing information or model output to determine the fair value.

HSBC Finance Corporation

Level 1 inputs are unadjusted quoted prices in active markets that the reporting entity has the ability to access for the identical assets or liabilities. A financial instrument is classified as a Level 1 measurement if it is listed on an exchange or is an instrument actively traded in the over-the-counter market where transactions occur with sufficient frequency and volume.

Level 2 inputs are inputs that are observable either directly or indirectly but do not qualify as Level 1 inputs. We generally classify derivative contracts as well as our own debt issuance for which we have elected fair value option as Level 2 measurements. These valuations are typically obtained from a third party valuation source which, in the case of derivatives, includes valuations provided by HSBC Bank USA.

Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. Level 3 inputs incorporate market participants' assumptions about risk and the risk premium required by market participants in order to bear that risk. We develop Level 3 inputs based on the best information available in the circumstances. At June 30, 2017 and December 31, 2016, our Level 3 assets recorded at fair value on a non-recurring basis totaled $1,346 million (13 percent of total assets) and $5,674 million (41 percent of total assets), respectively. At June 30, 2017 and December 31, 2016, we had no Level 3 assets recorded at fair value on a recurring basis.

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

See Note 11, "Fair Value Measurements," in the accompanying consolidated financial statements for further details including our valuation techniques as well as the classification hierarchy associated with assets and liabilities measured at fair value. Additionally, see Note 11, "Fair Value Measurements," in the accompanying consolidated financial statements for information about transfers between Level 1 and Level 2 measurements and transfers between Level 2 and Level 3 measurements during the three and six months ended June 30, 2017 and 2016.

Risk Management

Overview Managing risk effectively is fundamental to the delivery of our strategic priorities. To do so, we employ a risk management framework at all levels and across all risk types. This framework fosters the continuous monitoring of the risk environment and an integrated evaluation of risks and their interactions. It also ensures that we have a robust and consistent approach to risk management across all of our activities. While we are subject to a number of legal and regulatory actions and investigations, our risk management framework has been designed to provide robust controls and ongoing monitoring of our principal risks. We strive to continuously improve our risk management processes through ongoing employee training and development.

The principal risks associated with our operations include the following:


Ÿ	Credit risk is the risk that financial loss arises from the failure of a customer or counterparty to meet its obligations under a contract;


Ÿ	Liquidity risk is the potential that an institution will be unable to meet its obligations as they become due because of inadequate cash flow or the inability to liquidate assets or obtain funding itself;


Ÿ	Market risk is the risk that movements in market factors, including interest rates and foreign currency exchange rates, will reduce our income or the value of our portfolios;


Ÿ	Interest rate risk is the potential reduction of net interest income due to mismatched pricing between assets and liabilities as well as losses in value due to rate movements;


Ÿ	Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems or from external events (including legal risk);


Ÿ	Compliance risk is the risk that we fail to observe the letter and spirit of all relevant laws, codes, rules, regulations and standards of good market practice causing us to incur fines, penalties and damage to our business and reputation (including financial crime and fraud risk);


Ÿ	Reputational risk is the risk arising from failure to meet stakeholder expectations as a result of any event, behavior, action or inaction, either by us, our employees, the HSBC Group or those with whom we are associated that may cause stakeholders to form a negative view of us. This might also result in financial or non-financial impacts, loss of confidence or other consequences;

HSBC Finance Corporation


Ÿ	Strategic risk is the risk that the business will fail to identify, execute and react appropriately to opportunities and/or threats arising from changes in the market, some of which may emerge over a number of years such as changing economic and political circumstances, customer requirements, demographic trends, regulatory developments or competitor action;


Ÿ	Security risk is the risk to the business from terrorism, information security, incidents/disasters, cyber-attacks and groups hostile to HSBC interests;


Ÿ	Model risk is the potential for adverse consequences from decisions based on incorrect or misused model outputs and reports. This occurs primarily for two reasons: 1) the model may produce inaccurate outputs when compared to the intended business use and design objective; and 2) the model could be used incorrectly; and


Ÿ	Pension risk is the risk of increased costs from the post-employment benefit plans that we have established for our employees.

In the course of our regular risk management activities, we use simulation models to help quantify the risk we are taking. The output from some of these models is included in this section of our filing. By their nature, models are based on various assumptions and relationships. We believe that the assumptions used in these models are reasonable, but events may unfold differently than what is assumed in the models. In actual stressed market conditions, these assumptions and relationships may no longer hold, causing actual experience to differ significantly from the results predicted in the model. Consequently, model results may be considered reasonable estimates, with the understanding that actual results may differ significantly from model projections.

See "Risk Management" in MD&A in our 2016 Form 10-K for a more complete discussion of the objectives of our risk management system as well as our risk management policies and procedures. There have been no material changes to our approach to credit risk management, market risk management, reputational risk management, strategic risk management, model risk management or pension risk management since December 31, 2016.

Liquidity Risk Management The primary driver of our liquidity going forward will be sales of real estate secured receivables and other balance sheet attrition. However, as we continue to execute our receivables sales program, cash flows subsequent to 2017 may not provide sufficient cash to fully cover maturing debt in future periods. We currently do not expect third party debt to be a source of funding for us in the future given the run-off nature of our business. Any required incremental funding has been integrated into the overall HSBC North America funding plan and we expect it to be sourced through HSBC USA, HSBC North America, or will be obtained through direct support from HSBC or its affiliates. HSBC has indicated it remains fully committed and has the capacity to continue to provide such support.

HSBC North America maintains a liquidity management and contingency funding plan, which identifies certain potential early indicators of liquidity problems, and actions that can be taken both initially and in the event of a liquidity crisis, to minimize the long-term impact on its businesses. The liquidity contingency funding plan is reviewed annually and approved by the Risk Committee of the Board of Directors. We recognize a liquidity crisis can either be specific to us, relating to our ability to meet our obligations in a timely manner, or market-wide, caused by a macro risk event in the broader financial system. A range of indicators is monitored to attain an early warning of any liquidity issues. These include widening of key spreads or indices used to track market volatility, widening of our credit spreads and higher borrowing costs. In the event of a cash flow crisis, our objective is to fund cash requirements without HSBC affiliate access to the wholesale unsecured funding market for at least 90 days. Contingency funding needs will be satisfied primarily through liquidation of short-term investments, sale of receivables or secured borrowing using the mortgage portfolio as collateral. We maintain a liquid asset buffer consisting of cash and short-term liquid assets.

We project cash flow requirements and determine the level of liquid assets and available funding sources to have at our disposal, with consideration given to anticipated balance sheet run-off, including liquidation of receivables held for sale, contingent liabilities and the ability of HSBC USA to access wholesale funding markets.

The Basel Committee based Liquidity Coverage Ratio ("LCR") is designed to be a short-term liquidity measure to ensure banks have sufficient High Quality Liquid Assets ("HQLA") to cover net stressed cash outflows over the next 30 days. A LCR ratio of 100 percent or higher reflects an unencumbered HQLA balance that is equal to or exceeds liquidity needs for a 30 calendar day liquidity stress scenario. HQLA consists of cash or assets that can be converted into cash at little or no loss of value in private markets. HSBC North America has adjusted its liquidity profile to support compliance with these rules. HSBC North America may need to make further changes to its liquidity profile to support compliance with any future final rules. HSBC Finance Corporation may need to adjust its liquidity profile to support HSBC North America's compliance with these rules, but it is not anticipated to significantly impact our operations.

In 2015, the Financial Stability Board ("FSB") issued final standards for total loss-absorbing capacity ("TLAC") requirements for global systemically important banks ("G-SIBs"). In December 2016, the FRB adopted final rules implementing the FSB's TLAC standard in the United States. The rules require, among other things, the U.S. intermediate holding companies of non-U.S. G-SIBs, including HSBC North America, to maintain minimum amounts of TLAC which would include minimum levels of Tier 1 capital

HSBC Finance Corporation

and long-term debt satisfying certain eligibility criteria, and a related TLAC buffer commencing January 1, 2019, without the benefit of a phase-in period. The TLAC rules also include 'clean holding company requirements' that impose limitations on the types of financial transactions that HSBC North America could engage in. The FSB's TLAC standard and the FRB's TLAC rules represent a significant expansion of the current regulatory capital framework that may require HSBC North America to issue additional long-term debt.

As indicated by the major rating agencies, our credit ratings are directly dependent upon the continued support of HSBC. A credit rating downgrade would increase future borrowing costs only for new debt obligations, if any. As discussed above, we do not currently expect to need to raise funds from the issuance of third party debt going forward, but instead any required funding has been integrated into HSBC North America's funding plans and we expect it to be sourced through HSBC USA, HSBC North America or through direct support from HSBC or its affiliates. HSBC has historically provided significant capital in support of our operations and has indicated that they remain fully committed and have the capacity to continue that support.

The following table summarizes our credit ratings at both June 30, 2017 and December 31, 2016:



	Standard & Poor's Corporation	Moody's Investors Service	Fitch, Inc.
Senior debt	A	Baa1	A+
Senior subordinated debt	A-	Baa2	A

Rating agencies continue to evaluate economic and geopolitical trends, regulatory developments, future profitability, risk management practices and litigation matters, all of which could lead to adverse ratings actions.

Although we closely monitor and strive to manage factors influencing our credit ratings, there is no assurance that our credit ratings will not be changed in the future. As of June 30, 2017, there were no pending actions from these rating agencies in terms of changes to the ratings presented in the table above for HSBC Finance Corporation.

Other conditions that could negatively affect our liquidity include unforeseen capital requirements, a strengthening of the U.S. dollar which would require us to post additional collateral for our cross currency swaps, a slowdown in the rate of attrition of our balance sheet and an inability to obtain expected funding from HSBC and its subsidiaries.

See "Liquidity and Capital Resources" for further discussion of our liquidity position.

There have been no material changes to our approach to liquidity risk management since December 31, 2016.

Interest Rate Risk Management A principal part of our management of interest rate risk is to monitor the sensitivity of projected net interest income under varying interest rate scenarios (simulation modeling). We aim, through our management of interest rate risk, to mitigate the effect of prospective interest rate movements which could reduce future net interest income, while weighing the cost of hedging activities on the current net revenue stream.

Net interest income simulation modeling techniques are utilized to monitor a number of interest rate scenarios for their impact on projected net interest income. These techniques simulate the impact on projected net interest income under various rate shock scenarios, such as scenarios in which rates rise or fall by 100 basis points over a twelve month period as well as the impact of an immediate 50 basis point decrease in the yield curve.

HSBC Finance Corporation

Our exposure to interest rate risk has changed as a result of selling during the first half of 2017 a majority of the receivables held for sale at December 31, 2016. As a result of the significant decrease in receivables, projected net interest income is now negative (projected net interest expense) as receivable and short-term investment yields are not projected to cover interest expense. The following table reflects the impact on projected net interest income (expense) of the scenarios utilized by these modeling techniques:



	Amount			%
	(dollars are in millions)
June 30, 2017:
Estimated increase (decrease) in projected net interest expense:
Resulting from a gradual 100 basis point increase in the yield curve (reflects projected quarterly rate movements of 25 basis points at the beginning of each quarter)	$	(20	)	(20.9	)%
Resulting from a gradual 100 basis point decrease in the yield curve (reflects projected quarterly rate movements of 25 basis points at the beginning of each quarter)	20			20.9
Resulting from an immediate 50 basis point decrease in the yield curve	15			15.8
December 31, 2016:
Estimated increase (decrease) in projected net interest income:
Resulting from a gradual 100 basis point increase in the yield curve (reflects projected quarterly rate movements of 25 basis points at the beginning of each quarter)	$	35		17.7	%
Resulting from a gradual 100 basis point decrease in the yield curve (reflects projected quarterly rate movements of 25 basis points at the beginning of each quarter)	(35		)	(17.7	)
Resulting from an immediate 50 basis point decrease in the yield curve	(25		)	(12.7	)

As discussed above, we expect that substantially all of the remaining receivables held for sale will be sold in multiple transactions through 2017. In addition to interest rate risk implications, the receivable sales program also has liquidity risk implications as cash flows subsequent to 2017 may not provide sufficient cash to fully cover maturing debt in future periods. We are currently evaluating various options corresponding to the remaining other assets and liabilities from both an interest rate risk and liquidity risk perspective. The ultimate resolution and timing is dependent on several factors.

There have been no material changes to our approach to interest rate risk management since December 31, 2016.

Operational Risk Management During the second quarter of 2017, we implemented a new Operational Risk Management Framework ("ORMF") and operational risk database. The new ORMF was designed to simplify and improve our approach to managing operational risks. It promotes more focused efforts on material risks and ensures clarity and accountability of related roles and responsibilities.

Under the new ORMF, risk and control assessments provide an end to end view of operational risk. Material risks are assigned an inherent risk assessment based on the likelihood and the direct (financial costs) and indirect impacts to the business. An assessment of the effectiveness of key controls that mitigate these risks is made and a residual risk assessment is determined. An operational risk database is used to record risk and control assessments and track related issues and mitigation action plans. The risk assessments, which are refreshed based on relevant triggers, provide an up-to-date view of the operational risk profile.

There have been no other material changes to our approach to operational risk management since December 31, 2016.

Compliance Risk Management During the second quarter of 2017, there was a reorganization of certain risk activities as we continued to implement the most effective global standards to combat financial crime and strengthen our financial crime detection and compliance capabilities. As part of this reorganization, the activities related to financial crime and fraud risk management previously performed by the Security and Fraud Risk Management function, are now performed by the Financial Crime Risk function. Additionally, during the second quarter of 2017, the Compliance Committee of the Board of Directors was demised and the Compliance and Conduct Committee of the Board of Directors (the "CCC") was established. The CCC oversees the remediation of the compliance risk management program. There have been no other material changes to our approach to compliance risk management since December 31, 2016.

Security Risk Management As discussed above, during the second quarter of 2017, activities related to financial crime and fraud risk management activities are no longer performed by the Security and Fraud Risk Management function, but are now performed by the Financial Crime Risk function. Additionally, the Security and Fraud Risk Management function was renamed "Security Risk Management" to reflect this reorganization. There have been no other material changes to our approach to security risk management since December 31, 2016.

HSBC Finance Corporation

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Information required by this Item is included in the following sections of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: "Liquidity and Capital Resources" and "Risk Management."

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures We maintain a system of internal and disclosure controls and procedures designed to ensure that information required to be disclosed by HSBC Finance Corporation in the reports we file or submit under the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), is recorded, processed, summarized and reported on a timely basis. Our Board of Directors, operating through its Audit Committee, which is composed entirely of independent non-executive directors, provides oversight to our financial reporting process.

We conducted an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report so as to alert them in a timely fashion to material information required to be disclosed in reports we file under the Exchange Act.

Changes in Internal Control Over Financial Reporting There has been no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings.

See Note 12, "Litigation and Regulatory Matters," in the accompanying consolidated financial statements for our legal proceedings disclosure, which is incorporated herein by reference.

Item 5. Other Information.

Disclosures pursuant to Section 13(r) of the Securities Exchange Act Section 13(r) of the Securities Exchange Act requires each issuer registered with the SEC to disclose in its annual or quarterly reports whether it or any of its affiliates have knowingly engaged in specified activities or transactions with persons or entities targeted by U.S. sanctions programs relating to Iran, terrorism, or the proliferation of weapons of mass destruction, even if those activities are not prohibited by U.S. law and are conducted outside the U.S. by non-U.S. affiliates in compliance with local laws and regulations.

To comply with this requirement, HSBC has requested relevant information from its affiliates globally. During the period covered by this Form 10-Q, HSBC Finance Corporation did not engage in any activities or transactions requiring disclosure pursuant to Section 13(r). The following activities conducted by our affiliates are disclosed in response to Section 13(r):

Loans in repayment Between 2001 and 2005, the Project and Export Finance division of the HSBC Group arranged or participated in a portfolio of loans to Iranian energy companies and banks. All of these loans were guaranteed by European and Asian export credit agencies and have varied maturity dates with final maturity in 2018. For those loans that remain outstanding, the HSBC Group continues to seek repayment in accordance with its obligations to the supporting export credit agencies. Details of these loans follow.

At June 30, 2017, the HSBC Group had five loans outstanding to an Iranian petrochemical company. These loans are supported by the official export credit agencies of the following countries: the United Kingdom, South Korea and Japan. The HSBC Group continues to seek repayments from the Iranian company under the outstanding loans in accordance with their original maturity profiles.

Estimated gross revenue to the HSBC Group generated by the loans in repayment for the second quarter of 2017, which includes interest and fees, was approximately $30,000, and net estimated profit was approximately $30,000. While the HSBC Group intends

HSBC Finance Corporation

to continue to seek repayment under the existing loans, all of which were entered into before the petrochemical sector of Iran became a target of U.S. sanctions, it does not currently intend to extend any new loans.

Legacy contractual obligations related to guarantees Between 1996 and 2007, the HSBC Group provided guarantees to a number of its non-Iranian customers in Europe and the Middle East for various business activities in Iran. In a number of cases, the HSBC Group issued counter indemnities in support of guarantees issued by Iranian banks as the Iranian beneficiaries of the guarantees required that they be backed directly by Iranian banks. The Iranian banks to which the HSBC Group provided counter indemnities included Bank Tejarat, Bank Melli, and the Bank of Industry and Mine.

There was no measurable gross revenue in the second quarter of 2017 under those guarantees and counter indemnities. The HSBC Group does not allocate direct costs to fees and commissions and, therefore, has not disclosed a separate net profit measure. The HSBC Group is seeking to cancel all relevant guarantees and counter indemnities and does not currently intend to provide any new guarantees or counter indemnities involving Iran. None were canceled in the second quarter of 2017 and approximately 19 remain outstanding.

Other relationships with Iranian banks Activity related to U.S.-sanctioned Iranian banks not covered elsewhere in this disclosure includes the following:

The HSBC Group maintains several accounts in the United Kingdom for an Iranian-owned, U.K.-regulated financial institution. These accounts are generally no longer restricted under U.K. law, though HSBC maintains restrictions on the accounts as a matter of policy. Estimated gross revenue in the second quarter of 2017 on these accounts, which includes fees and/or commissions, was approximately $27,060.

The HSBC Group acts as the trustee and administrator for a pension scheme involving five employees of a U.S.-sanctioned Iranian bank in Hong Kong, one of whom joined the scheme during the second quarter of 2017. Under the rules of this scheme, the HSBC Group accepts contributions from the Iranian bank each month and allocates the funds into the pension accounts of the Iranian bank’s employees. The HSBC Group runs and operates this pension scheme in accordance with Hong Kong laws and regulations. Estimated gross revenue, which includes fees and/or commissions, generated by this pension scheme during the second quarter of 2017 was approximately $930.

For the Iranian bank related-activity discussed above, the HSBC Group does not allocate direct costs to fees and commissions and, therefore, has not disclosed a separate net profit measure.

The HSBC Group has been holding a safe custody box for the Central Bank of Iran. For a number of years, the box has not been accessed by the Central Bank of Iran and no fees have been charged to the Central Bank of Iran.

The HSBC Group currently intends to continue to wind down the activity discussed in this section, to the extent legally permissible, and not enter into any new such activity.

Frozen accounts and transactions The HSBC Group maintains several accounts that are frozen as a result of relevant sanctions programs and safekeeping boxes and other similar custodial relationships, for which no activity, except as licensed or otherwise authorized, took place during the second quarter of 2017.There was no measurable gross revenue or net profit to the HSBC Group during the second quarter of 2017 relating to these frozen accounts.

HSBC Finance Corporation

Item 6. Exhibits and Financial Statement Schedules.



3(i)		Amended and Restated Certificate of Incorporation of HSBC Finance Corporation effective as of December 15, 2004, as amended (incorporated by reference to Exhibit 3.1 of HSBC Finance Corporation's Current Report on Form 8-K filed June 22, 2005, Exhibit 3.1(b) to HSBC Finance Corporation's Current Report on Form 8-K filed December 19, 2005 and Exhibit 3.1 to HSBC Finance Corporation's Current Report on Form 8-K filed November 30, 2010).
3(ii)		Bylaws of HSBC Finance Corporation, as Amended and Restated effective April 20, 2017 (incorporated by reference to Exhibit 3.2 to HSBC Finance Corporation's Current Report on Form 8-K filed April 24, 2017).
12		Statement of Computation of Ratio of Earnings to Fixed Charges.
31		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document⁽¹⁾
101.SCH		XBRL Taxonomy Extension Schema Document⁽¹⁾
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document⁽¹⁾
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document⁽¹⁾
101.LAB		XBRL Taxonomy Extension Label Linkbase Document⁽¹⁾
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document⁽¹⁾


*	Schedules and exhibits are omitted pursuant to Item 601(b)(2) of Regulation S-K. HSBC Finance Corporation agrees to furnish supplementally a copy of any omitted schedules or exhibits to the Securities and Exchange Commission upon request.

⁽¹⁾

Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in our Quarterly Report on Form 10-Q for the three and six months ended June 30, 2017, formatted in eXtensible Business Reporting Language ("XBRL") interactive data files: (i) the Consolidated Statement of Income (Loss) for the three and six months ended June 30, 2017 and 2016, (ii) the Consolidated Statement of Comprehensive Income (Loss) for the three and six months ended June 30, 2017 and 2016, (iii) the Consolidated Balance Sheet as of June 30, 2017 and December 31, 2016, (iv) the Consolidated Statement of Changes in Equity for the six months ended June 30, 2017 and 2016, (iv) the Consolidated Statement of Cash Flows for the six months ended June 30, 2017 and 2016, and (v) the Notes to Consolidated Financial Statements.

HSBC Finance Corporation

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, HSBC Finance Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: July 31, 2017



HSBC FINANCE CORPORATION

By:		/s/ MICHAEL A. REEVES
		Michael A. Reeves
		Executive Vice President

HSBC Finance Corporation

Exhibit Index

Exhibits included in this Report:



3(i)		Amended and Restated Certificate of Incorporation of HSBC Finance Corporation effective as of December 15, 2004, as amended (incorporated by reference to Exhibit 3.1 of HSBC Finance Corporation's Current Report on Form 8-K filed June 22, 2005, Exhibit 3.1(b) to HSBC Finance Corporation's Current Report on Form 8-K filed December 19, 2005 and Exhibit 3.1 to HSBC Finance Corporation's Current Report on Form 8-K filed November 30, 2010).
3(ii)		Bylaws of HSBC Finance Corporation, as Amended and Restated effective April 20, 2017 (incorporated by reference to Exhibit 3.2 to HSBC Finance Corporation's Current Report on Form 8-K filed April 24, 2017).
12		Statement of Computation of Ratio of Earnings to Fixed Charges.
31		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document⁽¹⁾
101.SCH		XBRL Taxonomy Extension Schema Document⁽¹⁾
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document⁽¹⁾
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document⁽¹⁾
101.LAB		XBRL Taxonomy Extension Label Linkbase Document⁽¹⁾
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document⁽¹⁾


*	Schedules and exhibits are omitted pursuant to Item 601(b)(2) of Regulation S-K. HSBC Finance Corporation agrees to furnish supplementally a copy of any omitted schedules or exhibits to the Securities and Exchange Commission upon request.

⁽¹⁾

HSBC Finance Corp - FORM 10-Q - July 31, 2017

Attached files

HSBC Finance Corp Reports