Related Party Transactions

6 Months Ended

Jun. 30, 2011

14. 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:


	June 30,		December 31,
	2011		2010

	(in millions)

Assets:
Cash and due from banks	$	291	$	137
Interest bearing deposits with banks		2,432		1,287
Federal funds sold and securities purchased under resale agreements		519		534
Trading assets⁽¹⁾		16,627		16,575
Loans		1,399		1,060
Other		1,705		655

Total assets	$	22,973	$	20,248

Liabilities:
Deposits	$	12,494	$	10,337
Trading liabilities⁽¹⁾		19,944		19,211
Short-term borrowings		3,841		3,326
Long-term debt		3,986		984
Other		1,432		569

Total liabilities	$	41,697	$	34,427


⁽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						Six Months
	Ended						Ended
	June 30,						June 30,
	2011			2010			2011			2010

	(in millions)

Income/(Expense):
Interest income	$	17		$	30		$	30		$	66
Interest expense		(21	)		(11	)		(34	)		(21	)

Net interest income	$	(4	)	$	19		$	(4	)	$	45

HSBC affiliate income:
Fees and commissions:
HSBC Finance	$	17		$	2		$	36		$	4
HSBC Markets (USA) Inc. (“HMUS”)		9			7			11			10
Other HSBC affiliates		20			24			39			42
Fees on transfers of refund anticipation loans to HSBC Finance		-			-			-			4
Other HSBC affiliates income		10			3			16			9

Total affiliate income	$	56		$	36		$	102		$	69

Support services from HSBC affiliates:
HSBC Finance	$	162		$	165		$	316		$	389
HMUS		62			60			121			143
HSBC Technology & Services (USA) Inc. (“HTSU”)		240			191			446			363
Other HSBC affiliates		53			32			95			63

Total support services from HSBC affiliates	$	517		$	448		$	978		$	958

Stock based compensation expense with HSBC	$	15		$	11		$	24		$	22

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 as well as the GM and UP Portfolios from HSBC Finance as discussed in more detail below are indicative of such efficiencies contemplated.


•	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. Premiums paid are amortized to interest income over the estimated life of the receivables purchased. HSBC Finance retained the customer account relationships associated with these credit card portfolios. On a daily basis we purchase all new credit card loan originations for the GM and UP Portfolios from HSBC Finance. HSBC Finance continues to service these credit card loans for us for a fee. Information regarding these loans is summarized in the table below.

•	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. Information regarding these loans is summarized in the table below.

•	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 and by agreement we purchase on a daily basis substantially all new private label originations from HSBC Finance. HSBC Finance continues to service these loans for us for a fee. Information regarding these loans is summarized in the table below.


•	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. Information regarding these loans is summarized in the table below.

The following table summarizes the private label card, private label commercial and closed end loans, credit card (including the GM and UP credit card portfolios) and real estate secured loans serviced for us by HSBC Finance as well as the daily loans purchased during the three and six months ended June 30, 2011 and 2010:


	Private Label
			Commercial and		Credit Cards
			Closed		General		Union				Residential
	Cards		End Loans⁽¹⁾		Motors		Privilege		Other		Mortgage		Total

	(in billions)

Loans serviced by HSBC Finance:
June 30, 2011	$	11.5	$	.4	$	4.0	$	3.7	$	1.9	$	1.4	$	22.9
December 31, 2010		13.1		.4		4.5		4.1		2.0		1.5		25.6
Total loans purchased on a daily basis from HSBC Finance during:
Three months ended June 30, 2011		3.6		-		3.3		.8		1.1		-		8.8
Three months ended June 30, 2010		3.4		-		3.5		.8		1.0		-		8.7
Six months ended June 30, 2011		6.8		-		6.4		1.5		2.0		-		16.7
Six months ended June 30, 2010		6.4		-		6.6		1.5		2.0		-		16.5


⁽¹⁾		Private label commercial are included in other commercial loans and private label closed end loans are included in other consumer loans in Note 5, “Loans.”

Fees paid for servicing these loan portfolios totaled $158 million and $308 million during the three and six months ended June 30, 2011, respectively compared to $159 million and $323 million during the three and six months ended June 30, 2010, 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.


•	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 the three and six months ended June 30, 2011 we paid $1 million and $3 million, respectively, for services we received from HSBC Finance and received $2 million and $4 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 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 six months ended June 30, 2011, we received servicing revenue from HSBC Finance of $15 million and $32 million, respectively.


•	Excluding the servicing fees paid for the loan portfolios discussed above, support services from HSBC affiliates also includes charges by HSBC Finance under various service level agreements for other operational and administrative support and, in 2010, the servicing of certain tax refund anticipation loans as more fully discussed below. Fees paid for these services totaled $4 million and $8 million during the three and six months ended June 30, 2011, respectively. During the three and six months ended June 30, 2010, fees paid for these services totaled $6 million and $66 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 was 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. In 2010, we kept a portion of these loans on our balance sheet and earned 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 retained 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 the six months ended June 30, 2010, of which $3.1 billion was transferred to HSBC Finance. During the six months ended June 30, 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 $65 million and $58 million, respectively, during the six months ended June 30, 2010.

In December 2010, as a result of 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.


•	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 June 30, 2011 and December 31, 2010.

•	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 December 2010. There were no balances outstanding at June 30, 2011 and December 31, 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 December 2010. There were no balances outstanding at June 30, 2011 and December 31, 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 $.3 million and $.6 million during the three and six months ended June 30, 2010, respectively, which is included in residential mortgage banking revenue in the consolidated statement of income.

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

Transactions Conducted with HMUS

•

We utilize HSBC Securities (USA) Inc. (“HSI”), a wholly-owned subsidiary of HMUS, 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 June 30, 2011 and December 31, 2010. At June 30, 2011 and December 31, 2010, $978 million and $867 million, respectively, was outstanding on these loans and lines. Interest income on these loans and lines totaled $2 million and $4 million during the three and six months ended June 30, 2011, respectively compared to $5 million and $10 million during the three and six months ended June 30, 2010, respectively.

Other Transactions with HSBC Affiliates


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

•	In April 2011, we issued senior notes in the amount of $3.0 billion to HNAH. The 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.

•	In January 2011, we agreed to acquire 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 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.

•	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 28, 2014 with interest due quarterly beginning in November 2009. The note bears interest at 90 day USD Libor plus 180 basis points. Interest expense on this note totaled $13 million and $17 million during the three and six months ended June 30, 2011, respectively compared to $4 million and $8 million during the three and six months ended June 30, 2010, respectively.

•	We have a committed unused line of credit with HSBC Bank plc of $2.5 billion at June 30, 2011 and December 31, 2010.

•	We have an uncommitted unused line of credit with HSBC North America Inc. (“HNAI”) of $150 million at June 30, 2011 and December 31, 2010.

•	We have extended loans and lines of credit to various other HSBC affiliates totaling $460 million at June 30, 2011 and December 31, 2010. At June 30, 2011 and December 31, 2010 there were no amounts outstanding on these loans and lines of credit. Interest income on these lines totaled $2 million and $5 million during the three and six months ended June 30, 2010, respectively.

•	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. No such commercial paper was held at June 30, 2011. 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 $872.0 billion and $774.1 billion at June 30, 2011 and December 31, 2010, respectively. The net credit exposure (defined as the recorded fair value of derivative receivables) related to the contracts was approximately $16.6 billion at June 30, 2011 and December 31, 2010. 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 are expected to significantly reduce income volatility for HSBC Bank USA by transferring the volatility to the affiliate. The recorded fair value of derivative assets related to these derivative transactions was not significant at June 30, 2011 and 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.

•	Our domestic employees participate in a defined benefit pension plan sponsored by HSBC North America. Additional information regarding pensions is provided in Note 13, “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 $15 million and $24 million during the three and six months ended June 30, 2011, respectively. During the three and six months ended June 30, 2010, our share of the expense of these plans was $11 million and $22 million, 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 $7 million and $13 million during the three and six months ended June 30, 2011, respectively, are included as a component of Support services from HSBC affiliates in the consolidated statement of income and the table above. Prior to 2011, 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 six months ended June 30, 2011 and 2010.

- Definition

This element may be used for the entire related party transactions disclosure as a single block of text. Disclosure may include: the nature of the relationship(s), a description of the transactions, the amount of the transactions, the effects of any change in the method of establishing the terms of the transaction from the previous period, stated interest rate, expiration date, terms and manner of settlement per the agreement with the related party, and amounts due to or from related parties. If the entity and one or more other entities are under common ownership or management control and this control affects the operating results or financial position, disclosure includes the nature of the control relationship even if there are no transactions between the entities. Disclosure may also include the aggregate amount of current and deferred tax expense for each statement of earnings presented where the entity is a member of a group that files a consolidated tax return, the amount of any tax related balances due to or from affiliates as of the date of each statement of financial position presented, the principal provisions of the method by which the consolidated amount of current and deferred tax expense is allocated to the members of the group and the nature and effect of any changes in that method. Examples of related party transactions include transactions between (a) a parent company and its subsidiary; (b) subsidiaries of a common parent; (c) and entity and its principal owners; and (d) affiliates.

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