Citigroup Inc.

Trading PortfoliosPrice risk in trading portfolios is monitored using a series of measures,including:• factor sensitivities;• value-at-risk (VAR); and• stress testing.Factor sensitivities are expressed as the change in the value of a positionfor a defined change in a market risk factor, such as a change in the valueof a Treasury bill for a one-basis-point change in interest rates. Citigroup’sindependent market risk management ensures that factor sensitivities arecalculated, monitored and, in most cases, limited, for all relevant risks takenin a trading portfolio.VAR estimates the potential decline in the value of a position or a portfoliounder normal market conditions. The VAR method incorporates the factorsensitivities of the trading portfolio with the volatilities and correlations ofthose factors and is expressed as the risk to Citigroup over a one-day holdingperiod, at a 99% confidence level. Citigroup’s VAR is based on the volatilitiesof and correlations among a multitude of market risk factors as well asfactors that track the specific issuer risk in debt and equity securities.Stress testing is performed on trading portfolios on a regular basis toestimate the impact of extreme market movements. It is performed onboth individual trading portfolios, and on aggregations of portfolios andbusinesses. Independent market risk management, in conjunction with thebusinesses, develops stress scenarios, reviews the output of periodic stresstestingexercises, and uses the information to make judgments as to theongoing appropriateness of exposure levels and limits.Each trading portfolio has its own market risk limit frameworkencompassing these measures and other controls, including permittedproduct lists and a new product approval process for complex products.Total revenues of the trading business consist of:• customer revenue, which includes spreads from customer flow andpositions taken to facilitate customer orders;• proprietary trading activities in both cash and derivative transactions; and• net interest revenue.All trading positions are marked to market, with the result reflected inearnings. In 2010, negative trading-related revenue (net losses) was recorded for55 of 260 trading days. Of the 55 days on which negative revenue (net losses) wasrecorded, one day was greater than $100 million. The following histogram of totaldaily revenue or loss captures trading volatility and shows the number of days inwhich Citigroup’s VaR trading-related revenues fell within particular ranges.Histogram of VAR Daily-Trading Related Revenue—12 Months Ended December 31, 20103025Number of Trading Days20151050(130) to (120)(120) to (110)(110) to (100)(100) to (90)(90) to (80)(80) to (70)(70) to (60)(60) to (50)(50) to (40)(40) to (30)(30) to (20)(20) to (10)(10) to 00 to 1010 to 2020 to 3030 to 4040 to 5050 to 6060 to 7070 to 8080 to 9090 to 100100 to 110110 to 120120 to 130130 to 140140 to 150150 to 160160 to 170170 to 180180 to 190190 to 200200 to 210210 to 220220 to 230230 to 240240 to 250250 to 260260 to 470Trading Revenues Comparable to VAR (in millions of dollars)Citigroup periodically performs extensive back-testing of many hypotheticaltest portfolios as one check of the accuracy of its VAR. Back-testing is theprocess in which the daily VAR of a portfolio is compared to the actual dailychange in the market value of its transactions. Back-testing is conductedto confirm that the daily market value losses in excess of a 99% confidencelevel occur, on average, only 1% of the time. The VAR calculation for thehypothetical test portfolios, with different degrees of risk concentration, meetsthis statistical criterion.119