Citibank 2009 Annual Report Download - page 251

241
Maximum potential amount of future payments
In billions of dollars at December 31,
except carrying value in millions
Expire within
1 year
Expire after
1 year
Total amount
outstanding
Carrying value
(in millions)
2008
Financial standby letters of credit $ 31.6 $62.6 $ 94.2 $ 289.0
Performance guarantees 9.4 6.9 16.3 23.6
Derivative instruments considered to be guarantees (2) 7.6 7.2 14.8 1,308.4
Guarantees of collection of contractual cash flows (1) — 0.3 0.3 —
Loans sold with recourse — 0.3 0.3 56.4
Securities lending indemnifications (1) 47.6 — 47.6 —
Credit card merchant processing (1) 56.7 — 56.7 —
Custody indemnifications and other — 21.6 21.6 149.2
Total $152.9 $98.9 $251.8 $1,826.6
(1) The carrying values of guarantees of collections of contractual cash flows, securities lending indemnifications and credit card merchant processing are not material, as the Company has determined that the amount
and probability of potential liabilities arising from these guarantees are not significant.
(2) Reclassified to conform to the current period’s presentation.
Financial standby letters of credit
Citigroup issues standby letters of credit which substitute its own credit
for that of the borrower. If a letter of credit is drawn down, the borrower is
obligated to repay Citigroup. Standby letters of credit protect a third party
from defaults on contractual obligations. Financial standby letters of credit
include guarantees of payment of insurance premiums and reinsurance risks
that support industrial revenue bond underwriting and settlement of payment
obligations to clearing houses, and also support options and purchases of
securities or are in lieu of escrow deposit accounts. Financial standbys also
backstop loans, credit facilities, promissory notes and trade acceptances.
Performance guarantees
Performance guarantees and letters of credit are issued to guarantee a
customer’s tender bid on a construction or systems-installation project or to
guarantee completion of such projects in accordance with contract terms.
They are also issued to support a customer’s obligation to supply specified
products, commodities, or maintenance or warranty services to a third party.
Derivative instruments considered to be guarantees
Derivatives are financial instruments whose cash flows are based on a
notional amount or an underlying instrument, where there is little or
no initial investment, and whose terms require or permit net settlement.
Derivatives may be used for a variety of reasons, including risk management,
or to enhance returns. Financial institutions often act as intermediaries for
their clients, helping clients reduce their risks. However, derivatives may also
be used to take a risk position.
The derivative instruments considered to be guarantees, which are
presented in the tables above, include only those instruments that require Citi
to make payments to the counterparty based on changes in an underlying
that is related to an asset, a liability, or an equity security held by the
guaranteed party. More specifically, derivative instruments considered to be
guarantees include certain over-the-counter written put options where the
counterparty is not a bank, hedge fund or broker-dealer (such counterparties
are considered to be dealers in these markets, and may therefore not hold the
underlying instruments). However, credit derivatives sold by the Company
are excluded from this presentation, as they are disclosed separately within
this note below. In addition, non-credit derivative contracts that are cash
settled and for which the Company is unable to assert that it is probable the
counterparty held the underlying instrument at the inception of the contract
also are excluded from the disclosure above.
In instances where the Company’s maximum potential future payment is
unlimited, the notional amount of the contract is disclosed.
Guarantees of collection of contractual cash flows
Guarantees of collection of contractual cash flows protect investors in
credit card receivables securitization trusts from loss of interest relating
to insufficient collections on the underlying receivables in the trusts. The
notional amount of these guarantees as of December 31, 2008 was $300
million. No such guarantees were outstanding as of December 31, 2009.
Loans sold with recourse
Loans sold with recourse represent the Company’s obligations to reimburse
the buyers for loan losses under certain circumstances. Recourse refers to the
clause in a sales agreement under which a lender will fully reimburse the
buyer/investor for any losses resulting from the purchased loans. This may be
accomplished by the seller’s taking back any loans that become delinquent.
Securities lending indemnifications
Owners of securities frequently lend those securities for a fee to other parties
who may sell them short or deliver them to another party to satisfy some
other obligation. Banks may administer such securities lending programs for
their clients. Securities lending indemnifications are issued by the bank to
guarantee that a securities lending customer will be made whole in the event
that the security borrower does not return the security subject to the lending
agreement and collateral held is insufficient to cover the market value of
the security.