Citibank 2014 Annual Report Download - page 263

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Exposure to credit risk on derivatives is affected by market volatility,
which may impair the ability of counterparties to satisfy their obligations
to the Company. Credit limits are established and closely monitored for
customers engaged in derivatives transactions. Citi considers the level of
legal certainty regarding enforceability of its offsetting rights under master
netting agreements and credit support annexes to be an important factor in
its risk management process. Specifically, Citi generally transacts much lower
volumes of derivatives under master netting agreements where Citi does not
have the requisite level of legal certainty regarding enforceability, because
such derivatives consume greater amounts of single counterparty credit
limits than those executed under enforceable master netting agreements.
Cash collateral and security collateral in the form of G10 government
debt securities is often posted by a party to a master netting agreement to
secure the net open exposure of the other party; the receiving party is free
to commingle/rehypothecate such collateral in the ordinary course of its
business. Nonstandard collateral such as corporate bonds, municipal bonds,
U.S. agency securities and/or MBS may also be pledged as collateral for
derivative transactions. Security collateral posted to open and maintain a
master netting agreement with a counterparty, in the form of cash and/or
securities, may from time to time be segregated in an account at a third-party
custodian pursuant to a tri-party account control agreement.
Information pertaining to Citigroup’s derivative activity, based on notional
amounts, as of December 31, 2014 and December 31, 2013, is presented in
the table below. Derivative notional amounts are reference amounts from
which contractual payments are derived and, in Citigroup’s view, do not
accurately represent a measure of Citi’s exposure to derivative transactions.
Rather, as discussed above, Citi’s derivative exposure arises primarily from
market fluctuations (i.e., market risk), counterparty failure (i.e., credit
risk) and/or periods of high volatility or financial stress (i.e., liquidity
risk), as well as any market valuation adjustments that may be required on
the transactions. Moreover, notional amounts do not reflect the netting of
offsetting trades (also as discussed above). For example, if Citi enters into an
interest rate swap with $100 million notional, and offsets this risk with an
identical but opposite position with a different counterparty, $200 million in
derivative notionals is reported, although these offsetting positions may result
in de minimus overall market risk. Aggregate derivative notional amounts
can fluctuate from period-to-period in the normal course of business based
on Citi’s market share as well as levels of client activity.