Citigroup Inc.

24. CONCENTRATIONS OF CREDIT RISKConcentrations of credit risk exist when changes in economic, industry orgeographic factors similarly affect groups of counterparties whose aggregatecredit exposure is material in relation to Citigroup’s total credit exposure.Although Citigroup’s portfolio of financial instruments is broadly diversifiedalong industry, product, and geographic lines, material transactions arecompleted with other financial institutions, particularly in the securitiestrading, derivatives, and foreign exchange businesses.In connection with the Company’s efforts to maintain a diversifiedportfolio, the Company limits its exposure to any one geographic region,country or individual creditor and monitors this exposure on a continuousbasis. At December 31, 2010, Citigroup’s most significant concentration ofcredit risk was with the U.S. government and its agencies. The Company’sexposure, which primarily results from trading assets and investmentsissued by the U.S. government and its agencies, amounted to $176.4 billionand $126.6 billion at December 31, 2010 and 2009, respectively. TheMexican and Japanese governments and their agencies are the next largestexposures, which are rated investment grade by both Moody’s and S&P. TheCompany’s exposure to Mexico amounted to $44.2 billion and $41.4 billionat December 31, 2010 and 2009, respectively, and is composed of investmentsecurities, loans and trading assets. The Company’s exposure to Japanamounted to $39.2 billion and $31.8 billion at December 31, 2010 and2009, respectively, and is composed of investment securities, loans andtrading assets.25. FAIR VALUE MEASUREMENTSFAS 157 (now ASC 820-10) defines fair value, establishes a consistentframework for measuring fair value and expands disclosure requirementsabout fair value measurements. Fair value is defined as the price thatwould be received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date. Amongother things, the standard requires the Company to maximize the useof observable inputs and minimize the use of unobservable inputs whenmeasuring fair value. In addition, it precludes the use of block discountswhen measuring the fair value of instruments traded in an active market;such discounts were previously applied to large holdings of publicly tradedequity securities. It also requires recognition of trade-date gains related tocertain derivative transactions whose fair values have been determined usingunobservable market inputs.Under SFAS 157, the probability of default of a counterparty is factoredinto the valuation of derivative positions, includes the impact of Citigroup’sown credit risk on derivatives and other liabilities measured at fair value, andalso eliminates the portfolio servicing adjustment that is no longer necessary.Fair Value HierarchyASC 820-10 also specifies a hierarchy of valuation techniques basedon whether the inputs to those valuation techniques are observableor unobservable. Observable inputs reflect market data obtained fromindependent sources, while unobservable inputs reflect the Company’smarket assumptions. These two types of inputs have created the followingfair value hierarchy:• Level 1: Quoted prices for identical instruments in active markets.• Level 2: Quoted prices for similar instruments in active markets; quotedprices for identical or similar instruments in markets that are notactive; and model-derived valuations in which all significant inputs andsignificant value drivers are observable in active markets.• Level 3: Valuations derived from valuation techniques in which one ormore significant inputs or significant value drivers are unobservable.This hierarchy requires the use of observable market data when available.The Company considers relevant and observable market prices in itsvaluations where possible. The frequency of transactions, the size of thebid‐ask spread and the amount of adjustment necessary when comparingsimilar transactions are all factors in determining the liquidity of marketsand the relevance of observed prices in those markets.259