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 indices or financial instruments, 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.

Swaps and forwards and some option 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 contracts and other option contracts are 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: Citigroup trades derivatives as an active market maker. 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. Citigroup also manages its derivative risk positions through offsetting trade activities, controls focused on price verification, and daily reporting of positions to senior managers.

•

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 net 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 of the probability of counterparty default. Liquidity risk is the potential exposure that arises when the size of a derivative position may not be able to be monetized in a reasonable period of time and at a reasonable cost in periods of high volatility and financial stress.

Derivative transactions are customarily documented under industry standard master agreements that 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 the net amount due to be paid to, or by, the defaulting party. Events of default include: (i) failure to make a payment on a derivatives transaction that remains uncured following applicable notice and grace periods, (ii) breach of agreement that remains uncured after applicable notice and grace periods, (iii) breach of a representation, (iv) cross default, either to third-party debt or to other derivative transactions entered into between 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. Obligations under master netting agreements are often secured by collateral posted under an industry standard credit support annex to the master netting agreement. An event of default may also occur under a credit support annex if a party fails to make a collateral delivery that remains uncured following applicable notice and grace periods.

The netting and collateral rights incorporated in the master netting agreements are considered to be legally enforceable if a supportive legal opinion has been obtained from counsel of recognized standing that provides the requisite level of certainty regarding enforceability 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 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, as of September 30, 2015 and December 31, 2014, 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 minimus 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.

Derivative Notionals



	Hedging instruments under ASC 815⁽¹⁾⁽²⁾				Other derivative instruments
					Trading derivatives				Management hedges⁽³⁾
In millions of dollars	September 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014
Interest rate contracts
Swaps	$	179,366	$	163,348	$	24,197,468	$	31,906,549	$	31,024	$	31,945
Futures and forwards	—		—		8,385,914		7,044,990		38,226		42,305
Written options	—		—		2,979,791		3,311,751		3,141		3,913
Purchased options	—		—		2,901,225		3,171,056		4,495		4,910
Total interest rate contract notionals	$	179,366	$	163,348	$	38,464,398	$	45,434,346	$	76,886	$	83,073
Foreign exchange contracts
Swaps	$	26,212	$	25,157	$	4,622,283	$	4,567,977	$	23,754	$	23,990
Futures, forwards and spot⁽⁴⁾	65,741		73,219		2,799,499		3,003,295		5,090		7,069
Written options	204		—		1,389,887		1,343,520		—		432
Purchased options	204		—		1,402,117		1,363,382		—		432
Total foreign exchange contract notionals	$	92,361	$	98,376	$	10,213,786	$	10,278,174	$	28,844	$	31,923
Equity contracts
Swaps	$	—	$	—	$	174,378	$	131,344	$	—	$	—
Futures and forwards	—		—		34,718		30,510		—		—
Written options	—		—		406,820		305,627		—		—
Purchased options	—		—		402,736		275,216		—		—
Total equity contract notionals	$	—	$	—	$	1,018,652	$	742,697	$	—	$	—
Commodity and other contracts
Swaps	$	—	$	—	$	74,925	$	90,817	$	—	$	—
Futures and forwards	959		1,089		106,114		106,021		—		—
Written options	—		—		99,148		104,581		—		—
Purchased options	—		—		88,192		95,567		—		—
Total commodity and other contract notionals	$	959	$	1,089	$	368,379	$	396,986	$	—	$	—
Credit derivatives⁽⁵⁾
Protection sold	$	—	$	—	$	1,175,657	$	1,063,858	$	—	$	—
Protection purchased	—		—		1,200,249		1,100,369		22,298		16,018
Total credit derivatives	$	—	$	—	$	2,375,906	$	2,164,227	$	22,298	$	16,018
Total derivative notionals	$	272,686	$	262,813	$	52,441,121	$	59,016,430	$	128,028	$	131,014


(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 $2,608 million and $3,752 million at September 30, 2015 and December 31, 2014, 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 to mitigate certain economic risks, 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)	Foreign exchange notional contracts include spot contract notionals of $830 billion and $849 billion at September 30, 2015 and December 31, 2014, respectively. Previous presentations of foreign exchange derivative notional contracts did not include spot contracts. There was no impact to the Consolidated Financial Statements related to this updated presentation.

(5)

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 enters 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 amounts permitted under ASC 210-20-45 and ASC 815-10-45, as of September 30, 2015 and December 31, 2014. 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 a credit support annex are included in the offsetting amount if a legal opinion supporting enforceability of netting and collateral rights has been obtained. GAAP does not permit similar offsetting for security collateral. The tables also include 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 netting and collateral rights has been obtained.

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



In millions of dollars at September 30, 2015	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	$	4,986		$	265		$	2,506		$	363
Cleared	663			1,165			—			—
Interest rate contracts	$	5,649		$	1,430		$	2,506		$	363
Over-the-counter	$	3,117		$	1,004		$	49		$	710
Foreign exchange contracts	$	3,117		$	1,004		$	49		$	710
Total derivative instruments designated as ASC 815 hedges	$	8,766		$	2,434		$	2,555		$	1,073
Derivatives instruments not designated as ASC 815 hedges
Over-the-counter	$	310,616		$	294,324		$	199		$	—
Cleared	164,984			165,753			316			288
Exchange traded	61			48			—			—
Interest rate contracts	$	475,661		$	460,125		$	515		$	288
Over-the-counter	$	145,276		$	150,609		$	—		$	90
Cleared	157			190			—			—
Exchange traded	36			72			—			—
Foreign exchange contracts	$	145,469		$	150,871		$	—		$	90
Over-the-counter	$	21,769		$	26,394		$	—		$	—
Cleared	13			14			—			—
Exchange traded	5,426			5,361			—			—
Equity contracts	$	27,208		$	31,769		$	—		$	—
Over-the-counter	$	15,404		$	18,451		$	—		$	—
Exchange traded	2,201			3,844			—			—
Commodity and other contracts	$	17,605		$	22,295		$	—		$	—
Over-the-counter	$	32,292		$	31,510		$	744		$	232
Cleared	5,233			5,330			65			247
Credit derivatives⁽⁴⁾	$	37,525		$	36,840		$	809		$	479
Total derivatives instruments not designated as ASC 815 hedges	$	703,468		$	701,900		$	1,324		$	857
Total derivatives	$	712,234		$	704,334		$	3,879		$	1,930
Cash collateral paid/received⁽⁵⁾⁽⁶⁾	$	8,515		$	9,751		$	—		$	30
Less: Netting agreements⁽⁷⁾	(609,402		)	(609,402		)	—			—
Less: Netting cash collateral received/paid⁽⁸⁾	(50,476		)	(42,435		)	(1,737		)	(78		)
Net receivables/payables included on the consolidated balance sheet⁽⁹⁾	$	60,871		$	62,248		$	2,142		$	1,882
Additional amounts subject to an enforceable master netting agreement but not offset on the Consolidated Balance Sheet
Less: Cash collateral received/paid	$	(774	)	$	(2	)	$	—		$	—
Less: Non-cash collateral received/paid	(10,335		)	(5,795		)	(521		)	—
Total net receivables/payables⁽⁹⁾	$	49,762		$	56,451		$	1,621		$	1,882


(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 are 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 $18,102 million related to protection purchased and $19,423 million related to protection sold as of September 30, 2015. The credit derivatives trading liabilities comprise $19,476 million related to protection purchased and $17,364 million related to protection sold as of September 30, 2015.


(5)	For the trading account assets/liabilities, reflects the net amount of the $50,950 million and $60,227 million of gross cash collateral paid and received, respectively. Of the gross cash collateral paid, $42,435 million was used to offset trading derivative liabilities and, of the gross cash collateral received, $50,476 million was used to offset trading derivative assets.

(6)

For cash collateral paid with respect to non-trading derivative liabilities, this is the net amount of $78 million of the gross cash collateral paid, of which $78 million is netted against non-trading derivative positions within Other liabilities. For cash collateral received with respect to non-trading derivative liabilities, reflects the net amount of $1,767 million the gross cash collateral received, of which $1,737 million is netted against OTC non-trading derivative positions within Other assets.


(7)	Represents the netting of derivative receivable and payable balances with the same counterparty under enforceable netting agreements. Approximately $440 billion, $164 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 and paid is netted against OTC derivative assets and liabilities, respectively.


(9)	The net receivables/payables include approximately $12 billion of derivative asset and $11 billion of derivative liability fair values not subject to enforceable master netting agreements, respectively.



In millions of dollars at December 31, 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	$	1,508		$	204		$	3,117		$	414
Cleared	4,300			868			—			25
Interest rate contracts	$	5,808		$	1,072		$	3,117		$	439
Over-the-counter	$	3,885		$	743		$	678		$	588
Foreign exchange contracts	$	3,885		$	743		$	678		$	588
Total derivative instruments designated as ASC 815 hedges	$	9,693		$	1,815		$	3,795		$	1,027
Derivatives instruments not designated as ASC 815 hedges
Over-the-counter	$	376,778		$	359,689		$	106		$	—
Cleared	255,847			261,499			6			21
Exchange traded	20			22			141			164
Interest rate contracts	$	632,645		$	621,210		$	253		$	185
Over-the-counter	$	151,736		$	157,650		$	—		$	17
Cleared	366			387			—			—
Exchange traded	7			46			—			—
Foreign exchange contracts	$	152,109		$	158,083		$	—		$	17
Over-the-counter	$	20,425		$	28,333		$	—		$	—
Cleared	16			35			—			—
Exchange traded	4,311			4,101			—			—
Equity contracts	$	24,752		$	32,469		$	—		$	—
Over-the-counter	$	19,943		$	23,103		$	—		$	—
Exchange traded	3,577			3,083			—			—
Commodity and other contracts	$	23,520		$	26,186		$	—		$	—
Over-the-counter	$	39,412		$	39,439		$	265		$	384
Cleared	4,106			3,991			13			171
Credit derivatives⁽⁴⁾	$	43,518		$	43,430		$	278		$	555
Total derivatives instruments not designated as ASC 815 hedges	$	876,544		$	881,378		$	531		$	757
Total derivatives	$	886,237		$	883,193		$	4,326		$	1,784
Cash collateral paid/received⁽⁵⁾⁽⁶⁾	$	6,523		$	9,846		$	123		$	7
Less: Netting agreements⁽⁷⁾	(777,178		)	(777,178		)	—			—
Less: Netting cash collateral received/paid⁽⁸⁾	(47,625		)	(47,769		)	(1,791		)	(15		)
Net receivables/payables included on the Consolidated Balance Sheet⁽⁹⁾	$	67,957		$	68,092		$	2,658		$	1,776
Additional amounts subject to an enforceable master netting agreement but not offset on the Consolidated Balance Sheet
Less: Cash collateral received/paid	$	(867	)	$	(11	)	$	—		$	—
Less: Non-cash collateral received/paid	(10,043		)	(6,264		)	(1,293		)	—
Total net receivables/payables⁽⁹⁾	$	57,047		$	61,817		$	1,365		$	1,776


(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 $18,430 million related to protection purchased and $25,088 million related to protection sold as of December 31, 2014. The credit derivatives trading liabilities comprise $25,972 million related to protection purchased and $17,458 million related to protection sold as of December 31, 2014.


(5)	For the trading account assets/liabilities, reflects the net amount of the $54,292 million and $57,471 million of gross cash collateral paid and received, respectively. Of the gross cash collateral paid, $47,769 million was used to offset derivative liabilities and, of the gross cash collateral received, $47,625 million was used to offset derivative assets.

(6)

For cash collateral paid with respect to non-trading derivative liabilities, reflects the net amount of $138 million of the gross cash collateral received, of which $15 million is netted against OTC non-trading derivative positions within Other liabilities. For cash collateral received with respect to non-trading derivative liabilities, reflects the net amount of $1,798 million of gross cash collateral received of which $1,791 million is netted against non-trading derivative positions within Other assets.


(7)	Represents the netting of derivative receivable and payable balances with the same counterparty under enforceable netting agreements. Approximately $510 billion, $264 billion and $3 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 $46 billion and $2 billion is netted against OTC and cleared derivative liabilities, respectively.


(9)	The net receivables/payables include approximately $11 billion of derivative asset and $10 billion of liability fair values not subject to enforceable master netting agreements.

For the three and nine months ended September 30, 2015 and 2014, the amounts recognized in Principal transactions in the Consolidated Statement of Income 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, 2015 and 2014 related to derivatives not designated in a qualifying hedging relationship are shown below. The table below does not include any 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	2015			2014			2015			2014
Interest rate contracts	$	163		$	(4	)	$	127		$	(201	)
Foreign exchange	(19		)	(42		)	(65		)	9
Credit derivatives	536			38			607			(196		)
Total Citigroup	$	680		$	(8	)	$	669		$	(388	)

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 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 net investment hedges.

If certain hedging criteria specified in ASC 815 are met, including testing for hedge effectiveness, 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 highly 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 GAAP. However, by designating an interest rate swap 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 also reflected in earnings. Thus, any ineffectiveness resulting from the hedging relationship is captured in current earnings.

Alternatively, for management hedges that do not meet the ASC 815 hedging criteria, the derivative is recorded at fair value on the balance sheet, with the associated changes in fair value recorded in earnings, while the debt continues to be carried at amortized cost. Therefore, current earnings are affected 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 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 is reported in earnings. The related interest rate swap, with changes in fair value, is also reflected in earnings, which 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.

The key requirements to achieve 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 may exclude 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. These hedges are designated as fair value hedges of the benchmark interest rate risk associated with the currency of the hedged liability. The fixed cash flows of the hedged items 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 assess 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 due to changes in benchmark interest rates, 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 assess 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 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 (loss)—which serves to offset 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, 2015 and 2014:



	Gains (losses) on fair value hedges⁽¹⁾
	Three Months Ended September 30,						Nine Months Ended September 30,
In millions of dollars	2015			2014			2015			2014
Gain (loss) on the derivatives in designated and qualifying fair value hedges
Interest rate contracts	$	1,111		$	(330	)	$	72		$	278
Foreign exchange contracts	(311		)	780			1,093			1,110
Commodity contracts	(110		)	47			(69		)	(56		)
Total gain (loss) on the derivatives in designated and qualifying fair value hedges	$	690		$	497		$	1,096		$	1,332
Gain (loss) on the hedged item in designated and qualifying fair value hedges
Interest rate hedges	$	(1,113	)	$	371		$	(115	)	$	(283	)
Foreign exchange hedges	304			(789		)	(1,081		)	(1,157		)
Commodity hedges	109			(20		)	81			86
Total gain (loss) on the hedged item in designated and qualifying fair value hedges	$	(700	)	$	(438	)	$	(1,115	)	$	(1,354	)
Hedge ineffectiveness recognized in earnings on designated and qualifying fair value hedges
Interest rate hedges	$	(1	)	$	44		$	(42	)	$	(2	)
Foreign exchange hedges	(24		)	(11		)	(41		)	(11		)
Total hedge ineffectiveness recognized in earnings on designated and qualifying fair value hedges	$	(25	)	$	33		$	(83	)	$	(13	)
Net gain (loss) excluded from assessment of the effectiveness of fair value hedges
Interest rate contracts	$	(1	)	$	(3	)	$	(1	)	$	(3	)
Foreign exchange contracts⁽²⁾	17			2			53			(36		)
Commodity hedges⁽²⁾	(1		)	27			12			30
Total net gain (loss) excluded from assessment of the effectiveness of fair value hedges	$	15		$	26		$	64		$	(9	)


(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 variable interest rates, associated with hedged items, do not qualify as benchmark interest rates, 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 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, 2015 and 2014 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	2015			2014			2015			2014
Effective portion of cash flow hedges included in AOCI
Interest rate contracts	$	357		$	(70	)	$	594		$	153
Foreign exchange contracts	(98		)	1			(258		)	(56		)
Credit derivatives	—			—			—			2
Total effective portion of cash flow hedges included in AOCI	$	259		$	(69	)	$	336		$	99
Effective portion of cash flow hedges reclassified from AOCI to earnings
Interest rate contracts	$	(28	)	$	(84	)	$	(148	)	$	(218	)
Foreign exchange contracts	(35		)	(30		)	(112		)	(114		)
Total effective portion of cash flow hedges reclassified from AOCI to earnings⁽¹⁾	$	(63	)	$	(114	)	$	(260	)	$	(332	)


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

For cash flow hedges, the changes in the fair value of the hedging derivative remaining in Accumulated other comprehensive income (loss) on the Consolidated Balance Sheet will be included in the 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, 2015 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 $1,842 million and $2,599 million for the three and nine months ended September 30, 2015 and $2,020 million and $402 million for the three and nine months ended September 30, 2014, respectively.

Credit Derivatives

Citi is a market maker and trades a range of credit derivatives. Through these contracts, Citi either purchases or writes protection on either a single name or a portfolio of reference credits. Citi 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.

Citi monitors its counterparty credit risk in credit derivative contracts. As of September 30, 2015 and December 31, 2014, approximately 98% of the gross receivables are from counterparties with which Citi maintains collateral agreements. A majority of Citi’s top 15 counterparties (by receivable balance owed to Citi) are banks, financial institutions or other dealers. Contracts with these counterparties do not include ratings-based termination events. However, counterparty ratings downgrades may have an incremental effect by lowering the threshold at which Citi may

call for additional collateral.

The range of credit derivatives entered into 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 predefined credit event on a reference entity. These credit events are defined by the terms of the derivative contract 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 that reference emerging market entities will also typically include additional credit events 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 entities or asset-backed securities. If there is no credit event, 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. Under certain contracts, the seller of protection may not be required to make a 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.

A total return swap typically 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 plus any depreciation of the reference asset exceeds the cash flows associated with the underlying asset. A total return swap may terminate upon a default of the reference asset or a credit event with respect to the reference entity 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 a reference entity. For example, in a credit spread option, the option writer assumes the obligation to purchase or sell credit protection on the reference entity at a specified “strike” spread level. The option purchaser buys the right to sell credit default protection on the reference entity 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 or other reference. The options usually terminate if a credit event occurs with respect to the underlying reference entity.

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 effectively provides credit protection to the issuer by agreeing to receive a return that could be negatively affected by credit events on the underlying reference credit. If the reference entity defaults, the note may be cash settled or physically settled by delivery of a debt security of the reference entity. Thus, the maximum amount of the note purchaser’s exposure is the amount paid for the credit-linked note.

The following tables summarize the key characteristics of Citi’s credit derivatives portfolio by counterparty and derivative form as of September 30, 2015 and December 31, 2014:



	Fair values				Notionals
In millions of dollars at September 30, 2015	Receivable⁽¹⁾		Payable⁽²⁾		Protection purchased		Protection sold
By industry/counterparty
Banks	$	19,377	$	17,499	$	579,175	$	574,608
Broker-dealers	6,382		6,690		174,590		171,430
Non-financial	125		155		4,311		2,213
Insurance and other financial institutions	12,450		12,975		464,471		427,406
Total by industry/counterparty	$	38,334	$	37,319	$	1,222,547	$	1,175,657
By instrument
Credit default swaps and options	$	37,842	$	36,782	$	1,203,305	$	1,168,598
Total return swaps and other	492		537		19,242		7,059
Total by instrument	$	38,334	$	37,319	$	1,222,547	$	1,175,657
By rating
Investment grade	$	15,679	$	15,297	$	926,912	$	888,780
Non-investment grade	22,655		22,022		295,635		286,877
Total by rating	$	38,334	$	37,319	$	1,222,547	$	1,175,657
By maturity
Within 1 year	$	2,688	$	2,124	$	246,395	$	239,578
From 1 to 5 years	30,243		29,810		842,684		808,865
After 5 years	5,403		5,385		133,468		127,214
Total by maturity	$	38,334	$	37,319	$	1,222,547	$	1,175,657


(1)	The fair value amount receivable is composed of $18,911 million under protection purchased and $19,423 million under protection sold.


(2)	The fair value amount payable is composed of $19,955 million under protection purchased and $17,364 million under protection sold.



	Fair values				Notionals
In millions of dollars at December 31, 2014	Receivable⁽¹⁾		Payable⁽²⁾		Protection purchased		Protection sold
By industry/counterparty
Banks	$	24,828	$	23,189	$	574,764	$	604,700
Broker-dealers	8,093		9,309		204,542		199,693
Non-financial	91		113		3,697		1,595
Insurance and other financial institutions	10,784		11,374		333,384		257,870
Total by industry/counterparty	$	43,796	$	43,985	$	1,116,387	$	1,063,858
By instrument
Credit default swaps and options	$	42,930	$	42,201	$	1,094,199	$	1,054,671
Total return swaps and other	866		1,784		22,188		9,187
Total by instrument	$	43,796	$	43,985	$	1,116,387	$	1,063,858
By rating
Investment grade	$	17,432	$	17,182	$	824,831	$	786,848
Non-investment grade	26,364		26,803		291,556		277,010
Total by rating	$	43,796	$	43,985	$	1,116,387	$	1,063,858
By maturity
Within 1 year	$	4,356	$	4,278	$	250,489	$	229,502
From 1 to 5 years	34,692		35,160		790,251		772,001
After 5 years	4,748		4,547		75,647		62,355
Total by maturity	$	43,796	$	43,985	$	1,116,387	$	1,063,858


(1)	The fair value amount receivable is composed of $18,708 million under protection purchased and $25,088 million under protection sold.


(2)	The fair value amount payable is composed of $26,527 million under protection purchased and $17,458 million under protection sold.

Fair values included in the above tables are prior to application of any netting agreements and cash collateral. For notional amounts, Citi generally has a mismatch between the total notional amounts of protection purchased and sold, and it may hold the reference assets directly, rather than entering into offsetting credit derivative contracts as and when desired. The open risk exposures from credit derivative contracts are largely matched after certain cash positions in reference assets are considered and after notional amounts are adjusted, either to a duration-based equivalent basis or to reflect the level of subordination in tranched structures. The ratings of the credit derivatives portfolio presented in the tables and used to evaluate payment/performance risk are based on the assigned internal or external ratings of the referenced asset or entity. Where external ratings are used, investment-grade ratings are considered to be ‘Baa/BBB’ and above, while anything below is considered non-investment grade. Citi’s internal ratings are in line with the related external rating system.

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. 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 notional amount for credit protection sold is not representative of the actual loss exposure based on historical experience. This amount has not been reduced by the value of the reference assets and the related cash flows. In accordance with most credit derivative contracts, should a credit event occur, the Company usually is liable for the difference between the protection sold and the value of the reference assets. Furthermore, the notional amount 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 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 September 30, 2015 and December 31, 2014 was $25 billion and $30 billion, respectively. The Company had posted $22 billion and $27 billion as collateral for this exposure in the normal course of business as of September 30, 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, N.A. were downgraded a single notch by all three major rating agencies as of September 30, 2015, the Company could be required to post an additional $2.1 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 $2.2 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 in Citi’s 2014 Annual Report on Form 10-K 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 September 30, 2015, both the asset carrying amounts derecognized and gross cash proceeds received as of the date of derecognition were $2.1 billion. At September 30, 2015, the fair value of these previously derecognized assets was $2.0 billion and the fair value of the total return swaps was $6 million recorded as gross derivative assets and $94 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.