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:



	September 30, 2016		December 31, 2015
	(in millions)
Assets:
Cash	$	120	$	124
Securities purchased under agreements to resell⁽¹⁾	824		2,724
Other assets	78		128
Total assets	$	1,022	$	2,976
Liabilities:
Due to affiliates⁽²⁾	$	4,824	$	5,925
Other liabilities	18		62
Total liabilities	$	4,842	$	5,987


⁽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.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(in millions)
Income/(Expense):
Interest income from HSBC affiliates	$	1		$	1		$	4		$	5
Interest expense paid to HSBC affiliates⁽¹⁾	(45		)	(75		)	(189		)	(228		)
Net interest income (expense)	$	(44	)	$	(74	)	$	(185	)	$	(223	)
Gain (loss) on FVO debt with affiliate	$	(13	)	$	(6	)	$	(1	)	$	7
Servicing and other fees from HSBC affiliates	1			5			7			17
Support services from HSBC affiliates	(40		)	(54		)	(120		)	(166		)
Stock based compensation expense with HSBC⁽²⁾	(1		)	(1		)	(1		)	(2		)


⁽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⁾

Certain employees 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 also 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 and our funding requirements are currently sourced primarily through HSBC USA Inc. ("HSBC USA") or HSBC North America. Due to affiliates consists of the following:



	September 30, 2016		December 31, 2015
	(in millions)
HSBC Private Banking Holdings (Suisse) S.A. and subsidiaries	$	—	$	500
HSBC USA Inc.	3,012		3,012
HSBC Holdings plc (includes $497 million and $496 million at September 30, 2016 and December 31, 2015 carried at fair value, respectively)	812		813
HSBC North America Holdings Inc.	1,000		1,600
Due to affiliates	$	4,824	$	5,925

HSBC Private Banking Holdings (Suisse) S.A. and subsidiaries - These debt agreements matured in April 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 2017. The credit agreement allows for borrowings with maturities of up to 5 years. At both September 30, 2016 and December 31, 2015, $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 $812 million at September 30, 2016 and $813 million at December 31, 2015.

HSBC North America Holdings Inc. - We had a $600 million loan agreement with HSBC North America which provided for three $200 million borrowings with maturities between 2034 and 2035. In July 2016, we fully repaid this $600 million loan agreement. In October 2015, we entered into a $1.0 billion loan agreement with HSBC North America which we prepaid in October 2016 with proceeds from receivable sales.

We have the following funding arrangements available with HSBC affiliates, although there are no outstanding balances at either September 30, 2016 or December 31, 2015:


•	At December 31, 2015, we had a $1.0 billion, 364-day committed revolving credit facility with HSBC USA. This revolving credit facility was terminated in September 2016; and


•	$1.0 billion, 364-day uncommitted revolving credit facility with HSBC North America. This credit facility expires in January 2017.

In November 2013, we obtained a surety bond for $2.5 billion to secure a stay of execution of the partial judgment in the securities litigation while we appealed the judgment. This surety bond was guaranteed by HSBC North America and we paid HSBC North America an annual fee for providing the guarantee which was included as a component of interest expense. Given the mandate of the Court of Appeals for the Seventh Circuit reversing the judgment, during the third quarter of 2015 we terminated the surety bond and related guarantee by HSBC North America. During the nine months ended September 30, 2015, we recorded $4 million related to the guarantee provided by HSBC North America prior to its termination.

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 $1.8 billion and $8.9 billion at September 30, 2016 and December 31, 2015, respectively. The fair value of our agreements with HSBC Bank USA required us to provide collateral to HSBC Bank USA of $189 million at September 30, 2016 and $491 million at December 31, 2015, 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, HSBC Investments (North America) Inc. holds 1,000 shares of Series C Preferred Stock. Dividends paid on the Series C Preferred Stock totaled $21 million and $64 million during the three and nine months ended September 30, 2016 compared with $21 million and $64 million during the three and nine months ended September 30, 2015, respectively. During periods in which there is an accumulated deficit, dividends on the Series C preferred stock are paid from additional paid-in-capital.

At September 30, 2015, we had a deposit totaling $1,503 million with HSBC Bank USA at current market rates. At September 30, 2016 and December 31, 2015, we no longer maintained this deposit with HSBC Bank USA. Interest income earned on this deposit was included in interest income from HSBC affiliates in the table above and was insignificant during the three and nine months ended September 30, 2015. As the deposit was terminated prior to December 31, 2015, there was no interest income during three and nine months ended September 30, 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. During the three and nine months ended September 30, 2016 we paid fees to HSI totaling $1 million and $5 million, respectively. Fees paid to HSI for these services during the three and nine months ended September 30, 2015 were less than $1 million. 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 HSBC affiliates. This includes fees received for servicing real estate secured receivables (with a carrying amount of $586 million and $696 million at September 30, 2016 and December 31, 2015, 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") 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 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.