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, derivative transactions, servicing arrangements, information technology support, centralized support services, banking and other miscellaneous services and where applicable, these transactions are compliant with United States banking regulations. All extensions of credit by (and certain credit exposures of) HSBC Bank USA to other HSBC affiliates (other than Federal Deposit Insurance Corporation ("FDIC") insured banks) are legally required to be secured by eligible collateral. The following tables and discussions below present the more significant related party balances and the income (expense) generated by related party transactions:



	June 30, 2016		December 31, 2015
	(in millions)
Assets:
Cash and due from banks	$	172	$	169
Interest bearing deposits with banks	280		244
Securities purchased under agreements to resell⁽¹⁾	4,000		4,000
Trading assets⁽²⁾	19,795		18,632
Loans	5,072		4,815
Other⁽³⁾	229		458
Total assets	$	29,548	$	28,318
Liabilities:
Deposits	$	22,589	$	13,486
Trading liabilities⁽²⁾	21,632		19,496
Short-term borrowings	2,449		2,004
Long-term debt	1,830		1,827
Other⁽³⁾	274		346
Total liabilities	$	48,774	$	37,159


⁽¹⁾	Reflects overnight purchases of U.S. Treasury securities which HSBC Securities (USA) Inc. ("HSI") has agreed to repurchase.


⁽²⁾	Trading assets and trading liabilities do not reflect the impact of netting which allows the offsetting of amounts relating to certain contracts if certain conditions are met. Trading assets and liabilities primarily consist of derivatives contracts.


⁽³⁾	Other assets and other liabilities primarily consist of derivative balances associated with hedging activities and other miscellaneous account receivables and payables.



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in millions)
Income/(Expense):
Interest income	$	30		$	28		$	60		$	58
Interest expense	(35		)	(8		)	(64		)	(22		)
Net interest income	(5		)	20			(4		)	36
Trading revenue	956			221			799			369
Servicing and other fees from HSBC affiliates:
HSBC Bank plc	26			18			48			37
HSBC Finance Corporation	8			13			21			29
HSBC Markets (USA) Inc. ("HMUS")	4			6			10			13
Other HSBC affiliates	13			16			26			30
Total servicing and other fees from HSBC affiliates	51			53			105			109
Gain (loss) on instruments designed at fair value and related derivatives	79			(128		)	35			130
Support services from HSBC affiliates:
HMUS	(55		)	(69		)	(108		)	(133		)
HSBC Technology & Services (USA) ("HTSU")	(253		)	(264		)	(482		)	(504		)
Other HSBC affiliates	(47		)	(52		)	(85		)	(100		)
Total support services from HSBC affiliates	(355		)	(385		)	(675		)	(737		)
Stock based compensation expense with HSBC⁽¹⁾	(11		)	(15		)	(17		)	(28		)


⁽¹⁾	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). Employees also may participate in a defined benefit pension plan and other postretirement plans sponsored by HSBC North America which are discussed in Note 13, "Pension and Other Postretirement Benefits."

Funding Arrangements with HSBC Affiliates:

We use HSBC affiliates to fund a portion of our borrowing and liquidity needs. At June 30, 2016 and December 31, 2015, long-term debt with affiliates reflected $1.0 billion in floating rate senior debt and $0.9 billion in floating rate subordinated debt with HSBC North America. These borrowings mature in December 2016 and May 2025, respectively.

We have a $150 million uncommitted line of credit with HSBC North America Inc. although there was no outstanding balance at either June 30, 2016 or December 31, 2015.

We have also incurred short-term borrowings with certain affiliates, largely securities sold under repurchase agreements with HSI. In addition, certain affiliates have also placed deposits with us.

Lending and Derivative Related Arrangements Extended to HSBC Affiliates:

At June 30, 2016 and December 31, 2015, we have the following loan balances outstanding with HSBC affiliates:



	June 30, 2016		December 31, 2015
	(in millions)
HSBC Finance Corporation	$	3,013	$	3,014
HSBC Markets (USA) Inc. ("HMUS") and subsidiaries	588		978
HSBC Mexico S.A.	725		725
Regency Assets Limited ("Regency")⁽¹⁾	729		58
Other short-term affiliate lending	17		40
Total loans	$	5,072	$	4,815


⁽¹⁾	An asset-backed commercial paper conduit consolidated by an HSBC affiliate.

HSBC Finance Corporation We have extended a $5.0 billion, 364-day uncommitted unsecured revolving credit agreement to HSBC Finance which expires during the fourth quarter of 2016. The credit agreement allows for borrowings with maturities of up to 5 years. At both June 30, 2016 and December 31, 2015, $3.0 billion was outstanding under this credit agreement with $0.5 billion maturing in September 2017, $1.5 billion maturing in January 2018 and $1.0 billion maturing in September 2018. We have also extended a committed revolving credit facility to HSBC Finance of $1.0 billion which did not have any outstanding balance at either June 30, 2016 or December 31, 2015. This credit facility expires in May 2017.

HMUS and subsidiaries We have extended loans and lines, some of them uncommitted, to HMUS and its subsidiaries in the amount of $10.7 billion at both June 30, 2016 and December 31, 2015, respectively, of which $588 million and $978 million, respectively, was outstanding. The maturities of the outstanding borrowings range from overnight to three months. Each borrowing is re-evaluated prior to its maturity date and either extended or allowed to mature.

HSBC Mexico S.A. We have extended an uncommitted line of credit to HSBC Mexico S.A. in the amount of $1.2 billion at both June 30, 2016 and December 31, 2015, of which $725 million was outstanding at both June 30, 2016 and December 31, 2015, respectively. The outstanding balances mature in 2018.

Regency HUSI is committed to provide liquidity facilities to backstop the liquidity risk in Regency in relation to assets originated in the United States. The notional amount of the liquidity facilities provided by HUSI to Regency was approximately $3.8 billion and $3.4 billion at June 30, 2016 and December 31, 2015, respectively, which is less than half of Regency's total liquidity facilities. At June 30, 2016 and December 31, 2015, $729 million and $58 million, respectively, was outstanding under these facilities. These borrowings mature at various stages between 2016 and 2017.

We have extended lines of credit to various other HSBC affiliates totaling $3.1 billion which did not have any outstanding balances at either June 30, 2016 and December 31, 2015.

Other short-term affiliate lending 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, 2016 and December 31, 2015, there were $17 million and $40 million, respectively, of these loans outstanding.

As part of a global HSBC strategy to offset interest rate or other market risks associated with certain securities, debt issues and derivative contracts with unaffiliated third parties, we routinely enter into derivative transactions with HSBC Finance, HSBC Bank plc and other HSBC affiliates. The notional value of derivative contracts related to these transactions was approximately $978.1 billion and 1,004.1 billion at June 30, 2016 and December 31, 2015, respectively. The net credit exposure (defined as the net fair value of derivative assets and liabilities, including any collateral received) related to the contracts was approximately $13 million and $216 million at June 30, 2016 and December 31, 2015, 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.

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:

•

Servicing activities for residential mortgage loans across North America are performed both by us and HSBC Finance. As a result, we receive servicing fees from HSBC Finance for services performed on their behalf and pay servicing fees to HSBC Finance for services performed on our behalf. The fees we receive from HSBC Finance are reported in servicing and other fees from HSBC affiliates. Fees we pay to HSBC Finance are reported in support services from HSBC affiliates. This includes fees paid for the servicing of residential mortgage loans (with a carrying amount of $636 million and $696 million at June 30, 2016 and December 31, 2015, respectively) that we purchased from HSBC Finance in 2003 and 2004.

•

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 that are centralized within HTSU. 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 certain administrative services to them. The fees we receive from HTSU are included in servicing and other fees from HSBC affiliates. In certain cases, for facilities used by HTSU, we may guarantee their performance under the lease agreements.


•	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.

•

We utilize HSI for broker dealer, debt 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. Customer referral fees paid to HSI are netted against customer fee income, which is included in other fees and commissions.

Other Transactions with HSBC Affiliates

We received revenue from our affiliates for rent on certain office space, which has been recorded as a component of support services from HSBC affiliates. Rental revenue from our affiliates totaled $15 million and $31 million during the three and six months ended June 30, 2016, respectively, compared with $14 million and $29 million during the three and six months ended June 30, 2015, respectively.

During the second quarter of 2016, HSBC USA issued $1,265 million of 6.0 percent Non-Cumulative Series I Preferred Stock to HSBC North America. See Note 16, "Retained Earnings and Regulatory Capital Requirements," for additional details.