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:



	September 30, 2018		December 31, 2017
	(in millions)
Assets:
Cash and due from banks	$	284	$	191
Interest bearing deposits with banks	309		473
Securities purchased under agreements to resell⁽¹⁾	—		1,115
Trading assets	94		63
Loans	1,557		6,750
Other⁽²⁾	330		134
Total assets	$	2,574	$	8,726
Liabilities:
Deposits	$	14,189	$	10,521
Trading liabilities	174		737
Short-term borrowings	710		1,595
Long-term debt	4,844		4,841
Other⁽²⁾	271		387
Total liabilities	$	20,188	$	18,081


⁽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.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(in millions)
Income (Expense):
Interest income	$	26		$	16		$	72		$	51
Interest expense	(96		)	(72		)	(264		)	(208		)
Net interest expense	(70		)	(56		)	(192		)	(157		)
Trading revenue (expense)	(504		)	—			27			(806		)
Servicing and other fees from HSBC affiliates:⁽¹⁾
HSBC Bank plc	48			35			132			110
HSBC Markets (USA) Inc. ("HMUS")	31			18			92			53
HSBC Finance Corporation ("HSBC Finance")	2			3			4			40
Other HSBC affiliates	22			21			61			69
Total servicing and other fees from HSBC affiliates	103			77			289			272
Gain (loss) on instruments designated at fair value and related derivatives	241			347			(62		)	871
Support services from HSBC affiliates:⁽¹⁾
HSBC Technology & Services (USA) ("HTSU")	(301		)	(277		)	(909		)	(872		)
HMUS	(22		)	(30		)	(78		)	(90		)
Other HSBC affiliates	(76		)	(71		)	(228		)	(199		)
Total support services from HSBC affiliates	(399		)	(378		)	(1,215		)	(1,161		)
Rental income from HSBC affiliates, net⁽¹⁾⁽²⁾	10			13			36			41
Stock based compensation expense⁽³⁾	(6		)	(8		)	(21		)	(26		)

⁽¹⁾

During the fourth quarter of 2017, we changed our presentation for certain cost reimbursements that were previously netted as an offset to affiliate expense and began presenting 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 affiliate expense. As a result, we have reclassified prior period amounts in order to conform to the current year presentation, which increased servicing and other fees from HSBC affiliates by $25 million and $86 million, respectively, increased support services from HSBC affiliates by $38 million and $127 million, respectively, and increased rental income from HSBC affiliates, net by $13 million and $41 million, respectively, during the three and nine months ended September 30, 2017. Reported net income for the three and nine months ended September 30, 2017 remained unaffected.


⁽²⁾	We receive rental revenue from our affiliates, and in some cases pay rental expense to our affiliates, for rent on certain office space. Net rental income from our affiliates is recorded as a component of occupancy expense, net in our consolidated statement of income.

⁽³⁾

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. 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 12, "Pension and Other Postretirement Benefits."

During the nine months ended September 30, 2018, our results were impacted by an immaterial out of period adjustment which increased servicing and other fees from HSBC affiliates by approximately $10 million in connection with costs reimbursements related to prior years.

Funding Arrangements with HSBC Affiliates:

We use HSBC affiliates to fund a portion of our borrowing and liquidity needs. At both September 30, 2018 and December 31, 2017, 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. There was no outstanding balance under this credit facility at either September 30, 2018 or December 31, 2017.

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 September 30, 2018 and December 31, 2017, we have the following loan balances outstanding with HSBC affiliates:



	September 30, 2018		December 31, 2017
	(in millions)
HMUS and subsidiaries	$	1,000	$	6,690
HSBC Bank Canada	450		—
Other short-term affiliate lending	107		60
Total loans	$	1,557	$	6,750

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 at both September 30, 2018 and December 31, 2017 of which $1.0 billion and $6.7 billion, respectively, was outstanding. The maturities of the 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. Included in the outstanding borrowings at December 31, 2017 was a $5.0 billion overnight loan to HSI that was repaid in early January as the wire process from HSI to settle daily activity failed.

HSBC Bank Canada During 2018, we extended an uncommitted line of credit to HSBC Bank Canada in the amount of $500 million, of which $450 million was outstanding at September 30, 2018. The outstanding balance matures in November 2018.

We have extended lines of credit to various other HSBC affiliates totaling $3.2 billion which did not have any outstanding balances at either September 30, 2018 and December 31, 2017.

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 September 30, 2018 and December 31, 2017, there were $107 million and $60 million, respectively, of these loans outstanding.

HSBC Finance During the first quarter of 2017, we received $28 million of loan prepayment fees from HSBC Finance associated with the payoff of their loan, which were included in servicing and other fees from HSBC affiliates.

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 Bank plc and other HSBC affiliates. The notional value of derivative contracts related to these transactions was approximately $801.0 billion and $768.4 billion at September 30, 2018 and December 31, 2017, 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 $81 million and $64 million at September 30, 2018 and December 31, 2017, 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:

•

HSBC North America's technology and support services, including risk management, compliance, operations, finance, tax, legal, human resources, corporate affairs and other shared services, 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 other subsidiaries of HSBC, including HSBC Global Services Limited an HSBC subsidiary located outside of the United States, to provide various support services to our operations, including among other areas, information technology, software development, customer service, collection, risk management and accounting. 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 also receive fees from HSI for providing certain wealth management services to them. The fees we receive from HSI are included in servicing and other fees from HSBC affiliates.


•	We receive fees from other subsidiaries of HSBC, including HSBC Bank plc, 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.

•

Prior to 2018, we received residential mortgage loan servicing fees from HSBC Finance for services performed on their behalf and paid residential mortgage loan servicing fees to HSBC Finance for services performed on our behalf. The fees we received from HSBC Finance were 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 were reported in support services from HSBC affiliates. This included fees paid for the servicing of residential mortgage loans that we previously purchased from HSBC Finance. During 2017, we sold these residential mortgage loans to third parties.

Other Transactions with HSBC Affiliates

At both September 30, 2018 and December 31, 2017, we had $1,265 million of non-cumulative preferred stock issued and outstanding to HSBC North America. See Note 17, "Preferred Stock," in our 2017 Form 10-K for additional details.