Citibank 2011 Annual Report Download - page 253

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Client Intermediation
Client intermediation transactions represent a range of transactions
designed to provide investors with specified returns based on the returns of
an underlying security, referenced asset or index. These transactions include
credit-linked notes and equity-linked notes. In these transactions, the VIE
typically obtains exposure to the underlying security, referenced asset or
index through a derivative instrument, such as a total-return swap or a
credit-default swap. In turn the VIE issues notes to investors that pay a return
based on the specified underlying security, referenced asset or index. The VIE
invests the proceeds in a financial asset or a guaranteed insurance contract
(GIC) that serves as collateral for the derivative contract over the term of
the transaction. The Company’s involvement in these transactions includes
being the counterparty to the VIE’s derivative instruments and investing in a
portion of the notes issued by the VIE. In certain transactions, the investor’s
maximum risk of loss is limited and the Company absorbs risk of loss above
a specified level. The Company does not have the power to direct the activities
of the VIEs that most significantly impact their economic performance and
thus it does not consolidate them.
The Company’s maximum risk of loss in these transactions is defined
as the amount invested in notes issued by the VIE and the notional amount
of any risk of loss absorbed by the Company through a separate instrument
issued by the VIE. The derivative instrument held by the Company may
generate a receivable from the VIE (for example, where the Company
purchases credit protection from the VIE in connection with the VIE’s
issuance of a credit-linked note), which is collateralized by the assets
owned by the VIE. These derivative instruments are not considered variable
interests and any associated receivables are not included in the calculation of
maximum exposure to the VIE.
Investment Funds
The Company is the investment manager for certain investment funds that
invest in various asset classes including private equity, hedge funds, real
estate, fixed income and infrastructure. The Company earns a management
fee, which is a percentage of capital under management, and may earn
performance fees. In addition, for some of these funds the Company has
an ownership interest in the investment funds. The Company has also
established a number of investment funds as opportunities for qualified
employees to invest in private equity investments. The Company acts as
investment manager to these funds and may provide employees with
financing on both recourse and non-recourse bases for a portion of the
employees’ investment commitments.
The Company has determined that a majority of the investment entities
managed by Citigroup are provided a deferral from the requirements of
SFAS 167, Amendments to FASB Interpretation No. 46(R), because
they meet the criteria in Accounting Standards Update No. 2010-10,
Consolidation (Topic 810), Amendments for Certain Investment
Funds (ASU 2010-10). These entities continue to be evaluated under the
requirements of ASC 810-10, prior to the implementation of SFAS 167
(FIN 46(R), Consolidation of Variable Interest Entities), which required
that a VIE be consolidated by the party with a variable interest that will
absorb a majority of the entity’s expected losses or residual returns, or both.
Where the Company has determined that certain investment entities are
subject to the consolidation requirements of SFAS 167, the consolidation
conclusions reached upon initial application of SFAS 167 are consistent
with the consolidation conclusions reached under the requirements of
ASC 810-10, prior to the implementation of SFAS 167.
Trust Preferred Securities
The Company has raised financing through the issuance of trust preferred
securities. In these transactions, the Company forms a statutory business trust
and owns all of the voting equity shares of the trust. The trust issues preferred
equity securities to third-party investors and invests the gross proceeds in
junior subordinated deferrable interest debentures issued by the Company.
The trusts have no assets, operations, revenues or cash flows other than those
related to the issuance, administration and repayment of the preferred equity
securities held by third-party investors. Obligations of the trusts are fully and
unconditionally guaranteed by the Company.
Because the sole asset of each of the trusts is a receivable from the
Company and the proceeds to the Company from the receivable exceed
the Company’s investment in the VIE’s equity shares, the Company is not
permitted to consolidate the trusts, even though it owns all of the voting
equity shares of the trust, has fully guaranteed the trusts’ obligations, and
has the right to redeem the preferred securities in certain circumstances.
The Company recognizes the subordinated debentures on its Consolidated
Balance Sheet as long-term liabilities.