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Citigroup & Derivatives. Amandeep Hundal Andrie Lesmana Joshua Peligal Patrick Tong. The Citi Story. Key Stats and Businesses Financial Crisis TARP and LSA Derivatives Key Statements Capital Requirements Derivatives Overview. Key Stats for 5 Years.
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Citigroup & Derivatives AmandeepHundal AndrieLesmana Joshua Peligal Patrick Tong
The Citi Story • Key Stats and Businesses • Financial Crisis • TARP and LSA • Derivatives • Key Statements • Capital Requirements • Derivatives Overview
Troubled Asset Relief Program (TARP) and Loss Sharing Agreement (LSA) • Oct/Dec 2008: raised $25 billion, and $20 billion through sales or pref. stock and warrants to the US Treasury • Jan 2009: issued $7.1 billion of pref. Stock to the US Treasury and FDIC; issued warrants to the US Treasury • July 2009: exchanges $25b pref. for $7.7b of common • July 2009: exchanges $20b pref. And $7.1b pref. for trust preferred securities • Citigroup has paid $2.2 billion in dividends to the US gov’t on the preferred stock held • Citigroup has paid $800 million in interest on the trust preferred securities
Exit from TARP and LSA • Dec 2009: repaid $20 billion of the trust preferred securities, exiting the LSA (also, $1.8b of the $7.1b were cancelled) • Dec 2009: repaid TARP funds by raising money through common stock issuances, tangible equity units (T-DECs) • Outstanding Issues • US Treasury holds 27% of common shares (7.7b) • US Treasury intends to sell in 2010 after Mar 16 • US Treasury holds $5.3 billion of trust preferred securities • 3 warrants on Citigroup stock issued to the US Treasury as part of TARP and loss-sharing are still outstanding
Items Impacting SAP Revenue (p37) • The 1.283 million net gain in derivatives positions held in SAP during 2009 was due to the narrowing of spreads of Citi’s counterparties on its derivatives assets
Derivatives: Credit Valuation • in the fourth quarter of 2008, Citigroup’s credit spreads generally narrowed and counterparty credit spreads widened, each of which negatively affected revenues in 2008. • During 2009, both Citigroup’s and counterparty credit spreads narrowed.
Hedging • Hedging: Citigroup uses derivatives in connection with its risk management activities to hedge certain risks or reposition the risk profile of the Company. For example, Citigroup may issue fixed-rate long-term debt and then enter into a receive-fixed, pay-variable-rate interest rate swap with the same tenor and notional amount to convert the interest payments to a net variable-rate basis. This strategy is the most common form of an interest rate hedge, as it minimizes interest cost in certain yield curve environments. Derivatives are also used to manage risks inherent in specific groups of on-balance-sheet assets and liabilities, including investments, corporate and consumer loans, deposit liabilities, as well as other interest-sensitive assets and liabilities. In addition, foreign-exchange contracts are used to hedge non-U.S.-dollar-denominated debt, foreign currency-denominated available-for-sale securities, net capital exposures and foreign-exchange transactions.
Hedging • The Company manages its exposures to market rate movements outside its trading activities by modifying the asset and liability mix, either directly or through the use of derivative financial products, including interest-rate swaps, futures, forwards, and purchased-option positions, as well as foreign exchange contracts. • The hedge relationship must be formally documented at inception, detailing the particular risk management objective and strategy for the hedge, which includes the item and risk that is being hedged and the derivative that is being used, as well as how effectiveness will be assessed and ineffectiveness measured.
Hedging • The Company issues both fixed and variable rate debt in a range of currencies. It uses derivative contracts, primarily interest rate swaps, to effectively convert a portion of its fixed rate debt to variable rate debt and variable rate debt to fixed rate debt. The maturity structure of the derivatives generally corresponds to the maturity structure of the debt being hedged. In addition, the Company uses other derivative contracts to manage the foreign exchange impact of certain debt issuances. • At December 31, 2009, the Company’s overall weighted average interest rate for long-term debt was 3.51% on a contractual basis and 3.91% including the effects of derivative contracts.
Citi, Risk, and Derivatives • Risk Management Policy and Team • Price Risk • Value at Risk (VAR) • Foreign Exchange Risk • Interest Rate Risk
Risk Management • Chief Risk Officer: • Establishing core standards for management, measurement and reporting of risk • Identify, assessing, communicating and monitoring risk on company-wide basis • Engaging with senior management and on a frequent basis on material matters with respect to risk-taking activities in businesses and related risk management processes • Ensuring that risk function has adequate independence, authority, expertise, staffing, technology and resources
Risk Management • Business Chief Risk Officer: focal point for risk decisions in company’s major business groups • Regional Chief Risk Officers: Accountable for risks in their geographic areas • Product Chief Risk Officers: Accountable for risks within their speciality (real estate, structured products, etc)
Risk Management • Product Chief Risk Officers: • Accountable for risks within their specialty • Focus on problem areas across businesses and regions • Serve as a resource to Chief Risk Officer, Business and Regional Chief Risk officers
Business Management Team • Risk capital group: Enhance risk capital model, ensure it is consistent across all business activities • Risk architecture group: Ensures company has integrated systems and common metrics, thereby allows Citi to aggregate and stress-test exposures across the institution • Infrastructure risk group: Focuses on improving operational processes across businesses and regions
Price Risk • Price risk is the earnings risk from changes in interest rates, foreign exchange rates, and equity and commodity prices, and in their implied volatilities • Price risk arises in non-trading portfolios, as well as in trading portfolios • Focus on interest rate risk and foreign exchange risk
Trading Revenue Total revenues of the trading business consist of: • customer revenue, which includes spreads from customer flow and positions taken to facilitate customer orders; • proprietary trading activities in both cash and derivative transactions; and • net interest revenue.
Price Risk Measurement • Price risk in trading portfolios are measured by the following series of measures: • Factor sensitivities • Value at Risk (VAR) • Stress testing
Price Risk Measurement • 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 Treasury bill for a one-basis-point change in interest rates. • Stress testing is regularly performed on trading portfolios on a regular basis to estimate the impact of extreme market movements. • VAR estimates the potential decline in the value of a position or a portfolio under normal market conditions. The VAR method incorporates the factor sensitivities of the trading portfolio with the volatilities and correlations of those factors and is expressed as the risk to Citigroup over a one-day holding period, at a 99% confidence level.
Value at Risk Summary of Citigroup’s VAR in trading portfolios as of Dec 31, 2009 and 2008
Interest Rate Risk • Citigroup measure risk to Net Interest Revenue (NIR) by Interest Rate Exposure (IRE) • IRE measures the change in expected NIR in each currency resulting from unanticipated changes in forward interest rates • Mitigation and Hedging of Risk • Citigroup may modify pricing on new customer loans and deposits, enter into transactions with other institutions or enter into off-balance-sheet derivative transactions that have the opposite risk exposures • Regularly assesses the viability of strategies to reduce unacceptable risks to earnings and implements such strategies when it believes those actions are prudent • Do stress testing- of the impact of non-linear interest rate movements on the value of the balance sheet- analysis of portfolio duration and volatility, particularly as they relate to mortgage loans and MBS
Interest Rate Risk • Non-Trading Portfolios • The exposures in the following table represent the annualized risk to NIR assuming unanticipated parallel instantaneous 100bps change as well as a gradual (25 bps per quarter) parallel change in rates compared with the market forward interest rates in the selected currencies
Interest Rate Risk • The following table shows the risk to NIR from six different changes in the implied forward rates • Each scenario assumes that the rate change will occur on a gradual basis every three months over the course of the year
