Related Party Transactions

6 Months Ended

Jun. 30, 2011


*12.*	*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, derivative execution, purchases and sales of receivables, servicing arrangements, information technology and some centralized support services, item and statement processing services, banking and other miscellaneous services. The following tables present related party balances and the income and (expense) generated by related party transactions for continuing operations:


	June 30,		December 31,
	2011		2010

	(in millions)

Assets:
Cash	$	226	$	168
Interest bearing deposits with banks		1,004		1,009
Securities purchased under agreements to resell		857		2,060
Derivative related assets		197		64
Other assets		311		126

Total assets	$	2,595	$	3,427

Liabilities:
Due to affiliates (includes $443 million and $436 million at June 30, 2011 and December 31, 2010, respectively, carried at fair value)	$	8,168	$	8,255
Derivative related liability		-		2
Other liabilities		143		70

Total liabilities	$	8,311	$	8,327


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010

	(in millions)

Income/(Expense):
Interest income from HSBC affiliates	$	2		$	2		$	4		$	3
Interest expense paid to HSBC affiliates⁽¹⁾		(143	)		(202	)		(296	)		(422	)

Net interest income (loss)		(141	)		(200	)		(292	)		(419	)

Gain/(loss) on FVO debt with affiliate		5			-			(7	)		-

HSBC affiliate income:
Gain on receivable sales to HSBC affiliates:
Daily sales of private label receivable originations		50			50			89			88
Daily sales of credit card receivables		98			92			172			170

Total gain on receivable sales to HSBC affiliates		148			142			261			258

Servicing and other fees from HSBC affiliates:
HSBC Bank USA:
Real estate secured servicing and related fees		3			2			6			5
Private label and card receivable servicing and related fees		156			158			305			311
Other servicing, processing, origination and support revenues from HSBC Bank USA and other HSBC affiliates		4			5			9			9
HSBC Technology and Services (USA) Inc. (“HTSU”) administrative fees and rental revenue⁽²⁾		-			(4	)		2			10

Total servicing and other fees from HSBC affiliates		163			161			322			335

Support services from HSBC affiliates		(295	)		(254	)		(586	)		(530	)

Stock based compensation expense with HSBC		(2	)		(4	)		(6	)		(8	)

Insurance commission paid to HSBC Bank Canada		(4	)		(9	)		(8	)		(14	)


⁽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 positions related to non-affiliated debt.
⁽²⁾		Rental revenue/(expense) from HTSU totaled $(2) million and less than $(1) million during the three and six months ended June 30, 2011, respectively, and $(5) million and $6 million during the three and six months ended June 30, 2010, respectively.

Transactions with HSBC Bank USA:


•	In January 2009, we sold our GM and UP Portfolios to HSBC Bank USA with an outstanding principal balance of $12.4 billion at the time of sale and recorded a gain on the bulk sale of these receivables of $130 million. This gain was partially offset by a loss of $80 million recorded on the termination of cash flow hedges associated with the $6.1 billion of indebtedness transferred to HSBC Bank USA as part of these transactions. We retained the customer account relationships and by agreement sell on a daily basis all new credit card receivable originations for the GM and UP Portfolios to HSBC Bank USA. We continue to service the GM and UP receivables for HSBC Bank USA for a fee. Information regarding these receivables is summarized in the table below.

•	In July 2004 we purchased the account relationships associated with $970 million of credit card receivables from HSBC Bank USA and on a daily basis, we sell new receivable originations on these credit card accounts to HSBC Bank USA. We continue to service these loans for a fee. Information regarding these receivables is summarized in the table below.

•	In December 2004, we sold to HSBC Bank USA our private label receivable portfolio (excluding retail sales contracts at our Consumer Lending business). We continue to service the sold private label and credit card receivables and receive servicing and related fee income from HSBC Bank USA. We retained the customer account relationships and by agreement sell on a daily basis all new private label receivable originations and new receivable originations on these credit card accounts to HSBC Bank USA. Information regarding these receivables is summarized in the table below.

•	In 2003 and 2004, we sold approximately $3.7 billion of real estate secured receivables to HSBC Bank USA. We continue to service these receivables for a fee. Information regarding these receivables is summarized in the table below.

The following table summarizes the private label, credit card (including the GM and UP Portfolios) and real estate secured receivables we are servicing for HSBC Bank USA at June 30, 2011 and December 31, 2010 as well as the cumulative amount of receivables sold on a daily basis during the three and six months ended June 30, 2011 and 2010:


			Credit Cards
	Private		General		Union				Real Estate
	Label		Motors		Privilege		Other		Secured		Total

	(in billions)

Receivables serviced for HSBC Bank USA:
June 30, 2011	$	11.9	$	4.0	$	3.7	$	1.9	$	1.4	$	22.9
December 31, 2010		13.5		4.5		4.1		2.0		1.5		25.6
Total of receivables sold on a daily basis to HSBC Bank USA during:
Three months ended June 30, 2011	$	3.6	$	3.3	$	0.8	$	1.1	$	-	$	8.8
Three months ended June 30, 2010		3.4		3.5		0.8		1.0		-		8.7
Six months ended June 30, 2011		6.8		6.4		1.5		2.0		-	$	16.7
Six months ended June 30, 2010		6.4		6.6		1.5		2.0		-		16.5

Fees received for servicing these loan portfolios totaled $158 million and $308 million during the three and six months ended June 30, 2011, respectively, compared to $158 million and $313 million during the three and six months ended June 30, 2010, respectively.

The GM and UP credit card receivables as well as the private label receivables are sold to HSBC Bank USA on a daily basis at a sales price for each type of portfolio determined using a fair value calculated semi-annually in April and October by an independent third party based on the projected future cash flows of the receivables. The projected future cash flows are developed using various assumptions reflecting the historical performance of the receivables and adjusted for key factors such as the anticipated economic and regulatory environment. The independent third party uses these projected future cash flows and a discount rate to determine a range of fair values. We use the mid-point of this range as the sales price. If significant information becomes available that would alter the projected future cash flows, an analysis would be performed to determine if fair value rates needed to be updated prior to the normal semi-annual cycles.


•	Under multiple service level agreements, we also provide various services to HSBC Bank USA, including real estate and credit card servicing and processing activities and other operational and administrative support. Fees received for these services are reported as Servicing and other fees from HSBC affiliates.

•	In the fourth quarter of 2009, an initiative was begun to streamline the servicing of real estate secured receivables across North America. As a result, certain functions that we had previously performed for our mortgage customers are now being performed by HSBC Bank USA for all North America mortgage customers, including our mortgage customers. Additionally, we are currently performing certain functions for all North America mortgage customers where these functions had been previously provided separately by each entity. During the three and six months ended June 30, 2011, we paid $2 million and $4 million, respectively, for services we received from HSBC Bank USA and received $1 million and $3 million, respectively, for services we provided. During the three and six months ended June 30, 2010, we paid $2 million and $4 million, respectively, for services we received from HSBC Bank USA and received $2 million and $3 million, respectively, for services we provided.

•	In July 2010, we transferred certain employees in our real estate secured receivable servicing department to a subsidiary of HSBC Bank USA. These employees continue to service our real estate secured receivable portfolio and we pay a fee to HSBC Bank USA for these services. During the three and six months ended June 30, 2011, we paid $15 million and $32 million, respectively, for services we received from HSBC Bank USA.

•	We have extended revolving lines of credit to subsidiaries of HSBC Bank USA for an aggregate total of $1.0 billion. No balances were outstanding under any of these lines of credit at either June 30, 2011 or December 31, 2010.

•	HSBC Bank USA extended a secured $1.5 billion uncommitted credit facility to certain of our subsidiaries in December 2008. This is a 364 day credit facility which was renewed in November 2010. There were no balances outstanding at June 30, 2011 or December 31, 2010.

•	HSBC Bank USA extended a $1.0 billion committed unsecured credit facility to HSBC Bank Nevada (“HOBN”), a subsidiary of HSBC Finance Corporation, in December 2008. This 364 day credit facility was renewed in December 2010. There were no balances outstanding at June 30, 2011 or December 31, 2010.

•	As it relates to our discontinued TFS operations, HSBC Bank USA and HSBC Trust Company (Delaware) (“HTCD”) originated the loans on behalf of our TFS business for clients of a single third party tax preparer. During 2010, we purchased a portion of the loans originated by HSBC Bank USA and HTDC daily for a fee. A portion of the loans which were originated were retained by HSBC Bank USA and held on its balance sheet. In the event any of the loans which HSBC Bank USA continued to hold on its balance sheet reached a defined delinquency status, we purchased the delinquent loans at par value as we had assumed all credit risk associated with this program. During the three and six months ended June 30, 2010, we received a fee from HSBC Bank USA for both servicing the loans and assuming the credit risk associated with these loans which totaled $2 million and $58 million, respectively, and is included as a component of loss from discontinued operations. For the loans which we purchased from HTCD during the three and six months ended June 30, 2010, we received taxpayer financial services revenue and paid an origination fee to HTCD of $1 million and $4 million, respectively, which is included as a component of loss from discontinued operations.

•	As it relates to our discontinued auto finance operations, in January 2009, we sold certain auto finance receivables with an outstanding principal balance of $3.0 billion at the time of sale to HSBC Bank USA. In March 2010, we repurchased $379 million of these auto finance receivables from HSBC Bank USA and immediately sold them to SC USA. Prior to the sale of our receivable servicing operations to SC USA in March 2010, we serviced these auto finance receivables for HSBC Bank USA for a fee, which is included as a component of loss from discontinued auto operations. In August 2010, we sold the remainder of our auto finance receivable portfolio to SC USA.

Transactions with HSBC Holdings plc:


•	A commercial paper back-stop credit facility of $2.0 billion from HSBC at June 30, 2011 and December 31, 2010 supported our domestic issuances of commercial paper. No balances were outstanding under this credit facility at June 30, 2011 or December 31, 2010. The annual commitment fee requirement to support availability of this line is included as a component of Interest expense – HSBC affiliates in the consolidated statement of income (loss).

•	Employees of HSBC Finance Corporation participate in one or more stock compensation plans sponsored by HSBC. These expenses are recorded in Salary and employee benefits and are reflected in the above table as Stock based compensation expense with HSBC.

Transactions with other 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 HTSU. Technology related assets are generally capitalized and recorded on our consolidated balance sheet. HTSU also provides certain item processing and statement processing activities to 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 them certain administrative services, such as internal audit, as well as receiving rental revenue from HTSU for certain office space. The fees and rental revenue we receive from HTSU are recorded as a component of 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 of $15 million and $42 million during the three and six months ended June 30, 2011, respectively, and $31 million and $63 million during the three and six months ended June 30, 2010, respectively, are included as a component of Support services from HSBC affiliates in the table above. During 2010 and through February 2011, the expenses for these services for all HSBC North America operations were billed directly to HTSU who then billed these services to the appropriate HSBC affiliate who benefited from the services. Beginning in March 2011, HSBC Global Resourcing (UK) Ltd began billing us directly for the services we receive from them.

•	The notional value of derivative contracts outstanding with HSBC subsidiaries totaled $45.4 billion and $49.9 billion at June 30, 2011 and December 31, 2010, 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 with affiliate counterparties required the affiliate to provide collateral of $2.8 billion and $2.5 billion at June 30, 2011 and December 31, 2010, 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.

•	Due to affiliates includes amounts owed to subsidiaries of HSBC as a result of direct debt issuances. At June 30, 2011 and December 31, 2010, due to affiliates includes $443 million and $436 million, respectively, carried at fair value under FVO reporting. During the three and six months ended June 30, 2011, loss on debt designated at fair value and related derivatives includes $5 million of gain and $7 million of loss, respectively, related to these debt issuances. During the six months ended June 30, 2010, due to affiliates did not include any amounts carried at fair value under FVO reporting.

•	During the second quarter of 2011, we executed a $600 million loan agreement with HSBC North America which provides for three $200 million borrowings with maturities between 2034 and 2035. As of June 30, 2011, there were no amounts outstanding under this loan agreement.

•	During 2010, we executed a $1.0 billion 364-day uncommitted revolving credit agreement with HSBC North America which allowed for borrowings with maturities of up to 15 years, and borrowed the full amount available under this agreement during 2010. During the fourth quarter of 2010, we replaced this loan from HSBC North America by repaying the loan and issuing 1,000 shares of Series C preferred stock to HINO for $1.0 billion. Dividends paid on the Series C Preferred Stock totaled $22 million and $47 million during the three and six months ended June 30, 2011, respectively.


•	In December 2010, we made a deposit totaling $1.0 billion with HSBC Bank plc (“HBEU”) at current market rates. The deposit can be withdrawn anytime after June 3, 2011 with 185 days notice, and matures on March 1, 2012. Interest income earned on this deposit, which totaled $1 million and $2 million during the three and six months ended June 30, 2011, respectively, is included in interest income from HSBC affiliates in the table above.

•	We purchase from HSBC Securities (USA) Inc. (“HSI”) securities under an agreement to resell. Interest income recognized on these securities totaled $1 million and $2 million during the three and six months ended June 30, 2011, respectively, and $2 million and $3 million during the three and six months ended June 30, 2010, respectively, and is reflected as interest income from HSBC affiliates in the table above.

•	Support services from HSBC affiliates also includes banking services and other miscellaneous services provided by other subsidiaries of HSBC, including HSBC Bank USA.

•	Domestic employees of HSBC Finance Corporation participate in a defined benefit pension plan and other postretirement benefit plans sponsored by HSBC North America. See Note 11, “Pension and Other Postretirement Benefits,” for additional information on this pension plan.

•	We have utilized HSBC Markets (USA) Inc, (“HMUS”) to lead manage the underwriting of a majority of our ongoing debt issuances as well as manage the debt exchange which occurred during the fourth quarter of 2010. During the three and six months ended June 30, 2011 and 2010, there were no fees paid to HMUS for such services. For debt not accounted for under the fair value option, these fees would be amortized over the life of the related debt and included as a component of interest expense.

•	We continue to guarantee the long-term and medium-term notes issued by our Canadian business prior to its sale to HSBC Bank Canada. During the six months ended June 30, 2011 and 2010, we recorded fees of $2 million and $3 million, respectively, for providing this guarantee. As of June 30, 2011, the outstanding balance of the guaranteed notes was $829 million and the latest scheduled maturity of the notes is May 2012. As part of the sale of our Canadian business to HSBC Bank Canada, the sale agreement allows us to continue to distribute various insurance products through the branch network for a fee. Fees paid to HSBC Bank Canada for distributing insurance products through this network totaled $4 million and $8 million during the three and six months ended June 30, 2011, respectively, and $9 million and $14 million during the three and six months ended June 30, 2010, respectively, and are included in Insurance Commission paid to HSBC Bank Canada in the table above.

- Definition

This element may be used for the entire related party transactions disclosure as a single block of text. Disclosure may include: the nature of the relationship(s), a description of the transactions, the amount of the transactions, the effects of any change in the method of establishing the terms of the transaction from the previous period, stated interest rate, expiration date, terms and manner of settlement per the agreement with the related party, and amounts due to or from related parties. If the entity and one or more other entities are under common ownership or management control and this control affects the operating results or financial position, disclosure includes the nature of the control relationship even if there are no transactions between the entities. Disclosure may also include the aggregate amount of current and deferred tax expense for each statement of earnings presented where the entity is a member of a group that files a consolidated tax return, the amount of any tax related balances due to or from affiliates as of the date of each statement of financial position presented, the principal provisions of the method by which the consolidated amount of current and deferred tax expense is allocated to the members of the group and the nature and effect of any changes in that method. Examples of related party transactions include transactions between (a) a parent company and its subsidiary; (b) subsidiaries of a common parent; (c) and entity and its principal owners; and (d) affiliates.

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