Related Party Transactions

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



	June 30, 2013		December 31, 2012
	(in millions)
Assets:
Cash	$	258	$	193
Securities purchased under agreements to resell	5,342		2,160
Other assets	20		105
Total assets	$	5,620	$	2,458
Liabilities:
Due to affiliates (includes $478 million and $514 million at June 30, 2013 and December 31, 2012 carried at fair value, respectively)	$	8,250	$	9,089
Derivative related liability	—		18
Other liabilities⁽¹⁾	7		83
Total liabilities	$	8,257	$	9,190


⁽¹⁾	Other liabilities includes $54 million at June 30, 2013 related to accrued interest receivable on derivative positions with affiliates. There were no similar balances at December 31, 2012.



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(in millions)
Income/(Expense):
Interest income from HSBC affiliates	$	1		$	1		$	2		$	2
Interest expense paid to HSBC affiliates⁽¹⁾	(119		)	(141		)	(258		)	(280		)
Net interest income (loss)	$	(118	)	$	(140	)	$	(256	)	$	(278	)
Gain (loss) on FVO debt with affiliate	$	34		$	(5	)	$	37		$	(19	)
HSBC affiliate income:
Servicing and other fees from HSBC affiliates:
Real estate secured servicing and related fees from HSBC Bank USA	$	2		$	2		$	5		$	5
Other servicing, processing and support revenues	1			3			2			5
HSBC Technology and Services (USA) Inc. (“HTSU”) administrative fees and rental revenue⁽²⁾	3			4			6			8
Total servicing and other fees from HSBC affiliates	$	6		$	9		$	13		$	18
Support services from HSBC affiliates	$	(67	)	$	(79	)	$	(135	)	$	(145	)
Stock based compensation expense with HSBC	$	(2	)	$	(2	)	$	(4	)	$	(4	)


⁽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⁾	Rental revenue/(expense) from HTSU totaled $3 million and $6 million during the three and six months ended June 30, 2013, respectively, compared with $4 million and $7 million during the three and six months ended June 30, 2012, respectively.

Transactions with HSBC USA Inc., including HSBC Bank USA:

•

In 2003 and 2004, we sold approximately $3.7 billion of real estate secured receivables to HSBC Bank USA. We continue to service these receivables for a fee. At June 30, 2013 and December 31, 2012, we were servicing receivables totaling $1.1 billion and $1.2 billion, respectively. Servicing fees for these receivables totaled $1 million and $2 million during the three and six months ended June 30, 2013 compared with $1 million and $2 million during the three and six months ended June 30, 2012, respectively.


•	Under multiple service level agreements, we also provide various services to HSBC Bank USA, including processing activities and other operational and administrative support. Fees received for these services are reported as Servicing and other fees from HSBC affiliates.

•

In the fourth quarter of 2009, an initiative was begun to streamline the servicing of real estate secured receivables across North America. As a result, certain functions that we had previously performed for our mortgage customers were being performed by HSBC Bank USA for all North America mortgage customers, including our mortgage customers. Additionally, we began performing certain functions for all North America mortgage customers where these functions had been previously provided separately by each entity. During 2011, we began a process to separate these functions so that each entity will be servicing its own mortgage customers when the process is completed. The following table summarizes fees received and paid during the three and six months ended June 30, 2013 and 2012, respectively:



	2013		2012
	(in millions)
Three Months Ended June 30,
Fees received from HSBC Bank USA	$	1	$	1
Fees paid to HSBC Bank USA	—		1

Six Months Ended June 30,
Fees received from HSBC Bank USA	$	3	$	3
Fees paid to HSBC Bank USA	—		3

•

In July 2010, we transferred certain employees in our real estate secured receivable servicing department to a subsidiary of HSBC Bank USA. These employees continue to service our real estate secured receivable portfolio and we pay a fee to HSBC Bank USA for these services. During the three and six months ended June 30, 2013, we paid $15 million and $31 million, respectively, compared with $14 million and $28 million, respectively, for services we received from HSBC Bank USA during the three and six months ended June 30, 2012.

•

The notional amount of derivative contracts outstanding with HSBC subsidiaries totaled $20.4 billion and $26.0 billion at June 30, 2013 and December 31, 2012, respectively. When the fair value of our agreements with affiliate counterparties 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 affiliate counterparties required the affiliate to provide collateral to us of $661 million and $75 million at June 30, 2013 and December 31, 2012, respectively, all of which was received 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.

•

During the fourth quarter of 2011, HSBC USA Inc. extended a $3.0 billion 364-day uncommitted revolving credit agreement to us which allows for borrowings with maturities of up to 15 years. During the second quarter of 2012, an amendment was executed to increase the credit agreement to $4.0 billion. During the fourth quarter of 2012, the agreement was extended to the fourth quarter of 2013. As of both June 30, 2013 and December 31, 2012, $2.0 billion was outstanding under this credit agreement with $512 million maturing in September 2017 and $1.5 billion maturing in January 2018.


•	HSBC Bank USA extended a $1.5 billion uncommitted secured credit facility to certain of our subsidiaries in December 2008. This credit facility currently matures in November 2013. Any draws on this credit facility require regulatory approval. There were no balances outstanding at June 30, 2013 or December 31, 2012.


•	In May 2012, HSBC USA Inc. extended a $2.0 billion committed revolving credit facility to us which expires in May 2017. As of June 30, 2013 and December 31, 2012, there were no amounts outstanding under this credit facility.

Transactions with HSBC USA Inc. and HSBC Bank USA involving our Discontinued Operations:

•

As it relates to our discontinued credit card operations, in January 2009 we sold our General Motors (“GM”) and Union Plus (“UP”) portfolios to HSBC Bank USA with an outstanding principal balance of $12.4 billion at the time of sale but retained the customer account relationships. In December 2004, we sold our private label receivable portfolio (excluding retail sales contracts at our Consumer Lending business) to HSBC Bank USA and also retained the customer account relationships. In July 2004, we purchased the account relationships associated with $970 million of credit card receivables from HSBC Bank USA. In each of these transactions, we agreed to sell on a daily basis all new receivable originations on these account relationships to HSBC Bank USA and serviced these receivables for a fee. As discussed in Note 2, “Discontinued Operations,” on May 1, 2012, we sold our Card and Retail Services business to Capital One, which included these account relationships and receivables.

Intangible assets of our discontinued credit card operations at December 31, 2011 included $29 million, net, that related to the account relationships we purchased from HSBC Bank USA in July 2004 as discussed above. In March 2012, we sold these account relationships to HSBC Bank USA resulting in a gain of $79 million during the first quarter of 2012 which is included as a component of income from discontinued operations.

The following table summarizes the cumulative amount of receivables sold on a daily basis during the three and six months ended June 30, 2012:



			Credit Cards
	Private Label		General Motors		Union Plus		Other		Total
	(in billions)
Total of receivables sold on a daily basis to HSBC Bank USA during:
Three Months Ended June 30, 2012	$	1.1	$	1.0	$	.3	$	.1	$	2.5
Six Months Ended June 30, 2012	4.4		3.9		1.0		1.1		10.4

Gains on the daily sales of the receivables discussed above during 2012 through the date of sale, which are included as a component of income from discontinued operations in the consolidated statement of income (loss), totaled $10 million and $89 million during the three and six months ended June 30, 2012, respectively. No gains were recorded during the three and six months ended June 30, 2013 following the sale of our Card and Retail Services business to Capital One on May 1, 2012. Fees received for servicing these receivable portfolios during 2012 through the date of sale, which are included as a component of income from discontinued operations in the consolidated statement of income (loss), totaled $50 million and $207 million during the three and six months ended June 30, 2012, respectively. No fees were received during the three and six months ended June 30, 2013 following the sale of our Card and Retail Services business to Capital One on May 1, 2012.

The GM and UP credit card receivables as well as the private label receivables were sold to HSBC Bank USA on a daily basis at a sales price for each type of portfolio determined using a fair value calculated semi-annually in April and October by an independent third party based on the projected future cash flows of the receivables. The projected future cash flows were developed using various assumptions reflecting the historical performance of the receivables and adjusted for key factors such as the anticipated economic and regulatory environment. The independent third party used these projected future cash flows and a discount rate to determine a range of fair values. We used the mid-point of this range as the sales price.

Transactions with other HSBC affiliates:


•	Employees of HSBC Finance Corporation participate in one or more stock compensation plans sponsored by HSBC. These expenses are recorded in Salary and employee benefits and are reflected in the above table as Stock based compensation expense with HSBC.

•

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 HTSU. Technology related assets are generally capitalized and recorded on our consolidated balance sheet. HTSU also provides certain item processing and statement processing activities to 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 them certain administrative services, such as internal audit, as well as receiving rental revenue from HTSU for certain office space. The fees and rental revenue we receive from HTSU are recorded as a component of servicing and other fees from HSBC affiliates.

•

We use HSBC Global Resourcing (UK) Ltd., 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 of $1 million and $3 million during the three and six months ended June 30, respectively, are included as a component of Support services from HSBC affiliates in the table above. The expenses related to these services during the three and six months ended June 30, 2012 totaled $3 million and $6 million, respectively.

•

Due to affiliates includes amounts owed to subsidiaries of HSBC as a result of direct debt issuances. At June 30, 2013 and December 31, 2012, due to affiliates includes $478 million and $514 million carried at fair value under FVO reporting, respectively. During the three and six months ended June 30, 2013, the gain (loss) on debt designated at fair value and related derivatives includes a gain of $34 million and $37 million, respectively, compared with a loss of $5 million and $19 million during the three and six months ended June 30, 2012, respectively, related to these debt issuances.


•	During the first quarter of 2012, we executed two new $250 million loan agreements with HSBC Investments (Bahamas) Limited. During the third quarter of 2012, these loans matured and were not renewed.


•	During the second quarter of 2011, we executed a $600 million loan agreement with HSBC North America which provides for three $200 million borrowings with maturities between 2034 and 2035. As of June 30, 2013 and December 31, 2012, $600 million was outstanding under this loan agreement.


•	During the fourth quarter of 2011, we executed a credit facility of $400 million with HSBC Trinkaus & Burkhardt AG (“Trinkaus”). As of December 31, 2012, there were no amounts outstanding under this credit facility. This credit facility was terminated in October 2012.


•	During the fourth quarter of 2011, we executed a revolving credit facility of $500 million with HSBC Investments (Bahamas) Limited maturing in April 2014. In October 2012, the amount available under the credit facility was reduced to $100 million. As of June 30, 2013 and December 31, 2012, there were no amounts outstanding under this loan agreement.


•	In February 2012, HSBC North America extended to us a $455 million, 364-day uncommitted revolving credit facility. In January 2013, the facility was extended until January 2014. As of June 30, 2013 and December 31, 2012, there were no amounts outstanding under this credit facility.

•

During the fourth quarter of 2010, we issued 1,000 shares of Series C preferred stock to HSBC Investments (North America) Inc. ("HINO") for $1.0 billion. We began paying dividends on the Series C preferred stock during the first quarter of 2011. Dividends paid on the Series C Preferred Stock totaled $21 million and $43 million for the three and six months ended June 30, 2013, respectively, compared with $21 million and $43 million during the three and six months ended June 30, 2012, respectively.

•

We purchase from HSBC Securities (USA) Inc. (“HSI”) securities under an agreement to resell. Interest income recognized on these securities is reflected as interest income from HSBC affiliates in the table above. Securities purchased under agreements to resell increased as compared with December 31, 2012 as a result of the proceeds from the sale of our personal non-credit card receivable portfolio on April 1, 2013, the sale of a pool of real estate secured receivables, the run-off of our liquidating receivable portfolios, the sale of REO properties and a requirement to post collateral with us under our derivative agreements, partially offset by the retirement of long term debt.


•	Support services from HSBC affiliates also includes banking services and other miscellaneous services provided by other subsidiaries of HSBC, including HSBC Bank USA.


•	Domestic employees of HSBC Finance Corporation participate in a defined benefit pension plan and other post-retirement benefit plans sponsored by HSBC North America. See Note 11, “Pension and Other Post-retirement Benefits,” for additional information on this pension plan.

•

We guaranteed the long-term and medium-term notes issued by our Canadian business prior to its sale to HSBC Bank Canada through May 2012 when the notes were paid in full. The fees recorded for providing this guarantee in 2012 were not significant and are included in interest income from HSBC affiliates in the table above. As part of the sale of our Canadian business to HSBC Bank Canada, the sale agreement allowed us to continue to distribute various insurance products through the branch network for a fee which is included as a component of income from discontinued operations. We distributed insurance products for HSBC Bank Canada until the Insurance business was sold on March 29, 2013.