Bank of Montreal 2010 Annual Report Download - page 130

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes
128 BMO Financial Group 193rd Annual Report 2010
Note 9: Variable Interest Entities
Variable interest entities (“VIEs”) include entities whose equity is
considered insufficient to finance its activities or for which the equity-
holders do not have a controlling financial interest. We are required
to consolidate VIEs if the investments we hold in these entities and/or
the relationships we have with them result in us being exposed to the
majority of their expected losses, being able to benefit from a majority
of their expected residual returns, or both. We determine this based on
a quantitative assessment that involves estimating our relative exposure
to variability in the future cash flows and performance of the VIE.
Total assets in these VIEs and our maximum exposure to losses
are summarized in the following table, with the exception of our
compensation trusts, which are described in further detail below.
(Canadian $ in millions) October 31, 2010 October 31, 2009
Total Total
Exposure to loss assets Exposure to loss assets
Drawn Drawn
facilities facilities
Undrawn and loans Securities Derivative Undrawn and loans Securities Derivative
facilities (1) provided (2) held assets Total facilities (1) provided (2) held assets Total
Unconsolidated VIEs in which
we have a significant variable
interest
Canadian customer securitization
vehicles
(3) 2,958 – 113 14 3,085 2,976 5,819 – 328 44 6,191 5,674
U.S. customer securitization vehicle 3,905 251 – 2 4,158 4,074 6,214 158 – 2 6,374 4,943
Bank securitization vehicles (3) 5,100 – 637 100 5,837 9,469 5,100 – 625 94 5,819 9,719
Credit protection vehicle –
Apex
(4) (5) 1,030 – 1,128 669 2,827 2,208 918 112 833 1,236 3,099 2,322
Structured investment vehicles (6) 171 5,097 – 30 5,298 5,225 247 7,230 – 12 7,489 6,968
Structured finance vehicles na na 4,745 – 4,745 5,330 na na 1,762 – 1,762 2,451
Capital and funding trusts 43 12 2 – 57 1,277 43 12 2 – 57 1,270
Total 13,207 5,360 6,625 815 26,007 30,559 18,341 7,512 3,550 1,388 30,791 33,347
Consolidated VIEs
Canadian customer securitization
vehicles
(3) (7) 200 – 196 – 396 196 733 – 719 – 1,452 719
Capital and funding trusts 4,081 6,919 740 76 11,816 9,673 9,013 1,987 880 45 11,925 5,190
Structured finance vehicles – – 27 – 27 27 na na 54 – 54 54
Total 4,281 6,919 963 76 12,239 9,896 9,746 1,987 1,653 45 13,431 5,963
(1) These facilities include senior funding facilities provided to our credit protection vehicle and
structured investment vehicles as well as backstop liquidity facilities provided to our bank
securitization vehicles, our Canadian customer securitization vehicles and our U.S. customer
securitization vehicle. None of the backstop liquidity facilities provided to our Canadian
customer securitization vehicles related to credit support as at October 31, 2010 and 2009.
Backstop liquidity facilities provided to our U.S. customer securitization vehicle include credit
support and are discussed in Note 7.
(2) Amounts outstanding from backstop liquidity facilities and senior funding facilities are
classified as Loans – Businesses and governments.
(3) Securities held in our bank securitization vehicles are comprised of $105 million of asset-backed
commercial paper classified as trading securities ($55 million in 2009), and $261 million of
deferred purchase price ($293 million in 2009) and $271 million of asset-backed securities
($277 million in 2009) classified as available-for-sale securities. Securities held in our Canadian
Customer Securitization Vehicles
We sponsor customer securitization vehicles (also referred to as
bank-sponsored multi-seller conduits) that assist our customers with
the securitization of their assets to provide them with alternate sources
of funding. These vehicles provide clients with access to financing in
the asset-backed commercial paper (“ABCP”) markets by allowing them
to sell their assets into these vehicles, which then issue ABCP to investors
to fund the purchases. In all cases, we do not service the transferred
assets. If there are losses on the assets, the seller is the first to take
the loss. We do not sell assets to or service the assets held by these
customer securitization vehicles. We earn fees for providing services
related to the securitizations, including liquidity, distribution and
financial arrangement fees for supporting the ongoing operations
of the vehicles.
Canadian Customer Securitization Vehicles
Our exposure to our Canadian customer securitization vehicles is
summarized in the table above. We purchase ABCP through our role
as a market maker and hold these securities for an interim period
until investors purchase them. In general, investors in the ABCP have
recourse only to the assets of the related VIE and do not have recourse
to us. To the extent that we have purchased ABCP, our exposure under
the liquidity facilities is reduced by an equal amount. We use our
credit adjudication process in deciding whether to enter into global style
backstop liquidity facilities just as we do when extending credit in the
form of a loan. The vehicles have never drawn on these facilities to date.
We assess whether we are required to consolidate these vehicles
based on a quantitative analysis of expected losses that could be absorbed
by us. In doing this analysis, we consider our significant variable
interests,
primarily our holdings of ABCP, as well as fees earned for services
provided. We consolidate VIEs that are fully financed by us through
our ownership of ABCP. We are not required to consolidate five of our
eight Canadian customer securitization vehicles. Our exposure to loss
is limited to the consolidated assets disclosed in the preceding table.
customer securitization vehicles are comprised of asset-backed commercial paper and are
classified as trading securities. Assets held by all these vehicles relate to assets in Canada.
(4) Derivatives held with this vehicle are classified as trading instruments. Changes in the fair
value of these derivatives are offset by derivatives held with third-party counterparties that
are also classified as trading instruments.
(5) Securities held are classified as trading securities and have a face value of $1,415 million.
Our exposure to these securities has been hedged through derivatives.
(6) Securities held are comprised of capital notes, classified as available-for-sale securities.
We have written these notes down to $nil as at October 31, 2010 and 2009.
(7) Total assets held as at October 31, 2010 are comprised of a loan of $135 million ($560 million
in 2009) and $61 million of other assets ($159 million in 2009).
na – not applicable