Introduction to Derivatives & Securities Financing Transactions (DSFT)
The Menu button provides access to the individual sections.
The Home button at the end of each section takes you to the start of the lesson.
The Resource button provides a list of useful links.
The Switch Language button lets you switch to a different language.
The Close button ends your training session and closes the lesson window.
If you are accessing the lesson from a personal device directly over the Internet (outside of the Citi network), some links may not work if they link to content within Citi’s network. This will not impact your ability to complete the lesson.
Within Citi, we conduct DSFT activity globally across the firm, including Markets, Services and Wealth. However, the majority of DSFT activity takes place in Markets & Services – notably the Finance desk, the Securities Borrowing/Lending business, Prime Finance/Prime Brokerage, and in Treasury areas.
To proceed, select each market player to learn more.
Market Players Seeking Financing
Market players seeking financing include:
Market Players Providing Financing
Market players providing financing include:
DSFT are transactions that provide an extension of credit to counterparties, including exposures reported and capitalized on a net basis under the Basel III capital framework.
They include Securities Financing Transactions (SFT) and margin finance transactions where the exposure is reported and capitalized under Basel III and includes both asset-side and liability-side activity as both sides require Citi to calculate exposures and hold capital.
DSFT comprise transactions where Citi receives or provides securities, traded loans, or physical commodities, in return for financing or borrowing.
DSFT encompasses Total Return Swaps or certain similar derivative transactions where there is implicit financing to the counterparty or Citi, of the reference asset.
All margin type financing (e.g., reverse repo / stock borrow / buy-sell / margin loans and repo / stock lending / sell-buy / margin borrows), with collateral that is marked-to-market to reflect changes in the fair value of such collateral, where collateral is comprised of securities, traded loans, physical commodities, or baskets thereof, such as:
All Total Return Swaps (TRS), and structures with embedded TRS (“pay return” and “receive return”), that directly or indirectly reference securities, traded loans, physical commodities, or baskets thereof
All other Derivative transactions or structures where Citi’s principal intent is to replicate the economic characteristics (from either a credit or funding standpoint) of an SFT or Margin Lending transaction (long & short positions) collateralized by securities, traded loans, physical commodities, or baskets thereof (e.g., Funded Collars, Prepaid Swaps), with principality of intent to be assessed by the DSFT Governance Committee
Committed Facilities providing the right to enter into a DSFT, as described above, which include:
Variation Margin received and delivered in the form of securities associated with derivative transactions.
Forward Purchases and Forward Sales of securities, traded loans, physical commodities
Now that you are familiar with what types of products are considered DSFT, let’s highlight the key risks.
In Citi, the DSFT portfolio is very large and diverse, comparable in size with Citi’s Banking Book portfolio. All regions engage in this activity across Citi’s Institutional Clients Group, Private Bank, Consumer Bank, and across various legal entities.
The size and breadth of this portfolio may create risks to Citi, especially in maintaining funding sources and the ability to quickly monetize collateral at times of stress.
To proceed, select each risk to learn more.
The majority of DSFT activity is funded in the market through repos and, where Citi has legal right to do so, through re-hypothecation of financial instruments received as collateral or held as market risk hedges.
The risk:
An inability to maintain third party financing may require Citi to replace funding through alternative sources. Given the size of this portfolio, losing access to such funding sources is a key risk to Citi.
go to next button
These extensions of credit are backed by collateral. Idiosyncratic counterparty defaults and systemic market failures could expose Citi to the risk of holding illiquid and/or concentrated collateral. In certain jurisdictions, the legal landscape may cause a delay in taking control of the collateral.
The risk:
Idiosyncratic counterparty defaults, collateral value depreciation and systemic market failures could expose Citi to the risk of holding illiquid and/or concentrated collateral. In certain jurisdictions, the legal landscape may impede our ability to take control of the collateral in a timely fashion. Such events may create challenges to Citi’s risk and funding profile, especially under stressed market conditions.
DSFT notional limits restrict the notional amount of cash and securities delivered or synthetically financed against DSFT collateral.
DSFT aggregate Risk Capital limits apply to the aggregate (long and short) DSFT portfolio and complement the notional limits with a risk-sensitive measure that captures key risk drivers and potential losses in extreme market conditions (at 99.97% confidence interval).
Wrong-way risk arises when an exposure to a particular counterparty is positively correlated with the probability of default of that counterparty.
To proceed, select each risk to learn more.
Specific Wrong-Way Risk (SWWR) refers to wrong-way risk that arises when either the counterparty and issuer of the collateral supporting the transaction, or the counterparty and the reference asset of the transaction, are the same entity or have an equity ownership relationship of >25%.
go to next button
General Wrong-Way Risk (GWWR) arises when the probability of default of counterparties is positively correlated with general market risk factors (e.g., same industry sector, same country, same exposure to commodities).
To proceed, select each governance group to learn more.
The LRM Working Group was established to draft and develop the LRM decision trees. This group includes key stakeholders from Finance (Capital Planning), FICC, & Market Risk, as well as the Business.
go to next button
The LRM Liquidity Oversight Council (LOC) is responsible for formally approving the LRM Decision Trees.
go to next button
All LRM decision trees developed by the LRM Working Group are subject to model validation, per the model Risk Management Policy.
go to next button
The LRM-LOC is comprised of key stakeholders. The group was established to affirm approaches for LRM and MPOR determination and is also responsible for ongoing monitoring of the appropriateness of various thresholds and metrics related to the LRM framework.
The LRM-LOC reviews decision trees at least annually and escalates to the DSFT Oversight Group any matters requiring senior awareness, attention and/or decision with regard to the LRM framework.
This categorization determines a set of standard business controls, which are supplemented by additional product-level and aggregate-level firmwide controls.
A quarterly attestation process is in place to ensure that these controls are implemented and applied comprehensively to the DSFT activities performed within the business.
To proceed, select each control factor to learn more about the First Line of Defense responsibilities.
The First Line of Defense responsibilities are:
go to next button
The First line of Defense is responsible for identifying new DSFT activity and reporting it to the DSFT Oversight Group. The New Activity Policy and the Group New Activity (GNAC) processes include an assessment as to whether the new activity meets the definition of DSFT.
Any inquiries around interpretation of the DSFT definition should be directed to the DSFT Interpretive Group (DIG). The DIG is tasked with providing review and interpretation of PACs when there is ambiguity as to whether the activity should be considered a DSFT.
It is a key responsibility of the individuals designated as DSFT Risk Leads to liaise with the DIG on interpretations.
Treasury actively monitors and controls these risks by:
To proceed, select each control factor to learn more.
Creating Risk Frameworks
Creating risk frameworks to measure, model, and monitor DSFT risks and available mitigants
Calibrating Risk Appetite
Calibrating Citi’s risk appetite for DSFT activity
Evaluating Potential New Activity
Evaluating potential new DSFT business activity for risks
Mitigating and Remediating Exceptions
Mitigating and remediating exceptions to risk appetite, with partners in Liquidity Risk and the Businesses
CPB Risk Management has an extensive and comprehensive framework to manage credit risk that arises from extensions of credit to DSFT CPB clients under the Margin Lending (ML) and Global Capital Markets (GCM) product programs. The framework is governed by the Citi Private Bank Credit Policy Product Programs.
To proceed, select each program element to learn more.
Product programs are subject to limits. Collateral haircuts (1 – loanable value) are approved based on volatility, liquidity, credit rating, and country risk. The haircut is in line with or more conservative than the supervisory haircut. Any exception requires the approval of independent risk.
go to next button
CPB does not re-hypothecate received collateral. Funding is obtained via Citi Treasury.
go to next button
CPB monitors DSFT activity (ML & GCM) through portfolio reviews, concentration reports, CCAR stress testing reports, CitiRisk product stress testing, margin call reports, and margin shortfall, among others.
Collateral risk is defined as risk of concentration and loss arising from the decline in value or inability to liquidate in timely manner the collateral securing or referenced in a DSFT transaction.
Inability or delay in liquidating the collateral upon a default of a DSFT transaction can result in potential exposure against the collateral issuer in the form of holding the collateral securities if the borrower also defaults and cannot honor its obligations.
To proceed, select each risk category to learn more.
The Global Collateral Management Policy sets out the framework for the management of collateral, including DSFT, which considers:
The Collateral Advisory Group (CAG) has a quarterly review process whereby it distributes a broad-ranging collateral reporting package to senior management and convenes a meeting for its review, with a view to providing guidance and strategic direction for the management of collateral and overseeing its execution.
go to next button
Contingent collateral exposure is the potential amount of collateral Citi would need to liquidate if a borrower defaults. The collateral exposure is weighted by the probability of default of the borrower. It is captured in the Company Specific Citi Limit (CSCL) that measures and controls exposure across Citi to a single relationship under the Single Name Concentration framework.
Single name concentrations are monitored and managed by the Portfolio Management Group (PMG).
Market risk is broadly defined as the risk of loss arising from changes in market factors to which a party has a direct exposure.
Market liquidation risk is defined as the risk of loss arising from the inability to readily close out a position or market risk exposure without substantially affecting the asset’s price, thus resulting in unhedged market exposure which can result in losses caused by market fluctuations.
Risk has developed, updated, and implemented an enhanced risk management framework to manage DSFT activity. The Market Risk Limits Framework includes:
To proceed, select each framework component to learn more.
Enhanced LCI Pre-trade Approval Process
Large, Complex or Illiquid (LCI) Pre-Trade
Market Liquidation Dashboard
Market and credit risk
Enhanced Market Risk Reporting
Market risk managers monitor enhanced MTM Right Desk and Issuer Risk reports to highlight DSFT
Citi Legal reviews legal agreements that relate to DSFT activity to determine whether the Well-Founded Basis (WFB) requirements are met. The WFB legal review process includes analyzing the enforceability of the agreement, close out netting provisions, existence of any stay risk upon counterparty bankruptcy, as well as walk-away clauses.
To proceed, select each WFB requirement to learn more.
A framework for determining WFB for certain agreements provides consistent standards and processes for meeting the WFB standard.
go to next button
A WFB checklist for DSFT agreements should reflect the WFB analysis.
go to next button
Reporting capabilities in Master Agreement Central (MAC) system capture data from the checklist for use in enhanced risk reporting.
Let’s look at the WFB process in more detail.
To proceed, select each process component to learn more.
The Well-Founded Basis Standard or WFB Standard is a legal standard based on requirements set out in the Basel III regulatory capital rules that are designed to ascertain the risk that Citi’s netting rights and its rights as a secured creditor with respect to Covered Agreements (derivative contracts, repurchase agreements, reverse repurchase agreements, securities borrowing transactions, securities lending transactions, and margin loan agreements, whether documented under industry standard documentation or otherwise, including any related security or collateral agreements that are uploaded to MAC, as well as any Agreements outside of MAC that are identified to Legal by the DSFT Identification Forum) could be found to be ineffective under certain scenarios, including after the counterparty becomes subject to a bankruptcy, insolvency, liquidation or similar proceeding.
The WFB Standard is affected by and based on:
go to next button
The WFB Framework and checklist applies to Covered Agreements, where Citi is seeking:
In this situation, what process should be followed?
Risks embedded in and driven by DSFT transactions are captured via Citi’s liquidity risk management framework, which entails:
Liquidity Risk Management Policy
Risk appetite
Concentration analyses
Internal liquidity stress test (ILST) scenarios and metrics
For each of the main business lines that are in-scope for DSFT activity, customized approaches are developed to account for current processes for identifying operational risk events. As would be expected, Markets & Services experiences the greatest number of DSFT-related operational risk events.
To proceed, select each reporting approach to learn more.
DSFT identification relies on the person inputting the event to correctly classify it as DSFT. The person may leverage in-business SMEs (e.g. Business Managers, Traders, In-Business Risk and Controls), or they may leverage a DSFT questionnaire that product areas use to assess DSFT applicability to New Product Activity.
go to next button
The Private Bank process leverages In-Business Risk teams for investment finance and investment products to inform inputters when an event is DSFT.
go to next button
DSFT identification leverages a detailed checklist based on event type (Basel designations) and the referral of events to a DSFT SME.
Which group or forum decides whether a transaction is a DSFT?
Select the best response from the four options and then select Submit.
Please use the Space key only when selecting a radio option with the keyboard. The Enter key is not fully supported. If the Enter key has been used to select a radio option, please use the Escape key. Then you will be able to use the Space key again to select a radio option.
The DSFT Interpretive Group decides whether a transaction should be considered a DSFT.
The DSFT Interpretive Group decides whether a transaction should be considered a DSFT.
The DSFT Interpretive Group decides whether a transaction should be considered a DSFT.
That answer is correct.
The DSFT Interpretive Group decides whether a transaction should be considered a DSFT.
That answer is not correct.
Refer to the What are DSFT? section.
That answer is not correct.
Refer to the What are DSFT? section.
Which of the following products are considered DSFT?
Select the best response from the three options and then select Submit.
Please use the Space key only when selecting a radio option with the keyboard. The Enter key is not fully supported. If the Enter key has been used to select a radio option, please use the Escape key. Then you will be able to use the Space key again to select a radio option.
Reverse Repo and Total Return Swap are examples of DSFT.
Reverse Repo and Total Return Swap are examples of DSFT.
Reverse Repo and Total Return Swap are examples of DSFT.
That answer is correct.
Reverse Repo and Total Return Swap are examples of DSFT.
That answer is not correct.
Refer to the What are DSFT? section.
That answer is not correct.
Refer to the What are DSFT? section.
The most important key risks of DSFT include:
Select the best response from the four options and then select Submit.
Please use the Space key only when selecting a radio option with the keyboard. The Enter key is not fully supported. If the Enter key has been used to select a radio option, please use the Escape key. Then you will be able to use the Space key again to select a radio option.
Maintaining funding sources and the ability to quickly monetize collateral at times of stress are the most important risks of DSFT.
Maintaining funding sources and the ability to quickly monetize collateral at times of stress are the most important risks of DSFT.
Maintaining funding sources and the ability to quickly monetize collateral at times of stress are the most important risks of DSFT.
That answer is correct.
Maintaining funding sources and the ability to quickly monetize collateral at times of stress are the most important risks of DSFT.
That answer is not correct.
Refer to the What are DSFT? section.
That answer is not correct.
Refer to the What are DSFT? section.
How many Lines of Defense does Citi have?
Select the best response from the four options and then select Submit.
Please use the Space key only when selecting a radio option with the keyboard. The Enter key is not fully supported. If the Enter key has been used to select a radio option, please use the Escape key. Then you will be able to use the Space key again to select a radio option.
There are three Lines of Defense: the business, enterprise risk management, and Citi’s internal audit.
There are three Lines of Defense: the business, enterprise risk management, and Citi’s internal audit.
There are three Lines of Defense: the business, enterprise risk management, and Citi’s internal audit.
That answer is correct.
There are three Lines of Defense: the business, enterprise risk management, and Citi’s internal audit.
That answer is not correct.
Refer to The DSFT Framework section.
That answer is not correct.
Refer to The DSFT Framework section.
Which is the senior management forum for governance oversight and challenge of DSFT activity, including reviewing the risk profile of DSFT activity, discussing pertinent risk issues across Citi concerning DSFT, and ensuring Citi’s DSFT strategic decisions are consistent with established risk appetite?
Select the best response from the four options and then select Submit.
Please use the Space key only when selecting a radio option with the keyboard. The Enter key is not fully supported. If the Enter key has been used to select a radio option, please use the Escape key. Then you will be able to use the Space key again to select a radio option.
The DSFT Oversight Group challenges DSFT activity and ensures Citi’s DSFT strategic decisions are consistent with established risk appetite.
The DSFT Oversight Group challenges DSFT activity and ensures Citi’s DSFT strategic decisions are consistent with established risk appetite.
The DSFT Oversight Group challenges DSFT activity and ensures Citi’s DSFT strategic decisions are consistent with established risk appetite.
That answer is correct.
The DSFT Oversight Group challenges DSFT activity and ensures Citi’s DSFT strategic decisions are consistent with established risk appetite.
That answer is not correct.
Refer to The DSFT Framework section.
That answer is not correct.
Refer to The DSFT Framework section.
The boundaries Citi has set to constrain DSFT include Limits and Management Action Triggers (MAT) for which of the following entities?
Select the best response from the five options and then select Submit.
Please use the Space key only when selecting a radio option with the keyboard. The Enter key is not fully supported. If the Enter key has been used to select a radio option, please use the Escape key. Then you will be able to use the Space key again to select a radio option.
All of these are boundaries that constrain Citi’s DSFT.
All of these are boundaries that constrain Citi’s DSFT.
All of these are boundaries that constrain Citi’s DSFT.
That answer is correct.
All of these are boundaries that constrain Citi’s DSFT.
That answer is not correct.
Refer to The DSFT Framework section.
That answer is not correct.
Refer to The DSFT Framework section.
Which one of the following does the LRM Framework NOT develop criteria in the form of decision trees?
Select the best response from the four options and then select Submit.
Please use the Space key only when selecting a radio option with the keyboard. The Enter key is not fully supported. If the Enter key has been used to select a radio option, please use the Escape key. Then you will be able to use the Space key again to select a radio option.
Decision trees help determine whether securities and reference assets held as collateral can be considered LRM. They also assign the appropriate MPOR.
Decision trees help determine whether securities and reference assets held as collateral can be considered LRM. They also assign the appropriate MPOR.
Decision trees help determine whether securities and reference assets held as collateral can be considered LRM. They also assign the appropriate MPOR.
That answer is correct.
Decision trees help determine whether securities and reference assets held as collateral can be considered LRM. They also assign the appropriate MPOR.
That answer is not correct.
Refer to The DSFT Framework section.
That answer is not correct.
Refer to The DSFT Framework section.
1st LoD uses a matrix to categorize the businesses transacting DSFT into:
Select the best response from the four options and then select Submit.
Please use the Space key only when selecting a radio option with the keyboard. The Enter key is not fully supported. If the Enter key has been used to select a radio option, please use the Escape key. Then you will be able to use the Space key again to select a radio option.
There are four business-level categories.
There are four business-level categories.
There are four business-level categories.
That answer is correct.
There are four business-level categories.
That answer is not correct.
Refer to the Managing DSFT Risk – First Line of Defense section.
That answer is not correct.
Refer to the Managing DSFT Risk – First Line of Defense section.
What is the business responsible for within the First Line of Defense?
Select the best response from the five options and then select Submit.
Please use the Space key only when selecting a radio option with the keyboard. The Enter key is not fully supported. If the Enter key has been used to select a radio option, please use the Escape key. Then you will be able to use the Space key again to select a radio option.
All answers are correct.
All answers are correct.
All answers are correct.
That answer is correct.
All answers are correct.
That answer is not correct.
Refer to the Managing DSFT Risk – First Line of Defense section.
That answer is not correct.
Refer to the Managing DSFT Risk – First Line of Defense section.
The Second Line of Defense includes Credit Risk, Collateral Risk, Market Risk, Market Liquidation Risk, Legal Risk, Funding Liquidity Risk and ___________________________________.
Select the best response from the four options and then select Submit.
Please use the Space key only when selecting a radio option with the keyboard. The Enter key is not fully supported. If the Enter key has been used to select a radio option, please use the Escape key. Then you will be able to use the Space key again to select a radio option.
Only Operational Risk is in the Second Line of Defense. This risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.
Only Operational Risk is in the Second Line of Defense. This risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.
Only Operational Risk is in the Second Line of Defense. This risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.
That answer is correct.
Only Operational Risk is in the Second Line of Defense. This risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.
That answer is not correct.
Refer to the Managing DSFT Risk – Second Line of Defense section.
That answer is not correct.
Refer to the Managing DSFT Risk – Second Line of Defense section.
go to close menu button
go to close button
