Citibank 2012 Annual Report Download - page 269

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The pretax change in Accumulated other comprehensive income (loss) from cash flow hedges is presented below:
Year ended December 31,
In millions of dollars 2012 2011 2010
Effective portion of cash flow hedges included in AOCI
Interest rate contracts $ (322) $(1,827) $ (469)
Foreign exchange contracts 143 81 (570)
Total effective portion of cash flow hedges included in AOCI $ (179) $(1,746) $(1,039)
Effective portion of cash flow hedges reclassified from AOCI to earnings
Interest rate contracts $ (837) $(1,227) $(1,396)
Foreign exchange contracts (180) (257) (500)
Total effective portion of cash flow hedges reclassified from AOCI to earnings (1) $(1,017) $(1,484) $(1,896)
(1) Included primarily in Other revenue and Net interest revenue on the Consolidated Income Statement.
For cash flow hedges, any changes in the fair value of the end-user
derivative remaining in Accumulated other comprehensive income (loss)
on the Consolidated Balance Sheet will be included in earnings of future
periods to offset the variability of the hedged cash flows when such cash
flows affect earnings. The net loss associated with cash flow hedges expected
to be reclassified from Accumulated other comprehensive income (loss)
within 12 months of December 31, 2012 is approximately $1.0 billion. The
maximum length of time over which forecasted cash flows are hedged is
10 years.
The after-tax impact of cash flow hedges on AOCI is shown in Note 21 to
the Consolidated Financial Statements.
Net investment Hedges
Consistent with ASC 830-20, Foreign Currency Matters—Foreign Currency
Transactions (formerly SFAS 52, Foreign Currency Translation), ASC 815
allows hedging of the foreign currency risk of a net investment in a foreign
operation. Citigroup uses foreign currency forwards, options and foreign-
currency-denominated debt instruments to manage the foreign exchange
risk associated with Citigroup’s equity investments in several non-U.S.-dollar-
functional-currency foreign subsidiaries. Citigroup records the change in the
carrying amount of these investments in the Foreign currency translation
adjustment account within Accumulated other comprehensive income
(loss). Simultaneously, the effective portion of the hedge of this exposure is
also recorded in the Foreign currency translation adjustment account and
the ineffective portion, if any, is immediately recorded in earnings.
For derivatives designated as net investment hedges, Citigroup follows
the forward-rate method from FASB Derivative Implementation Group Issue
H8 (now ASC 815-35-35-16 through 35-26), “Foreign Currency Hedges:
Measuring the Amount of Ineffectiveness in a Net Investment Hedge.”
According to that method, all changes in fair value, including changes
related to the forward-rate component of the foreign currency forward
contracts and the time value of foreign currency options, are recorded in the
Foreign currency translation adjustment account within Accumulated
other comprehensive income (loss).
For foreign-currency-denominated debt instruments that are designated
as hedges of net investments, the translation gain or loss that is recorded in
the Foreign currency translation adjustment account is based on the spot
exchange rate between the functional currency of the respective subsidiary
and the U.S. dollar, which is the functional currency of Citigroup. To the
extent the notional amount of the hedging instrument exactly matches the
hedged net investment and the underlying exchange rate of the derivative
hedging instrument relates to the exchange rate between the functional
currency of the net investment and Citigroup’s functional currency (or, in the
case of a non-derivative debt instrument, such instrument is denominated in
the functional currency of the net investment), no ineffectiveness is recorded
in earnings.
The pretax gain (loss) recorded in the Foreign currency translation
adjustment account within Accumulated other comprehensive income
(loss), related to the effective portion of the net investment hedges, is
$(3,829) million, $904 million, and $(3,620) million, for the years ended
December 31, 2012, 2011, and 2010, respectively.
c redit Derivatives
A credit derivative is a bilateral contract between a buyer and a seller
under which the seller agrees to provide protection to the buyer against the
credit risk of a particular entity (“reference entity” or “reference credit”).
Credit derivatives generally require that the seller of credit protection make
payments to the buyer upon the occurrence of predefined credit events
(commonly referred to as “settlement triggers”). These settlement triggers
are defined by the form of the derivative and the reference credit and are
generally limited to the market standard of failure to pay on indebtedness
and bankruptcy 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, protection
may be provided on a portfolio of reference credits or asset-backed securities.
The seller of such 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 Company makes markets and trades a range of credit derivatives.
Through these contracts, the Company either purchases or writes protection
on either a single name or a portfolio of reference credits. The Company
also uses credit derivatives to help mitigate credit risk in its Corporate
and Consumer loan portfolios and other cash positions, and to facilitate
client transactions.