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, National Association ("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, 2017		December 31, 2016
	(in millions)
Assets:
Cash and due from banks	$	142	$	364
Interest bearing deposits with banks	844		980
Securities purchased under agreements to resell⁽¹⁾	—		949
Trading assets	41		74
Loans	1,423		3,274
Other⁽²⁾	576		291
Total assets	$	3,026	$	5,932
Liabilities:
Deposits	$	13,303	$	23,999
Trading liabilities	861		510
Short-term borrowings	1,721		2,148
Long-term debt	4,837		4,834
Other⁽²⁾	250		247
Total liabilities	$	20,972	$	31,738


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


⁽²⁾	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,
	2017			2016			2017			2016
	(in millions)
Income/(Expense):
Interest income	$	11		$	30		$	35		$	60
Interest expense	(70		)	(35		)	(136		)	(64		)
Net interest income (expense)	(59		)	(5		)	(101		)	(4		)
Trading revenue (expense)	(891		)	956			(806		)	799
Servicing and other fees from HSBC affiliates:
HSBC Bank plc	21			26			45			48
HSBC Finance Corporation	3			8			37			21
HSBC Markets (USA) Inc. ("HMUS")	5			4			10			10
Other HSBC affiliates	23			13			42			26
Total servicing and other fees from HSBC affiliates	52			51			134			105
Gain on instruments designated at fair value and related derivatives	164			79			524			35
Support services from HSBC affiliates:
HMUS	(12		)	(55		)	(24		)	(108		)
HSBC Technology & Services (USA) ("HTSU")	(293		)	(253		)	(578		)	(482		)
Other HSBC affiliates	(50		)	(47		)	(92		)	(85		)
Total support services from HSBC affiliates	(355		)	(355		)	(694		)	(675		)
Stock based compensation expense⁽¹⁾	(11		)	(11		)	(18		)	(17		)

⁽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). Certain employees are also eligible to participate in a defined benefit pension plan and other postretirement plans sponsored by HSBC North America which are discussed in Note 11, "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, 2017 and December 31, 2016, long-term debt with affiliates reflected $4.9 billion of floating rate borrowings from HSBC North America. The outstanding balances include $2.0 billion of senior debt which matures in August 2021, $0.9 billion of subordinated debt which matures in May 2025 and $2.0 billion of senior debt which matures in August 2026.

At June 30, 2017 and December 31, 2016, we had a $150 million uncommitted line of credit with HSBC North America. There was no outstanding balance under this credit facility at either June 30, 2017 or December 31, 2016.

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, 2017 and December 31, 2016, we have the following loan balances outstanding with HSBC affiliates:



	June 30, 2017		December 31, 2016
	(in millions)
HSBC Finance Corporation	$	—	$	2,501
HSBC Markets (USA) Inc. ("HMUS") and subsidiaries	1,192		563
HSBC Mexico S.A.	—		195
Other short-term affiliate lending	231		15
Total loans	$	1,423	$	3,274

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 2017. The credit agreement allows for borrowings with maturities of up to 5 years. During the first quarter of 2017, HSBC Finance prepaid the $2.5 billion that was outstanding under this credit agreement, including loan prepayment fees of $28 million which are included in servicing and other fees from HSBC affiliates.

HMUS and subsidiaries We have extended loans and lines, some of them uncommitted, to HMUS and its subsidiaries in the amount of $5.9 billion at both June 30, 2017 and December 31, 2016, of which $1.2 billion and $0.6 billion, respectively, was outstanding. The maturities of the outstanding balances range from overnight to six 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, 2017 and December 31, 2016, of which $195 million was outstanding at December 31, 2016. During the second quarter of 2017, this amount was repaid in full.

We have extended lines of credit to various other HSBC affiliates totaling $1.9 billion which did not have any outstanding balances at either June 30, 2017 and December 31, 2016.

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, 2017 and December 31, 2016, there were $231 million and $15 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 $788.1 billion and $878.5 billion at June 30, 2017 and December 31, 2016, 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 $45 million and $29 million at June 30, 2017 and December 31, 2016, 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 $71 million and $558 million at June 30, 2017 and December 31, 2016, respectively) that we purchased from HSBC Finance in 2003 and 2004. During 2016, we transferred these residential mortgage loans to held for sale. See Note 6, "Loans Held for Sale," for additional information.

•

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, a subsidiary of HMUS, for broker dealer, debt underwriting, customer referrals, loan syndication and other treasury and traded markets related services, pursuant to service level agreements. 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. Fees charged by HSI for the other services are included in support services from HSBC affiliates.


•	We receive fees from other subsidiaries of HSBC, including HSBC Bank plc and HSI, for providing them with banking and other miscellaneous services as well as support for certain administrative and global business activities. These fees are reported in servicing and other fees from HSBC affiliates.

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 $28 million during the three and six months ended June 30, 2017, respectively, compared with $15 million and $31 million during the three and six months ended June 30, 2016, respectively.

At both June 30, 2017 and December 31, 2016, we had $1,265 million of non-cumulative preferred stock issued and outstanding to HSBC North America. See Note 17, "Preferred Stock," in our 2016 Form 10-K for additional information.