FAIR VALUE ELECTIONS

The Company may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes in fair value reported in earnings, other than DVA (see below). The election is made upon the initial recognition of an eligible financial asset, financial liability or firm commitment or when certain specified reconsideration events occur. The fair value election may not be revoked once an election is made. The changes in fair value are recorded in current earnings, other than DVA, which from January 1, 2016 are reported in AOCI. Additional discussion regarding the applicable areas in which fair value elections were made is presented in Note 20 to the Consolidated Financial Statements.

The Company has elected fair value accounting for its mortgage servicing rights. See Note 18 to the Consolidated Financial Statements for further discussions regarding the accounting and reporting of MSRs.

The following table presents the changes in fair value of those items for which the fair value option has been elected:



	Changes in fair value—gains (losses)
	Three Months Ended September 30,						Nine Months Ended September 30,
In millions of dollars	2018			2017			2018			2017
Assets
Federal funds sold and securities borrowed and purchased under agreements to resell	$	(17	)	$	(17	)	$	(14	)	$	(108	)
Trading account assets	3			581			(98		)	1,243
Investments	—			—			—			(3		)
Loans
Certain corporate loans	11			(61		)	(115		)	(42		)
Certain consumer loans	—			1			—			3
Total loans	$	11		$	(60	)	$	(115	)	$	(39	)
Other assets
MSRs	$	25		$	(6	)	$	82		$	50
Certain mortgage loans held-for-sale⁽¹⁾	9			34			21			115
Total other assets	$	34		$	28		$	103		$	165
Total assets	$	31		$	532		$	(124	)	$	1,258
Liabilities
Interest-bearing deposits	$	(20	)	$	(16	)	$	18		$	(60	)
Federal funds purchased and securities loaned and sold under agreements to repurchase	230			97			104			183
Trading account liabilities	25			19			4			70
Short-term borrowings	20			(30		)	138			(110		)
Long-term debt	(270		)	(510		)	1,269			(981		)
Total liabilities	$	(15	)	$	(440	)	$	1,533		$	(898	)


(1)	Includes gains (losses) associated with interest rate lock commitments for those loans that have been originated and elected under the fair value option.

Own Debt Valuation Adjustments (DVA)

Own debt valuation adjustments are recognized on Citi’s liabilities for which the fair value option has been elected using Citi’s credit spreads observed in the bond market. Effective January 1, 2016, changes in fair value of fair value option liabilities related to changes in Citigroup’s own credit spreads (DVA) are reflected as a component of AOCI; previously these amounts were recognized in Citigroup’s Revenues and Net income along with all other changes in fair value. See Note 1 to the Consolidated Financial Statements for additional information.

Among other variables, the fair value of liabilities for which the fair value option has been elected (other than non-recourse and similar liabilities) is impacted by the narrowing or widening of the Company’s credit spreads.

The estimated change in the fair value of these liabilities due to such changes in the Company’s own credit spread (or instrument-specific credit risk) was a loss of $377 million and a loss of $195 million for the three months ended September 30, 2018 and 2017, and a gain of $208 million and a loss of $422 million for the nine months ended September 30, 2018 and 2017, respectively. Changes in fair value resulting from changes in instrument-specific credit risk were estimated by incorporating the Company’s current credit spreads observable in the bond market into the relevant valuation technique used to value each liability as described above.

The Fair Value Option for Financial Assets and Financial Liabilities

Selected Portfolios of Securities Purchased Under Agreements to Resell, Securities Borrowed, Securities Sold Under Agreements to Repurchase, Securities Loaned and Certain Non-Collateralized Short-Term Borrowings

The Company elected the fair value option for certain portfolios of fixed income securities purchased under agreements to resell and fixed income securities sold under agreements to repurchase, securities borrowed, securities loaned and certain non-collateralized short-term borrowings held primarily by broker-dealer entities in the United States, United Kingdom and Japan. In each case, the election was made because the related interest rate risk is managed on a portfolio basis, primarily with offsetting derivative instruments that are accounted for at fair value through earnings.

Changes in fair value for transactions in these portfolios are recorded in Principal transactions. The related interest revenue and interest expense are measured based on the contractual rates specified in the transactions and are reported as Interest revenue and Interest expense in the Consolidated Statement of Income.

Certain Loans and Other Credit Products

Citigroup has also elected the fair value option for certain other originated and purchased loans, including certain unfunded loan products, such as guarantees and letters of credit, executed by Citigroup’s lending and trading businesses. None of these credit products are highly leveraged financing commitments. Significant groups of transactions include loans and unfunded loan products that are expected to be either sold or securitized in the near term, or transactions where the economic risks are hedged with derivative instruments, such as purchased credit default swaps or total return swaps where the Company pays the total return on the underlying loans to a third party. Citigroup has elected the fair value option to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplifications. Fair value was not elected for most lending transactions across the Company.

The following table provides information about certain credit products carried at fair value:



	September 30, 2018				December 31, 2017
In millions of dollars	Trading assets		Loans		Trading assets		Loans
Carrying amount reported on the Consolidated Balance Sheet	$	8,922	$	4,239	$	8,851	$	4,374
Aggregate unpaid principal balance in excess of (less than) fair value	432		538		623		682
Balance of non-accrual loans or loans more than 90 days past due	—		1		—		1
Aggregate unpaid principal balance in excess of fair value for non-accrual loans or loans more than 90 days past due	—		—		—		1

In addition to the amounts reported above, $1,043 million and $508 million of unfunded commitments related to certain credit products selected for fair value accounting were outstanding as of September 30, 2018 and December 31, 2017, respectively.

Changes in the fair value of funded and unfunded credit products are classified in Principal transactions in Citi’s Consolidated Statement of Income. Related interest revenue is measured based on the contractual interest rates and reported as Interest revenue on Trading account assets or loan interest depending on the balance sheet classifications of the credit products. The changes in fair value for the nine months ended September 30, 2018 and 2017 due to instrument-specific credit risk totaled to a loss of $13 million and a gain of $57 million, respectively.

Certain Investments in Unallocated Precious Metals

Citigroup invests in unallocated precious metals accounts (gold, silver, platinum and palladium) as part of its commodity and foreign currency trading activities or to economically hedge certain exposures from issuing structured liabilities. Under ASC 815, the investment is bifurcated into a debt host contract and a commodity forward derivative instrument. Citigroup elects the fair value option for the debt host contract, and reports the debt host contract within Trading account assets on the Company’s Consolidated Balance Sheet. The total carrying amount of debt host contracts across unallocated precious metals accounts was approximately $0.4 billion and $0.9 billion at September 30, 2018 and December 31, 2017, respectively. The amounts are expected to fluctuate based on trading activity in future periods.

As part of its commodity and foreign currency trading activities, Citi trades unallocated precious metals investments and executes forward purchase and forward sale derivative contracts with trading counterparties. When Citi sells an unallocated precious metals investment, Citi’s receivable from its depository bank is repaid and Citi derecognizes its investment in the unallocated precious metal. The forward purchase or sale contract with the trading counterparty indexed to unallocated precious metals is accounted for as a derivative, at fair value through earnings. As of September 30, 2018, there were approximately $12.0 billion and $10.6 billion of notional amounts of such forward purchase and forward sale derivative contracts outstanding, respectively.

Certain Investments in Private Equity and Real Estate Ventures and Certain Equity Method and Other Investments

Citigroup invests in private equity and real estate ventures for the purpose of earning investment returns and for capital appreciation. The Company has elected the fair value option for certain of these ventures, because such investments are considered similar to many private equity or hedge fund activities in Citi’s investment companies, which are reported at fair value. The fair value option brings consistency in the accounting and evaluation of these investments. All investments (debt and equity) in such private equity and real estate entities are accounted for at fair value. These investments are classified as Investments on Citigroup’s Consolidated Balance Sheet.

Changes in the fair values of these investments are classified in Other revenue in the Company’s Consolidated Statement of Income.

Citigroup also elected the fair value option for certain non-marketable equity securities, whose risk is managed with derivative instruments that are accounted for at fair value through earnings. These securities are classified as Trading account assets on Citigroup’s Consolidated Balance Sheet. Changes in the fair value of these securities and the related derivative instruments are recorded in Principal transactions. Effective January 1, 2018, under ASU 2016-01 and ASU 2018-03, a fair value option election is no longer required to measure these non-marketable equity securities at fair value through earnings. See Note 1 to the Consolidated Financial Statements for additional details.

Certain Mortgage Loans Held-for-Sale (HFS)

Citigroup has elected the fair value option for certain purchased and originated prime fixed-rate and conforming adjustable-rate first mortgage loans HFS. These loans are intended for sale or securitization and are hedged with derivative instruments. The Company has elected the fair value option to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplifications.

The following table provides information about certain mortgage loans HFS carried at fair value:



In millions of dollars	September 30, 2018		December 31, 2017
Carrying amount reported on the Consolidated Balance Sheet	$	480	$	426
Aggregate fair value in excess of (less than) unpaid principal balance	9		14
Balance of non-accrual loans or loans more than 90 days past due	—		—
Aggregate unpaid principal balance in excess of fair value for non-accrual loans or loans more than 90 days past due	—		—

The changes in the fair values of these mortgage loans are reported in Other revenue in the Company’s Consolidated Statement of Income. There was no net change in fair value during the nine months ended September 30, 2018 and 2017 due to instrument-specific credit risk. Related interest income continues to be measured based on the contractual interest rates and reported as Interest revenue in the Consolidated Statement of Income.

Certain Structured Liabilities

The Company has elected the fair value option for certain structured liabilities whose performance is linked to structured interest rates, inflation, currency, equity, referenced credit or commodity risks. The Company elected the fair value option because these exposures are considered to be trading-related positions and, therefore, are managed on a fair value basis. These positions will continue to be classified as debt, deposits or derivatives (Trading account liabilities) on the Company’s Consolidated Balance Sheet according to their legal form.

The following table provides information about the carrying value of structured notes, disaggregated by type of embedded derivative instrument:



In billions of dollars	September 30, 2018		December 31, 2017
Interest rate linked	$	16.8	$	13.9
Foreign exchange linked	0.4		0.3
Equity linked	15.2		13.0
Commodity linked	0.2		0.2
Credit linked	1.4		1.9
Total	$	34.0	$	29.3

Prior to 2016, the total change in the fair value of these structured liabilities was reported in Principal transactions in the Company’s Consolidated Statement of Income. Beginning in the first quarter of 2016, the portion of the changes in fair value attributable to changes in Citigroup’s own credit spreads (DVA) is reflected as a component of AOCI while all other changes in fair value will continue to be reported in Principal transactions. Changes in the fair value of these structured liabilities include accrued interest, which is also included in the change in fair value reported in Principal transactions.

Certain Non-Structured Liabilities

The Company has elected the fair value option for certain non-structured liabilities with fixed and floating interest rates. The Company has elected the fair value option where the interest rate risk of such liabilities may be economically hedged with derivative contracts or the proceeds are used to purchase financial assets that will also be accounted for at fair value through earnings. The elections have been made to mitigate accounting mismatches and to achieve operational simplifications. These positions are reported in Short-term borrowings and Long-term debt on the Company’s Consolidated Balance Sheet. Prior to 2016, the total change in the fair value of these non-structured liabilities was reported in Principal transactions in the Company’s Consolidated Statement of Income. Beginning in the first quarter of 2016, the portion of the changes in fair value attributable to changes in Citigroup’s own credit spreads (DVA) is reflected as a component of AOCI while all other changes in fair value will continue to be reported in Principal transactions.

Interest expense on non-structured liabilities is measured based on the contractual interest rates and reported as Interest expense in the Consolidated Statement of Income.

The following table provides information about long-term debt carried at fair value:



In millions of dollars	September 30, 2018		December 31, 2017
Carrying amount reported on the Consolidated Balance Sheet	$	36,772	$	31,392
Aggregate unpaid principal balance in excess of (less than) fair value	1,967		(579		)

The following table provides information about short-term borrowings carried at fair value:

In millions of dollars

September 30, 2018

December 31, 2017

Carrying amount reported on the Consolidated Balance Sheet

Aggregate unpaid principal balance in excess of fair value