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:



	December 31, 2016		December 31, 2015
	(in millions)
Assets:
Cash	$	128	$	124
Interest bearing deposits with banks	1,500		—
Securities purchased under agreements to resell⁽¹⁾	2,392		2,724
Other assets	114		128
Total assets	$	4,134	$	2,976
Liabilities:
Due to affiliates⁽²⁾	$	3,300	$	5,925
Other liabilities	41		62
Total liabilities	$	3,341	$	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.



Year Ended December 31,	2016			2015			2014
	(in millions)
Income/(Expense):
Interest income from HSBC affiliates	$	6		$	6		$	6
Interest expense paid to HSBC affiliates⁽¹⁾	(225		)	(302		)	(307		)
Net interest income (expense)	$	(219	)	$	(296	)	$	(301	)
Gain (loss) on FVO debt with affiliate	$	10		$	17		$	(16	)
Servicing and other fees from HSBC affiliates	1			20			28
Support services from HSBC affiliates	(158		)	(224		)	(271		)
Stock based compensation expense with HSBC⁽²⁾	(2		)	(4		)	(5		)


⁽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 15, "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 or HSBC North America. Due to affiliates consists of the following:



	December 31, 2016		December 31, 2015
	(in millions)
HSBC Private Banking Holdings (Suisse) S.A. and subsidiaries	$	—	$	500
HSBC USA Inc.	2,500		3,012
HSBC Holdings plc (includes $485 million and $496 million at December 31, 2016 and December 31, 2015 carried at fair value, respectively)	800		813
HSBC North America Holdings Inc.	—		1,600
Due to affiliates	$	3,300	$	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. In December 2016, we prepaid $512 million that was outstanding under this credit agreement and incurred a loss on extinguishment of debt of $6 million which is included as a component of servicing and other fees from HSBC affiliates in our consolidated statement of income (loss). At December 31, 2016 and December 31, 2015, the balance outstanding under this credit agreement totaled $2,500 million and $3,012 million, respectively. Of the balance outstanding at December 31, 2016, $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 which matures in 2021. Of this amount, HSBC Holdings plc holds $800 million at December 31, 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 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 December 31, 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 2018.

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. In the third quarter of 2015, the judgment was reversed and we terminated the surety bond and related guarantee by HSBC North America. During the year ended December 31, 2015 and 2014, we recorded $4 million and $6 million, respectively, related to the guarantee provided by HSBC North America prior to its termination during the third quarter of 2015. The case was settled during 2016.

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 counterparty in these derivative transactions. The notional amount of the derivative contracts outstanding with HSBC Bank USA totaled $1.8 billion and $8.9 billion at December 31, 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 $317 million at December 31, 2016 and $491 million at December 31, 2015, all of which was provided in cash. See Note 10, "Derivative Financial Instruments," for additional information about our derivative portfolio.

In addition to the lending arrangements discussed above, our parent company, HSBC North America and prior to November 15, 2016, HSBC Investments (North America) Inc., holds 1,000 shares of Series C Preferred Stock. Dividends paid on the Series C Preferred Stock totaled $86 million, $86 million and $86 million during the years ended December 31, 2016, 2015 and 2014. 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 and December 31, 2014, we had deposits totaling $1,500 million and $2,000 million, respectively, with HSBC Bank USA at current market rates. We did not have any deposits with HSBC Bank USA at December 31, 2015. Interest income earned on these deposits was included in interest income from HSBC affiliates in the table above and was insignificant during 2016, 2015 and 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:

•

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 totaled $10 million, $2 million and $2 million during 2016, 2015 and 2014, respectively. 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 $559 million and $696 million at December 31, 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"). 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.

Other Transactions Between HSBC Affiliates:

During 2015, we sold a data center located in Vernon Hills, Illinois to HTSU. We received cash totaling $54 million which also reflected the carrying value of the data center. No gain or loss was recorded as a result of this transaction.

Transactions with HSBC Affiliates involving our Discontinued Operations:

In December 2016, we entered into a derivative instrument with HSBC USA in connection with the sale of Visa Class B Shares to a third-party. The notional amount of this derivative contract totaled $50 million at December 31, 2016. The fair value of the derivative related liability with HSBC USA Inc. was $5 million at December 31, 2016. See Note 3, "Discontinued Operations," for additional information about the sale of the Class B Shares.