TD Bank 2002 Annual Report Download - page 31

Management’s Discussion and Analysis of Operating Performance 29
HOW WE PERFORMED IN 2002
The graph below shows the frequency distribution of our net
trading revenue for fiscal 2002. Daily net trading revenues in
2002 were positive on 88% of the trading days in the year.
Losses never exceeded our statistically predicted VaR for the
total of our trading related businesses. Our worst daily loss
was less than $12 million. The distribution of trading revenues
reflects the broad diversification of trading activities in
TD Securities and shows that the probability of major losses
exceeding our reported VaR is low.
Stress testing
We use stress testing to quantify the largest quarterly loss we
are prepared to take in our trading activities and then limit
market risk accordingly.
Our trading business is subject to an overall global stress test
limit and each global business has a stress test limit. Stress
tests are produced and reviewed each week with the head of
Group Risk Management. They are reviewed with the Market
Risk Committee every two weeks and four times a year with
the Risk Committee of the Board of Directors. Stress scenarios
are designed to model extreme economic events, replicate worst
case historical experiences or introduce large but plausible
moves in key market risk factors.
The following graph is a history of our weekly stress test
results which shows the instantaneous impact of large market
disturbances. We continued to reduce our credit spread risk in
2002 by buying credit protection in the form of synthetic
collateralized debt obligations (CDOs) and credit default swaps.
This improved management of credit risk has had a major
positive impact on our risk profile.
Asset liability management
Asset liability management deals with managing the market
risks of our traditional banking activities. Market risks
primarily include interest rate risk and foreign exchange risk.
We are exposed to market risk when we enter into non-trading
banking transactions with our customers. These transactions
primarily include deposit taking and lending, which are also
referred to as our “asset and liability” positions.
Who is responsible for asset liability management
The Treasury and Balance Sheet Management department
within Group Finance measures and manages the market risks
of our non-trading banking activities. The Risk Oversight
Committee, which is chaired by the Vice Chair, Risk
Management and includes senior executives, oversees and
directs Treasury and Balance Sheet Management. The Risk
Committee of the Board of Directors reviews and approves all
market risk policies and procedures annually.
How we manage our asset and liability positions
We measure all product risks when products are issued, using
a fully hedged option-adjusted transfer pricing framework.
This framework allows Treasury and Balance Sheet Management
to measure and manage risk within a target risk profile. It
also ensures that TD’s business units engage in risk-taking
activities only if they are productive.
Managing interest rate risk
Interest rate risk is the impact changes in interest rates
could have on our margins, earnings and economic value.
Rising interest rates could, for example, increase our funding
costs, which would reduce the net interest income earned
on certain loans.
Stress test history
(millions of dollars)
$0
-50
-100
-150
-200
-250
Oct. 31/02Aug. 1/02May 2/02Jan. 31/02Nov. 1/01
Stress test loss
Distribution of daily net trading revenues
(number of days)
25
20
15
10
5
0
>302520151050-5-10$ <-15
(millions of dollars)