Citibank 2011 Annual Report Download - page 285

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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.
Credit card merchant processing
Credit card merchant processing guarantees represent the Company’s indirect
obligations in connection with the processing of private label and bank card
transactions on behalf of merchants.
Citigroup’s primary credit card business is the issuance of credit cards to
individuals. In addition, the Company: (a) provides transaction processing
services to various merchants with respect to its private-label cards and
(b) has potential liability for bank card transaction processing services. The
nature of the liability in either case arises as a result of a billing dispute
between a merchant and a cardholder that is ultimately resolved in the
cardholder’s favor. The merchant is liable to refund the amount to the
cardholder. In general, if the credit card processing company is unable to
collect this amount from the merchant, the credit card processing company
bears the loss for the amount of the credit or refund paid to the cardholder.
With regard to (a) above, the Company continues to have the primary
contingent liability with respect to its portfolio of private-label merchants.
The risk of loss is mitigated as the cash flows between the Company and the
merchant are settled on a net basis and the Company has the right to offset
any payments with cash flows otherwise due to the merchant. To further
mitigate this risk the Company may delay settlement, require a merchant
to make an escrow deposit, include event triggers to provide the Company
with more financial and operational control in the event of the financial
deterioration of the merchant, or require various credit enhancements
(including letters of credit and bank guarantees). In the unlikely event that
a private-label merchant is unable to deliver products, services or a refund to
its private-label cardholders, the Company is contingently liable to credit or
refund cardholders.
With regard to (b) above, the Company has a potential liability for bank
card transactions where Citi provides the transaction processing services
as well as those where a third party provides the services and Citi acts as a
secondary guarantor, should that processor fail to perform.
The Company’s maximum potential contingent liability related to both
bank card and private-label merchant processing services is estimated to be
the total volume of credit card transactions that meet the requirements to be
valid charge back transactions at any given time. At December 31, 2011 and
December 31, 2010, this maximum potential exposure was estimated to be
$70 billion and $65 billion, respectively.
However, the Company believes that the maximum exposure is not
representative of the actual potential loss exposure based on the Company’s
historical experience. This contingent liability is unlikely to arise, as most
products and services are delivered when purchased and amounts are
refunded when items are returned to merchants. The Company assesses
the probability and amount of its contingent liability related to merchant
processing based on the financial strength of the primary guarantor,
the extent and nature of unresolved charge-backs and its historical loss
experience. At December 31, 2011 and December 31, 2010, the estimated
losses incurred and the carrying amounts of the Company’s contingent
obligations related to merchant processing activities were immaterial.
Custody indemnifications
Custody indemnifications are issued to guarantee that custody clients will
be made whole in the event that a third-party subcustodian or depository
institution fails to safeguard clients’ assets.
Other guarantees and indemnifications
Credit Card Protection Programs
The Company, through its credit card business, provides various cardholder
protection programs on several of its card products, including programs
that provide insurance coverage for rental cars, coverage for certain losses
associated with purchased products, price protection for certain purchases
and protection for lost luggage. These guarantees are not included in
the table, since the total outstanding amount of the guarantees and the
Company’s maximum exposure to loss cannot be quantified. The protection
is limited to certain types of purchases and certain types of losses and it is
not possible to quantify the purchases that would qualify for these benefits
at any given time. The Company assesses the probability and amount of its
potential liability related to these programs based on the extent and nature
of its historical loss experience. At December 31, 2011 and 2010, the actual
and estimated losses incurred and the carrying value of the Company’s
obligations related to these programs were immaterial.
Other Representation and Warranty Indemnifications
In the normal course of business, the Company provides standard
representations and warranties to counterparties in contracts in connection
with numerous transactions and also provides indemnifications, including
indemnifications that protect the counterparties to the contracts in the
event that additional taxes are owed due either to a change in the tax
law or an adverse interpretation of the tax law. Counterparties to these
transactions provide the Company with comparable indemnifications.
While such representations, warranties and indemnifications are essential
components of many contractual relationships, they do not represent the
underlying business purpose for the transactions. The indemnification
clauses are often standard contractual terms related to the Company’s
own performance under the terms of a contract and are entered into in the