BOARD OF GOVERNORS 

OF THE 

FEDERAL RESERVE SYSTEM 

WASHINGTON, D. C. 20551 

Address OFFICIAL CORRESPONDENCE 

TO THE BOARD 

June 15,2007 

Mr. John C. Gerspach 

Controller and Chief Accounting Officer 

Citigroup Inc. 

399 Park Avenue 

3

rd

 Floor 

New York, NY 10022 

Dear Mr. Gerspach: 

This is in response to your letter dated May 17, 2007, regarding the regulatory 

capital treatment of the Regulation T margin debits ("Reg. T margin loans") of the 

registered U.S. broker-dealer subsidiary of Citigroup Inc. ("Citigroup"), Citigroup Global 

Markets Inc. ("CGMI"). You ask that Citigroup be granted an exception from the 

Board's risk-based capital adequacy guidelines for bank holding companies (the 

"guidelines") (12 CFR part 225, App. A), which require a 100 percent risk weight for 

Reg. T margin loans. Specifically, you ask for an exception from the guidelines to permit 

Citigroup to assign a lower (such as 10 percent) risk weight to its Reg. T margin loans. 

In the request, you contend that a lower risk weight for Citigroup's Reg. T margin 

loans would more closely align the regulatory capital requirement for such loans to the 

credit risk associated with such loans, given their high level of collateralization and 

Citigroup's long history of low loss rates on such loans. In support of your contention, 

you note that Citigroup's internal economic capital charge for credit risk on Reg. T 

margin loans is de minimis. You also state that a lower risk weight for Citigroup's 

Reg. T margin loans would be appropriate to, among other things, reduce competitive 

disadvantages that Citigroup (through CGMI) has relative to U.S. broker-dealers that are 

not consolidated subsidiaries of bank holding companies ("BHCs") and to non-U.S. 

banks and broker-dealers. 

A margin account at a broker-dealer registered with the Securities and Exchange 

Commission ("SEC") is a leveraged account through which securities can be purchased, 

sold short, carried, or traded using a loan from the broker-dealer and a deposit of cash or 

securities by the customer. The amount of leverage available to a customer is limited by 

the Board's Regulation T (12 CFR part 220), the margin-maintenance rule of the New 

York Stock Exchange (NYSE Rule 431), and the lender's internal margin-maintenance 
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requirements.footnote1 For example, a customer who purchases $100 of equity securities in a 

margin account may borrow only $50 against those securities from the broker-dealer 

under Regulation T. If this is the only transaction in the margin account, the loan will be 

200 percent collateralized at the time of purchase because the market value of the 

securities is twice that of the margin loan. If, on a daily basis, the equity in the account 

falls below the required NYSE margin maintenance of 25 percent - that is, if the value of 

the collateral falls below 133 percent of the loan - the customer is required to post 

additional collateral (either cash or securities) to eliminate the margin deficiency. If the 

customer does not meet the margin call within the required time, the broker-dealer must 

sell sufficient securities in the account to increase the account equity to the required 

maintenance level. Your request also explains that Citigroup applies in most instances 

(and in all instances when the collateral is equities or non-investment-grade bonds) 

internal margin-maintenance requirements that exceed those in NYSE Rule 431.footnote 2 

You have indicated that Citigroup's Reg. T margin loans arc typically 

collateralized by liquid and readily marketable securities and generally can be terminated 

on demand at any time by Citigroup. You also have represented that Citigroup marks to 

market the Reg. T margin loans and associated securities collateral on a daily basis and 

makes daily margin-maintenance calls for any collateral deficiencies. 

In addition, you have concluded that the collateral for a Reg. T margin loan 

generally should be available to Citigroup for prompt liquidation even in the event of the 

borrower's bankruptcy. The Board notes that the Ninth Circuit Court of Appeals held in 

1998 that Regulation T securities collateral is exempt from the automatic stay under the 

U.S. Bankruptcy Code.footnote 3This judicial decision was reinforced by the 2005 amendments 

to the U.S. Bankruptcy Code. Section 901(b) of the Bankruptcy Abuse Prevention and 

Consumer Protection Act of 2005 defined the term "securities contract" - a class of 

transactions exempt from the automatic stay in bankruptcy - explicitly to include "margin 

loans." Moreover, the legislative history of the statute clarifies specifically that Congress 

considered Reg. T margin loans to be "margin loans" exempt from the automatic stay..footnote 4 

Therefore, if a Reg. T margin loan borrower were to file for bankruptcy, or otherwise 

become insolvent, Citigroup generally would be able to promptly liquidate the collateral 

for the loan. 

footnote 1

 If the broker-dealer is not a member of the NYSE, the margin-maintenance rale of the 

NASD (NASD Rule 2520) generally would apply instead. Both rules impose the same 

leverage limitations. 

footnote 2Regulation T initial margin requirements and NYSE margin-maintenance requirements 

for debt securities and options differ from those applicable to equity securities. 

footnote 3

In re Weisberg, 136 F.3d 655, 659 (9th Cir. 1998). 

footnote 4H.R. Rep. 109-31, 109th

 Cong., lst Sess.,p. 119(2005). 
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As noted above, Reg. T margin loans held by U.S. BHCs currently are assigned to 

the 100 percent risk weight category under the guidelines, resulting in a risk-based capital 

requirement of 8 percent. In contrast, other domestic and foreign firms, including foreign 

banking organizations that own U.S. broker-dealers, as well as U.S. broker-dealers and 

consolidated supervised entities ("CSEs") regulated by the SEC, are currently required to 

hold either no or de minimis regulatory capital against Reg. T margin loans. You have 

maintained that the much higher regulatory capital requirement that U.S. BHCs incur for 

Reg. T margin loans places U.S. broker-dealers owned by U.S. BHCs at a disadvantage 

in competing for this low-risk business. 

After carefully considering your request, and subject to the conditions listed 

below, the Board has approved an exception to the guidelines that permits Citigroup to 

treat Reg. T margin loans in a manner that differs from that set forth in the guidelines. 

Specifically, the Board will allow Citigroup to apply a 10 percent risk weight to its 

Reg. T margin loans. The Board has approved this exception under the reservation-ofauthority provision contained in the guidelines (12 CFR part 225, App. A, § III.A). This 

provision permits the Board, on a case-by-case basis, to determine the appropriate risk 

weight for any asset or off-balance-sheet item that imposes risks on a BHC that are 

incommensurate with the risk weight otherwise specified in the guidelines. 

To qualify for the capital treatment outlined above, Citigroup's Reg. T margin 

loans must meet the following conditions: 

1. The securities collateral for the Reg. T margin loans is liquid and readily 

marketable; 

2. The Reg. T margin loans and associated collateral are marked to market each 

business day; 

3. The Reg. T margin loans are subject to initial margin requirements under 

Regulation T and daily margin-maintenance requirements under NYSE Rule 431; 

and 

4. Citigroup has a reasonable basis for concluding that it would be able to liquidate 

the collateral for the Reg. T margin loans without undue delay, even in the case of 

bankruptcy or insolvency of the borrower. 

The Board believes that the capital treatment approved above for Citigroup's 

Reg. T margin loans provides a more risk-sensitive treatment for these transactions than 

their treatment under the guidelines. The combination of initial margin requirements 

under Regulation T, ongoing margin-maintenance requirements under NYSE regulations, 

generally higher ongoing margin-maintenance requirements under Citigroup's internal 

policies, Citigroup's daily mark-to-market and margin-call policies, the high liquidity of 

the collateral, Citigroup's typical right to terminate the loan at any time, and Citigroup's 

general protection from the automatic stay in bankruptcy makes these loans a low-creditrisk product that warrants a 10 percent risk weight. 
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The Board also notes that lowering the risk-based capital requirement for 

Citigroup's Reg. T margin loans is fully consistent with the intent of the Gramm-LeachBliley Act of 1999 ("GLBA"), which authorized the creation of financial holding 

companies ("FHCs") and greatly expanded the scope of permissible activities for BHCs 

that meet the criteria to become FHCs. In enacting GLBA, Congress envisioned that the 

Board would, where appropriate, tailor its regulatory and supervisory framework, 

including risk-based capital standards, for FHCs that engage in a significant amount of 

securities-related activities..footnote 5Congress also expected the Board, to the extent feasible and 

consistent with safety and soundness considerations, to make the risk-based capital 

requirements for BHCs that own significant broker-dealers more consistent with the 

capital standards applied by the SEC to broker-dealers.footnote 6This exception accommodates 

Citigroup's broker-dealer activities in a risk-sensitive manner, helps remove an artificial 

and anachronistic constraint on certain of Citigroup's securities-based lending operations, 

and brings Citigroup's risk-based capital requirement for Reg. T margin loans more in 

accord with the capital requirement for such loans that the SEC imposes on brokerdealers and CSEs. Citigroup should be aware, however, that the Board may in the future 

impose a regulatory capital treatment for Reg. T margin loans that differs from the 

treatment described in this letter, depending in part on the outcome of the current efforts 

to implement the Basel II Capital Accord in the United States. 

This determination is conditioned on Citigroup's compliance with all the 

commitments and representations it has made to the Board in connection with the request. 

These commitments and representations are deemed to be conditions imposed in writing 

by the Board in connection with granting the request and, as such, may be enforced in 

proceedings under applicable law. Further, this determination is based on the specific 

facts and circumstances described in the request and in your discussions with Federal 

Reserve staff. Any material change in those facts and circumstances or any failure by 

Citigroup to observe any of its commitments or representations may result in a different 

view or in a revocation of the regulatory capital treatment permitted under this 

determination. 

The capital treatment set forth in this letter for Reg. T margin loans will be made 

available to similarly situated institutions that request and receive Board approval for 

such treatment. 

footnote 5See, e.g. H.R. Conf. Rep. 106-434, 106th Cong., 1st Sess., p. 159 (Nov. 2, 1999). 

footnote 6

 Id. 
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If you have any questions with regard to this letter, please direct them to Norah 

Barger, Associate Director, at (202) 452-2402, or Juan C. Climent, Supervisory Financial 

Analyst, at (202) 872-7526, in the Division of Banking Supervision and Regulation; or 

Mark E. Van Der Weide, Senior Counsel, at (202) 452-2263, or April Snyder, Senior 

Attorney, at (202) 452-3099, in the Legal Division. 

Sincerely yours, 

Robert deV. Frierson signature 

Robert deV. Frierson 

Deputy Secretary of the Board 

cc: Federal Reserve Bank of New York