Citibank 2008 Annual Report Download - page 98

future cash flows determined in step one. Own-credit CVA is determined
using Citi-specific CDS spreads for the relevant tenor. Generally, counterparty
CVA is determined using CDS spread indices for each credit rating and tenor.
For certain identified facilities where individual analysis is practicable (for
example, exposures to monoline counterparties) counterparty-specific CDS
spreads are used.
The CVA adjustment is designed to incorporate a market view of the credit
risk inherent in the derivative portfolio as required by SFAS 157. However,
most derivative instruments are negotiated bilateral contracts and are not
commonly transferred to third parties. Derivative instruments are normally
settled contractually, or if terminated early, are terminated at a value
negotiated bilaterally between the counterparties. Therefore, the CVA (both
counterparty and own-credit) may not be realized upon a settlement or
termination in the normal course of business. In addition, all or a portion of
the credit valuation adjustments may be reversed or otherwise adjusted in
future periods in the event of changes in the credit risk of Citi or its
counterparties, or changes in the credit mitigants (collateral and netting
agreements) associated with the derivative instruments. Historically,
Citigroup’s credit spreads have moved in tandem with general counterparty
credit spreads, thus providing offsetting CVAs affecting revenue. However, in
the fourth quarter of 2008, Citigroup’s credit spreads generally narrowed and
counterparty credit spreads widened, each of which negatively affected
revenues. The table below summarizes the CVA applied to the fair value of
derivative instruments as of December 31, 2008 and 2007.
Credit valuation adjustment
Contra liability (contra asset)
In millions of dollars
December 31,
2008
December 31,
2007
Non-monoline counterparties $(8,266) $(1,613)
Citigroup (own) 3,611 1,329
Net non-monoline CVA (4,655) (284)
Monoline counterparties (1) (4,279) (967)
Total CVA—derivative instruments $(8,934) $(1,251)
(1) Certain derivatives with monoline counterparties were terminated during 2008.
The table below summarizes pre-tax gains (losses) related to changes in
credit valuation adjustments on derivative instruments for the years ended
December 31, 2008 and 2007:
Credit valuation
adjustment gain
(loss)
In millions of dollars 2008 2007
Non-monoline counterparties $ (6,653) $(1,301)
Citigroup (own) 2,282 1,329
Net non-monoline CVA (4,371) 28
Monoline counterparties (5,736) (967)
Total CVA—derivative instruments $(10,107) $ (939)
The credit valuation adjustment amounts shown above relate solely to the
derivative portfolio, and do not include:
• Own-credit adjustments for non-derivative liabilities measured at fair
value under the fair-value option. See Note 26 on page 192 for further
information.
• The effect of counterparty credit risk embedded in non-derivative
instruments. During 2008, general spread widening has negatively
affected the market value of a range of financial instruments. Losses on
non-derivative instruments, such as bonds and loans, related to
counterparty credit risk are not included in the table above.
Credit Derivatives
Like all other derivative types, the Company makes markets in and trades a
range of credit derivatives, both on behalf of clients as well as for its own
account. Through these contracts the Company either purchases or writes
protection on either a single-name or portfolio basis. The Company uses
credit derivatives to help mitigate credit risk in its corporate loan portfolio
and other cash positions, to take proprietary trading positions, and to
facilitate client transactions.
Credit derivatives generally require that the seller of credit protection
make payments to the buyer upon the occurrence of predefined events
(settlement triggers). These settlement triggers, which are defined by the
form of the derivative and the referenced credit, are generally limited to the
market standard of failure to pay on indebtedness and bankruptcy of the
reference credit and, in a more limited range of transactions, debt
restructuring. Credit derivative transactions referring to emerging market
reference credits will also typically include additional settlement triggers to
cover the acceleration of indebtedness and the risk of repudiation or a
payment moratorium. In certain transactions on a portfolio of referenced
credits or asset-backed securities, the seller of protection may not be required
to make payment until a specified amount of losses have occurred with
respect to the portfolio and/or may only be required to pay for losses up to a
specified amount.
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