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 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:



At December 31,	2017		2016
	(in millions)
Assets:
Cash and due from banks	$	191	$	364
Interest bearing deposits with banks	473		980
Securities purchased under agreements to resell⁽¹⁾	1,115		949
Trading assets	63		74
Loans	6,750		3,274
Other⁽²⁾	134		291
Total assets	$	8,726	$	5,932
Liabilities:
Deposits	$	10,521	$	23,999
Trading liabilities	737		510
Short-term borrowings	1,595		2,148
Long-term debt	4,841		4,834
Other⁽²⁾	387		247
Total liabilities	$	18,081	$	31,738


⁽¹⁾	Reflects purchases of securities which other HSBC affiliates have 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.



Year Ended December 31,	2017			2016			2015
	(in millions)
Income/(Expense):
Interest income	$	65		$	122		$	117
Interest expense	(267		)	(166		)	(63		)
Net interest income (expense)	(202		)	(44		)	54
Trading revenue (expense)	(615		)	(1,297		)	402
Servicing and other fees from HSBC affiliates:
HSBC Bank plc	154			156			145
HSBC Finance Corporation	44			40			53
HSBC Markets (USA) Inc. ("HMUS")	71			34			25
Other HSBC affiliates	79			59			53
Total servicing and other fees from HSBC affiliates	348			289			276
Gain (loss) on instruments designated at fair value and related derivatives	1,108			467			(116		)
Support services from HSBC affiliates:
HMUS	(121		)	(214		)	(283		)
HSBC Technology & Services (USA) ("HTSU")	(1,165		)	(1,027		)	(1,030		)
Other HSBC affiliates	(263		)	(254		)	(243		)
Total support services from HSBC affiliates	(1,549		)	(1,495		)	(1,556		)
Occupancy expense, net	54			60			58
Stock based compensation expense⁽¹⁾	(31		)	(39		)	(49		)

⁽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 20, "Pension and Other Postretirement Benefits."

In 2017, we changed our presentation for certain cost reimbursements that were previously netted as an offset to affiliate expense. We now present these reimbursements gross in affiliate income for consistency in presentation across similar transactions. Separately, we also concluded that rental revenue we receive from our affiliates for rent on certain office space would be better presented as a reduction to occupancy expense as opposed to a reduction to affiliates expense. As a result, we have reclassified prior year amounts in order to conform to the current year presentation. Reported net income for all periods was unaffected. The following table reflects the impact of this reclassification on our consolidated statement of income (loss) for the periods below:



	Year Ended December 31, 2016						Year Ended December 31, 2015
	As Previously Reported			After Reclassification			As Previously Reported			After Reclassification
	(in millions)						(in millions)
Income/(Expense):
Servicing and other fees from HSBC affiliates:
HSBC Bank plc	$	95		$	156		$	82		$	145
HSBC Finance Corporation	40			40			53			53
HMUS	23			34			25			25
Other HSBC affiliates	59			59			53			53
Total servicing and other fees from HSBC affiliates	217			289			213			276

Total other revenues	1,332			1,404			1,672			1,735

Support services from HSBC affiliates:
HMUS	(176		)	(214		)	(256		)	(283		)
HTSU	(994		)	(1,027		)	(999		)	(1,030		)
Other HSBC affiliates	(193		)	(254		)	(180		)	(243		)
Total support services from HSBC affiliates	(1,363		)	(1,495		)	(1,435		)	(1,556		)

Occupancy expense, net	(231		)	(171		)	(230		)	(172		)

Total operating expenses	(3,226		)	(3,298		)	(3,221		)	(3,284		)

Funding Arrangements with HSBC Affiliates:

We use HSBC affiliates to fund a portion of our borrowing and liquidity needs. At both December 31, 2017 and 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.

We have a $150 million uncommitted line of credit with HSBC North America although there was no outstanding balance under this credit facility at either December 31, 2017 or 2016.

We have also incurred short-term borrowings with certain affiliates, largely securities sold under repurchase agreements with HSBC Securities (USA) Inc. ("HSI"). In addition, certain affiliates have also placed deposits with us.

Lending and Derivative Related Arrangements Extended to HSBC Affiliates:

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



At December 31,	2017		2016
	(in millions)
HSBC Finance Corporation	$	—	$	2,501
HMUS and subsidiaries	6,690		563
HSBC Mexico S.A.	—		195
Other short-term affiliate lending	60		15
Total loans	$	6,750	$	3,274

HSBC Finance Corporation We had extended a $5.0 billion, 364-day uncommitted unsecured revolving credit agreement to HSBC Finance, which expired during the fourth quarter of 2017 and was not renewed. 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 $7.9 billion and $5.9 billion at December 31, 2017 and 2016, respectively, of which $6.7 billion and $0.6 billion, respectively, was outstanding. Included in the outstanding borrowings at December 31, 2017 was a $5.0 billion overnight loan to HSI that was repaid in early January 2018 as the wire process from HSI to settle daily activity failed. The maturities of the remaining outstanding balances 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 December 31, 2017 and 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 December 31, 2017 and 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 December 31, 2017 and 2016, there were $60 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 $768.4 billion and $878.5 billion at December 31, 2017 and 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 $64 million and $29 million at December 31, 2017 and 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 were performed both by us and HSBC Finance. As a result, we received servicing fees from HSBC Finance for services performed on their behalf and paid servicing fees to HSBC Finance for services performed on our behalf. The fees we received from HSBC Finance are reported in servicing and other fees from HSBC affiliates. During 2017, HSBC Finance completed the execution of their receivable sales program and, as a result, we are no longer servicing residential mortgage loans for HSBC Finance. Fees we paid to HSBC Finance are reported in support services from HSBC affiliates. This included fees paid for the servicing of residential mortgage loans (which had a carrying amount of $558 million at December 31, 2016) that we previously purchased from HSBC Finance. During 2017, we sold these residential mortgage loans to third parties. See Note 7, "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 occupancy expense, net. Rental revenue from our affiliates totaled $54 million, $60 million and $58 million during the years ended December 31, 2017, 2016 and 2015, respectively.

At both December 31, 2017 and 2016, we had $1,265 million of non-cumulative preferred stock issued and outstanding to HSBC North America. See Note 17, "Preferred Stock," for additional details.