Bank of Montreal 2008 Annual Report Download - page 122

Notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
118 | BMO Financial Group 191st Annual Report 2008
Note 8: 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”).
We account for transfers to securitization vehicles as sales when
control over the loans is given up and consideration other than notes
issued by the securitization vehicle has been received. When the loans
are considered sold for accounting purposes, we remove them from
Note 7: Guarantees
In the normal course of business, we enter into a variety of 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 pay-
ments 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.
The most significant guarantees are as follows:
Standby Letters of Credit and Guarantees
Standby letters of credit and guarantees represent our obligation to
make payments to third parties on behalf of another party if that party
is unable to make the required payments or meet other contractual
requirements. The maximum amount payable under standby letters
of credit and guarantees totalled $15,270 million as at October 31, 2008
($12,395 million in 2007). Collateral requirements for standby letters
of credit and guarantees are consistent with our collateral requirements
for loans.
No amount was included in our Consolidated Balance Sheet as
at October 31, 2008 and 2007 related to these standby letters of credit
and guarantees.
Backstop and Other Liquidity Facilities
Backstop liquidity facilities are provided to asset-backed commercial
paper (“ABCP”) programs administered by either us or third parties
as an alternative source of financing in the event that such programs are
unable to access ABCP markets or 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 and other
liquidity facilities totalled $32,806 million as at October 31, 2008
($39,428 million in 2007). As at October 31, 2008, $1,143 million was drawn
($16 million in 2007) in accordance with the terms of the backstop
liquidity facilities, of which $1,025 million (US$851 million) ($nil in 2007)
related to the variable interest entities (“VIEs”) discussed in Note 9.
Credit Enhancement Facilities
Where warranted, we provide partial credit enhancement facilities
totransactionswithinABCPprogramsadministeredbyeitherus
orthirdparties.Creditenhancement facilities of $6,243 million as
at October 31, 2008 ($5,449 million in 2007) are included in backstop
liquidity facilities. These facilities include amounts that relate to our
U.S. customer securitization vehicle discussed in Note 9.
Senior Funding Facilities
We also provide senior funding support to our structured investment
vehicles (“SIVs”) and our credit protection vehicle. The majority of these
facilities support the repayment of senior note obligations of the SIVs.
As at October 31, 2008, $5,761 million was drawn ($350 million in 2007)
in accordance with the terms of the funding facilities related to the VIEs
discussed in Note 9.
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 is equal to their notional amount
of $71,977 million as at October 31, 2008 ($43,004 million in 2007).
The terms of these contracts range from two days to 10 years. The fair
value of the related derivative liabilities included in derivative instru-
ments in our Consolidated Balance Sheet was $5,828 million as at
October 31, 2008 ($570 million in 2007).
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 less than one month to
eight years. The fair value of the related derivative liabilities included
in derivative instruments in our Consolidated Balance Sheet was
$1,853 million as at October 31, 2008 ($662 million in 2007).
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 nine months to 25 years. The fair value of
the related derivative liabilities included in derivative instruments in
our Consolidated Balance Sheet was $113 million as at October 31, 2008
($118 million in 2007).
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 we could be required to pay to counterparties.
No material amount was included in our Consolidated Balance
Sheet as at October 31, 2008 and 2007 related to these indemnifications.