TD Bank 2010 Annual Report Download - page 111

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TD BANK GROUP ANNUAL REPORT 2010 FINANCIAL RESULTS 109
Derivative-related credit risks are subject to the same credit
approval, limit and monitoring standards that are used for managing
other transactions that create credit exposure. This includes evaluating
the creditworthiness of counterparties, and managing the size, diversi-
fication and maturity structure of the portfolios. The Bank actively
engages in risk mitigation strategies through the use of multi-product
derivative master netting agreements, collateral and other risk mitiga-
tion techniques. Master netting agreements reduce risk to the Bank by
allowing the Bank to close out and net transactions with counterparties
subject to such agreements upon the occurrence of certain events. The
effect of these master netting agreements is shown in the table below
entitled “Credit Exposure of Derivatives.”
Also shown in the table entitled “Credit Exposure of Derivatives,”
is the current replacement cost, which is the positive fair value of all
outstanding derivatives, and represents the Bank’s maximum derivative
credit exposure. The credit equivalent amount is the sum of the current
replacement cost and the potential future exposure, which is calcu-
lated by applying factors supplied by OSFI to the notional principal
amount of the derivatives. The risk-weighted amount is determined
by applying standard measures of counterparty credit risk to the
credit equivalent amount.
DERIVATIVE-RELATED RISKS
Market Risk
Derivatives, in the absence of any compensating upfront cash payments,
generally have no market value at inception. They obtain value, positive
or negative, as relevant interest rates, foreign exchange rates, equity,
commodity or credit prices or indices change, such that the previously
contracted terms of the derivative transactions have become more or
less favourable than what can be negotiated under current market
conditions for contracts with the same terms and the same remaining
period to expiry.
The potential for derivatives to increase or decrease in value as a
result of the foregoing factors is generally referred to as market risk.
This market risk is managed by senior officers responsible for the
Bank’s trading business and is monitored independently by the Bank’s
Risk Management Group.
Credit Risk
Credit risk on derivatives, also known as counterparty credit risk,
is the risk of a financial loss occurring as a result of the failure of a
counterparty to meet its obligation to the Bank. The Treasury Credit
area within the Wholesale Bank is responsible for implementing and
ensuring compliance with credit policies established by the Bank for
the management of derivative credit exposures.
Credit Exposure of Derivatives
(millions of Canadian dollars) 2010 2009
Current Credit Risk- Current Credit Risk-
replacement equivalent weighted replacement equivalent weighted
cost1 amount amount cost1 amount amount
Interest rate contracts
Forward rate agreements $ 22 $ 40 $ 8 $ 78 $ 109 $ 15
Swaps 26,817 33,600 13,978 23,283 29,676 11,429
Options purchased 669 770 293 850 986 344
Total interest rate contracts 27,508 34,410 14,279 24,211 30,771 11,788
Foreign exchange contracts
Forward contracts 6,148 11,683 2,209 6,905 11,890 2,128
Swaps 2,267 3,315 865 2,777 3,951 1,048
Cross-currency interest rate swaps 10,587 27,276 9,107 9,281 25,038 8,206
Options purchased 800 1,431 284 731 1,148 193
Total foreign exchange contracts 19,802 43,705 12,465 19,694 42,027 11,575
Other contracts
Credit derivatives 96 588 203 1,302 4,511 1,535
Equity contracts 3,039 6,053 1,456 2,499 5,119 1,030
Commodity contracts 626 1,239 304 836 1,572 417
Total other contracts 3,761 7,880 1,963 4,637 11,202 2,982
Total derivatives 51,071 85,995 28,707 48,542 84,000 26,345
Less: impact of master netting agreements 37,566 54,233 19,494 35,711 52,076 18,127
Total derivatives after netting 13,505 31,762 9,213 12,831 31,924 8,218
Less: impact of collateral 5,343 5,644 2,107 4,808 5,131 1,492
Net derivatives $ 8,162 $ 26,118 $ 7,106 $ 8,023 $ 26,793 $ 6,726
1
Exchange-traded instruments and non-trading credit derivatives, which are given
financial guarantee treatment for credit risk capital purposes, are excluded in
accordance with the guidelines of OSFI. The total positive fair value of the excluded
contracts as at October 31, 2010 was $604 million (2009 – $903 million).