Citigroup Inc.

for periodic stress tests (the first round of which is in the process of beingimplemented). The Federal Reserve Board may also impose other prudentialstandards, including contingent capital requirements, based upon itsauthority to distinguish among bank holding companies such as Citigroupin relation to their perceived riskiness, complexity, activities, size and otherfactors. The exact nature of these future requirements remains uncertain.Further, the so-called “Collins Amendment” reflected in the FinancialReform Act will result in new minimum capital requirements for bankholding companies such as Citigroup, and provides for the phase-out of trustpreferred securities and other hybrid capital securities from Tier 1 Capital forregulatory capital purposes, beginning January 1, 2013. As of December 31,2010, Citigroup had approximately $15.4 billion in outstanding trustpreferred securities that will be subject to the provisions of the CollinsAmendment. As a result, Citigroup may need to replace certain of its existingTier 1 Capital with new capital.Accordingly, Citigroup may not be able to maintain sufficient capitalin light of the changing and uncertain regulatory capital requirementsresulting from the Financial Reform Act, the Basel Committee, and U.S. orinternational regulators, or Citigroup’s costs to maintain such capital levelsmay increase.Changes in regulation of derivatives under the FinancialReform Act, including certain central clearing andexchange trading activities, will require Citigroup torestructure certain areas of its derivatives business whichwill be disruptive and may adversely affect the results ofoperations from certain of its over-the-counter and otherderivatives activities.The Financial Reform Act and the regulations to be promulgated thereunderwill require certain over-the-counter derivatives to be standardized, subjectto requirements for transaction reporting, clearing through regulatorilyrecognized clearing facilities and trading on exchanges or exchangelikefacilities. The regulations implementing this aspect of the FinancialReform Act, including for example the definition of, and requirementsfor, “swap execution facilities” through which transactions and reportingin standardized products may be required to be carried out, and thedetermination of margin requirements, are still in the process of beingformulated, and thus, the final scope of the requirements is not known. Theserequirements will, however, necessitate changes to certain areas of Citi’sderivatives business structures and practices, including without limitationthe successful and timely installation of the appropriate technological andoperational systems to report and trade the applicable derivatives accurately,which will be disruptive, divert management attention and require additionalinvestment into such businesses.The above changes could also increase Citigroup’s exposure to theregulatorily recognized clearing facilities and exchanges, which could buildup into material concentrations of exposure. This could result in Citigrouphaving a significant dependence on the continuing efficient and effectivefunctioning of these clearing and trading facilities, and on their continuingfinancial stability.In addition, under the so-called “push-out” provisions of the FinancialReform Act and the regulations to be promulgated thereunder, derivativesactivities, with the exception of bona fide hedging activities and derivativesrelated to traditional bank-permissible reference assets, will be curtailedon FDIC-insured depository institutions. Citigroup, like many of its U.S.bank competitors, conducts a substantial portion of its derivatives activitiesthrough an insured depository institution. Moreover, to the extent thatcertain of Citi’s competitors conduct such activities outside of FDIC-insureddepository institutions, Citi would be disproportionately impacted by anyrestructuring of its business for push-out purposes. While the exact natureof the changes required under the Financial Reform Act is uncertain, thechanges that are ultimately implemented will require restructuring theseactivities which could negatively impact Citi’s results of operations fromthese activities.Regulatory requirements aimed at facilitating thefuture orderly resolution of large financial institutionscould result in Citigroup having to change its businessstructures, activities and practices in ways that negativelyimpact its operations.The Financial Reform Act requires Citi to plan for a rapid and orderlyresolution in the event of future material financial distress or failure,and to provide its regulators information regarding the manner in whichCitibank, N.A. and its other insured depository institutions are adequatelyprotected from the risk of non-bank affiliates. Regulatory requirementsaimed at facilitating future resolutions in the U.S. and globally couldresult in Citigroup having to restructure or reorganize businesses, legalentities, or intercompany systems or transactions in ways that negativelyimpact Citigroup’s operations. For example, Citi could be required to createnew subsidiaries instead of branches in foreign jurisdictions, or createseparate subsidiaries to house particular businesses or operations (so-called“subsidiarization”), which would, among other things, increase Citi’s legal,regulatory and managerial costs, negatively impact Citi’s global capital andliquidity management and potentially impede its global strategy.While Citigroup believes one of its competitive advantagesis its extensive global network, Citi’s extensive operationsoutside of the U.S. subject it to emerging market andsovereign volatility and numerous inconsistent orconflicting regulations, which increase Citi’s compliance,regulatory and other costs.Citigroup believes its extensive global network—which includes a physicalpresence in approximately 100 countries and services offered in over160 countries and jurisdictions—provides it a competitive advantage inservicing the broad financial services needs of large multinational clients andits customers around the world, including in many of the world’s emergingmarkets. This global footprint, however, subjects Citi to emerging market andsovereign volatility and extensive, often inconsistent or conflicting, regulation,all of which increase Citi’s compliance, regulatory and other costs.72