Related Party Transactions

12 Months Ended

Dec. 31, 2011

Related Party Transactions [Abstract]

Related Party Transactions

19.    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:

At December 31,	2011		2010
	(in millions)
Assets:
Cash	$	214	$	159
Interest bearing deposits with banks		3		1,009
Securities purchased under agreements to resell		920		2,060
Derivative related assets		-		64
Other assets		124		126
Total assets	$	1,261	$	3,418
Liabilities:
Due to affiliates (includes $447 and million $436 million at December 31, 2011 and 2010 carried at fair value, respectively)	$	8,262	$	8,255
Derivative related liability		25		2
Other liabilities (1)		47		(60	)
Total liabilities	$	8,334	$	8,197

⁽¹⁾  Other liabilities includes $55 million and $119 million at December 31, 2011 and 2010, respectively, related to accrued interest receivable on derivative positions with affiliates.

Year Ended December 31,	2011			2010			2009
	(in millions)
Income/(Expense):
Interest income from HSBC affiliates	$	6		$	7		$	7
Interest expense paid to HSBC affiliates (1)		(578	)		(764	)		(1,103	)
Net Interest income (loss)		(572	)		(757	)		(1,096	)
Loss on FVO debt with affiliate		(10	)		(4	)		-
HSBC affiliate income:
Gain on receivable sales to HSBC affiliates:
Sales of real estate secured receivables		-			-			2
Gain (loss) on sale of other assets to HSBC affiliates		-			-			20
Loss on sale of affiliate preferred stock		-			-			(6	)
Servicing and other fees from HSBC affiliates:
HSBC Bank USA:
Real estate secured servicing and related fees		11			12			7
Other servicing, processing, origination and support revenues from HSBC Bank USA and other HSBC affiliates		11			16			45
HSBC Technology and Services (USA) Inc. (“HTSU”) administrative fees and rental revenue (2)		(1	)		8			59
Total servicing and other fees from HSBC affiliates		21			36			111
Support services from HSBC affiliates		(311	)		(275	)		(317	)
Stock based compensation expense with HSBC		(8	)		(10	)		(20	)
Insurance commission paid to HSBC Bank Canada		(17	)		(33	)		(18	)

⁽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⁾  During 2010, changes were made in the methodology used to allocate rental expense between us and HTSU. Rental revenue/(expense) from HTSU totaled $(9) million during 2011, $3 million during 2010 and $47 million during 2009.

Transactions with HSBC Bank USA:

• 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. At December 31, 2011 and 2010, we were servicing receivables totaling $1.3 billion and $1.5 billion, respectively. Servicing fees for these receivables totaled $4 million and $5 million during 2011 and 2010, respectively.

• 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 2011 and 2010, we paid $10 million and $8 million, respectively, for services we received from HSBC Bank USA and received $7 million in both 2011 and 2010 for services we provided to HSBC Bank USA. During 2011, we began to separate these processes so that each entity is servicing its own mortgage customers.

• 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 2011 and 2010, we paid $62 million and $34 million, respectively, for services we received from HSBC Bank USA.

• HSBC Bank USA extended a secured $1.5 billion uncommitted secured credit facility to certain of our subsidiaries in December 2008. This is a 364 day credit facility which currently matures in November 2012. There were no balances outstanding at December 31, 2011 or 2010.

• HSBC Bank USA serviced a portfolio of real estate secured receivables for us with an outstanding principal balance of $1.5 billion at December 31, 2009. During 2010, servicing of these receivables was transferred back to us. Fees paid relating to the servicing of this portfolio totaled $1 million during 2010 prior to the transfer of servicing to us compared to $6 million during 2009. These fees are reported in Support services from HSBC affiliates. The decrease during 2010 reflects a renegotiation of servicing fees for this portfolio.

• In the third quarter of 2009, we sold $86 million of Low Income Housing Tax Credit Investment Funds to HSBC Bank USA for a loss on sale of $20 million.

• In the second quarter of 2008, our Consumer Lending business launched a new program with HSBC Bank USA to sell real estate secured receivables to the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Our Consumer Lending business originated the loans in accordance with Freddie Mac’s underwriting criteria. The loans were then sold to HSBC Bank USA, generally within 30 days. HSBC Bank USA repackaged the loans and sold them to Freddie Mac under their existing Freddie Mac program. During the three months ended March 31, 2009, we sold $51 million of real estate secured loans to HSBC Bank USA for a gain on sale of $2 million. This program was discontinued in late February 2009 as a result of our decision to discontinue new customer account originations in our Consumer Lending business.

Transactions with HSBC Bank USA involving our Discontinued Operations:

• As it relates to our discontinued credit card operations, 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 but retained the customer account relationships. In December 2004, we sold our private label receivable portfolio (excluding retail sales contracts at our Consumer Lending business) to HSBC Bank USA and also retained the customer account relationships. In July 2004, we purchased the account relationships associated with $970 million of credit card receivables from HSBC Bank USA. In each of these transactions, we agreed to sell on a daily basis all new receivable originations on these account relationships to HSBC Bank USA and service these receivables for a fee. The following table summarizes the receivable portfolios we are servicing for HSBC Bank USA at December 31, 2011 and 2010 as well as the cumulative amount of receivables sold on a daily basis during 2011, 2010 and 2009:

			Credit Cards
	Private Label		General Motors		Union Privilege		Other		Total
	(in billions)
Receivables serviced for HSBC Bank USA:
December 31, 2011	$	12.8	$	4.1	$	3.5	$	2.0	$	22.4
December 31, 2010		13.5		4.5		4.1		2.0		24.1
Total of receivables sold on a daily basis to HSBC Bank USA during:
2011	$	15.4	$	13.0	$	3.2	$	4.1	$	35.7
2010		14.6		13.5		3.2		4.1		35.4
2009		15.7		14.5		3.5		4.3		38.0

Gains on the daily sales of the receivables discussed above, which are included as a component of Income from discontinued operations in the consolidated statement of income (loss), totaled $567 million, $540 million and $467 million during 2011, 2010 and 2009 respectively. Fees received for servicing these loan portfolios, which are included as a component of Income from discontinued operations in the consolidated statement of income (loss), totaled $594 million, $625 million and $635 million during 2011, 2010 and 2009, 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. With the announcement of the Capital One transaction, an analysis was performed and an adjustment to the fair value rates was made effective August 10, 2011 to reflect the sale of the receivables to a third party during the first half of 2012. The rates will continue to be updated as part of our normal semi-annual cycle process until the time the transaction is completed.

HSBC Bank USA extended a $1.0 billion committed unsecured credit facility to HSBC Bank Nevada (“HOBN”) which is part of our credit card operations. This is a 364-day credit facility which matures in November 2012. There were no balances outstanding at December 31, 2011 or 2010.

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 December 31, 2011 or 2010.

• As it relates to our TFS operations, which terminated in the fourth quarter of 2010, 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. We historically purchased the loans originated by HSBC Bank USA and HTCD daily for a fee. During the first quarter of 2010, we began purchasing a smaller portion of these loans. The loans which we previously purchased were retained on HSBC Bank USA’s 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 assumed all credit risk associated with this program. We received a fee from HSBC Bank USA for both servicing the loans and assuming the credit risk associated with these loans which totaled $58 million during 2010 and is included as a component of loss from discontinued operations. For the loans which we continued to purchase from HTCD, we received taxpayer financial services revenue and paid an origination fee to HTCD. Fees paid for originations totaled $4 million in 2010 and $11 million in 2009 and are 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 and recorded a gain on the bulk sale of these receivables of $7 million which is included as a component of loss from discontinued auto operations for 2009. 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:

• We have a commercial paper back-stop credit facility of $1.1 billion at December 31, 2011 from HSBC supporting our domestic issuances of commercial paper of which $600 million matures in September 2012 and $500 million matures in September 2014. At December 31, 2010, we had a commercial paper back-stop credit facility of $2.0 billion. No balances were outstanding under this credit facility at December 31, 2011 or 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.

• During the second quarter of 2009, we sold to HSBC $248 million of affiliate preferred stock which we had received on the sale of our U.K. credit card business. As a result, we recorded a loss on sale of $6 million which is included as a component of other income during 2009.

• In late February 2009, we effectively converted $275 million of mandatorily redeemable preferred securities of the Household Capital Trust VIII which had been issued during 2003 to common stock by redeeming the junior subordinated notes underlying the preferred securities and then issuing common stock to HSBC Investments (North America) Inc. (“HINO”). Interest expense recorded on the underlying junior subordinated notes totaled $3 million in 2009. This interest expense is included in Interest expense – HSBC affiliates in the consolidated statement of income (loss).

Transactions with other HSBC affiliates:

• HSBC North America’s technology and certain centralized support services including human resources, corporate affairs, risk management and other shared services and beginning in January 2010, legal, compliance, tax and finance 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 in 2011, $24 million in 2010 and $40 million in 2009 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 $40.4 billion and $49.9 billion at December 31, 2011 and 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 $584 million and $2.5 billion at December 31, 2011 and 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 December 31, 2011 and 2010, due to affiliates includes $447 million and $436 million carried at fair value under FVO reporting, respectively. During 2011 and 2010, loss on debt designated at fair value and related derivatives includes $10 million and $4 million, respectively, related to these debt issuances.

• 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 December 31, 2011, $600 million was outstanding under this loan agreement.

• During the fourth quarter of 2011, we executed a commercial paper back-stop credit facility of $400 million with HSBC Trinkaus & Burkhardt AG (Trinkaus) maturing in December 2012. As of December 31, 2011, there were no amounts outstanding under this loan agreement.

• During the fourth quarter of 2011, we executed a commercial paper back-stop credit facility of $500 million with HSBC Investments (Bahamas) Limited maturing in April 2014. This facility is secured by a $500 million deposit at HSBC Bank USA. As of December 31, 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 to HSBC North America with the issuance of 1,000 shares of Series C preferred stock to HINO for $1.0 billion. We began paying dividends on the Series C preferred stock during the first quarter of 2011. Dividends paid on the Series C Preferred Stock totaled $89 million during 2011. See Note 15, “Redeemable Preferred Stock,” for further discussion of the Series C preferred stock.

• In December 2010, we made a deposit totaling $1.0 billion with HSBC Bank plc (“HBEU”) at current market rates. This deposit was withdrawn during the third quarter of 2011. Interest income earned on this deposit which totaled $3 million during 2011 is included in interest income from HSBC affiliates in the table above. Interest income earned on this deposit during 2010 is immaterial.

• We purchase from HSBC Securities (USA) Inc. (“HSI”) securities under an agreement to resell. Interest income recognized on these securities totaled $3 million and $7 million during 2011 and 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 post-retirement benefit plans sponsored by HSBC North America. See Note 18, “Pension and Other Post-retirement Benefits,” for additional information on this pension plan.

• We have utilized HSI to lead manage the underwriting of a majority of our ongoing debt issuances as well as manage the debt exchange which occurred during 2010. During 2010, fees paid to HSI for such services totaled $13 million. There were no fees paid to HSI for such services during 2011 or 2009. For debt not accounted for under the fair value option, these fees are 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 2011 and 2010, we recorded fees of $2 million and $5 million, respectively, for providing this guarantee. As of December 31, 2011, the outstanding balance of the guaranteed notes was $107 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 $17 million and $33 million during 2011 and 2010, respectively, and are included in Insurance Commission paid to HSBC Bank Canada in the table above.

• In September 2008, we borrowed $1.0 billion from an existing uncommitted credit facility with HBEU. The borrowing was for 60 days and matured in November 2008. We renewed this borrowing for an additional 95 days. The borrowing matured in February 2009 and we chose not to renew it at that time. Interest expense on this borrowing totaled $5 million in 2009.

• In October 2008, we borrowed $1.2 billion from an uncommitted money market facility with a subsidiary of HSBC Asia Pacific (“HBAP”). The borrowing was for six months, matured in April 2009 and we chose not to renew it at that time. Interest expense on this borrowing totaled $19 million in 2009.