TD Bank 2007 Annual Report Download - page 69

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TD BANK FINANCIAL GROUP ANNUAL REPORT 2007 Management’s Discussion and Analysis 65
TABLE 36 VALUE-AT-RISK
For the years ended October 31 2007 2006
(millions of Canadian dollars) Year-end Average High Low Year-end Average High Low
Interest rate risk $ (14.1)$ (8.1)$ (14.2)$ (3.9)$ (4.0)$ (8.2)$ (14.0)$ (3.5)
Equity risk (4.8)(6.9)(13.8)(2.8)(6.0)(5.6)(10.8)(3.3)
Foreign exchange risk (1.8)(2.0)(3.9)(0.8)(1.2)(2.1)(4.4)(0.5)
Commodity risk (2.1)(1.4)(4.5)(0.4)(1.0)(1.3)(4.2)(0.4)
Diversification effect112.7 8.5 n/m2n/m25.0 7.3 n/m2n/m2
General Market Value-at-Risk $ (10.1)$ (9.9)$ (15.2)$ (4.7)$ (7.2)$ (9.9)$ (14.8)$ (6.2)
1 The aggregate VaR is less than the sum of the VaR of the different risk
types due to risk offsets resulting from portfolio diversification effect.
2 Not meaningful. It is not meaningful to compute a diversification effect
because the high and low may occur on different days for different risk types.
Stress Testing
Our trading business is subject to an overall global stress test
limit. As well, each global business has a stress test limit, and
each broad risk class has an overall stress test limit. Stress sce-
narios are designed to model extreme economic events, repli-
cate worst-case historical experiences, or introduce severe but
plausible moves in key market risk factors.
Stress tests are produced and reviewed regularly with the
Chief Risk Officer, and with the Market Risk and Capital
Committee.
MARKET RISK IN INVESTMENT ACTIVITIES
We are also exposed to market risk in the Bank’s own invest-
ment portfolio and in the merchant banking business. Risks are
managed through a variety of processes, including identification
of our specific risks and determining their potential impact.
Policies and procedures are established to monitor, measure and
mitigate those risks.
WHO MANAGES RISK IN INVESTMENT ACTIVITIES
The TDBFG Investment Committee regularly reviews the perfor-
mance of the Bank’s own investments and assesses the success
of the portfolio managers. Similarly, the Merchant Banking
Investment Committee reviews and approves merchant banking
investments. The Risk Committee of the Board reviews and
approves the investment policies and limits for the Bank’s own
portfolio and for the merchant banking business.
HOW WE MANAGE RISK IN INVESTMENT ACTIVITIES
We use advanced systems and measurement tools to manage
portfolio risk. Risk intelligence is embedded in the investment
decision-making process by integrating performance targets,
risk/return tradeoffs and quantified risk tolerances. Analysis of
returns identifies performance drivers, such as sector and secu-
rity exposures, as well as the influence of market factors.
MARKET RISK IN NON-TRADING
BANKING TRANSACTIONS
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 “asset and liability” positions.
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.
WHO IS RESPONSIBLE FOR ASSET/LIABILITY
MANAGEMENT
The Treasury and Balance Sheet Management Department mea-
sures and manages the market risks of our non-trading banking
activities, with oversight from the Asset/Liability Committee,
which is chaired by the Chief Financial Officer, and includes
other senior executives. The Risk Committee of the Board peri-
odically reviews and approves all asset/liability management
market risk policies and receives reports on compliance with
approved risk limits.
HOW WE MANAGE OUR ASSET AND
LIABILITY POSITIONS
When Bank products are issued, risks are measured using a fully
hedged option-adjusted transfer-pricing framework that allows
us to measure and manage product risk within a target risk pro-
file. The framework also ensures that business units engage in
risk-taking activities only if they are productive.
Calculating VaR
We estimate VaR by creating a distribution of potential changes
in the market value of the current portfolio. We value the cur-
rent portfolio using the market price and rate changes of the
most recent 259 trading days. VaR is then computed as the
threshold level that portfolio losses are not expected to exceed
more than one out of every 100 trading days.
The accompanying graph discloses daily VaR.
Value-at-Risk1
(millions of Canadian dollars)
VaR (General)
-20
0
-5
-10
-15
Feb
1/07
Mar
1/07
Apr
2/07
Jun
1/07
Jul
3/07
Aug
1/07
Sept
4/07
Oct
1/07
Oct
31/07
May
1/07
Jan
2/07
Dec
1/06
Nov
1/06
1 VaR data excludes the Bank’s position in TD Ameritrade.