Bank of Montreal 2010 Annual Report Download - page 164

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes
162 BMO Financial Group 193rd Annual Report 2010
As at October 31 (Canadian $ in millions) 2010 2009
Fair value measurement using Fair value measurement using
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Trading Securities
Issued or guaranteed by:
Canadian federal government 15,932 72 – 16,607 – –
Canadian provincial and
municipal governments 3,910 5 – 2,882 – –
U.S. federal government 8,060 – – 3,021 – –
U.S. states, municipalities and agencies 849 205 – 54 653 49
Other governments 1,365 – – 1,712 – –
Mortgage-backed securities and
collateralized mortgage obligations 859 – 211 584 238 204
Corporate debt 7,419 3,595 1,358 7,313 2,293 1,476
Corporate equity 27,267 603 – 21,985 – –
65,661 4,480 1,569 54,158 3,184 1,729
Available-for-Sale Securities
Issued or guaranteed by:
Canadian federal government 14,701 – – 17,359 – –
Canadian provincial and
municipal governments 1,442 253 – 1,688 – –
U.S. federal government 5,658 – – 1,111 – –
U.S. states, municipalities and agencies – 4,237 20 4,584 1,418 86
Other governments 9,455 587 – 8,220 9 –
Mortgage-backed securities and
collateralized mortgage obligations 688 8,204 20 826 9,530 39
Corporate debt 2,959 133 1,500 1,499 1,078 1,960
Corporate equity 139 178 369 303 236 311
35,042 13,592 1,909 35,590 12,271 2,396
Fair Value Liabilities
Securities sold but not yet purchased 16,438 – – 12,064 – –
Structured note liabilities – 3,976 – – 3,073 –
16,438 3,976 – 12,064 3,073 –
Derivative Assets
Interest rate contracts 24 33,862 217 42 30,062 1
Foreign exchange contracts 45 10,089 – 61 9,323 –
Commodity contracts 2,207 382 – 1,160 2,330 –
Equity contracts 1,028 617 8 618 1,353 11
Credit default swaps – 1,120 160 – 2,370 567
3,304 46,070 385 1,881 45,438 579
Derivative Liabilities
Interest rate contracts 38 32,593 48 61 28,781 73
Foreign exchange contracts 20 9,517 – 8 9,161 –
Commodity contracts 2,087 501 – 744 2,201 –
Equity contracts 53 2,109 71 – 1,480 97
Credit default swaps – 930 3 – 2,156 3
2,198 45,650 122 813 43,779 173
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Valuation Techniques and Signifi cant Inputs
We determine the fair value of publicly traded fixed maturity and
equity securities using quoted market prices in active markets (Level 1)
when these are available. When quoted prices in active markets are
not available, we determine the fair value of financial instruments using
models such as discounted cash flows with observable market inputs
for inputs such as yield and prepayment rates or broker quotes and other
third-party vendor quotes (Level 2). Fair value may also be determined
using models where the significant market inputs are unobservable
due to inactive or minimal market activity (Level 3). We maximize the
use of market inputs to the extent possible.
Our Level 2 trading securities are primarily valued using discounted
cash flow models with observable spreads or based on broker quotes.
The fair value of Level 2 available-for-sale securities is determined using
discounted cash flow models with observable spreads or third-party vendor
quotes. Level 2 structured note liabilities are valued using models with
observable market information. Level 2 derivative assets and liabilities are
valued using industry standard models and observable market information.
Sensitivity analysis at October 31, 2010 for the most significant
Level 3 instruments is provided below.
Within Level 3 trading securities is corporate debt of $1,242 million
that relates to securities that are hedged with total return swaps and
credit default swaps that are also considered a Level 3 instrument.
Fair Value Hierarchy
We use a fair value hierarchy to categorize the inputs we use in
valuation techniques to measure fair value. The extent of our use of
quoted market prices (Level 1), internal models using observable
market information as inputs (Level 2) and internal models without
observable market information as inputs (Level 3) in the valuation of
securities, fair value liabilities, derivative assets and derivative
liabilities was as follows: