Citibank 2015 Annual Report Download - page 252

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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 years ended December 31, 2015 and 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.