Citibank 2014 Annual Report Download - page 130

113
Regulatory VAR Back-testing
In accordance with Basel III, Citi is required to perform back-testing to
evaluate the effectiveness of its Regulatory VAR model. Regulatory VAR back-
testing is the process in which the daily one-day VAR, at a 99% confidence
interval, is compared to the buy-and-hold profit and loss (e.g., the profit and
loss impact if the portfolio is held constant at the end of the day and re-priced
the following day). Buy-and-hold profit and loss represents the daily mark-
to-market profit and loss attributable to price movements in covered positions
from the close of the previous business day. Buy-and-hold profit and loss
excludes realized trading revenue, net interest, fees and commissions, intra-
day trading profit and loss, and changes in reserves.
Based on a 99% confidence level, Citi would expect two to three days in
any one year where buy-and-hold losses exceeded the Regulatory VAR. Given
the conservative calibration of Citi’s VAR model (as a result of taking the
greater of short- and long-term volatilities and fat-tail scaling of volatilities),
Citi would expect fewer exceptions under normal and stable market
conditions. Periods of unstable market conditions could increase the number
of back-testing exceptions.
The following graph shows the daily buy-and-hold profit and loss
associated with Citi’s covered positions compared to Citi’s one-day Regulatory
VAR during 2014. As the graph indicates, for the 12-month period ending
December 31, 2014, there was one back testing exception where trading
losses exceeded the VAR estimate at the Citigroup level. This occurred
on October 15, 2014, a day on which significant market movements
and volatility impacted various fixed income as well as equities trading
businesses. The difference between the 56% of days with buy-and-hold gains
for Regulatory VAR back-testing and the 94% of days with buy-and-hold
gains shown in the histogram of daily trading related revenue above reflects,
among other things, that a significant portion of Citi’s trading-related
revenue is not generated from daily price movements on these positions and
exposures, as well as differences in the portfolio composition of Regulatory
VAR and Risk Management VAR.
Regulatory Trading VAR and Associated Buy-and-Hold Profit and Loss(1) — Twelve Months Ended December 31, 2014
In millions of dollars
-200
-150
-100
-50
0
50
100
150
Total Regulatory VAR Buy-and-Hold Profit and Loss
Regulatory VAR
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14
(1) Buy-and-hold profit and loss, as defined by the banking regulators under Basel III, represents the daily mark-to-market revenue movement attributable to the trading position from the close of the previous business day.
Buy-and-hold profit and loss excludes realized trading revenue, net interest, intra-day trading profit and loss on new and terminated trades, as well as changes in reserves. Therefore it is not comparable to the trading-
related revenue presented in the previous histogram of Daily Trading-Related Revenue.