Citibank 2014 Annual Report Download - page 270

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Hedging total return
Citigroup generally manages the risk associated with leveraged loans it
has originated or in which it participates by transferring a majority of its
exposure to the market through SPEs prior to or shortly after funding.
Retained exposures to leveraged loans receivable are generally hedged using
total return swaps.
The amount of hedge ineffectiveness on the cash flow hedges recognized
in earnings for the years ended December 31, 2014, 2013 and 2012 is not
significant. The pretax change in Accumulated other comprehensive
income (loss) from cash flow hedges is presented below:
Year ended December 31,
In millions of dollars 2014 2013 2012
Effective portion of cash flow hedges included in AOCI
Interest rate contracts $ 299 $ 749 $ (322)
Foreign exchange contracts (167) 34 143
Credit derivatives 214 —
Total effective portion of cash flow hedges included in AOCI $ 134 $ 797 $ (179)
Effective portion of cash flow hedges reclassified from AOCI to earnings
Interest rate contracts $(260) $(700) $ (837)
Foreign exchange contracts (149) (176) (180)
Total effective portion of cash flow hedges reclassified from AOCI to earnings (1) $(409) $(876) $(1,017)
(1) Included primarily in Other revenue and Net interest revenue on the Consolidated Income Statement.
For cash flow hedges, the changes in the fair value of the hedging
derivative remaining in Accumulated other comprehensive income (loss)
on the Consolidated Balance Sheet will be included in the earnings of future
periods to offset the variability of the hedged cash flows when such cash
flows affect earnings. The net loss associated with cash flow hedges expected
to be reclassified from Accumulated other comprehensive income (loss)
within 12 months of December 31, 2014 is approximately $0.4 billion.
The maximum length of time over which forecasted cash flows are hedged
is 10 years.
The after-tax impact of cash flow hedges on AOCI is shown in Note 20 to
the Consolidated Financial Statements.
Net Investment Hedges
Consistent with ASC 830-20, Foreign Currency Matters—Foreign
Currency Transactions, ASC 815 allows hedging of the foreign currency
risk of a net investment in a foreign operation. Citigroup uses foreign
currency forwards, options and foreign-currency-denominated debt
instruments to manage the foreign exchange risk associated with Citigroup’s
equity investments in several non-U.S.-dollar-functional-currency foreign
subsidiaries. Citigroup records the change in the carrying amount of these
investments in the Foreign currency translation adjustment account
within Accumulated other comprehensive income (loss). Simultaneously,
the effective portion of the hedge of this exposure is also recorded in the
Foreign currency translation adjustment account and the ineffective
portion, if any, is immediately recorded in earnings.
For derivatives designated as net investment hedges, Citigroup follows the
forward-rate method outlined in ASC 815-35-35-16 through 35-26. According
to that method, all changes in fair value, including changes related to the
forward-rate component of the foreign currency forward contracts and the
time value of foreign currency options, are recorded in the Foreign currency
translation adjustment account within Accumulated other comprehensive
income (loss).
For foreign-currency-denominated debt instruments that are designated
as hedges of net investments, the translation gain or loss that is recorded in
the Foreign currency translation adjustment account is based on the spot
exchange rate between the functional currency of the respective subsidiary
and the U.S. dollar, which is the functional currency of Citigroup. To the
extent the notional amount of the hedging instrument exactly matches the
hedged net investment and the underlying exchange rate of the derivative
hedging instrument relates to the exchange rate between the functional
currency of the net investment and Citigroup’s functional currency (or, in the
case of a non-derivative debt instrument, such instrument is denominated in
the functional currency of the net investment), no ineffectiveness is recorded
in earnings.
The pretax gain (loss) recorded in the Foreign currency translation
adjustment account within Accumulated other comprehensive income
(loss), related to the effective portion of the net investment hedges, is
$2,890 million, $2,370 million and $(3,829) million for the years ended
December 31, 2014, 2013 and 2012, respectively.