Bank of Montreal 2007 Annual Report Download - page 111

BMO Financial Group 190th Annual Report 2007 107
Notes
these vehicles limits the types of activities they can undertake and the
types of assets they can hold, and they have limited decision-making
authority. Total assets held by these vehicles amounted to $6,552 million
as at October 31, 2007 ($6,803 million in 2006), all of which relate
to assets in Canada. We are not required to consolidate our bank
securitization vehicles. More information on our rights and obligations
related to these vehicles can be found in Note 7. In addition to the
interests described in Note 7, we also provide liquidity support to our
bank securitization vehicles for the face value of the commercial paper
outstanding. We use our credit adjudication process in deciding whether
to enter into these agreements, just as we do when extending credit
in the form of a loan. The total contract amount of the liquidity support
was $5,100 million and $5,000 million as at October 31, 2007 and 2006,
respectively. No amounts were drawn at October 31, 2007 and 2006.
At October 31, 2007, we held $367 million of the commercial paper issued
by these vehicles.
During the year ended October 31, 2007, we changed the nature
of the liquidity lines offered to bank securitization vehicles to global style
liquidity lines, which have objective criteria for determining when they
can be drawn upon.
Derivativecontractsenteredintowiththesevehiclesenable
the vehicles to manage their exposure to interest rate fluctuations.
The fair value of derivatives outstanding with these vehicles and
recorded in our Consolidated Balance Sheet was a derivative liability
of$52millionasatOctober31,2007($27millionin2006).
Credit Investment Management Vehicles
Credit investment management vehicles provide investment
opportunities in customized, diversified debt portfolios in a variety of
asset and rating classes. We earn investment management fees for
managing these portfolios.
We hold interests in high grade Structured Investment Vehicles
(“SIVs”) and act as asset manager. Total assets held by these SIVs totalled
$22,754 million as at October 31, 2007 ($28,892 million in 2006).
Our exposure to loss relates to our investments in these vehicles,
derivatives contracts we have entered into with the vehicles and
the liquidity support we provide through standby letters of credit,
and
commitments to extend credit or purchase senior debt issued
by the SIVs. Our investment in the capital notes of the SIVs is recorded
in available-for-sale securities in our Consolidated Balance Sheet,
and was $53 million as at October 31, 2007 ($76 million in 2006).
We have provided a funding commitment of $1.3 billion to purchase
senior notes issued by the SIVs. As at October 31, 2007, $350 million
was drawn and included in the amount disclosed as available-for-sale
securities. The total
contract amount of letters of credit for backstop
liquidity facilities was $221 million as at October 31, 2007 ($184 million
in 2006);
no amounts were drawn at October 31, 2007 and 2006.
The fair value of our derivative contracts outstanding with the SIVs and
recorded in our Consolidated Balance Sheet was a derivative liability
of $11 million as at October 31, 2007 ($18 million in 2006). We are not
required to consolidate these SIVs. Subsequent to the year ended
October 31, 2007, an additional $904 million was drawn against the
funding commitment for the purchase of senior debt.
Compensation Trusts
We have established trusts in order to administer our employee share
ownership plan. Under this plan, we match 50% of employees’ contri-
butions when they choose to contribute a portion of their gross salary
toward the purchase of our common shares. Our matching contributions
are paid into trusts, which purchase our shares on the open market for
payment to employees once employees are entitled to the shares under
the terms of the plan. Total assets held by our compensation trusts
amounted to $825 million as at October 31, 2007 ($890 million in 2006).
We are not required to consolidate these compensation trusts and
we have no exposure to loss from these trusts.
to financing in the commercial paper markets by allowing them to
sell their assets into these vehicles, which then issue commercial paper
to investors to fund the purchases. In almost all cases, the seller
continues to service the transferred assets. If there are losses on the
assets, the seller is the first to take the loss. We do not sell assets
to or service the assets held by these customer securitization vehicles.
We earn fees for providing services related to the securitizations,
including liquidity, distribution and financial arrangement fees for
supporting the ongoing operations of the vehicles.
In general, investors in the commercial paper have recourse
only to the assets of the related VIE and do not have recourse to us.
Our exposure to losses relates to our investment in commercial paper
issued by the vehicles, derivative contracts we have entered into
with the vehicles and the liquidity support we provide through standby
letters of credit and commitments to extend credit. We use our credit
adjudication process in deciding whether to enter into these agreements
just as we do when extending credit in the form of a loan. To the extent
that we have purchased commercial paper, our exposure under the
liquidity facilities is reduced by an equal amount. As at October 31, 2007,
we had a net exposure of $5,564 million from commercial paper held
($448 million in 2006) classified as trading securities.
During the year ended October 31, 2007, we changed the nature
of the liquidity lines offered to certain of our Canadian customer
securitization vehicles to global style liquidity lines, which have objective
criteria for determining when they can be drawn upon. Previously,
we offered market disruption liquidity lines, which had more subjective
criteria. The total contractual amount of this support was $31,475 million
as at October 31, 2007 ($32,603 million in 2006), of which $20,756 mil-
lionrelatedtoCanadianfacilitiesandthebalancerelatedtoU.S.facilities.
No amounts were drawn as at October 31, 2007 and 2006. Included
in backstop liquidity facilities in 2006 was $634 million related to a credit
facility that has since been terminated. None of these facilities were
drawn upon as at October 31, 2007 and 2006.
Derivative contracts entered into with these vehicles enable
the vehicles to manage their exposures to interest and foreign exchange
rate fluctuations. The fair value of derivatives outstanding with these
VIEs and recorded in our Consolidated Balance Sheet was a derivative
liability of $20 million as at October 31, 2007 ($5 million in 2006).
Our ownership of asset-backed commercial paper in two of the
vehicles caused us to be exposed to the majority of the expected
losses and they have been consolidated. Included in our Consolidated
Balance Sheet at October 31, 2007 were assets of $311 million classified
as other assets and commercial paper of $65 million classified as a
deposit liability.
Structured Finance Vehicles
We facilitate development of investment products by third parties
including mutual funds, unit investment trusts and other investment
funds that are sold to retail investors. We enter into derivatives
with these funds to provide the investors their desired exposure and
hedge our exposure from these derivatives by investing in other funds.
We also sponsor VIEs that provide investors access to debt portfolios
through the issuance of commercial paper. We consolidate those
VIEs where our interests expose us to a majority of the expected losses
or residual returns, or both. Total assets and our exposure to losses
in these consolidated VIEs were $440 million as at October 31, 2007
($470 million in 2006). Total assets held by the VIEs in which we
have a significant variable interest but we do not consolidate totalled
$2,365 million as at October 31, 2007 ($762 million in 2006). Our
exposure to loss from VIEs related to this activity is limited to
the amount of our investment, which totalled $553 million as at
October 31, 2007 ($216 million in 2006).
Bank Securitization Vehicles
We use bank securitization vehicles to securitize our Canadian mortgage
loans and Canadian credit card loans either for capital management
purposes or to obtain alternate sources of funding. The structure of