Bank of Montreal 2004 Annual Report Download - page 98

BMO Financial Group Annual Report 200494
Notes to Consolidated Financial Statements
Notes
Guarantees include contracts where we may be required to make
payments to a counterparty based on changes in the value of
an asset, liability or equity security that the counterparty holds.
In addition, contracts under which we may be required to make
payments if a third party fails to perform under the terms of a
contract and contracts under which we provide indirect guarantees
of the indebtedness of another party are considered guarantees.
In the normal course of business we enter into a variety
of guarantees, the most significant of which are as follows:
Standby Letters of Credit and Guarantees
Standby letters of credit and guarantees, as discussed in Note 5,
are considered guarantees. The maximum amount payable under
standby letters of credit and guarantees was $13,042 million as at
October 31, 2004 ($11,170 million in 2003). Collateral requirements
for standby letters of credit and guarantees are consistent with
our collateral requirements for loans. In most cases, these com-
mitments expire within three years without being drawn upon.
No amount was included in our Consolidated Balance Sheet
as at October 31, 2004 or 2003 related to these standby letters
of credit and guarantees.
Backstop Liquidity Facilities
Commitments to extend credit, as discussed in Note 5, include
backstop liquidity facilities. Backstop liquidity facilities are
provided to asset-backed commercial paper programs administered
by us and third parties as an alternative source of financing in
the event that such programs are unable to access commercial
paper markets or, in limited circumstances, when predetermined
per formance measures of the financial assets owned by these
programs are not met. The terms of the backstop liquidity facilities
do not require us to advance money to these programs in the event
of bankruptcy. The maximum potential payments under these back-
stop liquidity facilities were $36,769 million as at October 31, 2004
($36,560 million in 2003). The facilities’ terms are generally no
longer than one year, but can be several years. None of the backstop
liquidity facilities that we have provided have been drawn upon.
No amount was included in our Consolidated Balance Sheet as at
October 31, 2004 or 2003 related to these facilities.
Credit Enhancement
Credit enhancement protects investors in asset-backed commercial
paper in the event that the assets’ cash flows are insufficient to
retire its commercial paper notes upon maturity. The amount and
type of credit enhancement support may come from various par-
ties, including the entity from which the assets were purchased and
other acceptable providers. Each transaction within an asset-backed
commercial paper program is structured with credit enhancement
so that the commercial paper program will receive an investment
grade rating. Where warranted, we provide partial credit enhance-
ment facilities to transactions within asset-backed commercial
paper programs administered by us to ensure a high investment
grade credit rating is achieved for notes issued by the programs.
These facilities can take the form of either program level letters
of credit ($199 million and $240 million were included in standby
letters of credit and guarantees as at October 31, 2004 and 2003,
respectively) or backstop liquidity facilities ($1,503 million and
$996 million were included in commitments to extend credit as
at October 31, 2004 and 2003, respectively). The terms of these
facilities are between one and three years. None of the credit
enhancement facilities that we have provided have been drawn
upon. No amount was included in our Consolidated Balance
Sheet as at October 31, 2004 or 2003 related to these facilities.
Derivatives
Certain of our derivative instruments meet the accounting definition
of a guarantee when we believe they are related to an asset, liability
or equity security held by the guaranteed party at the inception
of a contract.
Written credit default swaps require us to compensate a
counterparty following the occurrence of a credit event in relation
to a specified reference obligation, such as a bond or a loan.
The maximum amount payable under credit default swaps was equal
to their notional amount of $11,360 million as at October 31, 2004
($5,282 million in 2003). The terms of these contracts range from
two to 10 years. The fair value of the related derivative liabilities
as at October 31, 2004 was $15 million (less than $1 million in 2003)
and was included in derivative financial instruments in our
Consolidated Balance Sheet.
Written options include contractual agreements that convey
to the purchaser the right, but not the obligation, to require us
to buy a specific amount of a currency, commodity or equity
at a fixed price, either at a fixed future date or at any time within
a fixed future period. The maximum amount payable under
these written options cannot be reasonably estimated due to the
nature of these contracts. The terms of these contracts range from
one month to eight years. The fair value of the related derivative
liabilities as at October 31, 2004 was $118 million ($132 million in
2003) and was included in derivative financial instruments in our
Consolidated Balance Sheet.
Written options also include contractual agreements where we
agree to pay the purchaser, based on a specified notional amount,
the difference between the market interest rate and the strike price
of the instrument. The maximum amount payable under these
contracts is not determinable due to their nature. The terms of
these contracts range from one month to 23 years. The fair value
of the related derivative liabilities as at October 31, 2004 was
$63 million ($56 million in 2003) and was included in derivative
financial instruments in our Consolidated Balance Sheet.
In order to reduce our exposure to these derivatives, we enter
into contracts that hedge the related risks.
Indemnification Agreements
In the normal course of operations, we enter into various agreements
that provide general indemnifications. These indemnifications
typically occur in connection with sales of assets, securities offerings,
service contracts, membership agreements, clearing arrangements
and leasing transactions. These indemnifications require us,
in certain circumstances, to compensate the counterparties for
various costs resulting from breaches of representations or obli-
gations under such arrangements, or as a result of third-party claims
that may be suffered by the counterparty as a consequence of
the transaction. The terms of these indemnifications vary based
on the contract, the nature of which prevents us from making
a reasonable estimate of the maximum potential amount we could
be required to pay to counterparties. We believe that the likelihood
that we could incur significant liability under these obligations
is remote. Historically, we have not made any significant payments
under such indemnifications. No amount has been included in
our Consolidated Balance Sheet as at October 31, 2004 or 2003
related to these indemnifications.
Note 6 Guarantees