Citibank 2015 Annual Report Download - page 124

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Factor Sensitivities
Factor sensitivities are expressed as the change in the value of a position for
a defined change in a market risk factor, such as a change in the value of a
U.S. Treasury bill for a one basis point change in interest rates. Citi’s Market
Risk Management, within the Risk organization, works to ensure that factor
sensitivities are calculated, monitored and, in most cases, limited for all
material risks taken in the trading portfolios.
Value at Risk
VAR estimates, at a 99% confidence level, the potential decline in the value of
a position or a portfolio under normal market conditions assuming a one-
day holding period. VAR statistics, which are based on historical data, can be
materially different across firms due to differences in portfolio composition,
differences in VAR methodologies, and differences in model parameters. As
a result, Citi believes VAR statistics can be used more effectively as indicators
of trends in risk-taking within a firm, rather than as a basis for inferring
differences in risk-taking across firms.
Citi uses a single, independently approved Monte Carlo simulation VAR
model (see “VAR Model Review and Validation” below), which has been
designed to capture material risk sensitivities (such as first- and second-
order sensitivities of positions to changes in market prices) of various asset
classes/risk types (such as interest rate, credit spread, foreign exchange,
equity and commodity risks). Citi’s VAR includes positions which are
measured at fair value; it does not include investment securities classified
as AFS or HTM. For information on these securities, see Note 14 to the
Consolidated Financial Statements.
Citi believes its VAR model is conservatively calibrated to incorporate
fat-tail scaling and the greater of short-term (approximately the most
recent month) and long-term (three years) market volatility. The Monte
Carlo simulation involves approximately 300,000 market factors, making
use of approximately 180,000 time series, with sensitivities updated daily,
volatility parameters updated daily to weekly and correlation parameters
updated monthly. The conservative features of the VAR calibration contribute
an approximate 17% add-on to what would be a VAR estimated under the
assumption of stable and perfectly, normally distributed markets.
As set forth in the table below, Citi’s average and year-end Trading VAR
decreased from 2014 to 2015, mainly due to changes in interest rate and
credit spread exposures in the markets and securities services businesses
within ICG. Trading and Credit Portfolio VAR also declined, although the
decrease from Trading VAR was partially offset by additional hedging related
to lending activities in 2015.
In millions of dollars
December 31,
2015
2015
Average
December 31,
2014
2014
Average
Interest rate $ 37 $ 44 $ 68 N/A
Credit spread 56 69 87 N/A
Covariance adjustment (1) (25) (26) (36) N/A
Fully diversified interest rate and credit spread $ 68 $ 87 $119 $114
Foreign exchange 27 34 27 31
Equity 17 17 17 24
Commodity 17 19 23 16
Covariance adjustment (1) (53) (65) (56) (73)
Total trading VAR—all market risk factors, including general and specific risk (excluding credit portfolios) (2) $ 76 $ 92 $130 $112
Specific risk-only component (3) $ 11 $ 6 $ 10 $ 12
Total trading VAR—general market risk factors only (excluding credit portfolios) (2) $ 65 $ 86 $120 $100
Incremental impact of the credit portfolio (4) $ 22 $ 25 $ 18 $ 21
Total trading and credit portfolio VAR $ 98 $117 $148 $133
(1) Covariance adjustment (also known as diversification benefit) equals the difference between the total VAR and the sum of the VARs tied to each individual risk type. The benefit reflects the fact that the risks within each
and across risk types are not perfectly correlated and, consequently, the total VAR on a given day will be lower than the sum of the VARs relating to each individual risk type. The determination of the primary drivers of
changes to the covariance adjustment is made by an examination of the impact of both model parameter and position changes.
(2) The total Trading VAR includes mark-to-market and certain fair value option trading positions from ICG and Citi Holdings, with the exception of hedges to the loan portfolio, fair value option loans, and all CVA exposures.
Available-for-sale and accrual exposures are not included.
(3) The specific risk-only component represents the level of equity and fixed income issuer-specific risk embedded in VAR.
(4) The credit portfolio is composed of mark-to-market positions associated with non-trading business units including Citi Treasury, the CVA relating to derivative counterparties and all associated CVA hedges. FVA and
DVA are not included. The credit portfolio also includes hedges to the loan portfolio, fair value option loans and hedges to the leveraged finance pipeline within capital markets origination within ICG.