Citibank 2014 Annual Report Download - page 267

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For the years ended December 31, 2014, 2013 and 2012, the amounts
recognized in Principal transactions in the Consolidated Statement
of Income related to derivatives not designated in a qualifying hedging
relationship, as well as the underlying non-derivative instruments, are
presented in Note 6 to the Consolidated Financial Statements. Citigroup
presents this disclosure by business classification, showing derivative gains
and losses related to its trading activities together with gains and losses
related to non-derivative instruments within the same trading portfolios, as
this represents the way these portfolios are risk managed.
The amounts recognized in Other revenue in the Consolidated Statement
of Income for the years ended December 31, 2014, 2013 and 2012 related to
derivatives not designated in a qualifying hedging relationship are shown
below. The table below does not include any offsetting gains/losses on the
economically hedged items to the extent such amounts are also recorded in
Other revenue.
Gains (losses) included in Other revenue
Year ended December 31,
In millions of dollars 2014 2013 2012
Interest rate contracts $ 291 $(376)$ (427)
Foreign exchange (2,894) 221 182
Credit derivatives (135) (595)(1,022)
Total Citigroup $(2,738) $(750)$(1,267)
Accounting for Derivative Hedging
Citigroup accounts for its hedging activities in accordance with ASC 815,
Derivatives and Hedging. As a general rule, hedge accounting is permitted
where the Company is exposed to a particular risk, such as interest-rate or
foreign-exchange risk, that causes changes in the fair value of an asset or
liability or variability in the expected future cash flows of an existing asset,
liability or a forecasted transaction that may affect earnings.
Derivative contracts hedging the risks associated with changes in fair
value are referred to as fair value hedges, while contracts hedging the
variability of expected future cash flows are cash flow hedges. Hedges that
utilize derivatives or debt instruments to manage the foreign exchange
risk associated with equity investments in non-U.S.-dollar-functional-
currency foreign subsidiaries (net investment in a foreign operation) are net
investment hedges.
If certain hedging criteria specified in ASC 815 are met, including
testing for hedge effectiveness, hedge accounting may be applied. The hedge
effectiveness assessment methodologies for similar hedges are performed
in a similar manner and are used consistently throughout the hedging
relationships. For fair value hedges, changes in the value of the hedging
derivative, as well as changes in the value of the related hedged item due to
the risk being hedged are reflected in current earnings. For cash flow hedges
and net investment hedges, changes in the value of the hedging derivative
are reflected in Accumulated other comprehensive income (loss) in
Citigroup’s stockholders’ equity to the extent the hedge is highly effective.
Hedge ineffectiveness, in either case, is reflected in current earnings.
For asset/liability management hedging, fixed-rate long-term debt is
recorded at amortized cost under GAAP. However, by designating an interest
rate swap contract as a hedging instrument and electing to apply ASC 815
fair value hedge accounting, the carrying value of the debt is adjusted for
changes in the benchmark interest rate, with such changes in value recorded
in current earnings. The related interest-rate swap also is recorded on the
balance sheet at fair value, with any changes in fair value also reflected in
earnings. Thus, any ineffectiveness resulting from the hedging relationship is
captured in current earnings.
Alternatively, for management hedges, that do not meet the ASC 815
hedging criteria, only the derivative is recorded at fair value on the balance
sheet, with the associated changes in fair value recorded in earnings,
while the debt continues to be carried at amortized cost. Therefore, current
earnings are affected only by the interest rate shifts and other factors that
cause a change in the swap’s value. This type of hedge is undertaken when
hedging requirements cannot be achieved or management decides not to
apply ASC 815 hedge accounting.
Another alternative is to elect to carry the debt at fair value under the
fair value option. Once the irrevocable election is made upon issuance of
the debt, the full changes in fair value of the debt are reported in earnings.
The related interest rate swap, with changes in fair value, is also reflected in
earnings, which provides a natural offset to the debt’s fair value change. To
the extent the two offsets are not exactly equal because the full change in the
fair value of the debt includes risks not offset by the interest rate swap, the
difference is captured in current earnings.