Citibank 2015 Annual Report Download - page 271

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Short-Term Borrowings and Long-Term Debt
Where fair value accounting has been elected, the fair value of non-
structured liabilities is determined by utilizing internal models using the
appropriate discount rate for the applicable maturity. Such instruments are
generally classified as Level 2 of the fair value hierarchy when all significant
inputs are readily observable.
The Company determines the fair value of hybrid financial instruments,
including structured liabilities, using the appropriate derivative valuation
methodology (described above in “Trading account assets and liabilities—
derivatives”) given the nature of the embedded risk profile. Such instruments
are classified as Level 2 or Level 3 depending on the observability of
significant inputs to the model.
Alt-A Mortgage Securities
The Company classifies its Alt-A mortgage securities as held-to-maturity,
available-for-sale or trading investments. The securities classified as trading
and available-for-sale are recorded at fair value with changes in fair value
reported in current earnings and AOCI, respectively. For these purposes, Citi
defines Alt-A mortgage securities as non-agency residential mortgage-backed
securities (RMBS) where (i) the underlying collateral has weighted average
FICO scores between 680 and 720 or (ii) for instances where FICO scores
are greater than 720, RMBS have 30% or less of the underlying collateral
composed of full documentation loans.
Similar to the valuation methodologies used for other trading securities
and trading loans, the Company generally determines the fair values of
Alt-A mortgage securities utilizing internal valuation techniques. Fair value
estimates from internal valuation techniques are verified, where possible, to
prices obtained from independent vendors. Consensus data providers compile
prices from various sources. Where available, the Company may also make
use of quoted prices for recent trading activity in securities with the same or
similar characteristics to the security being valued.
The valuation techniques used for Alt-A mortgage securities, as with other
mortgage exposures, are price-based and yield analysis. The primary market-
derived input is yield. Cash flows are based on current collateral performance
with prepayment rates and loss projections reflective of current economic
conditions of housing price change, unemployment rates, interest rates,
borrower attributes and other market indicators.
Alt-A mortgage securities that are valued using these methods are
generally classified as Level 2. However, Alt-A mortgage securities backed
by Alt-A mortgages of lower quality or subordinated tranches in the capital
structure are mostly classified as Level 3 due to the reduced liquidity that
exists for such positions, which reduces the reliability of prices available from
independent sources.