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. 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, 2015		December 31, 2014
	(in millions)
Assets:
Cash	$	153	$	157
Interest bearing deposits with banks	2,002		2,000
Securities purchased under agreements to resell⁽¹⁾	1,092		3,863
Other assets	93		102
Total assets	$	3,340	$	6,122
Liabilities:
Due to affiliates⁽²⁾	$	5,931	$	6,945
Other liabilities	62		84
Total liabilities	$	5,993	$	7,029


⁽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 as well as HSBC's ownership of our subordinated debt and excludes preferred stock.



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(in millions)
Income/(Expense):
Interest income from HSBC affiliates	$	2		$	2		$	4		$	3
Interest expense paid to HSBC affiliates⁽¹⁾	(76		)	(75		)	(153		)	(155		)
Net interest income (expense)	$	(74	)	$	(73	)	$	(149	)	$	(152	)
Gain (loss) on FVO debt with affiliate	$	13		$	(12	)	$	13		$	(20	)
Servicing and other fees from HSBC affiliates	6			6			12			14
Support services from HSBC affiliates	(58		)	(73		)	(112		)	(133		)
Stock based compensation expense with HSBC⁽²⁾	—			(2		)	(1		)	(3		)


⁽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. Employees also participate in a defined benefit pension plan and other postretirement benefit plans sponsored by HSBC North America which are discussed in Note 9, “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 and our funding requirements are now sourced primarily through HSBC USA. Due to affiliates consists of the following:



	June 30, 2015		December 31, 2014
	(in millions)
HSBC Private Banking Holdings (Suisse) S.A. and subsidiaries	$	1,500	$	2,500
HSBC USA Inc.	3,012		3,012
HSBC Holdings plc (includes $500 million and $512 million at June 30, 2015 and December 31, 2014 carried at fair value, respectively)	819		833
HSBC North America Holdings Inc.	600		600
Due to affiliates	$	5,931	$	6,945

HSBC Private Banking Holdings (Suisse) S.A. and subsidiaries - We have various debt agreements with maturities between 2015 and 2016.

HSBC USA Inc. - We have a $5.0 billion, 364-day uncommitted unsecured revolving credit agreement with HSBC USA, which expires during the fourth quarter of 2015. The credit agreement allows for borrowings with maturities of up to 5 years. At both June 30, 2015 and December 31, 2014, $3,012 million was outstanding under this credit agreement with $512 million maturing in September 2017, $1.5 billion maturing in January 2018 and $1.0 billion maturing in September 2018.

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 $819 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.

We have the following funding arrangements available with HSBC affiliates, although there are no outstanding balances at either June 30, 2015 or December 31, 2014:


•	$1.0 billion committed revolving credit facility with HSBC USA. This credit facility expires in May 2017; and


•	$455 million, 364-day uncommitted revolving credit facility with HSBC North America.

In November 2013, we obtained a surety bond for $2.5 billion to secure a stay of execution of the partial judgment in the Jaffe litigation while we appealed the judgment. This surety bond has been guaranteed by HSBC North America and we pay HSBC North America an annual fee for providing the guarantee which is included as a component of interest expense. Guarantee fees during the three and six months ended June 30, 2015 totaled $1 million and $3 million, respectively, compared with $2 million and $3 million during the year-ago periods. Given the mandate of the Court of Appeals for the Seventh Circuit reversing the judgment, we will be seeking release of the surety bond.

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 sole counterparty in derivative transactions. The notional amount of derivative contracts outstanding with HSBC Bank USA totaled $12.2 billion and $14.0 billion at June 30, 2015 and December 31, 2014, respectively. 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 or in the form of securities which are not recorded on our balance sheet. The fair value of our agreements with HSBC Bank USA required us to provide collateral to HSBC Bank USA of $543 million at June 30, 2015 and $213 million at December 31, 2014, 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. See Note 7, “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 HSBC Investments (North America) Inc. for $1.0 billion. Dividends paid on the Series C Preferred Stock totaled $21 million and $43 million during the three and six months ended June 30, 2015 compared with $21 million and $43 million during the three and six months ended June 30, 2014, respectively.

Additionally, at June 30, 2015 and December 31, 2014, we had a deposit totaling $2,002 million and $2,000 million, respectively, with HSBC Bank USA at current market rates. Interest income earned on this deposit is included in interest income from HSBC affiliates in the table above and was insignificant during the three and six months ended June 30, 2015. As the deposit was originally made during December 2014, there was no interest income during the three and six months ended June 30, 2014.

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 $768 million and $837 million at June 30, 2015 and December 31, 2014, 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.