Citibank 2011 Annual Report Download - page 261

239
The Company 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, the Company either purchases or writes protection on either a
single name or a portfolio of reference credits. The Company uses credit
derivatives to help mitigate credit risk in its Corporate and Consumer loan
portfolios and other cash positions, to take proprietary trading positions, and
to facilitate client transactions.
The range of credit derivatives sold includes credit default swaps, total
return swaps, credit options and credit-linked notes.
A credit default swap is a contract in which, for a fee, a protection seller
agrees to reimburse a protection buyer for any losses that occur due to
a credit event on a reference entity. If there is no credit default event or
settlement trigger, as defined by the specific derivative contract, then the
protection seller makes no payments to the protection buyer and receives only
the contractually specified fee. However, if a credit event occurs as defined in
the specific derivative contract sold, the protection seller will be required to
make a payment to the protection buyer.
A total return swap transfers the total economic performance of a
reference asset, which includes all associated cash flows, as well as capital
appreciation or depreciation. The protection buyer receives a floating rate
of interest and any depreciation on the reference asset from the protection
seller and, in return, the protection seller receives the cash flows associated
with the reference asset plus any appreciation. Thus, according to the total
return swap agreement, the protection seller will be obligated to make a
payment any time the floating interest rate payment and any depreciation
of the reference asset exceed the cash flows associated with the underlying
asset. A total return swap may terminate upon a default of the reference asset
subject to the provisions of the related total return swap agreement between
the protection seller and the protection buyer.
A credit option is a credit derivative that allows investors to trade or hedge
changes in the credit quality of the reference asset. For example, in a credit
spread option, the option writer assumes the obligation to purchase or sell the
reference asset at a specified “strike” spread level. The option purchaser buys
the right to sell the reference asset to, or purchase it from, the option writer at
the strike spread level. The payments on credit spread options depend either
on a particular credit spread or the price of the underlying credit-sensitive
asset. The options usually terminate if the underlying assets default.
A credit-linked note is a form of credit derivative structured as a debt
security with an embedded credit default swap. The purchaser of the note
writes credit protection to the issuer, and receives a return which will be
negatively affected by credit events on the underlying reference credit. If
the reference entity defaults, the purchaser of the credit-linked note may
assume the long position in the debt security and any future cash flows
from it, but will lose the amount paid to the issuer of the credit-linked note.
Thus the maximum amount of the exposure is the carrying amount of the
credit-linked note. As of December 31, 2011 and December 31, 2010, the
amount of credit-linked notes held by the Company in trading inventory
was immaterial.
The following tables summarize the key characteristics of the Company’s
credit derivative portfolio as protection seller as of December 31, 2011 and
December 31, 2010:
In millions of dollars as of
December 31, 2011
Maximum potential
amount of
future payments
Fair
value
payable (1)(2)
By industry/counterparty
"ANK $ 929,608 $ 45,920
"ROKERDEALER 321,293 19,026
.ONFINANCIAL 1,048 98
)NSURANCEæANDæOTHERæFINANCIALæINSTITUTIONS 142,579 7,447
Total by industry/counterparty $1,394,528 $ 72,491
By instrument
#REDITæDEFAULTæSWAPSæANDæOPTIONS $1,393,082 $ 72,358
4OTALæRETURNæSWAPSæANDæOTHER 1,446 133
Total by instrument $1,394,528 $ 72,491
By rating
)NVESTMENTæGRADE $ 611,447 $ 16,913
.ONINVESTMENTæGRADE 226,939 28,034
.OTæRATED 556,142 27,544
Total by rating $1,394,528 $ 72,491
By maturity
7ITHINææYEAR $ 266,723 $ 3,705
&ROMææTOææYEARS 947,211 46,596
!FTERææYEARS 180,594 22,190
Total by maturity $1,394,528 $ 72,491
æ )NæADDITIONæFAIRæVALUEæAMOUNTSæPAYABLEæUNDERæCREDITæDERIVATIVESæPURCHASEDæWEREææMILLION
æ )NæADDITIONæFAIRæVALUEæAMOUNTSæRECEIVABLEæUNDERæCREDITæDERIVATIVESæSOLDæWEREææMILLION
In millions of dollars as of
December 31, 2010
Maximum potential
amount of
future payments
Fair
value
payable (1)(2)
By industry/counterparty
"ANK    
"ROKERDEALER  
.ONFINANCIAL  
)NSURANCEæANDæOTHERæFINANCIALæINSTITUTIONSæ  
Total by industry/counterparty   
By instrument
#REDITæDEFAULTæSWAPSæANDæOPTIONS   
4OTALæRETURNæSWAPSæANDæOTHER  
Total by instrument   
By rating
)NVESTMENTæGRADE    
.ONINVESTMENTæGRADE  
.OTæRATED  
Total by rating   
By maturity
7ITHINææYEAR    
&ROMææTOææYEARS  
!FTERææYEARS  
Total by maturity   
æ )NæADDITIONæFAIRæVALUEæAMOUNTSæPAYABLEæUNDERæCREDITæDERIVATIVESæPURCHASEDæWEREææMILLION
æ )NæADDITIONæFAIRæVALUEæAMOUNTSæRECEIVABLEæUNDERæCREDITæDERIVATIVESæSOLDæWEREææMILLION