Related Party Transactions

3 Months Ended

Mar. 31, 2012

Related Party Transactions [Abstract]

Related Party Transactions

11.    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:

	March 31, 2012			December 31, 2011
	(in millions)
Assets:
Cash	$	212		$	214
Interest bearing deposits with banks		4			3
Securities purchased under agreements to resell		2,645			920
Derivative related assets		2			-
Other assets		144			124
Total assets	$	3,007		$	1,261
Liabilities:
Due to affiliates (includes $461 million and $447 million at March 31, 2012 and December 31, 2011, respectively, carried at fair value)	$	8,776		$	8,262
Derivative related liability		34			25
Other liabilities (1)		(96	)		47
Total liabilities	$	8,714		$	8,334

⁽¹⁾  Other liabilities includes $136 million and $55 million at March 31, 2012 and December 31, 2011, respectively, related to accrued interest receivable on derivative positions and other amounts with affiliates.

Three Months Ended March 31,	2012			2011
	(In millions)
Income/(Expense):
Interest income from HSBC affiliates	$	1		$	2
Interest expense paid to HSBC affiliates (1)		(139	)		(153	)
Net interest income (loss)		(138	)		(151	)
Gain/(loss) on FVO debt with affiliate		(14	)		(12	)
HSBC affiliate income:
Servicing and other fees from HSBC affiliates:
Real estate secured servicing and related fees from HSBC Bank USA		3			3
Other servicing, processing, origination and support revenues		2			2
HSBC Technology and Services (USA) Inc. (“HTSU”) administrative fees and rental revenue (2)		3			2
Total servicing and other fees from HSBC affiliates		8			7
Support services from HSBC affiliates		(73	)		(76	)
Stock based compensation expense with HSBC		(2	)		(2	)
Insurance commission paid to HSBC Bank Canada		(4	)		(4	)

⁽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 from HTSU totaled $3 million and $1 million during the three months ended March 31, 2012 and 2011, respectively.

Transactions with HSBC USA Inc., including 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 March 31, 2012 and December 31, 2011, we were servicing receivables totaling $1.3 billion. Servicing fees for these receivables totaled $1 million during each of the three months ended March 31, 2012 and 2011.

• Under multiple service level agreements, we also provide various services to HSBC Bank USA, including real estate secured receivable 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 were being performed by HSBC Bank USA for all North America mortgage customers, including our mortgage customers. Additionally, we began performing certain functions for all North America mortgage customers where these functions had been previously provided separately by each entity. During 2011, we began a process to separate these functions so that each entity will be servicing its own mortgage customers when the process is completed. During each of the three months ended March 31, 2012 and 2011, we paid $2 million for services we received from HSBC Bank USA and received $2 million during each of the three months ended March 31, 2012 and 2011 for services we provided to HSBC Bank USA.

• 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 months ended March 31, 2012 and 2011, we paid $14 million and $17 million, respectively, for services we received from HSBC Bank USA.

• During the fourth quarter of 2011, we executed a $3.0 billion 364-day uncommitted revolving credit agreement with HSBC USA Inc. which allows for borrowings with maturities of up to 15 years. As of March 31, 2012 and December 31, 2011 there were no amounts outstanding under this loan agreement

• 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 March 31, 2012 or December 31, 2011.

Transactions with HSBC USA Inc. and 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.

Intangible assets of our discontinued credit card operations at December 31, 2011 included $29 million, net, that related to the account relationships we purchased from HSBC Bank USA in July 2004 as discussed above. In March 2012, we sold these account relationships to HSBC Bank USA resulting in a gain of $79 million which is included as a component of income from discontinued operations.

The following table summarizes the receivable portfolios we are servicing for HSBC Bank USA at March 31, 2012 and December 31, 2011 as well as the cumulative amount of receivables sold on a daily basis during the three months ended March 31, 2012 and 2011:

			Credit Cards
	Private Label		General Motors		Union Privilege		Other		Total
	(in billions)
Receivables serviced for HSBC Bank USA:
March 31, 2012	$	11.6	$	3.8	$	3.3	$	1.9	$	20.6
December 31, 2011		12.8		4.1		3.5		2.0		22.4
Total of receivables sold on a daily basis to HSBC Bank USA during:
Three months ended March 31, 2012	$	3.3	$	2.9	$	.7	$	1.0	$	7.9
Three months ended March 31, 2011		3.2		3.1		.7		.9		7.9

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 $79 million and $113 million during the three months ended March 31, 2012 and 2011, respectively. Fees received for servicing these receivable portfolios, which are included as a component of income from discontinued operations in the consolidated statement of income (loss), totaled $157 million and $149 million during the three months ended March 31, 2012 and 2011, respectively.

The GM and UP credit card receivables as well as the private label receivables were 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 were 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 used these projected future cash flows and a discount rate to determine a range of fair values. We used the mid-point of this range as the sales price. If significant information became available that altered the projected future cash flows, an analysis was 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.

• 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 March 31, 2012 or December 31, 2011.

• 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 March 31, 2012 or December 31, 2011.

Transactions with HSBC Holdings plc:

• We have a commercial paper back-stop credit facility of $1.1 billion at March 31, 2012 and 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. No balances were outstanding under these credit facilities at either March 31, 2012 or December 31, 2011. 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 $3 million and $5 million during the three months ended March 31, 2012 and 2011, respectively, are included as a component of Support services from HSBC affiliates in the table above. 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 $38.3 billion and $40.4 billion at March 31, 2012 and December 31, 2011, 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 $902 million and $584 million at March 31, 2012 and December 31, 2011, 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 March 31, 2012 and December 31, 2011, due to affiliates includes $461 million and $447 million, respectively, carried at fair value under FVO reporting. During the three months ended March 31, 2012 and 2011, loss on debt designated at fair value and related derivatives includes $14 million and $12 million, respectively, related to these debt issuances.

• During the first quarter of 2012, we executed two new $250 million loan agreements with HSBC Investments (Bahamas) Limited maturing in August 2012 and September 2012, respectively. As of March 31, 2012, $500 million was outstanding under these loan agreements.

• 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 March 31, 2012 and 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 March 31, 2012 and 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 March 31, 2012 and 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 $22 million and $25 million during the three months ended March 31, 2012 and 2011, respectively.

• 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 during the first quarter of 2011 which was included in interest income from HSBC affiliates in the table above, was not material.

• We purchase from HSBC Securities (USA) Inc. (“HSI”) securities under an agreement to resell. Interest income recognized on these securities totaled $1 million and $1 million during the three months ended March 31, 2012 and 2011, 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 10, “Pension and Other Post-retirement Benefits,” for additional information on this pension plan.

• 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 three months ended March 31, 2012 and 2011, we recorded fees of less than $1 million and $1 million, respectively, for providing this guarantee. As of March 31, 2012, the outstanding balance of the guaranteed notes was $109 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 during both the three months ended March 31, 2012 and 2011 and are included in Insurance Commission paid to HSBC Bank Canada in the table above.