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or Bank to observe any of its commitments or representations may result in a
different view or in a revocation of the exemption.

Sincerely yours,

Nat de. Fre

Robert deV. Frierson
Deputy Secretary of the Board

ce: Federal Reserve Bank of New York
Federal Deposit Insurance Corporation
Office of the Comptroller of the Currency


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For SFTs with a term that exceeds the life of the Federal Reserve System’s special
discount window lending facility, Bank would be permitted under the exemption to
hold these existing transactions to maturity.

Granting the exemption described above would have significant
public benefits. First, the exemption would enable Bank to provide a substantial
amount of liquidity to the markets for the Assets. Because of the operational
advantages to Bank of using the Affiliated Broker-Dealer as its conduit to convey
funds to market participants, the exemption would allow Bank to provide the
needed liquidity in the most rapid and cost-effective manner possible for Bank and
the market participants.

Bank would continue to be subject to the market-terms requirement of
section 23B of the Federal Reserve Act.* Section 23B requires that the SFTs
between Bank and its Affiliated Broker-Dealer be on terms that are substantially
the same, or at least as favorable to Bank, as those prevailing at the time for
comparable transactions with unaffiliated companies.”

For the reasons stated above, and in light of all the facts you have
presented, the securities financing transactions appear to be consistent with the
purposes of section 23A and in the public interest. Accordingly, the Board hereby
grants the requested exemption, subject to the indicated conditions and limits.

This determination is specifically conditioned on compliance by
Citigroup and Bank with all the commitments and representations they made to the
Board in connection with the exemption 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. This determination is based on the specific facts and
circumstances of the transactions described in your correspondence and this letter.
Any material change in those facts and circumstances or any failure by Citigroup

® 12 U.S.C. § 371c-1; 12 CER part 223.
° See 12 U.S.C. § 371c-1(a)(1).


BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D. C. 20551

ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD

August 20, 2007

Carl Howard, Esq.

General Counsel

Bank Regulatory

Citigroup Inc.

425 Park Avenue, 2" Floor/Zone 2
New York, New York 10022

Dear Mr. Howard:

This is in response to the request by Citigroup Inc. (“Citigroup”),
New York, New York, for a temporary exemption from section 23A of the Federal
Reserve Act and the Board’s Regulation W.' The exemption would allow
Citigroup’s subsidiary bank, Citibank, N.A. (“Bank”), Las Vegas, Nevada, to
engage in certain securities financing transactions with its affiliate, Citigroup
Global Markets Inc. (“Affiliated Broker-Dealer”), New York, New York, as
described below.

Bank proposes to extend credit to market participants in need of short-
term liquidity to finance their holdings of certain mortgage loans and related assets
(“Assets”). For operational reasons, Bank proposes to channel these transactions
through the Affiliated Broker-Dealer. The transactions between Bank and the
Affiliated Broker-Dealer and the mirror transactions between the Affiliated
Broker-Dealer and the unaffiliated market participants would take the form of
either reverse repurchase agreements or securities borrowing transactions
(collectively, “securities financing transactions” or “SFTs”). The transactions
between the Affiliated Broker-Dealer and Bank will be on the same terms as the
transaction between the Affiliated Broker-Dealer and the unaffiliated market
participant. For each of the proposed SFTs, Bank will be overcollateralized; the

' 12 U.S.C. § 371c; 12 CFR part 223.


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extent of this overcollateralization will vary depending on the type of assets
offered by the unaffiliated market participants as collateral for the SFTs.

Section 23A and Regulation W limit the amount of “covered
transactions” between a bank and any single affiliate to 10 percent of the bank’s
capital stock and surplus, and limit the amount of covered transactions between a
bank and all its affiliates to 20 percent of the bank’s capital stock and surplus.’
“Covered transactions” include a purchase of assets by a bank from an affiliate, a
loan or extension of credit by a bank to an affiliate, an issuance of a guarantee by a
bank on behalf of an affiliate, and certain other transactions.’ In addition, the
statute and regulation require a bank to secure its extensions of credit to, and
guarantees on behalf of, affiliates with prescribed amounts of collateral.*

Moreover, section 23A and Regulation W specifically authorize the
Board to exempt transactions or relationships from the requirements of the statute
and rule if the Board finds such an exemption to be in the public interest and
consistent with the purposes of section 23A.° The Board previously has indicated
that the twin purposes of section 23A are (i) to protect against a depository
institution suffering losses in transactions with affiliates; and (ii) to limit the ability
of a depository institution to transfer to its affiliates the subsidy arising from the
institution’s access to the federal safety net.°

The SFTs between Bank and the Affiliated Broker-Dealer would be
covered transactions under section 23A and Regulation W. Because Bank
proposes to engage in SFTs with the Affiliated Broker-Dealer in amounts that
exceed Bank’s quantitative limits under the statute and rule, Bank must receive an
exemption from the Board to engage in the proposed transactions.

> 12 U.S.C. § 371c(a)(1); 12 CFR 223.11 and 223.12.
5 12 U.S.C. § 3710(b)(7); 12 CFR 223.3(h).

* 12 US.C. § 371o(c); 12 CFR 223.14.

* 12 U.S.C. § 3710(£)(2); 12 CFR 223.43.

° 67 Federal Register 76560 (Dec. 12, 2002).


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The Board believes that a temporary, conditional exemption from
section 23A and Regulation W for the proposed SFTs would be consistent with the
purposes of section 23A and in the public interest.

Bank has agreed to several conditions that will help ensure that it
engages in the proposed SFTs in a safe and sound manner. Bank is well
capitalized and has represented that it will limit its lending under this exemption to
$25 billion, which constitutes less than 30 percent of Bank’s total regulatory
capital. Citigroup will, as a condition of the exemption, also agree to guarantee the
obligations of the Affiliated Broker-Dealer to Bank in connection with the
proposed SFTs. This parent guarantee provides additional protection to Bank in
the event of the insolvency of the Affiliated-Broker Dealer.

Each of the proposed SFTs will at all times be overcollateralized,
Bank will mark to market the SFTs on a daily basis, and the SFTs will be subject
to daily margin-maintenance requirements. In addition, the Affiliated Broker-
Dealer must execute an SFT with an unaffiliated market participant that is
contemporaneous with and on the same terms as Bank’s SFT with its Affiliated
Broker-Dealer. This requirement should help ensure that each transaction with
Bank is on market terms, that Bank does not use SFTs to finance the securities
inventory of the Affiliated Broker-Dealer, and that the affiliate serves only asa
conduit through which Bank engages in SFTs with unaffiliated counterparties. To
enhance the ability of Bank to promptly close out and liquidate SFTs with its
Affiliated Broker-Dealer in the event of the affiliate’s insolvency, the SFTs
between Bank and its Affiliated Broker-Dealer must be promptly collectable even
in the case of the bankruptcy of the Affiliated Broker-Dealer.’

Finally, as noted above, this would be a temporary exemption. The
exemption would be available only for SFTs initiated during the period that the
Federal Reserve System’s special discount window lending facility is available.

” This protection applies to “securities contracts” under section 555 of the
Bankruptcy Code. If an SFT between Bank and the Affiliated Broker-Dealer
qualifies as a securities contract under the Bankruptcy Code, Bank’s ability to
liquidate the transaction in the event of the bankruptcy of the Affiliated Broker-
Dealer generally cannot be stayed, avoided, or otherwise limited by operation of
any provision of the Bankruptcy Code. See, e.g., 11 U.S.C. § 555.