Bank of Montreal 2012 Annual Report Download - page 143

Notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. We do not service the transferred assets because
the responsibility is retained by the client. If there are losses on the
assets, the seller is the first to take the loss. We do not sell assets to
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. For our Canadian customer securitization vehicles, we
determined that we control and must consolidate five of these vehicles
(three in 2011), as we have the right to obtain the majority of the
benefits through our ownership of ABCP. We are not required to
consolidate five of our 10 (five of our eight in 2011) Canadian customer
securitization vehicles.
For our U.S. customer securitization vehicle, we determined that
we control and must consolidate this vehicle, as we have key decision-
making powers to obtain the majority of the benefits from the
vehicle’s activities.
Bank Securitization Vehicles
We use a bank securitization vehicle to securitize our Canadian credit
card loans in order to obtain alternate sources of funding. The structure
of this vehicle limits the types of activities it can undertake and the type
of assets it can hold, and has limited decision-making authority. This
vehicle issues term asset-backed securities to fund its activities. We
control and must consolidate this vehicle, as we have key decision-
making powers to obtain the majority of the benefits of its activities.
We also used two bank securitization vehicles to securitize our Canadian
mortgages. The two bank securitization vehicles ceased issuing ABCP
and have no ABCP outstanding as at October 31, 2012.
Credit Protection Vehicle
We sponsor a credit protection vehicle, Apex Trust (“Apex”), that
provides credit protection to investors on investments in corporate debt
portfolios through credit default swaps. In May 2008, upon the
restructuring of Apex, we entered into credit default swaps with swap
counterparties and offsetting swaps with Apex. As at October 31, 2012
and 2011, we have hedged our exposure to our holdings of notes as
well as the first $515 million of exposure under the senior funding
facility. Since 2008, a third party has held its exposure to Apex through a
total return swap with us on $600 million of notes. We control and must
consolidate this vehicle, through our ownership of medium-term notes.
Structured Investment Vehicles
Structured investment vehicles (“SIVs”) provide investment
opportunities in customized, diversified debt portfolios in a variety of
asset and rating classes. At October 31, 2012, we held interests in Links
Finance Corporation (“Links”), which we consolidate, as we have key
decision-making powers to obtain the majority of the benefits of its
activities. During the year ended October 31, 2012, Parkland Finance
Corporation (“Parkland”) sold its remaining assets, fully repaid our
liquidity facility and distributed the remaining proceeds to its capital
note holders.
Structured Finance Vehicles
We facilitate development of investment products by third parties,
including mutual funds, unit investment trusts and other investment
funds that are sold to retail investors. We enter into derivatives with
these funds to provide the investors their desired exposure, and we
hedge our exposure related to these derivatives by investing in other
funds through SPEs. We are not required to consolidate these vehicles.
Capital and Funding Trusts
Capital and Funding Trusts (the “Trusts”) are created to issue notes or
capital trust securities or to guarantee payments due to bondholders on
bonds issued by us. These Trusts purchase notes from us, or we may sell
assets to the Trusts in exchange for promissory notes. We control and
must consolidate these Trusts, as the majority of the activities of these
Trusts are conducted on our behalf. See Note 18 for further information
related to the Capital Trusts.
Compensation Trusts
We have established trusts in order to administer our employee share
ownership plan. Under this plan, employees can direct a portion of their
gross salary towards the purchase of our common shares and we match
50% of employees’ contributions up to 6% of their individual gross
salary. Our matching contributions are paid into trusts, which purchase
our shares on the open market for distribution to employees once
employees are entitled to the shares under the terms of the plan. Total
assets held by our compensation trusts amounted to $1,140 million as
at October 31, 2012 ($1,077 million in 2011). We are not required to
consolidate these compensation trusts.
Other SPEs
We are involved with other entities that may potentially be SPEs. This
involvement can include, for example, acting as a derivatives
counterparty, liquidity provider, investor, fund manager or trustee. These
activities do not cause us to control these SPEs. As a result, we are not
required to consolidate these SPEs. Transactions with these SPEs are
conducted at market rates, and individual creditor investment decisions
are based upon the analysis of the specific SPE, taking into consideration
the quality of underlying assets. We record and report these transactions
in the same manner as other transactions. For example, derivative
contracts are recorded in accordance with our derivatives accounting
policy as outlined in Note 10. Liquidity facilities and indemnification
agreements are described in Note 7.
Note 10: Derivative Instruments
Derivative instruments are financial contracts that derive their value
from underlying changes in interest rates, foreign exchange rates or
other financial or commodity prices or indices.
Derivative instruments are either regulated exchange-traded
contracts or negotiated over-the-counter contracts. We use these
instruments for trading purposes, as well as to manage our exposures,
mainly to currency and interest rate fluctuations, as part of our asset/
liability management program.
Types of Derivatives
Swaps
Swaps are contractual agreements between two parties to exchange a
series of cash flows. The various swap agreements that we enter into
are as follows:
Interest rate swaps – counterparties generally exchange fixed and
floating rate interest payments based on a notional value in a
single currency.
140 BMO Financial Group 195th Annual Report 2012