Citibank 2011 Annual Report Download - page 136

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CREDIT DERIVATIVES
Citigroup 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, Citi
either purchases or writes protection on either a single-name or portfolio
basis. Citi primarily uses credit derivatives to help mitigate credit risk in its
corporate loan portfolio and other cash 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 indebtedness and bankruptcy (or
comparable events) 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 has occurred with respect to the portfolio and/
or may only be required to pay for losses up to a specified amount.
The fair values shown below are prior to the application of any netting
agreements, cash collateral, and market or credit valuation adjustments.
Citi actively participates in trading a variety of credit derivatives products
as both an active two-way market-maker for clients and to manage credit
risk. The majority of this activity was transacted with other financial
intermediaries, including both banks and broker-dealers. Citi generally has
a mismatch between the total notional amounts of protection purchased
and sold and it may hold the reference assets directly, rather than entering
into offsetting credit derivative contracts as and when desired. The open risk
exposures from credit derivative contracts are largely matched after certain
cash positions in reference assets are considered and after notional amounts
are adjusted, either to a duration-based equivalent basis or to reflect the level
of subordination in tranched structures.
Citi actively monitors its counterparty credit risk in credit derivative
contracts. Approximately 96% and 89% of the gross receivables are from
counterparties with which Citi maintains collateral agreements as of
December 31, 2011 and December 31, 2010, respectively. A majority of
Citi’s top 15 counterparties (by receivable balance owed to Citi) are banks,
financial institutions or other dealers. Contracts with these counterparties do
not include ratings-based termination events. However, counterparty ratings
downgrades may have an incremental effect by lowering the threshold at
which Citi may call for additional collateral.