Bank of Montreal 2013 Annual Report Download - page 136

Customer Securitization Vehicles
We sponsor customer securitization vehicles (also referred to as bank-
sponsored multi-seller conduits) that provide our customers with
alternate sources of funding through the securitization of their assets.
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 certain of these
vehicles, as we have the right to obtain the majority of the benefits
through our ownership of ABCP.
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 Vehicle
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 types of
assets it can hold, and the vehicle 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.
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. In 2013, Apex redeemed $742 million of its
outstanding medium-term notes, of which $480 million were held by us.
We continue to hold $934 million of outstanding medium-term notes. As
at October 31, 2013 and 2012, we have hedged our exposure to our
holdings of notes issued by Apex. 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.
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, 2013, 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, 2013, Links sold its
remaining assets and fully repaid our senior liquidity facility. During the
year ended October 31, 2012, Parkland Finance Corporation 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 Vehicles
Capital and Funding vehicles are created to issue notes or capital trust
securities or to guarantee payments due to bondholders on bonds
issued by us. These vehicles purchase notes from us, or we may sell
assets to the vehicles in exchange for promissory notes. We control and
must consolidate these vehicles, as the majority of the activities of
these vehicles are conducted on our behalf. See Note 1 and 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 $1,343 million as
at October 31, 2013 ($1,140 million in 2012). 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 the 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.
Cross-currency swaps – fixed rate interest payments and principal
amounts are exchanged in different currencies.
Notes
BMO Financial Group 196th Annual Report 2013 147