Related Party Transactions

9 Months Ended

Sep. 30, 2012

Related Party Transactions

16.    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:

	September 30, 2012		December 31, 2011
	(in millions)
Assets:
Cash and due from banks	$	458	$	263
Interest bearing deposits with banks		908		1,416
Federal funds sold and securities purchased under resale agreements		-		228
Trading assets(1)		22,697		22,367
Loans		2,843		858
Other		977		248
Total assets	$	27,883	$	25,380
Liabilities:
Deposits	$	16,805	$	18,153
Trading liabilities(1)		24,695		25,298
Short-term borrowings		2,725		2,916
Long-term debt		3,989		3,988
Other		631		451
Total liabilities	$	48,845	$	50,806

⁽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.

	Three Months  Ended September 30,						Nine Months  Ended September 30,
	2012			2011			2012			2011
	(in millions)
Income/(Expense):
Interest income	$	12		$	16		$	38		$	46
Interest expense		(23	)		(23	)		(70	)		(57	)
Net interest expense	$	(11	)	$	(7	)	$	(32	)	$	(11	)
Servicing and other fees with HSBC affiliates:
Fees and commissions:
HSBC Finance	$	6		$	2		$	8		$	6
HSBC Markets (USA) Inc. (“HMUS”)		4			9			14			19
Other HSBC affiliates		17			13			59			53
Other HSBC affiliates income		36			25			84			73
Total affiliate income	$	63		$	49		$	165		$	151
Residential mortgage banking revenue	$	-		$	3		$	3		$	7
Support services from HSBC affiliates:
HSBC Finance	$	5		$	8		$	22		$	27
HMUS		81			70			227			192
HSBC Technology & Services (USA) Inc. (“HTSU”)		237			279			711			725
Other HSBC affiliates		39			55			140			148
Total support services from HSBC affiliates	$	362		$	412		$	1,100		$	1,092
Stock based compensation expense with HSBC	$	8		$	14		$	27		$	38

Transactions Conducted with HSBC Finance Corporation

• In July 2004, we sold the account relationships associated with $970 million of credit card receivables to HSBC Finance and on a daily basis through March 2012, we purchased new receivable originations on these credit card accounts. As discussed in Note 9, “Intangible Assets,” on March 29, 2012 we re-purchased these account relationships from HSBC Finance for $108 million and as a result, we stopped purchasing new originations on these credit card accounts from HSBC Finance. We purchased $492 million of credit card receivables from HSBC Finance during the nine months ended September 30, 2012, compared to purchases of credit card receivables of $582 million and $1.7 billion, respectively, during the three and nine months ended September 30, 2011. HSBC Finance continued to service these loans for us for a fee through April 30, 2012. At December 31, 2011, HSBC Finance was servicing credit card receivables on our behalf of $1.2 billion. Effective with the close of the sale of our General Motors and Union Plus credit card receivables and our private label credit card and closed-end receivables on May 1, 2012, these loans are now serviced by Capital One for a fee. Premiums paid are amortized to interest income over the estimated life of the receivables purchased. We paid HSBC Finance fees for servicing these loans of $7 million during the nine months ended September 30, 2012, compared to $4 million and $11 million during the three and nine months ended September 30, 2011.

• 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 September 30, 2012 and December 31, 2011, HSBC Finance was servicing $1.2 billion and $1.3 billion, respectively, of residential mortgage loans for us. We paid HSBC Finance fees for servicing these loans of $1 million and $3 million during the three and nine months ended September 30, 2012, respectively, compared to $1 million and $3 million during the year-ago periods.

• 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 were being performed by HSBC Finance for all North America mortgage customers, including our mortgage customers. Additionally, we began performing certain functions for all North America mortgage customers where these functions had been previously provided separately by each entity. During 2011, we began a process to separate these functions so that each entity will be servicing its own mortgage customers when the process is completed. During the three and nine months ended September 30, 2012 we paid $2 million and $5 million, respectively, for services we received from HSBC Finance and received less than one million and $3 million, respectively, for services we provided to HSBC Finance. During the three and nine months ended September 30, 2011 we paid $2 million and $5 million, respectively, for services we received from HSBC Finance and received $3 million and $7 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 the three and nine months ended September 30, 2012 we received servicing revenue from HSBC Finance of $14 million and $42 million, respectively, compared to $15 million and $47 million during the year-ago periods.

• 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 September 30, 2012 and December 31, 2011.

• During the fourth quarter of 2011, we extended an unsecured $3.0 billion 364-day uncommitted revolving credit facility to HSBC Finance which allowed for borrowings with maturities of up to 15 years. During the second quarter of 2012, an amendment was executed to increase this uncommitted revolving credit agreement to $4.0 billion. As of September 30, 2012, $512 million was outstanding under this loan agreement with a maturity of September 2017. We received interest income totaling $1million for both the three and nine months ended September 30, 2012 on this borrowing. As of December 31, 2011, there were no amounts outstanding.

• In May 2012, we extended a $2.0 billion 364-day committed revolving credit facility to HSBC Finance. There were no balances outstanding at September 30, 2012.

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 prior to these loans being sold to Capital One on May 1, 2012, we purchased on a daily basis substantially all new originations from these account relationships from HSBC Finance. Premiums paid for these receivables were 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 continued 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:
September 30, 2012	$	-	$	-	$	-	$	-	$	-	$	-
December 31, 2011		12.5		.3		4.1		3.5		.8		21.2
Total loans purchased on a daily basis from HSBC Finance during:
Three months ended September 30, 2012		-		-		-		-		-		-
Three months ended September 30, 2011		3.7		-		3.2		.8		.4		8.1
Nine months ended September 30, 2012		4.4		-		3.9		1.0		.6		9.9
Nine months ended September 30, 2011		10.5		-		9.6		2.3		1.3		23.7

⁽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 6, “Loans”.

Fees paid for servicing these loan portfolios, which are included as a component of income from discontinued operations, totaled $199 million during the nine months ended September 30, 2012, respectively, compared to $149 million and $447 million during the three and nine months ended September 30, 2011, respectively. No fees were paid during the three months ended September 30, 2012 following the sale of certain credit card operations to Capital One.

The GM and UP credit card receivables as well as the private label credit card receivables were 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 were 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 used these projected future cash flows and a discount rate to determine a range of fair values. We used the mid-point of this range as the sales price. If significant information became available that altered the projected future cash flows, an analysis was performed to determine if fair value rates needed to be updated prior to the normal semi-annual cycles.

• 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. These credit facilities were terminated in May 2012.

• 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. This credit facility was terminated in May 2012.

Transactions Conducted with HSBC Markets (USA) Inc. (“HMUS”)

• We utilize a subsidiary of HMUS, 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 $2.8 billion at September 30, 2012 and December 31, 2011. At September 30, 2012 and December 31, 2011, $270 million and $229 million, respectively, was outstanding on these loans and lines. Interest income on these loans and lines totaled $1 million and $3 million during the three and nine months ended September 30, 2012, respectively, compared to $1 million and $5 million during the three and nine months ended September 30, 2011, respectively.

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 in 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 $16 million and $49 million during the three and nine months ended September 30, 2012, respectively, compared to $14 million and $31 million during the three and nine months ended September 30, 2011, respectively.

• 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 and HSBC Canada. Marketable securities outstanding from these purchases are reflected in trading assets and totaled $15 million and $8.5 billion at September 30, 2012 and December 31, 2011, respectively.

• We have also entered into credit derivatives transactions, primarily in the form of credit default swaps, with certain affiliates. The notional value of these derivative contracts was $45.9 billion and $45.1 billion at September 30, 2012 and December 31, 2011, respectively. The net credit exposure (defined as the recorded fair value of the derivative liability) related to the contracts was $1.2 billion and $1.0 billion at September 30, 2012 and December 31, 2011, respectively.

• We had a committed unused line of credit with HSBC France of $2.5 billion at December 31, 2011. The facility was terminated effective July 30, 2012.

• We have a committed unused line of credit with HSBC Investment (Bahamas) Limited of $500 million at September 30, 2012.

• We have an uncommitted unused line of credit with HSBC North America Inc. (“HNAI”) of $150 million at both September 30, 2012 and December 31, 2011.

• We have extended lines of credit to various other HSBC affiliates totaling $460 million at September 30, 2012 and December 31, 2011. At September 30, 2012 and December 31, 2011, there were no amounts outstanding under these lines of credit.

• We routinely enter into derivative transactions with 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 $1,023 billion and $887 billion at September 30, 2012 and December 31, 2011, respectively. The net credit exposure (defined as the recorded fair value of derivative receivables) related to the contracts was approximately $22.7 billion and $22.4 billion at September 30, 2012 and December 31, 2011, 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.

• 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 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. The fees we pay to HTSU for centralized support services and processing activities 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 15, “Pension and Other Postretirement 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 $7 million and $27 million during the three and nine months ended September 30, 2012, respectively, compared to $14 million and $38 million during the three and nine months ended September 30, 2011, respectively.

• 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 $5 million and $18 million during the three and nine months ended September 30, 2012, respectively, compared to $7 million and $21 million in the year-ago periods. These amounts 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 immediate parent, HNAI, on our common stock during the nine months ended September 30, 2012 and 2011.