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, 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,	2019		2018
	(in millions)
Assets:
Cash and due from banks	$	850	$	245
Interest bearing deposits with banks	40		1,000
Securities purchased under agreements to resell⁽¹⁾	4,600		—
Trading assets	79		102
Loans	2,343		2,274
Other⁽²⁾	456		169
Total assets	$	8,368	$	3,790
Liabilities:
Deposits	$	9,000	$	12,000
Trading liabilities	293		349
Short-term borrowings	1,166		638
Long-term debt	7,848		7,845
Other⁽²⁾	931		333
Total liabilities	$	19,238	$	21,165


⁽¹⁾	Reflects purchases of securities under 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,	2019			2018			2017
	(in millions)
Income (Expense):
Interest income	$	168		$	107		$	65
Interest expense	(538		)	(367		)	(267		)
Net interest expense	(370		)	(260		)	(202		)
Trading revenue (expense)	(2,669		)	1,370			(615		)
Servicing and other fees from HSBC affiliates:
HSBC Bank plc	171			176			154
HSBC Markets (USA) Inc. ("HMUS")	111			112			71
Other HSBC affiliates	72			68			123
Total servicing and other fees from HSBC affiliates	354			356			348
Gain (loss) on instruments designated at fair value and related derivatives	1,986			(1,052		)	1,108
Support services from HSBC affiliates:
HSBC Technology & Services (USA) ("HTSU")	(1,153		)	(1,198		)	(1,165		)
HMUS	(100		)	(105		)	(121		)
Other HSBC affiliates	(385		)	(300		)	(263		)
Total support services from HSBC affiliates	(1,638		)	(1,603		)	(1,549		)
Rental income from HSBC affiliates, net⁽¹⁾	55			48			54
Stock based compensation expense⁽²⁾	(25		)	(25		)	(31		)


⁽¹⁾	We receive rental income 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 (loss).

⁽²⁾

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 21, "Pension and Other Postretirement Benefits."

During 2019, our results were impacted by an immaterial out of period adjustment which increased support services from HSBC affiliates by $13 million in connection with support service billings related to 2018.

Funding Arrangements with HSBC Affiliates:

We use HSBC affiliates to fund a portion of our borrowing and liquidity needs. At both December 31, 2019 and 2018, long-term debt with affiliates reflected $7.8 billion of borrowings from HSBC North America. The outstanding balances include $1.5 billion of fixed-rate senior debt which matures in March 2021, $2.0 billion of fixed-rate senior debt which matures in May 2021, $0.8 billion of floating-rate subordinated debt which matures in May 2025, $2.0 billion of fixed-rate senior debt which matures in September 2025 and $1.5 billion of fixed-rate senior debt which matures in March 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 December 31, 2019 or 2018.

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, 2019 and 2018, we had the following loan balances outstanding with HSBC affiliates:



	December 31, 2019		December 31, 2018
	(in millions)
HMUS and subsidiaries	$	2,296	$	2,235
Other short-term affiliate lending	47		39
Total loans	$	2,343	$	2,274

HMUS and subsidiaries We have extended loans and lines, some of them uncommitted, to HMUS and its subsidiaries in the amount of $12.0 billion and $12.8 billion at December 31, 2019 and 2018, respectively, of which $2.3 billion and $2.2 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.

We have extended lines of credit to various other HSBC affiliates totaling $4.7 billion which did not have any outstanding balances at either December 31, 2019 or 2018.

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, 2019 and 2018, there were $47 million and $39 million, respectively, of these loans outstanding.

HSBC Finance During 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.

Derivative contracts 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 $1,111.5 billion and $809.5 billion at December 31, 2019 and 2018, 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 $90 million and $108 million at December 31, 2019 and 2018, 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 December 31, 2019 and 2018, we had $1,265 million of non-cumulative preferred stock issued and outstanding to HSBC North America. See Note 18, "Preferred Stock," for additional details.

During the first quarter of 2019, we paid a distribution on our common stock of $2.4 billion from surplus capital to HSBC North America. See Note 25, "Retained Earnings and Regulatory Capital Requirements," for additional details.