Citigroup Inc.

The emerging markets in which Citi operates or invests are often morevolatile than the U.S. markets or other developed markets, and are subjectto changing political, social, economic and financial factors, includingcurrency exchange laws or other laws or restrictions applicable to companiesor investments in those markets or countries. Citi’s extensive globaloperations also expose it to sovereign risk, particularly in the countries inwhich Citi has a physical presence. There have recently been instances ofdisruptions and internal strife in some countries in which Citigroup operateswhich can place Citi’s staff at risk and can result in losses, particularlyif the sovereign defaults or nationalizes Citi’s assets. These risks must bebalanced against Citigroup’s obligations to its customers in the countryand its obligations to the central bank as a major international participantin the functioning of the country’s wholesale market. In addition, Citi’sglobal footprint also subjects it to higher compliance risk relating toU.S. regulations primarily focused on various aspects of global corporateactivities, such as anti-money laundering and Foreign Corrupt PracticesAct violations, which can also be more acute in less developed markets andwhich can require substantial investments in order to comply.Citigroup believes the level of regulation of financial institutions aroundthe world will likely further increase as a result of the recent financial crisisand the numerous regulatory efforts underway outside the U.S., which,to date, have not necessarily been undertaken on a coordinated basis. Forexample, uncertainties in the global regulatory arena that could impactCitigroup include, among others, different and inconsistent insolvency andresolution regimes and capital and liquidity requirements that may result inmandatory “ring-fencing” of capital or liquidity in certain jurisdictions, thusincreasing Citigroup’s overall global capital and liquidity needs, as well asthe possibility of bank taxes or fees, some of which could be significant.The extensive regulations to which Citi is subject, or may be subject in thefuture, are often inconsistent or conflicting, not only with U.S. regulations,but among jurisdictions around the world. Moreover, depending on the finalregulations, Citi could be disproportionately impacted in comparison to otherglobal financial institutions. Any failure by Citi to remain in compliance withapplicable U.S. regulations as well as the regulations in the countries andmarkets in which it operates as a result of its global footprint could resultin fines, penalties, injunctions or other similar restrictions, any of whichcould negatively impact Citi’s earnings as well as its reputation generally. Inaddition, complying with inconsistent, conflicting or duplicative regulationsrequires extensive time and effort and further increases Citigroup’scompliance, regulatory and other costs.Provisions of the Financial Reform Act and otherregulations relating to securitizations will imposeadditional costs on securitization transactions, increaseCitigroup’s potential liability in respect of securitizationsand may prohibit Citigroup from performing certain rolesin securitizations, each of which could make it impracticalto execute certain types of transactions and may have anoverall negative effect on the recovery of the securitizationmarkets.Citigroup plays a variety of roles in asset securitization transactions,including acting as underwriter of asset-backed securities, depositor ofthe underlying assets into securitization vehicles and counterparty tosecuritization vehicles under derivative contracts. The Financial ReformAct contains a number of provisions intended to increase the regulationof securitizations. These include a requirement that securitizers retainun-hedged exposure to at least 5% of the economic risk of certain assetsthey securitize, a prohibition on securitization participants engaging intransactions that would involve a conflict with investors in the securitizationand extensive additional requirements for review and disclosure of thecharacteristics of the assets underlying securitizations. In addition, theFDIC has adopted new criteria for establishing transfers of assets intosecuritization transactions from entities subject to its resolution authority,and the FASB has modified the requirements for transfers of assets tobe recognized for financial accounting purposes and for securitizationvehicles to be consolidated with a securitization participant. In April 2010,the SEC proposed further additional, extensive regulation of securitizationtransactions.The cumulative effect of these extensive regulatory changes, as well asother potential future regulatory changes (e.g., GSE reform), on the natureand profitability of securitization transactions, and Citi’s participationtherein, cannot currently be assessed. It is likely, however, that these variousmeasures will increase the costs of executing securitization transactions,could effectively limit Citi’s overall volume of, and the role Citi may playin, securitizations, expose Citigroup to additional potential liability forsecuritization transactions and make it impractical for Citigroup to executecertain types of securitization transactions it previously executed. In addition,certain sectors of the overall securitization markets, such as residentialmortgage-backed securitizations, have been inactive or experienceddramatically diminished transaction volumes for the last several years dueto the financial crisis. The recovery of the overall securitization markets,and thus the opportunities for Citigroup to participate in securitizationtransactions, could also be adversely affected by these various regulatoryreform measures.73