Citibank 2012 Annual Report Download - page 292

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Own Debt Valuation Adjustments for Structured Debt
Own debt valuation adjustments are recognized on Citi’s debt liabilities
for which the fair value option has been elected using Citi’s credit spreads
observed in the bond market. The fair value of debt liabilities for which the
fair value option is elected (other than non-recourse and similar liabilities)
is impacted by the narrowing or widening of the Company’s credit spreads.
The estimated change in the fair value of these debt liabilities due to such
changes in the Company’s own credit risk (or instrument-specific credit
risk) was a loss of $2,009 million and a gain of $1,774 million for the years
ended December 31, 2012 and 2011, respectively. Changes in fair value
resulting from changes in instrument-specific credit risk were estimated by
incorporating the Company’s current credit spreads observable in the bond
market into the relevant valuation technique used to value each liability as
described above.
The Fair Value Option for Financial Assets and
Financial Liabilities
Selected portfolios of securities purchased under
agreements to resell, securities borrowed, securities sold
under agreements to repurchase, securities loaned and
certain non-collateralized short-term borrowings
The Company elected the fair value option for certain portfolios of fixed-
income securities purchased under agreements to resell and fixed-income
securities sold under agreements to repurchase, securities borrowed, securities
loaned (and certain non-collateralized short-term borrowings) on broker-
dealer entities in the United States, United Kingdom and Japan. In each case,
the election was made because the related interest-rate risk is managed on a
portfolio basis, primarily with derivative instruments that are accounted for
at fair value through earnings.
Changes in fair value for transactions in these portfolios are recorded in
Principal transactions. The related interest revenue and interest expense are
measured based on the contractual rates specified in the transactions and
are reported as interest revenue and expense in the Consolidated Statement
of Income.
Selected letters of credit and revolving loans hedged by
credit default swaps or participation notes
The Company has elected the fair value option for certain letters of credit
that are hedged with derivative instruments or participation notes. Citigroup
elected the fair value option for these transactions because the risk is
managed on a fair value basis and mitigates accounting mismatches.
There was no notional amount of these unfunded letters of credit at
December 31, 2012 and $0.6 billion at December 31, 2011. The amount
funded was insignificant with no amounts 90 days or more past due or on
non-accrual status at December 31, 2012 and 2011.
These items have been classified in Trading account assets or Trading
account liabilities on the Consolidated Balance Sheet. Changes in fair value
of these items are classified in Principal transactions in the Company’s
Consolidated Statement of Income.
Certain loans and other credit products
Citigroup has elected the fair value option for certain originated and
purchased loans, including certain unfunded loan products, such as
guarantees and letters of credit, executed by Citigroup’s lending and trading
businesses. None of these credit products are highly leveraged financing
commitments. Significant groups of transactions include loans and
unfunded loan products that are expected to be either sold or securitized in
the near term, or transactions where the economic risks are hedged with
derivative instruments such as purchased credit default swaps or total return
swaps where the Company pays the total return on the underlying loans to a
third party. Citigroup has elected the fair value option to mitigate accounting
mismatches in cases where hedge accounting is complex and to achieve
operational simplifications. Fair value was not elected for most lending
transactions across the Company, including where management objectives
would not be met.
Certain investments in unallocated precious metals
Citigroup invests in unallocated precious metals accounts (gold, silver,
platinum and palladium) as part of its commodity trading business or to
economically hedge certain exposures from issuing structured liabilities.
Under ASC 815, the investment is bifurcated into a debt host contract and
a commodity forward derivative instrument. Citigroup elects the fair value
option for the debt host contract, and reports the debt host contract within
Trading account assets on the Company’s Consolidated Balance Sheet. The
total carrying amount of debt host contracts across unallocated precious
metals accounts at December 31, 2012 was approximately $5.5 billion.
The amounts are expected to fluctuate based on trading activity in the
future periods.