Citigroup Inc.

activities together with gains and losses related to non-derivative instrumentswithin the same trading portfolios, as this represents the way these portfoliosare risk managed.In millions of dollars 2010 (1) 2009 (1)Interest rate contracts $ 3,231 $ 6,211Foreign exchange 1,852 2,762Equity contracts 995 (334)Commodity and other 126 924Credit derivatives 1,313 (3,495)Total Citigroup (2) $ 7,517 $ 6,068(1) Beginning in the second quarter of 2010, for clarity purposes, Citigroup reclassified the MSR markto-marketand MSR hedging activities from multiple income statement lines into Other revenue. Allperiods presented reflect this reclassification.(2) Also see Note 7 to the Consolidated Financial Statements.The amounts recognized in Other revenue in the Consolidated Statementof Income for the years ended December 31, 2010 and December 31, 2009related to derivatives not designated in a qualifying hedging relationship andnot recorded in Trading account assets or Trading account liabilities areshown below. The table below does not include the offsetting gains/losses onthe hedged items, which amounts are also recorded in Other revenue.In millions of dollars 2010 (1) 2009 (1)Interest rate contracts $ (391) $ (73)Foreign exchange (2,098) 3,851Equity contracts — (7)Commodity and other — —Credit derivatives (502) —Total Citigroup (2) $(2,991) $ 3,771(1) Beginning in the second quarter of 2010, for clarity purposes, Citigroup reclassified the MSR markto-marketand MSR hedging activities from multiple income statement lines into Other revenue. Allperiods presented reflect this reclassification.(2) Non-designated derivatives are derivative instruments not designated in qualifyinghedging relationships.Accounting for Derivative HedgingCitigroup accounts for its hedging activities in accordance with ASC 815,Derivatives and Hedging (formerly SFAS 133). As a general rule, hedgeaccounting is permitted where the Company is exposed to a particular risk,such as interest-rate or foreign-exchange risk, that causes changes in the fairvalue of an asset or liability or variability in the expected future cash flows of anexisting asset, liability or a forecasted transaction that may affect earnings.Derivative contracts hedging the risks associated with the changes in fairvalue are referred to as fair value hedges, while contracts hedging the risksaffecting the expected future cash flows are called cash flow hedges. Hedgesthat utilize derivatives or debt instruments to manage the foreign exchangerisk associated with equity investments in non-U.S.-dollar functionalcurrency foreign subsidiaries (net investment in a foreign operation) arecalled net investment hedges.If certain hedging criteria specified in ASC 815 are met, including testingfor hedge effectiveness, special hedge accounting may be applied. The hedgeeffectiveness assessment methodologies for similar hedges are performedin a similar manner and are used consistently throughout the hedgingrelationships. For fair value hedges, the changes in value of the hedgingderivative, as well as the changes in value of the related hedged item due tothe risk being hedged, are reflected in current earnings. For cash flow hedgesand net investment hedges, the changes in value of the hedging derivative arereflected in Accumulated other comprehensive income (loss) in Citigroup’sstockholders’ equity, to the extent the hedge is effective. Hedge ineffectiveness,in either case, is reflected in current earnings.For asset/liability management hedging, the fixed-rate long-term debtmay be recorded at amortized cost under current U.S. GAAP. However, byelecting to use ASC 815 (SFAS 133) hedge accounting, the carrying valueof the debt is adjusted for changes in the benchmark interest rate, with anysuch changes in value recorded in current earnings. The related interest-rateswap is also recorded on the balance sheet at fair value, with any changesin fair value reflected in earnings. Thus, any ineffectiveness resulting fromthe hedging relationship is recorded in current earnings. Alternatively, aneconomic hedge, which does not meet the ASC 815 hedging criteria, wouldinvolve recording only the derivative at fair value on the balance sheet, withits associated changes in fair value recorded in earnings. The debt wouldcontinue to be carried at amortized cost and, therefore, current earningswould be impacted only by the interest rate shifts and other factors thatcause the change in the swap’s value and the underlying yield of the debt.This type of hedge is undertaken when hedging requirements cannot beachieved or management decides not to apply ASC 815 hedge accounting.Another alternative for the Company would be to elect to carry the debt atfair value under the fair value option. Once the irrevocable election is madeupon issuance of the debt, the full change in fair value of the debt wouldbe reported in earnings. The related interest rate swap, with changes in fairvalue, would also be reflected in earnings, and provides a natural offset to thedebt’s fair value change. To the extent the two offsets are not exactly equal,the difference would be reflected in current earnings. This type of economichedge is undertaken when the Company prefers to follow this simpler methodthat achieves generally similar financial statement results to an ASC 815 fairvalue hedge.Key aspects of achieving ASC 815 hedge accounting are documentationof hedging strategy and hedge effectiveness at the hedge inception andsubstantiating hedge effectiveness on an ongoing basis. A derivative mustbe highly effective in accomplishing the hedge objective of offsetting eitherchanges in the fair value or cash flows of the hedged item for the riskbeing hedged. Any ineffectiveness in the hedge relationship is recognizedin current earnings. The assessment of effectiveness excludes changes inthe value of the hedged item that are unrelated to the risks being hedged.Similarly, the assessment of effectiveness may exclude changes in the fairvalue of a derivative related to time value that, if excluded, are recognized incurrent earnings.253