Citibank 2013 Annual Report Download - page 135

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The following table provides the VAR for S&B during 2013, excluding the
CVA relating to derivative counterparties, hedges of CVA, fair value option
loans, and hedges to the loan portfolio.
In millions of dollars Dec. 31, 2013
Total—all market risk
factors, including general and specific risk $123
Average—during year $109
High—during quarter 151
Low—during quarter 81
VAR Model Review and Validation
Generally, Citi’s VAR review and model validation process entails reviewing
the model framework, major assumptions, and implementation of the
mathematical algorithm. In addition, as part of the model validation
process, product specific back-testing on portfolios is periodically completed
and฀reviewed฀with฀Citi’s฀U.S.฀banking฀regulators.฀Furthermore,฀Regulatory฀
VAR (as described below) back-testing is performed against buy-and-hold
profit and loss on a monthly basis for approximately 164 portfolios across the
organization (trading desk level, ICG business segment and Citigroup) and
the฀results฀are฀shared฀with฀the฀U.S.฀banking฀regulators.
Significant฀VAR฀model฀and฀assumption฀changes฀must฀be฀independently฀
validated within Citi’s risk management organization. This validation
process includes a review by Citi’s model validation group and further
approval from its model validation review committee, which is composed
of senior quantitative risk management officers. In the event of significant
model changes, parallel model runs are undertaken prior to implementation.
In addition, significant model and assumption changes are subject to the
periodic฀reviews฀and฀approval฀by฀Citi’s฀U.S.฀banking฀regulators.
Citi uses the same independently validated VAR model for both Regulatory
VAR and Risk Management VAR (i.e., Total Trading and Total Trading and
Credit Portfolios VARs) and, as such, the model review and oversight process
for both purposes is as described above.
Regulatory VAR, which is calculated in accordance with Basel II.5, differs
from Risk Management VAR due to the fact that certain positions included
in Risk Management VAR are not eligible for market risk treatment in
Regulatory VAR. The composition of Risk Management VAR is discussed
under “Value at Risk” above. The applicability of the VAR model for positions
eligible฀for฀market฀risk฀treatment฀under฀U.S.฀regulatory฀capital฀rules฀is฀
periodically฀reviewed฀and฀approved฀by฀Citi’s฀U.S.฀banking฀regulators.
In accordance with Basel II.5, Regulatory VAR includes all trading book
covered positions and all foreign exchange and commodity exposures.
Pursuant to Basel II.5, Regulatory VAR excludes positions that fail to meet the
intent and ability to trade requirements and are therefore classified as non-
trading book and categories of exposures that are specifically excluded as
covered positions. Regulatory VAR excludes CVA on derivative instruments and
DVA on Citi’s own fair value option liabilities, but includes associated hedges
to that CVA as of April 2013 pursuant to regulatory guidance. As reflected in
the graph on the following page, the impact of this asymmetrical treatment
of including only CVA hedges drove an increase in Regulatory VAR beginning
in April 2013. Citi expects that, effective April 1, 2014, CVA hedges will no
longer be included as a covered position for market risk-weighted assets in
accordance with the Final Basel III Rules. Instead, these positions will be
included in credit risk-weighted assets as computed under the Advanced
Approaches for determining risk-weighted-assets.