Citibank 2015 Annual Report Download - page 265

247
Credit-Risk-Related Contingent Features in Derivatives
Certain derivative instruments contain provisions that require the Company
to either post additional collateral or immediately settle any outstanding
liability balances upon the occurrence of a specified event related to the
credit risk of the Company. These events, which are defined by the existing
derivative contracts, are primarily downgrades in the credit ratings of the
Company and its affiliates. The fair value (excluding CVA) of all derivative
instruments with credit-risk-related contingent features that were in a net
liability position at both December 31, 2015 and December 31, 2014 was
$22 billion and $30 billion, respectively. The Company had posted $19 billion
and $27 billion as collateral for this exposure in the normal course of
business as of December 31, 2015 and December 31, 2014, respectively.
A downgrade could trigger additional collateral or cash settlement
requirements for the Company and certain affiliates. In the event that
Citigroup and Citibank were downgraded a single notch by all three major
rating agencies as of December 31, 2015, the Company could be required
to post an additional $1.8 billion as either collateral or settlement of the
derivative transactions. Additionally, the Company could be required to
segregate with third-party custodians collateral previously received from
existing derivative counterparties in the amount of $0.1 billion upon
the single notch downgrade, resulting in aggregate cash obligations and
collateral requirements of approximately $1.9 billion.
Derivatives Accompanied by Financial Asset Transfers
The Company executes total return swaps which provide it with synthetic
exposure to substantially all of the economic return of the securities or other
financial assets referenced in the contract. In certain cases, the derivative
transaction is accompanied by the Company’s transfer of the referenced
financial asset to the derivative counterparty, most typically in response
to the derivative counterparty’s desire to hedge, in whole or in part, its
synthetic exposure under the derivative contract by holding the referenced
asset in funded form. In certain jurisdictions these transactions qualify as
sales, resulting in derecognition of the securities transferred (see Note 1 to
the Consolidated Financial Statements for further discussion of the related
sale conditions for transfers of financial assets). For a significant portion of
the transactions, the Company has also executed another total return swap
where the Company passes on substantially all of the economic return of
the referenced securities to a different third party seeking the exposure. In
those cases, the Company is not exposed, on a net basis, to changes in the
economic return of the referenced securities.
These transactions generally involve the transfer of the Company’s
liquid government bonds, convertible bonds, or publicly traded corporate
equity securities from the trading portfolio and are executed with third-
party financial institutions. The accompanying derivatives are typically
total return swaps. The derivatives are cash settled and subject to ongoing
margin requirements.
When the conditions for sale accounting are met, the Company reports
the transfer of the referenced financial asset as a sale and separately reports
the accompanying derivative transaction. These transactions generally do
not result in a gain or loss on the sale of the security, because the transferred
security was held at fair value in the Company’s trading portfolio. For
transfers of financial assets accounted for by the Company as a sale, where
the Company has retained substantially all of the economic exposure to the
transferred asset through a total return swap executed in contemplation
of the initial sale with the same counterparty and still outstanding as of
December 31, 2015, both the asset carrying amounts derecognized and gross
cash proceeds received as of the date of derecognition were $1.0 billion. At
December 31, 2015, the fair value of these previously derecognized assets
was $1.0 billion and the fair value of the total return swaps was $7 million
recorded as gross derivative assets and $35 million recorded as gross
derivative liabilities. The balances for the total return swaps are on a gross
basis, before the application of counterparty and cash collateral netting,
and are included primarily as equity derivatives in the tabular disclosures in
this Note.