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, 2017		December 31, 2016
	(in millions)
Assets:
Cash	$	26	$	128
Interest bearing deposits with banks	—		1,500
Securities purchased under agreements to resell⁽¹⁾	4,040		2,392
Other assets	124		114
Total assets	$	4,190	$	4,134
Liabilities:
Due to affiliates⁽²⁾	$	—	$	3,300
Other liabilities	14		41
Total liabilities	$	14	$	3,341


⁽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,
	2017			2016			2017			2016
	(in millions)
Income/(Expense):
Interest income from HSBC affiliates	$	15		$	1		$	35		$	4
Interest expense paid to HSBC affiliates⁽¹⁾	(12		)	(45		)	(53		)	(189		)
Net interest income (expense)	$	3		$	(44	)	$	(18	)	$	(185	)
Gain (loss) on FVO debt with affiliate	$	7		$	(13	)	$	9		$	(1	)
Servicing and other fees from HSBC affiliates	—			1			1			7
Support services from HSBC affiliates	(15		)	(40		)	(59		)	(120		)
Loss on extinguishment of debt held by HSBC affiliates	(85		)	—			(113		)	—
Stock based compensation income (expense) with HSBC⁽²⁾	(1		)	(1		)	(2		)	(1		)


⁽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 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 with any future funding requirements to be sourced primarily through HSBC USA Inc. ("HSBC USA") or HSBC North America. Due to affiliates consists of the following:



	September 30, 2017		December 31, 2016
	(in millions)
HSBC USA Inc.	$	—	$	2,500
HSBC Holdings plc (includes $- million and $485 million at September 30, 2017 and December 31, 2016 carried at fair value, respectively)	—		800
Due to affiliates	$	—	$	3,300

HSBC USA Inc. - We have a $5.0 billion, 364-day uncommitted unsecured revolving credit agreement with HSBC USA, which expired in October 2017 and was not renewed. In March 2017, we prepaid the entire outstanding balance on this credit agreement of $2.5 billion and incurred a loss on extinguishment of debt held by HSBC affiliates of $28 million.

HSBC Holdings plc - We have a public subordinated debt issue which matures in 2021. At December 31, 2016, HSBC held $800 million of this public subordinated debt issue. In September 2017, we repurchased all of the notes held by HSBC and recorded a loss on extinguishment of debt held by HSBC affiliates of $85 million.

We have a $1.0 billion, 364-day uncommitted revolving credit facility with HSBC North America, which expires in January 2018. At September 30, 2017 and December 31, 2016, there are no outstanding balances under this credit facility.

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 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 $419 million and $1.8 billion at September 30, 2017 and December 31, 2016, respectively. The fair value of our agreements with HSBC Bank USA required us to provide collateral to HSBC Bank USA of $35 million at September 30, 2017 and $317 million at December 31, 2016, 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, our parent company 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, 2017, respectively, compared with $21 million and $64 million during the three and nine months ended September 30, 2016, respectively.

At December 31, 2016, we had a deposit totaling $1,500 million with HSBC Bank USA at current market rates. We did not have any deposits with HSBC Bank USA at September 30, 2017. Interest income earned on deposits with HSBC Bank USA was included in interest income from HSBC affiliates in the table above and was insignificant during three and nine months ended September 30, 2017 and 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. Fees paid to HSI for these services totaled $2 million and $7 million during the three and nine months ended September 30, 2017, respectively, compared with $1 million and $5 million during year ago periods. The fees paid to HSI for these services are reported as a component of gain (loss) on sale of real estate secured receivables.

During the third quarter of 2017, HSI also provided transaction assistance, including deal structure and execution, in the purchase of $1.1 billion of our senior subordinated debt held by non-affiliates. We paid HSI a fee of $3 million for providing these services which is recorded as a component of loss on extinguishment of debt held by non-affiliates.

•

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 million and $559 million at September 30, 2017 and December 31, 2016, 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.

Transactions with HSBC Affiliates involving our Discontinued Operations:

In December 2016, we sold our Visa Class B Shares ("Class B Shares"). The Class B Shares are currently considered restricted and are transferable under limited circumstances until certain credit card litigation is settled. Any settlement will be indemnified by Visa members, including us. Simultaneously, our affiliate, HSBC USA also sold Class B Shares to the same purchaser. Under the terms of the sale agreement, HSBC USA entered into a derivative instrument with the purchaser to retain the litigation risk associated with all of the Class B Shares sold by both us and HSBC USA until the credit card litigation is settled. Immediately following the execution of the sale agreement, we entered into a derivative instrument with HSBC USA to retain the litigation risk associated with our portion of the Class B Shares sold to the purchaser.

At September 30, 2017 and December 31, 2016, the notional amount of this derivative contract totaled $68 million and $50 million, respectively. The fair value of this derivative is estimated using a discounted cash flow methodology and is dependent upon the final resolution of the credit card litigation. The fair value of the derivative related liability with HSBC USA Inc. was $6 million and $5 million at September 30, 2017 and December 31, 2016, respectively. Derivative related expense totaled $1 million and $2 million during the three and nine months ended September 30, 2017, respectively, and was recorded as a component of income (loss) from discontinued operations. See Note 3, "Discontinued Operations," in our 2016 Form 10-K for additional information about the sale of the Visa Class B Shares and this derivative instrument.