Citibank 2014 Annual Report Download - page 261

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Municipal Investments
Municipal investment transactions include debt and equity interests in
partnerships that finance the construction and rehabilitation of low-income
housing, facilitate lending in new or underserved markets, or finance
the construction or operation of renewable municipal energy facilities.
The Company generally invests in these partnerships as a limited partner
and earns a return primarily through the receipt of tax credits and grants
earned from the investments made by the partnership. The Company may
also provide construction loans or permanent loans for the development or
operation of real estate properties held by partnerships. These entities are
generally considered VIEs. The power to direct the activities of these entities
is typically held by the general partner. Accordingly, these entities are not
consolidated by the Company.
Client Intermediation
Client intermediation transactions represent a range of transactions
designed to provide investors with specified returns based on the returns
of an underlying security, referenced asset or index. These transactions
include credit-linked notes and equity-linked notes. In these transactions,
the VIE typically obtains exposure to the underlying security, referenced
asset or index through a derivative instrument, such as a total-return swap
or a credit-default swap. In turn the VIE issues notes to investors that pay a
return based on the specified underlying security, referenced asset or index.
The VIE invests the proceeds in a financial asset or a guaranteed insurance
contract that serves as collateral for the derivative contract over the term of
the transaction. The Company’s involvement in these transactions includes
being the counterparty to the VIE’s derivative instruments and investing in a
portion of the notes issued by the VIE. In certain transactions, the investor’s
maximum risk of loss is limited, and the Company absorbs risk of loss above
a specified level. The Company does not have the power to direct the activities
of the VIEs that most significantly impact their economic performance, and
thus it does not consolidate them.
The Company’s maximum risk of loss in these transactions is defined
as the amount invested in notes issued by the VIE and the notional amount
of any risk of loss absorbed by the Company through a separate instrument
issued by the VIE. The derivative instrument held by the Company may
generate a receivable from the VIE (for example, where the Company
purchases credit protection from the VIE in connection with the VIE’s
issuance of a credit-linked note), which is collateralized by the assets owned
by the VIE. These derivative instruments are not considered variable interests,
and any associated receivables are not included in the calculation of
maximum exposure to the VIE.
The proceeds from new securitizations related to the Company’s client
intermediation transactions for the year ended December 31, 2014 totaled
approximately $2.0 billion.
Investment Funds
The Company is the investment manager for certain investment funds
and retirement funds that invest in various asset classes including private
equity, hedge funds, real estate, fixed income and infrastructure. The
Company earns a management fee, which is a percentage of capital under
management, and may earn performance fees. In addition, for some of these
funds the Company has an ownership interest in the investment funds. The
Company has also established a number of investment funds as opportunities
for qualified employees to invest in private equity investments. The Company
acts as investment manager to these funds and may provide employees with
financing on both recourse and non-recourse bases for a portion of the
employees’ investment commitments.
The Company has determined that a majority of the investment entities
managed by Citigroup are provided a deferral from the requirements of
ASC 810, because they meet the criteria in Accounting Standards Update
No. 2010-10, Consolidation (Topic 810), Amendments for Certain
Investment Funds (ASU 2010-10). These entities continue to be evaluated
under the requirements of ASC 810-10, prior to the implementation of
SFAS 167 (FIN 46(R), Consolidation of Variable Interest Entities), which
required that a VIE be consolidated by the party with a variable interest that
will absorb a majority of the entity’s expected losses or residual returns, or
both. See Note 1 to the Consolidated Financial Statements for a discussion
of ASU 2015-02 which includes impending changes to targeted areas of
consolidation guidance. When ASU 2015-02 becomes effective on January 1,
2016, it will eliminate the above noted deferral for certain investment entities
pursuant to ASU 2010-10.
Trust Preferred Securities
The Company has previously raised financing through the issuance of trust
preferred securities. In these transactions, the Company forms a statutory
business trust and owns all of the voting equity shares of the trust. The trust
issues preferred equity securities to third-party investors and invests the gross
proceeds in junior subordinated deferrable interest debentures issued by the
Company. The trusts have no assets, operations, revenues or cash flows other
than those related to the issuance, administration and repayment of the
preferred equity securities held by third-party investors. Obligations of the
trusts are fully and unconditionally guaranteed by the Company.
Because the sole asset of each of the trusts is a receivable from the
Company and the proceeds to the Company from the receivable exceed
the Company’s investment in the VIE’s equity shares, the Company is not
permitted to consolidate the trusts, even though it owns all of the voting
equity shares of the trust, has fully guaranteed the trusts’ obligations, and
has the right to redeem the preferred securities in certain circumstances.
The Company recognizes the subordinated debentures on its Consolidated
Balance Sheet as long-term liabilities. (For additional information, see Note
18 to the Consolidated Financial Statements.)