Citibank 2013 Annual Report Download - page 287

269
In millions of dollars at
December 31, 2012
Maximum potential
amount of
future payments
Fair
value
payable (1)(2)
By industry/counterparty
Bank $ 863,411 $18,824
Broker-dealer 304,968 9,193
Non-financial 3,241 87
Insurance and other financial institutions 174,874 3,726
Total by industry/counterparty $1,346,494 $31,830
By instrument
Credit default swaps and options $1,345,162 $31,624
Total return swaps and other 1,332 206
Total by instrument $1,346,494 $31,830
By rating
Investment grade $ 637,343 $ 6,290
Non-investment grade 200,529 15,591
Not rated 508,622 9,949
Total by rating $1,346,494 $31,830
By maturity
Within 1 year $ 287,670 $ 2,388
From 1 to 5 years 965,059 21,542
After 5 years 93,765 7,900
Total by maturity $1,346,494 $31,830
(1) In addition, fair value amounts payable under credit derivatives purchased were $20,832 million.
(2) In addition, fair value amounts receivable under credit derivatives sold were $19,710 million.
Citigroup evaluates the payment/performance risk of the credit derivatives
for which it stands as a protection seller based on the credit rating assigned
to the underlying referenced credit. Where external ratings by nationally
recognized statistical rating organizations (such as Moody’s and S&P)
are used, investment grade ratings are considered to be Baa/BBB or above,
while anything below is considered non-investment grade. The Citigroup
internal ratings are in line with the related external credit rating system.
On certain underlying reference credits, mainly related to over-the-counter
credit derivatives, ratings are not available. These are included in the not-
rated category. Credit derivatives written on an underlying non-investment
grade reference credit represent greater payment risk to the Company. The
non-investment grade category in the table above primarily includes credit
derivatives where the underlying referenced entity has been downgraded
subsequent to the inception of the derivative. On certain underlying
referenced credits or entities, ratings are not available. Such referenced
credits are included in the “not rated” category and are primarily related to
credit default swaps and other derivatives referencing investment grade and
high yield credit index products and customized baskets.
The maximum potential amount of future payments under credit
derivative contracts presented in the table above is based on the notional
value of the derivatives. The Company believes that the maximum potential
amount of future payments for credit protection sold is not representative of
the actual loss exposure based on historical experience. This amount has not
been reduced by the Company’s rights to the underlying assets and the related
cash flows. In accordance with most credit derivative contracts, should a
credit event (or settlement trigger) occur, the Company usually is liable for
the difference between the protection sold and the recourse it holds in the
value of the underlying assets. Thus, if the reference entity defaults, Citi will
have a right to collect on the underlying reference credit and any related cash
flows, while being liable for the full notional amount of credit protection
sold to the buyer. Furthermore, this maximum potential amount of future
payments for credit protection sold has not been reduced for any cash
collateral paid to a given counterparty, as such payments would be calculated
after netting all derivative exposures, including any credit derivatives with
that counterparty in accordance with a related master netting agreement.
Due to such netting processes, determining the amount of collateral that
corresponds to credit derivative exposures alone is not possible. The Company
actively monitors open credit-risk exposures and manages this exposure by
using a variety of strategies, including purchased credit derivatives, cash
collateral or direct holdings of the referenced assets. This risk mitigation
activity is not captured in the table above.
Credit-Risk-Related Contingent Features in Derivatives
Certain derivative instruments contain provisions that require the Company
to either post additional collateral or immediately settle any outstanding
liability balances upon the occurrence of a specified credit-risk-related event.
These events, which are defined by the existing derivative contracts, are
primarily downgrades in the credit ratings of the Company and its affiliates.
The fair value (excluding CVA) of all derivative instruments with credit-risk-
related contingent features that are in a net liability position at December 31,
2013 and December 31, 2012 was $26 billion and $36 billion, respectively.
The Company has posted $24 billion and $32 billion as collateral for this
exposure in the normal course of business as of December 31, 2013 and
December 31, 2012, respectively.
Each downgrade would trigger additional collateral or cash settlement
requirements for the Company and its affiliates. In the event that each
legal entity was downgraded a single notch by the three rating agencies
as of December 31, 2013, the Company would be required to post an
additional $2.5 billion as either collateral or settlement of the derivative
transactions. Additionally, the Company would be required to segregate
with third-party custodians collateral previously received from existing
derivative counterparties in the amount of $0.1 billion upon the single
notch downgrade, resulting in aggregate cash obligations and collateral
requirements of approximately $2.6 billion.