Bank of Montreal 2007 Annual Report Download - page 108

Note 6: Guarantees
Guarantees include contracts where we may be required to make
payments to a counterparty based on changes in the value of an asset,
liability or equity security that the counterparty holds due to changes
in an underlying interest rate, foreign exchange rate or other variable.
In addition, contracts under which we may be required to make
payments if a third party does not perform according to the terms of
a contract and contracts under which we provide indirect guarantees
of the indebtedness of another party are considered guarantees.
In the normal course of business, we enter into a variety of guar-
antees, the most significant of which are as follows:
Standby Letters of Credit and Guarantees
Standby letters of credit, as discussed in Note 5, are considered
guarantees. The maximum amount payable under standby letters
of credit and guarantees was $12,395 million as at October 31, 2007
($11,007 million in 2006). Collateral requirements for standby letters
of credit and guarantees are consistent with our collateral requirements
for loans. In most cases, these commitments expire within three years
without being drawn upon.
No amount was included in our Consolidated Balance Sheet as
at October 31, 2007 and 2006 related to these standby letters of credit
and guarantees.
Backstop Liquidity Facilities
Commitmentstoextendcredit,asdiscussedinNote5,includebackstop
liquidity facilities. Backstop liquidity facilities are provided to asset-
backed commercial paper programs administered by either us or third
parties as an alternative source of financing in the event that such
programs are unable to access asset-backed commercial paper markets
or, in limited circumstances, when predetermined performance measures
of the financial assets owned by these programs are not met. The terms
of the backstop liquidity facilities do not require us to advance money
to these programs in the event of bankruptcy of the borrower.
The facilities’ terms are generally no longer than one year, but can be
several years. The maximum amount payable under these backstop
liquidity facilities totalled $38,466 million as at October 31, 2007
($38,606 million in 2006). The amount drawn on the backstop liquidity
facilities was $16 million as at October 31, 2007 ($nil in 2006).
Credit Enhancement Facilities
Where warranted, we provide partial credit enhancement facilities
to transactions within asset-backed commercial paper programs
administered by us and by third parties. Credit enhancement facilities
were included in $5,449 million of backstop liquidity facilities as at
October 31, 2007 ($4,088 million in 2006). Credit enhancement was also
provided in the form of program letters of credit; $nil and $181 million
were included in standby letters of credit and guarantees as at
October 31, 2007 and 2006, respectively. The facilities’ terms are
generally no longer than one year, but can be several years. None
of the credit enhancement facilities that we have provided have
been drawn upon.
Derivatives
Certain of our derivative instruments meet the accounting definition of a
guarantee when we believe they are related to an asset, liability or equity
security held by the guaranteed party at the inception of a contract.
Written credit default swaps require us to compensate a counter-
party following the occurrence of a credit event in relation to a
specified reference obligation, such as a bond or a loan. The maximum
amount payable under credit default swaps was equal to their notional
amountof$42,433millionasatOctober31,2007($23,657millionin
2006). The terms of these contracts range from one month to 10 years.
The fair value of the related derivative liabilities included in the
derivative instruments in our Consolidated Balance Sheet was
$466millionasatOctober31,2007($19millionin2006).
Written options include contractual agreements that convey to
the purchaser the right, but not the obligation, to require us to buy
a specific amount of a currency, commodity, debt or equity instrument
at a fixed price, either at a fixed future date or at any time within a
fixed future period. The maximum amount payable under these written
options cannot be reasonably estimated due to the nature of these
contracts. The terms of these contracts range from one month to eight
years. The fair value of the related derivative liabilities included in the
derivative instruments in our Consolidated Balance Sheet was $662 mil-
lionasatOctober31,2007($2,407millionin2006).
Written options also include contractual agreements where
we agree to pay the purchaser, based on a specified notional amount,
the difference between a market price or rate and the strike price or
rate of the underlying instrument. The maximum amount payable under
these contracts is not determinable due to their nature. The terms of
these contracts range from four months to 25 years. The fair value of
the related derivative liabilities included in derivative instruments in
our Consolidated Balance Sheet was $118 million as at October 31, 2007
($114 million in 2006).
In order to reduce our exposure to these derivatives, we enter
into contracts that hedge the related risks.
Indemnification Agreements
In the normal course of operations, we enter into various agreements
that provide general indemnifications. These indemnifications typically
occur in connection with sales of assets, securities offerings, service
contracts, membership agreements, clearing arrangements, derivatives
contracts and leasing transactions. These indemnifications require
us, in certain circumstances, to compensate the counterparties for
various costs resulting from breaches of representations or obligations
under such arrangements, or as a result of third-party claims that
may be suffered by the counterparty as a consequence of the transaction.
The terms of these indemnifications vary based on the contract,
the nature of which prevents us from making a reasonable estimate
of the maximum amount payable we could be required to pay
to counterparties.
No material amount was included in our Consolidated Balance
Sheet as at October 31, 2007 and 2006 related to these indemnifications.
104 BMO Financial Group 190th Annual Report 2007
Notes to Consolidated Financial Statements
Notes
Note 7: Asset Securitization
Periodically, we securitize loans for capital management purposes
or to obtain alternate sources of funding. Securitization involves selling
loans to off-balance sheet entities or trusts (securitization vehicles),
which buy the loans and then issue either interest bearing or discounted
investor certificates.
Contracts with the securitization vehicles provide for the payment
to us over time of the excess of the sum of interest and fees collected
from customers, in connection with the loans that were sold, over the
yield paid to investors in the securitization vehicle, less credit losses and
other costs (the “deferred purchase price”).