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 services, item and statement processing services, banking and other miscellaneous services. All extensions of credit by (and certain credit exposures of) HSBC Bank USA to other HSBC affiliates (other than FDIC-insured banks) are legally required to be secured by eligible collateral. The following table presents related party balances and the income and expense generated by related party transactions:



	June 30, 2013		December 31, 2012
	(in millions)
Assets:
Cash and due from banks	$	173	$	114
Interest bearing deposits with banks	923		714
Securities purchased under agreements to resell	—		—
Trading assets⁽¹⁾	18,533		21,370
Loans	6,967		4,514
Other	945		858
Total assets	$	27,541	$	27,570
Liabilities:
Deposits	$	14,333	$	13,863
Trading liabilities⁽¹⁾	21,374		23,910
Short-term borrowings	3,513		2,721
Long-term debt	3,991		3,990
Other	631		459
Total liabilities	$	43,842	$	44,943


⁽¹⁾	Trading assets and liabilities exclude the impact of netting which allows the offsetting of amounts relating to certain contracts if certain conditions are met.



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
							(in millions)
Income/(Expense):
Interest income	$	83		$	14		$	105		$	27
Interest expense	(19		)	(23		)	(39		)	(47		)
Net interest income (loss)	$	64		$	(9	)	$	66		$	(20	)
Servicing and other fees from HSBC affiliate:
Fees and commissions:
HSBC Finance	$	26		$	17		$	47		$	30
HSBC Markets (USA) Inc. (“HMUS”)	4			5			9			10
Other HSBC affiliates	14			14			30			42
Other HSBC affiliates income	15			10			27			20
Total affiliate income	$	59		$	46		$	113		$	102
Residential mortgage banking revenue	$	—		$	1		$	—		$	3
Support services from HSBC affiliates:
HSBC Finance	$	(5	)	$	(7	)	$	(9	)	$	(17	)
HMUS	(54		)	(79		)	(106		)	(161		)
HSBC Technology & Services (USA) (“HTSU”)	(242		)	(240		)	(475		)	(474		)
Other HSBC affiliates	(61		)	(60		)	(96		)	(119		)
Total support services from HSBC affiliates	$	(362	)	$	(386	)	$	(686	)	$	(771	)
Stock based compensation expense with HSBC	$	(13	)	$	(8	)	$	(22	)	$	(20	)

Transactions Conducted with HSBC Finance Corporation

•

In July 2004, we sold the account relationships associated with $970 million of credit card receivables to HSBC Finance and on a daily basis, we purchased new originations on these credit card receivables. As discussed in Note 8, “Intangible Assets,” on March 29, 2012 we re-purchased these account relationships from HSBC Finance for $108 million and as a result, we stopped purchasing new originations on these credit card accounts from HSBC Finance. We purchased $492 million of credit card receivables from HSBC Finance during the three months ended March 31, 2012. HSBC Finance continued to service these loans for us for a fee through April 30, 2012. Effective with the close of the sale of our GM and UP credit card receivables and our private label credit card and closed-end receivables on May 1, 2012, these loans are now serviced by Capital One for a fee. Premiums previously paid are amortized to interest income over the estimated life of the receivables purchased. We paid HSBC Finance fees for servicing these loans of $2 million and $7 million during the three and six months ended June 30, 2012.

•

In 2003 and 2004, we purchased approximately $3.7 billion of residential mortgage loans from HSBC Finance. HSBC Finance continues to service these loans for us for a fee. At June 30, 2013 and December 31, 2012, HSBC Finance was servicing $1.1 billion and $1.2 billion, respectively, of residential mortgage loans for us. We paid HSBC Finance fees for servicing these loans of $1 million and $2 million during the three and six months ended June 30, 2013, respectively, compared with $1 million and $2 million during the three and six months ended June 30, 2012, respectively.

•

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 Finance 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 the three months ended June 30, 2013 and 2012, we paid $1 million and $1 million, respectively, for services we received from HSBC Finance and received less than a million and $1 million, respectively, for services we provided to HSBC Finance. During the six months ended June 30, 2013 and 2012, we paid $3 million and $3 million, respectively, for services we received from HSBC Finance and received less than a million and $3 million, respectively, for services we provided to HSBC Finance.

•

In July 2010, certain employees in the real estate receivable default servicing department of HSBC Finance were transferred to the mortgage loan servicing department of a subsidiary of HSBC Bank USA and subsequently to HSBC Bank USA. These employees continue to service defaulted real estate secured receivables for HSBC Finance and we receive a fee for providing these services. During the three and six months ended June 30, 2013, we received servicing revenue from HSBC Finance of $15 million and $31 million, respectively, compared with $14 million and $28 million during the year-ago periods.


•	We extended a $1.5 billion uncommitted secured credit facility to certain subsidiaries of HSBC Finance in December 2008. The current credit facility matures in November 2013. Any draws on this credit facility by HSBC Finance require regulatory approval. There were no balances outstanding at June 30, 2013 and December 31, 2012.

•

During the fourth quarter of 2011, we extended an unsecured $3.0 billion 364 day uncommitted revolving credit agreement to HSBC Finance which allowed for borrowings with maturities of up to 15 years. During the second quarter of 2012, an amendment was executed to increase this uncommitted revolving credit agreement to $4.0 billion. As of June 30, 2013 and December 31, 2012, $2.0 billion was outstanding under this credit agreement with $512 million maturing in September 2017 and $1.5 billion maturing in January 2018.


•	In May 2012, we extended a $2.0 billion committed revolving credit facility to HSBC Finance which expires in May 2017. As of June 30, 2013 and December 31, 2012 there were no amounts outstanding under this credit facility.

Transactions Conducted with HSBC Finance Corporation Involving Discontinued Operations As it relates to our discontinued credit card and private label operations, in January 2009, we purchased the GM and UP Portfolios from HSBC Finance, with an outstanding principal balance of $12.4 billion at the time of sale, at a total net premium of $113 million. Additionally, in December 2004, we purchased the private label credit card receivable portfolio as well as private label commercial and closed end loans from HSBC Finance. HSBC Finance retained the customer account relationships for both the GM and UP receivables and the private label credit card receivables and by agreement we purchased on a daily basis substantially all new originations from these account relationships from HSBC Finance. Premiums paid for these receivables are amortized to interest income over the estimated life of the receivables purchased and are included as a component of Income from Discontinued Operations. HSBC Finance serviced these credit card loans for us for a fee through April 30, 2012. Fees paid for servicing these loan portfolios, which are included as a component of Income from discontinued operations, totaled $48 million and $199 million during the three and six months ended June 30, 2012, respectively. Information regarding these loans is summarized in the table below.



	Private Label		Credit Card
	Cards	Commercial and Closed End Loans	General Motors	Union Privilege	Other	Total
	(in billions)
Total loans purchased on a daily basis from HSBC Finance during:
Three Months Ended June 30, 2012	1.1	—	.9	.3	.2	2.5
Six Months Ended June 30, 2012	4.4	—	3.9	1.0	.6	9.9

The GM and UP credit card receivables as well as the private label credit card receivables were purchased from HSBC Finance 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 adjusting 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 in August 2011 to reflect the sale of the receivables to a third party during the first half of 2012. The rates continued to be updated as part of our normal semi-annual process until the time the transaction was completed.

Transactions Conducted with HSBC Markets (USA) Inc. ("HMUS") and Subsidiaries

•

We utilize HSBC Securities (USA) Inc. (“HSI”) for broker dealer, debt and preferred stock underwriting, customer referrals, loan syndication and other treasury and traded markets related services, pursuant to service level agreements. Fees charged by HSI for broker dealer, loan syndication services, treasury and traded markets related services are included in support services from HSBC affiliates. Debt underwriting fees charged by HSI are deferred as a reduction of long-term debt and amortized to interest expense over the life of the related debt. Preferred stock issuance costs charged by HSI are recorded as a reduction of capital surplus. Customer referral fees paid to HSI are netted against customer fee income, which is included in other fees and commissions.

•

We have extended loans and lines, some of them uncommitted, to HMUS and its subsidiaries in the amount of $3.8 billion at June 30, 2013 and December 31, 2012. At June 30, 2013 and December 31, 2012, $1.3 billion and $310 million, respectively, was outstanding on these loans and lines. Interest income on these loans and lines totaled $1 million and $2 million during the three and six months ended June 30, 2013, respectively, compared with $1 million and $2 million during the three and six months ended June 30, 2012, respectively.

Other Transactions with HSBC Affiliates

•

HNAH extended a $1.0 billion senior debt to us in August 2009. This is a five year floating rate debt which matures in August 2014. In addition, in April 2011, we borrowed an additional $3.0 billion from HNAH. This senior debt matures in three equal installments of $1.0 billion in April 2015, 2016 and 2017. The debt bears interest at 90 day USD Libor plus a spread, with each maturity at a different spread. Interest expense on this debt totaled $14 million and $28 million during the three and six months ended June 30, 2013, respectively, compared with $17 million and $33 million during the three and six months ended June 30, 2012, respectively.

•

In addition to purchases of U.S. Treasury and U.S. Government Agency securities, we purchased both foreign-denominated and USD denominated marketable securities from certain affiliates including HSI, HSBC Asia-Pacific, HSBC Mexico, HSBC London, HSBC Brazil, HSBC Chile and HSBC Canada. Marketable securities outstanding from these purchases are reflected in trading assets and totaled $12 million and $14 million at June 30, 2013 and December 31, 2012, respectively.


•	We have extended uncommitted lines of credit to HSBC Bank Brasil in the amount of $1.5 billion and $1.0 billion at June 30, 2013 and December 31, 2012, respectively, of which $1.0 billion was outstanding at both June 30, 2013 and December 31, 2012.


•	We have extended an uncommitted line of credit to HSBC Panama in the amount of $752 million at June 30, 2013 and December 31, 2012 of which $292 million and $372 million was outstanding at June 30, 2013 and December 31, 2012, respectively.


•	We have a committed unused line of credit with HSBC Investment (Bahamas) Limited of $900 million at June 30, 2013 and December 31, 2012.


•	We have a committed unused line of credit with HSBC Holdings plc of $500 million at June 30, 2013 and December 31, 2012.


•	We have an uncommitted unused line of credit with HSBC North America Inc. (“HNAI”) of $150 million at June 30, 2013 and December 31, 2012.


•	We have extended loans and lines of credit to various other HSBC affiliates totaling $460 million at June 30, 2013 and December 31, 2012. At June 30, 2013 and December 31, 2012, there were no amounts outstanding under these loans or lines of credit.


•	In addition to loans and lines extended to affiliates discussed above, from time to time we may extend loans to affiliates which are generally short term in nature. At June 30, 2013 and December 31, 2012, there were $2.2 billion and $812 million of short term loans outstanding primarily related to metals activities.

•

Historically, we have provided support to several HSBC affiliate sponsored asset-backed commercial paper (“ABCP”) conduits by purchasing A-1/P-1 rated commercial paper issued by them. At June 30, 2013 and December 31, 2012, no ABCP issued by such conduits was held. Pursuant to a global restructure of HSBC sponsored ABCP conduits, certain assets previously originated and funded by Bryant Park, an ABCP conduit organized by HUSI, have been refinanced by Regency, another ABCP conduit organized and consolidated by our affiliate. HUSI is committed to provide liquidity facilities to backstop the liquidity risk in Regency in relation to assets originated in the U.S. region. The notional amount of the liquidity facilities provided by HUSI to Regency was approximately $3.1 billion as of June 30, 2013.

•

We routinely enter into derivative transactions with HSBC Finance and other HSBC affiliates as part of a global HSBC strategy to offset interest rate or other market risks associated with debt issues and derivative contracts with unaffiliated third parties. The notional value of derivative contracts related to these contracts was approximately $1,263.3 billion and $1,066.5 billion at June 30, 2013 and December 31, 2012, respectively. The net credit exposure (defined as the net fair value of derivative assets and liabilities) related to the contracts was approximately $836 million and $691 million at June 30, 2013 and December 31, 2012, respectively. Our Global Banking and Markets business accounts for these transactions on a mark to market basis, with the change in value of contracts with HSBC affiliates substantially offset by the change in value of related contracts entered into with unaffiliated third parties.

•

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 and software purchased are generally purchased and owned by HTSU. HTSU also provides certain item processing and statement processing activities which are included in Support services from HSBC affiliates in the consolidated statement of income. We also receive fees from HTSU for providing them certain administrative services. The fees we receive from HTSU are recorded as a component of servicing and other fees from HSBC affiliates.


•	Our domestic employees participate in a defined benefit pension plan sponsored by HSBC North America. Additional information regarding pensions is provided in Note 14 “Pension and Other Post retirement Benefits.”


•	Employees participate in one or more stock compensation plans sponsored by HSBC. Our share of the expense of these plans on a pre-tax basis was $13 million and $22 million during the three and six months ended June 30, 2013, respectively, compared with $8 million and $20 million during the three and six months ended June 30, 2012, respectively.

•

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 $8 million during the three and six months ended June 30, 2013, respectively, compared with $6 million and $13 million during the three and six months ended June 30, 2012, 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.


•	We did not pay any dividends to our parent company, HNAI, on our common stock during the three and six months ended June 30, 2013 and 2012.