Citibank 2010 Annual Report Download - page 274

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Own Credit Valuation Adjustment
The fair value of debt liabilities for which the fair value option is elected
(other than non-recourse and similar liabilities) is impacted by the
narrowing or widening of the Company’s credit spreads. The estimated
change in the fair value of these debt liabilities due to such changes in the
Company’s own credit risk (or instrument-specific credit risk) was a loss
of $589 million and $4.226 billion for the years ended December 31, 2010
and 2009, respectively. Changes in fair value resulting from changes
in instrument-specific credit risk were estimated by incorporating the
Company’s current observable credit spreads into the relevant valuation
technique used to value each liability as described above.
The Fair Value Option for Financial Assets and Financial
Liabilities
Selected portfolios of securities purchased under
agreements to resell, securities borrowed, securities sold
under agreements to repurchase, securities loaned and
certain non-collateralized short-term borrowings
The Company elected the fair value option for certain portfolios of
fixed-income securities purchased under agreements to resell and fixed-
income securities sold under agreements to repurchase (and certain
non-collateralized short-term borrowings) on broker-dealer entities in the
United States, United Kingdom and Japan. In each case, the election was
made because the related interest-rate risk is managed on a portfolio basis,
primarily with derivative instruments that are accounted for at fair value
through earnings.
Changes in fair value for transactions in these portfolios are recorded in
Principal transactions. The related interest revenue and interest expense are
measured based on the contractual rates specified in the transactions and
are reported as interest revenue and expense in the Consolidated Statement
of Income.
Selected letters of credit and revolving loans hedged by
credit default swaps or participation notes
The Company has elected the fair value option for certain letters of credit
that are hedged with derivative instruments or participation notes. Citigroup
elected the fair value option for these transactions because the risk is
managed on a fair value basis and mitigates accounting mismatches.
The notional amount of these unfunded letters of credit was $1.1 billion
as of December 31, 2010 and $1.8 billion as of December 31, 2009. The
amount funded was insignificant with no amounts 90 days or more past due
or on non-accrual status at December 31, 2010 and 2009.
These items have been classified in Trading account assets or Trading
account liabilities on the Consolidated Balance Sheet. Changes in fair value
of these items are classified in Principal transactions in the Company’s
Consolidated Statement of Income.
Certain loans and other credit products
Citigroup has elected the fair value option for certain originated and
purchased loans, including certain unfunded loan products, such as
guarantees and letters of credit, executed by Citigroup’s trading businesses.
None of these credit products is a highly leveraged financing commitment.
Significant groups of transactions include loans and unfunded loan
products that are expected to be either sold or securitized in the near
term, or transactions where the economic risks are hedged with derivative
instruments such as purchased credit default swaps or total return swaps
where the Company pays the total return on the underlying loans to a third
party. Citigroup has elected the fair value option to mitigate accounting
mismatches in cases where hedge accounting is complex and to achieve
operational simplifications. Fair value was not elected for most lending
transactions across the Company, including where management objectives
would not be met.