Bank of Montreal 2013 Annual Report Download - page 167

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(c) Collateral
When entering into trading activities such as purchases under resale
agreements, securities borrowing and lending activities or financing and
derivative transactions, we require our counterparties to provide us with
collateral that will protect us from losses in the event of the
counterparty’s default. The fair value of collateral that we are permitted
to sell or repledge (in the absence of default by the owner of the
collateral) was $38,606 million as at October 31, 2013 ($31,972 million
in 2012).
The fair value of collateral that we have sold or repledged was
$24,795 million as at October 31, 2013 ($26,228 million in 2012).
Collateral transactions (received or pledged) are typically conducted
under terms that are usual and customary in standard trading activities.
If there is no default, the securities or their equivalents must be
returned to or returned by the counterparty at the end of the contract.
(d) Pledged Assets
In the normal course of our business, we pledge assets as security for
various liabilities that we incur. The following tables summarize our
pledged assets, to whom they are pledged and in relation to what
activity:
(Canadian $ in millions) 2013 2012
Cash and Securities
Issued or guaranteed by Canada
Issued or guaranteed by a Canadian province,
municipality or school corporation
Other
Mortgages, securities borrowed or purchased under
resale agreements and other
8,917
4,749
28,421
54,630
8,813
4,000
30,512
64,264
Total assets pledged (1) (2) 96,717 107,589
Excludes restricted cash resources disclosed in Note 2.
(Canadian $ in millions) 2013 2012
Assets pledged to:
Clearing systems, payment systems and depositories 1,449 1,150
Bank of Canada 2,303 2,415
Foreign governments and central banks 2 2
Assets pledged in relation to:
Obligations related to securities lent or sold under
repurchase agreements 17,121 28,155
Securities borrowing and lending 23,819 19,215
Derivatives transactions 9,676 9,089
Securitization 26,435 28,676
Covered bonds 7,604 11,302
Other 8,308 7,585
Total assets pledged (1) (2) 96,717 107,589
Excludes cash pledged with central banks disclosed as restricted cash in Note 2.
Excludes collateral received that has been sold or repledged as disclosed in the collateral section
of this note.
(1) Excludes rehypothecated assets of $4,500 million ($7,370 million in 2012) pledged in
relation to securities borrowing transactions.
(2) Includes assets pledged in order to participate in clearing and payment systems and
depositories or to have access to the facilities of central banks in foreign jurisdictions.
(e) Other Commitments
As a participant in merchant banking activities, we enter into
commitments to fund external private equity funds and investments in
equity and debt securities at market value at the time the commitments
are drawn. In addition, we act as underwriter for certain new issuances
under which we alone or together with a syndicate of financial
institutions purchase the new issue for resale to investors. In connection
with these activities, our related commitments were $4,280 million as
at October 31, 2013 ($3,280 million in 2012).
Note 29: Fair Value of Financial Instruments
We record trading assets and liabilities, derivatives, available-for-sale
securities and securities sold but not yet purchased at fair value, and
other non-trading assets and liabilities at amortized cost less allowances
or write-downs for impairment. The fair values in this note are based
upon the estimated amounts for individual assets and liabilities and do
not include an estimate of the fair value of any of the legal entities or
underlying operations that comprise our business.
Fair value amounts disclosed represent point-in-time estimates that
may change in subsequent reporting periods due to market conditions
or other factors. Fair value represents our estimate of the amounts for
which we could exchange our financial instruments with willing third
parties who were interested in acquiring the instruments. Some financial
instruments are not typically exchangeable or exchanged and therefore
it is difficult to determine their fair value. Where there is no quoted
market price, we determine fair value using management’s best
estimates based on a range of valuation techniques and assumptions;
since they involve uncertainties, the fair values may not be realized in
an actual sale or immediate settlement of the instruments.
Financial Instruments Whose Book Value
Approximates Fair Value
Fair value is assumed to equal book value for acceptance-related assets
and liabilities, due to the short-term nature of these assets and
liabilities. Fair value is also assumed to equal book value for our cash
resources, certain other assets and certain other liabilities.
Securities
For traded securities, quoted market value is considered to be fair value.
Quoted market value is based on bid prices. Securities for which no
active market exists are valued using all reasonably available market
information. Our fair value methodologies are described below.
Government Securities
The fair value of government issued or guaranteed debt securities in
active markets is determined by reference to recent transaction prices,
broker quotes or third-party vendor prices. The fair value of securities
that are not traded in an active market are modelled using implied
yields derived from the prices of actively traded similar government
securities and observable spreads. Market inputs to the model include
coupon, maturity and duration.
Mortgage-Backed Securities and Collateralized Mortgage Obligations
The fair value of mortgage-backed securities and collateralized mortgage
obligations is determined by obtaining independent prices from third-
party vendors, broker quotes and relevant market indices, as applicable.
If such prices are not available, fair value is determined using cash flow
models that make maximum use of observable market inputs or
benchmark prices to similar instruments. Mortgage-backed security and
collateralized mortgage obligation valuation assumptions include the
discount rates, expected prepayments, credit spreads and recoveries.
Corporate Debt Securities
The fair value of corporate debt securities is determined using the most
recently executed transaction prices. When observable price quotations
are not available, fair value is determined based on discounted cash
flow models using discounting curves and spreads observed through
independent dealers, brokers and multi-contributor pricing sources.
Corporate Equity Securities
The fair value of equity securities is based on quoted prices in active
markets, where available. Where quoted prices in active markets are
not readily available, fair value is determined based on quoted market
prices for similar securities or through valuation techniques, including
discounted cash flow analysis and multiples of earnings.
Notes
178 BMO Financial Group 196th Annual Report 2013