DERIVATIVES ACTIVITIES

In the ordinary course of business, Citigroup enters into various types of derivative transactions. These derivative transactions include:


•	Futures and forward contracts, which are commitments to buy or sell at a future date a financial instrument, commodity or currency at a contracted price and may be settled in cash or through delivery.


•	Swap contracts, which are commitments to settle in cash at a future date or dates that may range from a few days to a number of years, based on differentials between specified financial indices, as applied to a notional principal amount.


•	Option contracts, which give the purchaser, for a premium, the right, but not the obligation, to buy or sell within a specified time a financial instrument, commodity or currency at a contracted price that may also be settled in cash, based on differentials between specified indices or prices.

The swap and forward contracts are over-the-counter (OTC) derivatives that are bilaterally negotiated with counterparties and settled with those counterparties, except for swap contracts that are novated and "cleared" through central counterparties (CCPs). Futures and option contracts are generally standardized contracts that are traded on an exchange with a CCP as the counterparty from the inception of the transaction. Citigroup enters into these derivative contracts relating to interest rate, foreign currency, commodity and other market/credit risks for the following reasons:

•

Trading Purposes—Customer Needs: Citigroup offers its customers derivatives in connection with their risk-management actions to transfer, modify or reduce their interest rate, foreign exchange and other market/credit risks or for their own trading purposes. As part of this process, Citigroup considers the customers’ suitability for the risk involved and the business purpose for the transaction. Citigroup also manages its derivative risk positions through offsetting trade activities, controls focused on price verification, and daily reporting of positions to senior managers.


•	Trading Purposes—Citigroup trades derivatives as an active market maker. Trading limits and price verification controls are key aspects of this activity.

•

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 issues fixed-rate long-term debt and then enters 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 AFS securities and borrowings, 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 AFS securities and net investment exposures.

Derivatives may expose Citigroup to market, credit or liquidity risks in excess of the amounts recorded on the Consolidated Balance Sheet. Market risk on a derivative product is the exposure created by potential fluctuations in interest rates, foreign-exchange rates and other factors and is a function of the type of product, the volume of transactions, the tenor and terms of the agreement and the underlying volatility. Credit risk is the exposure to loss in the event of nonperformance by the other party to the transaction where the value of any collateral held is not adequate to cover such losses. The recognition in earnings of unrealized gains on these transactions is subject to management’s assessment as to collectability. Liquidity risk is the potential exposure that arises when the size of the derivative position may not be able to be rapidly adjusted at a reasonable cost in periods of high volatility and financial stress.

Derivative transactions are customarily documented under industry standard master agreements and credit support annexes, which provide that following an uncured payment default or other event of default the non-defaulting party may promptly terminate all transactions between the parties and determine a net amount due to be paid to, or by, the defaulting party. Events of default generally include: (i) failure to make a payment on a derivatives transaction (which remains uncured following applicable notice and grace periods), (ii) breach of a covenant (which remains uncured after applicable notice and grace periods), (iii) breach of a representation, (iv) cross default, either to third-party debt or to another derivatives transaction entered into among the parties, or, in some cases, their affiliates, (v) the occurrence of a merger or consolidation which results in a party’s becoming a materially weaker credit, and (vi) the cessation or repudiation of any applicable guarantee or other credit support document. An event of default may also occur under a credit support annex if a party fails to make a collateral delivery (which remains uncured following applicable notice and grace periods).

The enforceability of offsetting rights incorporated in the master netting agreements for derivative transactions is evidenced to the extent that a supportive legal opinion has been obtained from counsel of recognized standing that provides the requisite level of certainty regarding the enforceability of these agreements and that the exercise of rights by the non-defaulting party to terminate and close-out transactions on a net basis under these agreements will not be stayed or avoided under applicable law upon an event of default including bankruptcy, insolvency or similar proceeding.

A legal opinion may not have been sought or obtained for certain jurisdictions where local law is silent or sufficiently ambiguous to determine the enforceability of offsetting 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 for a particular counterparty type may be nonexistent or

unclear as overlapping regimes may exist. 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 impacted by market volatility, which may impair the ability of clients 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. For example, because derivatives executed under master netting agreements where Citi does not have the requisite level of legal certainty regarding enforceability, consume much greater amounts of single counterparty credit limits, than those executed under enforceable master netting agreements, 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.

Cash collateral and security collateral in the form of G10 government debt securities generally is posted to secure the net open exposure of derivative transactions, at a counterparty level, whereby 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 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 the volume of derivative activity is provided in the table below. The notional amounts, for both long and short derivative positions, of Citigroup’s derivative instruments as of September 30, 2014 and December 31, 2013 are presented in the table below.

Derivative Notionals



	Hedging instruments under ASC 815⁽¹⁾⁽²⁾				Other derivative instruments
					Trading derivatives				Management hedges⁽³⁾
In millions of dollars	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
Interest rate contracts
Swaps	$	172,774	$	132,823	$	34,796,574	$	36,370,196	$	68,093	$	93,286
Futures and forwards	—		20		6,579,341		6,129,742		38,233		61,398
Written options	—		—		3,349,604		3,342,832		4,132		3,103
Purchased options	—		—		3,278,606		3,240,990		4,560		3,185
Total interest rate contract notionals	$	172,774	$	132,843	$	48,004,125	$	49,083,760	$	115,018	$	160,972
Foreign exchange contracts
Swaps	$	25,923	$	22,402	$	4,405,719	$	3,298,500	$	24,214	$	20,013
Futures and forwards	75,176		79,646		2,240,032		1,982,303		10,819		14,226
Written options	238		101		1,573,970		1,037,433		—		—
Purchased options	238		106		1,593,341		1,029,872		—		71
Total foreign exchange contract notionals	$	101,575	$	102,255	$	9,813,062	$	7,348,108	$	35,033	$	34,310
Equity contracts
Swaps	$	—	$	—	$	122,190	$	100,019	$	—	$	—
Futures and forwards	—		—		26,459		23,161		—		—
Written options	—		—		374,468		333,945		—		—
Purchased options	—		—		332,799		266,570		—		—
Total equity contract notionals	$	—	$	—	$	855,916	$	723,695	$	—	$	—
Commodity and other contracts
Swaps	$	—	$	—	$	161,538	$	81,112	$	—	$	—
Futures and forwards	1,201		—		105,036		98,265		—		—
Written options	—		—		117,188		100,482		—		—
Purchased options	—		—		111,742		97,626		—		—
Total commodity and other contract notionals	$	1,201	$	—	$	495,504	$	377,485	$	—	$	—
Credit derivatives⁽⁴⁾
Protection sold	$	—	$	—	$	1,161,986	$	1,143,363	$	—	$	—
Protection purchased	—		95		1,201,251		1,195,223		15,428		19,744
Total credit derivatives	$	—	$	95	$	2,363,237	$	2,338,586	$	15,428	$	19,744
Total derivative notionals	$	275,550	$	235,193	$	61,531,844	$	59,871,634	$	165,479	$	215,026


(1)	The notional amounts presented in this table do not include hedge accounting relationships under ASC 815 where Citigroup is hedging the foreign currency risk of a net investment in a foreign operation by issuing a foreign-currency-denominated debt instrument. The notional amount of such debt was $4,198 million and $6,450 million at September 30, 2014 and December 31, 2013, respectively.


(2)	Derivatives in hedge accounting relationships accounted for under ASC 815 are recorded in either Other assets/Other liabilities or Trading account assets/Trading account liabilities on the Consolidated Balance Sheet.


(3)	Management hedges represent derivative instruments used in certain economic hedging relationships that are identified for management purposes, but for which hedge accounting is not applied. These derivatives are recorded in either Other assets/Other liabilities or Trading account assets/Trading account liabilities on the Consolidated Balance Sheet.

(4)

Credit derivatives are arrangements designed to allow one party (protection buyer) to transfer the credit risk of a “reference asset” to another party (protection seller). These arrangements allow a protection seller to assume the credit risk associated with the reference asset without directly purchasing that asset. The Company has entered into credit derivative positions for purposes such as risk management, yield enhancement, reduction of credit concentrations and diversification of overall risk.

The following tables present the gross and net fair values of the Company’s derivative transactions, and the related offsetting amount permitted under ASC 210-20-45 and ASC 815-10-45, as of September 30, 2014 and December 31, 2013. Under ASC 210-20-45, gross positive fair values are offset against gross negative fair values by counterparty pursuant to enforceable master netting agreements. Under ASC 815-10-45, payables and receivables in respect of cash collateral received from or paid to a given counterparty pursuant to an enforceable credit support annex are included in the offsetting amount. U.S. GAAP does not permit offsetting for security collateral posted. The table also includes amounts that are not permitted to be offset under ASC 210-20-45 and ASC 815-10-45, such as security collateral posted or cash collateral posted at third-party custodians, but would be eligible for offsetting to the extent an event of default occurred and a legal opinion supporting enforceability of the offsetting rights has been obtained.

Derivative Mark-to-Market (MTM) Receivables/Payables



In millions of dollars at September 30, 2014	Derivatives classified in Trading account assets / liabilities^(1)(2)(3)						Derivatives classified in Other assets / liabilities⁽²⁾⁽³⁾
Derivatives instruments designated as ASC 815 hedges	Assets			Liabilities			Assets			Liabilities
Over-the-counter	$	1,159		$	189		$	3,021		$	342
Cleared	2,791			623			1			—
Interest rate contracts	$	3,950		$	812		$	3,022		$	342
Over-the-counter	$	1,892		$	570		$	756		$	707
Foreign exchange contracts	$	1,892		$	570		$	756		$	707
Total derivative instruments designated as ASC 815 hedges	$	5,842		$	1,382		$	3,778		$	1,049
Derivatives instruments not designated as ASC 815 hedges
Over-the-counter	$	332,157		$	314,791		$	39		$	1
Cleared	212,808			218,472			8			7
Exchange traded	52			27			719			816
Interest rate contracts	$	545,017		$	533,290		$	766		$	824
Over-the-counter	$	139,883		$	140,359		$	—		$	17
Cleared	759			713			—			—
Exchange traded	8			21			—			—
Foreign exchange contracts	$	140,650		$	141,093		$	—		$	17
Over-the-counter	$	17,899		$	32,629		$	—		$	—
Cleared	205			403			—			—
Exchange traded	7,136			2,409			—			—
Equity contracts	$	25,240		$	35,441		$	—		$	—
Over-the-counter	$	11,392		$	12,581		$	—		$	—
Exchange traded	668			754			—			—
Commodity and other contracts	$	12,060		$	13,335		$	—		$	—
Over-the-counter	$	37,541		$	37,535		$	118		$	403
Cleared	3,290			3,365			5			140
Credit derivatives⁽⁴⁾	$	40,831		$	40,900		$	123		$	543
Total derivatives instruments not designated as ASC 815 hedges	$	763,798		$	764,059		$	889		$	1,384
Total derivatives	$	769,640		$	765,441		$	4,667		$	2,433
Cash collateral paid/received⁽⁵⁾⁽⁶⁾	$	3,258		$	11,828		$	197		$	292
Less: Netting agreements⁽⁷⁾	(674,769		)	(674,769		)	—			—
Less: Netting cash collateral received/paid⁽⁸⁾	(40,435		)	(43,789		)	(2,297		)	—
Net receivables/payables included on the Consolidated Balance Sheet⁽⁹⁾	$	57,694		$	58,711		$	2,567		$	2,725
Additional amounts subject to an enforceable master netting agreement but not offset on the Consolidated Balance Sheet
Less: Cash collateral received/paid	$	(578	)	$	(14	)	$	—		$	—
Less: Non-cash collateral received/paid	(9,350		)	(5,663		)	(997		)	—
Total Net receivables/payables⁽⁹⁾	$	47,766		$	53,034		$	1,570		$	2,725


(1)	The trading derivatives fair values are presented in Note 12 to the Consolidated Financial Statements.


(2)	Derivative mark-to-market receivables/payables related to management hedges are recorded in either Other assets/Other liabilities or Trading account assets/Trading account liabilities.

(3)

Over-the-counter (OTC) derivatives include derivatives executed and settled bilaterally with counterparties without the use of an organized exchange or central clearing house. Cleared derivatives include derivatives executed bilaterally with a counterparty in the OTC market but then novated to a central clearing house, whereby the central clearing house becomes the counterparty to both of the original counterparties. Exchange traded derivatives include derivatives executed directly on an organized exchange that provides pre-trade price transparency.


(4)	The credit derivatives trading assets comprise $14,398 million related to protection purchased and $26,433 million related to protection sold as of September 30, 2014. The credit derivatives trading liabilities comprise $27,629 million related to protection purchased and $13,271 million related to protection sold as of September 30, 2014.


(5)	For the trading assets/liabilities, this is the net amount of the $47,047 million and $52,263 million of gross cash collateral paid and received, respectively. Of the gross cash collateral paid, $43,789 million was used to offset trading derivative liabilities and, of the gross cash collateral received, $40,435 million was used to offset trading derivative assets.


(6)	For cash collateral received with respect to non-trading derivative liabilities, this is the net amount of $2,589 million of the gross cash collateral received, of which $2,297 million is netted against OTC non-trading derivative positions within Other assets.


(7)	Represents the netting of derivative receivable and payable balances for the same counterparty under enforceable netting agreements. Approximately $453 billion, $220 billion and $2 billion of the netting against trading account asset/liability balances is attributable to each of the OTC, cleared and exchange traded derivatives, respectively.


(8)	Represents the netting of cash collateral paid and received by counterparty under enforceable credit support agreements. Substantially all cash collateral received is netted against OTC derivative assets. Cash collateral paid of approximately $40 billion and $4 billion is netted against each of the OTC and cleared derivative liabilities, respectively.


(9)	The net receivables/payables include approximately $14 billion and $12 billion of derivative asset and liability fair values as of September 30, 2014, respectively, not subject to enforceable master netting agreements.



In millions of dollars at December 31, 2013	Derivatives classified in Trading account assets / liabilities^(1)(2)(3)						Derivatives classified in Other assets / liabilities⁽²⁾⁽³⁾
Derivatives instruments designated as ASC 815 hedges	Assets			Liabilities			Assets			Liabilities
Over-the-counter	$	956		$	306		$	3,082		$	854
Cleared	2,505			585			5			—
Interest Rate contracts	$	3,461		$	891		$	3,087		$	854
Over-the-counter	$	1,540		$	1,244		$	989		$	293
Foreign exchange contracts	$	1,540		$	1,244		$	989		$	293
Over-the-counter	$	—		$	—		$	—		$	2
Credit derivatives	$	—		$	—		$	—		$	2
Total derivative instruments designated as ASC 815 hedges	$	5,001		$	2,135		$	4,076		$	1,149
Derivatives instruments not designated as ASC 815 hedges
Over-the-counter	$	313,772		$	297,115		$	37		$	9
Cleared	311,114			319,190			27			5
Exchange traded	33			30			—			—
Interest Rate contracts	$	624,919		$	616,335		$	64		$	14
Over-the-counter	$	89,847		$	86,147		$	79		$	3
Cleared	1,119			1,191			—			—
Exchange traded	48			55			—			—
Foreign exchange contracts	$	91,014		$	87,393		$	79		$	3
Over-the-counter	$	19,080		$	28,458		$	—		$	—
Exchange traded	5,797			5,834			—			—
Equity contracts	$	24,877		$	34,292		$	—		$	—
Over-the-counter	$	7,921		$	9,059		$	—		$	—
Exchange traded	1,161			1,111			—			—
Commodity and other Contracts	$	9,082		$	10,170		$	—		$	—
Over-the-counter	$	38,496		$	38,247		$	71		$	563
Cleared	1,850			2,547			—			—
Credit derivatives⁽⁴⁾	$	40,346		$	40,794		$	71		$	563
Total Derivatives instruments not designated as ASC 815 hedges	$	790,238		$	788,984		$	214		$	580
Total derivatives	$	795,239		$	791,119		$	4,290		$	1,729
Cash collateral paid/received⁽⁵⁾⁽⁶⁾	$	6,073		$	8,827		$	82		$	282
Less: Netting agreements⁽⁷⁾	(713,598		)	(713,598		)	—			—
Less: Netting cash collateral received/paid⁽⁸⁾	(34,893		)	(39,094		)	(2,951		)	—
Net receivables/payables included on the Consolidated Balance Sheet⁽⁹⁾	$	52,821		$	47,254		$	1,421		$	2,011
Additional amounts subject to an enforceable master netting agreement but not offset on the Consolidated Balance Sheet
Less: Cash collateral received/paid	$	(365	)	$	(5	)	$	—		$	—
Less: Non-cash collateral received/paid	(7,478		)	(3,345		)	(341		)	—
Total Net receivables/payables⁽⁹⁾	$	44,978		$	43,904		$	1,080		$	2,011


(1)	The trading derivatives fair values are presented in Note 12 to the Consolidated Financial Statements.


(2)	Derivative mark-to-market receivables/payables related to management hedges are recorded in either Other assets/Other liabilities or Trading account assets/Trading account liabilities.

(3)


(4)	The credit derivatives trading assets comprise $13,673 million related to protection purchased and $26,673 million related to protection sold as of December 31, 2013. The credit derivatives trading liabilities comprise $28,158 million related to protection purchased and $12,636 million related to protection sold as of December 31, 2013.


(5)	For the trading assets/liabilities, this is the net amount of the $45,167 million and $43,720 million of gross cash collateral paid and received, respectively. Of the gross cash collateral paid, $39,094 million was used to offset derivative liabilities and, of the gross cash collateral received, $34,893 million was used to offset derivative assets.


(6)	For cash collateral received with respect to non-trading derivative liabilities, this is the net amount of $3,233 million of gross cash collateral received of which $2,951 million is netted against non-trading derivative positions within other assets.


(7)	Represents the netting of derivative receivable and payable balances for the same counterparty under enforceable netting agreements. Approximately $392 billion, $317 billion and $5 billion of the netting against trading account asset/liability balances is attributable to each of the OTC, cleared and exchange-traded derivatives, respectively.


(8)	Represents the netting of cash collateral paid and received by counterparty under enforceable credit support agreements. Substantially all cash collateral received is netted against OTC derivative assets. Cash collateral paid of approximately $33 billion and $6 billion is netted against OTC and cleared derivative liabilities, respectively.


(9)	The net receivables/payables include approximately $16 billion of both derivative asset and liability fair values not subject to enforceable master netting agreements.

The amounts recognized in Principal transactions in the Consolidated Statement of Income for the three and nine months ended September 30, 2014 and 2013 related to derivatives not designated in a qualifying hedging relationship as well as the underlying non-derivative instruments are presented in Note 6 to the Consolidated Financial Statements. Citigroup presents this disclosure by business classification, showing derivative gains and losses related to its trading activities together with gains and losses related to non-derivative instruments within the same trading portfolios, as this represents the way these portfolios are risk managed.

The amounts recognized in Other revenue in the Consolidated Statement of Income for the three and nine months ended September 30, 2014 and 2013 related to derivatives not designated in a qualifying hedging relationship are shown below. The table below does not include the offsetting gains/losses on the economically hedged items to the extent such amounts are also recorded in Other revenue.



	Gains (losses) included in Other revenue
	Three Months Ended September 30,						Nine months ended September 30,
In millions of dollars	2014			2013			2014			2013
Interest rate contracts	$	25		$	5		$	146		$	(245	)
Foreign exchange	(1,812		)	867			(1,772		)	(35		)
Credit derivatives	37			(196		)	(191		)	(367		)
Total Citigroup	$	(1,750	)	$	676		$	(1,817	)	$	(647	)

Accounting for Derivative Hedging

Citigroup accounts for its hedging activities in accordance with ASC 815, Derivatives and Hedging. As a general rule, hedge accounting is permitted where the Company is exposed to a particular risk, such as interest-rate or foreign-exchange risk, that causes changes in the fair value of an asset or liability or variability in the expected future cash flows of an existing asset, liability or a forecasted transaction that may affect earnings.

Derivative contracts hedging the risks associated with changes in fair value are referred to as fair value hedges, while contracts hedging the variability of expected future cash flows are called cash flow hedges. Hedges that utilize derivatives or debt instruments to manage the foreign exchange risk associated with equity investments in non-U.S.-dollar-functional-currency foreign subsidiaries (net investment in a foreign operation) are called net investment hedges.

If certain hedging criteria specified in ASC 815 are met, including testing for hedge effectiveness, special hedge accounting may be applied. The hedge effectiveness assessment methodologies for similar hedges are performed in a similar manner and are used consistently throughout the hedging relationships. For fair value hedges, changes in the value of the hedging derivative, as well as changes in the value of the related hedged item due to the risk being hedged are reflected in current earnings. For cash flow hedges and net investment hedges, changes in the value of the hedging derivative are reflected in Accumulated other comprehensive income (loss) in Citigroup’s stockholders’ equity to the extent the hedge is effective. Hedge ineffectiveness, in either case, is reflected in current earnings.

For asset/liability management hedging, fixed-rate long-term debt is recorded at amortized cost under current GAAP. However, by designating an interest rate contract as a hedging instrument and electing to apply ASC 815 fair value hedge accounting, the carrying value of the debt is adjusted for changes in the benchmark interest rate, with such changes in value recorded in current earnings. The related interest-rate swap also is recorded on the balance sheet at fair value, with any changes in fair value reflected in earnings. Thus, any ineffectiveness resulting from the hedging relationship is captured in current earnings. Alternatively, a management hedge, which does not meet the ASC 815 hedging criteria, would allow recording only the derivative at fair value on the balance sheet, with its associated changes in fair value recorded in earnings, while the debt would continue to be carried at amortized cost. Therefore, current earnings would be impacted only by the interest rate shifts and other factors that cause a change in the swap’s value. This type of hedge is undertaken when hedging requirements cannot be achieved or management decides not to apply ASC 815 hedge accounting. Another alternative for the Company is to elect to carry the debt at fair value under the fair value option. Once the irrevocable election is made upon issuance of the debt, the full change in fair value of the debt would be reported in earnings. The related interest rate swap, with changes in fair value, would also be reflected in earnings, and provides a natural offset to the debt’s fair value change. To the extent the two

offsets are not exactly equal because the full change in the fair value of the debt includes risks not offset by the interest rate swap, the difference is captured in current earnings.

Key aspects of achieving ASC 815 hedge accounting are documentation of a hedging strategy and specific hedge relationships at hedge inception and substantiating hedge effectiveness on an ongoing basis. A derivative must be highly effective in accomplishing the hedge objective of offsetting either changes in the fair value or cash flows of the hedged item for the risk being hedged. Any ineffectiveness in the hedge relationship is recognized in current earnings. The assessment of effectiveness excludes changes in the value of the hedged item that are unrelated to the risks being hedged. Similarly, the assessment of effectiveness may exclude changes in the fair value of a derivative related to time value that, if excluded, are recognized in current earnings.

Fair Value Hedges

Hedging of benchmark interest rate risk

Citigroup hedges exposure to changes in the fair value of outstanding fixed-rate issued debt and certificates of deposit. These types of hedges are designated as fair value hedges of the benchmark interest rate risk associated with the benchmark interest rate commensurate with the currency of the hedged liability. The fixed cash flows of the hedged item are converted to benchmark variable-rate cash flows by entering into receive-fixed, pay-variable interest rate swaps. These fair value hedge relationships use either regression or dollar-offset ratio analysis to determine whether the hedging relationships are highly effective at inception and on an ongoing basis.

Citigroup also hedges exposure to changes in the fair value of fixed-rate assets, including available-for-sale debt securities and loans. The hedging instruments used are receive-variable, pay-fixed interest rate swaps. These fair value hedging relationships use either regression or dollar-offset ratio analysis to determine whether the hedging relationships are highly effective at inception and on an ongoing basis.

Hedging of foreign exchange risk

Citigroup hedges the change in fair value attributable to foreign-exchange rate movements in available-for-sale securities that are denominated in currencies other than the functional currency of the entity holding the securities, which may be within or outside the U.S. The hedging instrument employed is generally a forward foreign-exchange contract. In this type of hedge, the change in fair value of the hedged available-for-sale security attributable to the portion of foreign exchange risk hedged is reported in earnings and not Accumulated other comprehensive income—a process that serves to offset substantially the change in fair value of the forward contract that is also reflected in earnings. Citigroup considers the premium associated with forward contracts (i.e., the differential between spot and contractual forward rates) as the cost of hedging; this is excluded from the assessment of hedge effectiveness and reflected directly in earnings. The dollar-offset method is used to assess hedge effectiveness. Since that assessment is based on changes in fair value attributable to changes in spot rates on both the available-for-sale securities and the forward contracts for the portion of the relationship hedged, the amount of hedge ineffectiveness is not significant.

The following table summarizes the gains (losses) on the Company’s fair value hedges for the three and nine months ended September 30, 2014 and 2013:



	Gains (losses) on fair value hedges⁽¹⁾
	Three Months Ended September 30,						Nine months ended September 30,
In millions of dollars	2014			2013			2014			2013
Gain (loss) on the derivatives in designated and qualifying fair value hedges
Interest rate contracts	$	(330	)	$	(97	)	$	278		$	(2,588	)
Foreign exchange contracts	780			343			1,110			90
Commodity contracts	47			—			(56		)	—
Total gain (loss) on the derivatives in designated and qualifying fair value hedges	$	497		$	246		$	1,332		$	(2,498	)
Gain (loss) on the hedged item in designated and qualifying fair value hedges
Interest rate hedges	$	371		$	51		$	(283	)	$	2,519
Foreign exchange hedges	(789		)	(296		)	(1,157		)	6
Commodity hedges	(20		)	—			86			—
Total gain (loss) on the hedged item in designated and qualifying fair value hedges	$	(438	)	$	(245	)	$	(1,354	)	$	2,525
Hedge ineffectiveness recognized in earnings on designated and qualifying fair value hedges
Interest rate hedges	$	44		$	(46	)	$	(2	)	$	(69	)
Foreign exchange hedges	(11		)	2			(11		)	(4		)
Total hedge ineffectiveness recognized in earnings on designated and qualifying fair value hedges	$	33		$	(44	)	$	(13	)	$	(73	)
Net gain (loss) excluded from assessment of the effectiveness of fair value hedges
Interest rate contracts	$	(3	)	$	—		$	(3	)	$	—
Foreign exchange contracts⁽²⁾	2			45			(36		)	100
Commodity hedges⁽²⁾	27			—			30			—
Total net gain (loss) excluded from assessment of the effectiveness of fair value hedges	$	26		$	45		$	(9	)	$	100


(1)	Amounts are included in Other revenue on the Consolidated Statement of Income. The accrued interest income on fair value hedges is recorded in Net interest revenue and is excluded from this table.


(2)	Amounts relate to the premium associated with forward contracts (differential between spot and contractual forward rates). These amounts are excluded from the assessment of hedge effectiveness and are reflected directly in earnings.

Cash Flow Hedges

Hedging of benchmark interest rate risk

Citigroup hedges variable cash flows associated with floating-rate liabilities and the rollover (re-issuance) of liabilities. Variable cash flows from those liabilities are converted to fixed-rate cash flows by entering into receive-variable, pay-fixed interest rate swaps and receive-variable, pay-fixed forward-starting interest rate swaps. Citi also hedges variable cash flows from recognized and forecasted floating-rate assets. Variable cash flows from those assets are converted to fixed-rate cash flows by entering into receive-fixed, pay-variable interest rate swaps. These cash-flow hedging relationships use either regression analysis or dollar-offset ratio analysis to assess whether the hedging relationships are highly effective at inception and on an ongoing basis. When certain interest rates do not qualify as a benchmark interest rate, Citigroup designates the risk being hedged as the risk of overall changes in the hedged cash flows. Since efforts are made to match the terms of the derivatives to those of the hedged forecasted cash flows as closely as possible, the amount of hedge ineffectiveness is not significant.

Hedging of foreign exchange risk

Citigroup locks in the functional currency equivalent cash flows of long-term debt and short-term borrowings that are denominated in currencies other than the functional currency of the issuing entity. Depending on the risk management objectives, these types of hedges are designated as either cash flow hedges of only foreign exchange risk or cash flow hedges of both foreign exchange and interest rate risk, and the hedging instruments used are foreign exchange cross-currency swaps and forward contracts. These cash flow hedge relationships use dollar-offset ratio analysis to determine whether the hedging relationships are highly effective at inception and on an ongoing basis.

Hedging of overall changes in cash flows

Citigroup hedges the overall exposure to variability in cash flows related to the future acquisition of mortgage-backed securities using “to be announced” forward contracts. Since

the hedged transaction is the gross settlement of the forward contract, the assessment of hedge effectiveness is based on assuring that the terms of the hedging instrument and the hedged forecasted transaction are the same.

Hedging total return

Citigroup generally manages the risk associated with leveraged loans it has originated or in which it participates by transferring a majority of its exposure to the market through SPEs prior to or shortly after funding. Retained exposures to

leveraged loans receivable are generally hedged using total return swaps.

The amount of hedge ineffectiveness on the cash flow hedges recognized in earnings for the three and nine months ended September 30, 2014 and 2013 is not significant. The pretax change in Accumulated other comprehensive income (loss) from cash flow hedges is presented below:



	Three Months Ended September 30,						Nine months ended September 30,
In millions of dollars	2014			2013			2014			2013
Effective portion of cash flow hedges included in AOCI
Interest rate contracts	$	(70	)	$	230		$	153		$	748
Foreign exchange contracts	1			34			(56		)	37
Credit derivatives	—			1			2			14
Total effective portion of cash flow hedges included in AOCI	$	(69	)	$	265		$	99		$	799
Effective portion of cash flow hedges reclassified from AOCI to earnings
Interest rate contracts	$	(84	)	$	(211	)	$	(218	)	$	(596	)
Foreign exchange contracts	(30		)	(38		)	(114		)	(124		)
Total effective portion of cash flow hedges reclassified from AOCI to earnings⁽¹⁾	$	(114	)	$	(249	)	$	(332	)	$	(720	)


(1)	Included primarily in Other revenue and Net interest revenue on the Consolidated Income Statement.

For cash flow hedges, any changes in the fair value of the end-user derivative remaining in Accumulated other comprehensive income (loss) on the Consolidated Balance Sheet will be included in earnings of future periods to offset the variability of the hedged cash flows when such cash flows affect earnings. The net loss associated with cash flow hedges expected to be reclassified from Accumulated other comprehensive income (loss) within 12 months of September 30, 2014 is approximately $0.3 billion. The maximum length of time over which forecasted cash flows are hedged is 10 years.

The after-tax impact of cash flow hedges on AOCI is shown in Note 18 to the Consolidated Financial Statements.

Net Investment Hedges

Consistent with ASC 830-20, Foreign Currency Matters—Foreign Currency Transactions, ASC 815 allows hedging of the foreign currency risk of a net investment in a foreign operation. Citigroup uses foreign currency forwards, options and foreign-currency-denominated debt instruments to manage the foreign exchange risk associated with Citigroup’s equity investments in several non-U.S.-dollar-functional-currency foreign subsidiaries. Citigroup records the change in the carrying amount of these investments in the Foreign currency translation adjustment account within Accumulated other comprehensive income (loss). Simultaneously, the effective portion of the hedge of this exposure is also recorded in the Foreign currency translation adjustment account and the ineffective portion, if any, is immediately recorded in earnings.

For derivatives designated as net investment hedges, Citigroup follows the forward-rate method outlined in ASC 815-35-35-16 through 35-26. According to that method, all changes in fair value, including changes related to the forward-rate component of the foreign currency forward contracts and the time value of foreign currency options, are recorded in the Foreign currency translation adjustment account within Accumulated other comprehensive income (loss).

For foreign-currency-denominated debt instruments that are designated as hedges of net investments, the translation gain or loss that is recorded in the Foreign currency translation adjustment account is based on the spot exchange rate between the functional currency of the respective subsidiary and the U.S. dollar, which is the functional currency of Citigroup. To the extent the notional amount of the hedging instrument exactly matches the hedged net investment and the underlying exchange rate of the derivative hedging instrument relates to the exchange rate between the functional currency of the net investment and Citigroup’s functional currency (or, in the case of a non-derivative debt instrument, such instrument is denominated in the functional currency of the net investment), no ineffectiveness is recorded in earnings.

The pretax gain (loss) recorded in the Foreign currency translation adjustment account within Accumulated other comprehensive income (loss), related to the effective portion of the net investment hedges, is $2,020 million and $402 million for the three and nine months ended September 30, 2014, respectively and $(534) million and $1,788 million for the three and nine months ended September 30, 2013, respectively.

Credit Derivatives

A credit derivative is a bilateral contract between a buyer and a seller under which the seller agrees to provide protection to the buyer against the credit risk of a particular entity (“reference entity” or “reference credit”). Credit derivatives generally require that the seller of credit protection make payments to the buyer upon the occurrence of predefined credit events (commonly referred to as “settlement triggers”). These settlement triggers are defined by the form of the derivative and the reference credit and are generally limited to the market standard of failure to pay on indebtedness and bankruptcy of the reference credit and, in a more limited range of transactions, debt restructuring. Credit derivative

transactions referring to emerging market reference credits will also typically include additional settlement triggers to cover the acceleration of indebtedness and the risk of repudiation or a payment moratorium. In certain transactions, protection may be provided on a portfolio of reference credits or asset-backed securities. The seller of such protection may not be required to make payment until a specified amount of losses has occurred with respect to the portfolio and/or may only be required to pay for losses up to a specified amount.

The Company is a market maker and trades a range of credit derivatives. Through these contracts, the Company either purchases or writes protection on either a single name or a portfolio of reference credits. The Company also uses credit derivatives to help mitigate credit risk in its corporate and consumer loan portfolios and other cash positions, and to facilitate client transactions.

The range of credit derivatives sold includes credit default swaps, total return swaps, credit options and credit-linked notes.

A credit default swap is a contract in which, for a fee, a protection seller agrees to reimburse a protection buyer for any losses that occur due to a credit event on a reference entity. If there is no credit default event or settlement trigger, as defined by the specific derivative contract, then the protection seller makes no payments to the protection buyer and receives only the contractually specified fee. However, if a credit event occurs as defined in the specific derivative contract sold, the protection seller will be required to make a payment to the protection buyer.

A total return swap transfers the total economic performance of a reference asset, which includes all associated cash flows, as well as capital appreciation or depreciation. The protection buyer receives a floating rate of interest and any depreciation on the reference asset from the protection seller and, in return, the protection seller receives the cash flows associated with the reference asset plus any appreciation. Thus, according to the total return swap agreement, the protection seller will be obligated to make a payment any time the floating interest rate payment and any depreciation of the reference asset exceed the cash flows associated with the underlying asset. A total return swap may terminate upon a default of the reference asset subject to the provisions of the related total return swap agreement between the protection seller and the protection buyer.

A credit option is a credit derivative that allows investors to trade or hedge changes in the credit quality of the reference asset. For example, in a credit spread option, the option writer assumes the obligation to purchase or sell the reference asset at a specified “strike” spread level. The option purchaser buys the right to sell the reference asset to, or purchase it from, the option writer at the strike spread level. The payments on credit spread options depend either on a particular credit spread or the price of the underlying credit-sensitive asset. The options usually terminate if the underlying assets default.

A credit-linked note is a form of credit derivative structured as a debt security with an embedded credit default swap. The purchaser of the note writes credit protection to the issuer and receives a return that could be negatively affected by credit events on the underlying reference credit. If the reference entity defaults, the purchaser of the credit-linked note may assume the long position in the debt security and any future cash flows from it but will lose the amount paid to the issuer of the credit-linked note. Thus, the maximum amount of the exposure is the carrying amount of the credit-linked note. As of September 30, 2014 and December 31, 2013, the amount of credit-linked notes held by the Company in trading inventory was immaterial.

The following tables summarize the key characteristics of the Company’s credit derivative portfolio as protection seller as of September 30, 2014 and December 31, 2013:



In millions of dollars at September 30, 2014	Maximum potential amount of future payments		Fair value payable⁽¹⁾⁽²⁾
By industry/counterparty
Bank	$	668,108	$	7,250
Broker-dealer	213,263		3,558
Non-financial	5,720		85
Insurance and other financial institutions	274,895		2,378
Total by industry/counterparty	$	1,161,986	$	13,271
By instrument
Credit default swaps and options	$	1,155,278	$	13,101
Total return swaps and other	6,708		170
Total by instrument	$	1,161,986	$	13,271
By rating
Investment grade	$	867,548	$	2,598
Non-investment grade	294,438		10,673
Total by rating	$	1,161,986	$	13,271
By maturity
Within 1 year	$	249,306	$	1,271
From 1 to 5 years	842,025		8,761
After 5 years	70,655		3,239
Total by maturity	$	1,161,986	$	13,271


(1)	In addition, fair value amounts payable under credit derivatives purchased were $28,172 million.


(2)	In addition, fair value amounts receivable under credit derivatives sold were $26,433 million.



In millions of dollars at December 31, 2013	Maximum potential amount of future payments		Fair value payable⁽¹⁾⁽²⁾
By industry/counterparty
Bank	$	727,748	$	6,520
Broker-dealer	224,073		4,001
Non-financial	2,820		56
Insurance and other financial institutions	188,722		2,059
Total by industry/counterparty	$	1,143,363	$	12,636
By instrument
Credit default swaps and options	$	1,141,864	$	12,607
Total return swaps and other	1,499		29
Total by instrument	$	1,143,363	$	12,636
By rating
Investment grade	$	752,640	$	3,242
Non-investment grade	390,723		9,394
Total by rating	$	1,143,363	$	12,636
By maturity
Within 1 year	$	221,562	$	858
From 1 to 5 years	853,391		7,492
After 5 years	68,410		4,286
Total by maturity	$	1,143,363	$	12,636


(1)	In addition, fair value amounts payable under credit derivatives purchased were $28,723 million.


(2)	In addition, fair value amounts receivable under credit derivatives sold were $26,673 million.

Citigroup evaluates the payment/performance risk of the credit derivatives for which it stands as a protection seller based on the credit rating assigned to the underlying referenced credit. Where external ratings by nationally recognized statistical rating organizations (such as Moody’s and S&P) are used, investment grade ratings are considered to be Baa/BBB or above, while anything below is considered non-investment grade. The Citigroup internal ratings are in line with the related external credit rating system. Credit derivatives written on an underlying non-investment grade reference credit represent greater payment risk to the Company. The non-investment grade category in the table above also includes credit derivatives where the underlying referenced entity has been downgraded subsequent to the inception of the derivative.

The maximum potential amount of future payments under credit derivative contracts presented in the table above is based on the notional value of the derivatives. The Company believes that the maximum potential amount of future payments for credit protection sold is not representative of the actual loss exposure based on historical experience. This amount has not been reduced by the Company’s rights to the underlying assets and the related cash flows. In accordance with most credit derivative contracts, should a credit event (or settlement trigger) occur, the Company usually is liable for the difference between the protection sold and the recourse it holds in the value of the underlying assets. Thus, if the reference entity defaults, Citi will have a right to collect on the underlying reference credit and any related cash flows, while being liable for the full notional amount of credit protection sold to the buyer. Furthermore, this maximum potential amount of future payments for credit protection sold has not been reduced for any cash collateral paid to a given counterparty, as such payments would be calculated after netting all derivative exposures, including any credit derivatives with that counterparty in accordance with a related master netting agreement. Due to such netting processes, determining the amount of collateral that corresponds to credit derivative exposures alone is not possible. The Company actively monitors open credit-risk exposures and manages this exposure by using a variety of strategies, including purchased credit derivatives, cash collateral or direct holdings of the referenced assets. This risk mitigation activity is not captured in the table above.

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 credit-risk-related event. 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 are in a net liability position at September 30, 2014 and December 31, 2013 was $28 billion and $26 billion, respectively. The Company has posted $25 billion and $24 billion as collateral for this exposure in the normal course of business as of September 30, 2014 and December 31, 2013, respectively.

Each downgrade would trigger additional collateral or cash settlement requirements for the Company and its affiliates. In the event that each legal entity was downgraded a single notch by the three rating agencies as of September 30, 2014, the Company would be required to post an additional $2.4 billion as either collateral or settlement of the derivative transactions. Additionally, the Company would 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 $2.5 billion.