Bank of Montreal 2013 Annual Report Download - page 171

Notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
instruments and by obtaining independent prices from third-party
vendors, broker quotes and relevant market indices, as applicable.
Where external price data is not available, we assess the collateral
performance in assessing the fair value of the securities.
Within Level 3 trading securities is corporate debt of $800 million
related to securities which are hedged with total return swaps and credit
default swaps that are also considered a Level 3 instrument. The
sensitivity analysis for these structured products is performed on an
aggregate basis and is described in the discussion of derivatives below.
Within Level 3 available-for-sale securities is corporate equity of
$557 million related to U.S. Federal Reserve Banks and U.S. Federal
Home Loan Banks that we hold to meet regulatory requirements in the
United States and $392 million related to private equity investments.
The valuation of these investments requires management judgment due
to the absence of quoted market prices, the potential lack of liquidity
and the long-term nature of such assets. Each quarter, the valuation of
these investments is reviewed using relevant company-specific and
industry data, including historical and projected net income, credit and
liquidity conditions and recent transactions, if any. Since the valuation of
these investments does not involve models, a sensitivity analysis for the
category is not performed.
Within derivative assets and derivative liabilities as at October 31,
2013 was $28 million and $19 million related to the mark-to-market of
credit default swaps, on structured products. We have determined the
valuation of these derivatives and the related securities based on
external price data obtained from brokers and dealers for similar
structured products. Where external price information is not available,
we use market-standard models to model the specific collateral
composition and cash flow structure of the deal. Key inputs to the
models are market spread data for each credit rating, collateral type and
other relevant contractual features. The impact of assuming a 10 basis
point increase or decrease in the market spread would result in a
change in fair value of $(1) million and $1 million, respectively.
Significant Transfers
Transfers are made between the various fair value hierarchy levels due
to changes in the availability of quoted market prices or observable
market inputs that result from changing market conditions. The
following is a discussion of the significant transfers between Level 1,
Level 2 and Level 3 balances for the years ended October 31, 2013
and 2012.
During the year ended October 31, 2013, $28 million of trading
Canadian provincial and municipal securities, $29 million of available-
for-sale corporate debt securities, and $4 million of available-for-sale
corporate equity securities were transferred from Level 3 to Level 2 as
observable inputs became available. In addition, $17 million of trading
mortgage-backed securities were transferred from Level 2 to Level 3 as
a result of fewer available prices for these securities during the year.
During the year ended October 31, 2013, derivative liabilities
of $62 million were transferred from Level 3 to Level 2, as
market information became available for certain over-the-counter
equity contracts.
During the year ended October 31, 2012, $24 million of available-
for-sale corporate debt securities, $12 million of trading corporate debt
securities and $14 million of trading mortgage-backed securities were
transferred from Level 3 to Level 2, as values for these securities are
now obtained through a third-party vendor and are based on market
prices. In addition, $105 million of trading mortgage-backed securities
and $18 million of trading corporate debt securities were transferred
from Level 2 to Level 3 as a result of fewer available prices for these
securities during the year.
During the year ended October 31, 2012, derivative liabilities of
$9 million were transferred from Level 3 to Level 2, as market
information became available for certain over-the-counter equity
contracts.
182 BMO Financial Group 196th Annual Report 2013