SECURITIZATIONS AND VARIABLE INTEREST ENTITIES

Uses of Special Purpose Entities

A special purpose entity (SPE) is an entity designed to fulfill a specific limited need of the company that organized it. The principal uses of SPEs by Citi are to obtain liquidity and favorable capital treatment by securitizing certain financial assets, to assist clients in securitizing their financial assets and to create investment products for clients. SPEs may be organized in various legal forms, including trusts, partnerships or corporations. In a securitization, through the SPE’s issuance of debt and equity instruments, certificates, commercial paper or other notes of indebtedness, the company transferring assets to the SPE converts all (or a portion) of those assets into cash before they would have been realized in the normal course of business. These issuances are recorded on the balance sheet of the SPE, which may or may not be consolidated onto the balance sheet of the company that organized the SPE.

Investors usually have recourse only to the assets in the SPE, but may also benefit from other credit enhancements, such as a collateral account, a line of credit or a liquidity facility, such as a liquidity put option or asset purchase agreement. Because of these enhancements, the SPE issuances typically obtain a more favorable credit rating than the transferor could obtain for its own debt issuances. This results in less expensive financing costs than unsecured debt. The SPE may also enter into derivative contracts in order to convert the yield or currency of the underlying assets to match the needs of the SPE investors or to limit or change the credit risk of the SPE. Citigroup may be the provider of certain credit enhancements as well as the counterparty to any related derivative contracts.

Most of Citigroup’s SPEs are variable interest entities (VIEs), as described below.

Variable Interest Entities

VIEs are entities that have either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest (i.e., ability to make significant decisions through voting rights or similar rights and a right to receive the expected residual returns of the entity or an obligation to absorb the expected losses of the entity). Investors that finance the VIE through debt or equity interests or other counterparties providing other forms of support, such as guarantees, certain fee arrangements or certain types of derivative contracts, are variable interest holders in the entity.

The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate the VIE. Citigroup would be deemed to have a controlling financial interest and be the primary beneficiary if it has both of the following characteristics:


•	power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and


•	an obligation to absorb losses of the entity that could potentially be significant to the VIE, or a right to receive benefits from the entity that could potentially be significant to the VIE.

The Company must evaluate each VIE to understand the purpose and design of the entity, the role the Company had in the entity’s design and its involvement in the VIE’s ongoing activities. The Company then must evaluate which activities most significantly impact the economic performance of the VIE and who has the power to direct such activities.

For those VIEs where the Company determines that it has the power to direct the activities that most significantly impact the VIE’s economic performance, the Company must then evaluate its economic interests, if any, and determine whether it could absorb losses or receive benefits that could potentially be significant to the VIE. When evaluating whether the Company has an obligation to absorb losses that could potentially be significant, it considers the maximum exposure to such loss without consideration of probability. Such obligations could be in various forms, including, but not limited to, debt and equity investments, guarantees, liquidity agreements and certain derivative contracts.

In various other transactions, the Company may (i) act as a derivative counterparty (for example, interest rate swap, cross-currency swap or purchaser of credit protection under a credit default swap or total return swap where the Company pays the total return on certain assets to the SPE), (ii) act as underwriter or placement agent, (iii) provide administrative, trustee or other services or (iv) make a market in debt securities or other instruments issued by VIEs. The Company generally considers such involvement, by itself, not to be variable interests and thus not an indicator of power or potentially significant benefits or losses.

Citigroup’s involvement with consolidated and unconsolidated VIEs with which the Company holds significant variable interests or has continuing involvement through servicing a majority of the assets in a VIE is presented below:



	As of December 31, 2018
							Maximum exposure to loss in significant unconsolidated VIEs⁽¹⁾
							Funded exposures⁽²⁾				Unfunded exposures
In millions of dollars	Total involvement with SPE assets		Consolidated VIE/SPE assets		Significant unconsolidated VIE assets⁽³⁾		Debt investments		Equity investments		Funding commitments		Guarantees and derivatives		Total
Credit card securitizations	$	46,232	$	46,232	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage securitizations⁽⁴⁾
U.S. agency-sponsored	116,563		—		116,563		3,038		—		—		60		3,098
Non-agency-sponsored	30,886		1,498		29,388		431		—		—		1		432
Citi-administered asset-backed commercial paper conduits (ABCP)	18,750		18,750		—		—		—		—		—		—
Collateralized loan obligations (CLOs)	21,837		—		21,837		5,891		—		—		9		5,900
Asset-based financing	73,199		628		72,571		21,640		715		9,757		—		32,112
Municipal securities tender option bond trusts (TOBs)	7,998		1,776		6,222		9		—		4,262		—		4,271
Municipal investments	18,044		3		18,041		2,813		3,922		2,738		—		9,473
Client intermediation	858		614		244		172		—		—		2		174
Investment funds	1,272		440		832		12		—		1		1		14
Other	63		3		60		37		—		23		—		60
Total	$	335,702	$	69,944	$	265,758	$	34,043	$	4,637	$	16,781	$	73	$	55,534



	As of December 31, 2017
							Maximum exposure to loss in significant unconsolidated VIEs⁽¹⁾
							Funded exposures⁽²⁾				Unfunded exposures
In millions of dollars	Total involvement with SPE assets		Consolidated VIE/SPE assets		Significant unconsolidated VIE assets⁽³⁾		Debt investments		Equity investments		Funding commitments		Guarantees and derivatives		Total
Credit card securitizations	$	50,795	$	50,795	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage securitizations⁽⁴⁾
U.S. agency-sponsored	116,610		—		116,610		2,647		—		—		74		2,721
Non-agency-sponsored	22,251		2,035		20,216		330		—		—		1		331
Citi-administered asset-backed commercial paper conduits (ABCP)	19,282		19,282		—		—		—		—		—		—
Collateralized loan obligations (CLOs)	20,588		—		20,588		5,956		—		—		9		5,965
Asset-based financing	60,472		633		59,839		19,478		583		5,878		—		25,939
Municipal securities tender option bond trusts (TOBs)	6,925		2,166		4,759		138		—		3,035		—		3,173
Municipal investments	19,119		7		19,112		2,709		3,640		2,344		—		8,693
Client intermediation	958		824		134		32		—		—		9		41
Investment funds	1,892		616		1,276		14		7		13		—		34
Other	677		36		641		27		9		34		47		117
Total	$	319,569	$	76,394	$	243,175	$	31,331	$	4,239	$	11,304	$	140	$	47,014


(1)	The definition of maximum exposure to loss is included in the text that follows this table.


(2)	Included on Citigroup’s December 31, 2018 and 2017 Consolidated Balance Sheet.


(3)	A significant unconsolidated VIE is an entity in which the Company has any variable interest or continuing involvement considered to be significant, regardless of the likelihood of loss.


(4)	Citigroup mortgage securitizations also include agency and non-agency (private label) re-securitization activities. These SPEs are not consolidated. See “Re-securitizations” below for further discussion.

The previous tables do not include the following:


•	certain venture capital investments made by some of the Company’s private equity subsidiaries, as the Company accounts for these investments in accordance with the Investment Company Audit Guide (codified in ASC Topic 946);


•	certain investment funds for which the Company provides investment management services and personal estate trusts for which the Company provides administrative, trustee and/or investment management services;


•	certain VIEs structured by third parties in which the Company holds securities in inventory, as these investments are made on arm’s-length terms;


•	certain positions in mortgage- and asset-backed securities held by the Company, which are classified as Trading account assets or Investments, in which the Company has no other involvement with the related securitization entity deemed to be significant (for more information on these positions, see Notes 13 and 24 to the Consolidated Financial Statements);

•

certain representations and warranties exposures in legacy ICG-sponsored mortgage- and asset-backed securitizations, in which the Company has no variable interest or continuing involvement as servicer. The outstanding balance of mortgage loans securitized during 2005 to 2008 in which the Company has no variable interest or continuing involvement as servicer was approximately $7 billion and $9 billion at December 31, 2018 and 2017, respectively;


•	certain representations and warranties exposures in Citigroup residential mortgage securitizations, in which the original mortgage loan balances are no longer outstanding; and


•	VIEs such as trust preferred securities trusts used in connection with the Company’s funding activities. The Company does not have a variable interest in these trusts.

The asset balances for consolidated VIEs represent the carrying amounts of the assets consolidated by the Company. The carrying amount may represent the amortized cost or the current fair value of the assets depending on the legal form of the asset (e.g., loan or security) and the Company’s standard accounting policies for the asset type and line of business.

The asset balances for unconsolidated VIEs in which the Company has significant involvement represent the most current information available to the Company. In most cases, the asset balances represent an amortized cost basis without regard to impairments, unless fair value information is readily available to the Company.

The maximum funded exposure represents the balance sheet carrying amount of the Company’s investment in the VIE. It reflects the initial amount of cash invested in the VIE adjusted for any accrued interest and cash principal payments received. The carrying amount may also be adjusted for increases or declines in fair value or any impairment in value recognized in earnings. The maximum exposure of unfunded positions represents the remaining undrawn committed amount, including liquidity and credit facilities provided by the Company or the notional amount of a derivative instrument considered to be a variable interest. In certain transactions, the Company has entered into derivative instruments or other arrangements that are not considered variable interests in the VIE (e.g., interest rate swaps, cross-currency swaps or where the Company is the purchaser of credit protection under a credit default swap or total return swap where the Company pays the total return on certain assets to the SPE). Receivables under such arrangements are not included in the maximum exposure amounts.

Funding Commitments for Significant Unconsolidated VIEs—Liquidity Facilities and Loan Commitments

The following table presents the notional amount of liquidity facilities and loan commitments that are classified as funding commitments in the VIE tables above:



	December 31, 2018				December 31, 2017
In millions of dollars	Liquidity facilities		Loan/equity commitments		Liquidity facilities		Loan/equity commitments
Asset-based financing	$	—	$	9,757	$	—	$	5,878
Municipal securities tender option bond trusts (TOBs)	4,262		—		3,035		—
Municipal investments	—		2,738		—		2,344
Investment funds	—		1		—		13
Other	—		23		—		34
Total funding commitments	$	4,262	$	12,519	$	3,035	$	8,269

Consolidated VIEs

The Company engages in on-balance sheet securitizations, which are securitizations that do not qualify for sales treatment; thus, the assets remain on Citi’s Consolidated Balance Sheet, and any proceeds received are recognized as secured liabilities. The consolidated VIEs represent more than a hundred separate entities with which the Company is involved. In general, the third-party investors in the obligations of consolidated VIEs have legal recourse only to the assets of the respective VIEs and do not have such recourse to the Company, except where Citi has provided a guarantee to the investors or is the counterparty to certain derivative transactions involving the VIE. Thus, Citigroup’s maximum legal exposure to loss related to consolidated VIEs is significantly less than the carrying value of the consolidated VIE assets due to outstanding third-party financing. Intercompany assets and liabilities are excluded from Citi’s Consolidated Balance Sheet. All VIE assets are restricted from being sold or pledged as collateral. The cash flows from these assets are the only source used to pay down the associated liabilities, which are non-recourse to Citi’s general assets. See the Consolidated Balance Sheet for more information about these Consolidated VIE assets and liabilities.

Significant Interests in Unconsolidated VIEs—Balance Sheet Classification

The following table presents the carrying amounts and classification of significant variable interests in unconsolidated VIEs:



In billions of dollars	December 31, 2018		December 31, 2017
Cash	$	—	$	—
Trading account assets	8.7		8.5
Investments	5.0		4.4
Total loans, net of allowance	24.5		22.2
Other	0.5		0.5
Total assets	$	38.7	$	35.6

Credit Card Securitizations

The Company securitizes credit card receivables through trusts established to purchase the receivables. Citigroup transfers receivables into the trusts on a non-recourse basis. Credit card securitizations are revolving securitizations; as customers pay their credit card balances, the cash proceeds are used to purchase new receivables and replenish the receivables in the trust.

Substantially all of the Company’s credit card securitization activity is through two trusts—Citibank Credit Card Master Trust (Master Trust) and Citibank Omni Master Trust (Omni Trust), with the substantial majority through the Master Trust. These trusts are consolidated entities because, as

servicer, Citigroup has the power to direct the activities that most significantly impact the economic performance of the trusts. Citigroup holds a seller’s interest and certain securities issued by the trusts, which could result in exposure to potentially significant losses or benefits from the trusts. Accordingly, the transferred credit card receivables remain on Citi’s Consolidated Balance Sheet with no gain or loss recognized. The debt issued by the trusts to third parties is included on Citi’s Consolidated Balance Sheet.

Citi utilizes securitizations as one of the sources of funding for its business in North America. The following table reflects amounts related to the Company’s securitized credit card receivables:



In billions of dollars	December 31, 2018		December 31, 2017
Ownership interests in principal amount of trust credit card receivables
Sold to investors via trust-issued securities	$	27.3	$	28.8
Retained by Citigroup as trust-issued securities	7.6		7.6
Retained by Citigroup via non-certificated interests	11.3		14.4
Total	$	46.2	$	50.8

The following table summarizes selected cash flow information related to Citigroup’s credit card securitizations:



In billions of dollars	2018			2017			2016
Proceeds from new securitizations	$	6.8		$	11.1		$	3.3
Pay down of maturing notes	(8.3		)	(5.0		)	(10.3		)

Managed Loans

After securitization of credit card receivables, the Company continues to maintain credit card customer account relationships and provides servicing for receivables transferred to the trusts. As a result, the Company considers the securitized credit card receivables to be part of the business it manages. As Citigroup consolidates the credit card trusts, all managed securitized card receivables are on-balance sheet.

Funding, Liquidity Facilities and Subordinated Interests

As noted above, Citigroup securitizes credit card receivables through two securitization trusts—Master Trust and Omni Trust. The liabilities of the trusts are included on the Consolidated Balance Sheet, excluding those retained by Citigroup.

Master Trust Liabilities (at Par Value)

The Master Trust issues fixed- and floating-rate term notes. Some of the term notes may be issued to multi-seller commercial paper conduits. The weighted average maturity of

the term notes issued by the Master Trust was 3.0 years as of December 31, 2018 and 2.6 years as of December 31, 2017.



In billions of dollars	Dec. 31, 2018		Dec. 31, 2017
Term notes issued to third parties	$	25.8	$	27.8
Term notes retained by Citigroup affiliates	5.7		5.7
Total Master Trust liabilities	$	31.5	$	33.5

Omni Trust Liabilities (at Par Value)

The Omni Trust issues fixed- and floating-rate term notes, some of which are purchased by multi-seller commercial paper conduits. The weighted average maturity of the third-party term notes issued by the Omni Trust was 1.4 years as of December 31, 2018 and 1.9 years as of December 31, 2017.



In billions of dollars	Dec. 31, 2018		Dec. 31, 2017
Term notes issued to third parties	$	1.5	$	1.0
Term notes retained by Citigroup affiliates	1.9		1.9
Total Omni Trust liabilities	$	3.4	$	2.9

Mortgage Securitizations

Citigroup provides a wide range of mortgage loan products to a diverse customer base. Once originated, the Company often securitizes these loans through the use of VIEs. These VIEs are funded through the issuance of trust certificates backed solely by the transferred assets. These certificates have the same life as the transferred assets. In addition to providing a source of liquidity and less expensive funding, securitizing these assets also reduces Citi’s credit exposure to the borrowers. These mortgage loan securitizations are primarily non-recourse, thereby effectively transferring the risk of future credit losses to the purchasers of the securities issued by the trust.

Citi’s U.S. consumer mortgage business generally retains the servicing rights and in certain instances retains investment securities, interest-only strips and residual interests in future cash flows from the trusts and also provides servicing for a limited number of ICG securitizations. Citi’s ICG business may hold investment securities pursuant to credit risk retention rules or in connection with secondary market-making activities.

The Company securitizes mortgage loans generally through either a government-sponsored agency, such as Ginnie Mae, Fannie Mae or Freddie Mac (U.S. agency-sponsored mortgages), or private label (non-agency-sponsored

mortgages) securitization. Citi is not the primary beneficiary

of its U.S. agency-sponsored mortgage securitization entities because Citigroup does not have the power to direct the activities of the VIE that most significantly impact the entity’s economic performance. Therefore, Citi does not consolidate these U.S. agency-sponsored mortgage securitization entities. Substantially all of the consumer loans sold or securitized through non-consolidated trusts by Citigroup are U.S. prime residential mortgage loans. Retained interests in non-consolidated agency-sponsored mortgage securitization trusts are classified as Trading account assets, except for MSRs, which are included in Mortgage servicing rights on Citigroup’s Consolidated Balance Sheet.

Citigroup does not consolidate certain non-agency-sponsored mortgage securitization entities because Citi is either not the servicer with the power to direct the significant activities of the entity or Citi is the servicer, but the servicing relationship is deemed to be a fiduciary relationship; therefore, Citi is not deemed to be the primary beneficiary of the entity.

In certain instances, the Company has (i) the power to direct the activities and (ii) the obligation to either absorb losses or the right to receive benefits that could be potentially significant to its non-agency-sponsored mortgage securitization entities and, therefore, is the primary beneficiary and, thus, consolidates the VIE.

The following tables summarize selected cash flow information and retained interests related to Citigroup mortgage securitizations:



	2018				2017				2016
In billions of dollars	U.S. agency- sponsored mortgages		Non-agency- sponsored mortgages		U.S. agency- sponsored mortgages		Non-agency- sponsored mortgages		U.S. agency- sponsored mortgages		Non-agency- sponsored mortgages
Principal securitized	$	4.0	$	5.6	$	7.8	$	7.3	$	14.8	$	0.3
Proceeds from new securitizations⁽¹⁾	4.2		7.1		8.1		7.3		15.4		0.3
Contractual servicing fees received	0.1		—		0.2		—		0.4		—
Purchases of previously transferred financial assets	0.2		—		0.4		—		0.5		—

Note: Excludes re-securitization transactions.

(1) The proceeds from new securitizations in 2016 include $0.3 billion related to personal loan securitizations.

For non-consolidated mortgage securitization entities where the transfer of loans to the VIE meets the conditions for sale accounting, Citi recognizes a gain or loss based on the difference between the carrying value of the transferred assets and the proceeds received (generally cash but may be beneficial interests or servicing rights).

Agency and non-agency securitization gains for the year ended December 31, 2018 were $17 million and $36 million, respectively.

Agency and non-agency securitization gains for the year ended December 31, 2017 were $28 million and $70 million, respectively, and $76 million and $(5) million, respectively, for the year ended December 31, 2016.



	December 31, 2018						December 31, 2017
			Non-agency-sponsored mortgages⁽¹⁾						Non-agency-sponsored mortgages⁽¹⁾
In millions of dollars	U.S. agency- sponsored mortgages		Senior interests		Subordinated interests		U.S. agency- sponsored mortgages		Senior interests		Subordinated interests
Carrying value of retained interests⁽²⁾	$	564	$	300	$	51	$	529	$	132	$	30


(1)	Disclosure of non-agency-sponsored mortgages as senior and subordinated interests is indicative of the interests’ position in the capital structure of the securitization.


(2)	Retained interests consist of Level 2 or Level 3 assets depending on the observability of significant inputs. See Footnote 24 for more information about fair value measurements.

Key assumptions used in measuring the fair value of retained interests at the date of sale or securitization of mortgage receivables were as follows:



	December 31, 2018
			Non-agency-sponsored mortgages⁽¹⁾
	U.S. agency- sponsored mortgages		Senior interests		Subordinated interests
Weighted average discount rate	9.6	%	2.8	%	4.4	%
Weighted average constant prepayment rate	5.8	%	8.0	%	9.1	%
Weighted average anticipated net credit losses⁽²⁾	NM		4.4	%	3.4	%
Weighted average life	7.2 to 7.7 years		2.5 to 9.9 years		2.5 to 15.7 years



	December 31, 2017
			Non-agency-sponsored mortgages⁽¹⁾
	U.S. agency- sponsored mortgages		Senior interests		Subordinated interests
Weighted average discount rate	13.7	%	3.1	%	3.9	%
Weighted average constant prepayment rate	6.7	%	4.3	%	4.3	%
Weighted average anticipated net credit losses⁽²⁾	NM		7.0	%	8.7	%
Weighted average life	6.5 to 7.5 years		4.3 to 9.4 years		4.3 to 10.0 years


(1)	Disclosure of non-agency-sponsored mortgages as senior and subordinated interests is indicative of the interests’ position in the capital structure of the securitization.


(2)	Anticipated net credit losses represent estimated loss severity associated with defaulted mortgage loans underlying the mortgage securitizations disclosed above. Anticipated net credit losses, in this instance, do not represent total credit losses incurred to date, nor do they represent credit losses expected on retained interests in mortgage securitizations.


NM	Anticipated net credit losses are not meaningful due to U.S. agency guarantees.

The interests retained by Citi range from highly rated and/or senior in the capital structure to unrated and/or residual interests.

The key assumptions used to value retained interests, and the sensitivity of the fair value to adverse changes of 10% and 20% in each of the key assumptions, are presented in the tables below. The negative effect of each change is calculated independently, holding all other assumptions constant. Because the key assumptions may not be independent, the net effect of simultaneous adverse changes in the key assumptions may be less than the sum of the individual effects shown below.



	December 31, 2018
			Non-agency-sponsored mortgages⁽¹⁾
	U.S. agency- sponsored mortgages		Senior interests		Subordinated interests
Weighted average discount rate	7.8	%	9.3	%	—
Weighted average constant prepayment rate	9.1	%	8.0	%	—
Weighted average anticipated net credit losses⁽²⁾	NM		40.0	%	—
Weighted average life	3.6 to 7.5 years		6.6 years		—



	December 31, 2017
			Non-agency-sponsored mortgages⁽¹⁾
	U.S. agency- sponsored mortgages		Senior interests		Subordinated interests
Weighted average discount rate	12.0	%	5.8	%	—
Weighted average constant prepayment rate	11.2	%	8.9	%	—
Weighted average anticipated net credit losses⁽²⁾	NM		46.9	%	—
Weighted average life	3.8 to 6.9 years		4.8 to 5.3 years		—


(1)	Disclosure of non-agency-sponsored mortgages as senior and subordinated interests is indicative of the interests’ position in the capital structure of the securitization.


(2)	Anticipated net credit losses represent estimated loss severity associated with defaulted mortgage loans underlying the mortgage securitizations disclosed above. Anticipated net credit losses, in this instance, do not represent total credit losses incurred to date, nor do they represent credit losses expected on retained interests in mortgage securitizations.


NM	Anticipated net credit losses are not meaningful due to U.S. agency guarantees.



	December 31, 2018
				Non-agency-sponsored mortgages
In millions of dollars	U.S. agency- sponsored mortgages			Senior interests		Subordinated interests
Discount rate
Adverse change of 10%	$	(16	)	$	—	$	—
Adverse change of 20%	(32		)	—		—
Constant prepayment rate
Adverse change of 10%	(21		)	—		—
Adverse change of 20%	(41		)	—		—
Anticipated net credit losses
Adverse change of 10%	NM			—		—
Adverse change of 20%	NM			—		—



	December 31, 2017
				Non-agency-sponsored mortgages
In millions of dollars	U.S. agency- sponsored mortgages			Senior interests			Subordinated interests
Discount rate
Adverse change of 10%	$	(21	)	$	(2	)	$	—
Adverse change of 20%	(40		)	(4		)	—
Constant prepayment rate
Adverse change of 10%	(21		)	(1		)	—
Adverse change of 20%	(40		)	(1		)	—
Anticipated net credit losses
Adverse change of 10%	NM			(3		)	—
Adverse change of 20%	NM			(7		)	—


NM	Anticipated net credit losses are not meaningful due to U.S. agency guarantees.

The following table includes information about loan delinquencies and liquidation losses for assets held in non-consolidated, non-agency-sponsored securitization entities as of December 31, 2018 and 2017:



	Securitized assets				90 days past due				Liquidation losses
In billions of dollars	2018		2017		2018		2017		2018		2017
Securitized assets
Residential mortgage	$	5.2	$	4.9	$	0.4	$	0.4	$	0.1	$	0.1
Commercial and other	13.1		6.8		—		—		—		—
Total	$	18.3	$	11.7	$	0.4	$	0.4	$	0.1	$	0.1

Mortgage Servicing Rights (MSRs)

In connection with the securitization of mortgage loans, Citi’s U.S. consumer mortgage business generally retains the servicing rights, which entitle the Company to a future stream of cash flows based on the outstanding principal balances of the loans and the contractual servicing fee. Failure to service the loans in accordance with contractual requirements may lead to a termination of the servicing rights and the loss of future servicing fees.

These transactions create intangible assets referred to as MSRs, which are recorded at fair value on Citi’s Consolidated Balance Sheet. The fair value of Citi’s capitalized MSRs was $584 million and $558 million at December 31, 2018 and 2017, respectively. The MSRs correspond to principal loan balances of $62 billion and $66 billion as of December 31, 2018 and 2017, respectively.

The following table summarizes the changes in capitalized MSRs:



In millions of dollars	2018			2017
Balance, beginning of year	$	558		$	1,564
Originations	58			96
Changes in fair value of MSRs due to changes in inputs and assumptions	54			65
Other changes⁽¹⁾	(68		)	(110		)
Sale of MSRs⁽²⁾	(18		)	(1,057		)
Balance, as of December 31	$	584		$	558


(1)	Represents changes due to customer payments and passage of time.


(2)	See Note 2 to the Consolidated Financial Statements for additional information on the exit of the U.S. mortgage servicing operations and sale of MSRs.

The fair value of the MSRs is primarily affected by changes in prepayments of mortgages that result from shifts in mortgage interest rates. Specifically, higher interest rates tend to lead to declining prepayments, which causes the fair value of the MSRs to increase. In managing this risk, Citigroup economically hedges a significant portion of the value of its MSRs through the use of interest rate derivative contracts, forward purchase and sale commitments of mortgage-backed securities and purchased securities all classified as Trading account assets. The Company receives fees during the course of servicing previously securitized mortgages. The amounts of these fees were as follows:



In millions of dollars	2018		2017		2016
Servicing fees	$	172	$	276	$	484
Late fees	4		10		14
Ancillary fees	8		13		17
Total MSR fees	$	184	$	299	$	515

In the Consolidated Statement of Income these fees are primarily classified as Commissions and fees, and changes in MSR fair values are classified as Other revenue.

Re-securitizations

The Company engages in re-securitization transactions in which debt securities are transferred to a VIE in exchange for new beneficial interests. Citi did not transfer non-agency (private label) securities to re-securitization entities during the years ended December 31, 2018 and 2017. These securities are backed by either residential or commercial mortgages and are often structured on behalf of clients.

As of December 31, 2018, the fair value of Citi-retained interests in private label re-securitization transactions structured by Citi totaled approximately $16 million (all related to re-securitization transactions executed prior to 2016), which has been recorded in Trading account assets. Of this amount, all was related to subordinated beneficial interests. As of December 31, 2017, the fair value of Citi-retained interests in private label re-securitization transactions structured by Citi totaled approximately $79 million (all related to re-securitization transactions executed prior to 2016). Of this amount, substantially all was related to subordinated beneficial interests. The original par value of private label re-securitization transactions in which Citi holds a retained interest as of December 31, 2018 and 2017 was approximately $271 million and $887 million, respectively.

The Company also re-securitizes U.S. government-agency guaranteed mortgage-backed (agency) securities. During the years ended December 31, 2018 and 2017, Citi transferred agency securities with a fair value of approximately $26.3 billion and $26.6 billion, respectively, to re-securitization entities.

As of December 31, 2018, the fair value of Citi-retained interests in agency re-securitization transactions structured by Citi totaled approximately $2.5 billion (including $1.4 billion related to re-securitization transactions executed in 2018) compared to $2.1 billion as of December 31, 2017 (including $854 million related to re-securitization transactions executed in 2017), which is recorded in Trading account assets. The original fair value of agency re-securitization transactions in which Citi holds a retained interest as of December 31, 2018 and 2017 was approximately $70.9 billion and $68.3 billion, respectively.

As of December 31, 2018 and 2017, the Company did not consolidate any private label or agency re-securitization entities.

Citi-Administered Asset-Backed Commercial Paper Conduits

The Company is active in the asset-backed commercial paper conduit business as administrator of several multi-seller commercial paper conduits and also as a service provider to single-seller and other commercial paper conduits sponsored by third parties.

Citi’s multi-seller commercial paper conduits are designed to provide the Company’s clients access to low-cost funding in the commercial paper markets. The conduits purchase assets from or provide financing facilities to clients and are funded by issuing commercial paper to third-party investors. The conduits generally do not purchase assets originated by Citi. The funding of the conduits is facilitated by the liquidity support and credit enhancements provided by the Company.

As administrator to Citi’s conduits, the Company is generally responsible for selecting and structuring assets purchased or financed by the conduits, making decisions regarding the funding of the conduits, including determining the tenor and other features of the commercial paper issued, monitoring the quality and performance of the conduits’ assets and facilitating the operations and cash flows of the conduits. In return, the Company earns structuring fees from customers for individual transactions and earns an administration fee from the conduit, which is equal to the income from the client program and liquidity fees of the conduit after payment of conduit expenses. This administration fee is fairly stable, since most risks and rewards of the underlying assets are passed back to the clients. Once the asset pricing is negotiated, most ongoing income, costs and fees are relatively stable as a percentage of the conduit’s size.

The conduits administered by Citi do not generally invest in liquid securities that are formally rated by third parties. The assets are privately negotiated and structured transactions that are generally designed to be held by the conduit, rather than actively traded and sold. The yield earned by the conduit on each asset is generally tied to the rate on the commercial paper issued by the conduit, thus passing interest rate risk to the client. Each asset purchased by the conduit is structured with transaction-specific credit enhancement features provided by the third-party client seller, including over-collateralization, cash and excess spread collateral accounts, direct recourse or third-party guarantees. These credit enhancements are sized with the objective of approximating a credit rating of A or above, based on Citi’s internal risk ratings. At December 31, 2018 and 2017, the conduits had approximately $18.8 billion and $19.3 billion of purchased assets outstanding, respectively, and had incremental funding commitments with clients of approximately $14.0 billion and $14.5 billion, respectively.

Substantially all of the funding of the conduits is in the form of short-term commercial paper. At December 31, 2018 and 2017, the weighted average remaining lives of the commercial paper issued by the conduits were approximately 53 and 51 days, respectively.

The primary credit enhancement provided to the conduit investors is in the form of transaction-specific credit enhancements described above. In addition to the transaction-specific credit enhancements, the conduits, other than the government guaranteed loan conduit, have obtained a letter of credit from the Company, which is equal to at least 8% to 10% of the conduit’s assets with a minimum of $200 million. The letters of credit provided by the Company to the conduits total approximately $1.7 billion as of December 31, 2018 and 2017. The net result across multi-seller conduits administered by the Company is that, in the event defaulted assets exceed the transaction-specific credit enhancements described above, any losses in each conduit are allocated first to the Company and then to the commercial paper investors.

Citigroup also provides the conduits with two forms of liquidity agreements that are used to provide funding to the conduits in the event of a market disruption, among other events. Each asset of the conduits is supported by a transaction-specific liquidity facility in the form of an asset purchase agreement (APA). Under the APA, the Company has generally agreed to purchase non-defaulted eligible receivables from the conduit at par. The APA is not designed to provide credit support to the conduit, as it generally does not permit the purchase of defaulted or impaired assets. Any funding under the APA will likely subject the underlying conduit clients to increased interest costs. In addition, the Company provides the conduits with program-wide liquidity in the form of short-term lending commitments. Under these commitments, the Company has agreed to lend to the conduits in the event of a short-term disruption in the commercial paper market, subject to specified conditions. The Company receives fees for providing both types of liquidity agreements and considers these fees to be on fair market terms.

Finally, Citi is one of several named dealers in the commercial paper issued by the conduits and earns a market-based fee for providing such services. Along with third-party dealers, the Company makes a market in the commercial paper and may from time to time fund commercial paper pending sale to a third party. On specific dates with less liquidity in the market, the Company may hold in inventory commercial paper issued by conduits administered by the Company, as well as conduits administered by third parties. Separately, in the normal course of business, Citi purchases commercial paper, including commercial paper issued by Citigroup's conduits. At December 31, 2018 and 2017, the Company owned $5.5 billion and $9.3 billion, respectively, of the commercial paper issued by its administered conduits. The Company's investments were not driven by market illiquidity and the Company is not obligated under any agreement to purchase the commercial paper issued by the conduits.

The asset-backed commercial paper conduits are consolidated by Citi. The Company has determined that, through its roles as administrator and liquidity provider, it has the power to direct the activities that most significantly impact the entities’ economic performance. These powers include its ability to structure and approve the assets purchased by the conduits, its ongoing surveillance and credit mitigation activities, its ability to sell or repurchase assets out of the conduits and its liability management. In addition, as a result of all the Company’s involvement described above, it was concluded that Citi has an economic interest that could potentially be significant. However, the assets and liabilities of the conduits are separate and apart from those of Citigroup. No assets of any conduit are available to satisfy the creditors of Citigroup or any of its other subsidiaries.

Collateralized Loan Obligations (CLOs)

A collateralized loan obligation (CLO) is a VIE that purchases a portfolio of assets consisting primarily of non-investment grade corporate loans. CLOs issue multiple tranches of debt and equity to investors to fund the asset purchases and pay upfront expenses associated with forming the CLO. A third-party asset manager is contracted by the CLO to purchase the underlying assets from the open market and monitor the credit risk associated with those assets. Over the term of a CLO, the asset manager directs purchases and sales of assets in a manner consistent with the CLO’s asset management agreement and indenture. In general, the CLO asset manager will have the power to direct the activities of the entity that most significantly impact the economic performance of the CLO. Investors in a CLO, through their ownership of debt and/or equity in it, can also direct certain activities of the CLO, including removing its asset manager under limited circumstances, optionally redeeming the notes, voting on amendments to the CLO’s operating documents and other activities. A CLO has a finite life, typically 12 years.

Citi serves as a structuring and placement agent with respect to the CLOs. Typically, the debt and equity of the CLOs are sold to third-party investors. On occasion, certain Citi entities may purchase some portion of a CLO’s liabilities for investment purposes. In addition, Citi may purchase, typically in the secondary market, certain securities issued by the CLOs to support its market making activities.

The Company does not generally have the power to direct the activities that most significantly impact the economic performance of the CLOs, as this power is generally held by a third-party asset manager of the CLO. As such, those CLOs are not consolidated.

The following tables summarize selected cash flow information and retained interests related to Citigroup CLOs:



In millions of dollars	2018		2017		2016
Principal securitized	$	—	$	133	$	—
Proceeds from new securitizations	—		133		—
Cash flows received on retained interests and other net cash flows	127		107		39

Key assumptions used in measuring the fair value of retained interests at the date of sale or securitization of CLOs were as follows:



	Dec. 31, 2018	Dec. 31, 2017
Weighted average discount rate	—	1.4	%

The key assumptions used to value retained interests in CLOs, and the sensitivity of the fair value to adverse changes of 10% and 20%, are set forth in the tables below:



	Dec. 31, 2018	Dec. 31, 2017
Weighted average discount rate	—	1.1	%



In millions of dollars	Dec. 31, 2018		Dec. 31, 2017
Discount rates
Adverse change of 10%	$	—	$	(1	)
Adverse change of 20%	—		(1		)

All of Citi’s retained interests were held-to-maturity securities as of December 31, 2018 and substantially all were held-to-maturity securities as of December 31, 2017.

Asset-Based Financing

The Company provides loans and other forms of financing to VIEs that hold assets. Those loans are subject to the same credit approvals as all other loans originated or purchased by the Company. Financings in the form of debt securities or derivatives are, in most circumstances, reported in Trading account assets and accounted for at fair value through earnings. The Company generally does not have the power to direct the activities that most significantly impact these VIEs’ economic performance; thus, it does not consolidate them.

The primary types of Citi’s asset-based financings, total assets of the unconsolidated VIEs with significant involvement and Citi’s maximum exposure to loss are shown below. For Citi to realize the maximum loss, the VIE (borrower) would have to default with no recovery from the assets held by the VIE.



	December 31, 2018
In millions of dollars	Total unconsolidated VIE assets		Maximum exposure to unconsolidated VIEs
Type
Commercial and other real estate	$	23,918	$	6,928
Corporate loans	6,731		5,744
Hedge funds and equities	388		53
Airplanes, ships and other assets	41,534		19,387
Total	$	72,571	$	32,112



	December 31, 2017
In millions of dollars	Total unconsolidated VIE assets		Maximum exposure to unconsolidated VIEs
Type
Commercial and other real estate	$	15,370	$	5,445
Corporate loans	4,725		3,587
Hedge funds and equities	542		58
Airplanes, ships and other assets	39,202		16,849
Total	$	59,839	$	25,939

Municipal Securities Tender Option Bond (TOB) Trusts

Municipal TOB trusts may hold fixed- or floating-rate, taxable or tax-exempt securities issued by state and local governments and municipalities. TOB trusts are typically structured as single-issuer entities whose assets are purchased from either the Company or from other investors in the municipal securities market. TOB trusts finance the purchase of their municipal assets by issuing two classes of certificates: long-dated, floating rate certificates (“Floaters”) that are putable pursuant to a liquidity facility and residual interest certificates (“Residuals”). The Floaters are purchased by third-party investors, typically tax-exempt money market funds. The Residuals are purchased by the original owner of the municipal securities that are being financed.

From Citigroup’s perspective, there are two types of TOB trusts: customer and non-customer. Customer TOB trusts are those trusts utilized by customers of the Company to finance their securities, generally municipal securities. The Residuals issued by these trusts are purchased by the customer being financed. Non-customer TOB trusts are generally used by the Company to finance its own municipal securities investments; the Residuals issued by non-customer TOB trusts are purchased by the Company.

With respect to both customer and non-customer TOB trusts, Citi may provide remarketing agent services. If Floaters are optionally tendered and the Company, in its role as remarketing agent, is unable to find a new investor to purchase the optionally tendered Floaters within a specified period of time, Citigroup may, but is not obligated to, purchase the tendered Floaters into its own inventory. The level of the Company’s inventory of such Floaters fluctuates.

For certain customer TOB trusts, Citi may also serve as a voluntary advance provider. In this capacity, the Company may, but is not obligated to, make loan advances to customer TOB trusts to purchase optionally tendered Floaters that have not otherwise been successfully remarketed to new investors. Such loans are secured by pledged Floaters. As of December 31, 2018, Citi had no outstanding voluntary advances to customer TOB trusts.

For certain non-customer trusts, the Company also provides credit enhancement. At December 31, 2018 and 2017, none of the municipal bonds owned by non-customer TOB trusts were subject to a credit guarantee provided by the Company.

Citigroup also provides liquidity services to many customer and non-customer trusts. If a trust is unwound early due to an event other than a credit event on the underlying municipal bonds, the underlying municipal bonds are sold out of the trust and bond sale proceeds are used to redeem the outstanding trust certificates. If this results in a shortfall between the bond sale proceeds and the redemption price of the tendered Floaters, the Company, pursuant to the liquidity agreement, would be obligated to make a payment to the trust to satisfy that shortfall. For certain customer TOB trusts, Citigroup has also executed a reimbursement agreement with the holder of the Residual, pursuant to which the Residual holder is obligated to reimburse the Company for any payment the Company makes under the liquidity arrangement. These reimbursement agreements may be subject to daily margining based on changes in the market value of the underlying municipal bonds. In cases where a third party provides liquidity to a non-customer TOB trust, a similar reimbursement arrangement may be executed, whereby the Company (or a consolidated subsidiary of the Company), as Residual holder, would absorb any losses incurred by the liquidity provider.

For certain other non-customer TOB trusts, Citi serves as tender option provider. The tender option provider arrangement allows Floater holders to put their interests directly to the Company at any time, subject to the requisite notice period requirements, at a price of par.

At December 31, 2018 and 2017, liquidity agreements provided with respect to customer TOB trusts totaled $4.3 billion and $3.2 billion, respectively, of which $2.3 billion and $2.0 billion, respectively, were offset by reimbursement agreements. For the remaining exposure related to TOB transactions, where the residual owned by the customer was at least 25% of the bond value at the inception of the transaction, no reimbursement agreement was executed.

Citi considers both customer and non-customer TOB trusts to be VIEs. Customer TOB trusts are not consolidated by the Company, as the power to direct the activities that most significantly impact the trust’s economic performance rests with the customer Residual holder, which may unilaterally cause the sale of the trust’s bonds.

Non-customer TOB trusts generally are consolidated because the Company holds the Residual interest and thus has the unilateral power to cause the sale of the trust’s bonds.

The Company also provides other liquidity agreements or letters of credit to customer-sponsored municipal investment funds, which are not variable interest entities, and municipality-related issuers that totaled $6.1 billion as of December 31, 2018 and 2017. These liquidity agreements and letters of credit are offset by reimbursement agreements with various term-out provisions.

Municipal Investments

Municipal investment transactions include debt and equity interests in partnerships that finance the construction and rehabilitation of low-income housing, facilitate lending in new or underserved markets or finance the construction or operation of renewable municipal energy facilities. Citi generally invests in these partnerships as a limited partner and earns a return primarily through the receipt of tax credits and grants earned from the investments made by the partnership. The Company may also provide construction loans or permanent loans for the development or operation of real estate properties held by partnerships. These entities are generally considered VIEs. The power to direct the activities of these entities is typically held by the general partner. Accordingly, these entities are not consolidated by Citigroup.

Client Intermediation

Client intermediation transactions represent a range of transactions designed to provide investors with specified returns based on the returns of an underlying security, referenced asset or index. These transactions include credit-linked notes and equity-linked notes. In these transactions, the VIE typically obtains exposure to the underlying security, referenced asset or index through a derivative instrument, such as a total-return swap or a credit-default swap. In turn, the VIE issues notes to investors that pay a return based on the specified underlying security, referenced asset or index. The VIE invests the proceeds in a financial asset or a guaranteed insurance contract that serves as collateral for the derivative contract over the term of the transaction. The Company’s involvement in these transactions includes being the counterparty to the VIE’s derivative instruments and investing in a portion of the notes issued by the VIE. In certain transactions, the investor’s maximum risk of loss is limited and the Company absorbs risk of loss above a specified level. Citi does not have the power to direct the activities of the VIEs that most significantly impact their economic performance and thus it does not consolidate them.

Citi’s maximum risk of loss in these transactions is defined as the amount invested in notes issued by the VIE and the notional amount of any risk of loss absorbed by Citi through a separate instrument issued by the VIE. The derivative instrument held by the Company may generate a receivable from the VIE (for example, where the Company purchases credit protection from the VIE in connection with the VIE’s issuance of a credit-linked note), which is collateralized by the assets owned by the VIE. These derivative instruments are not considered variable interests and any associated receivables are not included in the calculation of maximum exposure to the VIE.

Investment Funds

The Company is the investment manager for certain investment funds and retirement funds that invest in various asset classes including private equity, hedge funds, real estate, fixed income and infrastructure. Citigroup earns a management fee, which is a percentage of capital under management, and may earn performance fees. In addition, for some of these funds the Company has an ownership interest in the investment funds. Citi has also established a number of investment funds as opportunities for qualified employees to invest in private equity investments. The Company acts as investment manager for these funds and may provide employees with financing on both recourse and non-recourse bases for a portion of the employees’ investment commitments.

In millions of dollars

Dec. 31, 2018

Dec. 31, 2017

Carrying value of retained interests