Bank of Montreal 2014 Annual Report Download - page 83

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
Linkages between Balance Sheet Items and Market Risk Disclosures
The table below presents items reported in our Consolidated Balance Sheet that are subject to market risk, comprised of balances that are subject to
traded risk and non-traded risk measurement techniques.
As at October 31, 2014 As at October 31, 2013
Subject to market risk Subject to market risk
(Canadian $ in millions)
Consolidated
Balance Sheet
Traded
risk (1)
Non-traded
risk (2)
Not subject to
market risk
Consolidated
Balance Sheet
Traded
risk (1)
Non-traded
risk (2)
Not subject to
market risk
Main risk factors for
non-traded risk
balances
Assets Subject to Market Risk
Cash and cash equivalents 28,386 – 28,386 – 26,089 – 26,089 – Interest rate
Interest bearing deposits
with banks 6,110 930 5,180 – 6,518 1,511 5,007 – Interest rate
Securities
Trading 85,022 78,997 6,025 – 75,159 69,393 5,766 – Interest rate,
credit spread
Available-for-sale 46,966 – 46,966 – 53,710 – 53,710 – Interest rate,
credit spread
Held-to-maturity 10,344 – 10,344 – 6,032 – 6,032 – Interest rate
Other 987 – 987 – 899 – 899 – Equity
Securities borrowed or
purchased under resale
agreements 53,555 – 53,555 – 39,799 – 39,799 – Interest rate
Loans and acceptances (net of
allowance for credit losses) 303,038 – 303,038 – 279,294 – 279,294 – Interest rate,
foreign exchange
Derivative instruments 32,655 31,627 1,028 – 30,259 29,484 775 – Interest rate,
foreign exchange
Other assets 21,596 – 7,787 13,809 19,285 – 7,692 11,593 Interest rate
Total Assets 588,659 111,554 463,296 13,809 537,044 100,388 425,063 11,593
Liabilities Subject to Market Risk
Deposits 393,088 7,639 385,449 – 368,369 5,928 362,441 – Interest rate,
foreign exchange
Derivative instruments 33,657 32,310 1,347 – 31,974 31,184 790 – Interest rate,
foreign exchange
Acceptances 10,878 – 10,878 – 8,472 – 8,472 – Interest rate
Securities sold but not
yet purchased 27,348 27,348 – – 22,446 22,446 – – Interest rate
Securities lent or sold under
repurchase agreements 39,695 – 39,695 – 28,884 – 28,884 – Interest rate
Other liabilities 43,676 – 43,263 413 41,724 – 41,179 545 Interest rate
Subordinated debt 4,913 – 4,913 – 3,996 – 3,996 – Interest rate
Total Liabilities 553,255 67,297 485,545 413 505,865 59,558 445,762 545
(1) Primarily comprised of BMO’s balance sheet items that are subject to the trading and underwriting risk management framework and fair valued through profit or loss.
(2) Primarily comprised of BMO’s balance sheet items that are subject to the structural balance sheet and insurance risk management framework, or are available-for-sale securities.
Certain comparative figures have been reclassified to conform to the current year’s presentation.
Structural (Non-Trading) Market Risk
Structural market risk is comprised of interest rate risk arising from our
banking activities (loans and deposits) and foreign exchange risk arising
from our foreign currency operations.
Structural Market Risk Governance
The RRC has oversight of the management of structural market risk,
annually approves the structural market risk strategy and limits, and
regularly reviews structural market risk positions. The RMC and Balance
Sheet and Capital Management Committee (BSCMC) regularly review
structural market risk positions and provide senior management
oversight.
In addition to Board-approved limits on earnings and economic
value exposure, more granular management limits are in place to guide
day-to-day management of this risk. BMO’s Corporate Treasury group is
responsible for the ongoing management of structural market risk across
the enterprise, with independent oversight provided by the Market Risk
group.
Structural Market Risk Measurement
Interest Rate Risk
Structural interest rate risk arises when changes in interest rates affect
the cash flows, earnings and values of assets and liabilities from our
banking activities. The objective of structural interest rate risk manage-
ment is to maintain high-quality earnings and maximize sustainable
product spreads.
Structural interest rate risk is primarily comprised of interest rate
mismatch risk and product embedded option risk.
Interest rate mismatch risk arises when there are differences in the
scheduled maturity, repricing dates or reference rates of assets,
liabilities and derivatives. The net interest rate mismatch, representing
residual assets funded by common shareholders’ equity, is managed to
a target profile through interest rate swaps and securities.
Product embedded option risk arises when product features allow
customers to alter scheduled maturity or repricing dates. Product
embedded options include loan prepayment, deposit redemption priv-
ileges and committed rates on unadvanced mortgages. Product
embedded options are managed to low risk levels through a dynamic
hedging process or with purchased options.
Material presented in a blue-tinted font above is an integral part of the 2014 annual consolidated financial statements (see page 77).
94 BMO Financial Group 197th Annual Report 2014