Citibank 2014 Annual Report Download - page 129

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The following table provides the VAR for ICG during 2014, 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, 2014
Total—all market risk
factors, including general and specific risk $122
Average—during year $109
High—during year 159
Low—during year 82
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 167 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.
In the second quarter of 2014, Citi implemented two VAR model
enhancements that were reviewed by Citi’s U.S. banking regulators as well
as Citi’s model validation group. Specifically, Citi enhanced the correlation
among mortgage products as well as introduced industry sectors (financial
and non-financial) into the credit spread component of the VAR model.
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 III, 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 III, Regulatory VAR includes all trading book
covered positions and all foreign exchange and commodity exposures.
Pursuant to Basel III, 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. With the April 2014
implementation of the U.S. final Basel III rules, CVA hedges are excluded
from Regulatory VAR and included in credit risk-weighted assets as computed
under the Advanced Approaches for determining risk-weighted assets.