Related Party Transactions

12 Months Ended

Dec. 31, 2011

Related Party Transactions [Abstract]

Related Party Transactions

24. Related Party Transactions

In the normal course of business, we conduct transactions with HSBC and its subsidiaries. These transactions occur at prevailing market rates and terms and include funding arrangements, derivative execution, purchases and sales of receivables, servicing arrangements, information technology and some centralized services, item and statement processing services, banking and other miscellaneous services. All extensions of credit by HSBC Bank USA to other HSBC affiliates (other than FDIC-insured banks) are legally required to be secured by eligible collateral. The following table presents related party balances and the income and expense generated by related party transactions:

At December 31,	2011		2010		2009
	(in millions)
Assets:
Cash and due from banks	$	263	$	137	$	359
Interest bearing deposits with banks		1,416		1,287		198
Federal funds sold and securities purchased under agreements to resell		228		534		294
Trading assets (1)		22,367		16,575		12,811
Loans		858		664		1,165
Other		248		537		715
Total assets	$	25,380	$	19,734	$	15,542
Liabilities:
Deposits	$	18,153	$	10,337	$	9,437
Trading liabilities (1)		25,298		19,211		16,848
Short-term borrowings		2,916		3,326		445
Long-term debt		3,988		984		989
Other		451		569		771
Total liabilities	$	50,806	$	34,427	$	28,490

⁽¹⁾  Trading assets and liabilities exclude the impact of netting which allow the offsetting of amounts relating to certain contracts if certain conditions are met.

	Year Ended December 31,
	2011			2010			2009
	(in millions)
Income/(Expense):
Interest income	$	62		$	91		$	178
Interest expense		(82	)		(44	)		(26	)
Net interest income (loss)	$	(20	)	$	47		$	152
HSBC affiliate income:
HSBC Finance	$	71		$	45		$	12
HSBC Markets (USA) Inc. (“HMUS”)		23			13			23
Other HSBC affiliates		76			72			83
Fees on transfers of refund anticipation loans to HSBC Finance		-			4			11
Other HSBC affiliates income		34			22			11
Total affiliate income	$	204		$	156		$	140
Support services from HSBC affiliates:
HSBC Finance	$	(36	)	$	(101	)	$	(100	)
HMUS		(257	)		(288	)		(247	)
HSBC Technology & Services (USA) (“HTSU”)		(967	)		(780	)		(471	)
Other HSBC affiliates		(195	)		(117	)		(144	)
Total support services from HSBC affiliates	$	(1,455	)	$	(1,286	)	$	(962	)
Stock based compensation expense with HSBC	$	(56	)	$	(42	)	$	(54	)

Transactions Conducted with HSBC Finance Corporation  In connection with its acquisition of HSBC Finance, HSBC announced its expectation that funding costs for the HSBC Finance business would be lower as a result of the funding diversity of HSBC. As a result, we work with our affiliates under the oversight of HSBC North America to maximize opportunities and efficiencies in HSBC’s operations in the U.S., including funding efficiencies. The purchases of the private label portfolio, the GM and UP Portfolios and certain auto finance loans from HSBC Finance as discussed in more detail below are indicative of such efficiencies contemplated.

• In July 2004, we sold the account relationships associated with $970 million of credit card receivables to HSBC Finance and on a daily basis, we purchase new originations on these credit card receivables. HSBC Finance continues to service these loans for us for a fee. We purchased $2.3 billion of credit card receivables from HSBC Finance during 2011 compared to $2.4 billion and $2.6 billion during 2010 and 2009, respectively. Premiums paid are amortized to interest income over the estimated life of the receivables purchased. At December 31, 2011 and 2010, HSBC Finance was servicing $1.2 billion of credit card receivables. We paid HSBC finance fees for servicing these loans of $15 million during 2011 and 2010.

• In 2003 and 2004, we purchased approximately $3.7 billion of residential mortgage loans from HSBC Finance. HSBC Finance continues to service these loans for us for a fee. At December 31, 2011 and 2010, HSBC Finance was servicing $1.3 billion and $1.5 billion of residential mortgage loans for us. We paid HSBC Finance fees for servicing these loans of $4 million during 2011 compared to $5 million during 2010.

• In the fourth quarter of 2009, an initiative was begun to streamline the servicing of real estate secured receivables across North America. As a result, certain functions that we had previously performed for our mortgage customers are now being performed by HSBC Finance for all North America mortgage customers, including our mortgage customers. Additionally, we are currently performing certain functions for all North America mortgage customers where these functions had been previously provided separately by each entity. During 2011 and 2010, we paid $7 million and $7 million, respectively, for services we received from HSBC Finance and received $10 million and $8 million, respectively, for services we provided to HSBC Finance.

• In July 2010, certain employees in the real estate receivable default servicing department of HSBC Finance were transferred to the mortgage loan servicing department of a subsidiary of HSBC Bank USA and subsequently to HSBC Bank USA. These employees continue to service defaulted real estate secured receivables for HSBC Finance and we receive a fee for providing these services. During 2011 and 2010, we received servicing revenue from HSBC Finance of $62 million and $34 million, respectively.

• Prior to 2011, our wholly-owned subsidiaries, HSBC Bank USA and HSBC Trust Company (Delaware), N.A. (“HTCD”), historically have been the originating lenders on behalf of HSBC Finance for a federal income tax refund anticipation loan program for clients of a single third party tax preparer which is managed by HSBC Finance. By agreement, HSBC Bank USA and HTCD historically processed applications, funded and subsequently transferred a portion of these loans to HSBC Finance. Prior to 2010, all loans were transferred to HSBC Finance. Beginning in 2010, we began keeping a portion of these loans on our balance sheet and earn a fee. The loans kept were transferred to HSBC Finance at par only upon reaching a defined delinquency status. We paid HSBC Finance a fee to service the loans we retain on our balance sheet and to assume the credit risk associated with these receivables. HSBC Bank USA and HTCD originated approximately $9.4 billion of loans during 2010, of which $3.1 billion, were transferred to HSBC Finance. During 2010, we received fees of $4 million for the loans we originated and sold to HSBC Finance. Fees earned on the loans retained on balance sheet and fees paid to HSBC Finance for servicing and assuming the credit risk for these loans totaled $69 million and $58 million, respectively, during 2010.

In December 2010, as a result of recent Internal Revenue Service decisions to stop providing information regarding certain unpaid taxpayer obligations which historically served as a significant part of the underwriting process, it was determined that tax refund anticipation loans could no longer be offered in a safe and sound manner and, therefore, we would no longer offer these loans and other related products going forward. These products have historically had an insignificant impact to our results of operations. See Note 5, “Exit from Taxpayer Financial Services Loan Program,” for further discussion.

• During the 2011, we purchased $5 million of commercial paper from HSBC Finance as part of our North America funding strategy. There was no amount outstanding at December 31, 2011.

• We extended a secured $1.5 billion uncommitted 364 day credit facility to certain subsidiaries of HSBC Finance in December 2009. This facility was renewed for an additional 364 days in November 2011. There were no balances outstanding at December 31, 2011 and 2010.

• We serviced a portfolio of residential mortgage loans owned by HSBC Finance with an outstanding principal balance of $1.5 billion at December 31, 2009. During 2010, we transferred servicing of this portfolio back to HSBC Finance and, as a result, no longer service any loans for HSBC Finance. The servicing fee income for servicing this portfolio was $1 million in 2010 and $6 million in 2009 which is included in residential mortgage banking revenue in the consolidated statement of income (loss).

• In the third quarter of 2009, we purchased $106 million of Low Income Housing Tax Credit Investment Funds from HSBC Finance.

Transactions Conducted with HSBC Finance Corporation Involving Discontinued Operations  As it relates to our discontinued credit card and private label operations, in January 2009, we purchased the GM and UP Portfolios from HSBC Finance, with an outstanding principal balance of $12.4 billion at the time of sale, at a total net premium of $113 million. Additionally, in December 2004, we purchased the private label credit card receivable portfolio as well as private label commercial and closed end loans from HSBC Finance. HSBC Finance retained the customer account relationships for both the GM and UP receivables and the private label credit card receivables and by agreement we purchase on a daily basis substantially all new originations from these account relationships from HSBC Finance. Premiums paid for these receivables are amortized to interest income over the estimated life of the receivables purchased and are included as a component of Income from discontinued operations. HSBC Finance continues to service these credit card loans for us for a fee. Information regarding these loans is summarized in the table below.

	Private Label				Credit Card
	Cards		Commercial and Closed End Loans(1)		General Motors		Union Privilege		Other		Total
	(in billions)
Loans serviced by HSBC Finance:
December 31, 2011	$	12.5	$	.3	$	4.1	$	3.5	$	.8	$	21.2
December 31, 2010		13.3		.4		4.6		4.2		.8		23.3
Total loans purchased on a daily basis from HSBC Finance during:
2011		15.4		-		13.0		3.2		1.8		33.4
2010		14.6		-		13.5		3.2		1.7		33.0
2009		15.7		-		14.5		3.5		1.7		35.4

⁽¹⁾  Private label commercial loans were previously included in other commercial loans and private label closed end loans were included in other consumer loans in Note 8, “Loans”.

Fees paid for servicing these loan portfolios, which are included as a component of Income from discontinued operations, totaled $578 million, $615 million and $625 million during 2011, 2010 and 2009, respectively.

The GM and UP credit card receivables as well as the private label credit card receivables that are purchased from HSBC Finance on a daily basis at a sales price for each type of portfolio determined using a fair value calculated semi-annually in April and October by an independent third party based on the projected future cash flows of the receivables. The projected future cash flows are developed using various assumptions reflecting the historical performance of the receivables and adjusting for key factors such as the anticipated economic and regulatory environment. The independent third party uses these projected future cash flows and a discount rate to determine a range of fair values. We use the mid-point of this range as the sales price. If significant information becomes available that would alter the projected future cash flows, an analysis would be performed to determine if fair value rates needed to be updated prior to the normal semi-annual cycles. With the announcement of the Capital One transaction, an analysis was performed and an adjustment to the fair value rates was made effective August 10, 2011 to reflect the sale of the receivables to a third party during the first half of 2012. The rates will continue to be updated as part of our normal semi-annual process until the time the transaction is completed.

• Certain of our consolidated subsidiaries have revolving lines of credit totaling $1.0 billion with HSBC Finance. There were no balances outstanding under any of these lines of credit at December 31, 2011 and 2010.

• We extended a $1.0 billion committed unsecured 364 day credit facility to HSBC Bank Nevada, a subsidiary of HSBC Finance, in December 2009. This facility was renewed for an additional 364 days in November 2011. There were no balances outstanding at December 31, 2011 and 2010.

Transactions Conducted with HMUS and Subsidiaries

• We utilize HSBC Securities (USA) Inc. (“HSI”) for broker dealer, debt and preferred stock 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. Preferred stock issuance costs charged by HSI are recorded as a reduction of capital surplus. Customer referral fees paid to HSI are netted against customer fee income, which is included in other fees and commissions.

• We have extended loans and lines, some of them uncommitted, to HMUS and its subsidiaries in the amount of $3.3 billion at December 31, 2011 and 2010. At December 31, 2011 and 2010, $229 million and $867 million, respectively, was outstanding on these loans and lines. Interest income on these loans and lines totaled $6 million in 2011, $15 million in 2010 and $34 million during 2009.

Other Transactions with HSBC Affiliates

• In January 2011, we acquired Halbis Capital Management (USA) Inc (Halbis), an asset management business, from an affiliate, Halbis Capital Management (UK) Ltd. as part of a reorganization which resulted in an increase to additional paid-in-capital of approximately $21 million.

• In April 2011, we completed the sale of our European Banknotes Business with assets of $123 million to HSBC Bank plc.

• HNAH extended a $1.0 billion senior note to us in August 2009. This is a five year floating rate note which matures on August 2014. In addition, in April 2011, we issued senior notes in the amount of $3.0 billion to HNAH. These notes mature in three equal installments of $1.0 billion in April 2013, 2015 and 2016. The notes bear interest at 90 day USD Libor plus a spread, with each maturity at a different spread. Interest expense on these notes totaled $46 million in 2011, $17 million in 2010 and $6 million in 2009.

• In addition to purchases of U.S. Treasury and U.S. Government Agency securities, we have periodically purchased both foreign-denominated and USD denominated marketable securities from certain affiliates including HSI, HSBC Asia-Pacific, HSBC Mexico, HSBC London, HSBC Brazil, HSBC Chile, HSBC Uruguay and HSBC Canada. Marketable securities outstanding from these purchases are reflected in trading assets and totaled $8.5 billion and $6.4 billion at December 31, 2011 and 2010, respectively.

• We have also entered into credit derivatives transactions, primarily in the form of credit default swaps, with certain affiliates. The notional value so these derivative contracts was $45.1 billion and $49.4 billion at December 31, 2011 and 2010, respectively. The net credit exposure (defined as the recorded fair value of the derivative liability) related to the contracts was $1.0 billion and $106 million at December 31, 2011 and 2010, respectively.

• In June 2010, we sold certain securities with a book value of $302 million to HSBC Bank plc and recognized a pre-tax loss of $40 million.

• In 2011, we sold our equity interest in Guernsey Joint Venture to HSBC Private Bank (Suisse) SA, resulting in a gain of $53 million.

• In March 2009, we sold an equity investment in HSBC Private Bank (Suisse) SA to another HSBC affiliate for cash, resulting in a gain of $33 million.

• We have a committed unused line of credit with HSBC France of $2.5 billion at December 31, 2011. At December 31, 2010, we had a committed unused line of credit with HSBC Bank plc for $2.5 billion, which matured during 2011.

• We have an uncommitted unused line of credit with HNAI of $150 million at December 31, 2011 and 2010.

• We have extended loans and lines of credit to various other HSBC affiliates totaling $460 million at December 31, 2011 and 2010. At December 31, 2011 and 2010, there were no amounts outstanding under these loans or lines of credit. Interest income on these lines totaled less than $1 million in 2011, $5 million in 2010 and $13 million in 2009.

• Historically, we have provided support to several HSBC affiliate sponsored asset-backed commercial paper (“ABCP”) conduits by purchasing A-1/P-1 rated commercial paper issued by them. At December 31, 2011, no ABCP issued by such conduits was held. At December 31, 2010, we held $75 million of commercial paper issued by an HSBC affiliate sponsored ABCP conduit.

• We routinely enter into derivative transactions with HSBC Finance and other HSBC affiliates as part of a global HSBC strategy to offset interest rate or other market risks associated with debt issues and derivative contracts with unaffiliated third parties. The notional value of derivative contracts related to these contracts was approximately $887.1 billion and $774.1 billion at December 31, 2011 and 2010, respectively. The net credit exposure (defined as the recorded fair value of derivative receivables) related to the contracts was approximately $22.4 billion and $16.6 billion at December 31, 2011 and 2010, 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.

• In December 2008, HSBC Bank USA entered into derivative transactions with another HSBC affiliate to offset the risk associated with the contingent “loss trigger” options embedded in certain leveraged super senior (“LSS”) tranched credit default swaps. These transactions reduced income volatility for HSBC Bank USA by transferring the volatility to the affiliate. The last of these transactions matured during the third quarter of 2011. The recorded fair value of derivative assets related to these derivative transactions was approximately $25 million at December 31, 2010.

• Technology and some centralized operational services including human resources, finance, treasury, corporate affairs, compliance, legal, tax and other shared services in North America are centralized within HTSU.

• Technology related assets and software purchased are generally purchased and owned by HTSU. HTSU also provides certain item processing and statement processing activities which are included in Support services from HSBC affiliates in the consolidated statement of income (loss).

• Our domestic employees participate in a defined benefit pension plan sponsored by HSBC North America. Additional information regarding pensions is provided in Note 23, “Pension and Other Post-retirement Benefits.”

• Employees participate in one or more stock compensation plans sponsored by HSBC. Our share of the expense of these plans on a pre-tax basis was $56 million in 2011, $42 million in 2010 and $54 million in 2009. As of December 31, 2011, our share of compensation cost related to nonvested stock compensation plans was approximately $38 million, which is expected to be recognized over a weighted-average period of less than 1 year. A description of these stock compensation plans can be found in Note 22, “Share-based Plans.”

• We use HSBC Global Resourcing (UK) Ltd., 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 of $25 million in 2011, $32 million in 2010 and $38 million in 2009, are included as a component of Support services from HSBC affiliates in the table above. Billing for these services was processed by HTSU.

• We did not pay any dividends to our parent company, HNAI, in 2011, 2010 or 2009.