Citibank 2015 Annual Report Download - page 254

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A legal opinion may not be sought for certain jurisdictions where local
law is silent or unclear as to the enforceability of such rights or where adverse
case law or conflicting regulation may cast doubt on the enforceability
of such rights. In some jurisdictions and for some counterparty types, the
insolvency law may not provide the requisite level of certainty. For example,
this may be the case for certain sovereigns, municipalities, central banks and
U.S. pension plans.
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 is presented in the table below. Derivative notional amounts are
reference amounts from which contractual payments are derived and do not
represent a complete and accurate 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 minimis 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, levels of client activity and
other factors.