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Information Relating to Derivative Instruments and Risk Management CITIGROUP GLOBAL MARKETS HOLDINGS INC. ANNUAL FINANCIAL REPORT FOR YEAR ENDED DECEMBER 31, 2013 1 April 30, 2014 Responsibility Statement The below named authorized officers of Citigroup Global Markets Holdings Inc., a New York corporation (the “Company”), confirm that to the best of their knowledge: (i) the accompanying financial statements (a) were prepared in accordance with Generally Accepted Accounting Principles in the United States of America and (b) give a true and fair view of the assets, liabilities, financial position and income or loss of the Company and the undertakings included in the consolidation taken as a whole; and (ii) the accompanying Management Report includes (a) a fair review of the development and performance of the business and position of the Company and the undertakings included in the consolidation taken as a whole and (b) a description of the principal risks and uncertainties that they face. CITIGROUP GLOBAL MARKETS HOLDINGS INC. By: /s/ James A. Forese By: /s/ Cliff Verron James A. Forese Cliff Verron Chairman and Chief Financial Officer Chief Executive Officer 2 CITIGROUP GLOBAL MARKETS HOLDINGS INC. MANAGEMENT REPORT 3 CITIGROUP GLOBAL MARKETS HOLDINGS INC. Citigroup Global Markets Holdings Inc. (CGMHI), operating through its subsidiaries, engages in full- service investment banking and securities brokerage business. As used in this description, CGMHI, Citigroup Global Markets, and the Company refer to CGMHI and its consolidated subsidiaries. Citigroup Global Markets operates in the Institutional Clients Group segment. CGMHI's parent, Citigroup Inc. (Citigroup, or Citi), is a global diversified financial services holding company whose businesses provide consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management. Citi has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. Citigroup currently operates, for management reporting purposes, via two primary business segments: Citicorp, consisting of Citi’s Global Consumer Banking businesses and Institutional Clients Group; and Citi Holdings, consisting businesses and portfolios of assets that Citigroup has determined are not central to its core Citicorp businesses. The principal offices of CGMHI are located at 388 Greenwich Street, New York, New York 10013, telephone number (212) 816-6000. CGMHI was incorporated in New York on 23 February 1977 and is the successor to Salomon Smith Barney Holdings Inc., a Delaware corporation, following a statutory merger effective on 1 July 1999, for the purpose of changing its state of incorporation. On 7 April 2003, CGMHI filed a Restated Certificate of Incorporation in the State of New York changing its name from Salomon Smith Barney Holdings Inc. to Citigroup Global Markets Holdings Inc. Institutional Clients Group Institutional Clients Group (ICG) includes Securities and Banking and Transaction Services. ICG provides corporate, institutional, public sector and high-net-worth clients around the world with a full range of wholesale banking products and services, including fixed income and equity sales and trading, foreign exchange, prime brokerage, equity and fixed income research, corporate lending, investment banking and advisory services, private banking, cash management, trade finance and securities services. Securities and Banking (S&B) offers a wide array of investment and commercial banking services and products for corporations, governments, institutional and public sector entities and high-net-worth individuals. S&B transacts with clients in both cash instruments and derivatives, including fixed income, foreign currency, equity and commodity products. S&B includes investment banking and advisory services, corporate lending, fixed income and equity sales and trading, prime brokerage, derivative services, equity and fixed income research and private banking. S&B revenue is generated primarily from fees and spreads associated with these activities. S&B earns fee income for assisting clients in clearing transactions, providing brokerage and investment banking services and other such activities. In addition, as a market maker, S&B facilitates transactions, including holding product inventory to meet client demand, and earns the differential between the price at which it buys and sells the products. 4 INFORMATION RELATING TO DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT DERIVATIVES ACTIVITIES In the ordinary course of business, the Company enters into various types of derivative transactions. These derivative transactions include: • Futures and forward contracts, which are commitments to buy or sell at a future date a financial instrument, commodity or currency at a contracted price and may be settled in cash or through delivery. • Swap contracts, which are commitments to settle in cash at a future date or dates that may range from a few days to a number of years, based on differentials between specified financial indices, as applied to a notional principal amount. • Option contracts, which give the purchaser, for a premium, the right, but not the obligation, to buy or sell within a specified time a financial instrument, commodity or currency at a contracted price that may also be settled in cash, based on differentials between specified indices or prices. The swap and forward contracts are over-the-counter (OTC) derivatives that are bilaterally negotiated with counterparties and settled with those counterparties, except for swap contracts that are novated and “cleared” through central counterparties (CCPs). Futures and option contracts are generally standardized contracts that are traded on an exchange with a CCP as the counterparty from the inception of the transaction. The Company enters into these derivative contracts relating to interest rate, foreign currency, commodity and other market/credit risks for the following reasons: • Trading Purposes—Customer Needs: The Company offers its customers derivatives in connection with their risk-management actions to transfer, modify or reduce their interest rate, foreign exchange and other market/credit risks or for their own trading purposes. As part of this process, the Company considers the customers’ suitability for the risk involved and the business purpose for the transaction. The Company also manages its derivative risk positions through offsetting trade activities, controls focused on price verification, and daily reporting of positions to senior managers. • Trading Purposes: The Company trades derivatives as an active market maker. Trading limits and price verification controls are key aspects of this activity. • Hedging: The Company uses derivatives in connection with its risk-management activities to hedge certain risks or reposition the risk profile of the Company. For example, the Company issues fixed-rate long-term debt and then enters into a receive-fixed, pay-variable-rate interest rate swap with the same tenor and notional amount to convert the interest payments to a net variable-rate basis. This strategy is the most common form of an interest rate hedge, as it minimizes interest cost in certain yield curve environments. In addition, foreign-exchange contracts are used to hedge non-U.S.-dollar-denominated debt and net investment exposures. Derivatives may expose the Company to market, credit or liquidity risks in excess of the amounts recorded on the Consolidated Statement of Financial Condition. Market risk on a derivative product is the exposure created by potential fluctuations in interest rates, foreign-exchange rates and other factors and is a function of the type of product, the volume of transactions, the tenor and terms of the agreement and the underlying volatility. Credit risk is the exposure to loss in the event of nonperformance by the other party to the transaction where the value of any collateral held is not adequate to cover such losses. The recognition in earnings of unrealized gains on these transactions is subject to management’s assessment as to collectability. Liquidity risk is the potential exposure that arises when the size of the derivative position may not be able to be rapidly adjusted at a reasonable cost in periods of high volatility and financial stress. Derivative transactions are customarily documented under industry standard master agreements and credit support annexes, which provide that following an uncured payment default or other event of default the non-defaulting party may promptly terminate all transactions between the parties and determine a net amount due to be paid to, or by, the defaulting party. Events of default generally 5 include: (i) failure to make a payment on a derivatives transaction (which remains uncured following applicable notice and grace periods), (ii) breach of a covenant (which remains uncured after applicable notice and grace periods), (iii) breach of a representation, (iv) cross default, either to third-party debt or to another derivatives transaction entered into among the parties, or, in some cases, their affiliates, (v) the occurrence of a merger or consolidation which results in a party becoming a materially weaker credit, and (vi) the cessation or repudiation of any applicable guarantee or other credit support document. An event of default may also occur under a credit support annex if a party fails to make a collateral delivery (which remains
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