Download emerald capital designated activity company series prospectus

Dated 31 May 2017
EMERALD CAPITAL DESIGNATED ACTIVITY
COMPANY
(incorporated with limited liability in Ireland, and formerly known as
Emerald Capital Limited)
SERIES PROSPECTUS
SERIES NO: 2017-02
USD 35,000,000 Fixed Rate The Kingdom of Saudi
Arabia Credit Linked Notes due 2026
issued pursuant to its
Emerging Markets Secured Note Issuance Programme
arranged by
CITIGROUP GLOBAL MARKETS LIMITED
The attention of investors is drawn to the section headed “Risk Factors” on page 4
of this Series Prospectus
Citi
This Series Prospectus, under which the Series No. 2017-02 Fixed Rate The Kingdom of Saudi
Arabia Credit Linked Notes due 2026 (the “Notes”) are issued, incorporates by reference, and
should be read in conjunction with the Base Prospectus dated 19 August 2016 (the “Base
Prospectus”) relating to the issuance by Emerald Capital Designated Activity Company (formerly
known as Emerald Capital Limited) (the “Issuer”) of secured notes under the Emerging Markets
Secured Note Issuance Programme (the “Programme”). Terms defined in the Base Prospectus
have the same meaning in this Series Prospectus. This Series Prospectus has been approved by
the Central Bank of Ireland (the “Central Bank”), as competent authority under Directive
2003/71/EC (as amended) (the “Prospectus Directive”). The Central Bank only approves this
Series Prospectus as meeting the requirements imposed under Irish and EU law pursuant to the
Prospectus Directive. This Series Prospectus constitutes a “prospectus” for the purposes of
Regulation 13 of the Prospectus (Directive 2003/71/EC) Regulations 2005 and Article 5 of the
Prospectus Directive and for the purpose of giving information with regard to the Issuer which is
necessary to enable investors to make an informed assessment of the assets and liabilities,
financial position, profit and losses and prospects of the Issuer. Application has been made to the
Irish Stock Exchange for the Notes to be admitted to the Official List and to trading on its Main
Securities Market. This Series Prospectus is to be read in conjunction with all documents which
are deemed to be incorporated herein by reference.
The Notes are cash-settled credit linked notes. In connection with the Notes, the Issuer has
entered into a swap confirmation (the “Credit Default Swap Confirmation”) documenting a credit
default swap transaction referencing a Reference Entity (the “Credit Default Swap”) and a swap
confirmation (the “Asset Swap Confirmation” and together with the Credit Default Swap
Confirmation, the “Swap Confirmations”) documenting an asset swap transaction (the “Asset
Swap”) under the ISDA Master Agreement including the Schedule (as defined in the ISDA Master
Agreement) in the form of the Swap Terms (August 2016 Version) relating to the Programme (as
such Schedule may have been amended by the Swap Confirmations) (the ISDA Master
Agreement, the Schedule thereto and the Swap Confirmations together, the “Swap Agreement”)
with Citigroup Global Markets Limited (“CGML”, in such capacity, the “Swap Counterparty”). The
Forms of the Swap Confirmations in relation to the Credit Default Swap and the Asset Swap are as
set out in Annexes 4 and 5 hereto. The Scheduled Maturity Date of the Notes is expected to fall on
or around 22 June 2026. However, the actual maturity date of the Notes may be extended beyond
the Scheduled Maturity Date in certain circumstances where the Swap Counterparty determines
that a Credit Event or related events have occurred or may occur on or prior to the Scheduled
Maturity Date and delivers a Potential Credit Event Notice or where the Termination Date of the
Credit Default Swap falls after the Scheduled Termination Date of the Credit Default Swap.
Noteholders will not receive any additional amounts in respect of any such postponement. See
paragraph 39 of the Terms and Conditions of the Notes below.
Capitalised terms used but not otherwise defined herein or in the Base Prospectus have the
meaning given to them in Annex 1 and, if not defined in Annex 1, such terms shall have the
meaning given to them in the Swap Agreement. The Annexes to this Series Prospectus form part
of, and should be read together with, this Series Prospectus.
Investors are advised to refer to the forms of the Credit Default Swap Confirmation and
Asset Swap Confirmation attached as Annexes 4 and 5, respectively.
The delivery of this Series Prospectus at any time does not imply that any information contained
herein is correct at any time subsequent to the date hereof.
The Issuer accepts responsibility for the information contained in this Series Prospectus. To the
best of the knowledge and belief of the Issuer (which has taken all reasonable care to ensure that
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such is the case) the information contained in this Series Prospectus is in accordance with the
facts and does not omit anything likely to affect the import of such information.
No person has been authorised to give any information or to make any representation other than
those contained in this Series Prospectus in connection with the issue and sale of the Notes and, if
given or made, such information or representation must not be relied upon as having been
authorised by the Issuer or CGML (in such capacity, the “Dealer”).
The net proceeds of this issue were USD 35,000,000, which were applied by the Issuer to
purchase the Initial Collateral on the Issue Date.
The Notes have not been and will not be registered under the U.S. Securities Act of 1933, as
amended (the “Securities Act”), no person has registered nor will register as a commodity pool
operator of the Issuer under the U.S. Commodity Exchange Act of 1936, as amended (the “CEA”),
and the rules of the U.S. Commodity Futures Trading Commission thereunder, and the Notes may
not be offered, sold, pledged or otherwise transferred within the United States or to, or for the
account or benefit of, any person who is (i) a U.S. person (as such term is defined under Rule
902(k)(1) of Regulation S under the Securities Act), (ii) not a Non-United States person (as defined
in Rule 4.7 under the CEA, but excluding, for the purposes of subsection (D) thereof, the exception
to the extent that it would apply to persons who are not Non-United States persons) or (iii) a U.S.
person (as defined in the credit risk retention regulations issued under Section 15G of the U.S.
Securities Exchange Act of 1934). For a description of certain further restrictions on offers and
sales of Notes and distribution of the Base Prospectus and the Series Prospectus, see
“Subscription and Sale and Transfer Restrictions” in the Base Prospectus.
If the Issuer is deemed to be a covered fund, then, in the absence of regulatory relief, the
provisions of the Volcker Rule and its related regulatory provisions will impact the ability of U.S.
banking institutions to hold an ownership interest in the Issuer or enter financial transactions with
the Issuer. Investors are required to independently consider the potential impact of the Volcker
Rule in respect of any investment in the Notes. See “Risk Factors – U.S. Regulatory
considerations – Risks relating to U.S. Volcker Rule” below.
This Series Prospectus does not constitute, and may not be used for the purposes of, an offer or
solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorised or to
any person to whom it is unlawful to make such offer or solicitation, and no action is being taken to
permit an offering of the Notes or the distribution of this Series Prospectus in any jurisdiction
where such action is required.
The credit ratings included or referred to in the Series Prospectus have been either issued or
endorsed by Moody’s Investors Service Limited (“Moody’s”), Standard & Poor’s Credit Market
Services Europe Limited (“S&P”) and Fitch Ratings Limited (“Fitch”) unless otherwise stated.
Moody’s, S&P and Fitch are established in the European Union and registered under Regulation
(EC) 1060/2009 on credit rating agencies. A rating is not a recommendation to buy, sell or hold
securities and may be subject to revision, suspension or withdrawal at any time by the assigning
rating agency.
In this Series Prospectus, references to “EUR” are to the single currency adopted and retained by
certain member states of the European Community pursuant to the Treaty establishing the
European Community, as amended by the Treaty on European Union, and references to “USD”
are to United States Dollars.
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TABLE OF CONTENTS
RISK FACTORS ................................................................................................................................ 4
INCORPORATION BY REFERENCE ............................................................................................. 29
TERMS AND CONDITIONS OF THE NOTES ................................................................................ 30
Annex 1 Defined Terms ................................................................................................................... 47
Annex 2 Security and Collateral ...................................................................................................... 49
Annex 3 The Swap Agreement ........................................................................................................ 52
Annex 4 Form of the Credit Default Swap Confirmation ................................................................. 57
Annex 5 Form of the Asset Swap Confirmation .............................................................................. 68
Annex 6 Description of the Issuer ................................................................................................... 74
DESCRIPTION OF THE SWAP COUNTERPARTY........................................................................ 76
SUBSCRIPTION AND SALE AND TRANSFER RESTRICTIONS .................................................. 77
GENERAL INFORMATION ............................................................................................................. 79
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RISK FACTORS
THE CONSIDERATIONS SET OUT BELOW ARE NOT, AND ARE NOT INTENDED TO BE, A
COMPREHENSIVE LIST OF ALL CONSIDERATIONS RELEVANT TO A DECISION TO
PURCHASE OR HOLD ANY NOTES. PROSPECTIVE INVESTORS SHOULD ALSO READ THE
BASE PROSPECTUS, THE RISK FACTORS SET OUT THEREIN AND THE DETAILED
INFORMATION SET OUT ELSEWHERE IN THIS SERIES PROSPECTUS.
The Issuer believes that the following factors may affect its ability to fulfil its obligations under the
Notes issued under the Programme. The Issuer is not in a position to express a view on the
likelihood of any contingency highlighted by a risk factor occurring.
Factors which the Issuer believes may be material for the purpose of assessing the market risks
associated with Notes issued under the Programme are also described below.
The Issuer believes that the factors described below represent the principal risks inherent in
investing in Notes issued under the Programme, but the inability of the Issuer to pay interest,
principal or other amounts on or in connection with the Notes may occur for other reasons and the
Issuer does not represent that the statements below regarding the risks of holding the Notes are
exhaustive. Prospective investors should also read the detailed information set out elsewhere in
this Series Prospectus (including any documents incorporated by reference herein) and reach their
own views prior to making any investment decision.
This Series Prospectus, read together with the information incorporated herein, identifies in
general terms certain information that a prospective investor should consider prior to making an
investment in the Notes. However, a prospective investor should, without any reliance on Citigroup
Global Markets Limited or its affiliates, conduct its own thorough analysis (including its own
accounting, legal and tax analysis) prior to deciding whether to invest in the Notes as any
evaluation of the suitability for an investor of an investment in the Notes depends upon a
prospective investor’s particular financial and other circumstances, as well as on the specific terms
of the Notes and, if it does not have experience in financial, business and investment matters
sufficient to permit it to make such a determination, it should consult with its financial adviser prior
to deciding to make an investment on the suitability of the Notes.
This Series Prospectus is not, and does not purport to be, investment advice, and neither the
Issuer nor Citigroup Global Markets Limited makes any recommendation as to the suitability of the
Notes. The provision of this Series Prospectus to prospective investors is not based on any
prospective investor’s individual circumstances and should not be relied upon as an assessment of
suitability for any prospective investor of the Notes. Even if the Issuer or Citigroup Global Markets
Limited possesses limited information as to the objectives of any prospective investor in relation to
any transaction, series of transactions or trading strategy, this will not be deemed sufficient for any
assessment of suitability for such person of the Notes. Any trading or investment decisions a
prospective investor takes are in reliance on its own analysis and judgement and/or that of its
advisers and not in reliance on the Issuer, Citigroup Global Markets Limited or any of their
respective affiliates.
In particular, each prospective investor in the Notes must determine, based on its own
independent review and such professional advice as it deems appropriate under the
circumstances, that its acquisition of the Notes (i) is fully consistent with its (or, if it is acquiring the
Notes in a fiduciary capacity, the beneficiary’s) financial needs, objectives and condition, (ii)
complies and is fully consistent with all investment policies, guidelines and restrictions applicable
to it (whether acquiring the Notes as principal or in a fiduciary capacity) and (iii) is a fit, proper and
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suitable investment for it (or, if it is acquiring the Notes in a fiduciary capacity, for the beneficiary),
notwithstanding the clear and substantial risks inherent in investing in or holding the Notes.
The Notes
The Notes are complex instruments that involve substantial risks and are suitable only for
sophisticated investors who have sufficient knowledge and experience and access to such
professional advisers as they shall consider necessary in order to make their own evaluation of the
risks and the merits of such an investment (including without limitation the tax, accounting, credit,
legal, regulatory and financial implications for them of such an investment) and who have
considered the suitability of such Notes in light of their own circumstances and financial condition.
Prospective investors should ensure that they understand the nature of the risks posed by an
investment in the Notes, and the extent of their exposure as a result of such investment in the
Notes and, before making their investment decision, should consider carefully all of the information
set forth in the Base Prospectus and, in particular, the considerations set forth below and in this
Series Prospectus. Owing to the structured nature of the Notes, their price may be more volatile
than that of unstructured securities.
Investors
Each prospective investor in the Notes should have sufficient financial resources and liquidity to
bear all of the risks of an investment in the Notes, including where principal and interest may
reduce as a result of the occurrence of different events whether related to the creditworthiness of
any entity or otherwise or changes in particular rates, prices or indices, or where the currency for
principal or interest payments is different from the prospective investor’s currency.
Investment activities of certain investors are subject to investment laws and regulations, or review
or regulation by certain authorities. Each prospective investor should therefore consult its
professional advisers to determine whether and to what extent (i) the Notes are legal investments
for it, and/or (ii) other restrictions apply to its purchase or, if relevant, pledge of any Notes.
Financial institutions should consult their professional advisers or the appropriate regulators to
determine the appropriate treatment of the Notes under any applicable risk-based capital or similar
rules.
No fiduciary role
None of the Issuer, the Arranger, the Dealer, the Custodian, the Trustee, the Agents or the Swap
Counterparty (excluding the Issuer, the “Transaction Parties”) or any of their respective affiliates
is acting as an investment adviser, and none of them (other than the Trustee) assumes any
fiduciary obligation to any purchaser of Notes or any other party, including the Issuer.
None of the Issuer, the Transaction Parties, or any of their respective affiliates assumes any
responsibility for conducting or failing to conduct any investigation into the business, financial
condition, prospects, creditworthiness, status and/or affairs of any issuer of any Collateral or the
terms thereof or (except in the case of the Swap Counterparty) the Swap Counterparty.
Investors may not rely on the views or advice of the Issuer or the Transaction Parties for any
information in relation to any person other than such Issuer or such Transaction Party.
No reliance
A prospective purchaser may not rely on the Issuer or the Transaction Parties or any of their
respective affiliates in connection with its determination as to the legality of its acquisition of the
Notes or as to the other matters referred to above.
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No representations
None of the Issuer, the Transaction Parties or any of their respective affiliates in respect of the
Notes makes any representation or warranty, express or implied, in respect of any Collateral or
any issuer of any Collateral or (except in the case of the Swap Counterparty) of the Swap
Counterparty or in respect of the Swap Agreement or in respect of any information contained in
any documents prepared, provided or filed by or on behalf of any such issuer or in respect of such
Collateral or (except in the case of the Swap Counterparty) of the Swap Counterparty or in respect
of the Swap Agreement with any exchange, governmental, supervisory or self regulatory authority
or any other person.
Risk Factors relating to the Issuer
The Issuer is a special purpose vehicle
The Issuer’s sole business is the raising of money by issuing notes or other obligations for the
purposes of purchasing assets and entering into related derivatives and other contracts. The
Issuer has covenanted not to, as long as any of the Notes (if any) remain outstanding, without the
consent of the Trustee, have any subsidiaries or employees, purchase, own, lease or otherwise
acquire any real property (including office premises or like facilities), consolidate or merge with any
other person, declare any dividends or issue any shares (other than such shares as were in issue
on the date of its incorporation). As such, the Issuer has, and will have, no assets other than its
issued and paid-up share capital, such fees (as agreed) payable to it in connection with the issue
of Notes or entry into other obligations from time to time and any Mortgaged Property and any
other assets on which Notes or other obligations are secured. There is no day-to-day management
of the business of the Issuer.
Regulation of the Issuer by any regulatory authority
The Issuer is not required to be licensed, registered or authorised under any current securities,
commodities, insurance or banking laws or regulations of its jurisdiction of incorporation. There is
no assurance, however, that in the future such regulatory authorities would not take a contrary
view regarding the applicability of any such laws or regulations to the Issuer. There is also no
assurance that the regulatory authorities in other jurisdictions would not require the Issuer to be
licensed or authorised under any securities, commodities, insurance or banking laws or regulations
of those jurisdictions. Any requirement to be licensed or authorised could have an adverse effect
on the Issuer and on the holders of the Notes.
Preferred creditors under Irish law
Under Irish law, upon an insolvency of an Irish company such as the Issuer, when applying the
proceeds of assets subject to fixed security that may have been realised in the course of a
liquidation or receivership, the claims of a limited category of preferential creditors will take priority
over the claims of creditors holding the relevant fixed security. These preferred claims include the
remuneration, costs and expenses properly incurred by any examiner of the company (that may
include any borrowings made by an examiner to fund the company’s requirements for the duration
of his appointment) that have been approved by the Irish courts (see “Examinership” below).
The holder of a fixed security over the book debts of an Irish tax resident company (that would
include the Issuer) may be required by the Irish Revenue Commissioners, by notice in writing from
the Irish Revenue Commissioners, to pay to them sums equivalent to those that the holder
received in payment of debts due to it by the company.
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Where notice has been given to the Irish Revenue Commissioners of the creation of the security
within 21 calendar days of its creation by the holder of the security, the holder’s liability is limited to
the amount of certain outstanding Irish tax liabilities of the company (including liabilities in respect
of value added tax) arising after the issuance of the Irish Revenue Commissioners’ notice to the
holder of fixed security.
The Irish Revenue Commissioners may also attach any debt due to an Irish tax resident company
by another person in order to discharge any liabilities of the company in respect of outstanding tax,
whether the liabilities are due on its own account or as an agent or trustee. The scope of this right
of the Irish Revenue Commissioners has not yet been considered by the Irish courts and it may
override the rights of holders of security (whether fixed or floating) over the debt in question.
In relation to the disposal of assets of any Irish tax resident company that are subject to security, a
person entitled to the benefit of the security may be liable for tax in relation to any capital gains
made by the company on a disposal of those assets on exercise of the security.
The essence of a fixed charge is that the chargor does not have liberty to deal with the assets that
are the subject matter of the security in the sense of disposing of such assets or expending or
appropriating the moneys or claims constituting such assets and accordingly, if and to the extent
that such liberty is given to the Issuer, any charge constituted by the Trust Deed may operate as a
floating, rather than a fixed charge.
In particular, the Irish courts have held that in order to create a fixed charge on receivables, it is
necessary to oblige the chargor to pay the proceeds of collection of the receivables into a
designated bank account and to prohibit the chargor from withdrawing or otherwise dealing with
the moneys standing to the credit of such account without the consent of the chargee.
Depending upon the level of control actually exercised by the chargor, there is therefore a
possibility that the fixed security purported to be created by the Trust Deed would be regarded by
the Irish courts as a floating charge.
Floating charges have certain weaknesses, including the following:
(a)
they have weak priority against purchasers (who are not on notice of any negative pledge
contained in the floating charge) and the chargees of the assets concerned and against
lien holders, execution creditors and creditors with rights of set-off;
(b)
as discussed above, they rank after certain preferential creditors, such as claims of
employees and certain taxes on winding-up;
(c)
they rank after certain insolvency remuneration expenses and liabilities;
(d)
the examiner of a company has certain rights to deal with the property covered by the
floating charge; and
(e)
they rank after fixed charges.
Examinership
Examinership is a court procedure available under the Irish Companies Act, 2014 (as amended) to
facilitate the survival of Irish companies in financial difficulties.
The Issuer, the directors of the Issuer, a contingent, prospective or actual creditor of the Issuer, or
shareholders of the Issuer holding, at the date of presentation of the petition, not less than onetenth of the voting share capital of the Issuer, are each entitled to petition either (i) the appropriate
Irish Circuit Court or (ii) the High Court of Ireland (each an “Irish Court”) for the appointment of an
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examiner. The examiner, once appointed, has the power to set aside contracts and arrangements
entered into by the company after his appointment and, in certain circumstances, can avoid a
negative pledge given by the company prior to his appointment. Furthermore, he may sell assets
which are the subject of a fixed charge. However, if such power is exercised, he must account to
the holders of the fixed charge for the amount realised and discharge the amount due to them out
of the proceeds of sale.
During the period of protection, the examiner will formulate proposals for a compromise or scheme
of arrangement to assist the survival of the company or the whole or any part of its undertaking as
a going concern. A scheme of arrangement may be approved by the relevant Irish Court when at
least one class of creditors has voted in favour of the proposals and the relevant Irish Court is
satisfied that such proposals are fair and equitable in relation to any class of members or creditors
who have not accepted the proposals and whose interests would be impaired by the
implementation of the scheme of arrangement.
In considering proposals by the examiner, it is likely that secured and unsecured creditors would
form separate classes of creditors. In the case of the Issuer, if the Trustee represented the majority
in number and value of claims within the secured creditor class (which would be likely given the
restrictions agreed to by the Issuer in the Conditions), the Trustee would be in a position to reject
any proposal not in favour of the Noteholders. The Trustee would also be entitled to argue at the
relevant Irish Court hearing at which the proposed scheme of arrangement is considered that the
proposals are unfair and inequitable in relation to the Noteholders, especially if such proposals
include a writing down of the value of amounts due by the Issuer to the Noteholders. The primary
risks to the holders of Notes if an examiner were to be appointed in respect of the Issuer are as
follows:
(i)
the potential for a scheme of arrangement to be approved involving the writing down of the
debt owed by the Issuer to the Noteholders as secured by the Trust Deed;
(ii)
the potential for the examiner to seek to set aside any negative pledge in the Notes
prohibiting the creation of security or the incurring of borrowings by the Issuer to enable
the examiner to borrow to fund the Issuer during the protection period; and
(iii)
in the event that a scheme of arrangement is not approved and the Issuer subsequently
goes into liquidation, the examiner’s remuneration and expenses (including certain
borrowings incurred by the examiner on behalf of the Issuer and approved by the relevant
Irish Court) will take priority over the moneys and liabilities which from time to time are or
may become due, owing or payable by the Issuer to each of the secured creditors under
the Notes or under any other secured obligations.
Anti-money laundering
The Issuer may be subject to anti-money laundering legislation in its jurisdiction of incorporation. If
the Issuer were determined by the relevant authorities to be in violation of any such legislation, it
could become subject to substantial criminal penalties. Any such violation could materially and
adversely affect the timing and amount of payments made by the Issuer to Noteholders in respect
of the Issuer’s Notes.
Risk Factors relating to the Notes
Limited recourse obligations
The Notes are direct, secured, limited recourse obligations of the Issuer payable solely out of the
Mortgaged Property by the Issuer in favour of the Trustee on behalf of the Noteholders and other
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secured parties. The Issuer will have no other assets or sources of revenue available for payment
of any of its obligations under the Notes. No assurance can be made that the proceeds available
for and allocated to the repayment of the Notes at any particular time will be sufficient to cover all
amounts that would otherwise be due and payable in respect of the Notes. If the proceeds of the
realisation of the Security (as defined in the Conditions) received by the Trustee for the benefit of
the Noteholders prove insufficient to make payments on the Notes, no other assets will be
available for payment of the deficiency, and, following distribution of the proceeds of such
realisation, the Issuer will have no further obligation to pay any amounts in respect of such
deficiency.
Further, none of the Noteholders nor any other secured party will be entitled at any time to proceed
against the Issuer unless the Trustee having become bound to proceed fails or neglects to do so.
No person other than the Issuer will be obliged to make payments on the Notes.
Trustee indemnity
In certain circumstances, the Noteholders may be dependent on the Trustee to take certain actions
in respect of the Notes, in particular if the Security in respect of the Notes becomes enforceable
under the Conditions. Prior to taking such action, the Trustee may require to be indemnified to its
satisfaction. If the Trustee is not satisfied with its indemnity it may decide not to take such action,
without being in breach of its obligations under the Trust Deed. Consequently, the Noteholders
may have to either arrange for such indemnity or accept the consequences of such inaction by the
Trustee. Noteholders should be prepared to bear the costs associated with any such indemnity
and/or the consequences of any such inaction by the Trustee. Such inaction by the Trustee will not
entitle Noteholders to proceed themselves directly against the Issuer.
Priority of claims
The priority of the claims of the Swap Counterparty and the Noteholders over the Mortgaged
Property shall depend on the particular circumstances in which the Notes are to be redeemed or in
which the security in respect of the Notes has become enforceable. Such priority of claims will only
be determined at the relevant time. If the Notes are redeemed early as a result of the occurrence
of a Swap Counterparty Default (as defined in this Series Prospectus), the claims of the
Noteholders rank prior to claims of the Swap Counterparty. If the Notes are being redeemed in
other circumstances or the security in respect of the Notes has become enforceable for any other
reason, the claims of the Swap Counterparty will rank prior to claims of the Noteholders. In either
scenario, the claims of the Trustee for its fees and expenses rank senior to the claims of the
Noteholders and the Swap Counterparty.
Noteholders should understand that the validity and enforceability of provisions such as paragraph
72(b) of the Terms and Conditions of the Notes below which determine the priority of payments
upon the occurrence of one or more specified trigger events (sometimes called “flip clauses”) have
been the subject of challenge in the English and U.S. courts on the basis that where the trigger
event is a creditor insolvency (such as the insolvency of the Swap Counterparty), the flip clause
breaches principles of English and U.S. insolvency law.
The Supreme Court of the United Kingdom in Belmont Park Investments PTY Ltd v BNY Corporate
Trustee Services Ltd [2011] UKSC 38 dismissed this argument and upheld the validity of a flip
clause contained in an English-law governed contract.
By contrast, the U.S. Bankruptcy Court for the Southern District of New York in Lehman Brothers
Special Financing Inc. v. BNY Corporate Trustee Services Limited. (In re Lehman Brothers
Holdings Inc.), Adv. Pro. No. 09-1242-JMP (Bankr. S.D.N.Y. May 20, 2009) and Lehman Bros.
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Special Fin. Inc. v. Ballyrock ABS CDO 2007-1 Ltd. (In re Lehman Bros. Holdings Inc.), 452 B.R.
31 (Bankr. S.D.N.Y. 2011) (JMP). previously held that such a provision, which seeks to modify one
creditor’s position in a priority of payments when that creditor files for bankruptcy, is unenforceable
under the U.S. Bankruptcy Code. However, in the recent case of Lehman Brothers Special
Financing Inc. v. Bank of America National Association (2016 WL 3621180 (Bankr. S.D.N.Y. June
28, 2016), the U.S. Bankruptcy Court for the Southern District of New York has upheld the validity
of a provision similar to that contained in paragraph 72(b) of the Terms and Conditions of the
Notes. It is possible that further cases in respect of similar provisions may be heard in the future
that may change this position.
If the Swap Counterparty was ever the subject of U.S. bankruptcy proceedings at a time when
these provisions were likely to be held to be unenforceable under the U.S. Bankruptcy Code, it is
possible, notwithstanding the validity of flip clauses as a matter of English law, that the Issuer
would be required to pay the Swap Counterparty in priority to the Noteholders and as a result, the
Issuer might not have sufficient funds to repay the Noteholders in full.
No gross-up on payments under Notes or Swap Agreement
In the event that any withholding tax or deduction for tax is imposed on payments on the Notes or
payments by the Swap Counterparty to the Issuer under the Swap Agreement (except in the latter
case where the tax is an “Indemnifiable Tax” pursuant to the Swap Agreement), the Noteholders
will not be entitled to receive grossed-up amounts to compensate for such withholding tax nor be
reimbursed for the amount of any shortfall and no Event of Default (as defined in the Conditions)
shall occur as a result of any such withholding or deduction (but see “Early redemption for tax or
other reasons” below).
Early redemption for tax or other reasons
The Issuer shall redeem the Notes earlier than the Maturity Date if either (a) specified tax or other
reasons shall occur, as detailed in Condition 7.3 of the Terms and Conditions of the Notes (as
modified below) or (b) any illegality, as detailed in Condition 7.12 (but see “Risk Factors relating to
the Swap Counterparty and the Swap Agreement” below for a description of how such redemption
is effected where it results from termination of the Swap Agreement). If the Issuer is required to
redeem the Notes early, the Issuer will redeem the Notes at their Early Redemption Amount as
specified in the Conditions. Such Early Redemption Amount is not principally protected and will be,
equal to the sale proceeds from the disposal of the Collateral, plus (if due from the Swap
Counterparty to the Issuer) or minus (if due from the Issuer to the Swap Counterparty) the Swap
Termination Value, minus the Unwind Costs, as detailed in the Conditions.
Cash held by Custodian as banker not as trustee
Any cash held in an account with the Custodian (including any cash held in the Cash Account, as
defined in the Custody Agreement) will be held by the Custodian as banker and not as trustee. Any
such cash will therefore not be held as client money in accordance with any client money rules. As
a result, if the Custodian becomes insolvent, the Issuer will only have an unsecured claim against
the Custodian’s estate in respect of any such cash. If the Issuer is unable to recover such cash in
full from the Custodian’s estate, it may not have sufficient proceeds to redeem the Notes in full and
the amount paid to Noteholders may be significantly less than the Noteholders’ original investment
and may be zero.
Modification, waivers and substitution
The Conditions contain provisions for calling meetings of Noteholders to consider matters affecting
their interests generally. These provisions permit defined majorities to bind all Noteholders of the
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Notes, including Noteholders who did not attend and vote at the relevant meeting and Noteholders
who voted in a manner contrary to the majority.
The conditions of the Notes also provide that the Trustee may, without the consent of Noteholders,
agree to (i) any modification of any of the Conditions or any of the provisions of the Trust Deed or
the Swap Agreement that is, in its opinion, of a formal, minor or technical nature or is made to
correct a manifest error, (ii) any other modification (except as mentioned in the Trust Deed) and
any waiver or authorisation of any breach or proposed breach of any of the Conditions or any
provisions of the Trust Deed or the Swap Agreement that are in the opinion of the Trustee not
materially prejudicial to the interest of the Noteholders or (iii) the substitution of another company
as principal debtor under any Notes in place of the Issuer.
Market value of Notes
The market value of the Notes will be affected by a number of factors, including, but not limited to
(i) the value and volatility of the Initial Collateral and the creditworthiness of the issuer of the Initial
Collateral, (ii) the value and volatility of obligations issued by the Reference Entity, and the
creditworthiness of the Reference Entity, (iii) market perception, interest rates, yields and foreign
exchange rates, (iv) the time remaining to the maturity date and (v) the nature and liquidity of the
Swap Agreement. Any price at which Notes may be sold prior to the maturity date may be at a
discount, which could be substantial, to the value at which the Notes were acquired on the issue
date.
Prospective purchasers should be aware that not all market participants would determine prices in
respect of the Notes in the same manner, and the variation between such prices may be
substantial. Accordingly, any prices provided by a dealer may not be representative of prices that
may be provided by other market participants. For this reason, any price provided or quoted by a
dealer should not be viewed or relied upon by prospective purchasers as establishing, or
constituting advice by that dealer concerning, a mark-to-market value of the Notes. The price (if
any) provided by a dealer is at the absolute discretion of that dealer and may be determined by
reference to such factors as it sees fit. Any such price may take into account fees, commissions or
arrangements entered into by that dealer with a third party in respect of the Notes and that dealer
shall have no obligation to any Noteholder to disclose such arrangements. Any price given would
be prepared as of a particular date and time and would not therefore reflect subsequent changes
in market values or any other factors relevant to the determination of the price.
Change of law
The Conditions of the Notes, and any non-contractual obligations arising out of or in connection
with them, are governed by and construed in accordance with English law in effect as at the Issue
Date. No assurance can be given as to the impact of any possible judicial decision or change to
English law or administrative practice after the Issue Date.
Provision of information
None of the Issuer, the Transaction Parties or any affiliate of such persons makes any
representation as to the credit quality of the Collateral. Any of such persons may have acquired, or
during the term of the Notes may acquire, non-public information with respect to the Collateral.
None of such persons is under any obligation to make such information directly available to
Noteholders. None of such persons is under any obligation to make available any information
relating to, or keep under review on the Noteholders’ behalf, the business, financial conditions,
prospects, creditworthiness or state of affairs of the Collateral or conduct any investigation or due
diligence into the Collateral.
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Non-registration under the Securities Act and restrictions on transfer
The Notes have not been, and will not be, registered under the Securities Act or with any securities
regulatory authority of any state or other jurisdiction of the United States. The Notes are being
issued and sold in reliance upon exemptions from registration provided by such laws.
Consequently, the transfer of the Notes will be subject to satisfaction of legal requirements
applicable to transfers that do not require registration under the Securities Act or with any
securities regulatory authority of any state or other jurisdiction of the United States. In addition, the
Notes are subject to certain transfer restrictions as described under “Subscription and Sale and
Transfer Restrictions” in the Base Prospectus, which may further limit the liquidity of the Notes.
Foreign Account Tax Compliance Withholding
Pursuant to certain provisions of U.S. law, commonly known as FATCA, a withholding tax is
imposed on (i) certain U.S. source payments (including ”dividend equivalent” payments), (ii)
beginning 1 January 2019, payments of gross proceeds from the disposition of assets that can
produce U.S. source interest or dividends (including “dividend equivalent” payments) and (iii)
beginning 1 January 2019 (at the earliest), certain payments made by “foreign financial
institutions” (“foreign passthru payments”). This withholding tax is imposed on such payments
made to persons that fail to meet certain certification, reporting or related requirements. The Issuer
expects to be treated as a foreign financial institution for these purposes. A number of jurisdictions
(including Ireland) have entered into, or have agreed in substance to, intergovernmental
agreements with the United States to implement FATCA (“IGAs”), which modify the way in which
FATCA applies in their jurisdictions.
Certain aspects of the application of FATCA to instruments or agreements such as the Collateral,
the Swap Agreement and the Notes, including whether withholding on foreign passthru payments
would ever be required pursuant to FATCA or an IGA with respect to payments on instruments or
agreements such as the Collateral, the Swap Agreement and/or the Notes, are uncertain and may
be subject to change. Even if withholding would be required with respect to foreign passthru
payments or payments of gross proceeds from the disposition of an asset that can produce U.S.
source interest or dividends pursuant to FATCA or an IGA, such withholding would not apply prior
to 1 January 2019. Additionally, an obligation that has a fixed term and is not treated as equity for
U.S. federal income tax purposes generally will be “grandfathered” for purposes of FATCA
withholding (i) in respect of foreign passthru payments, if entered into on or prior to the date that is
six months after the date on which final regulations defining foreign passthru payments are filed
with the U.S. Federal Register, and (ii) if the obligation is subject to FATCA withholding solely
because the obligation is treated as giving rise to “dividend equivalent” payments, if outstanding at
any point prior to six months after the date on which obligations of its type are first treated as
giving rise to “dividend equivalent” payments, in each case, unless the obligation is materially
modified after such grandfathering date.
Possible impact on Payments on the Collateral or under the Swap Agreement
If the Issuer fails to comply with its obligations under FATCA (including the IGA entered into
between Ireland and the United States (the “Ireland IGA”) and any Irish local law implementing the
Ireland IGA), it may be subject to FATCA withholding on all, or a portion of, payments it receives
with respect to the Collateral or under the Swap Agreement. Any such withholding would, in turn,
result in the Issuer having insufficient funds from which to make payments that would otherwise
have become due in respect of the Notes and/or the Swap Agreement. No other funds will be
available to the Issuer to make up any such shortfall and, as a result, the Issuer may not have
sufficient funds to satisfy its payment obligations to Noteholders. Additionally, if payments to the
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Issuer in respect of its assets are or will become subject to FATCA withholding, the Notes may be
subject to early redemption. No assurance can be given that the Issuer can or will comply with its
obligations under FATCA or that the Issuer will not be subject to FATCA withholding.
Impact on Payments on the Notes
Under the Ireland IGA (and Irish local law implementing the Ireland IGA) as currently in effect, an
Irish foreign financial institution, would generally not be required to withhold under FATCA or the
IGA from payments that it makes. However, the treatment of foreign passthru payments made by
foreign financial institutions in IGA jurisdictions has not been agreed and it is possible that the
Issuer could be required to withhold amounts from Noteholders that are foreign financial
institutions that are not compliant with, or exempt from, FATCA or Noteholders that do not provide
the information, documentation or certifications required for the Issuer to comply with its
obligations under FATCA.
Neither a Noteholder or beneficial owner of Notes will be entitled to any additional amounts in the
event FATCA withholding tax is imposed on any payments on or with respect to the Notes. As a
result, Noteholders may receive less interest or principal, as applicable, than expected.
FATCA IS PARTICULARLY COMPLEX AND ITS APPLICATION TO THE ISSUER, THE NOTES,
THE NOTEHOLDERS, AND THE SWAP AGREEMENT IS SUBJECT TO CHANGE. EACH
NOTEHOLDER SHOULD CONSULT ITS OWN TAX ADVISER TO OBTAIN A MORE DETAILED
EXPLANATION OF FATCA AND TO LEARN HOW IT MIGHT AFFECT EACH HOLDER IN ITS
PARTICULAR CIRCUMSTANCE.
Legality of purchase
None of the Issuer, the Trustee, CGML or any affiliate of such persons has or assumes
responsibility for the lawfulness of the acquisition of the Notes by a prospective purchaser of the
Notes (whether for its own account or for the account of any third party), whether under the laws of
the jurisdiction of its incorporation or the jurisdiction in which it operates (if different), or for
compliance by that prospective purchaser (or any such third party) with any law, regulation or
regulatory policy applicable to it.
Suspension of payments upon a Sanctions Event
Noteholders may be exposed to the risk that any Note, Noteholder, the Issuer, the Collateral, the
Trustee, the Issuing and Paying Agent, the Dealer and/or any other entity involved in the Notes is
subject to a Sanction that results in a Sanctions Event, causing payments under the Notes to that
Noteholder to be suspended. Prospective investors should note that, during the existence of a
Sanctions Event, Noteholders will have no right to take any action to compel the Trustee or the
Issuer to take any action or enforce the Collateral and that the Calculation Agent has broad
discretion to determine the amounts (if any) due to Noteholders following the occurrence of a
Sanctions Event.
Risk Factors relating to the Credit Linked Notes
Capitalised terms used in this section of the Risk Factors (“Risk Factors relating to the Credit
Linked Notes”) but not otherwise defined in this Series Prospectus or in the Base Prospectus shall
have the meaning given to them in the Swap Agreement.
Limited information about the Reference Entity and the Obligations thereof
Investors in the Notes will be exposed to the credit risk of the Reference Entity and the Obligations
thereof (each as defined herein) as that affects the amount that the Issuer will pay the Swap
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Counterparty under the Credit Default Swap. None of the Issuer, CGML, the Trustee or any other
person on their behalf makes any representation or warranty, express or implied, as to the credit
quality of the Reference Entity or the Obligations thereof. CGML may have acquired, or during the
term of the Notes may acquire, confidential information with respect to the Reference Entity or the
Obligations thereof and is not required to disclose this information to the Issuer or any other party.
Risk Factors relating to the Credit Default Swap
The Reference Entity (as defined herein) is, as at the Issue Date, set out in Annex 4 (Form of the
Credit Default Swap Confirmation). As at the Issue Date, the Reference Entity is The Kingdom of
Saudi Arabia.
Determination of Credit Events
Credit Derivatives Determinations Committees were originally established pursuant to the March
2009 Supplement to the 2003 ISDA Credit Derivatives Definitions published by ISDA to make
determinations that are relevant to the majority of the credit derivatives market and to promote
transparency and consistency. The Credit Derivatives Determinations Committees continue to
perform this role under the 2014 ISDA Credit Derivatives Definitions published by ISDA (the “2014
Credit Derivatives Definitions”). Further information about the Credit Derivatives Determinations
Committees may be found at http://dc.isda.org (or any successor website). Noteholders should
carefully monitor the matters under consideration by such committees and their determinations.
In making any determination in its capacity as Calculation Agent under the Swap Agreement,
CGML and its affiliates may, but are not obliged to, have regard to decisions made by
announcements, determinations and resolutions made by ISDA and/or the Credit Derivatives
Determinations Committees. Such announcements, determinations and resolutions could affect
the redemption and settlement of Notes (including the quantum and timing of payments and/or
deliveries on redemption). CGML and its affiliates may act as a voting member on a Credit
Derivatives Determinations Committee and consequently may take certain actions which may
influence the process and outcome of decisions relating to the Reference Entity, which could be
adverse to the interests of the Noteholders. For the avoidance of doubt, neither the Issuer nor the
Calculation Agent nor the Swap Counterparty will be liable to any person for any determination,
redemption, calculation and/or delay or suspension of payments and/or redemption of the Notes
resulting from or relating to any announcements, publications, determinations and resolutions
made by ISDA and/or any Credit Derivatives Determinations Committee.
Noteholders should be aware that redemption and settlement of the Notes may be postponed
following public announcement by ISDA that a DC Resolution (as defined in the 2014 Credit
Derivatives Definitions) will be passed by the relevant Credit Derivatives Determinations
Committee. The relevant Credit Derivatives Determinations Committee may resolve (i) that an
event that constitutes a Credit Event in respect of the Reference Entity (as defined in the Credit
Default Swap) for the purposes of the Credit Default Swap has occurred, (ii) that no event which
could constitute a Credit Event in respect of the Reference Entity for the purposes of the Credit
Default Swap has occurred, or (iii) not to determine whether an event constitutes a Credit Event.
Such announcements, determinations and resolutions could affect the redemption and settlement
of Notes (including the quantum and timing of payments and/or deliveries on redemption) and may
postpone the maturity date of the Notes.
By subscribing for or purchasing the Notes, each Noteholder shall be deemed to agree that (i) no
DC Party (as defined in the 2014 Credit Derivatives Definitions) and no legal counsel or other
third-party professional hired by a DC Party in connection with such DC Party's performance of its
respective duties under the DC Rules (as defined in the 2014 Credit Derivatives Definitions) and/or
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any relevant Credit Derivatives Auction Settlement Terms, as applicable, shall be liable to
Noteholders, and (ii) no DC Party and no legal counsel or other third-party professional hired by a
DC Party in connection with such DC Party's performance of its respective duties under the DC
Rules and/or any relevant Credit Derivatives Auction Settlement Terms is acting as fiduciary for, or
as an adviser to, Noteholders.
Prospective investors should note that the occurrence of a Credit Event on the Notes is
determined by the Swap Counterparty under the Credit Default Swap. The determination of
whether a Credit Event (or a potential Credit Event, if applicable) has occurred shall be made by
the Swap Counterparty without regard to the interest of the Noteholders. The likelihood of a Credit
Event occurring will generally fluctuate with, among other things, the financial condition and other
characteristics of the Reference Entity, general economic conditions, the condition of certain
financial markets, political events, developments or trends in any particular industry and changes
in prevailing interest rates.
If a Credit Event occurs in relation to the Reference Entity, an amount will be payable by the Issuer
to the Swap Counterparty. If there are one or more Auction(s) with respect to the Reference Entity,
this amount will be based on the relevant Auction Final Price, failing which it will be determined on
the Final Price (each as defined in the 2014 Credit Derivatives Definitions). The Issuer will need to
sell the Collateral in order to fund such payment and will also terminate the Asset Swap, with
corresponding termination payments being payable thereunder. The Notes will be redeemed at an
amount equal to the remaining sale proceeds of the Collateral (if any) after the payments due to or
from the Swap Counterparty under the Swap Agreement have been made.
Questions to the ISDA Credit Derivatives Determinations Committees
The ISDA Credit Derivatives Determinations Committees Rules provides that eligible market
participants may raise questions to the ISDA Credit Derivatives Determinations Committee which
have the power to make binding decisions on critical issues such as, without limitation, whether a
Credit Event has occurred, whether there is a Successor to a Reference Entity or which
obligations of a Reference Entity are deliverable. The Calculation Agent has no duty to the
Noteholders to refer specific questions to the ISDA Credit Derivatives Determinations Committees.
Noteholders should understand the role of the ISDA Credit Derivatives Determinations Committees
and how their determinations could affect the Issuer’s obligations under the Swap Agreement and
consequently have effect on the Notes.
Auctions
Prospective investors should note that the Notes are linked to the Auction Final Price of the
Reference Entity. Accordingly, where a Credit Event occurs, the Auction Final Price will be
determined according to an auction procedure set out in the Credit Derivative Auction Settlement
Terms, which will be published on the ISDA’s website at www.isda.org following the occurrence of
the Credit Event.
The Calculation Agent and its affiliates may participate as a participating bidder in an Auction and
consequently may take certain actions which may influence the Auction Final Price, which could be
adverse to the interests of the Noteholders. For the avoidance of doubt, neither the Issuer nor the
Calculation Agent accept any liability to any person for any determinations, redemption,
calculations and/or delay or suspension of payments and/or redemption of the Notes resulting from
or relating to the Auction Final Price or the Final Price.
Noteholders should be aware that redemption and settlement of the Notes may be postponed
following public announcement by ISDA that one or more Auction(s) will be held. The relevant
15
Credit Derivatives Determinations Committee may resolve to postpone the scheduled date for an
Auction or resolve that no Auction will be held, in which case the Calculation Agent will determine
the Final Price in accordance with the dealer poll procedure set out in the Credit Default Swap.
Successors
Investors should note that, from time to time, the Reference Entity may be subject to change
following an event such as an annexation, unification, secession, partition, dissolution,
consolidation, reconstitution or other similar event that results in any successor(s) (the
“Successor”) to the Reference Entity. The Calculation Agent will be responsible for determining,
as soon as reasonably practicable after it becomes aware of the relevant succession date the
sovereign and/or entity, if any, that qualifies as the Successor in accordance with the Credit Default
Swap. The Credit Default Swap provides that if a Reference Entity has more than one successor
entity, then the notional amount will be split evenly among the successor entities, and in the case
of joint potential Successors, each joint potential successor shall succeed in equal parts. The
Calculation Agent will be responsible for determining, as soon as reasonably practicable after it
becomes aware of the relevant succession date the sovereign and/or entity, if any, that qualifies as
the Successor. Investors should note that a Successor may be riskier than the Reference Entity it
replaces, and consequently the occurrence of a succession date may be detrimental to the
Noteholders. Noteholders should also be aware that the relevant event will not necessarily result in
the assumption of an obligation intended to be hedged by the Credit Default Swap (if any) by the
successor Reference Entities either at all or in the same proportion as the allocation of the notional
amount of the original Credit Default Swap.
Payments in the Notes may be deferred or suspended
In certain circumstances, for example where (i) a Credit Event has occurred and the related credit
loss has not been determined as at the relevant date for payment, (ii) where a potential Credit
Event exists as at the scheduled maturity of the Notes, or (iii) pending a resolution of an ISDA
Credit Derivatives Determinations Committee, payment of the redemption amount of the Notes
and/or interest on the Notes may be deferred for a material period in whole or part without
compensation to Noteholders.
Potential postponement of the Maturity Date
As the terms and conditions of the Notes relating to the Credit Default Swap include provisions
dealing with the postponement of the Maturity Date if either (i) a Potential Failure to Pay exists on
the Scheduled Maturity Date or (ii) a Potential Repudiation/Moratorium exists on the Scheduled
Maturity Date or (iii) the Issuer has received a relevant Potential Credit Event Notice from the
Swap Counterparty or (iv) the Auction Settlement Date (or Cash Settlement Date, if applicable)
has not occurred by the Scheduled Maturity Date, investors should be aware that such
postponement or any alternative provisions for valuation provided in the terms and conditions of
the Notes may have an adverse effect on the value of the Notes.
No legal or beneficial interest in Obligation of the Reference Entity
Under the Credit Default Swap, the Issuer will have a contractual relationship only with the Swap
Counterparty and not with any obligor in respect of the Reference Entity. Consequently, the Credit
Default Swap will not constitute a purchase or other acquisition or assignment of any interest
against the Reference Entity. The Issuer and the Trustee will have rights solely against the Swap
Counterparty and will have no recourse against the Reference Entity. None of the Issuer, the
Trustee, the Noteholders or any other entity will have any rights to acquire from the Swap
Counterparty (or to require the Swap Counterparty to transfer, assign or otherwise dispose of) any
16
interest in any obligation of the Reference Entity. Moreover, the Swap Counterparty will not grant
the Issuer or the Trustee any security interest in any such obligation.
None of the Issuer, CGML, the Trustee, the Swap Counterparty or any other person on their behalf
has undertaken any legal due diligence in respect of the Reference Entity.
Outstanding Principal Balance
The calculation of the outstanding principal balance of a Deliverable Obligation (as defined in the
2014 Credit Derivatives Definitions) under the Credit Default Swap is determined by (i) firstly
ascertaining all principal payment obligations of a Reference Entity, (ii) then determining all or any
portion of such principal payment obligations that are subject to a contingency (other than a
permitted contingency) or prohibited action which need to be disregarded, leaving an amount
equal to the non-contingent amount and (iii) finally, determining the claim that could be validly
asserted against a Reference Entity in respect of such non-contingent amount if the obligation was
redeemed or accelerated which would be the outstanding principal balance. If payments of
principal are subject to a contingency, the outstanding principal balance could be less than the
principal balance (and depending upon the type of contingency, could be zero).
Sale of Collateral following a Credit Event
Following the occurrence of a Credit Event: (a) the Collateral will be sold; (b) under the Credit
Default Swap between the Issuer and the Swap Counterparty, unless otherwise specified, the
Issuer will pay the Swap Counterparty an amount equal to the product of (x) the notional amount
thereof and (y) 100 per cent. minus the final price applicable to the Reference Entity; and (c) the
Asset Swap between the Issuer and the Swap Counterparty will be terminated and a termination
payment based on its mark-to-market value may be payable by the Issuer to the Swap
Counterparty or by the Swap Counterparty to the Issuer. See “Risk Factors relating to the
Collateral - Sale of Collateral” below.
Risk Factors relating to the Swap Counterparty and the Swap Agreement
The ability of the Issuer to meet its obligations under the Notes will depend on the receipt by it of
payments under the Swap Agreement. Consequently, the Issuer is exposed not only to the
performance of the Initial Collateral and to the occurrence of Credit Events in relation to the
Reference Entity, but also to the ability of the Swap Counterparty to perform its obligations under
the Swap Agreement. Default by the Swap Counterparty may result in the termination of the Swap
Agreement and, in such circumstance, any amount due to the Issuer upon such termination may
not be paid in full.
The Swap Counterparty has prepared audited financial statements in respect of its financial years
ending 31 December 2015 and 31 December 2014. Such audited financial statements are
attached at the end of the section entitled “Description of the Swap Counterparty” of this Series
Prospectus.
The receipt by the Issuer of payments under the Swap Agreement is also dependent on the timely
payment by the Issuer of its obligations under the Swap Agreement. The ability of the Issuer to
make timely payment of its obligations under the Asset Swap depends on receipt by it of the
scheduled payments under the Initial Collateral. Consequently, the Issuer is also exposed to the
ability of the Collateral Issuer to perform its obligations under the Initial Collateral.
Potential investors should note that in certain circumstances the Issuer may not hold any
Collateral. In such circumstance, the security for the Notes will consist solely of the Issuer’s
contractual rights under the Swap Agreement and other agreements relating to the Notes.
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U.S. Regulatory considerations
U.S. Dodd-Frank Act
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted 21 July
2010 (“Dodd-Frank”), establishes a comprehensive U.S. regulatory regime for a broad range of
derivatives contracts (collectively referred to in this risk factor as “covered swaps”). Among other
things, Title VII provides the U.S. Commodity Futures Trading Commission (the “CFTC”) and the
U.S. Securities and Exchange Commission (the “SEC”) with jurisdiction and regulatory authority
over many different types of derivatives that were previously traded over the counter, requires the
establishment of a comprehensive registration and regulatory framework applicable to covered
swap dealers and other major market participants, requires many types of covered swaps to be
exchange-traded or executed on swap execution facilities and centrally cleared, and contemplates
the imposition of capital and margin requirements for uncleared transactions in covered swaps.
While Title VII provided that it was to go into effect on 16 July 2011, the SEC and CFTC have
repeatedly delayed compliance with many of Title VII’s requirements through exemptive orders,
no-action letters or other forms of relief. While the CFTC had adopted a number of regulations
under Title VII and many of the obligations under those regulations have become effective, the
SEC is significantly behind the CFTC and its rules are not yet in effect. As Title VII’s requirements
go into effect, it is clear that covered swap counterparties, dealers and other major market
participants, as well as commercial users of covered swaps, will experience new and/or additional
regulatory requirements, compliance burdens and associated costs.
Notwithstanding the contractual restrictions that have been imposed by the Issuer in order to fall
outside the scope of Dodd-Frank, there is no assurance that the transactions entered into under
the Swap Agreement would not be treated as covered swaps under Title VII, nor is there
assurance that the Issuer would not be required to comply with additional regulation under the
CEA, as described immediately below. If the transactions entered into under the Swap Agreement
are treated as covered swaps under Title VII, the Issuer may be required to comply with additional
regulation under the CEA. Moreover, the Issuer could be required to register as a commodity pool
operator and to register the Notes as a commodity pool with the CFTC (see “Risks relating to the
U.S. Commodity Pool Regulation” below).
Such additional regulations and/or registration requirements may result in, among other things,
increased reporting obligations and also in extraordinary, non-recurring expenses of the Issuer
thereby materially and adversely impacting a transaction's value. Any such additional registration
requirements could result in one or more service providers or counterparties to the Issuer
resigning, seeking to withdraw or renegotiating their relationship with the Issuer. To the extent any
service providers resign, it may be difficult to replace such service providers.
Under Dodd-Frank, swap agreements entered into between the Issuer and a swap counterparty
may be subject to mandatory execution, clearing and documentation requirements. Even those
swap agreements not required to be cleared may be subject to initial and variation margining and
documentation requirements that may require modifications to existing agreements. Any of the
foregoing requirements and/or other requirements or obligations under Dodd-Frank could
materially increase costs associated with the Programme and could materially and adversely affect
the value of the Notes.
Investors are urged to consult their own advisors regarding the suitability of an investment in any
Notes.
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Risks relating to U.S. Commodity Pool Regulation
The CFTC has rescinded a rule which formerly provided an exemption from registration as a
“commodity pool operator” (a “CPO”) or a “commodity trading advisor” (“CTA”) under the CEA, in
respect of certain transactions and investment vehicles involving sophisticated investors. DoddFrank also expanded the definition of “commodity pool” to include any form of enterprise operated
for the purpose of trading in commodity interests, including swaps. It should also be noted that the
definition of “swap” under Dodd-Frank is itself broad and expressly includes certain interest rate
swaps, currency swaps and total return swaps. The term “commodity pool operator” has been
expanded to include any person engaged in a business that is of the nature of a commodity pool
or similar enterprise and in connection therewith, solicits, accepts, or receives from others, funds,
securities or property for the purpose of trading in commodity interests, including any swaps. The
CFTC has taken an expansive interpretation of these definitions, and has expressed the view that
entering into a single swap could make an entity a “commodity pool” subject to regulation under
the CEA. The CFTC has also provided extensive exemptive relief in respect of these matters
although there is no guarantee that all or any aspects of the Programme will be able to take
advantage of such relief.
As at the date of this Base Prospectus, no person has registered nor will register as a CPO of the
Issuer under the CEA and the CFTC Rules thereunder. No assurance can be made that either the
U.S. federal government or a U.S. regulatory body (or other authority or regulatory body) will not
take further legislative or regulatory action, and the effect of such action, if any, cannot be known
or predicted. Notwithstanding the contractual restrictions that have been imposed by the Issuer in
order to fall outside the scope of the CEA, if the Issuer was deemed to be one or more “commodity
pools”, then whoever is deemed to be acting as a CPO in respect thereof would be required to
register as such with the CFTC. While there remain certain limited exemptions from registration,
because the wording of these regulations applies to traditional commodity pools and was not
drafted with transactions such as those contemplated in relation to the Programme in mind, these
exemptions may not be available to avoid registration with respect to the Issuer or other parties. In
addition, if the Issuer were deemed to be a “commodity pool”, it would have to comply with a
number of reporting requirements that are geared to traded commodity pools. Complying with
these requirements on an ongoing basis could impose significant costs on the Issuer that may
materially and adversely affect the value of the Notes. It is presently unclear how an investment
vehicle such as the Issuer could comply with certain of these reporting requirements on an
ongoing basis. Such registration and other requirements would also involve material ongoing costs
to the Issuer. The scope of such requirements and related compliance costs is uncertain but could
materially and adversely affect the value of the Notes.
Risks relating to U.S. Volcker Rule
On December 10, 2013, the SEC, the CFTC and three U.S. banking regulators approved a final
rule to implement the Volcker Rule. Subject to certain exceptions, the Volcker Rule prohibits
sponsorship of and investment in certain “covered funds” by “banking entities”, a term that includes
Citibank, N.A. and most internationally active banking organizations that may be swap
counterparties. Even if an exception allows a banking entity to sponsor or invest in a covered fund,
the banking entity may be prohibited from entering into certain “covered transactions” with that
covered fund. Covered transactions include (among other things) entering into a swap transaction
if the swap would result in a credit exposure to the covered fund.
If the Issuer is considered a covered fund and if any affiliate of the Swap Counterparty were to be
deemed to be a “sponsor” of the Issuer, the Swap Counterparty could be prohibited from entering
19
into the Swap Agreement with the Issuer, which could have material adverse effects on the Notes.
Alternatively, the Issuer may incur additional costs in seeking new swap counterparties in order to
maintain the payment characteristics of the Notes, although there is no guarantee that it will be
able to find such counterparties. Such costs could materially and adversely affect the value of and
any return on the Notes. If the Issuer is considered a covered fund, the liquidity of the market for
the Notes may be materially and adversely affected, since banking entities could be prohibited
from, or face restrictions in, investing in the Notes. This could make it difficult or impossible for
Noteholders to sell the Notes or it could materially and adversely affect their market value.
Risk Factors relating to the Custodian
Collateral in the form of transferable securities will be held in an account of, and in the name of,
the Custodian. Where the Collateral consists of assets other than transferable securities, it may be
held in the name of or under the control of the Custodian or in such other manner as is approved
by the Trustee.
The ability of the Issuer to meet its obligations with respect to the Notes will be dependent upon
receipt by the Issuer of payments from the Custodian under the Custody Agreement for the Notes
(if the Collateral is so held). Consequently, the Noteholders are relying not only on the
creditworthiness of the Collateral, but also on the creditworthiness of the Custodian in respect of
the performance of its obligations under the Custody Agreement for such Notes.
If there is an overpayment in respect of the Collateral held in the Custodian’s account with a
clearing system that leads to a subsequent clawback of such overpayment via the relevant
clearing system, the Custodian may seek to recover the corresponding payments made in respect
of the Notes or may retain amounts payable in respect of the Notes in order to recover the amount
of such clawback.
Any cash deposited with the Custodian by the Issuer and any cash received by the Custodian for
the account of the Issuer in relation to a Series will be held by the Custodian as banker and not as
trustee and will be a bank deposit. Accordingly, such cash will not be held as client money and will
represent only an unsecured claim against the Custodian’s assets.
Sub-Custodians. Depositaries and Clearing Systems
Credit risk
Under the Custody Agreement, the Issuer authorises the Custodian to hold the Collateral in their
account or accounts with any other sub-custodian, any securities depositary or at such other
account keeper or clearing system as the Custodian deems to be appropriate for the type of
instruments which comprise the Collateral.
Therefore, where the Collateral is held with a sub-custodian, securities depositary or clearing
system, the ability of the Issuer to meet its obligations with respect to the Notes will be dependent
upon receipt by the Issuer of payments from the Custodian under the Custody Agreement for the
Notes (if the Collateral is so held) and, in turn, the Custodian will be dependant (in whole or in part)
upon receipt of payments from such sub-custodian, securities depositary or clearing system.
Consequently, the Noteholders are relying not only on the creditworthiness of the Collateral and
the Custodian in respect of the performance of its obligations under the Custody Agreement for
such Notes, but also on the creditworthiness of any duly appointed sub-custodian, securities
depositary or other account keeper or clearing system holding the Collateral.
Lien/Right of set-off
20
Pursuant to their terms of engagement, such sub-custodians, security depositaries or clearing
systems may have liens or rights of set-off with respect to the Collateral held with them in relation
to any of their fees and/or expenses. If, for whatever reason, the Custodian fails to pay such fees
and/or expenses, the relevant sub-custodian, security depositary or clearing system may exercise
such lien or right of set-off, which may result in the Issuer failing to receive any payments due to it
in respect of the Collateral, adversely affecting the ability of the Issuer to meet its obligations with
respect to the Notes.
Therefore, the ability of the Issuer to meet its obligations with respect to the Notes will not only be
dependent upon receipt by the Issuer of payments from the Custodian under the Custody
Agreement for the Notes (if the Collateral is so held) but also dependant on any sub-custodian,
security depositary or clearing system not exercising any lien or right of set-off in respect of any
Collateral that it holds. Consequently, the Noteholders are relying not only on the creditworthiness
of the Collateral but also on the creditworthiness of the Custodian in paying when due any fees or
expenses of such sub-custodian, security depositary or clearing system.
Risks Relating to the Paying Agent
Any payments made to Noteholders in accordance with the terms and conditions of the Notes will
be made by the Paying Agent on behalf of the Issuer. Pursuant to the Agency Agreement, the
Issuer is to transfer to the Paying Agent such amount as may be due under the Notes, on or before
each date on which such payment in respect of the Notes becomes due.
If the Paying Agent, while holding funds for payment to Noteholders in respect of the Notes, is
declared insolvent, the Noteholders may not receive all (or any part) of any amounts due to them
in respect of the Notes from the Paying Agent. The Issuer will still be liable to Noteholders in
respect of such unpaid amounts but the Issuer will have insufficient assets to make such payments
(or any part thereof) and Noteholders may not receive all, or any part, of any amounts due to them.
Consequently, the Noteholders are relying not only on the creditworthiness of the Securities, but
also on the creditworthiness of the Paying Agent in respect of the performance of its obligations
under the Agency Agreement to make payments to Noteholders.
Conflicts of Interest
The Trustee
In connection with the exercise of its functions, the Trustee shall have regard to the interests of the
Noteholders as a class and shall not have regard to the consequences of such exercise for
individual Noteholders and the Trustee shall not be entitled to require, nor shall any Noteholder be
entitled to claim, from the Issuer any indemnification or payment in respect of any tax
consequence of any such exercise upon individual Noteholders. In acting as Trustee under the
Trust Deed, the Trustee shall not, in respect of Notes of any Series, assume any duty or
responsibility to any Swap Counterparty (other than to pay to any Swap Counterparty any moneys
received and payable to it and to act in accordance with the Conditions) and shall have regard
solely to the interests of the Noteholders and shall not be obliged to act on any directions of the
relevant Swap Counterparty if this would in the Trustee’s opinion be contrary to the interests of the
Noteholders.
The Swap Counterparty
Prospective investors should be aware that, where any Swap Counterparty is entitled to exercise
its discretion or to undertake a decision in such capacity in respect of the Swap Agreement
(including any right to terminate the Swap Agreement), in respect of the terms and conditions or
21
otherwise in respect of the Notes, unless specified to the contrary therein, the relevant Swap
Counterparty will be entitled to act in its absolute discretion and will be under no obligation to, and
will not assume any fiduciary duty or responsibility for, the Noteholders or any other person. In
exercising its discretion or deciding upon a course of action, the relevant Swap Counterparty shall
attempt to maximise the beneficial outcome for itself (that is, maximise any payments due to it and
minimise any payments due from it) and will not be liable to account to the Noteholders or any
other person for any profit or other benefit to it or any of its affiliates that may result directly or
indirectly from any such selection.
The Calculation Agent
The Calculation Agent is a leading dealer in the credit derivatives market. If an auction is held in
respect of a Reference Entity for which a Credit Event has occurred, there is a high probability that
the Calculation Agent or one of its affiliates would act as a participating bidder in any such auction.
In such capacity, it may take certain actions which may influence the final price determined
pursuant to the auction, including, without limitation, (i) providing rates of conversion to determine
the applicable currency conversion rates to be used to convert any obligations that are not
denominated in the auction currency into such currency for the purposes of the auction and (ii)
submitting bids and offers with respect to the relevant deliverable obligations. In deciding whether
to take any such action, or whether to act as a participating bidder in any auction, the Calculation
Agent and its affiliates shall be under no obligation to consider the interests of any Noteholder.
The Calculation Agent (or, as the case may be, one of its affiliates) may also be a voting member
on one or more of the Credit Derivatives Determinations Committees and is a party to transactions
that incorporate, or are deemed to incorporate, either (a) the July 2009 Supplement to the 2003
ISDA Credit Derivatives Definitions published by ISDA or (b) the 2014 Credit Derivatives
Definitions and may take certain actions that may influence the process and outcome of decisions
of the Credit Derivatives Determinations Committees. Such actions may be adverse to the
interests of the Noteholders and may result in an economic benefit accruing to the Calculation
Agent or its affiliates. In taking any action relating to the Credit Derivatives Determinations
Committees or performing any duty under the rules that govern the Credit Derivatives
Determinations Committees, the Calculation Agent (or, as the case may be, one of its affiliates)
shall have no obligation to consider the interests of the Noteholders and may ignore any conflict of
interest arising in respect of the Notes.
Risk Factors relating to the Initial Collateral
No investigations
No investigations, searches or other enquiries have been made by or on behalf of the Issuer or the
Transaction Parties in respect of the Initial Collateral. No representations or warranties, express or
implied, have been given by the Issuer, the Transaction Parties or any other person on their behalf
in respect of the Initial Collateral.
Collateral
Noteholders may be exposed to the market value of the Initial Collateral. The Issuer may have to
fund its payments by the sale of some or all of the Initial Collateral at its market value. The market
value of the Initial Collateral will generally fluctuate with, among other things, the liquidity and
volatility of the financial markets, general economic conditions, domestic and international political
events, developments or trends in a particular industry and the financial condition of the relevant
issuer of the Initial Collateral.
22
For example, the occurrence of certain events, including, inter alia, the Initial Collateral becoming
repayable prior to its stated maturity as a result of a payment default, imposition of withholding tax
on the Issuer, imposition of withholding tax on payments due in respect of the Collateral, may
result in the Notes redeeming early. Furthermore, the Notes will be subject to an early redemption
if the value of the Initial Collateral held by the Issuer (as determined by the Calculation Agent
acting in good faith and in a commercially reasonable manner) is less than 65 per cent. of the
outstanding nominal amount of the Notes (such event, an “Asset Value Termination Event”). In
such circumstances, the Issuer will sell any Initial Collateral and Noteholders will then receive (i) a
pro rata share of the net realised sale proceeds of such Initial Collateral, plus (if due from the
Swap Counterparty to the Issuer) or minus (if due from the Issuer to the Swap Counterparty) (ii)
the Swap Termination Value.
Depending on the market price of the Initial Collateral, any of these events may cause significant
losses to the Noteholders and may result in the Notes redeeming at zero. In particular, investors
should note that whilst the Calculation Agent will use its reasonable endeavours to notify the Issuer
of the occurrence of an Asset Value Termination Event, notification may not occur immediately
following a fall in value to below the trigger percentage. There is no guarantee of timely receipt of
any such notice by the Issuer (which is subject to operational and other risks). In the case of
increasing market volatility, at the time of the Issuer’s receipt of a notice of the Asset Value
Termination Event (and the Noteholders’ receipt of a Mandatory Redemption Notice), the value of
the Initial Collateral may have fallen further below 65 per cent. of the outstanding nominal amount
of the Notes, even to zero.
The Arranger and the Dealer may have acquired, or during the terms of the Notes may acquire,
confidential information or enter into transactions with respect to any Initial Collateral and they
shall not be under any duty to disclose such confidential information or the nature of any
transaction to any Noteholder or the Issuer.
Sale of the Initial Collateral
Investors should note that any sale proceeds of the Initial Collateral may be less than the principal
amount thereof.
Early redemption due to early redemption of the Initial Collateral
If the Initial Collateral (i) becomes due and payable or becomes capable of being declared due and
payable prior to its stated date of maturity in accordance with its terms or (ii) there is a payment
default in respect of the Initial Collateral, the Issuer is required to redeem the Notes in whole (and
not in part) at the Early Redemption Amount.
Notes linked to the Emerging Markets
The performance of the Notes is linked to the performance of (a) the Initial Collateral issued by a
company incorporated in the United Arab Emirates and (b) The Kingdom of Saudi Arabia (as the
Reference Entity for the purposes of the Credit Default Swap), both of which are emerging markets
jurisdictions (each, an “Emerging Market Jurisdiction”). Prospective investors should note that
special risks may be associated with investment in or linked to securities that are issued by, or are
related or linked to, issuers and obligors which are Emerging Market Jurisdictions. Such risks may
arise because, among other reasons, there is a high degree of uncertainty and volatility associated
with investments in or linked to Emerging Market Jurisdictions, and the performance of the Notes
will be directly impacted by certain political, economic and legal conditions in one or more
Emerging Market Jurisdictions. There are political and economic uncertainties that are greater in
Emerging Market Jurisdictions than in other countries, many Emerging Market Jurisdictions do not
23
have fully developed or clear legal, judicial, regulatory or settlement infrastructures, accounting
standards may differ markedly and the markets may be far less liquid or transparent than in more
developed markets.
Initial Collateral Correlation Risk
As at the Issue Date, the issuer of the Initial Collateral is Abu Dhabi National Energy Company
PJSC (a company incorporated in the United Arab Emirates) and the Reference Entity for the
purposes of the Credit Default Swap is The Kingdom of Saudi Arabia. Noteholders should
therefore note that both the Initial Collateral and the Reference Entity may be affected by the
financial, political and general economic conditions prevailing from time to time in the Middle East.
There is likely to be a high degree of correlation between a default by the issuer of the Initial
Collateral and the occurrence of an Event Determination Date (as defined in the Credit Default
Swap) in respect of the Reference Entity. Accordingly, Noteholders may suffer greater loss (and
may be more likely to suffer losses) as a result of such correlation than they may otherwise have
done had the issuer of the Initial Collateral and the Reference Entity not been organised or located
in the same geographical area.
Risk Factors relating to business relationships and capacity of Citigroup Global
Markets Limited and its affiliates
The Issuer, CGML and any of its affiliates may have existing or future business relationships with
the issuer of the Collateral (including, but not limited to, lending, depository, risk management,
advisory, sponsorship and banking relationships), and will pursue actions and take steps that they
deem or it deems necessary or appropriate to protect their or its interests arising therefrom without
regard to the consequences for a Noteholder. In addition, the Issuer, CGML and any of its affiliates
may make a market or hold positions in respect of the Collateral relating to any particular
transaction. From time to time, CGML and its affiliates may own significant amounts of Notes.
CGML and its affiliates may act in a number of capacities in respect of the Notes including, without
limitation, Dealer, Calculation Agent and Swap Counterparty. CGML and its affiliates acting in such
capacities in connection with the Notes shall have only the duties and responsibilities expressly
agreed to by such entities in the relevant capacity and shall not, by virtue of acting in any other
capacity, be deemed to have other duties or responsibilities or be deemed to hold a standard of
care other than as expressly provided with respect to each such capacity. CGML and its affiliates
in their various capacities in connection with the Notes may enter into business dealings, from
which they may derive revenues and profits in addition to any fees, without any duty to account
therefor.
Risk Factors relating to the Market
Current market conditions
The current liquidity shortage and volatility in the credit markets has introduced a variety of
increased risks relating to several aspects of the Issuer’s operations. Such additional risks include
the inability of the Issuer to sell its assets which, among other things, may render it unable to
dispose of the Collateral and satisfy its obligations in respect of the redemption of the Notes. Such
market conditions may also lead to the inability of the Issuer to determine a reliable valuation of its
assets. All of such factors could materially adversely affect the interests of Noteholders.
Limited liquidity of the Notes
Although application has been made to admit the Notes to the Official List of the Irish Stock
Exchange and admit them to trading on the regulated market of the Irish Stock Exchange, there is
24
currently no secondary market for the Notes. There can be no assurance that a secondary market
for any of the Notes will develop, or, if a secondary market does develop, that it will provide the
holders of the Notes with liquidity or that it will continue for the life of the Notes. Consequently, any
investor of the Notes must be prepared to hold such Notes for an indefinite period of time or until
redemption of the Notes. If the Arranger or any Dealer begins making a market for the Notes, it is
under no obligation to continue to do so and may stop making a market at any time.
Exchange rate risks and exchange controls
The Issuer will pay principal and interest on the Notes in the currency of the Notes. This presents
certain risks relating to currency conversions if an investor's financial activities are denominated
principally in a currency or currency unit (the “Investor’s Currency”) other than the specified
currency. These include the risk that exchange rates may significantly change (including changes
due to devaluation of the specified currency or revaluation of the Investor’s Currency) and the risk
that authorities with jurisdiction over the Investor’s Currency may impose or modify exchange
controls. An appreciation in the value of the Investor’s Currency relative to the specified currency
would decrease (i) the Investor’s Currency-equivalent yield on the Notes, (ii) the Investor’s
Currency-equivalent value of the principal payable on the Notes and (iii) the Investor’s Currencyequivalent market value of the Notes.
Government and monetary authorities may impose (as some have done in the past) exchange
controls that could adversely affect an applicable exchange rate. As a result, investors may receive
less interest or principal than expected, or no interest or principal.
Interest rate risks
Investment in Notes may involve the risk that subsequent changes in market interest rates may
adversely affect the value of the Notes.
Risks relating to global events
General
Since mid-2007, the global economy and financial markets have experienced extreme levels of
instability.
The initial trigger for the instability was a downturn in the U.S. housing market. By mid-2007,
concerns about the value of mortgage assets held by global commercial banks, investment banks,
government sponsored entities, hedge funds, structured investment vehicles and institutional
investors led to a general tightening of available credit and liquidity in the global financial markets.
During 2008, the initial instability intensified into a severe global financial crisis.
In response to the crisis, various governments and central banks took substantial measures to
ease liquidity problems and enacted fiscal stimulus packages and measures to support certain
entities affected by the crisis. Such measures included establishing special liquidity schemes and
credit facilities, bank recapitalisation programmes and credit guarantee schemes.
In an attempt to counteract recessionary pressures, the central banks of the U.S., the UK and
certain other countries and the European Central Bank also lowered interest rates, in some cases
to record low levels.
No assurance can be given that any recovery will be sustained or that certain economies will not
encounter a “double dip” recession. In particular, a number of countries have accumulated
significant levels of public debt both absolutely and relative to GDP. This has led to international
“bail-outs” of certain countries and resulted in general concerns about sovereign credit defaults
25
which could undermine any recovery and could have the effect of taking the credit crisis into a new
recessionary phase.
The above factors have also led to substantial volatility in markets across asset classes, including
(without limitation) stock markets, foreign exchange markets, fixed income markets and credit
markets.
There can be no assurance that the steps taken by governments or international or supra-national
bodies to ameliorate the global financial crisis will be successful or that any recovery will continue.
The structure, nature and regulation of financial markets in the future may be fundamentally
altered as a consequence of the global financial crisis, possibly in unforeseen ways. There can be
no assurance that similar or greater disruption may not occur in the future for similar or other
reasons. In addition, the attempts being taken to reduce the high level of sovereign debt may
themselves contribute to a further global recession.
There can be no assurance as to how severe the global recession will be or as to how long it will
last. There can be no assurance that government actions or the actions of international or supranational bodies to limit the impact of the crisis will be successful and that they will not instead lead
or contribute to a deeper and/or longer-lasting recession. Economic prospects are subject to
considerable uncertainty.
Prospective investors should ensure that they have sufficient knowledge and awareness of the
global financial crisis and the response thereto and of the economic situation and outlook as they
consider necessary to enable them to make their own evaluation of the risks and merits of an
investment in the Notes. In particular, prospective investors should take into account the
considerable uncertainty as to how the global financial crisis and the wider economic situation will
develop over time.
Any person who had held securities during the periods considered above, particularly structured
securities, would be highly likely to have suffered significant adverse effects as a result of such
holding, including, but not limited to, major reductions in the value of those securities and a lack of
liquidity. Prospective investors should consider carefully whether they are prepared to take on
similar risks by virtue of an investment in the Notes.
Impact on liquidity
The events outlined above have had an extremely negative effect on the liquidity of financial
markets generally and in the markets in respect of certain financial assets or in the obligations of
certain obligors. This has particularly been the case with respect to the market for structured
assets and the obligations of financial institutions and certain sovereigns. Such assets may either
not be saleable at all or may only be saleable at significant discounts to their estimated fair value
or to the amount originally invested. No assurance can be given that liquidity in the market
generally, or in the market for any particular asset class or in the obligations of any particular
financial institution or sovereign, will improve or that it will not worsen in the future. Such limited
liquidity may have a negative impact on the value of the Notes or the value of the Collateral, in
terms of the assets or indices referenced. In particular, should the Notes be redeemed early,
Noteholders will be exposed to the realisation value of the Collateral, which value might be
affected (in some cases significantly) by such lack of liquidity.
Concerns about the creditworthiness of the Issuing and Paying Agent may also impact the value of
the Notes.
26
Impact on credit
The events outlined above have negatively affected the creditworthiness of a number of entities or
governments, in some cases to the extent of collapse or requiring rescue from governments or
international or supra-national bodies. Such credit deterioration has and may continue to be
widespread. The value of the Notes or of the amount of payments under them may be negatively
affected by such widespread credit deterioration. Prospective investors should note that recoveries
on assets of affected entities have, in some cases, been de minimis and that similarly low recovery
levels may be experienced with respect to other entities or governments in the future which may
include the obligors of the Collateral (or any guarantor or credit support provider in respect
thereof). Prospective investors should also consider the impact of a default by an Issuing and
Paying Agent and possible delays and costs in being able to access property held with a failed
agent.
Impact on valuations and calculations
Since 2007, actively traded markets for a number of asset classes and obligors either have ceased
to exist or have reduced significantly. To the extent that valuations or calculations in respect of
instruments related to those asset classes were based on quoted market prices or market inputs,
the lack or limited availability of such market prices or inputs has significantly impaired the ability to
make accurate valuations or calculations in respect of such instruments. No assurance can be
given that similar impairment may not occur in the future.
Furthermore, in a number of asset classes, a significant reliance has historically been placed on
valuations derived from models that use inputs that are not observable in the markets and/or that
are based on historical data and trends. Such models often rely on certain assumptions about the
values or behaviour of such unobservable inputs or about the behaviour of the markets generally
or interpolate future outcomes from historical data. In a number of cases, the extent of the market
volatility and disruption has resulted in the assumptions being incorrect to a significant degree or in
extreme departures from historical trends. Where reliance is placed on historical data, in certain
instances such data may only be available for relatively short time periods (for example, data with
respect to prices in relatively new markets) and such data may not be as statistically
representative as data for longer periods.
Prospective investors should be aware of the risks inherent in any valuation or calculation that is
determined by reference to a model and that certain assumptions will be made in operating the
model which may prove to be incorrect and give rise to significantly different outcomes to those
predicted by the model.
Impact of increased regulation and nationalisation
The events since 2007 have seen increased involvement of governmental and regulatory
authorities in the financial sector and in the operation of financial institutions. In particular,
governmental and regulatory authorities in a number of jurisdictions have imposed stricter
regulatory controls around certain financial activities and/or have indicated that they intend to
impose such controls in the future. The United States of America, the European Union and other
jurisdictions are actively considering or are in the process of implementing various reform
measures. Such regulatory changes and the method of their implementation may have a
significant impact on the operation of the financial markets. It is uncertain how a changed
regulatory environment will affect the Issuer, the treatment of instruments such as the Notes, the
Arranger and the other Transaction Parties. In addition, governments have shown an increased
willingness, wholly or partially, to nationalise financial institutions, corporates and other entities in
order to support the economy. Such nationalisation may impact adversely on the value of the stock
27
or other obligations of any such entity. In addition, in order to effect such nationalisation, existing
obligations or stock might have their terms mandatorily amended or be forcibly redeemed. To the
extent that the obligors of the Collateral (or any guarantor or credit support provider in respect
thereof) or any other person or entity connected with the Notes is subject to nationalisation or
other government intervention, it may have an adverse effect on a holder of a Note.
Systemic risk
Financial institutions and other significant participants in the financial markets that deal with each
other are interrelated as a result of trading, investment, clearing, counterparty and other
relationships. This risk is sometimes referred to as “systemic risk”. Financial institutions such as
the Arranger, the Dealer(s), the Trustee and the Agents (or any affiliate of any of them) and any
obligors of the Collateral (or any guarantor or credit support provider in respect thereof) that are
financial institutions or are significant participants in the financial markets are likely routinely to
execute a high volume of transactions with various types of counterparties, including brokers and
dealers, commercial banks, investment banks, insurers, mutual and hedge funds, and institutional
clients. To the extent they do so, they are and will continue to be exposed to the risk of loss if
counterparties fail or are otherwise unable to meet their obligations. In addition, a default by a
financial institution or other significant participant in the financial markets, or concerns about the
ability of a financial institution or other significant participant in the financial markets to meet its
obligations, could lead to further significant systemic liquidity problems and other problems that
could exacerbate the global financial crisis and, as such, have a material adverse impact on other
entities.
28
INCORPORATION BY REFERENCE
The provisions contained in pages 1 to 162 and 207 to 278 of the Base Prospectus, which
constitutes a Base Prospectus for the purposes of the Prospectus Directive, shall be deemed to be
incorporated into and form part of this Series Prospectus, save that any statement contained in the
Base Prospectus shall be deemed to be modified or superseded for the purpose of this Series
Prospectus to the extent that a statement contained herein modifies or supersedes such earlier
statement (whether expressly, by implication or otherwise). Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to constitute a part of this
Series Prospectus. This Series Prospectus must be read in conjunction with the Base Prospectus
and full information on the Issuer and the offer of the Notes is only available on the basis of the
combination of the provisions set out within this document and the provisions of the Base
Prospectus incorporated herein.
The audited financial statements in respect of its financial years ended 31 December 2015 and 31
December 2014 filed by the Issuer with the Central Bank are also deemed to be incorporated into
and form part of this Series Prospectus, and are available for viewing on the website of the Irish
Stock Exchange using the following link:
http://ise.ie/app/announcementDetails.aspx?ID=13044842
As at the Issue Date, the Base Prospectus and the Issuer’s audited financial statements in respect
of its financial years ended 31 December 2014 and 31 December 2013 (contained within
Schedules 1 and 2, respectively, of Issuer Disclosure Annex 2 to the Base Prospectus) have been
filed with the Central Bank and are also available for viewing on the website of the Irish Stock
Exchange using the following link:
http://www.ise.ie/debt_documents/Base%20Prospectus_d6a85a84-1a6e-481f-b9c3ce6c758fd8ad.PDF
Pages 179 to 180 of the Citigroup, Inc. Form 10-Q (filed with the SEC in respect of the quarterly
period ended 31 March 2017), containing the disclosures with respect to “Contingencies” in
respect of such Form 10-Q, are also deemed to be incorporated into and form part of this Series
Prospectus, and are available for viewing on the website of Citigroup, Inc. using the following link:
http://www.citigroup.com/citi/investor/data/q1701c.pdf?ieNocache=323
The non-incorporated parts of the documents incorporated by reference are either not relevant for
the prospective investors in the Notes or covered elsewhere in this Series Prospectus.
29
TERMS AND CONDITIONS OF THE NOTES
The terms and conditions of the Notes shall consist of the terms and conditions set out in the Base
Prospectus as amended or supplemented below.
Provisions appearing on the face of the Notes
1
Issuer:
Emerald Capital Designated Activity Company (formerly
known as Emerald Capital Limited)
2
Relevant Dealer/Lead
Manager (including, if
Syndicated Issue,
Managers):
Citigroup Global Markets Limited (“CGML”)
3
Series No:
2017-02
4
Tranche No:
1
5
ISIN:
XS1608156474
6
Common Code:
160815647
7
Currency (or Currencies in
the case of Dual Currency
Notes):
United States Dollar (“USD”)
8
Principal Amount:
USD 35,000,000.
Following any purchase and cancellation of the Notes
pursuant to Condition 7.4 (Purchases) or Condition 7.10
(Cancellation), the Principal Amount shall be reduced
accordingly.
As soon as practicable following receipt by the Issuer of
a Credit Event Notice and (if applicable) a Notice of
Publicly Available Information from the Swap
Counterparty under the Credit Default Swap, notice of
the same shall be given by or on behalf of the Issuer to
the Noteholders in accordance with Condition 16
(Notices).
9
10
(i)
Issue Date:
10 May 2017
(ii) Date Board approval for
issuance of Notes
obtained:
8 May 2017
Issue Price:
100 per cent.
Provisions appearing on the back of the Notes
11
Form of the Notes:
Registered
12
Denomination(s):
USD 250,000
13
Status:
Secured and limited recourse obligations of the Issuer,
secured as provided in item 72 below (under the heading
30
“The Security Arrangements”).
14
Interest Commencement
Date (if different from Issue
Date):
Issue Date
15
Interest Basis:
Fixed Rate, as described in paragraphs 16 to 37.
16
Interest Rate:
4.88 per cent. per annum.
17
Interest Payment Date(s):
Two Business Days following each Interest Period Date.
18
Relevant Time
(Floating Rate Notes):
Not applicable
19
Determination Date(s) (if
applicable):
Not applicable
20
Interest Determination Date
(Floating Rate Notes):
Not applicable
21
Primary Source for Floating
Rate (Floating Rate Notes):
Not applicable
22
Reference Banks (Floating
Rate Notes):
Not applicable
23
Relevant Financial Centre
(Floating Rate Notes):
Not applicable
24
Benchmark
(Floating Rate Notes):
Not applicable
25
Broken Amount (Fixed Rate
Notes):
Not applicable
26
Representative Amount
(Floating Rate Notes):
Not applicable
27
Relevant Currency (Floating
Rate Notes):
Not applicable
28
Effective Date (Floating Rate
Notes):
Not applicable
29
Specified Duration (Floating
Rate Notes):
Not applicable
30
Margin (Floating Rate Notes):
Not applicable
31
Rate Multiplier
(if applicable):
Not applicable
32
Maximum/Minimum Interest
Rate (if applicable):
Not applicable
33
Maximum/Minimum
Instalment Amount (if
applicable):
Not applicable
34
Maximum/Minimum
Not applicable
31
Redemption Amount (if
applicable):
35
Interest Amount:
The Interest Amount payable in respect of each Note and an
Interest Accrual Period shall be an amount in USD
calculated by the Calculation Agent as being equal to the
product of (a) the Denomination; (b) the Interest Rate; and
(c) the Day Count Fraction.
Interest will be payable in arrear on the Interest Payment
Dates.
The Interest Amount will cease to accrue from and including
the Interest Period Date immediately preceding an Event
Determination Date (as defined in the Credit Default Swap)
(or if none, the Interest Commencement Date), provided that
if the Event Determination Date is subsequently reversed
pursuant to the terms of the Credit Default Swap, any
Interest Amount which previously ceased to accrue shall be
deemed to have accrued and shall be payable by the Issuer
two Business Days after the date of such reversal. No
additional interest shall be payable in respect of any reversal
of an Event Determination Date.
If the Swap Counterparty notifies the Issuer that a Credit
Event (as defined in the Credit Default Swap) may have
occurred prior to an Interest Period Date but no Event
Determination Date has yet been determined (including
without limitation where a request has been made to ISDA
(in its capacity as secretary of the relevant Credit
Derivatives Determinations Committee, the “DC Secretary”)
to convene a Credit Derivatives Determinations Committee
to consider whether a Credit Event has occurred and (a)
such request has not been rejected by the DC Secretary;
and (b) the deliberations with respect to any DC Credit
Event Meeting Announcement in relation to such Credit
Event have not commenced yet or are still ongoing),
payment of the Interest Amount on the Interest Payment
Date relating to such Interest Period Date shall be
postponed until the Swap Counterparty confirms whether or
not a Credit Event has occurred. If the Swap Counterparty
notifies the Issuer that no Credit Event has occurred, the
Issuer will pay Noteholders the postponed Interest Amount
two Business Days after the Swap Counterparty makes
such confirmation without any additional interest in respect
of such postponement. If the Swap Counterparty determines
that an Event Determination Date has occurred, the Interest
Amount will cease to accrue from and including the Interest
Period Date immediately preceding such
Event
Determination Date and no Interest Amount shall be payable
on any Interest Payment Date following such event.
32
36
Day Count Fraction:
30/360
37
Interest Period Date(s) (if
applicable):
22 June and 22 December in each year from and including
22 June 2017 (a short first coupon) to and including 22 June
2026, in each case not subject to adjustment in accordance
with any Business Day Convention.
38
Redemption Amount:
Redemption Amount
payable on final
maturity pursuant to
Condition 7.1:
Final Redemption Amount
Redemption Amount
payable on
mandatory
redemption pursuant
to Condition 7.2:
Early Redemption Amount
No additional amounts shall be payable by the Issuer or
the Swap Counterparty as a result of the redemption of
the Notes falling on a date after the Scheduled Maturity
Date.
Condition 7.2.1 (Mandatory Redemption) shall be amended
by:
deleting “either” immediately before “(i) any of the
Initial Collateral”;
inserting the following immediately after the words “a
payment default in respect of any of the Initial
Collateral”:
“or (iv) the Asset Value Termination Event has
occurred”; and
inserting the following sentence at the end of
Condition 7.2.1:
“For the purposes of (iv) above, (a) an “Asset Value
Termination Event” shall occur if, on any day, the
value of the Initial Collateral then held by the Issuer
(as determined by the Calculation Agent acting in
good faith and in a commercially reasonable
manner) is less than 65 per cent. of the outstanding
nominal amount of the Notes (the “Asset Value
Trigger Level”) on such day and (b) the occurrence
of an Asset Value Termination Event on any day
shall give rise to an early redemption of the Notes in
accordance with this Condition 7.2.1 notwithstanding
the value of the Initial Collateral at any time
thereafter. The Calculation Agent will use reasonable
endeavours to notify the Issuer of the occurrence of
an Asset Value Termination Event.”
Noteholders should note that such notification may not
occur immediately following a fall in value to below the
trigger percentage. There is no guarantee of timely
receipt of any such notice by the Issuer (which is
subject to operational and other risks) and, particularly
in the case of increasing market volatility, the value of
the Initial Collateral may have fallen further below the
33
Asset Value Trigger Level, even to zero, at the time of
the Issuer’s receipt of a notice of the Asset Value
Termination Event (and the Noteholders’ receipt of a
Mandatory Redemption Notice) and at the time of
subsequent realisation of the Initial Collateral.
Noteholders may notify the Calculation Agent if they
believe that the value of the Initial Collateral has fallen
below the Asset Value Trigger Level and, in order to
ensure that it can monitor the such values, any
Noteholder should have its own access to real-time
sophisticated financial data. Noteholders shall have no
claim against the Calculation Agent for any failure to
provide (or delay in providing) notice of an Asset Value
Termination Event.
Redemption Amount
payable on
mandatory
redemption pursuant
to Condition 7.3:
Early Redemption Amount
Redemption Amount
payable on exercise
of Issuer’s option
pursuant to Condition
7.6:
Not applicable
Redemption Amount
payable on exercise
of Noteholder’s option
pursuant to Condition
7.7:
Not applicable
Redemption Amount
payable on final
maturity pursuant to
Condition 7.12:
Early Redemption Amount
Redemption Amount
payable where an
Event Determination
Date has occurred in
accordance with the
Credit Default Swap:
If a Credit Event occurs at any time from and including the
Credit Linkage Start Date (as defined in Annex 1) to and
including the later of (a) the Credit Linkage End Date (as
defined in Annex 1), (b) if a Potential Failure to Pay exists on
the Credit Linkage End Date, the Grace Period Extension
Date and (c) if a Potential Repudiation/Moratorium exists on
the Credit Linkage End Date, the Repudiation/Moratorium
Evaluation Date, and an Event Determination Date has
occurred and has not been subsequently reversed prior to
the occurrence of the Auction Final Price Determination
Date, Valuation Date or Termination Date (as applicable) in
accordance with the terms of the Credit Default Swap (and
where terms not defined herein have the meanings given to
them in the Credit Default Swap), subject to the paragraph
34
below with regard to Multiple Successors, each Note will,
subject as provided below, be redeemed at the Cash
Settlement Entitlement on the date falling two Business
Days after the relevant Settlement Date. Notes held by a
Noteholder shall be aggregated for the purpose of
determining the aggregate Cash Settlement Entitlement of
that Noteholder.
Where with respect to the Credit Default Swap, more than
one Successor (each a “Multiple Successor”) has been
identified and the relevant Event Determination Date relates
to a Multiple Successor, each Note shall be redeemed in
part, not in whole (except where the Credit Event relates to
the final remaining Multiple Successor that has not already
suffered a Credit Event) and:
(i)
Principal Amount to be redeemed: the principal
amount of each Note to be redeemed (the
“Allocated Principal Amount”) shall be a portion of
the corresponding principal amount of such Note
equal to the outstanding principal amount of such
Note allocated to the relevant Reference Entity
immediately prior to such Succession Date divided
by the number of Multiple Successors and the
aggregate principal amount of the Notes redeemed
in respect of such Event Determination Date shall be
the sum of all such Allocated Principal Amounts (the
“Aggregate Allocated Principal Amount”);
(ii)
Cessation of Interest: interest shall cease to accrue
on the principal amount of the Notes equal to the
Aggregate Allocated Principal Amount from and
including the Interest Period Date immediately
preceding the relevant Event Determination Date;
(iii)
Sale of Initial Collateral: the Disposal Agent on
behalf of the Issuer shall dispose of a portion of the
Initial Collateral bearing the same proportion to the
Initial Collateral as the Aggregate Allocated Principal
Amount bears to the Principal Amount outstanding;
and
(iv)
Partial Cash Settlement Entitlement payable: in such
circumstances each Note will be redeemed by
payment of the Cash Settlement Entitlement
(determined with respect to such Allocated Principal
Amount) on the day falling two Business Days after
the relevant Settlement Date. More than one Cash
Settlement Entitlement may be payable on the same
day in respect of different Multiple Successors but,
subject to the provisions of paragraphs 38(g)(i) and
(ii) above, not more than one Event Determination
Date resulting in a Credit Event may occur (or
35
deemed to occur) in relation to a single Multiple
Successor.
Following a partial redemption pursuant to this paragraph
38(g), the Calculation Agent may make such modifications
to the Conditions as it considers necessary acting in good
faith and in a commercially reasonable manner to preserve
the economic effects of the continuing notes.
Noteholders should note that in the event that the Notes
are redeemed pursuant to this paragraph 38(g), the
market value of any Cash Settlement Entitlement may
be less than the outstanding principal amount of the
Notes and may be zero.
Redemption Amount
payable upon the
acceleration of the
Notes following the
occurrence of an
Event of Default
pursuant to Condition
11:
Early Redemption Amount
Where the Notes redeem early, the Issuer shall apply the
proceeds of the sale of the Collateral and the Swap
Termination Value (if the same is due from the Swap
Counterparty to the Issuer) in accordance with the
applicable order of priorities that would then be
determined to apply in accordance with paragraph
72(b).
Noteholders may receive different payments as a result
of roundings effected by the Calculation Agent. In the
event that the Notes are redeemed prior to the Maturity
Date, the amount payable by the Issuer may be more or
less than the principal amount of the Notes and may be
zero.
39
Maturity Date:
Two Business Days following 22 June 2026 (the
“Scheduled Maturity Date”) or, if later, the latest of each of
the dates as determined below (each event causing an
extension to the Maturity Date of the Notes, a “Maturity
Date Extension Event”):
(a)
if an Event Determination Date or DC Credit Event
Question Dismissal has occurred or if, for any
reason, the Extension Date does not fall on the
Scheduled Termination Date (each as defined in the
Credit Default Swap), two Business Days following
the Termination Date of the Credit Default Swap (or,
if any event under the Credit Default Swap results in
the Calculation Agent only being able to determine
the Termination Date of the Credit Default Swap on a
date after such date has occurred, two Business
Days following the date that the Calculation Agent is
able to make such determination);
(b)
if a Potential Failure to Pay exists on the Credit
Linkage End Date, the Maturity Date shall be
36
postponed (but for the avoidance of doubt shall not
be accelerated) until the date falling two Business
Days following the later of the final day of (i) the
Notice Delivery Period; and (ii) the Post Dismissal
Additional Period (if any) (each as defined in the
Credit Default Swap);
(c)
if a Potential Repudiation/Moratorium (each as
defined in the Credit Default Swap) exists on the
Credit Linkage End Date, the Maturity Date shall be
postponed until the date falling two Business Days
following the later of the final day of (i) the Notice
Delivery Period; and (ii) the Post Dismissal
Additional Period (if any);
(d)
if the Swap Counterparty notifies the Issuer pursuant
to the Credit Default Swap (such notice, a “Potential
Credit Event Notice”) at any time on or prior to the
Scheduled Maturity Date of its determination (which
shall be exercisable in its sole and absolute
discretion) that a Credit Event may have occurred in
the period from and including the Credit Linkage
Start Date to and including the Credit Linkage End
Date in respect of which an Event Determination
Date has not occurred, or the determination as to
whether such Credit Event has occurred cannot be
resolved in accordance with the terms of the Credit
Default Swap on or before the Scheduled Maturity
Date, the Maturity Date shall be postponed until the
date falling two Business Days following the later of
the final day of (i) the Notice Delivery Period; and (ii)
the Post Dismissal Additional Period (if any) or such
later date on which, in the reasonable opinion of the
Calculation Agent, an Event Determination Date can
no longer occur with respect to such Credit Event;
and
(e)
if, with respect to a Reference Entity, an Event
Determination Date occurs and the Auction
Settlement Amount (or Cash Settlement Amount, if
applicable) in respect of the relevant Credit Event
has not been determined as of the Scheduled
Maturity Date, then the Maturity Date shall be
postponed until the date falling two Business Days
following the relevant Settlement Date.
For the avoidance of doubt, the Settlement Date of the
Credit Default Swap may be postponed following a public
announcement by the DC Secretary that a DC Resolution
(as defined in the 2014 ISDA Credit Derivatives Definitions)
will be passed by the relevant Credit Derivatives
37
Determinations Committee. See “Determination of Credit
Events” risk factor in “Risk Factors” above. See also
“Payments in the Notes may be deferred or suspended” risk
factor in “Risk Factors” above. Notice of any Potential Credit
Event Notice will be given to the Noteholders in accordance
with Condition 16 (Notices) by the Issuer promptly after
receipt by the Issuer thereof from the Swap Counterparty. In
addition, notice of the postponed Maturity Date will be given
to the Noteholders in accordance with Condition 16
(Notices) by the Issuer promptly after the postponed
Maturity Date is determined.
The Swap Counterparty may send more than one Potential
Credit Event Notice during the term of the Notes and in the
event of the occurrence of more than one Maturity Date
Extension Event the Maturity Date shall be postponed until
the latest of the dates determined pursuant to each Maturity
Date Extension Event described above.
No additional amounts of interest or otherwise will be
payable by the Issuer or the Swap Counterparty as a result
of any postponement of the Maturity Date.
40
Redemption for taxation
reasons permitted on days
other than Interest Payment
Dates:
Yes
41
Index/Formula
(Indexed Notes):
Not applicable
42
Calculation Agent:
For the purposes of the calculations described in
paragraphs 38(b) to (h), CGML, and otherwise, Citibank,
N.A., London Branch. The Calculation Agent shall make all
calculations and determinations in good faith and in a
commercially reasonable manner.
The Calculation Agent may in good faith make such
amendment to, or supplement, the Conditions following the
announcement or publication by the International Swaps
and Derivatives Association, Inc. of any provision, standard
protocol or material relating to credit derivatives transactions
which affects the Notes, the Credit Default Swap or any
hedge transaction related to the Notes or the Swap
Agreement entered into by the Issuer, the Swap
Counterparty or any of its affiliates as the Calculation Agent
determines appropriate to take into account the effect of
such provision, standard protocol or material.
43
Dual Currency Notes:
Not applicable
44
Partly-Paid Notes:
Not applicable
38
45
Amortisation Yield
(Zero Coupon Notes):
Not applicable
46
Redemption at the option of
the Issuer or other Issuer’s
option (if applicable):
Not applicable
47
Redemption at the option of
the Noteholders or other
Noteholders’ Option (if
applicable):
Not applicable
48
Issuer’s Option Period:
Not applicable
49
Noteholders’ Option Period:
Not applicable
50
Instalment Date(s) (if
applicable):
Not applicable
51
Instalment Amount(s) (if
applicable):
Not applicable
52
Unmatured Coupons to
become void upon early
redemption in full:
Not applicable
53
Noteholders’ option to
exchange Notes for the Net
Asset Amount
No
54
Talons to be attached to
Notes and, if applicable, the
number of Interest Payment
Dates between the maturity
of each Talon (Bearer Notes):
Not applicable
55
Business Day Jurisdictions
for Condition 8.8 (jurisdictions
required to be open for
payment):
London, New York and Riyadh
56
Additional steps that may
only be taken following
approval by an Extraordinary
Resolution in accordance
with Condition 13.1 (if
applicable):
None
57
Details of any other additions
or variations to the
Conditions:
A. Condition 7.9 (Redemption because of Ineligible
Investors) shall be deleted and replaced with the
following:
“7.9
Redemption because of Ineligible Investors
The Issuer may:
(i)
at any time, compel any beneficial owner of an
interest in the Notes to certify that such beneficial
39
owner is not an Ineligible Investor;
(ii)
refuse to honour the transfer of an interest in a
Note to the extent such transfer is to or for the
benefit of an Ineligible Investor; and
(iii) compel any beneficial owner of an interest in the
Notes that is an Ineligible Investor to transfer such
interest in the Notes to a Permitted Purchaser, or
transfer such interest in the Notes to the Issuer or
an affiliate of the Issuer at a price equal to the
lesser of (x) the purchase price therefor paid by the
beneficial owner, (y) 100 per cent. of the principal
amount thereof and (z) the fair market value
thereof.
For the purposes of these Conditions, an “Ineligible
Investor” means a person who is not (x) not a U.S.
person (as such term is defined under Rule 902(k)(1) of
Regulation S under the Securities Act), (y) a Non-United
States person (as such term is defined under CFTC
Rule 4.7) or (z) not a U.S. person (as defined in the
credit risk retention regulations issued under Section
15G of the U.S. Securities Exchange Act of 1934) (any
person who satisfies the conditions set forth in the
immediately preceding clauses (x), (y) and (z), a
“Permitted Purchaser”).”
B. By purchasing the Notes, each Noteholder or beneficial
owner of the Notes in the Kingdom of Saudi Arabia shall
be deemed to have represented to the Issuer and the
Dealer that, pursuant to Article 13(c) of the Saudi
Arabian Securities Business Regulations, they have
been advised by an authorized person in relation to their
purchase of the Notes.
C. Condition 7.3.1 shall be deleted and replaced with the
following:
“7.3.1 If the Issuer (i) on the occasion of the next
payment due in respect of the Notes, (a) would be
required by the law of any authority of any jurisdiction to
withhold, deduct or account for tax (except in the case of
any such withholding, deduction of accounting arising on
account of an Information Reporting Regime) or (b)
would suffer tax in accordance with the law of any
authority of any jurisdiction in respect of its income so
that it would be unable to make payment of the full
amount due or (ii) determines that any Noteholder,
Couponholder or beneficial owner of Notes has failed to
provide sufficient forms, documentation or other
information requested in accordance with Condition 9.2
such that any payment received by the Issuer may be
subject to a deduction or withholding or the Issuer may
40
suffer a fine or penalty, in each case, pursuant to an
Information Reporting Regime, then the Issuer shall so
inform the Trustee, and if an event described in
paragraphs (i)(a) or (b) has occurred shall use its best
endeavours (I) to arrange the substitution of a company
incorporated
in
another
jurisdiction
approved
beforehand in writing by the Trustee and any Swap
Counterparty,
Option
Counterparty
and
Loan
Counterparty in respect of any outstanding Notes as the
principal obligor such that no deduction, withholding, or
accounting described in (a) above shall be due with
respect to payments on the Notes or tax on income
described in (b) above would be suffered or (II) to
change (to the satisfaction of the Trustee and any Swap
Counterparty,
Option
Counterparty
and
Loan
Counterparty in respect of any outstanding Notes) its
residence for taxation purposes to another jurisdiction
approved beforehand in writing by the Trustee and any
such Swap Counterparty, Option Counterparty and Loan
Counterparty (and provided that Rating Agency
Affirmation has been received at the time of the
proposed substitution or change from each Rating
Agency (if any) then rating the outstanding Notes) such
that no deduction, withholding or accounting described
in (a) above shall be due with respect to payments on
the Notes or tax on income described in (b) above would
be suffered, and if it is unable to arrange such
substitution or change before the next payment is due in
respect of the Notes, or if an event described in
paragraphs (ii) has occurred, the Issuer shall redeem all
but not some only of the Notes; and/or”
D. Condition 7.3.2 shall be deleted and replaced with the
following:
“7.3.2 if the Issuer (i) is or will be unable to receive
any payment due in respect of the Initial Collateral
forming part of the Mortgaged Property in full on the due
date therefor without deduction for or on account of any
withholding tax, back-up withholding or other tax, duties
or charges of whatsoever nature imposed by any
authority of any jurisdiction, (ii) is required to pay any
tax, duty or charge of whatsoever nature in respect of
any payment received in respect of the Initial Collateral
forming part of the Mortgaged Property, (iii) is or will be
unable to receive any payment due under the Swap
Agreement in full on the due date therefor without
deduction for or on account of any withholding tax, backup withholding or other tax, duties or charges of
whatsoever nature, or (iv) is required to comply with any
reporting requirement of any such authority (except in
41
any case where the Issuer is able to obtain such
payment in full on the due date therefor or gain
exemption from such payment or reporting requirement
or comply with such reporting requirements by filing a
declaration that it is not a resident of such jurisdiction
and/or by executing any certificate, form or other
document in order to make a claim under a double
taxation treaty or other exemption available to it and
such filing or execution does not involve any material
expense and is not unduly onerous, or such reporting
requirement does not involve any material expense and
is not unduly onerous), in each case including where
such tax, duty, charge or reporting requirement is
imposed on account of an Information Reporting
Regime, then the Issuer shall so inform the Trustee and
the Issuer shall redeem all but not some only of the
Notes save where Condition 7.3.4 (Disapplication of
Conditions 7.3.1 and 7.3.2 and Information Reporting
Regime Withholding) below applies; and/or”
E. Condition 7.3.4 shall be deleted and replaced with the
following:
“7.3.4 Disapplication of Conditions 7.3.1 and 7.3.2
and Information Reporting Regime Withholding
Notwithstanding the foregoing, if the requirement to
withhold, deduct or account for any present or future
taxes, duties or charges of whatsoever nature or any
fine or penalty referred to in Conditions 7.3.1 or 7.3.2
above arises solely (i) due to the imposition of
withholding in respect of payments due in respect of the
Notes on account of an Information Reporting Regime,
(ii) by reason of any Noteholder’s, Couponholder’s or
beneficial owner of Notes’ connection with a relevant
taxing jurisdiction otherwise than by reason only of the
holding of any Note or receiving or being entitled to any
payment in respect thereof or (iii) by reason of the
failure of the relevant Noteholder, Couponholder or
beneficial owner of Notes to comply with any applicable
procedures required to establish non-residence or other
similar claim for exemption from such tax including,
without limitation, any failure to provide information or
documentation requested in accordance with Condition
9.2 or to provide any waiver required by an Information
Reporting Regime, then, to the extent the Issuer is able
to deduct such taxes, duties, charges, fines or penalties,
as applicable, from the amounts payable to such
Noteholder or Couponholder without impairing payments
to other Noteholders and Couponholders, Condition
7.3.1 or 7.3.2, as applicable, shall not apply and the
Issuer shall deduct such taxes, duties, charges, fines or
42
penalties, as applicable, from the amounts payable to
such Noteholder or Couponholder and all other
Noteholders and Couponholders shall receive the due
amounts payable to them and the Issuer shall not
redeem the Notes pursuant to Condition 7.3.1 or 7.3.2,
as applicable. Any such deduction shall not be an Event
of Default under Condition 11.”
F. Condition 9.1 (Withholding and Deductions) shall be
deleted and replaced with the following:
“9.1
Withholding and Deductions
All payments of principal and interest by the Issuer in
respect of the Notes and Coupons will be made subject
to any withholding or deduction for, or on account of,
any withholding tax. Any such deduction shall not be an
Event of Default under Condition 11. In the event of the
imposition of any withholding taxes other than on
account of an Information Reporting Regime on
payments in respect of the Notes, the Issuer will use its
best endeavours to (i) arrange for the substitution of its
obligations by a company incorporated in another
jurisdiction or (ii) to change its residence for taxation
purposes to another jurisdiction approved by the
Trustee, in each case such that no deduction or
withholding shall be due with respect to payments on
the Notes, as contemplated in Condition 7.3.1.”
58
The Agents appointed in
respect of the Notes are:
Citibank, N.A., London Branch
Citigroup Centre
Canada Square
Canary Wharf
London E14 5LB
as Issuing and
Calculation Agent
Paying Agent,
Transfer Agent
Citigroup Global Markets Limited
Citigroup Centre
Canada Square
Canary Wharf
London E14 5LB
as Calculation Agent and Disposal Agent
Citigroup Global Markets Deutschland AG
Agency and Trust Department
Reuterweg 16
60323 Frankfurt
Germany
as Registrar
Arthur Cox Listing Services Limited
Earlsfort Centre
Earlsfort Terrace
43
and
Dublin 2
Ireland
as Irish Listing Agent
59
Purchase by the Issuer of
Notes:
The Issuer may purchase Notes
60
Settlement method:
Delivery free of payment
Provisions applicable to Global Notes and Certificates
61
How Notes will be
represented on issue:
Global Certificate
62
Applicable TEFRA
exemption:
Not applicable
63
Whether Temporary/
Permanent Global Note/
Global Certificate is
exchangeable for Definitive
Notes/Individual Certificates
at the request of the holder:
Yes, in limited circumstances, for Individual Certificates.
64
New Global Note:
No
65
Intended to be held in a
manner which would allow
Eurosystem eligibility:
No. Whilst the designation is specified as “no” at the date of
this Series Prospectus, should the Eurosystem eligibility
criteria be amended in the future such that the Notes are
capable of meeting them the Notes may then be deposited
with one of the ICSDs as common safekeeper (and
registered in the name of a nominee of one of the ICSDs
acting as common safekeeper). Note that this does not
necessarily mean that the Notes will then be recognised as
eligible collateral for Eurosystem monetary policy and intra
day credit operations by the Eurosystem at any time during
their life. Such recognition will depend upon the ECB being
satisfied that Eurosystem eligibility criteria have been met.
Provisions relating only to the sale and listing of the Notes
66
Details of any additions or
variations to the Dealer
Agreement:
Not applicable
67
(i)
Listing and admission
to trading:
This Series Prospectus has been approved by the Central
Bank of Ireland (the “Central Bank”), as competent
authority under Directive 2003/71/EC (as amended). The
Central Bank only approves this Series Prospectus as
meeting the requirements imposed under Irish and EU law
pursuant to the Prospectus Directive. Application has been
made to the Irish Stock Exchange for the Notes to be
admitted to the Official List and admitted to trading on its
regulated market.
(ii)
Estimate of total
All such expenses are being paid by the Dealer.
44
expenses related to
admission to trading:
68
Dealers’ commission
(if applicable):
None.
69
Method of Issue:
Individual Dealer
70
The following Dealer is
subscribing to the Notes:
CGML
71
Rating (if applicable):
Not applicable
The Security Arrangements
72
Mortgaged Property:
Initial Collateral:
See Annex 2.
Security
(order of priorities):
See Annex 2. The Trustee shall apply the Available
Proceeds in accordance with one of the following orders of
priority:
(i)
if the Notes are being redeemed early directly as a
result of a Swap Counterparty Default, Noteholder
Priority; or
(ii)
if the Notes are being redeemed in circumstances
other than those outlined in paragraph 72(b)(i) above
or the security in respect of the Notes has become
enforceable for any other reason, Counterparty
Priority A.
Noteholders should understand that the validity and
enforceability of provisions such as paragraph 72(b)
have been the subject of caselaw in the English and
U.S. courts – see “Priority of claims” risk factor in “Risk
Factors” above.
Swap Agreement
(if applicable):
See Annexes 3, 4 and 5
Swap
Counterparty(ies):
Citigroup Global Markets Limited, whose registered office is
Citigroup Centre, Canada Square, Canary Wharf, London
E14 5LB.
Credit Support Annex:
Not applicable
Option Agreement (if
applicable):
Not applicable
Option
Counterparty(ies)
Not applicable
Details of Credit
Support Document (if
applicable):
Not applicable
Credit Support
Provider:
Not applicable
45
73
Details of Securities
Lending Agreement (if
applicable):
Not applicable
Loan
Counterparty(ies):
Not applicable
Noteholder Substitution of
Initial Collateral:
Not Applicable
46
Annex 1
Defined Terms
“Business Day” means a day on which commercial banks and foreign exchange markets settle
payments and are open for general business (including dealings in foreign exchange and foreign
currency deposits) in London and New York.
“Cash Settlement Entitlement” means, in respect of each Note outstanding, a pro rata share of
(a) the net realised proceeds of the sale of the Collateral (where applicable) together with any
other cash then held by or on behalf of the Issuer (or the relevant proportion thereof, in each case
converted, where necessary, into USD at the then prevailing exchange rate), plus (where the same
is due from the Swap Counterparty to the Issuer) or, as the case may be, minus (where the same
is due from the Issuer to the Swap Counterparty) (b) the Swap Termination Value (if applicable),
minus (c) the Auction Settlement Amount or the Cash Settlement Amount (as applicable), plus (d)
the Final Fixed Amount (as defined in the Credit Default Swap), minus (e) the Unwind Costs,
subject to a minimum of zero (rounded to the nearest USD 0.01, half of USD 0.01 being rounded
downwards). Notes held by a Noteholder shall be aggregated for the purposes of determining the
aggregate Cash Settlement Entitlement of that Noteholder.
“Credit Linkage End Date” means the Scheduled Termination Date (as defined in the Credit
Default Swap).
“Credit Linkage Start Date” means the Trade Date (as defined in the Credit Default Swap).
“Early Redemption Amount” means, in respect of each Note outstanding on the relevant Early
Redemption Date, an amount in USD determined by the Calculation Agent acting in good faith and
in a commercially reasonable manner as being equal to a pro rata share of:
(i)
if the Notes are being redeemed pursuant to Conditions 7.3 or 11 directly as a result of a
Swap Counterparty Default, the lower of:
(A) (I) the net realised proceeds of the sale of the Collateral (where applicable) together
with any other cash then held by or on behalf of the Issuer (in each case converted, were
necessary, into USD at the then prevailing exchange rate); plus (II) (only where the same
is due from the Swap Counterparty to the Issuer) the Swap Termination Value; and
(B) (I) the outstanding principal amount of the Notes; plus (II) any accrued but unpaid
interest on the Notes; or
(ii)
if the Notes are being redeemed in circumstances other than those outlined in subparagraph (i) above, (A) the net realised proceeds of the sale of the Collateral (where
applicable) together with any other cash then held by or on behalf of the Issuer (in each
case converted, where necessary, into USD at the then prevailing exchange rate) plus
(where the same is due from the Swap Counterparty to the Issuer) or, as the case may be,
minus (where the same is due from the Issuer to the Swap Counterparty) (B) the Swap
Termination Value (if applicable), minus (C) the Unwind Costs,
in each case subject to a minimum of zero (rounded to the nearest USD 0.01, half of USD 0.01
being rounded downwards). Notes held by a Noteholder shall be aggregated for the purposes of
determining the aggregate Early Redemption Amount in respect of the Notes of that Noteholder.
“Swap Counterparty Default” means an Event of Default (as defined in the ISDA Master
Agreement) in respect of which the Defaulting Party (as defined in the ISDA Master Agreement) is
the Swap Counterparty.
47
“Swap Termination Value” means the aggregate of the early termination payments due from or
payable to the Swap Counterparty under the Swap Agreement, the calculation of which is
described under “Consequences of Early Termination” in Annex 3. For the avoidance of doubt, if
an Event Determination Date under the Credit Default Swap has occurred and has not been
subsequently reversed prior to the occurrence of the Auction Final Price Determination Date,
Valuation Date or Termination Date (as applicable) in accordance with the Credit Default Swap, the
Swap Termination Value shall ignore the Credit Default Swap (which shall terminate following
payment of the Auction Settlement Amount (or Cash Settlement Amount, if applicable) and the
Final Fixed Amount) and shall comprise the early termination payment for the Asset Swap
calculated in accordance with Section 6(e) of the Swap Agreement. For the avoidance of doubt,
the Swap Termination Value will be calculated in the currency in which the Notes are denominated
and may be zero.
“Unwind Costs” means the fees, costs, charges, expenses and liabilities incurred by the Swap
Counterparty and the Issuer in connection with the early redemption of the Notes.
48
Annex 2
Security and Collateral
Description of the Collateral
On the Issue Date, the Issuer purchased the Initial Collateral.
The “Initial Collateral” in respect of the Notes comprises USD 35,000,000 in principal amount of the
USD 1,000,000,000 4.375% Notes due 2026 issued by Abu Dhabi National Energy Company PJSC
and having the ISIN number XS1435072464.
The Initial Collateral constitutes the “Collateral” as at the Issue Date and, at any time thereafter, the
“Collateral” shall include any other securities, cash or other assets or property derived therefrom or
delivered to the Issuer and held by the Custodian for the account of the Issuer at such time.
Initial Collateral
The following summary of the Initial Collateral is qualified by reference to the detailed terms and
conditions of the Initial Collateral.
Title:
4.375% Notes due 2026
Collateral Issuer:
Abu Dhabi National Energy Company PJSC
Country of Incorporation:
United Arab Emirates
Principal Address of
Collateral Issuer:
Levels 23-25, Al Maqam Tower, Abu Dhabi Global Market Square, Al
Maryah Island, P.O. Box 5524, Abu Dhabi, United Arab Emirates
Principal Business of
Collateral Issuer:
Abu Dhabi National Energy Company PJSC is the holding company
for a diversified international energy group headquartered in the
Emirate of Abu Dhabi, United Arab Emirates.
Principal Amount:
USD 1,000,000,000
Denomination:
USD 200,000 plus integral multiples of USD 1,000 in excess thereof
Issue Date:
22 June 2016
Final Maturity Date:
22 June 2026
Interest Rate:
4.375 per cent. per annum
Interest Payment Date:
22 June and 22 December in each year, commencing on 22
December 2016
Listing:
The Initial Collateral was listed on the regulated market of the London
Stock Exchange with effect from 22 June 2016.
Governing law:
English law
ISIN:
XS1435072464
Common Code:
143507246
49
Ratings:
As at the Issue Date of the Notes, the Initial Collateral was rated “A3”
by Moody’s and “BBB+” by S&P.
The Collateral Issuer has been assigned long-term unsecured senior
debt ratings of “A3 (stable outlook)” by Moody’s and “A- (negative
outlook)” by S&P.
Each of Moody’s and S&P is a credit rating agency established in the
European Community or registered in the European Community
under the CRA Regulations.
Ranking:
The Initial Collateral and any related coupons constitute senior
unsecured obligations of the Collateral Issuer.
Security Arrangements
Subject as set out below, the obligations of the Issuer under the Notes are secured pursuant to the
Trust Deed by:
(i)
a first fixed charge over the Collateral in favour of the Trustee;
(ii)
an assignment by way of security in favour of the Trustee of all the Issuer’s rights, title and
interest attaching to or relating to the Collateral and all sums derived therefrom including,
without limitation, any right to delivery thereof or to an equivalent number or nominal value
thereof which arises in connection with any such assets being held in a clearing system or
through a financial intermediary;
(iii)
an assignment by way of security in favour of the Trustee of the Issuer’s rights, title and
interest against the Custodian and the Disposal Agent, to the extent that they relate to the
Collateral;
(iv)
an assignment by way of security in favour of the Trustee of the Issuer’s rights, title and
interest under and in respect of the Agency Agreement, to the extent that they relate to the
Notes and all sums derived therefrom in respect of the Notes;
(v)
an assignment by way of security in favour of the Trustee of the Issuer’s rights, title and
interest under and in respect of the Custody Agreement, to the extent that they relate to
the Notes;
(vi)
an assignment by way of security in favour of the Trustee of the Issuer’s rights, title and
interest under the Swap Agreement and in respect of any sums received thereunder; and
(vii)
a first fixed charge in favour of the Trustee of (a) all sums held by the Issuing and Paying
Agent and the Custodian to meet payments due in respect of the obligations and duties of
the Issuer under the Trust Deed, the Swap Agreement, the Agency Agreement, the
Custody Agreement and the Notes, (b) all sums held by the Disposal Agent under the
Agency Agreement and (c) any sums received by the Issuing and Paying Agent under the
Swap Agreement,
(the rights and assets of the Issuer referred to in this paragraph being the “Mortgaged Property”).
In circumstances where Collateral is held by or through the Custodian in a clearing system, the
security will take the form of an assignment of the Issuer’s contractual rights against the Custodian
rather than a charge over such Collateral.
A charge, although expressed in words which would suffice to create a fixed charge, may be
treated as a floating charge, particularly if it appears that it was intended that the chargor should
50
have licence to dispose of the assets charged in the course of its business without the consent of
the chargee.
The Disposal Agent, acting on behalf of the Issuer, may procure the realisation of the equivalent
proportion of the Collateral in connection with any purchase and cancellation of the Notes by the
Issuer in accordance with Condition 7.4 (Purchases) and Condition 7.10 (Cancellation).
In the event that the Mortgaged Property described above is realised by the Trustee on
behalf of the Noteholders, there can be no assurance that the proceeds of realisation
thereof will be sufficient to repay the principal amount and any other amount that is due
under the Notes.
The Custodian
A description of the Custodian is set out in the section entitled “Description of Citibank, N.A.” in the
Base Prospectus.
51
Annex 3
The Swap Agreement
The description of the Swap Agreement set out below is a summary of certain features of the
Swap Agreement and is qualified by reference to the detailed provisions of the Swap Agreement.
Payments under the Swap Agreement
Under a 2002 ISDA Master Agreement deemed entered into between the Issuer and the Swap
Counterparty and dated as of the Issue Date (including the Schedule (as defined in the ISDA
Master Agreement) in the form of Part A of the Swap Terms (August 2016 Version) relating to the
Programme (as such Schedule may have been amended by the Swap Confirmations)) as may be
amended and/or supplemented from time to time (the “ISDA Master Agreement”), the Issuer and
the Swap Counterparty have entered into a swap confirmation (the “Credit Default Swap
Confirmation”) which constitutes a credit default swap transaction with an effective date of the
Issue Date of the Notes (the “Credit Default Swap”) (into which the 2014 ISDA Credit Derivatives
Definitions are incorporated by reference) a swap confirmation (the “Asset Swap Confirmation”
and together with the Credit Default Swap Confirmation, the “Swap Confirmations”) which
constitutes an asset swap transaction with an effective date of the Issue Date of the Notes (the
“Asset Swap”) (into which the 2006 ISDA Definitions are incorporated by reference) (the ISDA
Master Agreement together with the Swap Confirmations, the “Swap Agreement”).
Under the Credit Default Swap, the Issuer shall be paid the Fixed Rate on the Fixed Rate Payer
Payment Dates by the Swap Counterparty. Pursuant to the Credit Default Swap, the Swap
Counterparty has the right to exercise the credit event provisions under the Credit Default Swap
immediately upon (and, subject as set out below, at any time subsequent to) the occurrence of a
Credit Event during the period from and including the Credit Linkage Start Date to and including
the Credit Linkage End Date (or, in certain circumstances, after the Credit Linkage End Date if a
Potential Failure to Pay exists on the Credit Linkage End Date, or a Potential
Repudiation/Moratorium exists on the Credit Linkage End Date). When serving notice of the
occurrence of a Credit Event, the Swap Counterparty may provide the Issuer with the Notice of
Publicly Available Information (it will not need to do so if a Credit Derivatives Determinations
Committee resolves that a Credit Event has occurred). On the fifth Business Day (or such other
number of Business Days specified in respect of the relevant Auction in the “Transaction Auction
Settlement Terms” published by ISDA in respect of the Auction) following the determination of the
Auction Final Price, the Issuer will pay the Swap Counterparty an amount that is the greater of (a)
an amount equal in USD to the product of (i) the outstanding Principal Amount of the Notes and (ii)
the Reference Price minus the Auction Final Price; and (b) zero.
Under the Asset Swap, the Swap Counterparty will pay to the Issuer periodic amounts equal to the
interest and principal payable under the Notes and the Issuer will pay to the Swap Counterparty
periodic amounts equal to the scheduled interest and principal receivable on the Collateral and the
amounts payable by the Swap Counterparty to the Issuer under the Credit Default Swap.
In addition, other than following the occurrence of an Event Determination Date under the Credit
Default Swap (in which case see “Termination of the Swap Agreement following a Credit Event“
below) the Issuer will pay to the Swap Counterparty (or the Swap Counterparty will pay to the
Issuer, as the case may be) the termination amounts in connection with the termination of the
Swap Agreement whether in whole or in part (as further described in “Consequences of Early
Termination” below).
52
Termination of the Swap Agreement
Except as stated in the following paragraphs or following the occurrence of an Event
Determination Date under the Credit Default Swap, the Credit Default Swap is scheduled to
terminate on 22 June 2026 and the Asset Swap is scheduled to terminate on the Maturity Date of
the Notes.
The Swap Agreement may be terminated (either in whole or in part only), among other
circumstances:
(i)
if at any time any of the Notes becomes payable in accordance with the Conditions prior to
the Maturity Date, other than as a result of the Swap Agreement itself having already
terminated;
(ii)
if the Issuer or the Calculation Agent determines that the performance of the Issuer’s
obligations under the Notes has or will become unlawful, illegal or otherwise prohibited in
whole or in part, including without limitation, as a result of an enactment of or supplement
or amendment to, or a change in law, policy or official interpretation, implementation or
determination made by any relevant regulatory authority or for any other reason;
(iii)
if at any time the Swap Counterparty determines that the performance of the Swap
Counterparty’s and/or its Affiliates’ obligations under the Swap Agreement, the Trust Deed
or under any other Transaction Document or any arrangement made to hedge such
obligations has or will become unlawful, illegal or otherwise prohibited due to a Regulatory
Consequence (as defined in the Conditions) and that, if applicable, a transfer of the Swap
Agreement to an Affiliate of the Swap Counterparty will not be timely, practical or desirable
for any reason, all determined in its sole and absolute discretion;
(iv)
at the option of one party, if there is a failure by the other party to pay any amounts due, or
to comply with or perform any obligation, under the Swap Agreement;
(v)
if withholding taxes are imposed on any of the payments made either by the Issuer or by
the Swap Counterparty under the Swap Agreement or it becomes illegal for either party to
perform its obligations under any Transaction under the Swap Agreement (see “Transfer to
avoid Termination Event” below);
(vi)
upon the occurrence of certain other events with respect to either party to the Swap
Agreement, including insolvency or, in respect of the Swap Counterparty, a merger without
an assumption of the obligations in respect of the Swap Agreement; or
if either of the Credit Default Swap or the Asset Swap is terminated early for whatever reason, the
other swap transaction shall automatically terminate.
Consequences of Early Termination
Upon any early termination of the Swap Agreement in the circumstances set out in sub-paragraphs
(i) to (vii) above and the designation of an Early Termination Date, the Issuer or the Swap
Counterparty may be liable to make a termination payment to the other (regardless, if applicable,
of which of the parties may have caused such termination). Such termination payments will be
based on the replacement cost or gain for a swap agreement that would have the effect of
preserving for the party making the determination the economic equivalent of the Swap
Agreement. Such termination amounts shall also include amounts that are either unpaid as at the
Early Termination Date (as defined in the Swap Agreement) or represent the fair market value of
any obligation that was required to have been performed under the Swap Agreement had it not
been terminated on the relevant Early Termination Date (as defined in the Swap Agreement). In
53
addition, any fees, costs, charges, expenses and liabilities incurred by the Swap Counterparty and
the Issuer in connection with the early redemption of the Notes shall be deducted.
In all cases of early termination, the termination payment will be determined by the Swap
Counterparty.
General
Except as stated under “Transfer to avoid Termination Event” and “Transfer by the Swap
Counterparty to its Affiliates” below, neither the Issuer nor the Swap Counterparty are, save for the
assignment by way of security in favour of the Trustee under the Trust Deed and certain limited
circumstances set out in Section 7 (Transfer) of the ISDA Master Agreement, permitted to assign,
novate or transfer as a whole or in part any of their rights, obligations or interests under the Swap
Agreement.
Sanctions
Upon the occurrence of a Sanctions Event as defined in Condition 8.9 (Suspension of Obligations
following a Sanctions Event) of the Notes, all obligations will be suspended under the Swap
Agreement.
Taxation
The Issuer is not obliged under the Swap Agreement to gross up if withholding taxes or other
deductions for taxes are imposed on payments made by it under the Swap Agreement. The Swap
Counterparty is not obliged under the Swap Agreement to gross up if withholding taxes or other
deductions for taxes are imposed on payments made by it under the Swap Agreement, unless the
relevant tax is an “Indemnifiable Tax”.
Transfer to avoid Termination Event
If withholding taxes are imposed on payments made by the Issuer or the Swap Counterparty under
the Swap Agreement, then the Swap Counterparty shall, at its sole option, have the right to require
the Issuer:
(a)
to transfer all of its interest and obligations under the Swap Agreement together with its
interests and obligations under the Notes, the Trust Deed, the Dealer Agreement and the
Agency Agreement to another entity, whether or not in the same tax jurisdiction as the
Issuer, which would not have any obligation to withhold or deduct (if the Issuer is or would
be required to make such withholding or deduction) or to which the Swap Counterparty
would be entitled to make payments free from the relevant withholding or deduction and/or
not to be subject to any gross-up obligations (if the Swap Counterparty is or would
otherwise be required to make such withholding or deduction), subject to obtaining the
prior written consent of the Trustee; or
(b)
to transfer its residence for tax purposes to another jurisdiction such that no withholding
taxes would be due with respect to payments on the Swap Agreement, subject to obtaining
the prior written consent of the Trustee.
If the Issuer is unable to transfer its interests to another party or to transfer its tax residence in
accordance with the preceding provisions prior to the 30th calendar day following the date of
imposition of such withholding taxes or, if earlier, the 10th calendar day prior to the first date on
which it or the Swap Counterparty would otherwise be required to make a payment net of
withholding taxes or subject to gross-up, the Swap Counterparty may terminate the swap
transaction under the Swap Agreement.
54
Transfer by the Swap Counterparty to its Affiliates
The Swap Counterparty may, at any time, at its own expense and without the need for the consent
of the Issuer, transfer (by way of an assignment or novation) all or part of its interests and
obligations in and under the Swap Agreement together with its interests and obligations under the
Notes, the Trust Deed, the Dealer Agreement, the Custody Agreement, the Agency Agreement and
any other Transaction Document to any of its Affiliates (the “Transferee”) upon providing at least
five Business Days prior written notice to the Issuer and the Trustee provided that:
(a)
as of the date of such transfer, the Issuer will not, as a result of such transfer, be entitled to
receive from the Transferee on any payment date specified under the Swap Agreement an
amount less than an amount that would be received from the Swap Counterparty in the
absence of such transfer (in each case, taking into account any Taxes (as defined in the
ISDA Master Agreement) required to be withheld or deducted as well as amounts payable
under Section 2(d)(i)(4) of the ISDA Master Agreement);
(b)
no Event of Default, Potential Event of Default or Termination Event (each as defined in the
ISDA Master Agreement) is then continuing as of the date of such transfer or would result
from such transfer;
(c)
no additional amount will be payable by the Issuer to the Swap Counterparty or the
Transferee on the next succeeding scheduled payment date under the Swap Agreement
as a result of such transfer
(d)
there is an ISDA commissioned legal netting opinion and, if applicable, collateral opinion
for the jurisdiction of organisation of the Transferee which confirms the application of closeout netting in respect of the organisational form taken by the Transferee;
(e)
the Swap Counterparty or other acceptable Affiliate will provide a written guarantee of the
obligations of the Transferee if at the time of such transfer, the Transferee’s long term,
unsecured debt rating assigned by Moody’s Investors Service Inc. and by Standard &
Poor’s Rating Services, a division of The McGraw-Hill Companies, Inc., is less than the
ratings assigned to Swap Counterparty at the time of such transfer (and for purposes
hereof, in the event of a split rating, the lower rating shall be determinative); and
(f)
the Swap Counterparty will be responsible for all reasonable costs and expenses, including
reasonable counsel fees, incurred by Issuer in connection with such transfer.
Provided that the criteria set out in (a) to (f) above are satisfied, no consent shall be required from
the Issuer or the Trustee to such transfer and the Issuer and Trustee shall promptly take such
action and execute all documentation as the Swap Counterparty may reasonably require to effect
such transfer.
Description of the Reference Entity
The Kingdom of Saudi Arabia is located in the Middle East, and shares borders with Jordan, Iraq,
Kuwait, Bahrain, Qatar, the United Arab Emirates, Oman and Yemen. Natural resources include
petroleum, natural gas, iron ore, gold and copper. The Kingdom of Saudi Arabia’s capital is
Riyadh.
The Kingdom of Saudi Arabia has securities admitted to trading on the regulated market of the
Irish Stock Exchange.
55
EMIR Portfolio Reconciliation and Dispute Resolution Deed
The Issuer and the Swap Counterparty have entered into an EMIR Portfolio Reconciliation and
Dispute Resolution Deed dated 3 April 2014 as amended and restated on 28 May 2014 to comply
with the portfolio reconciliation and dispute resolution requirements of Regulation (EU) No
648/2012 of the European Parliament and of the Council on OTC derivatives, central
counterparties and trade repositories dated 4 July 2012.
56
Annex 4
Form of the Credit Default Swap Confirmation
Set out below is the form of the Credit Default Swap Confirmation
Date:
10 May 2017
To:
Emerald Capital Designated Activity Company
From:
Citigroup Global Markets Limited
Re:
Credit Derivative Transaction relating to Emerald Capital Designated Activity
Company Series No: 2017-02 USD 35,000,000 Fixed Rate The Kingdom of Saudi
Arabia Credit Linked Notes due 2026 (the “Notes”) (Ref: LEMA3C10735783).
Dear Sirs,
The purpose of this letter agreement (the “Confirmation”) is to confirm the terms and conditions of
the Transaction entered into between us on the first day on which this Confirmation has been
signed by both Party A and Party B (the “Transaction”, and such date the “Signing Date”). This
Confirmation constitutes a “Confirmation” as referred to in the 2002 ISDA Master Agreement
specified below.
The definitions and provisions contained in the 2014 ISDA Credit Derivatives Definitions, as
supplemented by the 2014 Sovereign No Asset Package Delivery Supplement (the “Credit
Derivatives Definitions”), as published by the International Swaps and Derivatives Association,
Inc., as amended herein, are incorporated into this Confirmation. In the event of any inconsistency
between the Credit Derivatives Definitions and this Confirmation, this Confirmation will govern.
This Confirmation supplements, forms a part of, and is subject to the 2002 ISDA Master
Agreement dated the Issue Date (the “Agreement”) deemed entered into between Citigroup
Global Markets Limited (“Party A”) and Emerald Capital Designated Activity Company (formerly
known as Emerald Capital Limited) (“Party B”) in respect of which the Schedule to such 2002
ISDA Master Agreement is in the form of the ISDA Schedule Terms (August 2016 Version). All
provisions contained in the Agreement govern this Confirmation except as expressly modified
below.
Party A and Party B have entered into a related asset swap transaction by means of a confirmation
under the Agreement on the Effective Date (the “Asset Swap”).
Party A represents and warrants that it has the capacity and power to enter into this Agreement
and that the entry into this Agreement has been validly authorised, executed and delivered by it.
Capitalised terms used but not defined herein will have the meanings given to them in (or
incorporated by reference into) the Information Memorandum dated 9 May 2017, as amended and
supplemented from time to time, relating to the issue of the Notes (the “Information
Memorandum”).
In this Confirmation, the “Conditions” refers to the terms and conditions of the Notes as set out in
or incorporated by reference into the Information Memorandum.
In the event of any inconsistency between terms defined in this Confirmation and the
corresponding terms in the Conditions, the terms as defined in the Conditions shall govern. In the
event of any inconsistency between terms defined in this Confirmation and the corresponding
terms in the Asset Swap, the terms as defined in this Confirmation shall govern.
57
The terms of the Transaction to which this Confirmation relates are as follows:
1
General Terms
Trade Date:
27 April 2017. Notwithstanding Section 1.5 of the Credit
Derivatives Definitions, the Parties agree that they have
entered into the Transaction to which this Confirmation
relates on the Signing Date.
Effective Date:
10 May 2017
Scheduled Termination Date:
22 June 2026
Floating Rate Payer:
Party B
Fixed Rate Payer
Party A
Calculation Agent:
Party A
Calculation Agent City:
London
Business Days:
London and New York
Business Day Convention:
Modified Following (which subject to Sections 1.14,
1.39, 2.2(k), 3.33(a) and 12.10 of the Credit Derivatives
Definitions, shall apply to any date referred to in the
Confirmation that falls on a day that is not a Business
Day).
Reference Entity:
The Kingdom of Saudi Arabia and any Successor
Standard Reference Obligation:
Applicable
Seniority Level:
Senior Level
Transaction Type:
Emerging European & Middle Eastern Sovereign
All Guarantees:
As set out in the Credit Derivatives Physical Settlement
Matrix (the “ISDA Matrix”) corresponding to the relevant
Transaction Type.
2
Fixed Payments
Fixed Rate Payer Calculation Amount:
Initially USD 35,000,000 and thereafter the Principal
Amount of the Notes from time to time.
Fixed Rate Payer Period End Date(s):
Each Interest Period Date in respect of the Notes up to
and including the Interest Period Date immediately
preceding the Event Determination Date (if any), and
such Event Determination Date (if any), which are not
subject to adjustment in accordance with any Business
Day Convention.
Fixed Rate Payer Payment Date(s):
Notwithstanding Section 12.11 of the Credit Derivative
Definitions, each Fixed Rate Payer Period End Date,
subject to adjustment in accordance with the Following
Business Day Convention, provided that if an Event
Determination Date occurs, the final Fixed Rate Payer
58
Payment Date shall be the Auction Settlement Date or
Cash Settlement Date (as applicable). The Fixed
Amount payable on the final Fixed Rate Payer Payment
Date shall be referred to as the “Final Fixed Amount”.
For the avoidance of doubt, if there is any delay in the
payment of the Final Fixed Amount after the Scheduled
Termination Date, no additional amount shall be payable
by Party A.
Fixed Rate:
0.50 per cent. per annum.
If, on or prior to a Fixed Rate Payer Payment Date,
Party A determines that a Credit Event may have
occurred prior to such Fixed Rate Payer Payment Date,
Party A may notify Party B thereof and payment of the
Fixed Amount by Party A to Party B on such Fixed Rate
Payer Payment Date shall be suspended until Party A
confirms whether or not a Credit Event has occurred. If
Party A confirms that no Credit Event has occurred,
Party A will pay to Party B the Fixed Amount that was
originally due to have been paid on the Fixed Rate
Payer Payment Date two Business Days after it makes
such confirmation, and no interest shall be payable in
respect of such postponement.
Fixed Rate Day Count Fraction:
3
Actual/360
Floating Amounts
Floating Rate Payer Calculation
Amount:
Initially USD 35,000,000 and thereafter the Principal
Amount of the Notes from time to time.
Notifying Party:
Party A
Notice of Publicly Available
Information:
Applicable provided that if a DC Credit Event
Announcement has occurred, the Notice of Publicly
Available Information is deemed to have been satisfied.
Specified Number of Public Sources: Two
The parties agree that, subject to Sections 1.19 and
10.2 of the Credit Derivatives Definitions, an Event
Determination Date may occur on one occasion only
with respect to each Reference Entity except in certain
circumstances following a Succession Date.
“Credit Event Notice” means a notice (which Party A
has the right but not the obligation to deliver) from Party
A (which may be oral including by telephone to be
confirmed in writing) to Party B (with a copy to the
Issuing and Paying Agent) during the Notice Delivery
Period (or any other period permissible pursuant to the
terms of the Credit Default Swap) that describes a
Credit Event that occurred on or after the Credit Linkage
59
Start Date to and including the Extension Date or (if
applicable and earlier) the Early Redemption Date, each
as determined by reference to Greenwich Mean Time.
Any Credit Event Notice that describes a Credit Event
that occurred after the Scheduled Termination Date
must relate to the relevant Potential Failure to Pay, in
the case of a Grace Period Extension Date, or the
relevant Potential Repudiation/Moratorium, in the case
of a Repudiation/Moratorium Evaluation Date.
A Credit Event Notice must contain a description in
reasonable detail of the facts relevant to the
determination that a Credit Event has occurred. The
Credit Event that is the subject of the Credit Event
Notice need not be continuing on the date the Credit
Event Notice is effective.
If a Credit Event Notice contains the information
required in the Notice of Publicly Available Information,
such Credit Event Notice shall be deemed to be both a
Credit Event Notice and a Notice of Publicly Available
Information.
Credit Events:
As set out in the ISDA Matrix corresponding to the
relevant Transaction Type.
Obligation Category:
As set out in the ISDA Matrix corresponding to the
relevant Transaction Type.
Obligation Characteristics:
As set out in the ISDA Matrix corresponding to the
relevant Transaction Type.
Excluded Obligations:
For the purposes of Section 3.6(a) of the Credit
Derivatives Definitions: None
4
Settlement Terms
Settlement Method:
Auction Settlement
Fallback Settlement Method:
Cash Settlement
Reference Price:
100 per cent.
Terms relating to Auction Settlement:
Auction Settlement Date:
Five Business Days following the determination of the
Auction Final Price.
Auction Settlement Amount:
The greater of:
an amount in USD equal to the product of (i) the
Floating Rate Payer Calculation Amount and (ii)
the Reference Price minus the Auction Final
Price; and
60
zero.
Terms relating to Cash Settlement (if
applicable)
Valuation Obligation:
Any obligation of the Reference Entity chosen by the
Calculation Agent in its sole discretion pursuant to
Section 3.2 of the Credit Derivatives Definitions, for
which purpose the Deliverable Obligation Category and
Deliverable Obligation Characteristics are set out in the
ISDA Matrix corresponding to the relevant Transaction
Type and there are no Excluded Deliverable Obligations
specified for the purposes of Section 3.7(a) of the Credit
Derivatives Definitions. References in Article VII of the
Credit Derivatives Definitions to “Reference Obligation”
shall be construed as references to “Valuation
Obligation”.
Valuation Date:
Single Valuation Date: the Business Day selected by the
Calculation Agent in its sole discretion (the “Scheduled
Valuation Date”), provided that such Business Day shall
be no earlier than forty-five (45) Business Days and no
later than sixty (60) Business Days after the relevant
Event Determination Date, provided that if the
Calculation Agent in its sole discretion considers that all
of the Valuation Obligation(s) with respect to the
Reference Entity outstanding on the relevant Event
Determination Date are reasonably likely to cease to
exist prior to the date that is forty-five (45) Business
Days after the relevant Event Determination Date, the
Calculation Agent may designate, as the Valuation Date,
an earlier date.
Valuation Time:
Any time (as selected by the Calculation Agent in its
sole discretion) on the applicable Valuation Date during
the hours that the Dealers customarily quote prices for
the relevant Valuation Obligation.
Quotation Method:
Bid
Quotation Amount:
An amount selected by the Calculation Agent greater
than or equal to USD 1,000,000 subject to a maximum
of 100 per cent. of the Floating Rate Payer Calculation
Amount, or the equivalent in the applicable currency
selected by the Calculation Agent in its sole discretion.
Valuation Method:
If there is only one Valuation Obligation, Highest, or if
there is more than one Valuation Obligation, Blended
Highest.
Where “Blended Highest” means the weighted
arithmetic mean of the highest Quotations obtained by
the Calculation Agent for each Valuation Obligation on
the Valuation Date.
61
Settlement Currency:
USD
Quotations:
Each Full Quotation or other quotation, excluding
accrued interest, expressed as a percentage of the
Valuation Obligation’s Outstanding Principal Balance or
Due and Payable Amount, as applicable, with respect to
a Valuation Date. The Calculation Agent shall attempt to
obtain Full Quotations from at least five Dealers (which
may include Party A) on the Scheduled Valuation Date.
If fewer than five Full Quotations are available, but at
least two Full Quotations are available, the Calculation
Agent shall determine the Final Price on the basis of the
available Full Quotations.
If at least two Full Quotations are not available on the
Scheduled Valuation Date, but a Weighted Average
Quotation is available then such Weighted Average
Quotation will be used, on the Valuation Date, to
determine the Final Price. If neither two Full Quotations
nor a Weighted Average Quotation are available on the
Valuation Date, but a single Full Quotation is available,
such single Full Quotation will be used with respect to
the Valuation Date, to determine the Final Price.
If a single Full Quotation is also not available, but one or
more firm quotations for an amount equal to or less than
the Minimum Quotation Amount is available, then the
weighted average of such firm quotations with respect to
the aggregate portion of the Quotation Amount for which
such quotations were obtained and a quotation deemed
to be zero for the balance of the Quotation Amount for
which firm quotations were not obtained will be used on
the Scheduled Valuation Date to determine the Final
Price. If one or more firm quotations for an amount
equal to or less than the Minimum Quotation Amount are
not available, the Quotation will be zero.
Where a Quotation is sought in respect of a Valuation
Obligation which is a Consent Required Loan, the
Calculation Agent shall, to the extent practicable in
connection with any requests for quotations in respect of
such Valuation Obligation, inform the Dealers of the
identity of the debtor, the governing law and jurisdiction
of the relevant loan documentation, details of any
guarantee and/or security, the main covenants
contained within the relevant loan documentation, the
maturity date of the loan and any amortisation, the
interest rate of the loan, whether the loan is a revolving
loan or a term loan, the amounts if any drawn down
under the loan, any conditions to transfer and the date
of the relevant loan agreement subject to not thereby
breaching any duty of confidentiality the Calculation
62
Agent or any Affiliate thereof may owe in respect of such
Consent Required Loan. Any firm bid quotations
received from Dealers in respect of such Valuation
Obligation shall be treated as firm bid quotations
notwithstanding that the Dealers express such firm bid
quotations as being subject to the loan documentation.
For the purposes of this Transaction, the last sentence
of Section 7.4 of the Credit Derivatives Definitions shall
not apply.
Dealer:
A dealer in obligations of the type of the Valuation
Obligation for which Quotations are to be obtained as
selected by the Calculation Agent in its sole and
absolute discretion, which may include the Calculation
Agent or any one Affiliate of the Calculation Agent
(including Party A).
Cash Settlement Date:
Five Business Days following the Valuation Date.
Cash Settlement Amount:
The greater of:
an amount in USD payable equal to the product
of (i) the Floating Rate Payer Calculation
Amount and (ii) the Reference Price minus the
Final Price; and
zero.
5
Amendments to the Credit Derivatives Definitions and Additional Definitions
Section 1.19 (No Event Determination
Date) of the Credit Derivatives
Definitions:
Section 1.19 shall be amended by the insertion of the
words “the Notifying Party has the option, in its sole
discretion, to retract a Credit Event Notice and” after the
words “Subject to Section 10.2(a)(i)(III),” in the first line
thereto.
Fixed Payments:
Section 12.9(b) of the Credit Derivatives Definitions shall
be deleted and substituted with the following:
“(b)
the final Fixed Rate Payer Calculation Period will
end on, but include, the earlier to occur of the
Scheduled Termination Date and the Fixed Rate
Payer Period End Date immediately preceding
the Event Determination Date.”
Notwithstanding anything to the contrary in the Credit
Derivatives Definitions, no further Fixed Amounts shall
be payable by the Fixed Rate Payer pursuant to this
Transaction following the occurrence of an Event
Determination Date, to the extent that such Event
Determination Date is not subsequently reversed prior to
the Auction Final Price Determination Date, Valuation
Date or Termination Date. If this Transaction terminates
other than as a result of the occurrence of an Event
63
Determination Date, any accrued and unpaid Fixed
Amount as at such early termination date shall be taken
into account when determining the future cash flows of
the Transaction in respect of what would have been due
on the next following Fixed Rate Payer Payment Date
had the early termination not occurred.
Section 11.4 of the Credit Derivatives
Definitions:
Section 11.4 of the Credit Derivatives Definitions shall
not apply to this Transaction.
Potential Credit Event Notice:
If the Buyer determines in its sole and absolute
discretion that a Credit Event may have occurred in the
period from and including the Credit Linkage Start Date
(as defined in the Conditions) to and including the
Scheduled Termination Date in respect of which the
Event Determination Date has not occurred or may not
be determined on or before the Scheduled Maturity Date
of the Notes, the Buyer undertakes to forthwith notify the
Issuer, the Trustee and the Issuing and Paying Agent of
the same.
Credit Event Backstop Date:
Notwithstanding anything to the contrary in the Credit
Derivatives Definitions, no event occurring prior to the
Trade Date shall be capable of comprising a Credit
Event giving rise to an Event Determination Date in
respect of this Transaction.
Valuation Notice:
If the Calculation Agent determines that a Cash
Settlement Amount greater than zero is payable under
this Transaction, then as soon as reasonably practicable
following the determination of the Final Price, the
Calculation Agent shall send a notice to the Swap
Counterparty and the Issuer that contains the
Quotations received, the Final Price and the calculation
of the Cash Settlement Amount. Failure to send such a
Valuation Notice shall not affect the Issuer’s obligation
to pay a Cash Settlement Amount under this
Transaction.
General:
All references in the Credit Derivatives Definitions to
consultation between the parties shall be deemed to be
deleted and any determinations to be made under the
Credit Derivatives Definitions by either party in
connection with the other shall be made in the sole and
absolute discretion of the Calculation Agent.
6
Other Provisions
(a)
For the purpose of determining any amounts payable pursuant to Section 6 (Early
Termination; Close-Out Netting) of the Agreement in connection with an early
termination of this Transaction, notwithstanding any other provision of the
64
Agreement, all calculations and determinations that, under the Agreement, would
otherwise be made by Party B shall be made by Party A.
(b)
The occurrence or designation of an Early Termination Date pursuant to the Asset
Swap (such date, the “Asset Swap Termination Date”) shall be an Additional
Termination Event in respect of this Credit Default Swap (for which purpose the
Affected Party shall be Party B, except if Party A is the Defaulting Party or the sole
Affected Party in relation to the termination of the Asset Swap, in which case the
Affected Party hereunder shall be Party A) unless such occurrence or designation
is due to the occurrence of the Auction Final Price Determination Date, Valuation
Date or Termination Date (as applicable) following the occurrence of an Event
Determination Date, in each case in relation to the Credit Default Swap. In such
circumstances, the Asset Swap Termination Date shall be deemed to have been
designated as an Early Termination Date hereunder. For the avoidance of doubt if
an event or circumstance which would otherwise constitute or give rise to this
Additional Termination Event, would also constitute or give rise to any other
Termination Event or Event of Default, it will be treated as only giving rise to such
other Termination Event or Event of Default.
(c)
An Additional Termination Event (for which the Affected Party shall be Party B and
all Transactions shall be Affected Transactions) shall occur if at any time Party A
notifies Party B that it has determined that the performance of the Swap
Counterparty’s and/or its Affiliates’ obligations under the Swap Agreement, the
Trust Deed or under any other Transaction Document or any arrangement made to
hedge such obligations has or will become unlawful, illegal or otherwise prohibited
due to a Regulatory Consequence and that, if applicable, a transfer of the Swap
Agreement to an Affiliate of the Swap Counterparty will not be timely, practical or
desirable for any reason, all determined in its sole and absolute discretion.
(d)
The “Breach of Agreement” provisions of Section 5(a)(ii) of the Agreement shall not
apply to Party A or Party B.
(e)
The “Misrepresentation” provisions of Section 5(a)(iv) of the Agreement shall not
apply to Party A or Party B.
(f)
Party B agrees that Party A may report the details of this Transaction (including any
modification or termination of this Transaction) to a trade repository that collects
and maintains records of derivatives.
(g)
Notwithstanding Part 1, paragraph 11 (Termination Currency) of the Schedule to
the Agreement, the Termination Currency for this Transaction shall be the currency
in which the Notes are denominated.
(h)
The Calculation Agent may in good faith make such amendment to, or supplement,
the terms of this Transaction following the announcement or publication by the
International Swaps and Derivatives Association, Inc. of any provision, standard
protocol or material relating to credit derivatives transactions which affects the
Notes, this Transaction or any hedge transaction related to the Notes or the Swap
Agreement entered into by Party B, Party A or any of its affiliates as the Calculation
Agent determines appropriate to take into account the effect of such provision,
standard protocol or material.
65
7
8
Other Terms
(a)
Non-insurance business. Party A and Party B acknowledge and agree that this
Transaction is not intended to constitute insurance business and is not a contract
of insurance, assurance, suretyship or guarantee and payments may be made
under this Transaction by each party independently and without proof of the
economic loss (if any) of the other party.
(b)
Third party rights. No person shall have any right to enforce any provision of this
Transaction under the Contracts (Rights of Third Parties) Act 1999.
(c)
Rounding. For the purposes of any calculations, determinations and valuations
referred to in this Confirmation, (a) all percentages resulting from such
calculations, determinations or valuations will be rounded, if necessary, to the
nearest one hundred-thousandth of a percentage point (with 0.000005 per cent.
being rounded up to 0.00001 per cent.) and (b) all amounts used in or resulting
from such calculations, determinations or valuations will be rounded to the nearest
USD (with USD 0.5 being rounded upwards).
Account Details
Account details of Party A:
Citibank, N.A., New York
Swift: CITIUS33
A/C of: Citigroup Global Markets Limited
Account Number: 30761652
Account details of Party B:
Citibank, N.A.
BIC: CITIUS33
A/C of: Citibank, N.A. London Branch
Swift: CITIGB2L
Account Number: 10990765
Ref: GATS Emerald Capital DAC 2017-02
XS1608156474
This Confirmation and any non-contractual obligations arising out of or in connection with it shall
be governed by English law.
This Transaction has been arranged by Citigroup Global Markets Limited which is authorised by
the Prudential Regulation Authority (the “PRA”) and regulated by the Financial Conduct Authority
(the “FCA”) and the PRA. Unless specified herein, information about the time of dealing and the
amount or basis of any charges shared with any third party in connection with this Transaction will
be made available on request.
Your counterparty to the Transaction is Citigroup Global Markets Limited, which is authorised by
the PRA and regulated by the FCA and the PRA. In the event that you have dealt with employees
of an affiliate of Citigroup Global Markets Limited in placing the order for or otherwise arranging
the Transaction (which is likely if you are not a UK person), then the Transaction has been
introduced to you, and arranged, by such affiliate. Such affiliate does not act as agent for Citigroup
Global Markets Limited, which is the principal to the Transaction with you. In the European Union,
66
such affiliate may be Citibank, N.A., London Branch (authorised by the PRA, subject to regulation
by the FCA and limited regulation by the PRA) or Citibank Europe plc (authorised and regulated by
the Central Bank).
Please confirm your agreement to be bound by the terms of the foregoing by executing a copy of
this Confirmation and returning it to us by facsimile.
Yours faithfully,
CITIGROUP GLOBAL MARKETS LIMITED
By:
Name:
Title:
Confirmed on the date first above written:
EMERALD CAPITAL DESIGNATED ACTIVITY COMPANY
By:
Name:
67
Annex 5
Form of the Asset Swap Confirmation
Set out below is the form of the Asset Swap Confirmation:
Date:
10 May 2017
To:
Emerald Capital Designated Activity Company
From:
Citigroup Global Markets Limited
Re:
Asset Swap Transaction relating to Emerald Capital Designated Activity Company
Series No: 2017-02 USD 35,000,000 Fixed Rate The Kingdom of Saudi Arabia
Credit Linked Notes due 2026 (the “Notes”) (Ref: LEMA3C10737243)
Dear Sirs,
The purpose of this letter agreement (the “Confirmation”) is to confirm the terms and conditions of
the Transaction entered into between us on the first day on which this Confirmation has been
signed by both Party A and Party B (the “Transaction”, and such date the “Signing Date”). This
Confirmation constitutes a “Confirmation” as referred to in the 2002 ISDA Master Agreement
specified below.
The definitions and provisions contained in the 2006 ISDA Definitions (the “2006 Definitions”), as
published by the International Swaps and Derivatives Association, Inc., are incorporated into this
Confirmation. In the event of any inconsistency between the 2006 Definitions and this
Confirmation, this Confirmation will govern.
This Confirmation supplements, forms a part of, and is subject to the 2002 ISDA Master
Agreement dated the Issue Date (the “Agreement”) deemed entered into between Citigroup
Global Markets Limited (“Party A”) and Emerald Capital Designated Activity Company (formerly
known as Emerald Capital Limited) (“Party B”) in respect of which the Schedule to such 2002
ISDA Master Agreement is in the form of the ISDA Schedule Terms (August 2016 Version). All
provisions contained in the Agreement govern this Confirmation except as expressly modified
below.
Party A and Party B have entered into a related credit default swap transaction by means of a
confirmation under the Agreement on the Effective Date (the “Credit Default Swap”).
Party A represents and warrants that it has the capacity and power to enter into this Agreement
and that the entry into this Agreement has been validly authorised, executed and delivered by it.
Capitalised terms used but not defined herein will have the meanings given to such terms in (or
incorporated by reference into) the Credit Default Swap relating to the Notes or in the Information
Memorandum dated 9 May 2017, as amended and supplemented from time to time, relating to the
issue of the Notes (the “Information Memorandum”).
In this Confirmation, the “Conditions” refers to the terms and conditions of the Notes, as set out in
or incorporated by reference into the Information Memorandum.
In the event of any inconsistency between terms defined in this Confirmation and the
corresponding terms in the Credit Default Swap or the Conditions, the terms as defined in the
Credit Default Swap or the Conditions, as the case may be, shall govern.
The terms of the Transaction to which this Confirmation relates are as follows:
68
1
General Terms
Trade Date:
27 April 2017. Notwithstanding Section 3.7 of the 2006
Definitions, the Parties agree that they have entered into
the Transaction to which this Confirmation relates on the
Signing Date.
Effective Date:
10 May 2017
Termination Date:
The Maturity Date of the Notes
Calculation Agent:
Citigroup Global Markets Limited
Business Days:
London and New York
Business Day Convention:
Modified Following
2
Party B Fixed Amount 1
Party B Fixed Amount 1 Payer:
Party B
Party B Fixed Amount 1:
On each Party B Fixed Amount 1 Payment Date Party B
will pay to Party A an amount equal to the aggregate
interest and principal amount receivable (in accordance
with the terms of the Initial Collateral as at the Trade
Date) in respect of the Initial Collateral held by or on
behalf of Party B on such date.
Party B Fixed Amount 1 Payment
Date(s):
In respect of the Initial Collateral, each Collateral
Payment Date from and including the Collateral
Payment Date falling on or immediately following the
Effective Date to and including the Collateral Maturity
Date.
“Collateral Payment Date” means each date on which
interest and/or principal is due and payable in respect of
the Initial Collateral.
“Collateral Maturity Date” means the Collateral
Payment Date falling on the maturity date of the Initial
Collateral.
3
Party B Fixed Amount 2
Party B Fixed Amount 2 Payer:
Party B
Party B Fixed Amount 2:
On each Party B Fixed Amount 2 Payment Date Party B
will pay to Party A an amount equal to the fixed amount
receivable by Party B from Party A under the Credit
Default Swap on such date.
Party B Fixed Amount 2 Payment
Date(s):
In respect of the Credit Default Swap, each Credit
Default Swap Payment Date.
“Credit Default Swap Payment Date” means each
“Fixed Rate Payer Payment Date”, as defined in the
Credit Default Swap.
69
4
Party A Fixed Amounts
Party A Fixed Amount Payer:
Party A
Party A Fixed Amount:
An amount equal to the aggregate coupon amount that
is payable by Party B in respect of the Notes then
outstanding.
Party A Fixed Amount Payer Payment
Date(s):
Each Interest Period Date in respect of the Notes,
subject to adjustment in accordance with the Following
Business Day Convention.
5
Final Exchange
Party A Final Exchange Date:
The Maturity Date of the Notes.
Party A Final Exchange Amount:
An amount in the Notes Currency equal to the
outstanding Principal Amount of the Notes as at the
Maturity Date.
6
Other Provisions
(a)
For the purpose of determining any amounts payable pursuant to Section 6 (Early
Termination; Close-Out Netting) of the Agreement in connection with an early
termination of this Transaction, notwithstanding any other provision of the
Agreement, all calculations and determinations that, under the Agreement, would
otherwise be made by Party B shall be made by Party A.
(b)
Where a termination amount is to be calculated in respect of this Transaction in
accordance with Section 6 (Early Termination; Close-Out Netting) of the
Agreement, notwithstanding any other provision of the Agreement, such calculation
shall:
(c)
(i)
not take into account the related early redemption of the Notes or the
occurrence of an Event Determination Date (as applicable) in calculating
the Party A Fixed Amounts, the Party B Fixed Amounts 1 or the Party B
Fixed Amounts 2;
(ii)
assume that interest will be payable in respect of the Notes until (and
including) the Scheduled Maturity Date of the Notes;
(iii)
not take into account any sale by or on behalf of Party B of any Initial
Collateral in connection with such related early redemption of the Notes or
occurrence of an Event Determination Date in calculating the Party B Fixed
Amounts 2;
(iv)
assume that interest will be payable on the Initial Collateral until the
Collateral Maturity Date; and
(v)
assume that “Fixed Amounts” under the Credit Default Swap will continue
to be payable to and including the Scheduled Termination Date of the
Credit Default Swap.
The termination of the Credit Default Swap (including following a Credit Event)
shall be an Additional Termination Event in respect of this Asset Swap, for which
70
purpose the Affected Party shall be Party B, except if Party A is the Defaulting Party
or the sole Affected Party in relation to the termination of the Credit Default Swap,
in which case the Affected Party hereunder shall be Party A. For the avoidance of
doubt if an event or circumstance which would otherwise constitute or give rise to
this Additional Termination Event, would also constitute or give rise to any other
Termination Event or Event of Default, it will be treated as only giving rise to such
other Termination Event or Event of Default.
If the Credit Default Swap has been deemed to have been divided into multiple
credit default swap transactions following a Successor Date (as defined in the
Credit Default Swap) for which multiple Successors have been identified, the
Additional Termination Event described in the above paragraph shall be deemed to
apply in respect of a portion of this Transaction only (the “Terminated Portion”),
bearing the same proportion to the whole Transaction as the Aggregate Allocated
Principal Amount (as defined in the Conditions) bears to the Principal Amount
outstanding, and the termination amount determined in accordance with Section
6(e) of the Agreement shall be determined only in respect of the Terminated
Portion. The portion of this Transaction other than the Terminated Portion shall be
deemed to continue as reduced by the Terminated Portion. The Calculation Agent
may make such modifications to the terms of this Transaction as it considers
necessary acting in good faith and in a commercially reasonable manner to
preserve the economic effects of this Transaction after any multiple Successor
event under the Credit Default Swap.
Terms used in this paragraph 6(c) and not defined herein shall have the meanings
given to such terms in the Credit Default Swap.
(d)
An Additional Termination Event (for which the Affected Party shall be Party B and
all Transactions shall be Affected Transactions) shall occur if at any time Party A
notifies Party B that it has determined that the performance of the Swap
Counterparty’s and/or its Affiliates’ obligations under the Swap Agreement, the
Trust Deed or under any other Transaction Document or any arrangement made to
hedge such obligations has or will become unlawful, illegal or otherwise prohibited
due to a Regulatory Consequence and that, if applicable, a transfer of the Swap
Agreement to an Affiliate of the Swap Counterparty will not be timely, practical or
desirable for any reason, all determined in its sole and absolute discretion.
(e)
The “Breach of Agreement” provisions of Section 5(a)(ii) of the Agreement shall not
apply to Party A or Party B.
(f)
The “Misrepresentation” provisions of Section 5(a)(iv) of the Agreement shall not
apply to Party A or Party B.
(g)
Party B agrees that Party A may report the details of this Transaction (including any
modification or termination of this Transaction) to a trade repository that collects
and maintains records of derivatives.
(h)
Notwithstanding Part 1, paragraph 11 (Termination Currency) of the Schedule to
the Agreement, the Termination Currency for this Transaction shall be the currency
in which the Notes are denominated.
(i)
The Calculation Agent may in good faith make such amendment to, or supplement,
the terms of this Transaction following the announcement or publication by the
71
International Swaps and Derivatives Association, Inc. of any provision, standard
protocol or material relating to credit derivatives transactions which, by agreement
or otherwise, affects the Notes, the Credit Default Swap or any hedge transaction
related to the Notes or the Swap Agreement entered into by Party B, Party A or any
of its affiliates as the Calculation Agent determines appropriate to take into account
the effect of such provision, standard protocol or material.
7
Third party rights
No person shall have any right to enforce any provision of this Transaction under the
Contracts (Rights of Third Parties) Act 1999.
8
Account Details
Account details of Party A:
Citibank, N.A., New York
Swift: CITIUS33
A/C of: Citigroup Global Markets Limited
Account Number: 30761652
Account details of Party B:
Citibank, N.A.
BIC: CITIUS33
A/C of: Citibank, N.A. London Branch
Swift: CITIGB2L
Account Number: 10990765
Ref: GATS Emerald Capital DAC 2017-02
XS1608156474
This Confirmation and any non-contractual obligations arising out of or in connection with it shall
be governed by and construed in accordance with English law.
This Transaction has been arranged by Citigroup Global Markets Limited which is authorised by
the Prudential Regulation Authority (the “PRA”) and regulated by the Financial Conduct Authority
(the “FCA”) and the PRA. Unless specified herein, information about the time of dealing and the
amount or basis of any charges shared with any third party in connection with this Transaction will
be made available on request.
Your counterparty to the Transaction is Citigroup Global Markets Limited, which is authorised by
the PRA and regulated by the FCA and the PRA. In the event that you have dealt with employees
of an affiliate of Citigroup Global Markets Limited branch in placing the order for or otherwise
arranging the Transaction (which is likely if you are not a UK person), then the Transaction has
been introduced to you, and arranged, by such affiliate. Such affiliate does not act as agent for
Citigroup Global Markets Limited, which is the principal to the Transaction with you. In the
European Union, such affiliate may be Citibank, N.A., London Branch (authorised by the PRA,
subject to regulation by the FCA and limited regulation by the PRA) or Citibank Europe plc
(authorised and regulated by the Central Bank).
Please confirm your agreement to be bound by the terms of the foregoing by executing a copy of
this Confirmation and returning it to us by facsimile.
72
Yours faithfully,
CITIGROUP GLOBAL MARKETS LIMITED
By:
Name:
Title:
Confirmed on the date first above written:
EMERALD CAPITAL DESIGNATED ACTIVITY COMPANY
By:
Name:
73
Annex 6
Description of the Issuer
The Issuer was incorporated and formerly registered as a private limited company under the Irish
Companies Acts, 1963 to 2013 (which were repealed with effect from 1 June 2015). The Issuer
applied to re-register under the Companies Act, 2014 (as amended) of Ireland (the “2014 Act”)
and on 20 September 2016 the Issuer was converted to a “designated activity company” under the
2014 Act. The following section provides an updated description of the Issuer following such
conversion and should be read in place of the section of the Base Prospectus entitled Issuer
Disclosure Annex 2.
EMERALD CAPITAL DESIGNATED ACTIVITY COMPANY
(formerly known as Emerald Capital Limited, the “Issuer”)
The Issuer is a private limited company and was incorporated on 31 January 2007 and is
registered under the 2014 Act under registration number 433859. The Issuer has been
incorporated for an indefinite period. The registered office of the Issuer is at 3rd Floor, Kilmore
House, Park Lane, Spencer Dock, Dublin 1 (Tel: +353 1 614 6240). The authorised share capital of
the Issuer is Euro 1,000 divided into 1,000 ordinary shares of Euro 1 each, all of which have been
issued and fully paid up. All of the issued ordinary shares are held by TMF Management (Ireland)
Limited as share trustee (the “Share Trustee”). Under the terms of a declaration of trust (the
“Declaration of Trust”) dated on or about 13 February 2007, the Share Trustee holds all the
issued shares held directly or indirectly by it on trust for the holders of Notes and counterparties to
other transactions until all payments in respect of such Notes and other transactions have been
duly made and thereafter on trust for one or more Qualified Charities as defined in the Declaration
of Trust. The Share Trustee has no beneficial interest in and derives no benefit (other than its fees
for acting as Share Trustee) from its holding of the shares of the Issuer.
Business
The Issuer has not engaged, since its incorporation, in any activities other than those incidental to
its incorporation, the accession to the Programme, the authorisation and issue of the Notes, the
matters referred to or contemplated in the Base Prospectus and the authorisation, execution,
delivery and performance of the other documents to which it is or will be a party and matters which
are incidental or ancillary to the foregoing. The principal objects of the Issuer are set forth in
Clause 3.1 of its Memorandum of Association and include, inter alia, the management of financial
assets, the purchase, transfer of, investment in and acquisition of, by any means of loans, bonds
or other obligations, including the extension of credit and any security therefore and the raising
and borrowing of money and the granting of security over its assets for such purposes. So long as
any of the obligations of the Issuer remain outstanding, the Issuer will not, inter alia, (a) enter into
any business whatsoever, other than acquiring Mortgaged Property, issuing Notes or creating
other obligations or entering into a similar limited recourse transaction, entering into related
agreements and transactions and performing any act incidental to or in connection with the
foregoing, (b) have any subsidiaries, (c) have any employees or (d) dispose of any Mortgaged
Property or any interest therein or create any mortgage, charge or security interest or right of
recourse in respect thereof in favour of any person (other than contemplated by the Base
Prospectus) provided that nothing shall limit the ability of either the Issuer or the Trustee on behalf
of the Issuer from entering into any agreement described in Section 1471(b) of the U.S. Internal
Revenue Code of 1986, as amended, or perform any act incidental or necessary thereto to comply
with such agreement.
74
Authorised and Issued Share Capital
The following table sets forth the authorised and issued share capital of the Issuer as at the date of
the Base Prospectus:
Shareholders’ Funds
EUR
Share Capital
Authorised: ..........................................................................................................
1,000
Issued: .................................................................................................................
1,000
Directors
The Directors of the Issuer are as follows:
Name
Function
Business Address
Principal
Occupation
Deirdre Brennan
Director
3rd Floor, Kilmore House, Park Lane,
Spencer Dock, Dublin 1
Accountant
Keat Cheng Chin
Director
3rd Floor, Kilmore House, Park Lane,
Spencer Dock, Dublin 1
Accountant
TMF Administration Services Limited of 3rd Floor, Kilmore House, Park Lane, Spencer Dock,
Dublin 1 is the administrator for the Issuer. Its duties include the provision of certain administrative
and related services. The appointment of the administrator may be terminated and the
administrator may retire upon two months’ written notice subject to the appointment of an
alternative administrator. TMF Administration Services Limited is Secretary to the Issuer.
Financial Statements
The Issuer has prepared audited financial statements in respect of its financial years ending 31
December 2014 and 31 December 2013 which form part of the Base Prospectus approved by the
Central Bank, as well as in respect of its financial year ending 31 December 2015. The Issuer will
prepare annually and publish audited financial statements, with explanatory notes. These financial
statements will be available from the registered office of the Issuer and the office of the Issuing
and Paying Agent. The auditors of the Issuer, Deloitte & Touche, Chartered Accountants and
Registered Auditors of Deloitte & Touche House, Earlsfort Terrace, Dublin 2, are Chartered
Accountants authorised and regulated by the Institute of Chartered Accountants in Ireland for
designated investment business.
75
DESCRIPTION OF THE SWAP COUNTERPARTY
The information referred to below in respect of Citigroup Global Markets Limited has been sourced
from publicly available information. Such information has been accurately reproduced and, as far
as the Issuer is aware and able to ascertain from information published by Citigroup Global
Markets Limited, no facts have been omitted that would render the reproduced information
inaccurate or misleading.
A description of the Swap Counterparty is set out in the section of the Base Prospectus entitled
“Description of Citigroup Global Markets Limited”.
Financial Statements
Citigroup Global Markets Limited has prepared audited financial statements in respect of its
financial years ending 31 December 2015 and 31 December 2014. Such audited financial
statements are attached at the end of this section of the Series Prospectus.
Significant or Material Change
There has been no significant change in the financial or trading position of Citigroup Global
Markets Limited or Citigroup Global Markets Limited and its subsidiaries as a whole since 31
December 2015 (the date of its most recently prepared audited financial statements) and there has
been no material adverse change in the financial position or prospects of Citigroup Global Markets
Limited or Citigroup Global Markets Limited and its subsidiaries as a whole since 31 December
2015 (the date of its most recently prepared audited financial statements).
Litigation
Save as disclosed in the Exhibit (entitled “Citigroup Contingencies”) to the section of the Base
Prospectus entitled “Description of Citigroup Global Markets Limited” and in the equivalent
“Contingencies” section within the Citigroup, Inc. Form 10-Q (filed with the SEC in respect of the
quarterly period ended 31 March 2017), Citigroup Global Markets Limited is not subject to any
governmental, legal or arbitration proceedings (including any such proceedings which are pending
or threatened of which Citigroup Global Markets Limited is aware) in the twelve months preceding
the date of this Series Prospectus which may have or have had in the recent past a significant
effect on the financial position or profitability of Citigroup Global Markets Limited or Citigroup
Global Markets Limited and its subsidiaries as a whole.
The disclosures with respect to “Contingencies” within the Citigroup, Inc. Form 10-Q (filed with the
SEC in respect of the quarterly period ended 31 March 2017) are contained on pages 179 to 180
of such Form 10-Q that is available for viewing on the website of Citigroup, Inc. using the following
link:
http://www.citigroup.com/citi/investor/data/q1701c.pdf?ieNocache=323
76
INDEPENDENT AUDITOR’S REPORT TO THE MEMBER OF CITIGROUP GLOBAL
MARKETS LIMITED
We have audited the financial statements of Citigroup Global Markets Limited for the year ended 31 December
2015 set out on pages 18 to 83, with the exception of the unaudited information on pages 78 to 81. The financial
reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting
Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 101 Reduced Disclosure
Framework.
This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those
matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's
members, as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and Auditor
As explained more fully in the Directors' Responsibilities Statement set out on pages 14 and 15, the Directors are
responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit, and express our opinion on, the financial statements in accordance with applicable
law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the
Auditing Practices Board's (APB's) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at www.frc.org.uk/auditscopeukprivate.
Opinion on financial statements
In our opinion the financial statements:
• give a true and fair view of the state of the Company's affairs as at 31 December 2015 and of its profit for
the year then ended;
• have been properly prepared in accordance with United Kingdom Generally Accepted Accounting
Practice; and
• have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Strategic Report and the Directors' Report for the financial year for
which the financial statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report
to you if, in our opinion:
• adequate accounting records have not been kept, or returns adequate for our audit have not been received
from branches not visited by us; or
• the financial statements are not in agreement with the accounting records and returns; or
• certain disclosures of the Directors' remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
Richard Faulkner (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
31st March 2016
17
CITIGROUP GLOBAL MARKETS LIMITED
INCOME STATEMENT
for the year ended 31 December 2015
Notes
2015
2014 *
$ Million
$ Million
Commission income and fees
Net dealing income
4
6
2,063
1,237
2,195
725
Interest receivable
Interest payable
5
5
591
(632)
773
(638)
3,259
3,055
(2,910)
18
6
(2,955)
10
3
373
113
(5)
73
368
186
Gross profit
Operating expenses
Other finance income
Other income
7
8
Operating profit on ordinary activities before taxation
Tax on profits on ordinary activities
11(a)
Profit for the financial year
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
The accompanying notes on pages 21 to 83 form an integral part of these financial statements.
18
CITIGROUP GLOBAL MARKETS LIMITED
STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 December 2015
Notes
Profit/(loss) for the financial year
2015
2014 *
$ Million
$ Million
368
186
(70)
166
298
352
Other Comprehensive Income (Expense)
Items that will not be reclassified subsequently to profit or loss:
Gains/(losses) on remeasurement of net defined benefit pension
asset
8
Total comprehensive gain for the financial year
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2015
Share
Capital
$ Million
Capital
reserve
$ Million
Profit and
loss account
$ Million
Total
$ Million
At 31 December 2013
Transitional adjustments in respect of FRS 101
Balance at 1 January 2014
Profit for the year
Net movement in Statement of Comprehensive
Income in respect of the pension scheme
Share based payment transactions
At 31 December 2014
Profit for the year
Net movement in Statement of Comprehensive
Income in respect of the pension scheme
Share based payment transactions
1500
1,500
-
9,989
9,989
-
1,265
38
1,303
186
166
12,754
38
12,792
186
166
1,500
-
9,989
-
(9)
1,646
368
(70)
(9)
13,135
368
(70)
-
-
14
14
At 31 December 2015
1,500
9,989
1,958
13,447
The accompanying notes on pages 21 to 83 form an integral part of these financial statements.
19
CITIGROUP GLOBAL MARKETS LIMITED
BALANCE SHEET
as at 31 December 2015
2015
$ Million
2014 *
$ Million
2013 *
$ Million
12
1,939
46,335
1,571
48,764
2,805
50,659
13
14
162,450
41,583
47,126
31
446
23,429
213,383
45,133
44,290
40
502
29,667
83,549
41,926
48,215
50
218
18,038
323,339
383,350
245,460
11,995
34,729
10,104
39,025
5,881
38,244
161,858
28,996
41,067
25,810
5,437
309,892
211,759
32,754
40,193
32,300
4,080
370,215
85,086
29,429
49,230
20,598
4,200
232,668
1,500
9,989
1,958
1,500
9,989
1,646
1,500
9,989
1,303
13,447
13,135
12,792
323,339
383,350
245,460
Notes
Assets
Financial assets at amortised cost
- cash at bank and in hand
- collateralised financing transactions
Financial assets classed as held for trading
- derivatives
- inventory
- financial assets designated at fair value through profit or loss
Financial assets classed as available for sale
Pension asset
Other assets
16
8
18
Total Assets
Liabilities and Equity
Financial liabilities at amortised cost
- bank loans and overdrafts
- collateralised financing transactions
Financial liabilities classed as held for trading
- derivatives
- securities sold but not yet purchased
- financial liabilities designated at fair value through profit or
Other liabilities
Subordinated loans
Total Liabilities
Capital and reserves
Called up share capital
Capital reserve
Profit and loss account
13
22
26
27
Shareholders' funds
Total Liabilities and Shareholders' Funds
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
The accompanying notes on pages 21 to 83 form an integral part of these financial statements.
The financial statements on pages 18 to 83 were approved by the Directors on 31 March 2016 and were signed on
their behalf by:
J D K Bardrick
Director
Registered Number: 01763297
20
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
1.
Principal accounting policies
(a) Basis of presentation
The financial statements of the Company have been prepared in accordance with Financial Reporting Standard
101, ‘Reduced Disclosure Framework’ (FRS 101) from the beginning of the accounting period. In preparing these
financial statements, the Company applies the recognition, measurement and disclosure requirements of
International Financial Reporting Standards as adopted by the EU (Adopted IFRSs), but makes amendments where
necessary in order to comply with Companies Act 2006 and has set out below where advantage of the FRS 101
disclosure exemptions has been taken.
The Company has taken exemption available under FRS 101 not to disclose all transactions with other group
companies and investees of the group qualifying as related parties. It has also taken the exemption available under
FRS 101 not to prepare a cash flow statement.
In the transition to FRS 101, the Company has applied IFRS 1 whilst ensuring that its assets and liabilities are
measured in compliance with FRS 101. The major measurement impact on the net assets and liabilities of the
company upon transition to FRS 101 has been the recognition of the full surplus attributable to its defined benefit
pension scheme. For full details of the transition impact on the Company’s P&L and balance sheet, see Note 29
‘FRS 101 Transition Adjustments.
The financial statements have been prepared in US Dollars, which is the functional currency of the Company, and
any reference to $ in these financial statements refers to US Dollars.
As permitted under section 401 of the Companies Act 2006, consolidated financial statements have not been
prepared because the Company is a wholly owned subsidiary of the ultimate parent Citigroup Inc. which prepares
consolidated financial statements under US GAAP. Citigroup Inc. makes its financial statements available to the
public on a quarterly basis.
(b) Changes in accounting policy and disclosures
Standards issued but not yet effective
There are a number of accounting standards that have been amended by the International Accounting Standards
Board (IASB), but which are not yet effective for the Company’s financial statements. The Company does not
plan on early adoption of these standards. They include those set out below.
•
In December 2014 the IASB published the final Standard Disclosure Initiative (Amendments to IAS 1).
These amendments to IAS 1 Presentation of Financial Statements address some of the concerns expressed
about existing presentation and disclosure requirements and ensure that entities are able to use judgement
when applying IAS 1. The final Standard Disclosure Initiative (Amendments to IAS 1) is effective for annual
periods beginning on or after 1 January 2016 with earlier application permitted.
•
Annual Improvements to IFRS 2010-2012 and 2011-2013 Cycles. The IASB’s annual improvement projects
for the 2010-2012 and 2011-2013 cycles resulted in minor amendments to multiple standards. The
amendments are effective for annual reporting periods beginning on or after 1 February 2015, with early
adoption permitted. The amendments are not expected to have a significant impact on the Company’s
financial statements.
•
Annual Improvements to IFRS 2012-2014 Cycle. The IASB’s annual improvement projects for the 20122014 cycle resulted in minor amendments to multiple standards. The amendments are effective for annual
reporting periods beginning on or after 1 January 2016, with early adoption permitted. The amendments are
not expected to have a significant impact on the Company’s financial statements.
21
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
1.
Principal accounting policies (continued)
(b) Changes in accounting policy and disclosures (continued)
Standards issued but not yet endorsed by the EU
There are a number of accounting standards and interpretations that have been issued by the IASB, but which are
not yet effective for the Company’s financial statements. The Company does not plan on early adoption of these
standards. They include:
•
IFRS 9 – Financial Instruments. The new standard includes a model for classification and measurement of
financial instruments, a forward-looking ‘expected loss’ impairment model and a substantially reformed
approach to hedge accounting. The standard replaces the existing guidance in IAS 39 – Financial
Instruments: Recognition and Measurement. IFRS 9 is effective from 1 January 2018 and can be adopted
early once it is endorsed by the EU. The Company is assessing the impact IFRS 9 will have on its financial
statements and has initiated a project strategy to assess the impact of the new standard on Citi’s internal
processes and systems.
•
IFRS 15 – Revenue from Contracts with Customers. IFRS 15 establishes a comprehensive framework for
determining whether, how much and when revenue is recognised. It replaces existing revenue recognition
guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty
Programmes. IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018, with
early adoption permitted. The Company is assessing the potential impact on its financial statements resulting
from the application of IFRS 15.
(c)
Financial instruments
Trading assets and trading liabilities
Financial instruments that have been acquired principally for the purpose of selling in the near term, or form part
of a portfolio of financial instruments that are managed at fair value together and for which there is evidence of
short term profit taking are classified as “held for trading”. Financial assets classified as “held for trading” include
collateralised financing transactions, government bonds, eurobonds and other corporate bonds, equities,
certificates of deposit, commercial paper and derivatives. Financial liabilities classified as “held for trading”
include securities sold but not yet purchased, collateralised financing transactions and derivatives.
Trading assets and liabilities are initially recognised at fair value on settlement date and subsequently re-measured
at fair value. Any changes in fair value between trade date and settlement date are reported in the profit and loss
account. Gains and losses realised on disposal or redemption and unrealised gains and losses from changes in fair
value are reported in the profit and loss account. Any initial gain or loss on financial instruments where valuation
is depended on valuation techniques using unobservable parameters are deferred over the life of the contract or
until the instrument is redeemed, transferred or sold or the fair value becomes observable.
Derivative contracts
Derivative contracts used in trading activities are recognised at fair value on the date the derivative is entered into
and are subsequently re-measured at fair value. All derivatives are carried as assets when fair value is positive and
as liabilities when fair value is negative. Gains and losses realised on disposal or redemption and unrealised gains
and losses from changes in fair value are reported in the profit and loss account.
Repurchase and resale agreements
Repurchase and resale agreements are treated as collateralised financing transactions. Securities which have been
sold with an agreement to repurchase continue to be shown on the balance sheet and the sale proceeds are recorded
as a collateralised financing transaction within other liabilities. Securities acquired in purchase and resale
transactions are not recognised in the balance sheet and the purchase is recorded as a collateralised financing
transaction within other assets. The difference between the sale price and the repurchase price is recognised over
the life of the transaction and is charged or credited to the profit and loss account as interest payable or receivable.
22
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
1.
Principal accounting policies (continued)
(c)
Financial instruments (continued)
The Company has chosen to designate a portion of its repurchase and resale agreements at fair value. Financial
instruments are classified as fair value through profit and loss when they meet one or more of the criteria set out
below, and are so designated by management:
•
The assets or liabilities are managed, evaluated and reported internally on a fair value basis.
•
The designation eliminates or significantly reduces an accounting mismatch that would otherwise arise.
Loans and receivables
Loans and receivables incorporate trade debtors, including settlement receivables, and are initially recognised at
fair value including direct and incremental transaction costs and subsequently measured at amortised cost using
the effective interest rate method.
At each reporting date the Company assesses whether there is objective evidence that financial assets carried at
amortised cost are impaired. A financial asset or a group of financial assets is impaired when objective evidence
demonstrates that a loss event has occurred after the initial recognition of the asset(s), and that the loss event has
an impact on the future cash flows of the asset(s) that can be estimated reliably.
Objective evidence that financial assets are impaired can include significant financial difficulty of the debtor or
other observable data such as adverse changes in the payment status of debtors, or economic conditions that
correlate with defaults of the debtor.
Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount
of the financial asset and the present value of estimated future cash flows discounted at the asset’s original
effective interest rate. Impairment losses are recognised in profit or loss and reflected in an allowance account
against loans and receivables. Interest on impaired assets continues to be recognised through the unwinding of the
discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment
loss is reversed through profit or loss. The Company writes off loans and receivables when they are determined to
be uncollectible.
Available for Sale Assets
Financial assets that are not classified as at fair value through profit or loss or as loans and receivables are
classified as Available for Sale (AFS). A financial asset classified as AFS is initially recognized at its fair value
plus transaction costs that are directly attributable to the acquisition of the financial asset. Financial assets
classified as AFS are carried at fair value with the changes in fair value reported in other comprehensive income.
For AFS debt instruments, changes in carrying amounts relating to changes in foreign exchange rate are
recognized in the Statement of Income and other changes in carrying amount are recognized in other
comprehensive income as indicated above. For financial assets classified as AFS that are nonmonetary items
(equity instruments), the gain or loss that is recognized in other comprehensive income includes any related
foreign exchange component. However, interest calculated using the effective interest rate method is recognised
in the income statement.
Other financial liabilities and subordinated loans
Financial liabilities and subordinated loans are measured at amortised cost using the effective interest rate, except
those which are “held for trading”, which are held at fair value through the profit and loss account.
Determination of fair value
Where the classification of a financial instrument requires it to be stated at fair value, this is determined by
reference to the quoted market value in an active market wherever possible. Where no such active market exists
for the particular instrument, the Company uses a valuation technique to arrive at the fair value, including the use
of prices obtained in recent arms’ length transactions, discounted cash flow analysis, option pricing models and
other valuation techniques commonly used by market participants. See Note 15 ‘Financial assets and liabilities
accounting classifications and fair values’ for further details.
23
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
1.
(c)
Principal accounting policies (continued)
Financial instruments (continued)
Collateral
The Company receives collateral from customers as part of its business activities. Collateral can take the form of
cash, securities or other assets. Where cash collateral (client money) is received this is recorded on the balance
sheet and, where required by collateral agreements, is held in segregated client cash accounts. The Company does
not recognise non-cash collateral on its balance sheet.
Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the balance sheet only when there is a
legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise
the asset and settle the liability simultaneously. The legal right to set off the recognized amounts must be
enforceable in both the normal course of business, in the event of default, insolvency or bankruptcy of both the
Company and its counterparty. In all other situations they are presented gross.
The majority of the offsetting applied by the Company relates to derivatives and repurchase and reverse
repurchase agreements. A significant portion of offsetting is applied to interest rate derivatives and related cash
margin balances, which are cleared through central clearing parties such as the London Clearing House. The
Company also offsets repurchase and reverse repurchase agreements for which the Company has the right to set
off and has the intent to settle on a net basis or to realize an asset and settle a liability simultaneously.
Derecognition of financial assets and financial liabilities
Financial assets are derecognised when the right to receive cash flows from the assets has expired or when the
Company has transferred its contractual right to receive the cash flows of the financial assets and either
substantially all the risks and rewards of ownership have been transferred or substantially all the risks and rewards
have neither been retained nor transferred but control is not retained.
If the Company enters into a transaction that results in it retaining significantly all of the risks and rewards of a
financial asset it will continue to recognise that financial asset and will recognise a financial liability equal to the
consideration received under the transaction.
In transactions in which the Company neither retains nor transfers substantially all the risks and rewards of
ownership of a financial asset and it retains control over the asset, the Company continues to recognise the asset to
the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of
the transferred asset.
Financial liabilities are derecognised when they are extinguished, that is when the obligation is modified,
exchanged, discharged, cancelled or expired.
(d) Physical commodities
Physical commodities are initially recognised at fair value on settlement date and subsequently re-measured at fair
value. Realised gains and losses on sales of commodities inventory are included in Net dealing income.
(e)
Commission income and fees
Commission revenues and expenses are recognised when the right to consideration has been obtained in exchange
for performance.
(f)
Interest receivable and payable
Interest income and expense is recognised in the profit and loss account for all financial assets classified as loans
and receivables and non-trading financial liabilities, using the effective interest rate method.
Interest arising on financial assets or financial liabilities that are “held for trading” or “designated at fair value” is
reported within interest income and expense respectively.
24
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
1.
Principal accounting policies (continued)
(g) Net dealing income
Net dealing income comprises gains and losses related to trading assets, trading liabilities and financial assets and
liabilities designated at fair value and physical commodities, and includes all realised and unrealised fair value
changes, dividends and foreign exchange differences.
(h) Tangible and Intangible assets
Tangible fixed assets are measured at cost, less accumulated depreciation. The cost of developed software
includes directly attributable internal costs and the cost of external consultants. Depreciation is provided at rates
calculated to write-off the cost, less the estimated residual value of each asset, on a straight-line basis over its
expected economic useful life, as follows:
Premises improvements
Equipment
Capitalised software
-
lesser of the life of the lease or 10 years
3 to 5 years
5 to 10 years
At each reporting date the Company assesses whether there is any indication that tangible or intangible fixed
assets are impaired.
(i)
Fixed asset investments
Investments in subsidiary undertakings are stated at cost, less any write down for diminution in value regarded as
permanent.
(j)
Taxation
Income tax payable on profits is recognised as an expense based on the applicable tax laws in each jurisdiction in
the period in which profits arise.
Deferred tax assets and liabilities are recognised for taxable and deductible temporary differences between the tax
bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets are
recognised to the extent that it is probable that there will be sufficient profits available against which these
differences can be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the
asset will be realised or the liability will be settled based on tax rates that are enacted or substantively enacted at
the balance sheet date.
(k) Pension and other post retirement benefit costs
CGML operates both a defined benefit and a defined contribution pension scheme.
The cost of CGML’s defined contribution pension scheme is the amount of contributions payable in respect of the
year. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit
method. The present value of the defined benefit obligation is determined by discounting the estimated future cash
outflows using interest rates of high quality corporate bonds that are denominated in the currency in which the
benefits will be paid and that have terms to maturity approximating to the term of the related pension liability.
Remeasurement gains and losses are recognised immediately in the statement of comprehensive income. The
current service cost and any past service costs are included in the income statement within operating expenses.
The interest income on pension scheme assets, net of the impact of the interest cost on the pension scheme
liabilities, is included with other finance income.
A surplus is recognised on the balance sheet where an economic benefit is available as a reduction in future
contributions or as a refund of monies to Citi.
25
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
1.
Principal accounting policies (continued)
(l)
Foreign currencies
Transactions in foreign currencies are recorded using the rate of exchange at the date of transaction. Monetary
assets and liabilities denominated in currencies other than US Dollars are translated into US Dollars using the year
end spot exchange rates. Non-monetary assets and liabilities denominated in currencies other than US Dollar that
are classified as “held for trading” or “designated at fair value” are translated into US Dollars using the year end
spot rate. Non-monetary assets and liabilities denominated in currencies other than US Dollars that are not
measured at fair value have been translated at the relevant historical exchange rates. Any gains or losses on
exchange are taken to the profit and loss account as incurred.
(m) Share-based incentive plans
The Company participates in a number of Citigroup Inc. (Citi) share-based incentive plans under which Citi grants
shares to the Company’s employees. Pursuant to a separate Stock Plans Affiliate Participation Agreement
(SPAPA) the Company makes a cash settlement to Citi for the fair value of the share-based incentive awards
delivered to the Company’s employees under these plans.
The Company applies equity-settled accounting for its share based incentive plans, with separate accounting for its
associated obligations to make payments to Citigroup Inc. The Company recognises the fair value of the awards at
grant date as compensation expense over the vesting period with a credit to the intercompany payable to Citigroup
Inc. All amounts paid to Citigroup Inc. and the associated obligations are recognised over the vesting period.
Subsequent changes in the fair value of all unexercised awards are reviewed annually and any changes in value are
recognised in the equity reserve, again over the vesting period. The SPAPA is also updated annually.
For Citi’s share based incentive plans that have a graded vested period each “tranche” of the award is treated as a
separate award. Where a plan has a cliff vest, the award only has a single “tranche”. The expense is recognised
as follows:
Vesting Period of Award
2 Years (vesting in 2 Tranches)
2 Years (vesting in 1 Tranche)
3 Years (vesting in 3 Tranches)
3 years (vesting in 1 Tranche)
4 Years (vesting in 4 Tranches)
4 Years (vesting in 1 Tranche)
% of expense recognised in Income Statement
Year 1
Year 2
Year 3
Year 4
75%
25%
50%
50%
61%
28%
11%
33%
33%
33%
52%
27%
15%
6%
25%
25%
25%
25%
Employees who meet certain age plus years of service requirements (retirement eligible employees) may terminate
active employment and continue vesting of their awards provided they comply with specified non-compete
provisions. The cost of share based incentive plans are recognised over the requisite service period. For awards
granted to retirement eligible employees, the services are provided prior to grant date, and subsequently the costs
are accrued in the year prior to the grant date.
EU Short Term awards are a form of Capital Accumulation Program (CAP) awarded to qualifying staff. The
award is accounted for similarly to CAP awards but is delivered in the form of immediately vested restricted
shares subject to a six month sale restriction.
26
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
2.
Use of assumptions, estimates and judgements
The results of the Company are sensitive to the accounting policies, assumptions and estimates that underlie the
preparation of its financial statements. The accounting policies used in the preparation of the financial statements
are described in detail above.
The preparation of financial statements requires management to make judgements, estimates and assumptions that
affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses.
Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognised in the period in which the estimate is revised and in any future periods affected.
Further information about those areas where estimation, uncertainty and the application of critical judgements to
accounting policies have the most significant effect on the amounts recognised in the financial statements are set
out below.
Valuation of financial instruments
The Company’s accounting policy for valuation of financial instruments is described in Note 1(c). The fair values
of financial instruments that are not quoted in active markets are determined by using valuation techniques. To the
extent practicable, models use only observable data. Where this is not possible, management may be required to
make estimates. Note 15 ‘Financial assets and liabilities accounting classifications and fair values’ discusses
further the valuation of financial instruments.
Credit valuation adjustment
The Company has a number of financial liabilities that are valued at fair value. Under IAS 39, the Company is
required to consider its own credit risk in determining the fair value of such financial liabilities. Management
judgement is required in determining the appropriate measure of own credit risk to be included in the valuation
model of the financial liability.
Credit valuation adjustments (CVA) and, effective in the third quarter of 2014, funding valuation adjustments
(FVA), are applied to OTC derivative instruments in which the base valuation generally discounts expected cash
flows using the relevant base interest rate curve for the currency of the derivative (e.g., LIBOR for uncollateralized
U.S. dollar derivatives). As not all counterparties have the same credit risk as that implied by the relevant base
curve, a CVA is necessary to incorporate the market view of both counterparty credit risk and Citi’s own credit
risk in the valuation. FVA reflects a market funding risk premium inherent in the uncollateralized portion of
derivative portfolios and in collateralized derivatives where the terms of the agreement do not permit the reuse of
the collateral received.
Citi’s CVA methodology is composed of two steps. First, the credit exposure profile for each counterparty is
determined using the terms of all individual derivative positions and a Monte Carlo simulation or other
quantitative analysis to generate a series of expected cash flows at future points in time. The calculation of this
exposure profile considers the effect of credit risk mitigants, including pledged cash or other collateral and any
legal right of offset that exists with counterparty through arrangements such as netting agreements. Individual
derivative contracts that are subject to an enforceable master netting agreement with a counterparty are aggregated
for this purpose, since it is those aggregate net cash flows that are subject to non-performance risk. This process
identifies specific, point-in-time future cash flows that are subject to non-performance risk, rather than using the
current recognized net asset or liability as a basis to measure the CVA.
Second, market-based views of default probabilities derived from observed credit spreads in the credit default
swap (CDS) market are applied to the expected future cash flows determined in step one. Citi’s own-credit CVA
is determined using Citi-specific CDS spreads for the relevant tenor. Generally, counterparty CVA is determined
using CDS spread indices for each credit rating and tenor. For certain identified netting sets where individual
analysis is practicable (e.g., exposures to counterparties with liquid CDSs), counterparty-specific CDS spreads are
used.
The CVA and FVA are designed to incorporate a market view of the credit and funding risk, respectively, inherent
in the derivative portfolio. However, most unsecured derivative instruments are negotiated bilateral contracts and
are not commonly transferred to third parties. Derivative instruments are normally settled contractually or, if
terminated early, are terminated at a value negotiated bilaterally between the counterparties. Thus, the CVA and
FVA may not be realized upon a settlement or termination in the normal course of business. In addition, all or a
27
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
2.
Use of assumptions, estimates and judgements (continued)
Credit valuation adjustment (continued)
portion of these adjustments may be reversed or otherwise adjusted in future periods in the event of changes in the
credit or funding risk associated with the derivative instruments.
During 2015, the Company recorded net CVA losses of $100 million (2014: $19 million losses). These were
offset by a net FVA gain of $28 million (2014: £22 million gains). The total adjustment recorded in the balance
sheet at the year-end was $47 million (2014: $180 million).
Pension
The Company’s defined benefit schemes are measured on an actuarial basis, with the key assumptions being
discount rate, inflation, mortality and investment returns. Following adoption of FRS 101, there is no separate
assumption for expected return on assets. The net finance income is calculated using the discount rate.
Mortality assumptions are based upon the relevant standard industry and national mortality tables. Discount rates
are based on specific corporate bond indices which reflect the underlying yield curve of each scheme.
Management judgement is required in estimating the rate of future salary growth and in assessing the implications
of IFRIC 14 and the recoverability of any surplus. All assumptions are unbiased, mutually compatible and based
upon market expectations at the reporting date.
Share-based incentive plans
Awards granted through Citi's Stock Option Programme are measured by applying an option pricing model, taking
into account the terms and conditions of the programme. Analysis of past exercise behaviour, Citi's dividend
history and historical volatility are inputs to the valuation model. Management judgement is required in estimating
the forfeiture rate.
3.
Turnover and results
As permitted by paragraph 4 of Schedule 1 to the Companies Act 2006 The Large and Medium-sized Companies
and Groups (Accounts and Reports) Regulations 2008 (SI 2008 No 410), the format of the income statement and
the Balance sheet have been adapted to the circumstances of the Company. Instead of turnover, the Directors have
reported commission income and fees, net dealing income and interest income less interest expense in determining
the gross profit of the Company. On the face of the Balance sheet, financial investments have been broken down
into different components whereas non-financial assets and liabilities have been combined within ‘Other assets’
and ‘Other liabilities’ respectively.
28
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
.
4.
Commission income and fees
Commission income and fees are derived from underwriting activities, marketing securities owned by other group
undertakings, trading services provided to other group undertakings and corporate finance fees associated with
mergers and acquisitions and other corporate finance and broking advisory activities. All fees relate to financial
assets measured at fair value.
5.
Interest receivable and interest payable
Interest receivable comprises:
Interest on collateral paid, current asset investments and collateralised
financing transactions at fair value through profit and loss
Interest on debtors and cash assets not at fair value through profit and loss
Interest payable comprises:
Interest on collateral held and collateralised financing transactions at fair
value through profit and loss
Interest on borrowings not at fair value through profit and loss
Interest on subordinated debt
2015
$ Million
2014 *
$ Million
323
521
268
252
591
773
44
111
497
91
434
93
632
638
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
Included within interest receivable is interest received on client money.
6.
Gains and losses on financial assets and financial liabilities held at fair value through profit and loss
Gains and losses on financial assets and financial liabilities held for trading:
Net dealing income
Interest receivable
Interest payable
Gains and losses on financial assets "designated at fair value through profit or
loss":
Net dealing income
Interest receivable
Interest payable
2015
$ Million
2014 *
$ Million
1,232
231
23
721
362
14
1,486
1,097
5
92
21
4
159
97
118
260
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
29
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
7.
Operating expenses
2015
$ Million
2014
$ Million
1,171
178
171
1,260
186
166
10
63
10
64
60
56
Operating expenses include:
Employee remuneration
Share-based incentive expense (Note 9)
Payroll taxes
Pension costs
- defined benefit scheme (Note 8)
- defined contribution scheme
Depreciation (Note 19)
Auditor’s remuneration:
Audit of these financial statements
Amounts receivable by the company's auditor and its associates in respect of:
Audit related assurance services
Taxation compliance services
Other assurance services
1.30
1.23
0.36
0.29
0.34
0.09
-
The prior year auditors’ remuneration has been restated.
The Company employed an average of 4,066 (2014: 3,931) employees during the year.
8.
Pension costs
Defined contribution scheme
The Citigroup (UK) Pension Plan was established in September 2000 and provides defined contribution benefits to
all new hires.
Defined benefit scheme
The Citigroup Global Markets Limited Pension and Life Assurance Scheme (“the Scheme”) is a funded pension
scheme providing benefits on both a defined benefit and defined contribution basis. The Scheme is now closed to
new entrants. The assets of the Scheme are held separately from those of the Company, in a trustee administered
fund. Employees are not required to contribute to the Scheme, which is contracted out of the State Earnings
Related Pension Scheme.
The pension cost in respect of defined benefit obligations is assessed in accordance with the advice of a qualified
external actuary using a Projected Unit method with a triennial review. The most recent full actuarial assessment of
the liabilities of the scheme was at 5 April 2014.
Expected regular employer contributions to be paid into the Scheme during 2016 are $14 million (2015: $14
million).
The mortality assumptions are based on standard mortality tables which allow for expected future mortality
improvements. The assumptions are that a member currently aged 65 will live on average for a further 23.6 years
for males and 25.2 years for females. Members currently aged 45 are expected to live a further 24.8 years and 26.9
years from age 65 for males and females respectively. The Scheme duration is an indicator of the weighted average
time until benefit payment are made. For the Scheme as a whole, the duration is around 24 years, reflecting the
approximate split of the defined benefit obligation between current employees, deferred members and current
pensioners.
Assumptions that are affected by economic conditions (financial assumptions) are based on market expectations at
the balance sheet date, for the period over which the obligations are settled. FRS 101 requires the interest income
on scheme assets to be determined using the same discount rate assumption applied to the scheme obligations.
30
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
8.
Pension costs (continued)
Previously, under FRS 17, expected rate of return on assets was derived by aggregating the expected return for each
asset class over the actual asset allocation for the Scheme, which is applicable to years prior to 2014. Prior year
comparatives have been adjusted to reflect this change.
The financial assumptions used in calculating the defined benefit scheme liabilities as at 31 December 2015 are as
follows:
2015
2014
2013
Discount rate for scheme liabilities
Interest income rate on scheme assets
Expected rate of return on assets
Inflation
Rate of general long-term increase in salaries
Rate of increase to pensions in payment
- Pensions accrued from 1 May 2005
- Pensions accrued prior to 1 May 2005
3.85%
3.85%
N/A
3.40%
1.50%
3.70%
3.70%
N/A
3.30%
1.50%
4.50%
N/A
3.70%
3.70%
1.50%
2.50%
3.20%
2.40%
3.00%
2.50%
3.20%
The fair value of Scheme assets and the interest income at the reporting date are set out as follows:
Government bonds
Corporate bonds
Insured Pensions
Other
Total market value of assets
2015
$ Million
1,168
575
1
10
Fair value
2014
$ Million
1,279
608
1
19
2013
$ Million
937
592
1
13
1,754
1,907
1,543
Analysis of amounts recognised in profit and loss account:
2015
$ Million
2014
$ Million
Current service cost
Curtailment cost
10
-
9
1
Expense recognised in the profit and loss account
10
10
2015
$ Million
2014 *
$ Million
69
(51)
69
(59)
18
10
Analysis of other finance income:
Interest income on pension scheme assets
Interest cost on pension scheme liabilities
Net finance income
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
31
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
8.
Pension costs (continued)
Analysis of amount recognised in Statement of Comprehensive Income:
2015
$ Million
2014 *
$ Million
(94)
392
40
(126)
(54)
266
Deferred tax adjustment on pension in Statement of Comprehensive
Income
(16)
(100)
Total gains/(losses) recognised in Statement of Comprehensive Income
(70)
166
Return on scheme assets (in excess of)/below that recognised in net
interest
Remeasurement gains/(losses) on scheme liabilities
Total remeasurement gains/(losses) recognised in Statement of
Comprehensive Income
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
Reconciliation to the balance sheet:
Total market value of assets
Present value of scheme liabilities
Gross pension asset
Related deferred tax liability
2015
$ Million
2014 *
$ Million
1,754
(1,308)
446
1,907
(1,405)
502
(116)
(100)
330
402
Net pension asset
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
2015
$ Million
2014 *
$ Million
Surplus in scheme at beginning of the year
Current service cost
Contributions
Curtailments
Other finance income/(expense)
Remeasurement gains/(losses)
Foreign exchange adjustment
502
(10)
14
18
(53)
(25)
218
(9)
30
(1)
10
266
(12)
Surplus in scheme at end of year
446
502
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
The entirety of the surplus has been recognised on CGML’s balance sheet with no restrictions, as it is likely that
Citi will be able to derive economic benefit from the existing or any future surplus that may arise.
32
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
8.
Pension costs (continued)
The changes to the present value of the defined obligation during the year are as follows:
2015
$ Million
2014
$ Million
Opening defined benefit obligation
Current service cost
Interest cost
Remeasurement (gains)/losses on scheme liabilities
Net benefits paid out
Curtailments
Foreign exchange adjustment
1,405
10
51
(40)
(48)
(70)
1,325
9
59
126
(35)
1
(80)
Closing defined benefit obligation
1,308
1,405
The changes to the fair value of scheme assets during the year are as follows:
2015
$ Million
2014 *
$ Million
Opening fair value of scheme assets
Interest income on pension scheme assets
Remeasurement (losses)/gains on scheme assets
Contributions by the employer
Net benefits paid out
Foreign exchange adjustment
1,907
69
(94)
14
(48)
(94)
1,543
69
392
30
(35)
(92)
Closing fair value of scheme assets
1,754
1,907
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
The actual return on assets is as follows:
2015
$ Million
2014 *
$ Million
Interest income on pension scheme assets
Remeasurement gains/(losses) on scheme assets
69
(94)
69
392
Actual return on assets
(25)
461
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
The interest income on scheme assets is set using the discount rate assumption. In 2015, asset values grew by less
than assumed, leading to an overall remeasurement loss of $94 million, as bond yields increased slightly in 2015.
In 2014, asset values grew by more than assumed, leading to a remeasurement gain of $392 million, as bond yields
fell significantly during 2014.
33
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
8.
Pension costs (continued)
The table below sets out the history of experience gains and losses:
2015
2014 *
2013 *
2012 *
2011 *
$ Million $ Million $ Million $ Million $ Million
Gains/(losses) on scheme assets due to experience
Gains on scheme liabilities due to experience
Gains/(losses) on scheme liabilities due to assumptions
Remeasurements recognised in Statement of
Comprehensive Income
(94)
27
13
392
9
(135)
(21)
3
(70)
(13)
37
(67)
145
(58)
(54)
266
(88)
(43)
87
Related deferred tax (liability)
(16)
(100)
-
-
-
Total gains/(losses) recognised in Statement of
Comprehensive Income net of tax
(70)
166
(88)
(43)
87
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
The key assumptions used for IAS 19 are the discount rate, inflation and mortality. If different assumptions were
used, this could have a material effect on the results disclosed. The sensitivity of the results to these assumptions
is set out in the table below.
Change in
Change in
defined
P&L
scheme
benefit
Sensitivity to key assumptions
change
assets
obligation
increase/
positive/
increase/
(negative)
(decrease) (decrease)
$ Million
$ Million
$ Million
Effect of decreasing the discount rate assumption by 0.5%
Effect of increasing the inflation assumption by 0.5%
Effect of increasing the life expectancy assumption by 1 year
34
(9)
(4)
(2)
0
0
0
165
94
45
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
9.
Share-based incentive plans
As part of the Company’s remuneration programme it participates in a number of Citi share-based incentive plans.
These plans involve the granting of restricted or deferred share awards and share payments. Such awards are used
to attract, retain and motivate officers and employees, to provide incentives for their contributions to the long-term
performance and growth of Citi, and to align their interests with those of the shareholders. The award programmes
are administered by the Personnel and Compensation Committee of the Citigroup Inc. Board of Directors, which is
composed entirely of non-employee directors.
In the share award program Citi issues common shares in the form of restricted share awards, deferred share
awards and share payments. For all stock award programs during the applicable vesting period, the shares
awarded are not issued to participants (in the case of a deferred stock award) or cannot be sold or transferred by
participants (in the case of a restricted stock award), until after the vesting conditions have been satisfied.
Recipients of deferred share awards do not have any shareholder rights until shares are delivered to them, but they
generally are entitled to receive dividend-equivalent payments during the vesting period. Recipients of restricted
share awards are entitled to limited voting rights and to receive dividends or dividend-equivalent payments during
the vesting period. Once a share award vests the shares become freely transferrable, but in the case of certain
employees, may be subject to transfer restrictions by their terms or share ownership commitment.
Certain stock-based awards contain discretionary clawback provisions and are subject to variable accounting. The
associated value of the award fluctuates with changes in Citi’s common stock price until the date that the award is
settled, either in cash or shares. Any fluctuation from the grant date value of the award until the award is fully
vested is recognised through the income statement.
(i)
Stock award programme
The Company participates in the Citigroup Capital Accumulation Program (CAP), under which shares of Citi
common stock are awarded in the form of restricted or deferred stock to participating employees.
Generally, CAP awards of restricted or deferred stock constitute a percentage of annual incentive compensation
and vest over a three or four year period beginning on or about the first anniversary of the award date. Except in
specific circumstances, continuous employment within Citi is required for CAP and other stock award programs to
vest.
The program provides that employees who meet certain age plus years-of-service requirements (retirement-eligible
employees) may terminate active employment and continue vesting in their awards provided they comply with
specified non-compete provisions. Awards granted to retirement-eligible employees are accrued in the year prior
to the grant date in the same manner as cash incentive compensation is accrued.
For all stock award programmes, the shares awarded cannot be sold or transferred by the participant during the
applicable vesting period, and the award is subject to cancellation if the participant’s employment is terminated.
After the award vests, the shares become freely transferable (subject to specific sale restrictions). From the date of
award, the recipient of a restricted stock award can direct the vote of the shares and receive regular dividends to
the extent dividends are paid on Citi common stock. Recipients of deferred stock awards receive dividend
equivalents to the extent dividends are paid on Citi common stock, but cannot vote.
Stock awards granted generally vest 25% per year over four years or 33% per year over 3 years.
As part of remuneration since 2010, the Company entered into an arrangement referred to as an “EU Short Term”
award. The award will be delivered in the form of immediately vested restricted shares subject to a six month sale
restriction.
3hares awarded
7eighted average fair market value per share
2015
2014
2013
2012
2011
3,380,169
$50.54
3,744,987
$49.64
4,677,014
$44.23
6,488,348
$30.54
7,197,950
$49.96
35
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
9.
Share-based incentive plans (continued)
(ii) Stock option programme
Stock options have not been granted to Citi’s employees as part of the annual incentive award programs since
2009.
In 2009 the Company made discretionary grants of options to eligible employees pursuant to the broad-based
Citigroup Employee Option Grant (CEOG) Program under the Citigroup Stock Incentive Plan. Under CEOG, the
options generally vest equally over three years, the option term is 6 years from the grant date and the shares
acquired on exercise are not subject to a sale restriction. To the extent permitted, CEOG options granted to
eligible UK employees were granted under an HMRC approved sub-plan with any excess over the applicable
individual limit being granted under the global plan, which is not an HMRC approved plan.
In 2011, outside the annual incentive award programme, Citi granted options to certain of its executive officers.
The options have six-year terms and vest in three equal annual instalments. The exercise price of the options is
$49.10, equal to the closing price of a share of Citi common stock on the grant date. Upon exercise of the options
before the fifth anniversary of the grant date, the shares received on exercise (net of the amount required to pay
taxes and the exercise price) are subject to a one-year transfer restriction.
Under FRS 101 certain disclosure exemptions for share based payments are taken on the basis that equivalent
disclosures are included within Citi’s audited consolidated financial statements. See Note 33 for details of where
Citi’s audited consolidated financial statements may be obtained.
The following table summarises the stock options outstanding under Citi stock option plans at 31 December 2015:
2015
Range of exercise prices
Number
outstanding
Options outstanding
Weighted
average
Weighted
contractual
average
life
exercise
remaining
price
Options exercisable
Number
Exercisable
Weighted
average
exercise
price
$
< $50.00
$50.01 - $399.99
$
853,512
10,000
0.52
2.16
48.88
249.50
853,512
10,000
48.88
249.50
863,512
0.54
51.20
863,512
51.20
The weighted average share price at the exercise date for options exercised during the year was $54.64 (2014:
$52.42).
The following table summarises the stock options outstanding under Citi stock option plans at 31 December 2014:
2014
Range of exercise prices
Number
outstanding
Options outstanding
Weighted
average
Weighted
contractual
average
life
exercise
remaining
price
Options exercisable
Number
Exercisable
$
< $50.00
$50.01 - $399.99
Weighted
average
exercise
price
$
3,770,010
32,564
1.00
1.54
42.98
161.43
3,769,314
32,564
42.98
161.43
3,802,574
1.01
43.99
3,801,878
43.99
36
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
9.
(iii)
Share-based incentive plans (continued)
Profit and loss statement impact
The table below details the profit and loss impact of the share based incentive plans.
2015
2014
$ million
$ million
Stock Awards
Granted in 2015
119
-
Granted in 2014
27
132
Granted in 2013
9
35
Granted in 2012
(1)
13
Granted in 2011
(3)
(3)
Granted in 2010
-
(1)
27
10
178
186
Accrued Expenses
Total Expense (Note 7)
Fair value adjustment of intercompany recharges in equity reserve
Total carrying amount of equity-settled transaction liability
Total carrying amount of cash-settled transaction liability
14
(9)
344
439
7
5
2015
$’000
2014
$’000
5,174
94
4,936
97
5,268
5,033
10. Directors’ remuneration
Directors’ remuneration in respect of services to the Company was as follows:
Aggregate emoluments
Contributions to money purchase pension scheme
Contributions to the money purchase pension schemes were accruing to four of the Directors (2014: four). Four of
the Directors (2014: five) of the Company participated in parent company share and share option plans and, during
the year, four of the Directors (2014: none) exercised options.
The remuneration of the highest paid Director was $2,587,491 (2014: $2,438,014) and accrued pension of $58,416
(2014: $59,620). The highest paid Director did (2014: did not) exercise share options during the year.
The Directors benefited from qualifying third party indemnity provisions in place during the financial year and at
the date of this report.
The above remuneration was based on the apportionment of time incurred by the Directors for services to the
Company, both in their capacity as a Director and, where applicable, their normal employment.
37
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
11. Tax on profit on ordinary activities
(a) Analysis of tax charge in the year
2015
$ Million
2014 *
$ Million
Current tax:
UK corporation tax
Double taxation relief
Overseas current tax
Adjustment in respect of overseas tax for previous years
Total current tax
21
(21)
28
(3)
25
20
20
Deferred tax:
Origination and reversal of temporary differences
- UK
- overseas
Rate change adjustment
Total deferred tax
14
(4)
(30)
(20)
(100)
7
(93)
5
(73)
Tax charge on ordinary activities
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
(b) Factors affecting tax charge for the year
Profit/(loss) on ordinary activities before tax
2015
$ Million
2014 *
$ Million
373
113
75
24
23
(21)
28
(23)
(43)
(3)
(15)
(30)
14
23
(3)
20
(19)
(18)
(100)
5
(73)
Profit/(loss) on ordinary activities multiplied by the standard rate of corporation
tax in the UK of 20.25% (2014: 21.49%)
Effects of:
Expenses not deductible for tax purposes
Foreign tax deductions
Foreign tax credits
Overseas tax in respect of European branch operations and dividends received
Group relief surrendered / (received)
Utilisation of losses carried forward
Adjustments in relation to previous years
Unrecognised current year deferred tax
Rate change adjustment
Dererred tax on pension recognised in equity
Total tax charge for year
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
38
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
11. Tax on profit on ordinary activities (continued)
(c)
Factors that may affect future tax charges:
The Company has not recognised a deferred tax asset of $291 million (2014: $347 million) in relation to
temporary differences where the recoverability of potential benefits is not considered likely.
The UK Corporate tax rate applying to CGML was 20.25%. Other subsidiaries and overseas branches provided
for taxation at the appropriate rates for the countries in which they operate.
The main rate of corporation tax in the UK was reduced from 21% to 20% on 1 April 2015. Finance (No. 2) Act
2015 provides that the rate of corporation tax will reduce to 19% from 1 April 2017 and further to 18% from 1
April 2020. It also introduced a surcharge of 8% on the taxable profits of banking companies arising on or after 1
January 2016 over a threshold of £25 million per banking group. These rates were enacted in November 2015.
12. Cash at bank and in hand
The following amounts are included within cash at bank and in hand:
Cash at bank held by third parties
Cash at bank held by other group undertakings
2015
$ Million
2014
$ Million
1,027
912
950
621
1,939
1,571
Included within cash held by third parties is $555 million (2014: $852 million) that is held on behalf of clients in
segregated accounts. Included within cash held by other group undertakings is $238 million (2014: $228 million)
on behalf of clients in segregated accounts.
13. Derivatives
2015
Fair Value
Asset
Liability
$ Million
$ Million
Swap agreements, swap options and
interest rate cap and floor agreements
145,331
144,336
190,734
188,922
3,888
4,961
5,661
7,219
13,231
12,561
16,988
15,618
162,450
161,858
213,383
211,759
Index and equity options and similar
contractual commitments
Other options and contractual
commitments
2014 *
Fair Value
Asset
Liability
$ Million
$ Million
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
39
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
14. Financial assets classed as held for trading
Current asset investments form part of the asset trading portfolio of the Company and comprise marketable
securities and other financial assets. The following amounts are included in current asset investments:
Financial assets classed as held for trading
Derivatives (Note 13)
Inventory
Government bonds
Eurobonds and other corporate bonds
Equities
Physical Commodities
Financial assets designated at fair value through profit or loss
Collateralised financing transactions
2015
$ Million
2014 *
$ Million
162,450
213,383
22,022
7,275
11,223
1,063
41,583
21,902
11,629
10,144
1,458
45,133
47,126
44,290
251,159
302,806
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
40
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
15. Financial assets and liabilities accounting classifications and fair values
The table below sets out the Company’s classification of each class of financial assets and liabilities, and their
fair values.
31 December 2015
Cash
Inventory
Derivatives
Collateralised financing transactions
Cash collateral pledged
Trade debtors
Other debtors
Fixed asset investments
Bank loans and overdrafts
Collateralised financing transactions
Derivatives
Cash collateral held
Securities sold but not yet purchased
Trade creditors
Other creditors and accruals
Subordinated loans
31 December 2014 *
Cash
Inventory
Derivatives
Collateralised financing transactions
Cash collateral pledged
Trade debtors
Other debtors
Fixed asset investments
Bank loans and overdrafts
Collateralised financing transactions
Derivatives
Cash collateral held
Securities sold but not yet purchased
Trade creditors
Other creditors and accruals
Subordinated loans
Held for Designated at
fair value
Trading
$ Million
$ Million
41,583
162,450
-
-
Amortised Available for
Sale
cost
$ Million
$ Million
Total
carrying
amount
$ Million
Fair value
$ Million
47,126
-
1,939
46,335
15,515
7,420
114
-
31
1,939
41,583
162,450
93,461
15,515
7,420
114
31
1,939
41,583
162,450
93,461
15,515
7,420
114
31
204,033
47,126
71,323
31
322,513
322,513
161,858
28,996
-
41,067
-
11,995
34,729
18,081
6,433
1,051
5,437
-
11,995
75,796
161,858
18,081
28,996
6,433
1,051
5,437
11,995
75,796
161,858
18,081
28,996
6,433
1,051
5,941
190,854
41,067
77,726
-
309,647
310,151
Amortised Available for
cost
Sale
$ Million
$ Million
Total
carrying
amount
$ Million
Fair value
$ Million
Held for Designated at
Trading
fair value
$ Million
$ Million
45,133
213,383
-
44,290
-
1,571
48,764
19,598
9,459
257
-
40
1,571
45,133
213,383
93,054
19,598
9,459
257
40
1,571
45,133
213,383
93,054
19,598
9,459
257
40
258,516
44,290
79,649
40
382,495
382,495
211,759
32,754
-
40,193
-
10,104
39,025
24,625
6,360
1,043
4,080
-
10,104
79,218
211,759
24,625
32,754
6,360
1,043
4,080
10,104
79,218
211,759
24,625
32,754
6,360
1,043
4,547
244,513
40,193
85,237
-
369,943
370,410
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
41
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
15. Financial assets and liabilities accounting classifications and fair values (continued)
The following table shows an analysis of financial assets and liabilities classified as held for trading or
designated at fair value by level in the hierarchy:
31 December 2015
Level 1
$ Million
Level 2
$ Million
Level 3
$ Million
Total
$ Million
43
20,455
84
10,602
-
159,376
1,564
6,968
590
1,063
3,031
3
223
31
-
162,450
22,022
7,275
11,223
1,063
31,184
169,561
3,288
204,033
-
46,907
219
47,126
31,184
216,468
3,507
251,159
18
26,280
26,298
158,206
2,713
160,919
3,634
3
3,637
161,858
28,996
190,854
Financial assets held for trading
Derivatives
Government bonds
Eurobonds and other corporate bonds
Equities
Physical Commodities
Financial assets designated at fair value
Collateralised financing transactions
Financial liabilities held for trading
Derivatives
Securities sold but not yet purchased
Financial liabilities designated at fair value
-
41,067
-
41,067
26,298
201,986
3,637
231,921
Level 1
$ Million
Level 2
$ Million
Level 3
$ Million
Total
$ Million
31
20,662
11
8,487
0
210,733
1,228
11,197
1,540
1,458
2,619
12
421
117
0
213,383
21,902
11,629
10,144
1,458
29,191
226,156
3,169
258,516
-
44,025
265
44,290
29,191
270,181
3,434
302,806
24
28,486
28,510
208,186
4,263
212,449
3,549
5
3,554
211,759
32,754
244,513
-
40,193
-
40,193
28,510
252,642
3,554
284,706
Collateralised financing transactions
31 December 2014 *
Financial assets held for trading
Derivatives
Government bonds
Eurobonds and other corporate bonds
Equities
Physical Commodities
Financial assets designated at fair value
Current asset investments
Collateralised financing transactions
Financial liabilities held for trading
Derivatives
Securities sold but not yet purchased
Financial liabilities designated at fair value
Collateralised financing transactions
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
42
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
15. Financial assets and liabilities accounting classifications and fair values (continued)
Given the short term nature and characteristics of trade debtors, other debtors, trade creditors, other creditors and
accruals the fair value has been assumed to approximate the carrying value. The fair value of subordinated loans
has been calculated using the present value of future estimated cash flows, discounted using a discount rate of USD
3 month Overnight Indexed Swap (OIS) or 3 month Euro Overnight Index Average (EONIA) plus the Company’s
credit spread as at 31 December 2015.
Fair Value Measurement
IFRS 13 – Fair Value Measurement defines fair value, establishes a framework for measuring fair value and
requires disclosures about fair value measurements. Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Among other things, the standard requires the Company to maximise the use of observable inputs and minimise the
use of unobservable inputs when measuring fair value.
Under IFRS 13, the probability of default of a counterparty is factored into the valuation of derivative positions and
includes the impact of the Company’s own credit risk on derivatives and other liabilities measured at fair value.
Fair Value Hierarchy
The calculation of fair value incorporates the Company’s estimate of the fair value of financial assets and financial
liabilities. Other entities may use different valuation methods and assumptions in determining fair values, so
comparisons of fair values between entities may not necessarily be meaningful.
The Company measures fair values using the following fair value hierarchy that indicates whether the inputs to
those valuation techniques are observable or unobservable. Observable inputs denote market data obtained from
independent sources, while unobservable inputs reflect the Company’s market assumptions.
The types of inputs have created the following fair value hierarchy:
•
Level 1: Quoted prices for identical instruments in active markets.
•
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations in which all significant inputs and
significant value drivers are observable in active markets.
•
Level 3: Valuations derived from valuation techniques in which one or more significant inputs or
significant value drivers are unobservable.
The Company considers relevant and observable market prices in its valuations where possible. The frequency of
transactions and the size of the bid-ask spread when comparing similar transactions are factors that are driven by the
liquidity of markets and determine the relevance of observed prices in those markets.
Financial instruments may move between levels in the fair value hierarchy when factors such as liquidity or the
observability of input parameters change. As conditions around these factors deteriorate or improve, financial
instruments may transfer lower down or higher up the fair value hierarchy. The Company’s policy with respect to
transfers between levels of the fair value hierarchy is to recognise transfers into and out of each level as of the end
of the reporting period.
43
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
15. Financial assets and liabilities accounting classifications and fair values (continued)
Determination of Fair Value
As set out more fully in Note 1(c) of these financial statements, when available, the Company generally uses quoted
market prices in an active market to calculate the fair value of a financial asset or liability and classifies such items
as Level 1. In some cases where a market price is available, the Company will make use of alternative pricing
techniques, such as matrix pricing, whereby a similar instrument is used as a proxy, to calculate fair value, in which
case the items are classified as Level 2.
If quoted market prices are not available, fair values are based upon internally developed valuation techniques that
use, where possible, current market-based or independently sourced market parameters such as interest rates,
foreign exchange rates and option volatilities. Items valued using such internally generated valuation techniques
are classified according to the lowest level input or value driver that is significant to the valuation. Thus an item
may be classified in Level 3 even though there may be some significant inputs that are readily observable.
Where available, the Company may also make use of quoted prices for recent trading activity in positions with the
same or similar characteristics to that being valued. The frequency and size of transactions and the amount of the
bid-ask spread are among the factors considered in determining the liquidity of markets and the relevance of
observed prices from those markets. If relevant and observable prices are available, those valuations would be
classified as Level 2. If such prices are not available, other valuation techniques would be used and the item would
be classified as Level 3. Fair value estimates from internal valuation techniques are verified, where possible, to
prices obtained from independent vendors or brokers. Vendors’ and brokers’ valuations may be based on a variety
of inputs ranging from observed prices to proprietary valuation models.
The Company values a number of assets and liabilities using valuation techniques that use one or more significant
inputs that are not based on observable market data. The Company grades all such assets and liabilities in order to
identify those items for which a reasonably possible change in one or more assumptions is likely to have a
significant impact on the fair value.
Adjustments may be applied to the “base” valuations of financial assets and liabilities calculated using one of the
valuation techniques described above, to ensure that the fair value measurement incorporates all factors that market
participants would consider when determining fair value. Note that no such adjustments are applied to instruments
that are valued using quoted prices for identical instruments in an active market.
Set out below is a description of the procedures used by CGML to determine the fair value of financial assets and
financial liabilities irrespective of whether they are “held for trading” or have been “designated at fair value”. This
description includes an indication of the level in the fair value hierarchy in which each financial instrument is
generally classified. Where appropriate, it also includes details of the valuation models, the key inputs to those
models and any significant assumptions.
Market valuation adjustments
Market valuation adjustments are applied to items in Level 2 and Level 3 of the fair value hierarchy to ensure that
the fair value reflects the liquidity or illiquidity of the market. The liquidity reserve may utilise the bid-ask spread
for an instrument as one of the factors.
Credit valuation adjustments
Counterparty credit-risk adjustments are applied to derivatives, such as over-the-counter uncollateralised
derivatives, where the base valuation uses market parameters based on the relevant base interest rate curves. Not all
counterparties have the same credit risk as that implied by the relevant base curve, so it is necessary to consider the
market view of the credit risk of a counterparty in order to estimate the fair value of such an item.
Bilateral or “own” credit-risk adjustments are applied to reflect the Company’s own credit risk when valuing
derivative liabilities and other liabilities measured at fair value. Counterparty and own credit adjustments consider
the expected future cash flows between the Company and its counterparties under the terms of the instrument and
the effect of credit risk on the valuation of those cash flows, rather than a point-in-time assessment of the current
recognised net asset or liability. Furthermore, the credit-risk adjustments take into account the effect of credit-risk
mitigants, such as pledged collateral and any legal right of offset (to the extent such offset exists) with a
counterparty through arrangements such as netting agreements.
44
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
15. Financial assets and liabilities accounting classifications and fair values (continued)
Derivatives
Exchange-traded derivatives in active markets are generally fair valued using quoted market prices (i.e. exchange
prices) and are therefore classified as Level 1 of the fair value hierarchy.
The majority of derivatives entered into by the Company are executed over the counter and are valued using a
combination of external prices and internal valuation techniques, including benchmarking to pricing vendor
services. The valuation techniques and inputs vary according to the type of derivative and the nature of the
underlying instrument. The principal methods used to value these instruments are those adopted industry wide and
include discounted cash flows, modelling and numerical approaches.
The type of inputs may include interest rate yield curves, credit spreads, foreign exchange rates, volatilities and
correlations.
The Company discounts future cash flows using appropriate interest rate curves. In the case of collateralised
interest rate derivatives the Company follows the terms in the collateral agreement governing the transaction. The
agreements generally provide that an OIS curve is used. The OIS curves reflect the interest rate paid on the
collateral against the fair value of these derivatives. Citi uses the relevant benchmark curve for the currency of the
derivative (e.g., the U.S. Dollar London Interbank Offered Rate (LIBOR) for U.S. dollar derivatives) as the
discount rate for uncollateralized derivatives.
Government bonds, corporate bonds and equities
CGML uses quoted market prices to determine the fair value of government bonds and exchange traded equities;
such items are typically classified as Level 1 of the fair value hierarchy.
For government bonds, corporate bonds and equities traded over the counter, for which a quoted price is not
available, CGML generally determines fair value utilising internal valuation techniques. Fair value estimates from
internal valuation techniques are verified, where possible, to prices obtained from independent vendors. Vendors
compile prices from various sources and may apply alternative pricing techniques, such matrix pricing, whereby a
similar instrument is used as a proxy for similar bonds or loans where no price is observable. If available, the
Company may also use quoted prices for recent trading activity of assets with similar characteristics to the bond
being valued. Government bonds, corporate bonds and equities priced using such methods are generally classified
as Level 2. However, when less liquidity exists for government bonds, corporate bonds or equities, a quoted price
is stale or prices from independent sources vary, they are generally classified as Level 3.
Collateralised financing transactions
No quoted prices exist for such financial instruments and so fair value is determined using a discounted cash-flow
technique. Cash flows are estimated based on the terms of the contract, taking into account any embedded
derivative or other features. Expected cash flows are discounted using market rates appropriate to the maturity of
the instrument as well as the nature and amount of collateral taken or received. Generally, when such instruments
are held at fair value, they are classified within Level 2 of the fair value hierarchy as the inputs used in the valuation
are readily observable.
45
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
15. Financial assets and liabilities accounting classifications and fair values (continued)
Changes in Level 3 Fair Value Category
The following tables present the changes in the Level 3 fair value category for the years ended 31 December
2015 and 31 December 2014. Gains and losses presented below include changes in the fair value related to both
observable and unobservable inputs. CGML often hedges positions with offsetting positions that are classified in
a different level.
Gain/(loss) recorded in the
profit and loss statement
2015
Financial assets held for trading
Derivatives
Government bonds
Eurobonds and other corporate bonds
Equities
Financial assets designated at fair value
Collateralised financing transactions
At 1
January
$ Million
Realised
$ Million
2,619
12
421
117
(2,193)
65
27
2,488
(1)
(14)
(24)
21
7
278
32
(138)
(13)
(551)
(97)
(441)
-
1,052
1
307
20
(377)
(3)
(283)
(44)
3,031
3
223
31
265
(87)
(7)
90
-
(126)
804
(721)
218
3,434
(2,188)
2,442
428
(799)
(567)
2,184
(1,428)
3,506
Unrealised Purchases
$ Million $ Million
Sales Settlements
$ Million
$ Million
Transfers Transfers out
At 31
into Level 3
of Level 3 December
$ Million
$ Million $ Million
(Gain)/loss recorded in the
profit and loss statement
Financial liabilities held for trading
Derivatives
Securities sold but not yet purchased
At 1
January
$ Million
3,549
5
Realised
$ Million
(2,827)
2
3,554
(2,825)
Unrealised Purchases
$ Million
3,064
(8)
297,580
3,064
(8)
Sales Settlements
$ Million
$ Million
28
(473)
6
(8)
34
(481)
Transfers Transfers out
At 31
into Level 3
of Level 3 December
$ Million
$ Million $ Million
1,102
(801)
3,634
3
(5)
3
1,105
(806)
3,637
Gain/(loss) recorded in the
profit and loss statement
2014 *
Financial assets held for trading
Derivatives
Government bonds
Eurobonds and other corporate bonds
Equities
Financial assets designated at fair value
Collateralised financing transactions
At 1
January
$ Million
Realised
$ Million
2,741
19
1,141
111
(3,114)
32
(28)
2,525
(1)
(15)
10
68
313
1,227
150
(116)
(222)
(1,698)
(132)
94
-
800
25
315
152
(379)
(122)
(581)
(146)
2,619
12
421
117
343
13
-
153
(58)
(186)
-
-
265
4,355
(3,097)
2,519
1,911
(2,226)
(92)
1,292
(1,228)
3,434
Unrealised Purchases
$ Million $ Million
Sales Settlements
$ Million
$ Million
Transfers Transfers out
At 31
into Level 3
of Level 3 December
$ Million
$ Million $ Million
(Gain)/loss recorded in the
profit and loss statement
Financial liabilities held for trading
Derivatives
Securities sold but not yet purchased
At 1
January
$ Million
3,376
20
Realised
$ Million
(5,230)
2
3,396
(5,228)
Unrealised Purchases
$ Million
4,492
(23)
10
4,502
(23)
Sales Settlements
$ Million
$ Million
39
70
36
(51)
75
19
Transfers Transfers out
At 31
into Level 3
of Level 3 December
$ Million
$ Million $ Million
1,574
(749)
3,549
(12)
5
1,574
(761)
3,554
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
Included in the Level 3 balance at 31 December 2015 above are intercompany assets of $1,964 million (2014:
$1,570 million) and liabilities of $1,941 million (2014: $1,655 million).
46
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
15. Financial assets and liabilities accounting classifications and fair values (continued)
Valuation process for Level 3 Fair Value Measurements
Price verification procedures and related internal control procedures are governed by the Citi Pricing and Price
Verification Policy and Standards, which are jointly owned by Finance and Risk Management. Finance has
implemented the Pricing and Price Verification Standards and Procedures to facilitate compliance with this
policy.
For fair value measurements of substantially all assets and liabilities held by CGML, individual business units
are responsible for valuing the trading account assets and liabilities, and Product Control within Finance
performs independent price verification procedures to evaluate those fair value measurements. Product Control
is independent of the individual business units and reports into the Global Head of Product Control, who
ultimately reports to the Citi Chief Financial Officer. Fair value measurements of assets and liabilities are
determined using various techniques including, but not limited to, discounted cash flows and internal models,
such as option and correlation models.
Based on the observability of inputs used, Product Control classifies the inventory as Level 1, Level 2 or Level 3
within the fair value hierarchy. When a position involves one or more significant inputs that are not directly
observable, additional price verification procedures are applied. These procedures may include reviewing
relevant historical data, analysing profit and loss, valuing each component of a structured trade individually and
benchmarking, amongst others.
Reports of Level 3 inventory of each business line of the Company are distributed to senior management in
Finance, Risk and the individual business lines. Reports are also discussed at the EMEA Risk Committee, the
CGML Risk Committee and in monthly meetings with Senior Management. Whenever a valuation adjustment is
needed to bring the price of an asset or liability to its exit price, Product Control reports it to management along
with other price verification results.
In addition, the pricing models used in measuring fair value are governed by an independent control framework.
Although the models are developed and tested by the individual business units, they are independently validated
by the Model Validation Group within Model Risk Management and reviewed by Finance with respect to their
impact on the price verification procedures. The purpose of this independent control framework is to assess
model risk arising from models’ theoretical soundness, calibration techniques where needed, and the
appropriateness of the model for a specific product in a defined market. To ensure their continued applicability,
models are independently reviewed annually. In addition, Risk Management approves and maintains a list of
products permitted to be valued under each approved model for a given business.
Transfers into or out of Level 3 are primarily driven by changes in the availability of independent data for
positions where the Company has risk exposure, yet the market is no longer considered to be active. As liquidity
and transparency improves, the financial instrument may transfer back to a previous classification level.
The Level 3 financial instruments inventory remained relatively flat over the course of 2015, the main
contributors to the Level 3 fair value inventory being the Rates, Finance Desk and Equity Markets businesses.
Movements across purchases and sales were largely driven by asset backed securities across the European ABS
business and corporate bonds across the Rates and Credit Markets. Settlements were driven by exotic equity
derivatives across the Equities business and credit derivatives across the Emerging Markets Credit Trading
business.
Transfers into Level 3 were driven by Equity and Credit Markets, specifically activity across the Corporate
Equity Derivatives and Exotics businesses, and across the European Credit and Emerging Markets Credit
47
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
15. Financial assets and liabilities accounting classifications and fair values (continued)
Trading businesses. Transfers out of Level 3 were driven by greater observability around Equity Markets,
mainly across exotic equity derivatives.
Unobservable inputs
During the year, total changes in fair value, representing a gain of $108 million (2014: $147 million gain) were
recognised in the profit and loss account relating to items where fair value was estimated using a valuation
technique that incorporated one or more significant inputs based on unobservable market data. As these
valuation techniques were based upon assumptions, changing the assumptions would change the estimate of fair
value. The potential impact of using reasonably possible alternative assumptions for the valuation techniques for
both observable and unobservable market data has been quantified as approximately $152 million (2014:
$176 million). The main contributors to this impact are Equity Markets, Emerging Markets Credit Trading,
Credit Trading and other cross-asset businesses.
Valuation uncertainty is computed on a quarterly basis. The methodology used to derive the impact across each
product is determined by applying adjustments to the price or significant model input parameters used in the
valuation.
The adjustments are typically computed with reference to proxy analysis using third party data. Examples of the
approach used to derive sensitivity adjustments are outlined below:
•
Equity Markets: Valuation uncertainty is computed from a combination of consensus market data and
proxy analysis using third party data providers.
•
Credit Trading and Securitised Markets: Valuation uncertainty is computed from a combination of
consensus market data, broker data and proxy analysis using third party data providers.
•
Commodity Markets: Valuation uncertainty is computed from a combination of consensus market data
and proxy analysis using third party data providers.
48
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
15. Financial assets and liabilities accounting classifications and fair values (continued)
Valuation Techniques and Inputs for Level 3 Fair Value Measurements
The following tables presents the valuation techniques covering the majority of Level 3 inventory and the most
significant unobservable inputs used in Level 3 fair value measurements as of 31 December 2015 and 31
December 2014. Note that this table represents key drivers by disclosures line and may not agree back to the
Changes in Level 3 Fair Value Category table.
2015
Assets
Commodity and other contracts
Credit derivatives
Credit derivatives
Equity contracts
Equity contracts
Equity contracts
Foreign exchange contracts
Interest rate contracts
Interest rate contracts
Securities financing transactions
Corporate Bonds
MBS (Non US Residential)
Liabilities
Commodity and other contracts
Credit derivatives
Credit derivatives
Equity contracts
Equity contracts
Equity contracts
Foreign exchange contracts
Interest rate contracts
2014
Assets
Commodity and other contracts
Credit derivatives
Equity contracts
Equity contracts
Equity contracts
Foreign exchange contracts
Interest rate contracts
Securities financing transactions
Corporate Bonds
Liabilities
Commodity and other contracts
Credit derivatives
Equity contracts
Equity contracts
Foreign exchange contracts
Interest rate contracts
Fair Value
$ million
Methodology
Input
221
301
551
258
686
184
34
466
18
60
40
148
Model-based
Model-based
Model-based
Model-based
Model-based
Model-based
Model-based
Model-based
Price-based
Cashflow
Price-based
Price-based
Commodity Volatility
Credit Spread
Recovery Rate
Equity Forward
Equity Volatility
Equity-Equity Correlation
FX Volatility
IR Lognormal Volatility
Price
Yield
Price
Price
2.0
1.0
1.0
3.0
0.0
(80.5)
0.4
10.4
0.9
1.5
0.0
1.5
83.0
597.1
75.0
100.5
440.6
100.0
25.7
137.0
100.7
4.5
139.0
98.7
%
bps
%
%
%
%
%
%
$
%
$
$
173
284
547
1,107
1,513
1,014
35
416
Model-based
Model-based
Model-based
Model-based
Model-based
Model-based
Model-based
Model-based
Commodity Volatility
Credit Spread
Recovery Rate
Equity Forward
Equity Volatility
Equity-Equity Correlation
FX Volatility
IR Lognormal Volatility
2.0
1.0
1.0
82.7
0.0
(80.5)
0.4
10.4
83.0
597.1
75.0
100.5
440.6
100.0
25.7
137.0
%
bps
%
%
%
%
%
%
Fair Value
$ million
Methodology
Input
Low
High
Unit
349
147
429
306
108
38
587
164
195
Model-based
Model-based
Model-based
Model-based
Model-based
Model-based
Model-based
Model-based
Price-based
Forward Price
Credit Spread
Equity Forward
Equity Volatility
Equity-Equity Correlation
FX Volatility
IR Lognormal Volatility
Interest Rate
Price
308
140
1,364
404
38
568
Model-based
Model-based
Model-based
Model-based
Model-based
Model-based
Forward Price
Credit Spread
Equity Forward
Equity Volatility
FX Volatility
IR Lognormal Volatility
49
Low
High
Unit
35.3
1.1
89.5
9.6
(36.0)
0.4
10.3
8.0
0.0
268.8
7,815.9
100.8
82.4
53.2
58.4
196.8
9.0
146.4
%
bps
%
%
%
%
%
%
$
35.3
1.1
89.5
9.6
0.4
10.3
268.8
3,380.0
100.8
82.4
58.4
196.8
%
bps
%
%
%
%
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
15. Financial assets and liabilities accounting classifications and fair values (continued)
Sensitivity to unobservable inputs and interrelationships between unobservable inputs
The impact of key unobservable inputs on the Level 3 fair value measurements may not be independent of one
another. In addition, the amount and direction of the impact on a fair value measurement for a given change in
an unobservable input depends on the nature of the instrument as well as whether the Company holds the
instrument as an asset or a liability. For certain instruments, the pricing, hedging and risk management are
sensitive to the correlation between various inputs rather than on the analysis and aggregation of the individual
inputs.
The following section describes the sensitivities and interrelationships of the most significant unobservable
inputs used by the Company in Level 3 fair value measurements.
Yield
Adjusted yield is generally used to discount the projected future principal and interest cash flows on instruments,
such as loans. Adjusted yield is impacted by changes in the interest rate environment and relevant credit spreads.
In some circumstances, the yield of an instrument is not observable in the market and must be estimated from
historical data or from yields of similar securities. This estimated yield may need to be adjusted to capture the
characteristics of the security being valued. In other situations, the estimated yield may not represent sufficient
market liquidity and must be adjusted as well. Whenever the amount of the adjustment is significant to the value
of the security, the fair value measurement is classified as Level 3.
Recovery
Recovery is the proportion of the total outstanding balance of a bond or loan that is expected to be collected in a
liquidation scenario. For many credit securities (such as asset-backed securities), there is no directly observable
market input for recovery, but indications of recovery levels are available from pricing services. The assumed
recovery of a security may differ from its actual recovery that will be observable in the future. The recovery rate
impacts the valuation of credit securities. Generally, an increase in the recovery rate assumption increases the
fair value of the security. An increase in loss severity, the inverse of the recovery rate, reduces the amount of
principal available for distribution and, as a result, decreases the fair value of the security.
Credit Spread
Credit spread is a component of the security’s yield representing its credit quality. Credit spread reflects the
market perception of changes in prepayment, delinquency and recovery rates. Changes in credit spread affect the
fair value of securities differently depending on the characteristics and maturity profile of the security. For
example, credit spread is a more significant driver of the fair value measurement of a high yield bond as
compared to an investment grade bond. Generally, the credit spread for an investment grade bond is also more
observable and less volatile than its high yield counterpart.
Volatility
Volatility represents the speed and severity of market price changes and is a key factor in pricing options.
Typically, instruments can become more expensive if volatility increases. For example, as an index becomes
more volatile, the cost to Citi of maintaining a given level of exposure increases because more frequent
rebalancing of the portfolio is required. Volatility generally depends on the tenor of the underlying instrument
and the strike price or level defined in the contract. Volatilities for certain combinations of tenor and strike are
not observable. The general relationship between changes in the value of a portfolio to changes in volatility also
depends on changes in interest rates and the level of the underlying index. Generally, long option positions
(assets) benefit from increases in volatility, whereas short option positions (liabilities) will suffer losses. Some
instruments are more sensitive to changes in volatility than others. For example, an at-the-money option would
experience a larger percentage change in its fair value than a deep-in-the-money option. In addition, the fair
value of an option with more than one underlying security (for example, an option on a basket of bonds) depends
on the volatility of the individual underlying securities as well as their correlations.
50
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
15. Financial assets and liabilities accounting classifications and fair values (continued)
Correlation
Correlation is a measure of the co-movement between two or more variables. A variety of correlation-related
assumptions are required for a wide range of instruments, including equity baskets, foreign-exchange options and
many other instruments. For almost all of these instruments, correlations are not observable in the market and
must be estimated using historical information. Estimating correlation can be especially difficult where it may
vary over time. Extracting correlation information from market data requires significant assumptions regarding
the informational efficiency of the market (for example, swaption markets). Changes in correlation levels can
have a major impact, favorable or unfavorable, on the value of an instrument, depending on its nature.
Qualitative discussion of the ranges of significant unobservable inputs
The following section describes the ranges of the most significant unobservable inputs used by the Company in
Level 3 fair value measurements. The level of aggregation and the diversity of instruments held by the Company
lead to a wide range of unobservable inputs that may not be evenly distributed across the Level 3 inventory.
Price
The price input is a significant unobservable input for certain fixed income instruments. For these instruments,
the price input is expressed as a percentage of the notional amount, with a price of 100 meaning that the
instrument is valued at par. For most of these instruments, the price varies between zero and slightly above 100.
Relatively illiquid assets that have experienced significant losses since issuance, such as certain asset-backed
securities, are at the lower end of the range, whereas most investment grade corporate bonds will fall in the
middle to the higher end of the range. The price input is also a significant unobservable input for certain equity
securities; however, the range of price inputs varies depending on the nature of the position, the number of shares
outstanding and other factors.
Yield
Ranges for the yield inputs vary significantly depending upon the type of security. For example, securities that
typically have lower yields, such as German or U.S. government bonds, will fall on the lower end of the range,
while more illiquid securities or securities with lower credit quality, such as certain residual tranche asset-backed
securities, will have much higher yield inputs.
Credit Spread
Credit spread is relevant primarily for fixed income and credit instruments; however, the ranges for the credit
spread input can vary across instruments. For example, certain fixed income instruments, such as certificates of
deposit, typically have lower credit spreads, whereas certain derivative instruments with high-risk counterparties
are typically subject to higher credit spreads when they are uncollateralized or have a longer tenor. Other
instruments, such as credit default swaps, also have credit spreads that vary with the attributes of the underlying
obligor. Stronger companies have tighter credit spreads, and weaker companies have wider credit spreads.
Volatility
Similar to correlation, asset-specific volatility inputs vary widely by asset type. For example, ranges for foreign
exchange volatility are generally lower and narrower than equity volatility. Equity volatilities are wider due to
the nature of the equities market and the terms of certain exotic instruments. For most instruments, the interest
rate volatility input is on the lower end of the range; however, for certain structured or exotic instruments (such
as market-linked deposits or exotic interest rate derivatives), the range is much wider.
Correlation
There are many different types of correlation inputs, including credit correlation, cross-asset correlation (such as
equity-interest rate correlation), and same-asset correlation (such as interest rate-interest rate correlation).
Correlation inputs are generally used to value hybrid and exotic instruments. Generally, same-asset correlation
inputs have a narrower range than cross-asset correlation inputs. However, due to the complex nature of many of
these instruments, the ranges for correlation inputs can vary widely across portfolios.
51
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
16. Fixed asset investments and Related undertakings
Cost
At 1 January
Additions
Disposals
Gains/(losses) recognised in profit and loss account
At 31 December
Unlisted
Investments
2015
$ Million
Unlisted
Investments
2014
$ Million
40
8
(15)
(2)
50
(9)
(1)
31
40
The following amounts for subsidiary undertakings are included in fixed asset investments:
2015
$’000
2014
$’000
Cost
At 1 January
Additions
3,580
-
3,268
312
At 31 December
3,580
3,580
Details of all related undertakings held at 31 December 2015 as required by section 409 of the Companies Act
2006 are as follows:
Subsidiary undertakings
Name
Country of
incorporation
Citigroup South Africa Credit Products (Proprietary) Limited (CSA)
CGM (Monaco) SAM
Citigroup Global Markets Luxembourg LLC
Citigroup Global Markets Funding Luxembourg SCA
Citigroup Global Markets Funding Luxembourg SaRL
South Africa
Monaco
Luxembourg
Luxembourg
Luxembourg
% holding in
ordinary share
capital
100%
100%
100%
100%
100%
17. Involvement with unconsolidated structured entities
The table below describes the types of structured entities that CGML does not consolidate but in which it holds
an interest. CGML does not sponsor or provide any funding or liquidity facilities to any of the below entities.
Type of structured entity
Nature and purpose
Collateralised Debt Obligation (CDO)
CDO
Investment Funds
Fund/Limited Partnership Structure
Total VIE assets CGML exposure
$ millions
$'000
-
-
233
482
233
482
CDO
CGML has synthetic exposure to the super senior tranche of the CDO which is hedged with single name credit
default swaps. There is no exposure on this deal and no funding or other commitment in place.
Investment funds
The investors in these funds are professional or institutional investors. CGML is the derivative swap
counterparty to the fund. The derivative transactions are FX options and swaps.
52
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
18. Other Assets
The following amounts are included in Other Assets:
Trade debtors
Cash collateral pledged
Other debtors
Prepayments and accrued income
Corporation tax recoverable
Deferred tax asset (Note 21)
Intangible fixed assets (Note 19)
Tangible fixed assets - equipment (Note 19)
Tangible fixed assets - premises improvement (Note 19)
2015
$ Million
2014 *
$ Million
7,420
15,515
114
19
6
125
223
1
6
9,459
19,598
257
17
12
105
210
2
7
23,429
29,667
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
Included within Other Assets is $1,520 million (2014: $1,013 million) that is held on behalf of clients. Other
Assets includes the following balances due from group undertakings:
Trade debtors
Cash collateral pledged
Other debtors
Prepayments and accrued income
2015
$ Million
2014 *
$ Million
1,383
3,165
7
1
1,776
666
45
1
4,556
2,488
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
Included within Other Assets due from group undertakings is $1,082 million (2014: $546 million) that is held on
behalf of clients.
53
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
19. Intangible and Tangible fixed assets
The movement in Intangible and Tangible fixed assets for the year was as follows:
Intangible
Software
$ Million
Cost
At 1 January 2015
Additions
Disposals
Tangible Fixed Assets
Premises
Equipment
improvements
$ Million
$ Million
448
72
(9)
11
-
15
-
At 31 December 2015
Accumulated depreciation
At 1 January 2015
Charge for the year (Note 7)
Additions
Disposals
511
11
15
238
58
(8)
9
1
-
8
1
-
At 31 December 2015
288
10
9
Net book value
At 31 December 2015
223
1
6
Intangible
Tangible Fixed Assets
Premises
Software
Equipment
improvements
$ Million
$ Million
$ Million
392
11
15
56
-
-
-
448
11
15
181
9
7
55
-
1
Cost
At 1 January 2014
Additions
Disposals
At 31 December 2014
Accumulated depreciation
At 1 January 2014
Charge for the year (Note 7)
Additions
2
-
-
Disposals
-
-
-
238
9
8
210
2
7
At 31 December 2014
Net book value
At 31 December 2014
54
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
20. Pledged assets
Collateral accepted as security for assets
The fair value of financial assets including government bonds, eurobonds and other corporate bonds, equities,
and cash accepted that were permitted to be sold or re-pledged in the absence of default was $165 billion (2014:
$150 billion). The fair value of the collateral accepted that had been re-pledged at 31 December 2015 was $163
billion (2014: $144 billion). The Company was obliged to return equivalent securities. These transactions were
conducted under terms that are usual and customary to standard lending and securities borrowing and lending
activities.
Financial assets pledged to secure liabilities
The total value of purchased financial assets including government bonds, eurobonds and other corporate bonds,
equities and cash that were pledged as collateral for liabilities at 31 December 2015 was $42 billion (2014: $45
billion). These transactions were conducted under terms that are usual and customary to standard lending and
securities borrowing and lending activities.
21. Deferred tax asset
The following amounts are included within deferred tax:
2015
$ Million
2014 *
$ Million
Short term temporary differences
125
105
At 1 January
(Released) / arising during the year in P&L
Rate change adjustment
FX movement
105
(10)
30
-
14
93
(2)
At 31 December
125
105
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
Deferred tax assets are recognised to the extent that it is more likely than not that there will be suitable taxable
profits from which the reversal of the underlying temporary differences can be deducted.
Deferred tax is recognised on temporary differences arising in the Company's non-UK branch operations,
including differences in relation to share based payments and pensions. The recognition accords with the
Company's accounting policies, because it is more likely than not that there will be suitable taxable profits
arising in these operations from which the future reversal of underlying temporary differences can be deducted.
There is also a UK deferred tax asset included in the above balance to offset the deferred tax liability on the
pension asset.
The Company has not recognised a deferred tax asset of $291 million (2014: $347 million) in relation to
temporary differences where the recoverability of potential benefits is not considered likely. The deferred tax
asset is based on a rate of 26% on the assumption that the £25 million banking surcharge threshold will be
allocated to another group entity.
The deferred tax asset in the balance sheet comprises:
Accelerated tax depreciation
Deferred compensation
Provisions and other temporary differences
55
2015
$ Million
2014 *
$ Million
62
46
17
125
78
11
16
105
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
21. Deferred tax asset (continued)
The deferred tax charge or credit in the income statement comprises:
2015
$ Million
2014 *
$ Million
(16)
35
1
20
78
11
2
91
2015
$ Million
2014 *
$ Million
(10)
30
20
93
(2)
91
Accelerated tax depreciation
Deferred compensation
Provisions and other temporary differences
This is made up of:
(Released) / arising during the year P & L
FX
Rate change adjustment
22. Other Liabilities
The following amounts are included within Other Liabilities. Included within ‘Other creditors and accruals’ is
the accrual in respect of the bank levy.
Cash collateral held
Trade creditors
Other creditors and accruals
Payroll taxes
Corporation tax payable
Deferred tax liability on pensions (Note 8)
Provisions for liabilities and charges (Note 23)
2015
$ Million
2014 *
$ Million
18,081
6,433
1,051
40
19
116
70
24,625
6,360
1,043
38
15
100
119
25,810
32,300
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
Included within Other Liabilities are the following balances due to group undertakings:
Cash collateral held
Trade creditors
Other creditors and accruals
2015
$ Million
2014 *
$ Million
902
315
298
5,407
631
354
1,515
6,392
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
56
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
23. Provisions for liabilities
Restructuring
provision
$ Million
Litigation
provisions
$ Million
Other
provisions
$ Million
Total
$ Million
30
(29)
-
27
6
-
62
16
(39)
(3)
119
22
(68)
(3)
1
33
36
70
At 1 January 2015
Charge to profits
Provisions utilised
Exchange adjustments
At 31 December 2015
No further information is disclosed in respect of the litigation provision due to its sensitive nature. Other
provisions are held in respect of accounting reconciliation and control procedures as part of the balance sheet
substantiation process.
24. Derecognition of financial assets and financial liabilities
Transferred financial assets that are not derecognised in their entirety
There are certain instances where the Company continues to recognise financial assets that it has transferred.
CGML enters into collateralised financing transactions where it sells or lends debt or equity securities with a
concurrent agreement to repurchase them. As significantly all of the risks and rewards of the underlying
securities are retained, a collateralised financing liability is recognised and the securities remain on balance
sheet.
As at 31 December 2015 the Company recognised $41,632 million of assets (2014: $44,893 million), with an
associated $39,131 million of collateralised financing liabilities (2014: $41,916 million).
25. Trading financial assets and liabilities
Any initial gain or loss on financial instruments where valuation is dependent on techniques using unobservable
parameters is deferred over the life of the contract or until the instrument is redeemed, transferred or sold or the
fair value becomes observable.
The table below sets out the aggregate difference yet to be recognised in profit or loss at the beginning and end
of the year with a reconciliation of the changes of the balance during the year for those financial assets and
liabilities classified as trading.
Unamortised balance at 1 January
Deferral on new transactions
Recognised in profit and loss during the period:
- amortisation
Unamortised balance at 31 December
57
2015
$ Million
2014
$ Million
53
19
35
34
(24)
(16)
48
53
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
26. Subordinated loans
The subordinated loans form part of the Company’s Tier 2 regulatory capital resources held to meet the capital
adequacy requirements of the PRA and can only be repaid with their consent. The loans, on which interest is
payable at market rates, are due to other group undertakings and are denominated in both USD and EUR. The
following amounts were included within subordinated loans:
Amounts falling due after five years
2015
$ Million
2014
$ Million
5,437
4,080
5,437
4,080
On 4 February 2015 the Company drew down $800 million of subordinated loan borrowings from Citigroup
Financial Products Inc. On 10 March 2015 the Company drew down $750 million of subordinated loan
borrowings from Citigroup Financial Products Inc.
27. Called up share capital
CGML’s share capital comprises:
Allotted, called-up and fully paid:
1,499,626,620 ordinary shares of $1 each
2015
$ Million
1,500
2014
$ Million
1,500
1,500
1,500
28. Other commitments
a)
Letters of credit
As at 31 December 2015, the Company had $11 million (2014: $14 million) of unsecured letters of credit
outstanding from banks to satisfy collateral requirements under securities borrowing agreements and margin
requirements.
b)
Capital commitments
As at 31 December 2015, the Company had no capital commitments (2014: $nil).
58
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
29. FRS 101 transition adjustments
The following adjustments have been applied in order to transition the Company’s balance sheet and profit and
loss account in accordance with the requirements of FRS 101 with effect from 1 January 2013 as described in
Note 1 'Principal Accounting Policies'.
Balance Sheet
as at 31 December 2013
As originally Transition
reported to FRS 101
2013
$ Million
Assets
Financial assets at amortised cost
- cash at bank and in hand
- collateralised financing transactions
Financial assets classed as held for trading
- derivatives
- inventory
- financial assets designated at fair value through profit or loss
Financial assets classed as available for sale
Net pension asset
Other assets
Total Assets
Liabilities and Equity
Financial liabilities at amortised cost
- bank loans and overdrafts
- collateralised financing transactions
Financial liabilities classed as held for trading
- derivatives
- securities sold but not yet purchased
- financial liabilities designated at fair value through profit or loss
Other liabilities
Subordinated loans
Total Liabilities
Capital and reserves
Called up share capital
Capital reserve
Profit and loss account
Shareholders' funds
Total Liabilities and Shareholders' Funds
59
2013
$ Million
2,805
50,659
Adjusted for
FRS 101
2013
$ Million
2,805
50,659
77,648
41,926
48,215
50
103
12,983
5,901
115
5,055
83,549
41,926
48,215
50
218
18,038
234,389
11,071
245,460
5,881
38,244
79,999
29,429
49,230
14,652
4,200
221,635
5,881
38,244
5,087
11,033
85,086
29,429
49,230
20,598
4,200
232,668
1,500
9,989
1,265
38
1,500
9,989
1,303
12,754
38
12,792
234,389
11,071
245,460
5,946
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
29. FRS 101 transition adjustments (continued)
Balance Sheet
as at 31 December 2014
As originally Transition
reported to FRS 101
2014
$ Million
Assets
Financial assets at amortised cost
- cash at bank and in hand
- collateralised financing transactions
Financial assets classed as held for trading
- derivatives
- inventory
- financial assets designated at fair value through profit or loss
Financial assets classed as available for sale
Net pension asset
Other assets
Total Assets
Liabilities and Equity
Financial liabilities at amortised cost
- bank loans and overdrafts
- collateralised financing transactions
Financial liabilities classed as held for trading
- derivatives
- securities sold but not yet purchased
- financial liabilities designated at fair value through profit or loss
Other liabilities
Subordinated loans
Total Liabilities
Capital and reserves
Called up share capital
Capital reserve
Profit and loss account
Shareholders' funds
Total Liabilities and Shareholders' Funds
60
2014
$ Million
1,571
48,764
Adjusted for
FRS 101
2014
$ Million
1,571
48,764
203,894
45,133
44,290
40
97
21,498
9,489
405
8,169
213,383
45,133
44,290
40
502
29,667
365,287
18,063
383,350
10,104
39,025
203,375
32,754
40,193
22,895
4,080
352,426
10,104
39,025
8,384
17,789
211,759
32,754
40,193
32,300
4,080
370,215
1,500
9,989
1,372
274
1,500
9,989
1,646
12,861
274
13,135
365,287
18,063
383,350
9,405
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
29. FRS 101 transition adjustments (continued)
Profit and Loss Account
for the year ended 31 December 2014
As originally Transition to
reported
FRS 101
Adjusted for
FRS 101
$ Million
$ Million
$ Million
Commission income and fees
Net dealing income
2,195
731
(6)
2,195
725
Interest receivable
Interest payable
773
(638)
Gross profit
3,061
(6)
3,055
(2,955)
4
3
6
(2,955)
10
3
113
0
113
(3)
76
73
110
76
186
Operating expenses
Other finance income
Other income
Operating profit on ordinary activities before taxation
Tax on profits on ordinary activities
Profit for the financial year
773
(638)
Under FRS 101 the full surplus attributable to the Company's defined benefit pension scheme is recognised
before any tax impact on the Company's balance sheet (2013: $115 million, 2014: $405 million). A deferred tax
liability is recognised on the additional pension surplus, with a corresponding deferred tax asset also recognised
up to the amount of the deferred tax liability. The deferred tax asset is expected to unwind at the same time as
the taxable profit arising from the unwinding of the deferred tax liability, and will offset it. Movements on the
deferred tax asset will impact the profit and loss account (2014: $76 million) with movements on the deferred tax
liability being reflected in the Statement of Comprehensive Income.
The Company is required to recognise on its balance sheet the fair value of positive and negative derivative
assets for which it provides a clearing service on behalf of clients (2013: assets of $5,901 million, liabilities of
$5,087 million; 2014: assets of $9,489 million, liabilities of $8,384 million). The collateral held or posted
against these derivative assets and liabilities is recognised within Other Liabilities (2013: $5,869 million, 2014:
$9,221 million) and Other Assets (2013: $5,035 million, 2014: $8,116 million).
CGML has reinstated a liability that had previously been derecognised, as it was considered that the probability
of having to settle the liability was very low. Under FRS 101 the liability may not be derecognised until it is
extinguished. The effect of reinstating the liability is reflected in retained earnings (2013: $77 million, 2014: $83
million) with subsequent movements being included in the profit and loss account (2014: loss of $6 million).
61
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management
Risk Management Overview and Culture
Effective risk management is of primary importance to the Company and accordingly, the Company seeks to
maintain a comprehensive risk management process. The Company utilises Citi’s risk management model and
organisation, with its multi-dimensional risk oversight and its people, processes and systems to ensure robust
oversight of entity risks. In addition, the Company has entity specific risk management and controls, to ensure
local challenge to risk-taking and to ensure that Citi’s approach is appropriate for the Company.
The activities that the Company engages in, and the risks those activities generate, must be consistent with the
underlying commitment to the principles of “Responsible Finance”.
“Responsible Finance” denotes conduct that is transparent, prudent and dependable, and that delivers better
outcomes for Citi’s clients and society. In order to achieve these principles, Citi establishes and enforces
expectations for its risk-taking activities through its risk culture, through defined roles and responsibilities and
through its supporting policies, procedures and processes that enforce these standards.
While the management of risk is the collective responsibility of all employees, Citi and the Company assign
accountability into three lines of defence:
•
•
•
first line of defence: the business owns all of its risks and is responsible for the management of those
risks;
second line of defence: the Company’s control functions (e.g., risk, finance, compliance, etc.) establish
standards for the management of risks and effectiveness of controls; and
third line of defence: Citi’s internal audit function independently provides assurance, based on a riskbased audit plan, that processes are reliable and governance and controls are effective.
Significant focus has been placed on fostering a risk culture based on a policy of taking intelligent risk with shared
responsibility, without forsaking individual accountability:
•
•
•
taking intelligent risk means that the Company must identify, measure and aggregate risks and it must
establish risk tolerances based on a full understanding of concentrations and tail risk;
shared responsibility means that all individuals collectively bear responsibility to seek input and leverage
knowledge across and within the “Three Lines of Defence”; and
individual accountability means that all individuals must actively manage risk, identify issues, and make
fully informed decisions that take into account all risks to the Company.
The Company applies Citi’s global risk management framework, tailored as appropriate for the Company, based
on the following principles established by the Chief Risk Officer:
•
•
•
•
•
•
a defined risk appetite, aligned with business strategy;
accountability through a common framework to manage risks;
risk decisions based on transparent, accurate and rigorous analytics;
a common risk capital model to evaluate risks;
expertise, stature, authority and independence of risk managers; and
risk managers empowered to make decisions and escalate issues.
Reputational and Franchise Risk and New Products or Services
A Citi-wide (including an EMEA-based) Business Practices Committee (BPC) reviews practices involving
reputational or franchise issues. These committees review whether Citi’s business practices have been designed
and implemented in a way that meets the highest standards of professionalism, integrity and ethical behaviour.
Additional committees ensure that product risks are identified, evaluated and determined to be appropriate for Citi
and its customers, and safeguard the existence of necessary approvals, controls and accountabilities.
The New Product Approval Committee (NPAC) is designed to ensure that significant risks, including reputation
and franchise risks, for all new ICG products, services or complex transactions, are identified and evaluated,
determined to be appropriate, properly recorded for risk aggregation purposes, effectively controlled, and have
accountabilities in place.
62
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Reputational and Franchise Risk and New Products or Services (continued)
The Investment Products Risk (IPR) Committee oversees two product approval committees that facilitate analysis
and discussion of new retail investment products and services created and/or distributed by Citi. The
Manufacturing Product Approval Committee (MPAC) is responsible for reviewing new or modified products or
transactions created by Citi that are distributed to individual investors as well as third-party retail distributors. The
Distribution Product Approval Committee (DPAC) approves new investment products and services, including
those created by third parties as part of Citi’s “open architecture” distribution model, before they are offered to
individual investors via Citi distribution businesses (e.g. private bank, consumer, etc.).
Risk Appetite Framework
The Company’s risk appetite framework includes principle-based qualitative boundaries to guide behaviour and
quantitative boundaries within which the Company will operate, focusing on ensuring it has sufficient capital
resources for the risks to which the Company could be exposed. The Company’s Board of Directors sets the
Company’s risk appetite, and incorporates management judgement regarding prudent risk taking and growth in
light of the business environment within which the Company operates. The Company’s Board of Directors, with
input from senior Citi and Company management, sets overarching expectations and holds management
accountable for ensuring the risk profile remains within this appetite.
CGML Risk Committee
The CGML Risk Committee assists the Board in fulfilling its responsibility for oversight of the risks the Company
faces including market, liquidity, credit, operational and certain other risks; their alignment with the Company’s
strategy, capital adequacy and the macroeconomic environment; and the development of a strategy to manage
these risks in line with Citi’s global risk strategy. The CGML Risk Committee meets not less than quarterly.
Managing Risk across Businesses, Regions and Products
Citi manages risk across three dimensions: businesses, regions and critical products. The Company’s risk
management framework aims to recognise the range of the Company’s global business activities by combining
corporate oversight with independent risk management functions within each business.
Each of the major business groups has a Business Chief Risk Officer who is the focal point for risk decisions (such
as setting risk limits or approving transactions) in the business. The independent risk managers at the business
level are responsible for establishing and implementing risk management policies and practices within their
business, for overseeing the risk in their business, and for responding to the needs and issues of their business.
This ensures the active management of the principal risks of the Company.
Regional Chief Risk Officers are accountable for the risks in their geographic area and are the primary risk contact
for the regional business heads and local regulators. In addition, Product Chief Risk Officers are accountable for
those areas of critical importance to Citi and are accountable for the risks within their specialities across
businesses and regions, such as real estate and fundamental credit. The Product Risk Officers serve as a resource
to the Chief Risk Officer, as well as enabling the Business and Regional Chief Risk Officers to focus on the dayto-day management of risks and respond in a timely manner to business needs. Risk management within the
Company is overseen by the Regional Risk Manager along with the managers for the different risk types within
the region, such as market risk, liquidity risk, credit risk and operational risk.
The Business Management team within the Citi risk organisation seek to ensure that the risk organisation has the
appropriate infrastructure, processes and management reporting capabilities, and includes the following groups:
• the risk capital group, which continues to enhance the risk capital model and its consistency across all
business activities;
• the risk architecture group, which seeks to ensure integrated systems and common metrics, and thereby
facilitates aggregation and stress testing of exposures across the institution;
• the operational risk management group, which focuses on improving the effectiveness of existing controls
while increasing accountability and eliminating redundancy; and
• the office of Strategic Regulatory Relationships and the Chief Administrative Officer, which focuses on
critical regulatory relationships as well as risk communications.
63
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Risk Aggregation and Stress Testing
The Citi Chief Risk Officer is responsible for monitoring and controlling major risk exposures and concentrations
across the organisation. This means aggregating risks, within and across businesses, as well as subjecting those
risks to alternative stress scenarios in order to assess the potential economic impact they may have on Citi. This
aggregation is also performed at a Company level.
Stress tests are undertaken across Citi and the Company and cover mark-to-market, available-for-sale, and
amortised cost portfolios. These firm-wide stress reports seek to measure the potential impact to Citi, the Company
and its component businesses, of stresses such as the risk of very large movements in a number of key risk factors
(e.g. interest rates, credit spreads), as well as the potential impact of a range of historical and hypothetical forwardlooking systemic stress scenarios.
Supplementing the stress testing described above, risk management works with input from the businesses and
finance to provide periodic updates to senior management and the Board of Directors on significant potential
exposures across the Company arising from risk concentrations, financial market participants and other systemic
issues. These risk assessments are forward-looking exercises, intended to inform senior management and the
Board of Directors about the potential economic impacts to the Company that may occur, directly or indirectly, as
a result of hypothetical scenarios, based on judgmental analysis from independent risk managers.
The stress testing and risk assessment exercises are a supplement to the standard limit-setting and risk capital
exercises described later in this section, as these processes incorporate events in the marketplace and within the
Company that impact the firm’s view of the form, magnitude, correlation and timing of identified risks that may
arise. In addition to enhancing awareness and understanding of potential exposures within the Company, the
results of these processes serve as the starting point for risk management and mitigation strategies.
Market Risk
Market risk is the risk to earnings or capital from adverse changes in market factors. Price risk losses arise from
fluctuations in the market value of trading and non-trading positions resulting from changes in interest rates, credit
spreads, foreign exchange rates, equity and commodity prices, and in their implied volatilities. The Company’s
trading results are particularly exposed to movements in these market factors.
The Company’s derivative transactions are principally in the equity, interest rate, credit and commodity markets.
Most of the counterparties to the Company’s derivative transactions are banks and other financial institutions.
Market risk is measured through a complementary set of tools, including factor sensitivity limits, Value at Risk
(VaR) and stress testing. In addition the Company has a defined risk appetite framework which is supplemented
by regular stress testing and daily monitoring against the Company’s VaR limit with monthly and quarterly
reporting to senior management and the Board of Directors respectively.
Each business that uses the Company in client facing transactions is required to establish, with approval from the
independent market risk management function, a market risk limit framework for identified risk factors. This
framework must clearly define approved risk profiles, include permitted product lists, and must remain within the
parameters of Citi’s overall risk appetite. The established limits are monitored by market risk management.
In all cases, the businesses are ultimately responsible for the market risks taken and for remaining within their
defined limits. Management of this process begins with the employees who work most closely with the Group’s
customers, products and markets and extends up to the senior executives who manage these businesses with a
complementary aggregation up to the country level.
The Company’s VaR reports are circulated daily for monitoring of: (i) the VaR usage against the overall VaR
limit; (ii) the standalone VaR by market risk factor; (iii) the component Value at Risk (CVaR) contribution to total
VaR; and (iv) the stressed VaR. As well as an overall VaR limit, the Company has factor sensitivity limits in
place for each market risk factor that are monitored daily. Factor sensitivities are defined as the change in the
value of a position for a defined change in a market risk factor (e.g. the change in the value of a Treasury bill for a
one basis point change in interest rates). It is the responsibility of each business to seek to ensure that factor
sensitivities are calculated and reported for all relevant risks taken within a trading portfolio.
64
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Market Risk (continued)
Exposure that approaches or exceeds limit or trigger levels is escalated within market risk management and to the
Company’s Market Risk Manager and Legal Entity Risk Manager, with necessary actions taken.
Where the Equities business is concerned, an ex-ante stress loss based escalation framework has been put in place
to cover all block trades, including accelerated equity offerings, equity underwritings, rights offerings and special
situation (event-driven) transactions. Transactions with estimated stress losses above certain levels require
escalation to the EMEA Chief Risk Officer, the Company’s Chief Executive Officer and to the Company’s board.
VaR Methodology
VaR estimates the potential decline in the value of a position or a portfolio, under normal market conditions, over a
specified holding period and confidence level. The VaR methodology developed and applied at Citi at a global
level is also used at subsidiary level, including the Company. The Citi standard is a one-day holding period, at a
99 per cent confidence level. The VaR methodology incorporates the factor sensitivities of the trading portfolio
and the volatilities and correlations of those factors. The Company’s VaR is based on the volatilities of, and
correlations between, a wide range of market risk factors, including factors that track the specific issuer risk in debt
and equity securities. VaR statistics can be materially different across firms due to differences in portfolio
composition, differences in VaR methodologies, and differences in model parameters. Citi believes that VaR
statistics can be used more effectively as indicators of trends in risk taking within a firm, rather than as a basis for
inferring differences in risk taking across firms.
Citi and the Company use Monte Carlo simulation, which they believe is conservatively calibrated to incorporate
the greater of short-term (most recent month) and long-term (three years) market volatility. The Monte Carlo
simulation involves approximately 300,000 market factors, making use of 180,000 time series, with market factors
updated daily and model parameters updated weekly.
VaR Limitations
Although extensive back-testing of VaR hypothetical portfolios is performed, with varying concentrations by
industry, risk rating and other factors, the VaR measure cannot necessarily provide an indication of the potential
size of loss when it occurs. Hence a varied set of factor sensitivity limits and stress tests are used, in addition to
VaR limits.
A VaR limit is in place for the Company, to ensure that any excesses are discussed and resolved between risk
officers and the business and entity management. This limit is complemented by the factor sensitivity triggers
defined above.
Although it provides a valuable guide to risk, VaR should also be viewed in the context of its limitations:
•
•
•
•
•
the use of historical data as a proxy for estimating future events may not encompass all potential events,
particularly those of an extreme nature;
the use of a one day holding period assumes that all positions can be liquidated or their risks offset in one
day. This may not fully reflect the market risk arising at times of severe illiquidity, when a one day
holding period may be insufficient to fully liquidate or hedge positions;
the use of a 99% confidence level, by definition, does not take into account losses that might occur
beyond this confidence level;
VaR is calculated on the basis of exposures outstanding at close of business and therefore does not
necessarily reflect intra-day exposures; and
VaR is unlikely to reflect loss potential on exposures that only arise under significant market movements.
Stress testing is performed on portfolios on a weekly basis to estimate the impact of extreme market movements.
Stress testing is performed on individual portfolios, as well as on aggregations of portfolios and businesses, as
appropriate. It is the responsibility of independent market risk management, in conjunction with the businesses, to
develop stress scenarios, review the output of periodic stress testing exercises, and use the information to make
judgments concerning the on-going suitability of exposure levels and limits.
65
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Market Risk (continued)
The following table summarises market risk by disclosing the Company’s average VaR during the reporting
period, together with the VaR as at 31 December, broken down into component Value at Risk (CVaR). CVaR
represents the correlation or diversification adjusted standalone VaR contribution from a particular sub-portfolio,
and to the overall 31 December VaR:
Average
As at 31 December
Peak
Average
As at 31 December
Peak
Equity
risk
Interest
rate risk
4.4
4.0
11.6
12.4
10.5
26.9
Equity
risk
Interest
rate risk
9.7
6.3
24.2
20.1
9.9
32.3
2015
$ Million
Foreign
exchange Commodity
risk
risk Credit Risk
1.8
0.4
7.6
6.0
2.3
10.1
27.2
18.3
38.7
2014
$ Million
Foreign
exchange Commodity
risk Credit Risk
risk
Overall
VaR
1.9
3.4
6.8
66
2.6
1.1
7.6
Overall
VaR
0.9
1.9
6.9
4.2
8.0
8.8
36.8
29.5
53.1
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Liquidity risk
The Company defines liquidity risk as the risk that it will not be able to meet efficiently both expected and
unexpected current and future cash flow and collateral needs without adversely affecting either daily operations or
its financial condition.
Citi operates as a centralised treasury model, where the overall balance sheet is managed by Treasury, through its
Global Franchise and Regional Treasurers. The EMEA Regional Treasurer is supported by the UK Treasurer who
is responsible for the Company’s balance sheets and liquidity profile. The UK Treasurer heads the EMEA
Markets Liquidity and Balance Sheet Management group which includes a liquidity management team responsible
for managing CGML’s liquidity on a day to day basis. The liquidity management team is specifically responsible
for the Company’s daily funding, liquidity risk management, liquidity stress testing, and provision of oversight to
the Fixed Income and Equity Finance desks (including setting and monitoring limits).
The Company adheres to the Citi Global Liquidity Risk Management Policy which requires it to define its
liquidity risk appetite and operate limit and trigger structures to ensure compliance. The Company is also required
to comply with the European Union CRD IV delegated act which sets out certain regulatory qualitative and
quantitative standards for managing liquidity. The Company’s liquidity position is calculated and reported to
senior management on a daily basis and reviewed formally by the UK ALCO committee and Board of Directors.
Funding and Liquidity Objectives
Adequate liquidity and sources of funding are essential to Citi’s businesses. Funding and liquidity risks arise from
multiple factors, many of which are beyond Citi’s control, such as disruptions in the financial markets, changes in
key funding sources, credit spreads, alterations to Citi’s credit ratings and political and economic conditions across
the globe.
Citi’s funding and liquidity objectives are to maintain adequate liquidity to:
(i)
(ii)
(iii)
(iv)
fund its existing asset base;
grow its core businesses;
maintain sufficient excess liquidity, structured appropriately, to enable operation under a wide
variety of market conditions, including both short and long term market disruptions; and
satisfy regulatory requirements.
These Citi-wide primary liquidity objectives are also applied at the individual Company level.
CGML funds itself through a combination of secured financing, equity, long term subordinated debt, and long
term and short term unsecured intercompany borrowings. Long term structural liquidity is funded through
subordinated debt, stockholder’s equity and intercompany loans with a maturity of greater than a year. Short- term
intercompany loans are used to manage day to day funding fluctuations.
Citigroup employs a single face to the market approach for long term benchmark unsecured borrowing. Structural
liquidity is originated primarily through issuance of long term debt by the parent company, Citigroup Inc. and is
passed down stream to CGML and other broker dealer entities via explicit intercompany lending transactions or
investment in subsidiaries.
In order to meet its liquidity stress testing requirements and liquidity ratio hurdles, the Company holds a pool of
liquid assets including highly liquid government bonds. This liquidity pool is reviewed on a daily basis and
adjusted as necessary to maintain CGML’s key liquidity ratios and metrics. Increases to the liquidity pool are
typically funded through increased unsecured long term borrowing from CGML’s parent.
Liquidity Risk Management Framework
The Company’s liquidity risk management framework is defined by Citi's Global Liquidity Risk Management
Policy (Policy). The Policy establishes the standards for defining, measuring, limiting and reporting liquidity risk
to ensure the transparency and comparability of liquidity risk taking activities and the establishment of an
appropriate risk appetite.
67
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Liquidity risk (continued)
The Policy is collectively owned by the Citi Treasurer and the Citi Chief Risk Officer and is applicable to
Citigroup Inc. and its consolidated subsidiaries. The Policy and any material amendments to it must be approved
by the Citigroup Board of Directors.
As a part of the global framework, the Company is required to prepare a detailed plan of its liquidity position
which also considers the forecast of future business activities. This plan is called the Funding and Liquidity Plan
(FLP) and it addresses strategic liquidity issues and establishes the parameters for identifying, measuring,
monitoring and limiting liquidity risk and sets forth key assumptions for liquidity risk management.
In short, the FLP is a strategic implementation of the global framework which is divided into the following
components:
• Contingency Funding Plan (CFP);
• Intra-day liquidity risk management plan; and
• Balance Sheet Funding and Liquidity Plan.
The Company’s FLP is prepared annually and the liquidity profile is monitored on an on-going basis and reported
daily. Liquidity risk is monitored using various ratios and limits in accordance with the Liquidity Risk
Management Policy for Citi. The FLP includes analysis of the balance sheet as well as of the economic and
business conditions impacting the major operating subsidiaries in the UK. As part of the FLP, liquidity limits,
liquidity ratios and assumptions for periodic stress tests are reviewed and approved.
Funding and Liquidity Risk Governance
The UK Asset-Liability Committee (ALCO) is the primary governance committee for CGML’s balance sheet
management. Among its key responsibilities are:
•
•
•
•
•
•
•
•
Provide oversight of market and liquidity risks, transfer pricing and balance sheet management across
businesses;
Evaluation of capital adequacy, and oversight of regulatory constraints;
Oversight of balance sheet trends and mix;
Oversight of liquidity levels, structure, metrics and policies, including Contingency Funding Plans;
Review and approval of the Annual Funding and Liquidity Plan;
Management and oversight of local regulatory requirements related to the balance sheet, including
liquidity and market risk regulations;
Adherence to capital standards and determination of dividend repatriation recommendations; and
Assessment of market conditions and macro-economic environment.
Citi’s UK management team and UK ALCO monitor changes in the economic environment and any corresponding
impact to the asset quality on Citi’s local and consolidated balance sheets including CGML. The UK ALCO also
functions as a forum for senior management to ensure adherence to corporate wide policies and procedures,
regulatory requirements and rating agency commitments.
The membership of the UK ALCO includes the UK Citi Country Officer (CCO), CGML Chief Executive Officer
(CEO) (chair), UK Chief Financial Officer (CFO), UK Treasurer, EMEA Regional Treasurer, UK Legal Entity
Risk Manager, Independent Treasury Market Risk, Financing Desk Heads and other key business and functional
heads.
The UK ALCO committee meets on a monthly basis. CGML’s non-executive directors are standing invitees and
regularly attend UK ALCO meetings to provide additional review and challenge.
External Liquidity Risk Management Metrics
From a regulatory perspective, the Company monitors its liquidity position against the European Commission
liquidity coverage ratio (LCR) and the PRA’s Individual Liquidity Guidance (ILG) which advises entities of the
amount and quality of high quality liquid assets which it considers appropriate, having regard to the liquidity risk
68
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Liquidity risk (continued)
profile of an entity. Prior to 1 October 2015, the ILG referenced liquidity metrics reported under BIPRU
(Prudential sourcebook for
Banks, Building Societies and Investment Firms) whereas from 1 October 2015 the ILG references the LCR and
also covers liquidity risks to which the Company is exposed to but which are not captured by the LCR.
The Company also monitors its position against the Net Stable Funding Ratio (NSFR) adopting Basel III
guidelines. Final European Commission regulatory rules and standards for the NSFR have not yet been set.
The LCR is designed to promote short term resilience of an entity’s liquidity risk profile by ensuring that it has
sufficient high quality liquid assets to survive an acute stress scenario lasting 30 days. The NSFR has a time
horizon of one year and has been developed to promote a sustainable maturity structure of assets and liabilities.
The key regulatory liquidity metrics used by the Company are summarised below:
Stress Test
Time Horizon
Calculation
ILG
3 months
Liquid assets to net cash
outflows
LCR
30 days
Liquid assets to net cash
outflows
NSFR
1 year
Stable funding resources to stable
funding requirements
Throughout the year the Company was in compliance with its ILG and LCR regulatory requirements.
Internal Liquidity Risk Management Metrics
From an internal perspective, the Company uses two stress tests to monitor its liquidity position. The first stress
test covers a 12 month survival horizon in a highly stressed market disruption scenario (S2) whilst the other covers
30 days in a severely stressed market disruption scenario with a loss of confidence in Citi (LCR Prime):
Highly Stressed Market Disruption Scenario (Referred to as S2) – This scenario assumes market, credit and
economic conditions are moderately to highly stressed with potential further deterioration covering a one year
period. Access to the unsecured wholesale funding market is severely constrained and assumed to be unavailable.
Access to the wholesale secured financing markets is also assumed to be constricted with the level of access based
on the underlying collateral type. Potential changes in counterparty haircut requirements and other relevant
market factors are considered when determining expected liquidity value; the severity of these impacts takes into
account the quality of the underlying asset, as well as the depth of the relevant market. Other than highly liquid
assets, access should be primarily limited to the rollover of existing activity.
As a consequence of these conditions, Citi and CGML’s long term ratings are downgraded one notch from their
current levels. Scenario modelling is designed to reflect these conditions, and where appropriate, potential
operational, collateral and counterparty constraints are factored in.
Loss of Confidence/Severe Market Disruption Scenario (Referred to as LCR Prime) – This is a stressed cash flow
used to measure the short term (30 calendar days) survival horizon under a severe loss of confidence (idiosyncratic
event) and severe market disruption scenario. The LCR Prime metric is aligned to the LCR Regulatory
framework, but utilises internal assumptions which are most appropriate for managing short term liquidity risk.
Overall, the LCR Prime stress test is more severe than S2, with both Citigroup and CGML assumed to experience
a three-notch downgrade to their long term ratings and a one-notch downgrade to their short term ratings.
Additionally, CGML’s ability to roll over existing secured financing transactions is limited to only the highest
quality of securities. This is coupled with the more conservative stress assumptions relating to the Prime
Brokerage business and loss of liquidity from its top 5 liquidity providers.
69
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Liquidity risk (continued)
These metrics are calculated and monitored on a universal currency basis and in the most material currencies that
constitute CGML’s balance sheet (EUR, GBP and USD).
Stress Test
Time Horizon
Calculation
LCR Prime
30 days
Liquid assets to net cash outflows
S2
1 year
Liquid assets to net cash outflows
Both LCR Prime and S2 internal liquidity metrics were in surplus as at 31 December 2015.
Liquidity Stress Testing and Scenario Analysis Framework
The Company’s use of stress testing and scenario analysis is intended to quantify the potential impact of a liquidity
event on the Company’s balance sheet and liquidity position, and to identify viable funding alternatives that can be
utilised. These scenarios include:
• potential significant changes in key funding sources;
• market triggers (such as credit rating downgrades);
• uses of funding; and
• political and economic conditions, including standard and stressed market conditions as well as
Company-specific events.
Some tests span liquidity events over a full year while others may cover a more intense shock over a shorter period
such as 30 days. These tests can identify potential mismatches between liquidity sources and uses over a variety
of time horizons, and liquidity limits are set accordingly. The stress tests and potential mismatches may be
calculated with varying frequencies, with several important tests performed daily. They are also performed for the
material currencies that constitute CGML’s balance sheet.
CGML’s stress testing framework ensures that sufficient contingent liquidity is maintained (the liquidity pool of
highly liquid assets mentioned above) after considering the impact of key liquidity risks including:
•
•
•
•
•
•
•
restriction of wholesale secured and unsecured funding through widening of haircuts, reluctance of
counterparties to roll maturing transactions or lack of availability for financing for certain asset classes;
intraday liquidity risk where correspondent banks and securities settlement agents or depositories
withdraw or restrict secured or unsecured intraday credit facilities upon which the Company relies to
make payments and settle its transactions;
cross currency liquidity shortfalls arising from cash flow mismatches within a particular currency;
potential outflows from off balance sheet activities such as security versus security transactions, letters of
credit or committed facilities (e.g. underwriting);
loss of liquidity from derivatives transactions due to asymmetric margining terms, legally agreed
conditions such as rating downgrade triggers, margin calls due to large market revaluations or clearing
house/exchange action, novation of liquidity accretive contracts away from the Company or increased
operational diligence of certain counterparties;
recognition that the Company may continue to provide funding to certain customers to preserve its
franchise despite there being no legal obligation to do so; and
incremental funding requirements of the Company’s Prime Brokerage and Delta One businesses from
loss of internal coverage and cross funding, inability to roll repo or increased repo haircuts.
Given the range of potential stresses, Citi maintains a series of contingency funding plans on a consolidated basis
as well as for individual entities, including the Company. The Contingency Funding Plan (CFP) is a key
component of the Global Framework and it incorporates the management plan of contingent actions in the event of
crisis. The Company’s CFP includes the “playbook” for addressing liquidity and funding challenges in crisis
situations, triggers, procedures, roles and responsibilities, communication plan and key contact list to manage a
liquidity event. The CFP defines a crisis committee responsible for decision making and execution of contingency
plans to address both short-term and longer term disruptions in funding sources.
70
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Liquidity risk (continued)
The following table assigns the Company’s assets and liabilities to relevant maturity groupings based on the
remaining period from the balance sheet date to the contractual maturity date. Note that in managing liquidity
risk, management uses certain assumptions based on a combination of contractual and behavioural maturity
profiles which differ from the contractual maturity dates shown below.
Total
$ Million
On
demand
$ Million
Cash
Inventory
Derivatives
Collateralised financing
transactions
Cash collateral pledged
Trade debtors
Other debtors
Fixed asset investments
1,939
41,583
162,450
333
41,583
162,450
1,606
-
93,461
22,965
59,005
Total financial assets
322,513
227,331
Total
$ Million
On
demand
$ Million
11,995
1,293
-
75,796
18,953
45,121
161,858
18,081
28,996
161,858
-
18,081
28,996
6,433
1,051
-
31 December 2015
Bank loans and overdrafts
Collateralised financing
transactions
Derivatives
Cash collateral held
Securities sold but not yet
purchased
Trade creditors
Other creditors and accruals
Subordinated loans
Total financial liabilities
Net liquidity gap
Cumulative liquidity gap
15,515
7,420
114
31
6,433
1,051
5,437
3 months
& less 3 - 12 months
$ Million
$ Million
More than
5 years
$ Million
-
-
376
807
-
31
10,308
376
838
3 months
& less 3 - 12 months
$ Million
$ Million
1 – 5 years
$ Million
More than
5 years
$ Million
5,327
2,061
3,314
10,861
861
-
-
-
-
-
-
-
-
-
-
15,515
7,420
114
83,660
-
-
1 – 5 years
$ Million
10,308
-
5,437
309,647
182,104
99,682
16,188
2,922
8,751
12,866
45,227
(16,022)
(5,880)
(2,546)
(7,913)
45,227
29,205
23,325
20,779
12,866
71
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Liquidity risk (continued)
Total
$ Million
On
demand
$ Million
Cash
Current asset investments
Derivatives
Collateralised financing
transactions
Cash collateral pledged
Trade debtors
Other debtors
Fixed asset investments
1,571
45,133
213,383
111
45,133
213,383
1,460
-
-
-
-
93,054
28,220
61,287
2,820
264
463
19,598
9,459
257
40
-
19,598
9,459
257
-
-
-
40
Total financial assets
382,495
286,847
92,061
2,820
264
503
Total
$ Million
On
demand
$ Million
31 December 2014 *
Bank loans and overdrafts
Collateralised financing
transactions
Derivatives
Cash collateral held
Securities sold but not yet
purchased
Trade creditors
Other creditors and accruals
Subordinated loans
Total financial liabilities
Net liquidity gap
Cumulative liquidity gap
3 months
& less
$ Million
3 months
& less
$ Million
3 - 12
months
$ Million
3 - 12
months
$ Million
1 – 5 years
$ Million
1 – 5 years
$ Million
More than
5 years
$ Million
More than
5 years
$ Million
10,104
1,310
3,922
841
2,675
1,356
79,218
19,617
51,282
7,252
1,067
-
211,759
24,625
211,759
24,625
-
-
-
32,754
-
32,754
-
-
-
6,360
1,043
4,080
-
6,360
1,043
-
-
-
4,080
369,943
232,686
119,986
8,093
3,742
5,436
54,161
(27,925)
(5,273)
(3,478)
(4,933)
54,161
26,236
20,963
17,485
12,552
12,552
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
72
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Liquidity risk (continued)
The table below assigns the Company’s liabilities to relevant maturity groupings based on the remaining
contractual future undiscounted cash flows up to maturity. The amounts disclosed in the table are the contractual
undiscounted cash flows, whereas the Company manages the liquidity risk based on a combination of contractual
and behavioural maturity profiles. Derivatives are excluded from the table because they are not held for settlement
over the period of contractual maturity.
31 December 2015
Contractual
value
$ Million
On
demand
$Million
3 months
& less
$ Million
3 - 12
months
$ Million
1 – 5 years
$ Million
More than
5 years
$ Million
Subordinated loans
6,220
-
23
70
373
5,754
Total financial liabilities
6,220
-
23
70
373
5,754
31 December 2014
Contractual
value
$ Million
On
demand
$Million
3 months
& less
$ Million
3 - 12
months
$ Million
1 – 5 years
$ Million
More than
5 years
$ Million
Subordinated loans
4,610
-
14
42
225
4,329
Total financial liabilities
4,610
-
14
42
225
4,329
Credit risk
Credit risk is the potential for financial loss resulting from the failure of a borrower or counterparty to honour its
financial or contractual obligations.
Credit risk arises in many of the Company’s business activities, including:
•
•
•
•
•
•
sales and trading;
derivatives;
securities transactions;
settlement;
when Citi acts as an intermediary on behalf of its clients and other third parties; and
when acting as underwriter or within a capital raising capacity.
Credit risk arises from the Company’s activities in OTC derivatives markets, repurchase and reverse repurchase
agreements as well as securities borrowing and lending transactions and margin lending. The Company’s credit
exposure on derivatives and foreign exchange contracts is primarily to professional counterparties in the global
financial sector, including banks, investment banks, hedge funds, insurance companies and asset management
companies.
The Company enters into derivatives principally to enable customers to transfer, modify or reduce their credit,
equity, interest rate and other market risks. In addition, the Company uses derivatives, and other instruments, as
an end user to manage the risks to which the Company is exposed.
Credit risk also arises from settlement and clearing activities, when the Company transfers an asset in advance of
receiving its counter-value or advances funds to settle a transaction on behalf of a client. Concentration risk,
within credit risk, is the risk associated with having credit exposure concentrated within a specific client, industry,
region or other category.
Credit risk is one of the most significant risks the Company faces as an institution. As a result, Citi has a wellestablished framework in place for managing credit risk across all businesses. This includes a defined risk
appetite, credit limits and credit policies, both at the business level as well as at the firm-wide level. Citi’s credit
risk management also includes processes and policies with respect to problem recognition, including “watch lists,”
portfolio review, updated risk ratings and classification triggers. The framework is supplemented by regular stress
testing and monitoring of exposures, with monthly and quarterly reporting to the senior management and the
Board of Directors respectively.
73
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Credit risk (continued)
The credit process is based on a series of fundamental policies, including:
•
•
•
•
•
joint business and independent risk management responsibility for managing credit risks;
a single centre of control for each credit relationship to coordinate credit activities with that client;
a requirement for a minimum of two authorised credit officer signatures on extensions of credit, one of
which must be from a sponsoring credit officer in the business and the other from a credit officer in
independent credit risk management;
consistent risk rating standards, applicable to every Citi obligor and facility; consistent standards for
credit origination documentation and remedial management; and
portfolio limits to ensure diversification and maintain risk/capital alignment.
Large exposure limit reports are circulated daily that show the Company’s exposure to various counterparty
groupings as a proportion of its own funds. Regulations require that the Company does not exceed specified limits
for its non trading book exposures. Within a certain percentage below the maximum permitted level, the
Regulatory Reporting group conducts initial analysis and provides a breakdown of exposures to credit risk
management. At or above the maximum permitted level, the credit risk management team takes action and
escalates to the front office in order to reduce exposure to that counterparty and thereby bring exposure back
within permitted levels. Similar reporting is carried out against internal limits for the trading book exposures.
Wrong-way risk is an aggravated form of concentration risk and arises when there is a strong correlation between
the counterparty’s probability of default and the mark-to-market value of the underlying transaction. Citi uses a
range of procedures to monitor and control wrong-way risk, including requiring entities to obtain prior approval
before undertaking wrong-way risk transactions outside pre-agreed guidelines. This is monitored at a Company
level, and includes circulation of a monthly report that identifies CDS based, OTC or securities finance
transactions (SFT) that generate specific wrong-way risk. Wrong-way risk is mitigated through the use of
enforceable netting agreements and margining.
The Company seeks to restrict its exposure to credit losses by entering into master netting arrangements with most
counterparties with which it undertakes a significant volume of transactions. Master netting arrangements do not
generally result in an offset of balance sheet assets and liabilities, as transactions are usually settled on a gross
basis. However, the credit risk associated with favourable contracts is reduced by a master netting arrangement to
the extent that if an event of default occurs, all amounts with the counterparty are terminated and settled on a net
basis. Many of these arrangements also provide for the calling and posting of variation margin or collateral,
further reducing the Company’s exposures. The internal measurement of exposure on each credit facility takes
into account legally enforceable netting and margining arrangements – both in terms of current exposure and in
terms of the simulated calculation of potential future exposure.
74
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Credit risk (continued)
The following table presents the maximum exposure to credit risk, before taking account of any collateral held or
other credit enhancements (where such credit enhancements do not meet offsetting requirements).
2015
Gross
exposure
Assets
Impact of
Amounts set Net exposure
master netting
off on the
agreements
balance sheet
Cash
collateral
Derivatives
183,938
(21,488)
162,450
(138,737)
SFTs
104,573
(11,112)
93,461
(14,595)
288,511
(32,600)
255,911
(153,332)
(18,081)
183,346
(21,488)
161,858
(138,737)
(15,515)
86,909
(11,112)
75,797
(14,595)
270,255
(32,600)
237,655
(153,332)
(15,515)
Amounts set Net exposure
Impact of
off on the
master netting
balance sheet
agreements
Cash
collateral
(18,081)
-
Securities Net exposure
collateral
(2,980)
2,652
(78,866)
-
(81,846)
2,652
(2,001)
5,605
Liabilities
Derivatives
SFTs
2014
Gross
exposure
Assets
-
(24,625)
(61,202)
(63,203)
5,605
Securities Net exposure
collateral
Derivatives
259,672
(46,289)
213,383
(182,811)
SFTs
105,973
(12,919)
93,054
(11,552)
365,645
(59,208)
306,437
(194,363)
(24,625)
(83,423)
4,026
258,048
(46,289)
211,759
(182,811)
(19,598)
(1,290)
8,060
92,137
(12,919)
79,218
(11,552)
(67,666)
-
350,185
(59,208)
290,977
(194,363)
(68,956)
8,060
-
(1,921)
(81,502)
4,026
-
Liabilities
Derivatives
SFTs
(19,598)
* Prior periods have been adjusted in accordance with the requirements of FRS 101 as set out in Note 29.
75
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Credit risk (continued)
The current asset investments offset amount in the above table relates to exposures where the counterparty has an
offsetting derivative exposure with the Company and a master netting agreement is in place. These amounts do
not qualify for net presentation for accounting purposes as settlement may not actually be made on a net basis.
The collateralised financing transactions offset adjustment relates to balances arising from repo and reverse repo
transactions. The offsets relate to balances where there is a legally enforceable right of offset in the event of
counterparty default and consequently a net exposure for credit risk management purposes. However as there is
no intention to settle individual transactions on a net basis under normal circumstances, they do not qualify for net
presentation for accounting purposes. Credit risk exposure is monitored on an asset basis except for positions
which are specifically collateralised, normally in the form of cash.
As at 31 December the Company’s third party credit exposure (mark to market plus potential future exposure as
determined by the Company’s internal measure) in relation to collateralised financing transactions and derivatives
was distributed as shown in the table below (these exposures do not include derivative and collateralised financing
transactions with other group undertakings). Since December 2015, CGML exposures are reported on a Global
Organisation Code (GOC) basis. This is a consistent format across corporate risk reporting at the firm. Under this
method, the amount of exposure from market-sensitive Pre-Settlement Exposure (PSE) that estimates the amount
that a counterparty may owe over the life of a transaction (or a portfolio of transactions), is calculated to a higher
degree of statistical confidence. The following percentages for CGML’s 2015 and 2014 exposures by industry
have been reflected on the same basis.
Industry
2015
%
2014
%
42.6
30.4
5.2
21.8
47.6
25.1
6.7
20.6
100
100
Commercial and universal banks
Insurance and fund management (pension funds and mutual funds)
Brokers and investment banks
Other (including Corporates, SPVs and Hedge Funds)
The credit quality of the Company’s financial assets is maintained by adherence to Citi policies on the provision of
credit to counterparties. The Company monitors the credit ratings of its counterparties with the table below
presenting an analysis of the Company's current asset investments and derivative transactions by rating agency
designation based on Standard & Poor, Moody’s and Fitch ratings as at 31 December:
Government bonds
2015
2014
Eurobonds and
corporate bonds
2015
2014
Derivatives
2015
2014
%
%
%
%
%
%
57.0
39.0
4.0
54.0
32.0
14.0
71.0
15.0
10.0
81.0
8.0
7.0
47.6
8.2
0.7
47.6
3.9
0.5
CCC or below
Central counterparty clearing house (unrated)
-
-
1.0
-
1.0
-
15.5
26.8
Unrated
-
-
3.0
3.0
28.0
21.2
100.0
100.0
100.0
100.0
100.0
100.0
AAA / AA / A
BBB
BB / B
As discussed above the maximum credit risk is mitigated through the use of collateral, netting arrangements and
the application of credit limits.
76
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Country Risk
Country risk is the risk that an event in a country (precipitated by developments within or external to that country)
will impair the value of Citi’s franchise or will adversely affect the ability of obligors within that country to
honour their obligations to Citi. Country risk events may include sovereign defaults, banking defaults or crises,
currency crises and/or political events.
The information below is based on Citi’s internal risk management measures. The country designation in Citi’s
risk management systems is based on the country to which the client relationship, taken as a whole, is most
directly exposed with regard to economic, financial, socio-political or legal risks. This includes exposure to
subsidiaries within the client relationship that are domiciled outside of the country.
Citi assesses the risk of loss associated with certain of the country exposures on a regular basis. These analyses
take into consideration alternative scenarios that may unfold, as well as specific characteristics of the Company’s
portfolio, such as transaction structure and collateral. The Company currently believes that the risk of loss
associated with the exposures set forth below is likely to be materially lower than the exposure amounts disclosed
below and is sized appropriately relative to its operations in these countries.
The sovereign entities of all the focus countries disclosed below, as well as the financial institutions and
corporations domiciled in these countries, are important clients both to the Company and to the global Citi
franchise. Citi fully expects to maintain its presence in these markets to service all of its global customers. Hence
the Company’s exposure in these countries may vary over time, based upon its franchise, client needs and
transaction structures.
The economic and fiscal situations of several European countries remained fragile in 2015, and geopolitical
tensions throughout the region, including in Russia and Greece, added to the uncertainties. Fiscal and monetary
actions, or expected actions, throughout the region further impacted the global financial markets. Concerns
relating to sovereign defaults or a partial or complete break-up of the European Monetary Union (EMU), including
potential accompanying redenomination risks and uncertainties, eventually abated somewhat in the latter half of
2015, once the EU and Greece reached agreement on the terms of the EU bail-out.
The weaker performing members of the EU (Greece, Italy, Portugal and Spain, collectively referred to as GIPS
countries) and Russia continued to be countries of particular focus for risk management during 2015.
2015
$ Millions
Greece
Italy Portugal
Spain
Russia
Total
(6)
-
121
Net current funded credit exposure
1
127
(1)
Net trading exposure
8
2,180
(18)
974
(372)
2,772
Net current funded exposure
9
2,307
(19)
968
(372)
2,893
Sovereigns
-
41
-
-
-
41
Financial institutions
-
25
-
9
-
34
Corporations
1
61
(1)
(15)
-
46
Total net current funded credit exposure
1
127
(1)
(6)
-
121
-
-
-
-
40
40
-
-
-
-
40
40
Net current funded credit exposure:
Unfunded commitments
Sovereigns
Total unfunded commitments
77
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Country Risk (continued)
2014
$ Millions
Greece
Italy Portugal
Spain
Russia
Total
-
282
8
14
44
348
Net trading exposure
45
1,308
356
1,502
(2)
3,209
Net current funded exposure
45
1,590
364
1,516
42
3,557
Sovereigns
-
177
-
-
20
197
Financial institutions
-
101
-
5
24
130
Corporations
-
5
7
8
-
20
Total net current funded credit exposure
-
283
7
13
44
347
-
-
-
-
-
-
-
-
-
Net current funded credit exposure
Net current funded credit exposure:
Unfunded commitments
Sovereigns
Total unfunded commitments
-
The exposures detailed above represent nominal levels of exposure without taking account of the benefit of any
collateral, but including the benefits of margin and credit protection. The net trading exposures are marked to
market daily, and levels of exposure vary as the positions are maintained consistent with customer needs. As
discussed above, the Company’s net exposure is significantly lower than shown in this table.
Pension Risk
The Company’s defined benefit schemes are measured on an actuarial basis, with the key assumptions being
inflation, discount rate, mortality, and investment returns. Return on assets is an average of expected returns
weighted by asset class.
Mortality assumptions are based upon the relevant standard industry and national mortality tables. Discount rates
are based on specific corporate bond indices which reflect the underlying yield curve of each scheme.
Management judgement is required in estimating the rate of future salary growth. All assumptions are unbiased,
mutually compatible and based upon market expectations at the reporting date.
Operational risk (unaudited)
Operational Risk is the risk of loss resulting from inadequate or failed internal processes, systems, or human
factors, or from external events.
It includes reputation and franchise risks associated with Citi’s business practices or market conduct. It also
includes the risk of failing to comply with applicable laws, regulations, ethical standards or Citi policies.
Operational Risk does not encompass strategic risk or the risk of loss resulting solely from authorised judgments
made with respect to taking credit, market, liquidity, or insurance risk.
The objective is to keep operational risk at appropriate levels relative to the characteristics of Citi’s businesses, the
markets in which it operates, its capital and liquidity, and the competitive, economic and regulatory environment.
Operational risk is part of the Company’s defined risk appetite framework supplemented with regular reporting
and updates to the senior management and the Board of Directors.
Citi maintains an Operational Risk Management (ORM) framework with a Governance Structure to ensure
effective management of Operational Risk across Citi. The Governance Structure presents Three Lines of Defence
as follows:
78
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Operational risk (unaudited) (continued)
•
•
•
First Line of Defence - the Business owns all risks arising from its activities, including its Operational
Risk, and is responsible for its management. For example, the operational risks of new product
strategies must be understood and addressed. The Business Senior management, in partnership with
Independent Risk Management, must determine each Business’ Key Operational Risks.
Second Line of Defence - Citi’s Independent Control Functions establish the second line of defence to
oversee and challenge the effectiveness of controls and manage operational risks. The Second Line of
Defence Control Functions include Risk Management and its Operational Risk Management (ORM)
organisation, Compliance, Finance, Human Resources, and Legal. Operational Risk Management
oversees the implementation of the ORM Framework for the management of operational risk across Citi.
Third Line of Defence - Internal Audit recommends enhancements on an ongoing basis and provides
independent assessment and evaluation.
There are five Event Types (Categories) used by Citi for categorising Operational Risk:
•
•
•
•
•
Clients, Products and Business Practices;
Execution, Delivery and Process Management;
Fraud, Theft and Unauthorised Activity;
Employment Practices and Workplace Environment; and
Physical Asset and Infrastructure.
To anticipate, mitigate and control operational risk, Citi maintains a system of policies and has established a
consistent framework for monitoring, assessing and communicating operational risks and the overall effectiveness
of the internal control environment across Citi. As part of this framework, Citi has established a Manager’s
Control Assessment (MCA) programme which helps managers to self-assess key operational risks and controls
and to identify and address weaknesses in the design and effectiveness of internal controls that mitigate significant
operational risks.
The ORM Framework establishes a foundation on which the activities of Businesses, Regions, and Functions, the
resulting operational risks, and the associated controls are identified, periodically assessed, subject to corrective
action, appropriately documented, and communicated. Specifically, the ORM Framework establishes minimum
standards for consistent identification, measurement, monitoring, reporting, and management of operational risk
across Citi.
The process established by the ORM Framework is expected to lead to effective anticipation and mitigation of
operational risk and improved operational risk loss experience and includes the following steps:
•
•
•
•
•
•
Identify and assess Key Operational Risks (KOR);
Design controls to mitigate identified risks;
Establish Key Risk Indicators (KRI);
Implement a process for early problem recognition and timely escalation;
Produce comprehensive operational risk reporting; and
Ensure that sufficient resources are available to actively improve the operational risk environment and
mitigate emerging risks.
As new products and business activities are developed, processes are designed, modified or sourced through
alternative means and operational risks are considered.
In addition, Operational Risk Management, within Citi’s Franchise Risk and Strategy group, proactively assists the
businesses, operations and technology and the other independent control groups in enhancing the effectiveness of
controls and managing operational risks across products, business lines and regions, and facilitates the
management of operational risk at a Citi and Company level.
Measurement
To support advanced capital modelling and management, each business is required to capture relevant operational
risk event information. An enhanced version of the Citi risk capital model for operational risk has been developed
79
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Operational risk (unaudited) (continued)
and applied across the major business segments. The PRA has approved this model, including the associated
capital allocation, for use within the Company as an “Advanced Measurement Approach”. It uses a combination
of internal and external loss data to support statistical modelling of capital requirement estimates, which are then
adjusted to incorporate qualitative aspects of the operational risk and control environment.
To enhance its operational risk management the Company has implemented a forward looking scenario analysis to
identify and quantify emerging operational risks, through a systematic process of obtaining opinions from business
managers and risk management experts to devise reasoned assessments of the likelihood and loss impact of
plausible, high severity operational risk losses. This development has been integrated into the operational risk
capital assessment for the Company.
Key operational risks identified for CGML include those set out below.
Unauthorised Trading Risk / Fraud
The risk of unauthorised trading and P&L manipulation is a key risk for CGML. A number of initiatives are
ongoing to enhance Citi’s rogue trading prevention and detection controls framework. These include the
implementation of consistent Markets-wide controls, designed to identify and prevent unauthorised trading in the
Markets business and Corporate Treasury.
Cyber and Data Protection Risk
The cyber security threat landscape is rapidly evolving with increasingly sophisticated attacks for gain (e.g. denial
of service, account takeover) on Citi, our clients and third-party applications. Citi’s Information Security
programme strategy is built on a deep understanding of the threat environment through the work of the Global
Information Security (GIS) Cyber Intelligence Centre (CIC). External benchmarks indicate that Citi appears to be
well placed to deal with today’s threat, but due to the ever-changing evolution of the threat landscape, Citi
continues to invest in its identification, prevention and detection capabilities.
Conduct Risk
Conduct risk is the risk that Citi’s employees or agents may – intentionally or through negligence – harm
customers, clients, or the integrity of the markets, and thereby the integrity of the Company. Conduct risk spans
all conduct and behaviour at the Company. Citi’s exposure to conduct risk resulted in the issuance of a Citi-wide
Conduct Risk Policy which sets out a framework through which Citi manages, minimises, and mitigates its
significant conduct risks, and describes the responsibilities of each of the three lines of defence for complying with
the policy.
Client Assets Sourcebook (CASS) Non-Compliance Risk
The FCA’s Client Assets Sourcebook (CASS) sets out the requirements with which Companies must comply when
holding or controlling client money and safe custody assets. The EU Directive covering the protection of client
assets is contained in The Markets in Financial Instruments Directive (MiFID) and enacted through UK legislation
by rules implemented by The Financial Conduct Authority (FCA). These rules are designed to help ensure that
clients’ assets are protected by being held separately from the Company’s own and returned to clients within a
reasonable timeframe in the event of a Company’s failure. The legislative framework also has rules that prescribe
requirements for organisational arrangements, controls and governance. Citi has a Client Asset Oversight Officer
whose function it is to oversee the operational effectiveness of the Company’s systems and controls, designed to
achieve compliance with the regulatory requirements and who reports to the Board on this function. Citi continues
to build and enhance its client asset control environment, including the operation of a governance structure.
Anti-Money Laundering and Sanctions Risk
Local and international Anti-Money Laundering (AML) and Sanctions requirements impact the activities carried
out by the Company and its clients. Following the development of Sectoral Sanctions to address the political
situation in Ukraine, Citi has developed an enhanced control infrastructure around activities that may be affected
80
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Operational risk (unaudited) (continued)
by applicable Sanctions regimes. Regulatory requirements concerning AML controls continue to focus
particularly on customer due diligence and suspicious activity monitoring, and Citi continues to implement
enhancements in these areas.
Regulatory risk and developments
Dodd Frank Act
The Dodd–Frank Wall Street Reform and Consumer Protection Act and the Wall Street Transparency and
Accountability Act (together commonly referred to as the Dodd-Frank Act) introduced an array of new regulations
in respect of financial instruments, and the activities of major institutions transacting these products. These
included:
•
•
•
•
•
•
registration and regulatory requirements for swap dealers;
an enhanced risk management framework for swaps;
business conduct rules applicable when transacting swaps with certain types of counterparties;
rules on mandatory clearing and trade execution of certain swaps;
application of initial and variation margin rules for uncleared swaps; and
a new regulatory and compliance regime relating to proprietary trading and certain relationships with, and
interests in, covered funds.
Financial intermediaries that transact above certain thresholds with U.S. counterparties (or counterparties with US
originated guarantees) were required to register with the Commodity Futures Trading Commission (CFTC). The
Directors and senior management of the Company accordingly elected to register the Company as a Swap Dealer,
and the Company was provisionally registered by the CFTC as a non-US Swap Dealer in October 2013. A
consequence of registering as a Swap Dealer is increased regulatory oversight by the CFTC and enhanced
compliance obligations. 2015 represented the second full year of the Company operating as a CFTC-registered
non-US Swap Dealer for purposes of the Dodd-Frank Act Title VII. In addition, the Volcker Rule (part of DoddFrank Title VI) finalised by US Regulators in December 2013 and became effective for compliance from July
2015, applies to Citigroup globally including activity undertaken by CGML.
In December 2013 the CFTC granted limited relief from certain requirements under the Dodd-Frank Act for EUbased Swap Dealers, to the extent that Swap Dealers comply with comparable regulatory obligations under
European law. The Company elected to take advantage of certain elements of this relief. Whilst this CFTC relief
has, to some extent, reduced the compliance burden of the Dodd-Frank Act upon the Company, it continues to be
subject to significant aspects of the Dodd-Frank Act. A governance structure was implemented to assist the Board
of Directors in overseeing ongoing compliance with the Company’s regulatory obligations under the Dodd-Frank
Act. This included the establishment of a Swap Dealer Governing Body (constituted by the Company’s CEO and
senior representatives of the Business and control functions including Compliance and Risk) and various subcommittees. The CEO and EMEA Head of Markets act as co-chairs of the Swap Dealer Governing Body and are
responsible for updating the Company’s Board of Directors on a regular basis as to the Company’s compliance
with the Dodd-Frank Act and any material breaches thereof. Pursuant to the Dodd-Frank Act, the Company’s
Head of Compliance and CF10 Compliance Oversight Officer also produces an annual report addressed to the
Chief Executive Officer, outlining the Company’s compliance with certain matters prescribed under the DoddFrank Act.
European Market Infrastructure Regulation (EMIR)
Similarly to the Dodd-Frank Act in the US, the EU’s EMIR regulation introduces mandatory central clearing of
transactions with certain counterparties that will impact the Company, with potential liquidity, expense and capital
considerations. The regulation requires all counterparties to report details of contracts to an authorised trade
repository (TR) and to comply with certain risk mitigation requirements for non-cleared derivatives. Exposure to
Central Counterparty Clearing Houses (CCPs) will need to be carefully monitored and managed as any other
relationship within the Company’s credit risk management framework. Final rules for client clearing of OTC
derivatives and the implications of mandatory margin requirements for derivatives not cleared will continue to be
closely monitored, as will the rules for intragroup trades with EU and non-EU affiliates. The Company is
81
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
30. Financial instruments and risk management (continued)
Regulatory risk and developments (continued)
currently engaged in system developments to ensure implementation readiness once the final phases of the
regulation come into effect.
Recast Markets in Financial Instruments Directive (MiFID II) and Regulation on Markets in Financial
Instruments (MiFIR)
MiFID II and MiFIR, which shall replace the current Markets in Financial Instruments Directive (MiFID), were
originally planned to be implemented in January 2017, but may now be subject to a delay of one year. The MiFID
II and MiFIR reforms will have a significant impact on a number of areas including:
• scope of exemptions;
• market structure;
• transparency requirements;
• transaction reporting;
• algorithmic trading;
• commodities;
• the third country regime;
• investment research; and
• supervision.
MiFID II and MiFIR will increase the transparency requirements for the equities market and introduce new
transparency requirements for fixed income instruments and derivatives, with additional requirements including
the submission of post-trade data to Authorised Reporting Mechanisms. There will be increased conduct of
business requirements aimed at increasing investor protection to a broader range of clients, including rules relating
to inducements and the provision of investment research. Strengthened supervisory powers and administrative
sanctions will also apply.
As well as revising and enhancing some existing MiFID requirements, MiFID II and MiFIR also introduces new
concepts and obligations including, a new multilateral, discretionary trading venue for non-equity instruments, the
Organised Trading Facility (OTF), and an extension of the Systematic Internaliser (SI) regime to non-equity
instruments. There will also be a requirement for investment firms to trade listed equities on a Regulated Market,
Multilateral Trading Facility, OTF or SI. There are new requirements for:
•
•
•
•
•
commodity position limits and reporting;
organised trading venues;
trading controls for algorithmic trading activities;
an obligation to trade clearable derivatives on trading venues; and
the introduction of a harmonised EU regime for access to trading venues, CCPs and benchmarks.
31. Registered charges
The Company has granted to various banks and other entities a number of fixed and floating charges over certain
holdings in securities, properties, collateral and monies held by or on behalf of such banks or other entities.
32. Post balance sheet events
During 2016 a number of staff, assets and contracts were transferred from CGML to another Citi affiliate in order
to comply with various regulatory requirements concerning operational continuity. Whilst this will have an
impact of the direction of transfer pricing activities, the overall net impact to CGML’s earnings is not material.
82
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
33. Group structure
The Company’s immediate parent undertaking is Citigroup Global Markets Holdings Bahamas Limited
(CGMHBL), a company registered in the Bahamas. It was transferred from its previous parent, CGMEL, on a
going concern basis during 2015. The Company’s ultimate parent company and ultimate controlling party is
Citigroup Inc., incorporated in the State of Delaware, United States of America.
The audited consolidated financial statements of Citigroup Inc. are made available to the public annually in
accordance with Securities and Exchange Commission regulations and may be obtained from
http://www.citigroup.com/citi/investor/overview.html
34. Segmental analysis
As outlined in the Strategic Report, the Company is Citi’s international broker dealer and management reviews its
performance by geography in the same way as Citigroup Inc. reports its performance.
It is organised into four regions, Asia Pacific, EMEA, Latin America and North America.
Asia
EMEA
Latin
America
North
America
Total
Regional
Other /
Corp
Total
$ Million
$ Million
$ Million
$ Million
$ Million
$ Million
$ Million
2015 Revenues
149
1,677
(5)
19
1,840
1,419
3,259
2014 Revenues *
192
1,439
15
63
1,709
1,346
3,055
Increase (decrease)
compared to prior year
(43)
(20)
(44)
131
73
204
Revenue by Region
238
35. Country by country reporting
The information relating to Country-by-Country reporting, required by Article 89 of Directive 2013/36/EU
(Capital Requirements Directive), will be published at http://www.citigroup.com/citi/investor/reg.htm.
83
INDEPENDENT AUDITOR’S REPORT TO THE MEMBER OF CITIGROUP GLOBAL
MARKETS LIMITED
We have audited the financial statements of Citigroup Global Markets Limited for the year ended 31 December
2014 set out on pages 15 to 69. The financial reporting framework that has been applied in their preparation is
applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting
Practice).
This report is made solely to the Company's member, as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's member those
matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's
member, as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and Auditor
As explained more fully in the Directors' Responsibilities Statement set out on pages 3 and 4, the Directors are
responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit, and express our opinion on, the financial statements in accordance with applicable
law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the
Auditing Practices Board's (APB's) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at www.frc.org.uk/auditscopeukprivate.
Opinion on financial statements
In our opinion the financial statements:
• give a true and fair view of the state of the Company's affairs as at 31 December 2014 and of its profit for
the year then ended;
• have been properly prepared in accordance with United Kingdom Generally Accepted Accounting
Practice; and
• have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Strategic Report and the Directors' Report for the financial year for
which the financial statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report
to you if, in our opinion:
• adequate accounting records have not been kept, or returns adequate for our audit have not been received
from branches not visited by us; or
• the financial statements are not in agreement with the accounting records and returns; or
• certain disclosures of directors' remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
Richard Faulkner (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
27th March 2015
14
CITIGROUP GLOBAL MARKETS LIMITED
PROFIT AND LOSS ACCOUNT
for the year ended 31 December 2014
Notes
2014
2013
$ Million
$ Million
Commission income and fees
Net dealing income
4
6
2,195
731
1,618
1,085
Interest receivable
Interest payable
5
5
773
(638)
897
(797)
3,061
2,803
(2,955)
4
3
(3,021)
(3)
12
113
(209)
(3)
(25)
110
(234)
Gross profit
Operating expenses
Other finance income/( expense)
Other income
7
8
Operating profit/(loss) on ordinary activities before taxation
Tax on profits/(losses) on ordinary activities
11(a)
Profit/(loss) for the financial year
The accompanying notes on pages 18 to 69 form an integral part of these financial statements.
15
CITIGROUP GLOBAL MARKETS LIMITED
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES (STRGL)
for the year ended 31 December 2014
Notes
2014
2013
$ Million
$ Million
110
(234)
5
(50)
115
(284)
Profit/(loss) for the financial year
Net movement in STRGL in respect of the pension scheme
8
Total recognised gain/(loss) for the financial year
RECONCILIATION OF MOVEMENTS IN SHAREHOLDER’S FUNDS
for the year ended 31 December 2014
2014
2013
$ Million
$ Million
110
(234)
(8)
5
3,000
(83)
(50)
Opening shareholder’s funds
12,754
10,119
Closing shareholder’s funds
12,861
12,754
Notes
Profit/(loss) for the financial year
Capital Contribution
Share based payment transactions
Other recognised gains/(losses) relating to the year (net)
27
9
8
The accompanying notes on pages 18 to 69 form an integral part of these financial statements.
16
CITIGROUP GLOBAL MARKETS LIMITED
BALANCE SHEET
as at 31 December 2014
Notes
2014
$ Million
2013
$ Million
Fixed assets
Tangible fixed assets
Fixed Asset Investments
12
13
219
40
259
221
50
271
Current assets
Debtors
Investments
Cash at bank and in hand
15
17
19
114,304
249,027
1,571
111,623
119,574
2,805
Debtors: amounts due after more than one year
Debtors
15
29
364,931
13
234,015
Creditors: amounts falling due within one year
Creditors
21
348,105
348,105
217,219
217,219
16,797
17,085
16,796
17,067
122
4,080
4,202
119
160
4,200
4,360
56
12,764
12,651
97
103
12,861
12,754
1,500
9,989
1,372
1,500
9,989
1,265
12,861
12,754
Net current assets
Total assets, less current liabilities
Creditors: amounts falling due after more than one year
Creditors
Subordinated loans
21
24
Provisions for liabilities
25
Net assets excluding net pension asset
Net pension asset
8
Net assets
Capital and reserves
Called up share capital
Capital reserve
Profit and loss account
26
27
27
Shareholder’s funds
The accompanying notes on pages 18 to 69 form an integral part of these financial statements.
The financial statements on pages 15 to 69 were approved by the Directors on 26 March 2015 and were signed on
their behalf by:
J Bardrick
Director
Registered Number: 01763297
17
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
1.
Principal accounting policies
(a) Basis of presentation
The financial statements have been prepared in accordance with UK Generally Accepted Accounting Practice and
the Companies Act 2006. The financial statements have been prepared under the historical cost convention with
the following exceptions:
•
•
derivative and trading financial instruments are measured at fair value; and
financial instruments designated at fair value through profit or loss are measured at fair value.
The risks and uncertainties faced by the Company are discussed further in the Directors’ Report and Strategic
Report on pages 1 to 13, including details on where to find information about the risks faced by the Company’s
parent. The Directors acknowledge and accept the intent and ability of Citi to provide support to the Company if
required and consequently present these financial statements on a going concern basis.
The principal accounting policies have been applied consistently throughout the current and preceding year.
Forthcoming changes to accounting standards:
The Financial Reporting Council (FRC) revised the financial reporting standards for the United Kingdom and
Republic of Ireland. This revision fundamentally reforms financial reporting, replacing almost all extant standards
with three Financial Reporting Standards which are effective for periods beginning on or after 1 January 2015.
•
•
•
FRS 100 “Application of Financial Reporting Requirements” sets out a new financial reporting regime
explaining which standards apply to which entity and when an entity can apply the reduced disclosure
framework.
FRS 101 “Reduced Disclosure Framework” sets out the disclosure exemptions for the individual financial
statements of subsidiaries, including intermediate parents, and ultimate parents that otherwise apply the
recognition, measurement and disclosure requirements of EU-adopted International Financial Reporting
Standards (IFRS).
FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” based on the
IFRS for SMEs, with amendments for application in the UK and Republic of Ireland.
For periods beginning 1 January 2015, the Company will adopt FRS 101. The adoption is not expected to result in
significant changes to assets, liabilities and shareholders’ equity of the Company as at 1 January 2015.
Other matters:
The financial statements have been prepared in US Dollars, which is the functional currency of the Company, and
any reference to $ in these financial statements refers to US Dollars.
As permitted under section 400 of the Companies Act 2006, consolidated financial statements have not been
prepared because the Company is a wholly owned subsidiary of Citigroup Global Markets Europe Limited
(CGMEL) which prepares annual consolidated financial statements and is incorporated and registered in England
and Wales.
Under the wholly owned group exemption of FRS 8, “Related Party Disclosures”, the Company is not required to
disclose all transactions with other group companies and investees of the group qualifying as related parties.
The Company has taken the subsidiary undertaking exemption permitted by FRS 1, “Cash Flow Statements”, and
has not prepared a cash flow statement. The Company’s results are included in the consolidated financial
statements of Citigroup Inc., the Company’s ultimate parent company. Citigroup Inc. makes its financial
statements available to the public on an annual basis.
18
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
1.
Principal accounting policies (continued)
(b)
Financial instruments
Trading assets and trading liabilities
Financial instruments that have been acquired principally for the purpose of selling in the near term, or form part
of a portfolio of financial instruments that are managed together and for which there is evidence of short term
profit taking are classified as “held for trading”. Financial assets classified as “held for trading” include
collateralised financing transactions, government bonds, eurobonds and other corporate bonds, equities,
certificates of deposit, commercial paper and derivatives. Financial liabilities classified as “held for trading”
include securities sold but not yet purchased, collateralised financing transactions and derivatives.
Trading assets and liabilities are initially recognised at fair value on settlement date and subsequently re-measured
at fair value. Any changes in fair value between trade date and settlement date are reported in the profit and loss
account. Gains and losses realised on disposal or redemption and unrealised gains and losses from changes in fair
value are reported in the profit and loss account.
Derivative contracts
Derivative contracts used in trading activities are recognised at fair value on the date the derivative is entered into
and are subsequently re-measured at fair value. All derivatives are carried as assets when fair value is positive and
as liabilities when fair value is negative. Gains and losses realised on disposal or redemption and unrealised gains
and losses from changes in fair value are reported in the profit and loss account.
.
Repurchase and resale agreements
Repurchase and resale agreements are treated as collateralised financing transactions. Securities which have been
sold with an agreement to repurchase continue to be shown on the balance sheet and the sale proceeds are recorded
as a collateralised financing transaction within creditors. Securities acquired in purchase and resale transactions
are not recognised in the balance sheet and the purchase is recorded as a collateralised financing transaction within
debtors. The difference between the sale price and the repurchase price is recognised over the life of the
transaction and is charged or credited to the profit and loss account as interest payable or receivable. Assets and
liabilities recognised under collateralised financing transactions are classified as “held for trading” and are
recorded at fair value, with changes in fair value reported in the profit and loss account.
Financial instruments designated at fair value
Financial instruments, other than those held for trading, are classified as fair value through profit and loss when
they meet one or more of the criteria set out below, and are so designated by management. The Company may
designate financial instruments at fair value when this will:
•
•
•
eliminate or significantly reduce valuation or recognition inconsistencies that would otherwise arise from
measuring financial assets or financial liabilities, or recognising gains and losses on them, on different
bases;
apply to groups of financial assets, financial liabilities or combinations thereof that are managed, and
their performance evaluated, on a fair value basis in accordance with a documented risk management or
investment strategy, and where information about groups of financial instruments is reported to
management on that basis; and
relate to financial instruments containing one or more embedded derivatives that significantly modify the
cash flows resulting from those financial instruments.
The fair value designation, once made, is irrevocable. Designated financial instruments are initially recognised at
fair value on settlement date and subsequently re-measured at fair value. Gains and losses realised on disposal or
redemption and unrealised gains and losses from changes in fair value are reported in the profit and loss account.
19
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
1.
(b)
Principal accounting policies (continued)
Financial instruments (continued)
The Company has elected to apply the fair value option to certain corporate bonds on the basis that such bonds are
part of a portfolio that is managed and evaluated on a fair value basis.
Other financial assets
Financial assets other than those which are classified as “held for trading” or “designated at fair value through
profit and loss” are classified as loans and receivables. Loans and receivables incorporate trade debtors, including
settlement receivables, and are initially recognised at fair value including direct and incremental transaction costs
and subsequently measured at amortised cost using the effective interest rate method.
At each reporting date the Company assesses whether there is objective evidence that financial assets carried at
amortised cost are impaired. A financial asset or a group of financial assets is impaired when objective evidence
demonstrates that a loss event has occurred after the initial recognition of the asset(s), and that the loss event has
an impact on the future cash flows of the asset(s) that can be estimated reliably.
Objective evidence that financial assets are impaired can include significant financial difficulty of the debtor or
other observable data such as adverse changes in the payment status of debtors, or economic conditions that
correlate with defaults of the debtor.
Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount
of the financial asset and the present value of estimated future cash flows discounted at the asset’s original
effective interest rate. Impairment losses are recognised in profit or loss and reflected in an allowance account
against loans and receivables. Interest on impaired assets continues to be recognised through the unwinding of the
discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment
loss is reversed through profit or loss. The Company writes off loans and receivables and fixed asset investments
when they are determined to be uncollectible.
Other financial liabilities and subordinated loans
Financial liabilities and subordinated loans are measured at amortised cost using the effective interest rate, except
those which are “held for trading”, which are held at fair value through the profit and loss account.
Determination of fair value
Where the classification of a financial instrument requires it to be stated at fair value, this is determined by
reference to the quoted market value in an active market wherever possible. Where no such active market exists
for the particular instrument, the Company uses a valuation technique to arrive at the fair value, including the use
of prices obtained in recent arms’ length transactions, discounted cash flow analysis, option pricing models and
other valuation techniques commonly used by market participants. See Note 14 ‘Financial assets and liabilities
accounting classifications and fair values’ for further details.
Collateral
The Company receives collateral from customers as part of its business activities. Collateral can take the form of
cash, securities or other assets. Where cash collateral (client money) is received this is recorded on the balance
sheet and, where required by collateral agreements, is held in segregated client cash accounts. The Company does
not recognise non-cash collateral on its balance sheet.
Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the balance sheet only when there is a
legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise
the asset and settle the liability simultaneously.
20
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
1.
Principal accounting policies (continued)
(b)
Financial instruments (continued)
Derecognition of financial assets and financial liabilities
Financial assets are derecognised when the right to receive cash flows from the assets has expired or when the
Company has transferred its contractual right to receive the cash flows of the financial assets and either
substantially all the risks and rewards of ownership have been transferred or substantially all the risks and rewards
have neither been retained nor transferred but control is not retained.
If the Company enters into a transaction that results in it retaining significantly all of the risks and rewards of a
financial asset it will continue to recognise that financial asset and will recognise a financial liability equal to the
consideration received under the transaction.
In transactions in which the Company neither retains nor transfers substantially all the risks and rewards of
ownership of a financial asset and it retains control over the asset, the group continues to recognise the asset to the
extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the
transferred asset.
Financial liabilities are derecognised when they are extinguished, that is when the obligation is modified,
exchanged, discharged, cancelled or expired.
(c)
Physical commodities
Physical commodities are initially recognised at fair value on settlement date and subsequently re-measured at fair
value. Realised gains and losses on sales of commodities inventory are included in Net dealing income.
(d) Commission income and fees
Commission revenues and expenses are recognised when the right to consideration has been obtained in exchange
for performance.
(e)
Interest receivable and payable
Interest income and expense is recognised in the profit and loss account for all financial assets classified as loans
and receivables and non-trading financial liabilities, using the effective interest rate method.
Interest arising on financial assets or financial liabilities that are “held for trading” or “designated at fair value” is
reported within interest income and expense respectively.
(f)
Net dealing income
Net dealing income comprises gains and losses related to trading assets, trading liabilities and financial assets
designated at fair value and physical commodities, and includes all realised and unrealised fair value changes,
dividends and foreign exchange differences.
(g) Tangible fixed assets
Tangible fixed assets are stated at cost, less accumulated depreciation. The cost of developed software includes
directly attributable internal costs and the cost of external consultants. Depreciation is provided at rates calculated
to write-off the cost, less the estimated residual value of each asset, on a straight-line basis over its expected
economic useful life, as follows:
Premises improvements
Equipment
Capitalised software
-
lesser of the life of the lease or 10 years
3 to 5 years
5 to 10 years
At each reporting date the Company assesses whether there is any indication that tangible fixed assets are
impaired.
21
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
1.
Principal accounting policies (continued)
(h) Fixed asset investments
Investments in subsidiary undertakings are stated at cost, less any write down for diminution in value regarded as
permanent.
Non-subsidiary investments are initially recognised at fair value on settlement date and subsequently re-measured
with value changes being recognised in earnings.
(i)
Taxation
The charge for taxation is based on the taxable profits/losses for the year and takes into account taxation deferred
because of timing differences between the treatment of certain items for taxation and accounting purposes.
Deferred tax assets are recognised to the extent that it is more likely than not that there will be suitable taxable
profits from which the future reversal of the underlying timing differences can be deducted. Full provision is
made for deferred tax assets and liabilities arising from timing differences between the recognition of gains and
losses in the financial statements and their treatment for tax purposes except as otherwise provided by FRS 19 on
an undiscounted basis.
(j)
Pension and other post retirement benefit costs
The Company operates both a defined benefit and a defined contribution pension scheme.
The cost of the Company’s defined contribution pension scheme is the amount of contributions payable in respect
of the year. For defined benefit obligations, the current service cost and any past service costs are included in the
profit and loss account within operating expenses and the expected return on the scheme’s assets, net of the impact
of the unwinding of the discount on scheme liabilities, is included within other finance income. The postretirement benefit surplus or deficit is included on the balance sheet, net of the related deferred tax. Actuarial
gains and losses are recognised in the statement of total recognised gains and losses. These include differences
between the expected and actual return on scheme assets and differences which arise from experience and
assumption changes.
(j)
Pension and other post retirement benefit costs (continued)
Under FRS 17 paragraph 41, net asset surpluses can only be recognised on the balance sheet if the surplus can be
recovered either by a refund to the Company (which must have been agreed at the balance sheet date) or by the
reduction of future employer contributions. FRS 17 specifies that the maximum amount that can be recognised in
respect of the reduction of future contributions is the present value of the liability expected to arise from future
service, net of employee contributions.
(k) Foreign currencies
Transactions in foreign currencies are recorded using the rate of exchange at the date of transaction. Monetary
assets and liabilities denominated in currencies other than US Dollars are translated into US Dollars using the year
end spot exchange rates. Non-monetary assets and liabilities denominated in currencies other than US Dollar that
are classified as “held for trading” or “designated at fair value” are translated into US Dollars using the year end
spot rate. Non-monetary assets and liabilities denominated in currencies other than US Dollars that are not
measured at fair value have been translated at the relevant historical exchange rates. Any gains or losses on
exchange are taken to the profit and loss account as incurred.
22
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
1.
Principal accounting policies (continued)
(l)
Share-based incentive plans
The Company participates in a number of Citigroup Inc. (Citi) share-based incentive plans under which Citi grants
shares to the Company’s employees. Pursuant to a separate Stock Plans Affiliate Participation Agreement
(SPAPA) the Company makes a cash settlement to Citi for the fair value of the share-based incentive awards
delivered to the Company’s employees under these plans.
The Company applies equity-settled accounting for its share based incentive plans, with separate accounting for its
associated obligations to make payments to Citigroup Inc. The Company recognises the fair value of the awards at
grant date as compensation expense over the vesting period with a credit to the intercompany payable to Citigroup
Inc. All amounts paid to Citigroup Inc. and the associated obligations are recognised over the vesting period.
Subsequent changes in the fair value of all unexercised awards are reviewed annually and any changes in value are
recognised in the equity reserve, again over the vesting period. The SPAPA is also updated annually.
For Citi’s share based incentive plans that have a graded vested period each “tranche” of the award is treated as a
separate award. Where a plan has a cliff vest, the award only has a single “tranche”. The expense is recognised
as follows:
% of expense recognised
Year 3
Year 1
Year 2
75%
25%
50%
50%
61%
28%
11%
33%
33%
33%
52%
27%
15%
25%
25%
25%
Vesting Period of Award
2 Years (2 Tranches)
2 Years (1 Tranche)
3 Years (3 Tranches)
3 years (1 Tranche)
4 Years (4 Tranches)
4 Years (1 Tranche)
Year 4
6%
25%
Employees who meet certain age plus years of service requirements (retirement eligible employees) may terminate
active employment and continue vesting in their awards provided they comply with specified non-compete
provisions. The cost of share based incentive plans are recognised over the requisite service period. For awards
granted to retirement eligible employees, the services are provided prior to grant date, and subsequently the costs
are accrued in the year prior to the grant date.
EU Short Term awards are a form of Capital Accumulation Program (CAP) awarded to qualifying staff. The
award is accounted for similarly to CAP awards but is delivered in the form of immediately vested restricted
shares subject to a six month sale restriction.
(m) Profit sharing plan
In October 2010, the Committee approved awards under the 2010 Key Employee Profit Sharing Plan (KEPSP)
which entitled participants to profit-sharing payments if performance measurements between 1 January 2010 and
31 December 2012 were achieved. Participants received an initial payment in 2013 and the remaining payment in
2014. As the vesting and performance conditions were satisfied, participants received the product of the
cumulative pre-tax income of Citicorp (as defined in the KEPSP) for the performance period and the participant’s
applicable percentage. These have been accounted for on an accrual basis and the expense recognised in employee
remuneration.
23
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
2.
Use of assumptions, estimates and judgements
The results of the Company are sensitive to the accounting policies, assumptions and estimates that underlie the
preparation of its financial statements. The accounting policies used in the preparation of the financial statements
are described in detail above.
The preparation of financial statements requires management to make judgements, estimates and assumptions that
affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses.
Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognised in the period in which the estimate is revised and in any future periods affected.
Further information about those areas where estimation, uncertainty and the application of critical judgements to
accounting policies have the most significant effect on the amounts recognised in the financial statements are set
out below.
Valuation of financial instruments
The Company’s accounting policy for valuation of financial instruments is described in Note 1(b). The fair values
of financial instruments that are not quoted in active markets are determined by using valuation techniques. To the
extent practicable, models use only observable data. Where this is not possible, management may be required to
make estimates. Note 14 ‘Financial assets and liabilities accounting classifications and fair values’ discusses
further the valuation of financial instruments.
Credit value adjustment
The Company has a number of financial liabilities that are valued at fair value. Under FRS 26, the Company is
required to consider its own credit risk in determining the fair value of such financial liabilities. Management
judgement is required in determining the appropriate measure of own credit risk to be included in the valuation
model of the financial liability.
Credit valuation adjustments (CVA) and, effective in the third quarter of 2014, funding valuation adjustments
(FVA), are applied to OTC derivative instruments in which the base valuation generally discounts expected cash
flows using the relevant base interest rate curve for the currency of the derivative (e.g., LIBOR for uncollateralized
U.S. dollar derivatives). As not all counterparties have the same credit risk as that implied by the relevant base
curve, a CVA is necessary to incorporate the market view of both counterparty credit risk and Citi’s own credit
risk in the valuation. FVA reflects a market funding risk premium inherent in the uncollateralized portion of
derivative portfolios and in collateralized derivatives where the terms of the agreement do not permit the reuse of
the collateral received.
Citi’s CVA methodology is composed of two steps. First, the credit exposure profile for each counterparty is
determined using the terms of all individual derivative positions and a Monte Carlo simulation or other
quantitative analysis to generate a series of expected cash flows at future points in time. The calculation of this
exposure profile considers the effect of credit risk mitigants, including pledged cash or other collateral and any
legal right of offset that exists with counterparty through arrangements such as netting agreements. Individual
derivative contracts that are subject to an enforceable master netting agreement with a counterparty are aggregated
for this purpose, since it is those aggregate net cash flows that are subject to non-performance risk. This process
identifies specific, point-in-time future cash flows that are subject to non-performance risk, rather than using the
current recognized net asset or liability as a basis to measure the CVA.
Second, market-based views of default probabilities derived from observed credit spreads in the credit default
swap (CDS) market are applied to the expected future cash flows determined in step one. Citi’s own-credit CVA
is determined using Citi-specific CDS spreads for the relevant tenor. Generally, counterparty CVA is determined
using CDS spread indices for each credit rating and tenor. For certain identified netting sets where individual
analysis is practicable (e.g., exposures to counterparties with liquid CDSs), counterparty-specific CDS spreads are
used.
The CVA and FVA are designed to incorporate a market view of the credit and funding risk, respectively, inherent
in the derivative portfolio. However, most unsecured derivative instruments are negotiated bilateral contracts and
are not commonly transferred to third parties. Derivative instruments are normally settled contractually or, if
terminated early, are terminated at a value negotiated bilaterally between the counterparties. Thus, the CVA and
FVA may not be realized upon a settlement or termination in the normal course of business. In addition, all or a
24
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
2.
Use of assumptions, estimates and judgements (continued)
Credit value adjustment (continued)
portion of these adjustments may be reversed or otherwise adjusted in future periods in the event of changes in the
credit or funding risk associated with the derivative instruments.
During 2014 the Company recorded net CVA losses of $19 million (2013: $63 million losses) due to the
narrowing of the Company’s credit spreads. These were offset by a net FVA gain of $ 22 million (2013: nil) due
to the tightening of Citi’s bond spreads throughout 2014. The total adjustment recorded in the balance sheet at the
year-end was $180 million (2013: $193 million).
Pension
The Company’s defined benefit schemes are measured on an actuarial basis, with the key assumptions being
inflation, discount rate, mortality, and investment returns. Return on assets is an average of expected returns
weighted by asset class. Returns on investments in equity are based upon government bond yields with a premium
to reflect an additional return expected on equity investments.
Mortality assumptions are based upon the relevant standard industry and national mortality tables. Discount rates
are based on specific corporate bond indices which reflect the underlying yield curve of each scheme.
Management judgement is required in estimating the rate of future salary growth. All assumptions are unbiased,
mutually compatible and based upon market expectations at the reporting date.
Share-based incentive plans
Awards granted through Citi's Stock Option Programme are measured by applying an option pricing model, taking
into account the terms and conditions of the programme. Analysis of past exercise behaviour, Citi's dividend
history and historical volatility are inputs to the valuation model. Management judgement is required in estimating
the forfeiture rate.
3.
Turnover and results
As permitted by paragraph 4 of Schedule 1 to the Companies Act 2006 The Large and Medium-sized Companies
and Groups (Accounts and Reports) Regulations 2008 (SI 2008 No 410), the format of the profit and loss account
has been adapted to the circumstances of the Company. Instead of turnover, the Directors have reported
commission income and fees, net dealing income and interest income less interest expense in determining the
gross profit of the Company.
25
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
.
4.
Commission income and fees
Commission income and fees are derived from underwriting activities, marketing securities owned by other group
undertakings, trading services provided to other group undertakings and corporate finance fees associated with
mergers and acquisitions and other corporate finance advisory activities.
5.
Interest receivable and interest payable
Interest receivable comprises:
Interest on current asset investments and collateralised financing transactions
at fair value through profit and loss
Interest on debtors and cash assets not at fair value through profit and loss
Interest payable comprises:
Interest on collateral held and collateralised financing transactions at fair
value through profit and loss
Interest on borrowings not at fair value through profit and loss
Interest on subordinated debt
2014
$ Million
2013
$ Million
751
22
890
7
773
897
414
131
93
377
208
212
638
797
Included within interest receivable is interest received on client money.
6.
Gains and losses on financial assets and financial liabilities held at fair value through profit and loss
Gains and losses on financial assets and financial liabilities held for trading:
Net dealing income
Interest receivable
Interest payable
2014
$ Million
2013
$ Million
739
751
(414)
1,120
890
(377)
(8)
(35)
1,068
1,598
Gains and losses on financial assets "designated at fair value through profit or loss":
Net dealing expense
26
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
7.
Operating expenses
2014
$ Million
2013
$ Million
1,260
186
166
1,243
224
185
10
64
10
57
56
53
0.84
1.25
0.51
0.09
0.65
0.12
Operating expenses include:
Employee remuneration
Share-based incentive expense (Note 9)
Payroll taxes
Pension costs
- defined benefit scheme (Note 8)
- defined contribution scheme
Depreciation (Note 12)
Auditor’s remuneration:
Audit of these financial statements
Amounts receivable by the company's auditor and its associates in respect of:
Audit related assurance services
Taxation compliance services
The Company employed an average of 3,931 (2013: 3,824) employees during the year.
8.
Pension costs
Defined contribution scheme
The Citigroup (UK) Pension Plan was established in September 2000 and provides defined contribution benefits to
all new hires.
Defined benefit scheme
The Citigroup Global Markets Limited Pension and Life Assurance Scheme (“the Scheme”) is a funded pension
scheme providing benefits on both a defined benefit and defined contribution basis. The Scheme is now closed to
new entrants. The assets of the Scheme are held separately from those of the Company, in a trustee administered
fund. Employees are not required to contribute to the Scheme, which is contracted out of the State Earnings
Related Pension Scheme.
The pension cost in respect of defined benefit obligations is assessed in accordance with the advice of a qualified
external actuary using a Projected Unit method with a triennial review. The most recent full actuarial assessment of
the liabilities of the scheme was at 5 April 2014.
Expected regular employer contributions to be paid into the scheme during 2015 are $15 million (2014: $30
million).
The assumptions which have the most significant effect on the results of the valuation are those relating to the
discount rate on scheme liabilities and mortality assumptions. The Company changed its approach to setting the
discount rate assumption at 31 December 2014. The yield curve used for determining the discount rate in 2014 is
based on all corporate bonds from the UK market which have a rating of AA from at least one of the three ratings
agencies (Moody’s, S&P and Fitch). The yield curve used in 2013 was based on all corporate bond yields from the
UK market which have an average rating of AA from the three ratings agencies. The discount rate used as at 31
December 2014 is 3.7%. Using an approach consistent with 2013, the discount rate would have been 3.4%, leading
to an estimated difference of $112 million in the defined benefit obligation.
The mortality assumptions are based on standard mortality tables which allow for expected future mortality
improvements. The assumptions are that a member currently aged 65 will live on average for a further 23.5 years
for males and 25.1 years for females. Members currently aged 45 are expected to live a further 24.6 years and 26.7
years from age 65 for males and females respectively.
27
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
8.
Pension costs (continued)
The financial assumptions used in calculating the defined benefit scheme liabilities as at 31 December 2014 are as
follows:
2014
2013
2012
Discount rate for scheme liabilities
Inflation
Rate of general long-term increase in salaries
Rate of increase to pensions in payment
- Pensions accrued from 1 May 2005
- Pensions accrued prior to 1 May 2005
3.7%
3.3%
1.5%
4.5%
3.7%
1.5%
4.7%
3.3%
3.3%
2.4%
3.0%
2.5%
3.2%
2.4%
3.0%
In addition to the assumptions on which the Scheme obligation at the balance sheet date is based, it is also
necessary to select expected rates of return on assets. Assumptions that are affected by economic conditions
(financial assumptions) are based on market expectations, at the balance sheet date, for the period over which the
obligations are settled. The overall expected rate of return on assets is derived by aggregating the expected return
for each asset class over the actual asset allocation for the scheme. The expected rate of return on assets (EROA) in
2015 of 3.7% is set at the 2014 year end discount rate. As such, the EROA is provided as the total rate and is not
split by asset category.
The expected return and fair value at the reporting date are set out as follows:
2014
$ Million
1,279
608
1
19
Fair value
2013
$ Million
937
592
1
13
2012
$ Million
906
569
1
4
Total market value of assets
1,907
1,543
1,480
Expected rate of return on assets
3.7%
4.1%
3.6%
Government bonds
Corporate bonds
Insured Pensions
Other
Analysis of amounts recognised in profit and loss account:
Current service cost
Curtailment cost
Expense recognised in the profit and loss account
Expected return on pension scheme assets
Interest cost on pension scheme liabilities
Net finance income/(cost)
28
2014
$ Million
2013
$ Million
9
1
10
-
10
10
2014
$ Million
2013
$ Million
63
(59)
52
(54)
4
(2)
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
8.
Pension costs (continued)
Analysis of amount recognised in Statement of Total Recognised Gains and Losses (STRGL):
Actual return less expected return on pension scheme assets
Actuarial losses on scheme liabilities
Change in unrecognised surplus in respect of FRS 17 para 41
Impact of foreign exchange
Actuarial gains/(losses) recognised in STRGL
Deferred tax adjustment in respect of losses in STRGL
Total gains/(losses) recognised in STRGL net of tax
Cumulative amount of pre tax losses recognised in STRGL
2014
$ Million
2013
$ Million
398
(126)
(266)
23
(21)
(67)
51
(13)
29
(50)
(24)
-
5
(50)
(486)
(515)
Under FRS 17, any surplus in a Scheme can only be recognised on the balance sheet if the surplus can be recovered
either by an agreed refund to the Company or by the reduction of future contributions. As the Scheme is closed to
new entrants, the surplus has been calculated as the present value of the service cost expected to arise over the
average future working lifetime of the active membership resulting in an unrecognised asset of $381 million (2013:
$115 million).
Reconciliation to the balance sheet:
Total market value of assets
Present value of scheme liabilities
Net pension asset excluding unrecognised asset
Unrecognised asset due to limit in para 41
Gross pension asset/(liability)
Related deferred tax asset/(liability)
Net pension asset/(liability)
29
2014
$ Million
2013
$ Million
1,907
(1,405)
1,543
(1,325)
502
218
(381)
(115)
121
103
(24)
-
97
103
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
8.
Pension costs (continued)
2014
$ Million
2013
$ Million
103
(9)
30
(1)
4
272
(12)
(266)
111
(10)
34
(3)
(88)
8
51
121
103
Surplus in scheme at beginning of the year
Current service cost
Contributions
Curtailments
Other finance income/(expense)
Actuarial gain/(loss)
Foreign exchange adjustment
Change in unrecognised asset due to FRS 17 para 41
Surplus in scheme at end of year
The impact of para 41 limitation in FRS 17:
2014
$ Million
2013
$ Million
1,907
(1,405)
502
1,543
(1,325)
218
(121)
(103)
381
115
2014
$ Million
2013
$ Million
Opening defined benefit obligation
Current service cost
Interest cost
Actuarial losses on scheme liabilities
Net benefits paid out
Curtailments
Foreign exchange adjustment
1,325
9
59
126
(35)
1
(80)
1,203
10
54
67
(38)
29
Closing defined benefit obligation
1,405
1,325
Fair value of scheme assets
Defined benefit obligation
Net asset
Present value of service cost over next 11 years
Unrecognisable surplus in respect of FRS 17 para 41
The changes to the present value of the defined obligation during the year are as follows:
30
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
8.
Pension costs (continued)
The changes to the fair value of scheme assets during the year are as follows:
2014
$ Million
2013
$ Million
Opening fair value of scheme assets
Expected return on scheme assets
Actuarial gains/(losses) on scheme assets
Contributions by the employer
Net benefits paid out
Foreign exchange adjustment
1,543
63
398
30
(35)
(92)
1,480
52
(21)
34
(38)
36
Closing fair value of scheme assets
1,907
1,543
Less unrecognisable surplus in respect of FRS 17 para 41
(381)
(115)
1,526
1,428
2014
$ Million
2013
$ Million
Expected return on assets
Actuarial gains/(losses) on scheme assets
63
398
52
(21)
Actual return on assets
461
31
The actual return on assets is as follows:
The actual return on the pension scheme assets of $398 million was significantly higher than the expected return
of $63 million, which is based on a long-term assumption about the rate of return on assets.
History of experience gains and losses:
2014
2013
2012
2011
2010
$ Million $ Million $ Million $ Million $ Million
Difference between expected and actual return on
scheme assets
Gains on scheme liabilities due to experience
Gains/(losses) on scheme liabilities due to assumptions
Change in unrecognised surplus in respect of FRS 17
Foreign exchange adjustment
Remeasurements recognised in STRGL
Related deferred tax (asset)/ liability
Total gains/(losses) recognised in STRGL net of tax
31
398
9
(135)
(266)
23
29
(21)
3
(70)
51
(13)
(50)
(13)
37
(67)
(28)
(4)
(75)
145
(58)
(138)
1
(50)
(12)
23
11
(24)
-
-
-
-
5
(50)
(75)
(50)
11
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
9.
Share-based incentive plans
As part of the Company’s remuneration programme it participates in a number of Citi share-based incentive plans.
These plans involve the granting of restricted or deferred share awards and share payments. Such awards are used to
attract, retain and motivate officers and employees, to provide incentives for their contributions to the long-term
performance and growth of Citi, and to align their interests with those of the shareholders. The award programmes
are administered by the Personnel and Compensation Committee of the Citigroup Inc. Board of Directors, which is
composed entirely of non-employee directors.
In the share award program Citi issues common shares in the form of restricted share awards, deferred share awards
and share payments. For all stock award programs during the applicable vesting period, the shares awarded are not
issued to participants (in the case of a deferred stock award) or cannot be sold or transferred by participants (in the
case of a restricted stock award), until after the vesting conditions have been satisfied. Recipients of deferred share
awards do not have any shareholder rights until shares are delivered to them, but they generally are entitled to
receive dividend-equivalent payments during the vesting period. Recipients of restricted share awards are entitled
to limited voting rights and to receive dividends or dividend-equivalent payments during the vesting period. Once a
share award vests the shares become freely transferrable, but in the case of certain employees, may be subject to
transfer restrictions by their terms or share ownership commitment.
Certain stock-based awards contain discretionary clawback provisions and are subject to variable accounting. The
associated value of the award fluctuates with changes in Citi’s common stock price until the date that the award is
settled, either in cash or shares. Any fluctuation from the grant date value of the award until the award is fully
vested is recognised through the income statement.
(i)
Stock award programme
The Company participates in the Citigroup Capital Accumulation Program (CAP), under which shares of Citi
common stock are awarded in the form of restricted or deferred stock to participating employees.
Generally, CAP awards of restricted or deferred stock constitute a percentage of annual incentive compensation and
vest over a three or four year period beginning on or about the first anniversary of the award date. Except in
specific circumstances, continuous employment within Citi is required for CAP and other stock award programs to
vest.
The program provides that employees who meet certain age plus years-of-service requirements (retirement-eligible
employees) may terminate active employment and continue vesting in their awards provided they comply with
specified non-compete provisions. Awards granted to retirement-eligible employees are accrued in the year prior to
the grant date in the same manner as cash incentive compensation is accrued.
For all stock award programmes, the shares awarded cannot be sold or transferred by the participant during the
applicable vesting period, and the award is subject to cancellation if the participant’s employment is terminated.
After the award vests, the shares become freely transferable (subject to specific sale restrictions). From the date of
award, the recipient of a restricted stock award can direct the vote of the shares and receive regular dividends to the
extent dividends are paid on Citi common stock. Recipients of deferred stock awards receive dividend equivalents
to the extent dividends are paid on Citi common stock, but cannot vote.
Stock awards granted generally vest 25% per year over four years or 33% per year over 3 years.
As part of remuneration since 2010, the Company entered into an arrangement referred to as an “EU Short Term”
award. The award will be delivered in the form of immediately vested restricted shares subject to a six month sale
restriction.
Shares awarded
Weighted average fair market value per share
2014
2013
2012
2011
3,744,987
$49.64
4,677,014
$44.23
6,488,348
$30.54
7,197,950
$49.96
32
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
9.
Share-based incentive plans (continued)
(ii) Stock option programme
Stock options have not been granted to Citi’s employees as part of the annual incentive award programs since 2009.
In 2009 the Company made discretionary grants of options to eligible employees pursuant to the broad-based
Citigroup Employee Option Grant (CEOG) Program under the Citigroup Stock Incentive Plan. Under CEOG, the
options generally vest equally over three years, the option term is 6 years from the grant date and the shares
acquired on exercise are not subject to a sale restriction. To the extent permitted, CEOG options granted to eligible
UK employees were granted under an HMRC approved sub-plan with any excess over the applicable individual
limit being granted under the global plan, which is not an HMRC approved plan.
In 2011, outside the annual incentive award programme, Citi granted options to certain of its executive officers. The
options have six-year terms and vest in three equal annual instalments. The exercise price of the options is $49.10,
equal to the closing price of a share of Citi common stock on the grant date. Upon exercise of the options before the
fifth anniversary of the grant date, the shares received on exercise (net of the amount required to pay taxes and the
exercise price) are subject to a one-year transfer restriction.
The stock option activity with respect to 2014 and 2013 under Citi stock option plans is as follows:
2014
Options
2013
Weighted
average
exercise price
$
Options
Weighted
average
exercise price
$
Outstanding, beginning of year
4,535,017
44.50
4,887,279
44.00
Forfeited
Exercised
Transfers to/from other Citi entities
Expired
(673,720)
(38,160)
(20,563)
41.46
41.50
244.50
(2,393)
(372,155)
23,453
(1,167)
244.50
40.80
135.08
543.80
Outstanding, end of year
3,802,574
43.99
4,535,017
44.50
Exercisable, end of year
3,801,878
43.99
4,459,305
44.43
33
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
9.
Share-based incentive plans (continued)
The following table summarises the stock options outstanding under Citi stock option plans at 31 December 2014:
2014
Range of exercise prices
Number
outstanding
Options outstanding
Weighted
average
Weighted
contractual
average
life
exercise
remaining
price
Options exercisable
Number
Exercisable
Weighted
average
exercise
price
$
< $50.00
$50.01 - $399.99
$
3,770,010
32,564
1.00
1.54
42.98
161.43
3,769,314
32,564
42.98
161.43
3,802,574
1.01
43.99
3,801,878
43.99
The weighted average share price at the exercise date for options exercised during the year was $52.42 (2013:
$43.24).
The following table summarises the stock options outstanding under Citi stock option plans at 31 December 2013:
2013
Range of exercise prices
Number
outstanding
Options outstanding
Weighted
average
Weighted
contractual
average
life
exercise
remaining
price
Options exercisable
Number
Exercisable
$
< $50.00
$50.00 - $399.90
Weighted
average
exercise
price
$
4,475,634
59,383
1.98
1.61
42.62
186.08
4,399,922
59,383
42.51
186.08
4,535,017
1.97
44.50
4,459,305
44.43
Fair value assumptions
Valuation and related assumption information for the Citi option plans is presented below. Citi used a binomial
model to value stock options. Volatility was estimated by taking the historical implied volatility in traded Citi
options over a recorded 31 month period and adjusting where there were known factors that could affect future
volatility.
34
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
9.
Share-based incentive plans (continued)
Weighted average fair value for options granted during the year
Weighted average expected life
Option life
Valuation assumptions
Expected volatility (per annum)
Risk-free interest rate
Expected annual dividend yield per share
Expected annual forfeitures
(iii)
2014
2013
$0.00
$0.00
1 year
2 years
35.69%
0.35%
0.08%
9.62%
37.23%
0.45%
0.08%
9.62%
2014
2013
$ million
$ million
Profit and loss statement impact
The table below details the profit and loss impact of the share based incentive plans.
Stock Awards
Granted in 2014
132
-
Granted in 2013
35
157
Granted in 2012
13
43
Granted in 2011
(3)
24
Granted in 2010
(1)
(7)
Granted in 2009 & prior
-
(2)
Granted in 2011
-
1
Accrued Expenses
10
8
Total Expense (Note 7)
186
224
Fair value adjustment of intercompany recharges in equity reserve (Note 27)
(8)
(83)
Total carrying amount of equity-settled transaction liability
439
512
5
10
Stock Options
Total carrying amount of cash-settled transaction liability
35
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
10. Directors’ remuneration
Directors’ remuneration in respect of services to the Company was as follows:
Aggregate emoluments
Contributions to money purchase pension scheme
2014
$’000
2013
$’000
4,936
97
3,564
76
5,033
3,640
The contributions to the money purchase pension schemes were accruing to four of the Directors (2013: five). Five
of the Directors (2013: five) of the Company participated in parent company share and share option plans and,
during the year, none of the Directors (2013: none) exercised options.
The remuneration of the highest paid Director was $2,438,014 (2013: $1,872,397) and accrued pension of $59,620
(2013: $3,222).
The Directors benefited from qualifying third party indemnity provisions in place during the financial year and at
the date of this report.
The above remuneration was based on the apportionment of time incurred by the Directors for services to the
Company, both in their capacity as a Director and, where applicable, their normal employment.
11. Tax on profit on ordinary activities
(a) Analysis of tax charge in the year
Current tax:
Overseas current tax
Adjustment in respect of overseas tax for previous years
Total current tax (Note 11(b))
Deferred tax:
Origination and reversal of timing differences
-UK
- overseas
Total deferred tax
Tax charge on ordinary activities
36
2014
$ Million
2013
$ Million
20
20
21
5
26
(24)
7
(17)
(1)
(1)
3
25
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
11. Tax on profit on ordinary activities (continued)
(b) Factors affecting tax charge for the year
Profit/(loss) on ordinary activities before tax
Profit/(loss) on ordinary activities multiplied by the standard rate of corporation
in the UK of 21.49% (2013: 23.25%)
2014
$ Million
2013
$ Million
113
(209)
24
(49)
24
(4)
15
3
(6)
20
(56)
-
20
(5)
(8)
(134)
6
(10)
21
179
5
20
25
Effects of:
Expenses not deductible for tax purposes
Foreign tax deductions
Depreciation in excess of capital allowances
Accrued interest paid
Other timing differences
Pensions
Overseas tax in respect of European branch operations and dividends received
Group relief for nil consideration
Losses carried forward
Adjustments in relation to previous years
Current tax charge for year
(c)
Factors that may affect future tax charges:
The Company has not recognised a deferred tax asset of $347 million (2013: $379 million) in relation to carried
forward losses and timing differences where the recoverability of potential benefits is not considered likely.
The UK Corporate tax rate applying to CGML was 21.49%. Other subsidiaries and overseas branches provided for
taxation at the appropriate rates for the countries in which they operate.
The main rate of corporation tax in the UK was reduced from 23% to 21% on 1 April 2014 and will be further
reduced to 20% on 1 April 2015. The reduction in the corporate tax rate was enacted through the 2013 Finance Act
on 17 July 2013. It is not expected that the future rate reduction will have a significant impact on the group.
37
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
12. Tangible fixed assets
The movement in tangible fixed assets for the year was as follows:
Equipment
and software
$ Million
Premises
improvements
$ Million
Total
$ Million
403
56
15
-
418
56
At 31 December 2014
Accumulated depreciation
At 1 January 2014
Charge for the year (Note 7)
Additions
459
15
474
190
55
2
7
1
-
197
56
2
At 31 December 2014
247
8
255
Net book value
At 31 December 2014
At 31 December 2013
212
213
7
8
219
221
Cost
At 1 January 2014
Additions
13. Fixed asset investments
Unlisted
Investments
2014
$ Million
Unlisted
Investments
2013
$ Million
Cost
At 1 January
Additions
Disposals
Gains/(losses) recognised in profit and loss account
50
(9)
(1)
36
2
12
At 31 December
40
50
The following amounts for subsidiary undertakings are included in fixed asset investments:
2014
$’000
Cost
At 1 January
3,268
Additions
312
At 31 December
3,580
2013
$’000
3,253
15
3,268
Details of principal Group subsidiary undertakings held at 31 December 2014 are as follows:
Name
Country of
incorporation
Citigroup South Africa Credit Products (Proprietary) Limited (CSA)
CGM (Monaco) SAM
Citigroup Global Markets Luxembourg LLC
Citigroup Global Markets Funding Luxembourg SCA
Citigroup Global Markets Funding Luxembourg SaRL
South Africa
Monaco
Luxembourg
Luxembourg
Luxembourg
38
% holding in
ordinary share
capital
100%
100%
100%
100%
100%
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
14. Financial assets and liabilities accounting classifications and fair values
The table below sets out the Company’s classification of each class of financial assets and liabilities, and their
fair values.
31 December 2014
Cash
Current asset investments
Derivatives
Collateralised financing transactions
Cash collateral pledged
Trade debtors
Other debtors
Fixed asset investments
Bank loans and overdrafts
Collateralised financing transactions
Derivatives
Cash collateral held
Securities sold but not yet purchased
Trade creditors
Other creditors and accruals
Subordinated loans
31 December 2013
Cash
Current asset investments
Derivatives
Collateralised financing transactions
Cash collateral pledged
Trade debtors
Other debtors
Fixed asset investments
Bank loans and overdrafts
Collateralised financing transactions
Derivatives
Cash collateral held
Securities sold but not yet purchased
Trade creditors
Other creditors and accruals
Subordinated loans
Other
Total
Held for Designated Loans and amortised carrying
Trading at fair value receivables
cost amount Fair value
$ Million
$ Million $ Million $ Million $ Million $ Million
44,557
203,894
93,054
-
576
-
1,571
11,482
9,459
281
-
40
1,571
45,133
203,894
93,054
11,482
9,459
281
40
1,571
45,133
203,894
93,054
11,482
9,459
281
40
341,505
576
22,793
40
364,914
364,914
79,218
203,375
32,754
-
-
-
10,104
15,404
6,276
1,043
4,080
10,104
79,218
203,375
15,404
32,754
6,276
1,043
4,080
10,104
79,218
203,375
15,404
32,754
6,276
1,043
4,547
315,347
-
-
36,907
352,254
352,721
Other
Total
Held for Designated Loans and amortised carrying
Trading at fair value receivables
cost amount Fair value
$ Million
$ Million $ Million $ Million $ Million $ Million
40,529
77,648
98,874
-
1,397
-
2,805
4,650
7,930
130
-
50
2,805
41,926
77,648
98,874
4,650
7,930
130
50
2,805
41,926
77,648
98,874
4,650
7,930
130
50
217,051
1,397
15,515
50
234,013
234,013
87,474
79,999
29,429
-
-
-
5,881
7,457
5,781
1,214
4,200
5,881
87,474
79,999
7,457
29,429
5,781
1,214
4,200
5,881
87,474
79,999
7,457
29,429
5,781
1,214
5,003
196,902
-
-
24,533
221,435
222,238
39
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
14. Financial assets and liabilities accounting classifications and fair values (continued)
The following table shows an analysis of financial assets and liabilities classified as held for trading or
designated at fair value by level in the hierarchy:
31 December 2014
Level 1
$ Million
Level 2
$ Million
Level 3
$ Million
Total
$ Million
31
20,662
11
8,487
-
201,244
1,228
10,621
1,540
1,458
2,619
12
421
117
-
203,894
21,902
11,053
10,144
1,458
-
92,789
265
93,054
29,191
308,880
3,434
341,505
-
576
-
576
29,191
309,456
3,434
342,081
24
28,486
199,802
79,218
4,263
3,549
5
203,375
79,218
32,754
28,510
283,283
3,554
315,347
Level 1
$ Million
Level 2
$ Million
Level 3
$ Million
Total
$ Million
17
20,418
6,943
-
74,890
2,464
8,345
506
530
52
2,741
19
1,140
112
-
77,648
22,901
9,485
7,561
530
52
-
98,531
343
98,874
27,378
185,318
4,355
217,051
-
1,397
-
1,397
27,378
186,715
4,355
218,448
7
24,637
76,616
87,474
4,772
3,376
20
79,999
87,474
29,429
24,644
168,862
3,396
196,902
Financial assets held for trading
Current asset investments
Derivatives
Government bonds
Eurobonds and other corporate bonds
Equities
Physical Commodities
Collateralised financing transactions
Financial assets designated at fair value
Current asset investments
Eurobonds and other corporate bonds
Financial liabilities held for trading
Derivatives
Collateralised financing transactions
Securities sold but not yet purchased
31 December 2013
Financial assets held for trading
Current asset investments
Derivatives
Government bonds
Eurobonds and other corporate bonds
Equities
Physical Commodities
Commercial Paper
Collateralised financing transactions
Financial assets designated at fair value
Current asset investments
Eurobonds and other corporate bonds
Financial liabilities held for trading
Derivatives
Collateralised financing transactions
Securities sold but not yet purchased
40
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
14. Financial assets and liabilities accounting classifications and fair values (continued)
Given the short term nature and characteristics of trade debtors, other debtors, trade creditors, other creditors and
accruals the fair value has been assumed to approximate the carrying value. The fair value of subordinated loans
has been calculated using the present value of future estimated cash flows, discounted using a discount rate of
USD 3 month Overnight Indexed Swap (OIS) or 3 month Euro Overnight Index Average (EONIA) plus the
Company’s credit spread as at 31 December 2014.
Fair Value Hierarchy
The calculation of fair value incorporates the Company’s estimate of the fair value of financial assets and
financial liabilities. Other entities may use different valuation methods and assumptions in determining fair
values, so comparisons of fair values between entities may not necessarily be meaningful.
The Company measures fair values using the following fair value hierarchy that indicates whether the inputs to
those valuation techniques are observable or unobservable. Observable inputs denote market data obtained from
independent sources, while unobservable inputs reflect the Company’s market assumptions.
The types of inputs have created the following fair value hierarchy:
•
Level 1: Quoted prices for identical instruments in active markets.
•
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations in which all significant inputs
and significant value drivers are observable in active markets.
•
Level 3: Valuations derived from valuation techniques in which one or more significant inputs or
significant value drivers are unobservable.
The Company considers relevant and observable market prices in its valuations where possible. The frequency of
transactions and the size of the bid-ask spread when comparing similar transactions are factors that are driven by
the liquidity of markets and the relevance of observed prices in those markets.
The Company’s policy with respect to transfers between levels of the fair value hierarchy is to recognise
transfers into and out of each level as of the end of the reporting period.
Determination of Fair Value
As set out in Note 1(b), when available, the Company generally uses quoted market prices in an active market to
calculate the fair value of a financial asset or liability and classifies such items as Level 1. In some cases where a
market price is available, the Company will make use of acceptable practical expedients (such as matrix pricing)
to calculate fair value, in which case the items are classified as Level 2.
If quoted market prices are not available, fair values are based upon internally developed valuation techniques
that use, where possible, current market-based or independently sourced market parameters such as interest rates,
currency rates and option volatilities. Items valued using such internally generated valuation techniques are
classified according to the lowest level input or value driver that is significant to the valuation. Thus an item
may be classified in Level 3 even though there may be some significant inputs that are readily observable.
Where available, the Company may also make use of quoted prices for recent trading activity in positions with
the same or similar characteristics to that being valued. The frequency and size of transactions and the amount of
the bid-ask spread are among the factors considered in determining the liquidity of markets and the relevance of
observed prices from those markets. If relevant and observable prices are available, those valuations would be
classified as Level 2. If such prices are not available, other valuation techniques would be used and the item
would be classified as Level 3. Fair value estimates from internal valuation techniques are verified, where
possible, to prices obtained from independent vendors or brokers. Vendors’ and brokers’ valuations may be
based on a variety of inputs ranging from observed prices to proprietary valuation models.
41
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
14. Financial assets and liabilities accounting classifications and fair values (continued)
The Company uses the following procedures to determine the fair value of financial assets and financial
liabilities irrespective of whether they are “held for trading” or have been “designated at fair value”. The
description includes an indication of the level in the fair value hierarchy in which each financial instrument is
generally classified. Where appropriate, details are provided of the valuation models, the key inputs to those
models and any significant assumptions.
Derivatives
Exchange-traded derivatives in active markets are generally fair valued using quoted market prices (i.e. exchange
prices) and are therefore classified as Level 1 of the fair value hierarchy.
The majority of derivatives entered into by the Company are executed over the counter and are valued using a
combination of external prices and internal valuation techniques, including benchmarking to pricing vendor
services. The valuation techniques and inputs vary according to the type of derivative and the nature of the
underlying instrument. The principal methods used to value these instruments are those adopted industry wide
and include discounted cash flows, modelling and numerical approaches.
The type of inputs may include interest rate yield curves, credit spreads, foreign exchange rates, volatilities and
correlations.
Government bonds, Corporate bonds and Equities
When available, the Company uses quoted market prices to determine the fair value of government bonds and
exchange traded equities; such items are typically classified as Level 1 of the fair value hierarchy.
For government bonds, corporate bonds and equities traded over the counter, the Company generally determines
fair value utilising internal valuation techniques. Fair value estimates from internal valuation techniques are
verified, where possible, to prices obtained from independent vendors. Vendors compile prices from various
sources and may apply matrix pricing for similar bonds or loans where no price is observable. If available, the
Company may also use quoted prices for recent trading activity of assets with similar characteristics to the bond
or loan being valued. Government bonds, corporate bonds and equities and loans priced using such methods are
generally classified as Level 2. However, when less liquidity exists for government bonds, corporate bonds or
equities, a quoted price is stale or prices from independent sources vary, they are generally classified as Level 3.
The Company discounts future cashflows using appropriate interest rate curves. In the case of collateralised
interest rate derivatives and equity derivatives the Company follows the terms in the collateral agreement
governing the transaction. The agreements generally provide that an OIS curve is used. The OIS curves reflect
the interest rate paid on the collateral against the fair value of these derivatives.
Collateralised financing transactions
No quoted prices exist for such financial instruments and so fair value is determined using a discounted cashflow technique. Cash flows are estimated based on the terms of the contract, taking into account any embedded
derivative or other features. Expected cash flows are discounted using market rates appropriate to the maturity of
the instrument as well as the nature and amount of collateral taken or received. Generally, when such
instruments are held at fair value, they are classified within Level 2 of the fair value hierarchy as the inputs used
in the valuation are readily observable.
The Company values a number of assets and liabilities using valuation techniques that use one or more
significant inputs that are not based on observable market data. The Company grades all such assets and
liabilities in order to identify those items for which a reasonably possible change in one or more assumptions is
likely to have a significant impact on the fair value.
Adjustments may be applied to the “base” valuations of financial assets and liabilities calculated using one of the
valuation techniques described above, to ensure that the fair value measurement incorporates all factors that
market participants would consider when determining fair value. Note that no such adjustments are applied to
instruments that are valued using quoted prices for identical instruments in an active market.
42
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
14. Financial assets and liabilities accounting classifications and fair values (continued)
The movement on Level 3 items for the year was:
2014
Financial assets held for trading
Current asset investments
Derivatives
Government bonds
Eurobonds and other corporate bonds
Equities
Collateralised financing transactions
Financial liabilities held for trading
Derivatives
Long Term Debt
Securities sold but not yet purchased
Gain/(loss)
recorded in
At 1 the profit and
January loss statement Purchases
$ Million
$ Million $ Million
2,741
19
1,141
111
(589)
(1)
17
(18)
68
313
1,227
150
(116)
(222)
(1,698)
(132)
94
-
421
(97)
(266)
6
2,619
12
421
117
343
13
153
(58)
(186)
-
265
4,355
(578)
1,911
(2,226)
(92)
64
3,434
At 1
January
$ Million
3,376
20
3,396
2013
Financial assets held for trading
Current asset investments
Derivatives
Government bonds
Eurobonds and other corporate bonds
Equities
Collateralised financing transactions
Financial liabilities held for trading
Derivatives
Long Term Debt
Securities sold but not yet purchased
Sales Settlements
$ Million
$ Million
Transfer
from/(to)
At 31
Level 1 and
Level 2 December
$ Million $ Million
(Gain)/loss
recorded in
the profit and
loss statement Purchases
$ Million $ Million
(738)
(23)
12
(726)
(23)
Gain/(loss)
recorded in
At 1 the profit and
January loss statement Purchases
$ Million
$ Million $ Million
Sales Settlements
$ Million
$ Million
39
70
36
(51)
75
19
Sales Settlements
$ Million
$ Million
Transfer
from/(to)
At 31
Level 1 and
Level 2 December
$ Million $ Million
825
3,549
(12)
5
813
3,554
Transfer
from/(to)
Level 1 and
At 31
Level 2 December
$ Million $ Million
3,447
77
679
60
(771)
(23)
439
24
13
113
1,663
42
(11)
(143)
(1,480)
(37)
(551)
(6)
614
(5)
(161)
29
2,741
19
1,140
112
-
-
292
-
(391)
442
343
4,263
(331)
2,123
(1,671)
(948)
919
4,355
At 1
January
$ Million
4,729
19
4,748
(Gain)/loss
recorded in
the profit and
loss statement Purchases
$ Million $ Million
(222)
145
1
(16)
(237)
145
Sales Settlements
$ Million
$ Million
5
(1,588)
(1)
90
(91)
95
(1,680)
Transfer
from/(to)
Level 1 and
At 31
Level 2 December
$ Million $ Million
307
3,376
18
20
325
3,396
Included in the Level 3 balance at 31 December 2014 above are intercompany assets of $1,570 million (2013:
$1,786 million) and liabilities of $1,655 million (2013: $1,704 million).
43
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
14. Financial assets and liabilities accounting classifications and fair values (continued)
Financial instruments may move between levels in the fair value hierarchy when factors such as liquidity or the
observability of input parameters change. As conditions around these factors improve, financial instruments may
transfer higher up the fair value hierarchy. There were no significant transfers of investments between Level 1
and Level 2 during the years ended 31 December 2014 and 2013.
Valuation process for Level 3 Fair Value Measurements
Price verification procedures and related internal control procedures are governed by the Citi Pricing and Price
Verification Policy and Standards, which are jointly owned by Finance and Risk Management. Finance has
implemented the ICG Securities and Banking Pricing and Price Verification Standards and Procedures to
facilitate compliance with this policy.
Transfers into or out of Level 3 are primarily driven by changes in the availability of independent data for
positions where the Company has risk exposure, yet the market is no longer considered to be active. As liquidity
and transparency improves, the financial instrument may transfer back to a previous classification level.
The key derivative contributors to the Level 3 financial instrument decrease over 2014 focussed on exotic
inventory across the Rates, Commodities and Credit Trading businesses.
Movements across purchases, issuances, sales and settlements were driven by asset backed securities across the
Securitised Markets business and corporate bonds across the European Rates and Credit Trading businesses.
Transfers into Level 3 were driven by Credit Trading across trading securities, and a decrease in observability of
input parameters, such as correlation, over the year. Transfers out of Level 3 were driven by greater
observability around Securitised Markets and Credit Trading, mainly across asset backed securities, as visibility
improved.
During the year, total changes in fair value, representing a gain of $147 million (2013: $94 million loss) were
recognised in the profit and loss account relating to items where fair value was estimated using a valuation
technique that incorporates one or more significant inputs based on unobservable market data. As these
valuation techniques are based upon assumptions, changing the assumptions will change the estimate of fair
value. The potential impact of using reasonably possible alternative assumptions for the valuation techniques for
both observable and unobservable market data has been quantified as approximately $176 million (2013:
$185 million). The main contributors to this impact are Equity Markets, Emerging Markets Credit Trading,
Credit Trading and other cross-asset businesses.
Valuation uncertainty is computed on a quarterly basis. The methodology used to derive the impact across each
product is determined by applying adjustments to the price or significant model input parameters used in the
valuation.
The adjustments are typically computed with reference to proxy analysis using third party data. Examples of the
approach used to derive sensitivity adjustments are outlined below:
•
Equity Markets: Valuation uncertainty is computed from a combination of consensus market data and
proxy analysis using third party data providers.
•
Credit Trading and Securitised Markets: Valuation uncertainty is computed from a combination of
consensus market data, broker data and proxy analysis using third party data providers.
•
Commodity Markets: Valuation uncertainty is computed from a combination of consensus market data
and proxy analysis using third party data providers.
44
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
15. Debtors
The following amounts are included in debtors:
Amounts due within one year:
Trade debtors
Collateralised financing transactions
Cash collateral pledged
Other debtors
Prepayments and accrued income
Corporation tax recoverable
Amounts due in greater than one year:
Deferred tax asset (Note 20)
2014
$ Million
2013
$ Million
9,459
93,054
11,482
281
16
12
7,930
98,874
4,650
130
18
21
29
13
114,333
111,636
2014
$ Million
2013
$ Million
3,118
28,335
666
45
3,068
24,324
776
13
32,164
28,181
Included within debtors are the following balances due from group undertakings:
Amounts due within one year:
Trade debtors
Collateralised financing transactions
Cash collateral pledged
Other debtors
16. Pledged assets
Collateral accepted as security for assets
The fair value of financial assets including government bonds, eurobonds and other corporate bonds, equities,
and cash accepted that were permitted to be sold or re-pledged in the absence of default was $150.2 billion
(2013: $124.1 billion). The fair value of the collateral accepted that had been re-pledged at 31 December 2014
was $144.3 billion (2013: $110.4 billion). The Company was obliged to return equivalent securities. These
transactions were conducted under terms that are usual and customary to standard lending and securities
borrowing and lending activities.
Financial assets pledged to secure liabilities
The total value of purchased financial assets including government bonds, eurobonds and other corporate bonds,
equities and cash that were pledged as collateral for liabilities at 31 December 2014 was $44.9 billion (2013:
$42.9 billion). These transactions were conducted under terms that are usual and customary to standard lending
and securities borrowing and lending activities.
45
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
17. Current asset investments
Current asset investments form part of the asset trading portfolio of the Company and comprise marketable
securities and other financial assets. The following amounts are included in current asset investments:
Government bonds
Eurobonds and other corporate bonds
Equities - listed on a recognised UK exchange
- listed elsewhere
Physical Commodities
Certificates of deposit
Commercial Paper
Derivatives (Note 18)
2014
$ Million
2013
$ Million
21,902
11,629
2,201
7,943
1,458
0
0
203,894
22,901
10,881
1,440
6,121
530
1
52
77,648
249,027
119,574
Eurobonds and other corporate bonds include $576 million (2013: $1,397 million) of bonds that are “designated
at fair value” and the remainder are classified as “held for trading”.
18. Derivatives
2014
Fair Value
Asset
Liability
$ Million
$ Million
Swap agreements, swap options and
interest rate cap and floor agreements
Index and equity options and similar
contractual commitments
Other options and contractual
commitments
2013
Fair Value
Asset
Liability
$ Million
$ Million
181,245
180,538
60,879
62,556
5,661
7,219
8,379
9,863
16,988
15,618
8,390
7,580
203,894
203,375
77,648
79,999
19. Cash at bank and in hand
The following amounts are included within cash at bank and in hand:
Cash at bank held by third parties
Cash at bank held by other group undertakings
2014
$ Million
2013
$ Million
950
621
2,201
604
1,571
2,805
Included within cash held by third parties is $852 million (2013: $1,115 million) that is held on behalf of clients
in segregated accounts. Included within cash held by other group undertakings is $228 million (2013: $142
million) on behalf of clients in segregated accounts.
46
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
20. Deferred tax asset
The following amounts are included within deferred tax:
2014
$ Million
2013
$ Million
Short term timing differences
29
13
At 1 January
Increase during the year - P&L
FX movement
13
17
(1)
12
1
-
At 31 December
29
13
Deferred tax assets are recognised to the extent that it is more likely than not that there will be suitable taxable
profits from which the reversal of the underlying timing differences can be deducted.
Deferred tax is recognised on timing differences arising in the Company's non-UK branch operations, including
differences in relation to share based payments and pensions. The recognition accords with the Company's
accounting policies, because it is more likely than not that there will be suitable taxable profits arising in these
operations from which the future reversal of underlying timing differences can be deducted.
The Company has not recognised a deferred tax asset of $347 million (2013: $379 million) in relation to carried
forward losses and timing differences where the recoverability of potential benefits was not previously
considered likely. This year the Company is profitable and, if this continues, the directors will reconsider
whether recognition is appropriate on the basis that there is sufficient certainty around the future profitability of
the Company to enable the use of the recognised deferred tax asset against future profits of the Company.
21. Creditors
The following amounts are included within creditors.
Included within ‘Other creditors and accruals’ is the accrual in respect of the bank levy.
Amounts falling due within one year:
Securities sold, but not yet purchased
Derivatives (Note 18)
Collateralised financing transactions
Cash collateral held
Bank loans and overdrafts
Trade creditors
Other creditors and accruals
Payroll taxes
Corporation tax payable
Amounts falling due in greater than one year:
Trade creditors
47
2014
$ Million
2013
$ Million
32,754
203,375
79,218
15,404
10,104
6,154
1,043
38
15
29,429
79,999
87,474
7,457
5,881
5,621
1,214
130
14
348,105
217,219
122
160
122
160
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
21
Creditors (continued)
Included within creditors are the following balances due to group undertakings:
Amounts falling due within one year:
Collateralised financing transactions
Cash collateral held
Bank loans and overdrafts
Trade creditors
Other creditors and accruals
Amounts falling due in greater than one year:
Trade creditors
22.
2014
$ Million
2013
$ Million
13,221
5,407
9,960
573
354
9,124
2,623
5,591
930
423
29,515
18,691
122
160
Derecognition of financial assets and financial liabilities
Transferred financial assets that are not derecognised in their entirety
There are certain instances where the Company continues to recognise financial assets that it has transferred.
The Company enters into collateralised financing transactions where it sells or lends debt or equity securities
with a concurrent agreement to repurchase them. As significantly all of the risks and rewards of the underlying
securities are retained, a collateralised financing liability is recognised and the securities remain on balance
sheet.
As at 31 December 2014 the Company recognised $44,893 million of assets (2013: $42,931 million), with an
associated $41,916 million of collateralised financing liabilities (2013: $31,789 million).
23. Trading financial assets and liabilities
Any initial gain or loss on financial instruments where valuation is dependent on valuation techniques using
unobservable parameters are deferred over the life of the contract or until the instrument is redeemed, transferred
or sold or the fair value becomes observable.
The table below sets out the aggregate difference yet to be recognised in profit or loss at the beginning and end
of the year with a reconciliation of the changes of the balance during the year for those financial assets and
liabilities classified as trading.
Unamortised balance at 1 January
Deferral on new transactions
Recognised in profit and loss during the period:
- amortisation
Unamortised balance at 31 December
48
2014
$ Million
2013
$ Million
35
34
28
15
(16)
(8)
53
35
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
24. Subordinated loans
The subordinated loans form part of the Company’s regulatory capital resources held to meet the capital
adequacy requirements of the PRA and can only be repaid with their consent.
The following amounts were included within subordinated loans:
Amounts falling due after five years
2014
$ Million
2013
$ Million
4,080
4,200
4,080
4,200
The subordinated loans, on which interest is payable at market rates, are due to other group undertakings.
On 10 September 2014 the Company repaid $1,300 million of subordinated loan borrowings to Citigroup
Financial Products Inc. and simultaneously drew down EUR 1,000 million of subordinated loan borrowings from
Citigroup Financial Products Inc.
On 27 October 2014 the Company repaid $700 million of subordinated loan borrowings to Citigroup Financial
Products Inc. and simultaneously drew down EUR 550 million of subordinated loan borrowings from Citigroup
Financial Products Inc.
These repayments and borrowings were made in order to enhance the efficient allocation of Citi’s resources.
At 31 December 2014, the Company had in place the following subordinated loan facilities:
Facilities with other group undertakings:
Facilities expiring between one and five years
2014
Total
facilities
available
$ Million
2013
Total
facilities
available
$ Million
-
5,000
-
5,000
On 4 February 2015 the Company drew down $800 million of subordinated loan borrowings from Citigroup
Financial Products Inc.
On 10 March 2015 the Company drew down $750 million of subordinated loan borrowings from Citigroup
Financial Products Inc.
The $5 billion subordinated loan facility expired on 31 December 2014. The subordinated loan borrowings
drawn in 2015 were borrowed under terms analogous to those contained in the expired facility.
49
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
25. Provisions for liabilities
At 1 January 2014
Charge to profits
Provisions utilised
At 31 December 2014
Restructuring
provision
$ Million
Litigation
provisions
$ Million
Other
provisions
$ Million
Total
$ Million
14
56
(40)
14
14
(1)
28
36
(2)
56
106
(43)
30
27
62
119
The restructuring provision is in respect of the cost of staff redundancies. The full amount is expected to be
utilised in 2014. There are no releases anticipated.
No additional information is disclosed in respect of the litigation provision due to its sensitive nature. Other
provisions are held in respect of accounting reconciliation and control procedures as part of the balance sheet
substantiation process.
26. Called up share capital
The Company’s share capital comprises:
2014
$ Million
2013
$ Million
1,500
1,500
1,500
1,500
Allotted, called-up and fully paid:
1,499,626,620 ordinary shares of $1 each
27. Reserves
The Company’s reserves comprise:
Capital
reserve
$ Million
Profit and
loss account
$ Million
Total
$ Million
At 1 January 2014
Profit for the year
Net movement in STRGL in respect of pension scheme
Share based payment transactions
9,989
-
1,265
110
5
(8)
11,254
110
5
(8)
At 31 December 2014
9,989
1,372
11,361
The capital reserve includes capital contributions from the parent company, which are distributable.
Further information on the Company’s regulatory capital is provided in Note 28.
50
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
28. Financial instruments and risk management
Objectives, policies and strategies
Dealing in financial instruments is fundamental to the Company’s business. The risks associated with financial
instruments are a significant component of the overall risk faced by the Company, particularly in turbulent
financial markets.
The Company maintains positions in financial instruments for four principal reasons:
•
•
•
•
as a result of the sale or assignment of structured or derivative positions to its clients (usually in the
over-the-counter market);
to satisfy its clients’ requirements to buy or sell investments;
as a result of underwriting activities; and
to economically hedge positions on its books created by the business noted above.
The Company also acts as agent for its customers in the purchase, sale and assignment of securities and
derivatives listed on recognised investment exchanges.
The Company’s derivative transactions are principally in the equity, interest rate, credit and commodity markets.
Most of the counterparties to the Company’s derivative transactions are banks and other financial institutions.
The risks involved in trading derivatives include market, liquidity, credit and operational risk.
Market uncertainty places additional importance on the risk management policies and procedures which are
outlined below. The Company believes that effective risk management is of primary importance to its overall
operations. Accordingly, the Company seeks to maintain a comprehensive risk management process to monitor,
evaluate and manage the principal risks it assumes in conducting its activities. These risks include market,
liquidity, credit and operational risks. Citi’s risk management framework, as established by the Chief Risk
Officer, is designed to balance business ownership and accountability for risks with well-defined independent
risk management oversight and responsibility to monitor, evaluate and manage the principal risks it assumes in
conducting its activities. Citi’s risk management framework, tailored as appropriate for the Company, is based
on the following principles established by the Chief Risk Officer:
•
•
•
•
•
•
a defined risk appetite, aligned with business strategy;
accountability through a common framework to manage risks;
risk decisions based on transparent, accurate and rigorous analytics;
a common risk capital model to evaluate risks;
expertise, stature, authority and independence of Risk Managers; and
risk managers empowered to make decisions and escalate issues.
The Company’s risk appetite framework includes principle-based qualitative boundaries to guide behaviour and
quantitative boundaries within which the firm will operate, focusing on ensuring it has sufficient capital
resources in light of the risks to which the entity could be exposed. The legal entity risk appetite for the
Company is set by the its board, and incorporates management judgement regarding prudent risk taking and
growth in light of the business environment within which the entity operates. The Company’s board of directors,
with input from senior Citi and Company management, sets overarching expectations and holds management
accountable for ensuring the risk profile remains within this appetite.
In January 2014 a CGML Risk Committee was established, with the aim of assisting the Board in fulfilling its
responsibility with respect to oversight of the risks the Company faces in managing its market, liquidity, credit,
operational and certain other risks and their alignment with the Company’s strategy, capital adequacy and the
macroeconomic environment and development of a strategy to manage these risks. This was pursued in order to
51
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
28
Financial instruments and risk management (continued)
Objectives, policies and strategies (continued)
strengthen local risk governance and ensure prioritisation of local risk and regulatory objectives of the Company,
while at the same time maintaining their alignment with Citi’s global risk strategy. The CGML Risk Committee
meets not less than quarterly.
Risk management
Citi manages risk across three dimensions: businesses, regions and critical products. Each of the major business
groups has a Business Chief Risk Officer who is the focal point for risk decisions (such as setting risk limits or
approving transactions) in the business.
There are also Regional Chief Risk Officers, accountable for the risks in their geographic area and who are the
primary risk contact for the regional business heads and local regulators. In addition, there are Product Chief
Risk Officers for those areas of critical importance to Citi such as real estate and fundamental credit. The Product
Risk Officers are accountable for the risks within their specialities across businesses and regions. The Product
Risk Officers serve as a resource to the Chief Risk Officer, as well as to the Business and Regional Chief Risk
Officers, to better enable the Business and Regional Chief Risk Officers to focus on the day-to-day management
of risks and respond in a timely manner to business needs. Risk management within the Company is overseen by
the Regional Risk Manager along with the managers for the different risk types within the region, such as market
risk, liquidity risk, credit risk and operational risk.
The Citi risk organisation also includes a Business Management team who seek to ensure that the risk
organisation has the appropriate infrastructure, processes and management reporting. This team, which supports
risk management within the Company, includes the following groups:
•
•
•
•
the risk capital group, which continues to enhance the risk capital model and its consistency across all
business activities;
the risk architecture group, which seeks to ensure integrated systems and common metrics, and thereby
facilitates aggregation and stress testing of exposures across the institution;
the operational risk management group, which focuses on improving the effectiveness of existing
controls while increasing accountability and eliminating redundancy; and
the office of Strategic Regulatory Relationships and the Chief Administrative Officer, which focuses on
critical regulatory relationships as well as risk communications.
The Company utilises Citi’s risk management model and organisation, with its multi-dimensional risk oversight
and its people, processes and systems to ensure robust oversight of entity risks. In addition, the Company has
entity specific risk management and controls, to facilitate local challenge to risk taking and to ensure that the
Citi’s approach is appropriate for the Company.
Risk aggregation and stress testing
The Citi Chief Risk Officer, as noted above, is responsible for monitoring and controlling major risk exposures
and concentrations across the organisation. This means aggregating risks, within and across businesses, as well
as subjecting those risks to alternative stress scenarios in order to assess the potential economic impact they may
have on Citi. This aggregation is also performed at a Company level.
Stress tests are undertaken across Citi and the Company and cover mark-to-market, available-for-sale, and
amortised cost portfolios. These firm-wide stress reports seek to measure the potential impact to Citi, the
Company and its component businesses, of stresses such as the risk of very large movements in a number of key
risk factors (e.g. interest rates, credit spreads), as well as the potential impact of a range of historical and
hypothetical forward-looking systemic stress scenarios.
Supplementing the stress testing described above, Risk Management works with input from the businesses and
finance to provide periodic updates to senior management and the Board of Directors on significant potential
exposures across the Company arising from risk concentrations, financial market participants and other systemic
issues. These risk assessments are forward-looking exercises, intended to inform senior management and the
52
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
28 Financial instruments and risk management (continued)
Risk management (continued)
Board of Directors about the potential economic impacts to the Company that may occur, directly or indirectly,
as a result of hypothetical scenarios, based on judgmental analysis from independent risk managers.
The stress testing and risk assessment exercises are a supplement to the standard limit-setting and risk capital
exercises described later in this section, as these processes incorporate events in the marketplace and within the
Company that impact the firm’s view of the form, magnitude, correlation and timing of identified risks that may
arise. In addition to enhancing awareness and understanding of potential exposures within the Company, the
results of these processes serve as the starting point for risk management and mitigation strategies.
A Citi-wide (including an EMEA-based) Business Practices Committee (BPC) reviews practices involving
potentially significant reputational or franchise issues. These committees review whether Citi’s business
practices have been designed and implemented in a way that meets the highest standards of professionalism,
integrity and ethical behaviour.
Additional committees ensure that product risks are identified, evaluated and determined to be appropriate for
Citi and its customers, and safeguard the existence of necessary approvals, controls and accountabilities.
The New Product Approval Committee (NPAC) is designed to ensure that significant risks, including reputation
and franchise risks, for all new ICG products, services or complex transactions, are identified and evaluated,
determined to be appropriate, properly recorded for risk aggregation purposes, effectively controlled, and have
accountabilities in place.
The Investment Products Risk (IPR) Committee oversees two product approval committees that facilitate
analysis and discussion of new retail investment products and services created and/or distributed by Citi. The
Manufacturing Product Approval Committee is responsible for reviewing new or modified products or
transactions created by Citi that are distributed to individual investors as well as third-party retail distributors.
The Distribution Product Approval Committee (DPAC) approves new investment products and services,
including those created by third parties as part of Citi’s “open architecture” distribution model, before they are
offered to individual investors via Citi distribution businesses (e.g. private bank, consumer, etc.).
Along with the processes described above, the following sections summarise the processes that were in place
during 2014 for managing the Company's major risks.
As summarised in the Strategic Report, Citi has identified the following as the key risks facing the Company.
Market risk
Market risk (and namely the price risk component) is the risk to earnings or capital from adverse changes in
market factors such as interest rates, foreign exchange rates, equity and commodity prices, as well as their
implied volatilities and other higher order factors.
The independent risk management is tasked with establishing an effective risk management process, including
defining policies and procedures and suitable market risk controls and limits taking into account where
appropriate business considerations. It is supplemented by appropriate senior Business and Corporate
management risk oversight.
Market risk limit structure clearly defines approved risk profiles and follows the principles and parameters of
Citi's overall risk appetite.
In addition the Company has a defined risk appetite framework supplemented by a daily Value at Risk (VaR)
limit and regular stress testing, with monthly and quarterly reporting to senior management and the Board of
Directors respectively.
53
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
28
Financial instruments and risk management (continued)
Market risk (continued)
Management of this process begins with the employees who work most closely with the Group’s customers,
products and markets and extends up to the senior executives who manage these businesses with a
complementary aggregation up to the country level. In all cases, the businesses are ultimately responsible for the
market risks they take and for remaining within their defined limits.
Market risk is measured through a complementary set of tools, including factor sensitivities, VaR, and stress
testing. Each of these is discussed in greater detail below. Each business has its own market risk limit
framework, encompassing these measures and other controls, including permitted product lists and a new
product approval process for complex products.
The Company’s VaR reports are circulated daily for monitoring of: (i) the VaR usage against the overall VaR
limit; (ii) the standalone VaR by market risk factor; (iii) the component Value at Risk (CVaR) contribution to
total VaR; and (iv) the stressed VaR. As well as an overall VaR limit, the Company has factor sensitivity
triggers in place for each market risk factor that are monitored daily. Factor sensitivities are defined as the
change in the value of a position for a defined change in a market risk factor (e.g. the change in the value of a
Treasury bill for a one basis point change in interest rates). It is the responsibility of each business to seek to
ensure that factor sensitivities are calculated and reported for all relevant risks taken within a trading portfolio.
Exposure that approaches or exceeds limit or trigger levels is escalated within market risk management and to
the Company’s Market Risk Manager and Legal Entity Risk Manager, with necessary actions taken.
Where the Equities business is concerned, an ex-ante stress loss based escalation framework has been put in
place to cover all block trades, including accelerated equity offerings, equity underwritings, rights offerings and
special situation (event-driven) transactions. Transactions with estimated stress losses above certain levels
require escalation to the EMEA Chief Risk Officer, the Company’s Chief Executive Officer and to the
Company’s board.
VaR methodology
VaR estimates the potential decline in the value of a position or a portfolio, under normal market conditions, over
a specified holding period and confidence level. The VaR methodology developed and applied at Citi at a global
level is also used at subsidiary level, including the Company. The Citi standard is a one-day holding period, at a
99 per cent confidence level. The VaR methodology incorporates the factor sensitivities of the trading portfolio
and the volatilities and correlations of those factors. The Company’s VaR is based on the volatilities of, and
correlations between, a wide range of market risk factors, including factors that track the specific issuer risk in
debt and equity securities. VaR statistics can be materially different across firms due to differences in portfolio
composition, differences in VaR methodologies, and differences in model parameters. Citi believes that VaR
statistics can be used more effectively as indicators of trends in risk taking within a firm, rather than as a basis for
inferring differences in risk taking across firms.
Citi and the Company use Monte Carlo simulation, which they believe is conservatively calibrated to incorporate
the greater of short-term (most recent month) and long-term (three years) market volatility. The Monte Carlo
simulation involves approximately 300,000 market factors, making use of 180,000 time series, with market
factors updated daily and model parameters updated weekly. The conservative features of the VaR calibration
contribute an approximate 20% add-on to what would be a VaR estimated under the assumption of stable and
perfectly normally distributed markets. Under normal and stable market conditions, Citi would thus expect the
number of days where trading losses exceed its VaR to be fewer than three exceptions per year. Periods of
unstable market conditions could increase the frequency of these exceptions.
54
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
28 Financial instruments and risk management (continued)
Market risk (continued)
VaR limitations
Although extensive back-testing of VaR hypothetical portfolios is performed, with varying concentrations by
industry, risk rating and other factors, the VaR measure cannot necessarily provide an indication of the potential
size of loss when it occurs. Hence a varied set of factor sensitivity limits and stress tests are used, in addition to
VaR limits.
A VaR limit is in place for the Company, to ensure that any excesses are discussed and resolved between risk
officers and the business and entity management. This limit is complemented by the factor sensitivity triggers
defined above.
Although it provides a valuable guide to risk, VaR should also be viewed in the context of its limitations:
•
•
•
•
•
the use of historical data as a proxy for estimating future events may not encompass all potential events,
particularly those of an extreme nature;
the use of a one day holding period assumes that all positions can be liquidated or their risks offset in one
day. This may not fully reflect the market risk arising at times of severe illiquidity, when a one day
holding period may be insufficient to fully liquidate or hedge positions;
the use of a 99% confidence level, by definition, does not take into account losses that might occur
beyond this confidence level;
VaR is calculated on the basis of exposures outstanding at close of business and therefore does not
necessarily reflect intra-day exposures; and
VaR is unlikely to reflect loss potential on exposures that only arise under significant market movements.
As set out above, stress testing is performed on portfolios on a weekly basis to estimate the impact of extreme
market movements. Stress testing is performed on individual portfolios, as well as on aggregations of portfolios
and businesses, as appropriate. It is the responsibility of independent market risk management, in conjunction with
the businesses, to develop stress scenarios, review the output of periodic stress testing exercises, and use the
information to make judgments concerning the on-going suitability of exposure levels and limits.
The following table summarises market risk by disclosing the Company’s average VaR during the reporting
period, together with the VaR as at 31 December, broken down into component Value at Risk (CVaR). CVaR
represents the correlation or diversification adjusted standalone VaR contribution from a particular sub-portfolio to
the total VaR:
2014
$ Million
Foreign
Equity
Interest
Overall
exchange Commodity
risk rate risk
risk
VaR
risk Credit Risk
Average
As at 31 December
Peak
Average
As at 31 December
9.7
6.3
24.2
20.1
9.9
32.3
Equity
risk
Interest
rate risk
8.7
6.1
17.4
17.3
1.9
3.4
6.8
0.9
1.9
6.9
4.2
8.0
8.8
36.8
29.5
53.0
2013
$ Million
Foreign
exchange Commodity
risk
risk Credit Risk
Overall
VaR
4.7
0.8
55
2.5
0.5
2.5
5.5
35.8
30.1
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
28
Financial instruments and risk management (continued)
Liquidity risk
The Company defines Liquidity risk as the risk that the Company will not be able to meet efficiently both
expected and unexpected current and future cash flow and collateral needs without adversely affecting either daily
operations or the financial condition of the Company.
The Company’s funding and liquidity objectives aim to maintain liquidity, to fund the existing asset base and grow
the core business, while at the same time conserving sufficient excess liquidity, structured appropriately, to
continue operating under a wide variety of market conditions, including both short and long-term market
disruptions.
The UK forum for liquidity management is the UK Asset/Liability Management Committee (UK ALCO), which
includes senior executives from within the Company and is chaired by the Chief Country Officer. This forum is
composed of the UK CFO, EMEA CFO, UK legal entity Risk Manager, UK Treasurer, EMEA Regional
Treasurer, the Financing Desk Heads and key business representatives. The UK ALCO reviews the current and
prospective funding requirements of the Company, as well as its capital position and balance sheet.
A liquidity plan is prepared annually and the liquidity profile is monitored on an on-going basis and reported daily.
Liquidity risk is monitored using various ratios and limits in accordance with the Liquidity Risk Management
Policy for Citi. The funding and liquidity plan includes analysis of the balance sheet as well as of the economic
and business conditions impacting the major operating subsidiaries in the UK. As part of the funding and liquidity
plan, liquidity limits, liquidity ratios and assumptions for periodic stress tests are reviewed and approved.
In order to meet its liquidity stress testing requirements and liquidity ratio hurdles, the Company holds a pool of
liquid assets including highly liquid government bonds.
Stress testing and scenario analyses are intended to quantify the potential impact of a liquidity event on the
Company’s balance sheet and liquidity position, and to identify viable funding alternatives that can be utilised.
These scenarios include potential significant changes in key funding sources, market triggers (such as credit rating
downgrades), uses of funding, and political and economic conditions, including standard and stressed market
conditions as well as firm-specific events. Some tests span liquidity events over a full year while others may cover
a more intense shock over a shorter period such as one month. These potential liquidity events can identify
potential mismatches between liquidity sources and uses over a variety of time horizons, and liquidity limits are
set accordingly. To monitor the liquidity of a unit, these stress tests and potential mismatches may be calculated
with varying frequencies, with several important tests performed daily.
Given the range of potential stresses, Citi maintains a series of contingency funding plans on a consolidated basis
as well as for individual entities, including the Company. The plans specify a wide range of readily available
actions under a variety of adverse market conditions or idiosyncratic disruptions.
56
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
28 Financial instruments and risk management (continued)
Liquidity risk (continued)
The following table assigns the Company’s assets and liabilities to relevant maturity groupings based on the
remaining period from the balance sheet date to the contractual maturity date. Note that in managing liquidity
risk, management uses certain assumptions based on a combination of contractual and behavioural maturity
profiles which differ from the contractual maturity dates shown below.
Total
$ Million
On
demand
$ Million
Cash
Current asset investments
Derivatives
Collateralised financing
transactions
Cash collateral pledged
Trade debtors
Other debtors
Fixed asset investments
1,571
45,133
203,894
111
45,133
203,894
1,460
-
93,054
28,220
11,482
9,459
281
40
Total financial assets
31 December 2014
Bank loans and overdrafts
Collateralised financing
transactions
Derivatives
Cash collateral held
Securities sold but not yet
purchased
Trade creditors
Other creditors and accruals
Subordinated loans
Total financial liabilities
Net liquidity gap
Cumulative liquidity gap
3 months
& less 3 - 12 months
$ Million
$ Million
1 – 5 years
$ Million
More than
5 years
$ Million
-
-
-
61,287
2,820
264
463
-
11,482
9,459
281
-
-
-
40
364,914
277,358
83,969
2,820
264
Total
$ Million
On
demand
$ Million
3 months
& less 3 - 12 months
$ Million
$ Million
1 – 5 years
$ Million
503
More than
5 years
$ Million
10,104
1,310
3,922
841
2,675
1,356
79,218
19,617
51,282
7,252
1,067
-
203,375
15,404
203,375
15,404
-
-
-
32,754
-
32,754
-
-
-
6,276
1,043
4,080
-
6,154
1,043
-
-
122
-
4,080
352,254
224,302
110,559
8,093
3,864
5,436
53,056
(26,590)
(5,273)
(3,600)
(4,933)
53,056
26,466
21,193
17,593
12,660
12,660
57
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
28
Financial instruments and risk management (continued)
Liquidity risk (continued)
31 December 2013
Cash
Current asset investments
Derivatives
Collateralised financing
transactions
Cash collateral pledged
Trade debtors
Other debtors
Fixed asset investments
Total financial assets
Bank loans and overdrafts
Collateralised financing
transactions
Derivatives
Cash collateral held
Securities sold but not yet
purchased
Trade creditors
Other creditors and accruals
Subordinated loans
Total financial liabilities
Net liquidity gap
Cumulative liquidity gap
Total
$ Million
On
demand
$ Million
3 months
& less
$ Million
3 - 12
months
$ Million
1 – 5 years
$ Million
More than
5 years
$ Million
2,805
41,926
77,648
1,367
41,926
77,648
1,438
-
-
-
-
98,874
30,715
64,857
1,113
1,078
1,111
4,650
7,930
130
50
-
4,650
7,930
130
-
-
-
50
234,013
151,656
79,005
1,113
1,078
1,161
Total
$ Million
On
demand
$ Million
3 months
& less
$ Million
3 - 12
months
$ Million
1 – 5 years
$ Million
More than
5 years
$ Million
5,881
1,090
617
1,087
3,087
-
87,474
23,179
55,111
8,818
366
-
79,999
7,457
79,999
7,457
-
-
-
29,429
-
29,429
-
-
-
5,781
1,214
4,200
-
5,621
1,214
-
-
160
-
4,200
221,435
104,268
99,449
9,905
3,613
4,200
47,388
(20,444)
(8,792)
(2,535)
(3,039)
47,388
26,944
18,152
15,617
12,578
12,578
The table below assigns the Company’s liabilities to relevant maturity groupings based on the remaining
contractual future undiscounted cash flows up to maturity. The amounts disclosed in the table are the contractual
undiscounted cash flows, whereas the Company manages the liquidity risk based on a combination of contractual
and behavioural maturity profiles. Derivatives are excluded from the table because they are not held for settlement
over the period of contractual maturity.
58
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
28
Financial instruments and risk management (continued)
Liquidity risk (continued)
31 December 2014
Contractual
value
$ Million
On
demand
$Million
Subordinated loans
4,610
-
14
42
225
4,329
Total financial liabilities
4,610
-
14
42
225
4,329
On
demand
$Million
3 months
& less
$ Million
3 months
& less
$ Million
3 - 12
months
$ Million
3 - 12
months
$ Million
1 – 5 years
$ Million
More than
5 years
$ Million
31 December 2013
Contractual
value
$ Million
Subordinated loans
5,401
-
43
129
686
4,543
Total financial liabilities
5,401
-
43
129
686
4,543
1 – 5 years
$ Million
More than
5 years
$ Million
Credit risk
Credit risk is the potential for financial loss resulting from the failure of a borrower or counterparty to honour its
financial or contractual obligations. Credit risk arises in many of the Company’s business activities, including:
•
•
•
•
•
sales and trading;
derivatives;
securities transactions;
settlement; and
when Citi acts as an intermediary on behalf of its clients and other third parties.
Credit risk is captured in the Company’s defined risk appetite framework, which is supplemented by regular stress
testing and monitoring of exposures, with monthly and quarterly reporting to the senior management and the
Board of Directors respectively.
The credit process is grounded in a series of fundamental policies, including:
•
•
•
•
•
joint business and independent risk management responsibility for managing credit risks;
a single centre of control for each credit relationship to coordinate credit activities with that client;
a requirement for a minimum of two authorised-credit-officer signatures on extensions of credit, one of
which must be from a sponsoring credit officer in the business and the other from a credit officer in
independent credit risk management;
consistent risk rating standards, applicable to every Citi obligor and facility; consistent standards for
credit origination documentation and remedial management; and
portfolio limits to ensure diversification and maintain risk/capital alignment.
The Company uses derivatives both as an end-user for asset/liability management and in its client businesses. The
Company enters into derivatives principally to enable customers to transfer, modify or reduce their credit, equity,
interest rate and other market risks. In addition, the Company uses derivatives, and other instruments, as an end
user to manage the risks to which the Company is exposed.
The Company’s credit exposure on derivatives and foreign exchange contracts is primarily to professional
counterparties in the global financial sector, including banks, investment banks, hedge funds, insurance companies
and asset management companies.
59
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
28 Financial instruments and risk management (continued)
Credit risk (continued)
Wrong-way risk is an aggravated form of concentration risk and arises when there is a strong correlation between
the counterparty’s probability of default and the mark-to-market value of the underlying transaction. Citi uses a
range of procedures to monitor and control wrong-way risk, including requiring entities to obtain prior approval
before undertaking wrong-way risk transactions outside pre-agreed guidelines. This is monitored at a Company
level, and includes circulation of a monthly report that identifies CDS based, OTC or securities finance
transactions (SFT) that generate specific wrong-way risk. Wrong-way risk is mitigated through the use of
enforceable netting agreements and margining.
The Company seeks to restrict its exposure to credit losses by entering into master netting arrangements with most
counterparties with which it undertakes a significant volume of transactions. Master netting arrangements do not
generally result in an offset of balance sheet assets and liabilities, as transactions are usually settled on a gross
basis. However, the credit risk associated with favourable contracts is reduced by a master netting arrangement to
the extent that if an event of default occurs, all amounts with the counterparty are terminated and settled on a net
basis. Many of these arrangements also provide for the calling and posting of variation margin or collateral,
further reducing the Company’s exposures. The internal measurement of exposure on each credit facility takes
into account legally enforceable netting and margining arrangements – both in terms of current exposure and in
terms of the simulated calculation of potential future exposure.
Large exposure limit reports are circulated daily that show the Company’s exposure to various counterparty
groupings as a proportion of its own funds. Regulations require that the Company does not exceed specified limits
for its non trading book exposures. Within a certain percentage below the maximum permitted level, the
Regulatory Reporting group conducts initial analysis and provides a breakdown of exposures to credit risk
management. At or above the maximum permitted level, the credit risk management team takes action and
escalates to the front office in order to reduce exposure to that counterparty and thereby bring exposure back
within permitted levels. Similar reporting is carried out against internal limits for the trading book exposures.
The following table presents the maximum exposure to credit risk, before taking account of any collateral held or
other credit enhancements (where such credit enhancements do not meet offsetting requirements).
31 December 2014
Cash
Current asset investments
Collateralised financing transactions
Cash collateral pledged
Trade debtors
Other debtors
Fixed asset investments
31 December 2013
Cash
Current asset investments
Collateralised financing transactions
Cash collateral pledged
Trade debtors
Other debtors
Fixed asset investments
60
Maximum
exposure
$ Million
1,571
249,027
93,054
11,482
9,459
281
40
Offset
$ Million
(205,145)
(11,552)
-
Exposure to credit
risk (net)
$ Million
1,571
43,882
81,502
11,482
9,459
281
40
364,914
(216,697)
148,217
Maximum
exposure
$ Million
2,805
119,574
98,874
4,650
7,930
130
50
Offset
$ Million
(67,170)
(17,622)
-
Exposure to credit
risk (net)
$ Million
2,805
52,404
81,252
4,650
7,930
130
50
234,013
(84,792)
149,221
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
28
Financial instruments and risk management (continued)
Credit risk (continued)
The current asset investments offset amount in the above table relates to exposures where the counterparty has an
offsetting derivative exposure with the Company and a master netting agreement is in place. These amounts do
not qualify for net presentation for accounting purposes as settlement may not actually be made on a net basis.
The collateralised financing transactions offset adjustment relates to balances arising from repo and reverse repo
transactions. The offsets relate to balances where there is a legally enforceable right of offset in the event of
counterparty default and consequently a net exposure for credit risk management purposes. However as there is
no intention to settle individual transactions on a net basis under normal circumstances, they do not qualify for net
presentation for accounting purposes. Credit risk exposure is monitored on an asset basis except for positions
which are specifically collateralised, normally in the form of cash.
As at 31 December the Company’s third party credit exposure (mark to market plus potential future exposure as
determined by the Company’s internal measure) in relation to collateralised financing transactions and derivatives
was distributed as follows (these exposures do not include derivative and collateralised financing transactions with
other group undertakings):
Industry
2014
%
2013
%
37.4
29.4
5.9
27.3
45.6
16.2
5.0
33.2
100
100
Commercial and universal banks
Insurance and fund management
Brokers and investment banks
Other (including Corporates, SPVs and Hedge Funds)
The credit quality of the Company’s financial assets is maintained by adherence to Citi policies on the provision of
credit to counterparties. The Company monitors the credit ratings of its counterparties with the table below
presenting an analysis of the Company's current asset investments and derivative transactions by rating agency
designation based on Standard & Poor, Moody’s and Fitch ratings as at 31 December:
Government bonds
2013
2014
Eurobonds and
corporate bonds
2014
2013
Derivatives
2014
2013
%
%
%
%
%
%
AAA / AA / A
54.0
57.7
81.0
74.7
47.6
76.9
BBB
32.0
36.8
8.0
12.1
3.9
1.8
BB / B
14.0
5.0
7.0
-
-
1.0
0.5
-
0.9
CCC or below
8.8
1.6
Central counterparty clearing house (unrated)
-
-
-
-
26.8
-
Unrated
-
0.5
3.0
2.9
21.2
20.4
100.0
100.0
100.0
100.0
100.0
100.0
-
As discussed above the maximum credit risk is mitigated through the use of collateral, netting arrangements and
the application of credit limits.
61
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
28
Financial instruments and risk management (continued)
Country Risk
Country risk is the risk that an event in a country (precipitated by developments within or external to that country)
will impair the value of Citi’s franchise or will adversely affect the ability of obligors within that country to
honour their obligations to Citi. Country risk events may include sovereign defaults, banking defaults or crises,
currency crises and/or political events.
The information below is based on Citi’s internal risk management measures. The country designation in Citi’s
risk management systems is based on the country to which the client relationship, taken as a whole, is most
directly exposed with regard to economic, financial, socio-political or legal risks. This includes exposure to
subsidiaries within the client relationship that are domiciled outside of the country.
Citi assesses the risk of loss associated with certain of the country exposures on a regular basis. These analyses
take into consideration alternative scenarios that may unfold, as well as specific characteristics of the Company’s
portfolio, such as transaction structure and collateral. The Company currently believes that the risk of loss
associated with the exposures set forth below is likely to be materially lower than the exposure amounts disclosed
below and is sized appropriately relative to its operations in these countries.
The sovereign entities of all the countries disclosed below, as well as the financial institutions and corporations
domiciled in these countries, are important clients both to the Company and to the global Citi franchise. Citi fully
expects to maintain its presence in these markets to service all of its global customers. Hence the Company’s
exposure in these countries may vary over time, based upon its franchise, client needs and transaction structures.
The economic and fiscal situations of several European countries remain fragile, and geopolitical tensions
throughout the region, including in Russia, have added to the uncertainties. Fiscal and monetary actions, or
expected actions, throughout the region have further impacted the global financial markets. While concerns
relating to sovereign defaults or a partial or complete break-up of the European Monetary Union (EMU), including
potential accompanying redenomination risks and uncertainties, seemed to have abated during 2014, such
concerns have resurfaced with the election of a new government in Greece in January 2015. The table below
outlines the Group’s exposures to these countries as of 31 December:
2014
$ Millions
Greece
Ireland
Italy Portugal
Spain
Russia
Total
-
125
282
8
14
44
473
Net trading exposure
45
162
1,308
356
1,502
(2)
3,371
Net current funded exposure
45
287
1,590
364
1,516
42
3,844
Net current funded credit exposure
Net current funded credit exposure:
Sovereigns
-
-
177
-
-
20
197
Financial institutions
-
125
101
-
5
24
255
Corporations
-
-
5
7
8
-
20
Total net current funded credit exposure
-
125
283
7
13
44
472
2013
$ Millions
Greece
Ireland
1
39
177
Net trading exposure
104
372
Net current funded exposure
105
Sovereigns
Spain
Total
-
5
222
1,278
86
2,282
4,122
411
1,455
86
2,287
4,344
-
-
149
-
-
149
Financial institutions
1
39
24
-
3
67
Corporations
-
-
4
-
2
6
Total net current funded credit exposure
1
39
177
-
5
221
Net current funded credit exposure
Italy Portugal
Net current funded credit exposure:
62
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
28
Financial instruments and risk management (continued)
Country Risk (continued)
The exposures detailed above represent nominal levels of exposure without taking account of the benefit of any
collateral, but including the benefits of margin and credit protection. The net trading exposures are marked to
market daily, and levels of exposure vary as the positions are maintained consistent with customer needs. As
discussed above, the Company’s net exposure is significantly lower than shown in this table.
Operational risk (unaudited)
Operational risk is the risk of loss resulting from inadequate or failed internal processes, systems or human factors,
or from external events. It includes the reputation and franchise risk associated with business practices or market
conduct in which Citi is involved. Operational risk is inherent in the Company’s global business activities, as well
as its internal processes that support those business activities, and can result in losses arising from events related to
the following, among others:
•
•
•
•
•
fraud, theft and unauthorised activities;
employment practices and workplace environment;
clients, products and business practices;
physical assets and infrastructure; and
execution, delivery and process management.
Where applicable, losses stemming from fines and regulatory penalties are included in the relevant categories
above, which are consistent with the Basel framework.
Framework
Citi’s global operational risk is managed through an overall framework designed to balance strong corporate
oversight with well-defined independent risk management. This framework includes:
•
•
•
recognised ownership of the risk by the businesses;
oversight by Citi’s independent risk management and control functions; and
independent assessment by Citi’s Internal Audit function.
The goal is to keep operational risk at appropriate levels relative to the characteristics of the Company’s
businesses, the markets in which it operates, its capital and liquidity, and the competitive, economic and regulatory
environment.
To anticipate, mitigate and control operational risk, Citi maintains a system of policies and has established a
consistent framework for monitoring, assessing and communicating operational risks and the overall effectiveness
of the internal control environment across Citi. As part of this framework, Citi has established a MCA programme
to help managers self-assess key operational risks and controls and identify and address weaknesses in the design
and/or effectiveness of internal controls that mitigate significant operational risks. MCAs are in place for all the
major business lines and control areas impacting the Company.
As noted above, each major business segment must implement an operational risk process consistent with the
requirements of this framework. The process for operational risk management includes the following steps:
• identify and assess key operational risks;
• design controls to mitigate identified risks;
• establish key risk and control indicators;
• implement a process for early problem recognition and timely escalation;
• produce a comprehensive operational risk report; and
• ensure that sufficient resources are available actively to improve the operational risk environment and
mitigate emerging risks.
As new products and business activities are developed, processes are designed, modified or sourced through
alternative means and operational risks are considered.
63
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
28
Financial instruments and risk management (continued)
Operational risk (continued)
Framework (continued)
In addition, Operational Risk Management, within Citi’s Franchise Risk and Strategy group, proactively assists the
businesses, operations and technology and the other independent control groups in enhancing the effectiveness of
controls and managing operational risks across products, business lines and regions, and facilitates the
management of operational risk at a Citi and Company level.
Operational risk is part of the Company’s defined risk appetite framework supplemented with regular reporting
and updates to the senior management and the Board of Directors.
Measurement
To support advanced capital modelling and management, each business is required to capture relevant operational
risk event information. An enhanced version of the Citi risk capital model for operational risk has been developed
and applied across the major business segments. The PRA has approved this model, including the associated
capital allocation, for use within the Company as an “Advanced Measurement Approach”. It uses a combination
of internal and external loss data to support statistical modelling of capital requirement estimates, which are then
adjusted to incorporate qualitative aspects of the operational risk and control environment.
To enhance its operational risk management the Company has implemented a forward looking scenario analysis to
identify and quantify emerging operational risks, through a systematic process of obtaining opinions from business
managers and risk management experts to devise reasoned assessments of the likelihood and loss impact of
plausible, high severity operational risk losses. This development has been integrated into the operational risk
capital assessment for the Company.
Anti Money Laundering and Sanctions
Local and international Anti-Money Laundering (AML) and Sanctions requirements impact the activities carried
out by the Company and its clients. The development of Sectoral Sanctions to address the political situation in
Ukraine may restrict the Company’s ability to act for certain clients with respect to advisory services connected to
longer term lending and capital raising activities by those clients. To facilitate Citi’s overall compliance with
these requirements, including recent and upcoming changes, Citi has developed an enhanced control infrastructure
around activities that may be affected by applicable Sanctions regimes. Regulatory requirements concerning AML
controls may continue to cause elevated costs to the Company, particularly those associated with customer due
diligence and suspicious activity monitoring, as Citi continues to implement enhancements in these programme
areas.
Conduct Risk
Conduct risk is the risk that Citi’s employees or agents may – intentionally or through negligence – harm
customers, clients, or the integrity of the markets, and thereby the integrity of the firm. Conduct risk is not limited
to specific businesses or functions, but rather spans all conduct and behaviour at the firm. Consistent with Citi’s
commitment to elevate the focus on conduct risks, Citi has continued to enhance the MCA process to enrich
conduct risk considerations. In 2014, Citi proactively established a global Conduct Risk Program which is
designed to identify, manage, minimize and mitigate Citi’s exposure to conduct risk and resulted in issuance of a
Citi-wide Conduct Risk Policy. The Conduct Risk Policy describes framework through which Citi manages,
minimizes, and mitigates its significant conduct risks, and the responsibilities of each of the three lines of defence
for complying with the policy.
64
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
28
Financial instruments and risk management (continued)
Operational risk (continued)
Client Assets Sourcebook (CASS)
The FCA’s Client Assets Sourcebook (CASS) sets out the requirements with which firms must comply when
holding or controlling client assets (client money and safe custody assets). Due to recent market activity and high
profile insolvencies the FCA has published changes to its CASS rules, which all firms are expected to implement
and be fully compliant with by 1 June 2015.
The UK rules are designed to help ensure that clients’ assets are protected and returned to clients within a
reasonable timeframe in the event of a firm’s failure and that the UK market is regarded as a safe place to conduct
business. The rules also prescribe requirements for organisational arrangements, controls and governance. In line
with this, Citi has a CASS Oversight Officer and continues to develop CASS governance arrangements and is
working towards the implementation of the new CASS rules coming into force on 1 June 2015, which may result
in elevated costs to the Company.
Outsourcing Risk
Third parties with which Citi does business may also be sources of cybersecurity or other technological risks. Citi
outsources certain functions, such as uploading content on customer-facing websites, and developing software for
new products and services. These relationships allow for the storage and processing of customer information by
third-party hosting of or access to Citi websites, which could result in service disruptions or website defacements,
and the potential to introduce vulnerable code, resulting in security breaches impacting Citi customers. While Citi
engages in certain actions to reduce the exposure resulting from outsourcing, such as performing onsite security
control assessments, limiting third-party access to the least privileged level necessary to perform job functions and
restricting third-party processing to systems stored within Citi’s data centres, ongoing threats may result in
unauthorized access, loss or destruction of data or other cyber incidents with increased costs and consequences to
Citi such as those discussed above.
Furthermore, because financial institutions are becoming increasingly interconnected with central agents,
exchanges and clearing houses, partly because of the derivatives reforms over the last few years, Citi has increased
exposure to operational failure or cyber attacks through third parties.
Regulatory risk and developments
Regulatory risk is the risk of failing to comply with regulatory requirements, regulatory change or regulators’
expectations. Failing to manage regulatory risk properly may result in regulatory sanctions and increased
reputational and franchise risk.
As the regulatory environment continues to evolve, Citi and the Company remain committed to implementing new
regulations and to ensuring continuous compliance with forthcoming regulatory requirements. The most
significant developments assessed by the Company are:
•
•
•
•
•
Capital Requirements Directive (CRD IV)
Bank Recovery and Resolution Directive (BRRD)
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
European Market Infrastructure Regulation (EMIR)
Markets in Financial Instruments Directive (MiFID) and Regulation on Markets in Financial Instruments
(MiFIR)
Implementation of CRD IV
The EU CRD IV legislative package includes the Capital Requirements Regulation (CRR) and the Capital
Requirements Directive (CRD) as approved by the European Parliament on 16 April 2013 and is directly
applicable to banks and financial firms which are prudentially regulated in the United Kingdom. It became
effective on 1 January 2014 and has introduced significant quantitative and qualitative changes to capital adequacy
and the related governance processes throughout the financial sector in the European Union. The quantitative
implications of this include higher capital requirements associated with counterparty credit risk and the
introduction of additional capital buffers to cover cyclical and systemic risks as well as capital conservation
concerns. A number of these requirements will be introduced on a phased basis between 2015 and 2019. There
65
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
28
Financial instruments and risk management (continued)
Regulatory risk and developments (continued)
are also qualitative implications, such as more reliance on higher quality capital and expectations of improved risk
management processes.
Bank Recovery and Resolution Directive
There is an increased focus from local regulators on ensuring that subsidiaries and branches of large international
financial services companies are adequately capitalised and managed locally, such that in the event of a local
market disruption they would be able to sustain their business and cover any losses incurred without an
exaggerated reliance on offshore parental financial aid.
As of 1 January 2015 all EU Member States have to apply a single rulebook for the resolution of banks and large
investment firms, as prescribed by the BRRD, designed to harmonise and improve the tools for dealing with bank
crises across the EU.
Additionally, the Company has been identified as a Material Legal Entity in Citi’s Resolution Plan. Citi defines
Material Legal Entities as those legal entities, including subsidiaries and foreign offices, with business lines,
including associated operations, services, functions and support that upon failure would result in a material loss of
revenue, profit or franchise value of Citi.
Citi’s Resolution Plan can be found at
: http://www.federalreserve.gov/bankinforeg/resolution-plans.htm.
Dodd Frank Act
The Dodd–Frank Wall Street Reform and Consumer Protection Act and the Wall Street Transparency and
Accountability Act (together commonly referred to as the Dodd-Frank Act) introduced an array of new regulations
in respect of over-the-counter derivatives (swaps), and the activities of major institutions transacting in these
products. These included registration and regulatory requirements for swap dealers, an enhanced risk management
framework, segregation of initial margin for uncleared swaps, business conduct rules applicable when transacting
swaps with certain types of counterparties, and rules on mandatory clearing and trade execution of certain swaps.
Financial intermediaries that transact above certain thresholds with U.S. counterparties (or counterparties with US
originated guarantees) were required to register with the Commodity Futures Trading Commission (CFTC). The
directors and senior management of the Company accordingly elected to register the Company as a Swap Dealer,
and the Company was provisionally registered by the CFTC as a non-US Swap Dealer in October 2013. A
consequence of registering as a Swap Dealer is increased regulatory oversight by the CFTC and enhanced
compliance obligations. 2014 represented the first full year of the Company operating as a CFTC-registered nonUS Swap Dealer for purposes of the Dodd-Frank Act.
In December 2013 the CFTC granted limited relief from certain requirements under the Dodd-Frank Act for EUbased Swap Dealers, to the extent that Swap Dealers comply with comparable regulatory obligations under
European law. The Company has elected to take advantage of certain elements of this relief. Whilst this CFTC
relief has, to some extent, reduced the compliance burden of the Dodd-Frank Act upon the Company, it continues
to be subject to significant aspects of the Dodd-Frank Act. A governance structure has therefore been
implemented to assist the Board of Directors in overseeing ongoing compliance with the Company’s regulatory
obligations under the Dodd-Frank Act. This includes the establishment of a Swap Dealer Governing Body
(constituted by the Company’s Chief Executive Officer and senior representatives of the Business, Compliance,
Risk, Finance, Legal, and Operations & Technology) and various sub-committees. The Chief Executive Officer
and EMEA Chief Administrative Officer are responsible for updating the Company’s Board of Directors on a
regular basis as to the Company’s compliance with the Dodd-Frank Act and any material breaches thereof.
Pursuant to the Dodd-Frank Act, the Company’s Head of Compliance and CF10 Compliance Oversight Officer
also produces an annual report addressed to the Chief Executive Officer, outlining the Company’s compliance
with certain matters prescribed under the Dodd-Frank Act.
EMIR
Similarly to the Dodd-Frank Act in the US, the EU’s EMIR regulation introduces mandatory central clearing of
transactions with certain counterparties that will impact the Company, with potential liquidity, expense and capital
considerations. The regulation requires all counterparties to report details of contracts to an authorised trade
repository (TR) and to comply with certain risk mitigation requirements for non-cleared derivatives. Exposure to
Central Counterparty Clearing Houses (CCPs) will need to be carefully monitored and managed as any other
66
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
28
Financial instruments and risk management (continued)
Regulatory risk and developments (continued)
relationship within the Company’s credit risk management framework. Final rules for client clearing of OTC
derivatives and the implications of mandatory margin requirements for derivatives not cleared will continue to be
closely monitored, as will the rules for intragroup trades with EU and non-EU affiliates. The Company is
currently engaged in system developments to ensure implementation readiness once the final phases of the
regulation come into effect.
Markets in Financial Instruments Directive (MiFID) and Regulation on Markets in Financial Instruments (MiFIR)
The new rules relating to MiFID II/MiFIR will start to apply to firms early in 2017. The MiFID II/MiFIR reforms
will have a significant impact on a number of areas including market structure, transparency requirements,
transaction reporting, algorithmic trading, commodities, the third country regime, investment research and
supervision.
Some key aspects of MiFID II/MiFIR include the introduction of a new multilateral, discretionary trading venue
for non-equity instruments, the Organised Trading Facility (OTF), and an extension of the Systematic Internaliser
(SI) regime to non-equity instruments. There will also be a requirement for investment firms to trade listed
equities on a Regulated Market, Multilateral Trading Facility, OTF or SI. There are new systems and controls
requirements for organised trading venues, trading controls for algorithmic trading activities, an obligation to trade
clearable derivatives on organised trading platforms and the introduction of a harmonised EU regime for access to
trading venues, CCPs and benchmarks. MiFID II/MiFIR will also cover structured deposits and commodities.
The scope of transaction reporting obligations will be widened. There will additionally be an increase in the
transparency requirements for the equities market and new transparency requirements for fixed income
instruments and derivatives, with additional requirements including the submission of post-trade data to
Authorised Reporting Mechanisms. There are increased conduct of business requirements aimed at increasing
investor protection, including rules relating to inducements and the provision of investment research.
Strengthened supervisory powers and administrative sanctions will also apply.
Capital management
The Company’s regulatory capital is held to ensure that sufficient loss-absorbing capital is available to meet
unexpected losses and to meet minimum capital standards as set by the PRA. The composition and amount of
capital takes full account of the regulations in force, including the recently implemented CRD IV package.
Capital forecasts are prepared taking into account strategic growth plans, as set out in the Company’s Internal
Capital Adequacy Assessment Process (ICAAP) document. Capital forecasts are updated and reviewed monthly
through the UK ALCO and the Company’s Basel Governance Oversight Committee.
The Company’s capital adequacy position is managed and monitored in accordance with the prudential
requirements of the PRA. The Company must at all times meet the applicable minimum capital requirements of
the PRA. The Company has established processes and controls to monitor and manage its capital adequacy
position, and has remained in compliance with these requirements throughout the year. The Company maintains
an internal capital buffer in excess of the PRA’s minimum regulatory capital requirements.
Regulatory capital (unaudited)
Under the PRA’s minimum capital standards, the Company is required to maintain a prescribed excess of total
capital resources over its capital requirements. For this purpose the Company calculates capital requirements for
market risk, credit risk, concentration risk and operational risk based upon a number of internal models and
recognises a number of credit risk mitigation techniques.
The Company’s regulatory capital resources comprise two distinct elements:
•
•
Tier 1 capital, which includes ordinary share capital, retained earnings and capital reserves;
Tier 2 capital, which includes qualifying long-term subordinated liabilities.
Various limits are applied to the Tier 2 element of the capital base. In particular, qualifying long-term
subordinated loan capital may not exceed 75 per cent of Tier 1 capital. In addition, the CRR requires a number of
67
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
28
Financial instruments and risk management (continued)
Regulatory capital (continued)
deductions from Common Equity Tier 1 (CET1) capital. These include intangible assets, certain deferred tax
balances and, above certain thresholds, capital instruments issued by financial sector entities.
Tier 3 capital, which included qualifying short-term subordinated liabilities, ceased to qualify as eligible capital
from 1 January 2014 under the CRR. At 31 December 2013 Tier 3 capital comprised the unaudited loss for the
year. The increase in capital deductions in 2014 was primarily driven by the deduction of holdings in other
financial sector entities.
The Company’s policy is to maintain a sufficient capital base in order to retain investor, counterparty, creditor and
market confidence and to sustain the future development of the business. The impact of the level of capital on
shareholders’ returns is also recognised, alongside the need to maintain a balance between the higher returns that
might be possible with greater gearing and the advantages and security afforded by a sound capital position.
The Company’s regulatory capital resources at 31 December were as follows:
2014
$ Million
2013
$ Million
Tier 1 capital
Tier 2 capital
Tier 3 capital
Deductions
12,754
4,080
(871)
12,794
4,086
(234)
(265)
Total regulatory capital resources
15,963
16,381
Under CRD IV’s framework of capital adequacy regulation, Pillar III mandates enhanced public disclosures in
respect of capital, risk profile and remuneration. Further details on the Company’s Pillar III regulatory capital
disclosures can be found at: http://www.citigroup.com/citi/investor/reg.htm
29. Other commitments
a)
Letters of credit
As at 31 December 2014, the Company had $14 million (2013: $17 million) of unsecured letters of credit
outstanding from banks to satisfy collateral requirements under securities borrowing agreements and margin
requirements.
b)
Capital commitments
As at 31 December 2014, the Company had no capital commitments (2013: $nil).
30. Registered charges
The Company has granted to various banks and other entities a number of fixed and floating charges over certain
holdings in securities, properties, collateral and monies held by or on behalf of such banks or other entities.
68
CITIGROUP GLOBAL MARKETS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
31. Group structure
The Company’s immediate parent undertaking is CGMEL, a company registered in England and Wales. The
Company’s ultimate parent company and ultimate controlling party is Citigroup Inc, incorporated in the State of
Delaware, United States of America.
The audited consolidated financial statements of CGMEL are made available to the public annually in accordance
with Companies House regulations and may be obtained from its registered office at Citigroup Centre, Canada
Square, Canary Wharf, London E14 5LB.
The audited consolidated financial statements of Citigroup Inc are made available to the public annually in
accordance with Securities and Exchange Commission regulations and may be obtained
from http://www.citigroup.com/citi/investor/overview.html
32. Segmental analysis
As outlined in the Strategic Report, the Company is Citi’s international broker dealer and management reviews its
performance by geography in the same way as Citigroup Inc. report its performance.
It is organised into four regions, Asia Pacific, EMEA, Latin America and North America.
Asia
EMEA
Latin
America
North
America
Total
Regional
Other /
Corp
Total
$ Million
$ Million
$ Million
$ Million
$ Million
$ Million
$ Million
2014 Revenues
192
1,439
15
63
1,709
1,352
3,061
2013 Revenues
258
1,711
(4)
95
2,060
743
2,803
Increase (decrease)
compared to prior year
(66)
(272)
19
(32)
(351)
609
258
Revenue by Region
Asia
EMEA
Latin
America
North
America
Total
Regional
Other /
Corp
Total
$ Billion
$ Billion
$ Billion
$ Billion
$ Billion
$ Billion
$ Billion
2014 Assets
34
295
2
34
365
-
365
2013 Assets
21
186
3
24
234
-
234
Increase (decrease)
compared to prior year
13
109
(1)
10
131
-
131
Assets by Region
* Other / Corporate items relate to Intercompany Revenues as mentioned in the Strategic Report.
33.
Country by country reporting
The information relating to Country-by-Country reporting, required by Article 89 of Directive 2013/36/EU
(Capital Requirements Directive), will be published at http://www.citigroup.com/citi/investor/reg.htm.
69
SUBSCRIPTION AND SALE AND TRANSFER RESTRICTIONS
The transfer restrictions under the heading “United States of America” set out in the section of the
Base Prospectus entitled “Subscription and Sale and Transfer Restrictions” shall apply, subject to
the amendments set out below:
1
The first paragraph shall be deleted and replaced with the following:
“The Notes have not been and will not be registered under the Securities Act, no person
has registered nor will register as a commodity pool operator of the Issuer under the U.S.
Commodity Exchange Act of 1936, as amended (the “CEA”) and the rules of the U.S.
Commodities Futures Trading Commission thereunder, and the Notes may not at any time
be offered or sold, or, in the case of Bearer Notes, delivered, within the United States or to,
or for the account or benefit of, any person who is (i) a U.S. person (as such term is
defined under Rule 902(k)(1) of Regulation S), (ii) not a Non-United States person (as
defined in Rule 4.7 under the CEA, but excluding, for the purposes of subsection (D)
thereof, the exception to the extent that it would apply to persons who are not Non-United
States persons (“CFTC Rule 4.7”)) or (iii) a U.S. person (as defined in the credit risk
retention regulations issued under Section 15G of the U.S. Securities Exchange Act of
1934) (any person who is (i) not a U.S. person (as such term is defined under Rule
902(k)(1) of Regulation S), (ii) a Non-United States person (as such term is defined under
CFTC Rule 4.7) and (iii) not a U.S. person (as defined in the credit risk retention
regulations issued under Section 15G of the U.S. Securities Exchange Act of 1934), a
“Permitted Purchaser”). Terms used in this section and not otherwise defined have the
meanings given to them by Regulation S.”
2
Sub-paragraph (c) of the fourth paragraph shall be deleted and replaced with the following:
“(c)
3
(i) it is (x) not a U.S. person (as such term is defined under Rule 902(k)(1) of
Regulation S) and it is located outside the United States (within the meaning of
Regulation S), (y) a Non-United States person (as such term is defined under
CFTC Rule 4.7) and (z) not a U.S. person (as defined in the credit risk retention
regulations issued under Section 15G of the U.S. Securities Exchange Act of 1934)
(any person who satisfies the conditions set forth in the immediately preceding
clauses (x), (y) and (z), a “Permitted Purchaser”), (ii) it is not an affiliate of the
Issuer or a person acting on behalf of such an affiliate and (iii) if it is acting for the
account or benefit of another person, such other person is also a Permitted
Purchaser;”
Sub-paragraph (h)(1) of the fourth paragraph shall be deleted and replaced with the
following:
(1) REPRESENTS THAT (A) IT ACQUIRED THIS NOTE OR SUCH BENEFICIAL
INTEREST IN AN OFFSHORE TRANSACTION (AS SUCH TERM IS DEFINED UNDER
REGULATION S UNDER THE SECURITIES ACT (“REGULATION S”)); (B) IT IS (X) NOT
A U.S. PERSON (AS SUCH TERM IS DEFINED UNDER RULE 902(K)(1) OF
REGULATION S), (Y) A NON-UNITED STATES PERSON (AS SUCH TERM IS DEFINED
IN RULE 4.7 UNDER THE U.S. COMMODITY EXCHANGE ACT OF 1936, BUT
EXCLUDING, FOR THE PURPOSES OF SUBSECTION (D) THEREOF, THE EXCEPTION
TO THE EXTENT THAT IT WOULD APPLY TO PERSONS WHO ARE NOT NON-UNITED
STATES PERSONS) AND (Z) NOT A U.S. PERSON (AS DEFINED IN THE CREDIT RISK
RETENTION REGULATIONS ISSUED UNDER SECTION 15G OF THE U.S.
77
SECURITIES EXCHANGE ACT OF 1934) (ANY PERSON SATISFYING (X), (Y) AND (Z)
IMMEDIATELY ABOVE, A “PERMITTED PURCHASER”); AND (C) IF IT IS ACQUIRING
THIS NOTE OR A BENEFICIAL INTEREST HEREIN FOR THE ACCOUNT OR BENEFIT
OF ANOTHER PERSON, SUCH OTHER PERSON IS ALSO A PERMITTED
PURCHASER;”
78
GENERAL INFORMATION
1.
From the date of this Series Prospectus and for so long as the Notes remain outstanding,
the following documents will be available for inspection in physical format during usual
business hours on any weekday (Saturdays, Sundays and public holidays excepted) at the
office of the Issuing and Paying Agent:
(a)
this Series Prospectus;
(b)
the Supplemental Trust Deed in relation to the Notes; and
(c)
the audited financial statements of the Issuer in respect of its financial years ending
31 December 2014 and 31 December 2015.
2.
The issue of the Notes was authorised by a resolution of the Board of Directors of the
Issuer passed on 8 May 2017.
3.
There has been no material adverse change in the financial position or prospects of the
Issuer since 31 December 2015 (such date being the date of the Issuer’s latest audited
financial statements) which is material or significant.
4.
The Issuer has not been involved in any litigation, arbitration or governmental proceedings
(including such proceedings which are pending or threatened or of which the Issuer is
aware during the 12 months preceding the date of this Series Prospectus) which may have
or have had in the recent past, significant effects on the financial position or profitability of
the Issuer.
5.
The Issuer does not intend to provide any post issuance transactional information on the
Notes or the Initial Collateral (as described in the Terms and Conditions above).
6.
Arthur Cox Listing Services Limited has been appointed by the Issuer to act as its listing
agent and as such is not seeking admission to listing of the Notes on the regulated market
of the Irish Stock Exchange for the purposes of the Prospectus Directive on its own behalf,
but as an agent on behalf of the Issuer.
7.
References to any web or internet addresses in this document do not form part of this
Series Prospectus for the purpose of its approval or the listing of the Notes.
79
REGISTERED OFFICE OF THE ISSUER
3rd Floor, Kilmore House
Park Lane
Spencer Dock
Dublin 1
Ireland
TRUSTEE
Citicorp Trustee Company Limited
Citigroup Centre
Canada Square
Canary Wharf
London E14 5LB
REGISTRAR
Citigroup Global Markets Deutschland AG
Reuterweg 16
60323 Frankfurt
Germany
ISSUING AND PAYING AGENT, TRANSFER AGENT,
CALCULATION AGENT AND CUSTODIAN
Citibank, N.A., London Branch
Citigroup Centre
Canada Square
Canary Wharf
London E14 5LB
DEALER, CALCULATION AGENT, DISPOSAL
AGENT AND SWAP COUNTERPARTY
Citigroup Global Markets Limited
Citigroup Centre
Canada Square
Canary Wharf
London E14 5LB
IRISH LISTING AGENT
Arthur Cox Listing Services Limited
Earlsfort Centre
Earlsfort Terrace
Dublin 2
Ireland
LEGAL ADVISERS
to the Issuer
as to Irish law
to the Arranger and Dealer
as to English law
A & L Goodbody
International Financial Services Centre
North Wall Quay
Dublin 1
Ireland
Linklaters LLP
One Silk Street
London EC2Y 8HQ
United Kingdom
80
This Series Prospectus is hereby executed by or on behalf of the Issuer.
EMERALD CAPITAL DESIGNATED ACTIVITY COMPANY
By:
Delegated Signatory
81