Bank of Montreal 2013 Annual Report Download - page 75

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
Derivative Transactions
With limited exceptions, we utilize the International Swaps and
Derivatives Association (ISDA) Master Agreement to document our
contractual trading relationships with our counterparties for over-the-
counter (OTC) derivatives. ISDA Master Agreements set out the legal
framework and standard terms that apply to all derivative transactions
entered into bilaterally between the parties. In addition to providing
Events of Default and Termination Events, which can lead to the early
termination of transactions prior to their maturity date, ISDA Master
Agreements also contain rules for the calculation and netting of termi-
nation values (also known as Close-out Amounts) for transactions
between counterparties to identify a single net aggregate amount
payable by one party to the other.
Credit Support Annexes (CSAs) are commonly included with ISDA
Master Agreements to provide for the exchange of collateral between
the parties where one party’s OTC derivatives exposure to the other
Over-the-Counter Derivatives (Notional amounts)
(Canadian $ in millions)
party exceeds an agreed amount (Threshold). The purpose of
collateralization is to mitigate counterparty credit risk. Collateral can be
exchanged as initial margin and/or variation margin. CSAs outline,
among other things, provisions setting out acceptable collateral types
(e.g., government treasuries and cash) and how they will be valued
(discounts are often applied to the market values), as well as Thresh-
olds, whether or not the collateral can be re-pledged by the recipient
and how interest is calculated.
The following table represents the notional amounts of our OTC
derivative contracts, comprised of those which are centrally cleared and
settled through a designated clearing house and those which are non-
centrally cleared. The notional amounts of our derivatives represent the
amount to which a rate or price is applied in order to calculate the
amount of cash that must be exchanged under the contract. Notional
amounts do not represent assets or liabilities and therefore are not
recorded in our Consolidated Balance Sheet. The fair values of OTC
derivative contracts are recorded in our Consolidated Balance Sheet.
Non-centrally cleared Centrally cleared Total
As at October 31 2013 2012 2013 2012 2013 2012
Interest Rate Contracts
Swaps 1,084,369 1,563,766 1,140,417 401,410 2,224,786 1,965,176
Forward rate agreements 52,137 223,482 347,614 346,266 399,751 569,748
Purchased options 18,283 24,015 – – 18,283 24,015
Written options 23,020 31,364 – – 23,020 31,364
Total interest rate contracts 1,177,809 1,842,627 1,488,031 747,676 2,665,840 2,590,303
Foreign Exchange Contracts
Cross-currency swaps 44,834 30,485 – – 44,834 30,485
Cross-currency interest rate swaps 255,337 238,675 – – 255,337 238,675
Forward foreign exchange contracts 263,607 217,345 – – 263,607 217,345
Purchased options 10,923 8,682 – – 10,923 8,682
Written options 13,530 10,588 – – 13,530 10,588
Total foreign exchange contracts 588,231 505,775 – – 588,231 505,775
Commodity Contracts
Swaps 15,122 15,034 – – 15,122 15,034
Purchased options 8,081 9,002 – – 8,081 9,002
Written options 4,285 5,164 – – 4,285 5,164
Total commodity contracts 27,488 29,200 – – 27,488 29,200
Equity Contracts 39,360 30,000 – – 39,360 30,000
Credit Default Swaps
Purchased 8,541 11,682 294 – 8,835 11,682
Written 13,072 24,126 216 – 13,288 24,126
Total credit default swaps 21,613 35,808 510 – 22,123 35,808
Total 1,854,501 2,443,410 1,488,541 747,676 3,343,042 3,191,086
86 BMO Financial Group 196th Annual Report 2013