Citibank 2009 Annual Report Download - page 101

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Trading Portfolios
Price risk in trading portfolios is monitored using a series of measures, including:
factor sensitivities; •฀
value-at-risk (VAR); and •฀
stress testing. •฀
Factor sensitivities are expressed as the change in the value of a position
for a defined change in a market risk factor, such as a change in the value
of a Treasury bill for a one-basis-point change in interest rates. Citigroup’s
independent market risk management ensures that factor sensitivities are
calculated, monitored and, in most cases, limited, for all relevant risks taken
in a trading portfolio.
VAR estimates the potential decline in the value of a position or a portfolio
under normal market conditions. The VAR method incorporates the factor
sensitivities of the trading portfolio with the volatilities and correlations of
those factors and is expressed as the risk to Citigroup over a one-day holding
period, at a 99% confidence level. Citigroup’s VAR is based on the volatilities
of and correlations among a multitude of market risk factors as well as
factors that track the specific issuer risk in debt and equity securities.
Stress testing is performed on trading portfolios on a regular basis to
estimate the impact of extreme market movements. It is performed on
both individual trading portfolios, and on aggregations of portfolios and
businesses. Independent market risk management, in conjunction with the
businesses, develops stress scenarios, reviews the output of periodic stress-
testing exercises, and uses the information to make judgments as to the
ongoing appropriateness of exposure levels and limits.
Each trading portfolio has its own market risk limit framework
encompassing these measures and other controls, including permitted
product lists and a new product approval process for complex products.
Total revenues of the trading business consist of:
customer revenue, which includes spreads from customer flow and •฀
positions taken to facilitate customer orders;
proprietary trading activities in both cash and derivative transactions; and •฀
net interest revenue.•฀
All trading positions are marked-to-market, with the result reflected in
earnings. In 2009, negative trading-related revenue (net losses) was recorded
for 58 of 260 trading days. Of the 58 days on which negative revenue (net
losses) was recorded, two days were greater than $400 million. The following
histogram of total daily revenue or loss captures trading volatility and shows
the number of days in which Citigroup’s trading-related revenues fell within
particular ranges.
0
5
10
15
20
25
30
35
40
45
(300) to (275)
Revenues (in millions of dollars)
(650) to (400)
(25) to 0
(50) to (25) (75) to (50)
(100) to (75)
(125) to (100) (150) to (125) (175) to (150) (200) to (175) (225) to (200) (250) to (225) (275) to (250) (325) to (300) (350) to (325) (375) to (350) (400) to (375)
0 to 25
25 to 50 50 to 75
75 to 100
100 to 125 125 to 150 150 to 175 175 to 200 200 to 225 225 to 250
250 to 275
275 to 300 300 to 325 325 to 350 350 to 375 375 to 400 400 to 550
Number of Trading Days
Histogram of Daily-Trading Related Revenue—12 Months Ended December 31, 2009
Citigroup periodically performs extensive back-testing of many hypothetical
test portfolios as one check of the accuracy of its VAR. Back-testing is the
process in which the daily VAR of a portfolio is compared to the actual daily
change in the market value of its transactions. Back-testing is conducted
to confirm that the daily market value losses in excess of a 99% confidence
level occur, on average, only 1% of the time. The VAR calculation for the
hypothetical test portfolios, with different degrees of risk concentration, meets
this statistical criteria.