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, derivatives, servicing arrangements, information technology, centralized support services, item and statement processing services, banking and other miscellaneous services. Prior to 2013, we also sold receivables to related parties. 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:



	December 31, 2013		December 31, 2012
	(in millions)
Assets:
Cash	$	172	$	193
Securities purchased under agreements to resell⁽¹⁾	6,924		2,160
Other assets	86		105
Total assets	$	7,182	$	2,458
Liabilities:
Due to affiliates⁽²⁾	$	8,742	$	9,089
Derivative related liability	—		18
Other liabilities	51		83
Total liabilities	$	8,793	$	9,190


⁽¹⁾	Securities under an agreement to resell are purchased from HSI 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 as well as HSBC's ownership of our subordinated debt and excludes preferred stock.



Year Ended December 31,	2013			2012			2011
	(in millions)
Income/(Expense):
Interest income from HSBC affiliates	$	5		$	4		$	6
Interest expense paid to HSBC affiliates⁽¹⁾	(474		)	(552		)	(578		)
Net interest income (loss)	$	(469	)	$	(548	)	$	(572	)
Gain (loss) on FVO debt with affiliate	$	18		$	(68	)	$	(10	)
Servicing and other fees from HSBC affiliates	26			35			20
Support services from HSBC affiliates	(281		)	(310		)	(270		)
Stock based compensation expense with HSBC⁽²⁾	(4		)	(10		)	(8		)


⁽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 participate in one or more stock compensation plans sponsored by HSBC. These expenses are included in Salary and employee benefits in our consolidated statement of income (loss). Employees also participate in a defined benefit pension plan and other postretirement benefit plans sponsored by HSBC North America which are discussed in Note 16, “Pension and Other Postretirement Benefits.”

Funding Arrangements with HSBC Affiliates:

We have historically used a variety of HSBC affiliates to fund a portion of our borrowing needs. However, in the first quarter of 2012, we revised our funding strategies and as a result, all of our ongoing funding requirements have been integrated into the overall HSBC North America funding plans and our funding requirements are now sourced primarily through HSBC USA, Inc. Due to affiliates consists of the following:



	December 31, 2013		December 31, 2012
	(in millions)
HSBC Private Banking Holdings (Suisse) S.A. and subsidiaries	$	4,300	$	5,625
HSBC USA Inc.	3,012		2,012
HSBC Holdings plc (includes $496 million and $514 million at December 31, 2013 and December 31, 2012 carried at fair value, respectively)	820		842
HSBC North America Holdings Inc.	600		600
HSBC Asia Holdings BV	10		10
Due to affiliates	$	8,742	$	9,089

HSBC Private Banking Holdings (Suisse) S.A.and subsidiaries - We have various debt agreements with maturities between 2013 and 2016.

HSBC USA Inc. - We have a $5.0 billion, 364-day uncommitted revolving credit agreement with HSBC USA Inc. which expires during the fourth quarter of 2014. The credit agreement allows for borrowings with maturities of up to 15 years. Of the amounts outstanding at December 31, 2013, $512 million matures in September 2017, $1.5 billion matures in January 2018 and $1.0 billion matures in September 2018.

HSBC Holdings plc - We have a public subordinated debt issue with a carrying amount of $3.0 billion at December 31, 2013 which matures in 2021. Of this amount, HSBC Holdings plc holds $820 million.

HSBC North America Holdings Inc. - We have a $600 million loan agreement with HSBC North America which provides for three $200 million borrowings with maturities between 2034 and 2035.

HSBC Asia Holdings BV - We have two $5 million loan agreements with maturity dates in 2014 and 2015.

We have the following funding arrangements available with HSBC affiliates, although there are no outstanding balances at either December 31, 2013 or December 31, 2012:


•	$1.5 billion uncommitted secured credit facility with HSBC Bank USA was available at December 31, 2012. In December 2013, the amount available was reduced to $0. Any draws on this credit facility required regulatory approval;


•	$2.0 billion committed revolving credit facility with HSBC USA Inc. was available at December 31, 2012. In December 2013, the amount available was reduced to $1.0 billion. This credit facility expires in May 2017;


•	$100 million committed revolving credit facility with HSBC Investments (Bahamas) Limited which matures in April 2014; and


•	$455 million, 364-day uncommitted revolving credit facility with HSBC North America was available at December 31, 2013 and 2012.

As discussed more fully in Note 21, "Commitments, Contingent and Other Liabilities," and in Note 22, "Litigation and Regulatory Matters," in November 2013, we obtained a surety bond to secure a stay of execution of the partial judgment in the Jaffe litigation pending the outcome of our appeal in the Jaffe litigation. This surety bond has been guaranteed by HSBC North America and we will pay HSBC North America an annual fee for providing the guarantee which is included as a component of interest expense paid to HSBC affiliates.

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 affiliate and third-party debt liabilities. HSBC Bank USA is our primary counterparty in derivative transactions. The notional amount of derivative contracts outstanding with HSBC Bank USA totaled $16.5 billion and $26.0 billion at December 31, 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 or in the form of securities which are not recorded on our balance sheet. The fair value of our agreements at December 31, 2013 and December 31, 2012 with HSBC Bank USA required HSBC Bank USA to provide collateral to us of $811 million and $75 million, 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. See Note 11, “Derivative Financial Instruments,” for additional information about our derivative portfolio.

In addition to the lending arrangements discussed above, during the fourth quarter of 2010, we issued 1,000 shares of Series C preferred stock to HINO for $1.0 billion. Dividends paid on the Series C Preferred Stock totaled $86 million, $86 million and $89 million in 2013, 2012 and 2011, respectively.

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:

•

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 HSBC affiliates. This includes fees received for servicing real estate secured receivables (with a carrying amount of $1.0 billion and $1.2 billion at December 31, 2013 and December 31, 2012, 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 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 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 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:

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. In March 2012, we sold the account relationships we had previously purchased in July 2004 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. As discussed in Note 3, “Discontinued Operations,” on May 1, 2012, we sold our Card and Retail Services business to Capital One, which included these account relationships and receivables.

During 2012 and 2011, we sold a cumulative total of $10.4 billion and $35.7 billion, respectively, of receivables on a daily basis to HSBC Bank USA prior to the sale of our Card and Retail Services business which resulted in gains on the daily sales of receivables in 2012 through the date of sale of $89 million and $567 million in 2011. Fees received for servicing these receivable portfolios in 2012 through the date of sale totaled $207 million and $594 million in 2011. The gains on the daily sale of these receivables as well as the fees received for servicing these receivable portfolios of our Card and Retail Services business are included as a component of income from discontinued operations in the consolidated statement of income (loss).

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 and 2011 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