Bank of Montreal 2008 Annual Report Download - page 151

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Following our disclosures of mark-to-market losses in our
commodities trading businesses on April 27, 2007 and May 17, 2007
aggregating $680 million (pre-tax) as of April 30, 2007, we have
received inquiries, requests for documents or subpoenas pertaining
to those trading losses from securities, commodities, banking and
law enforcement authorities. On November 18, 2008, a number of
proceedings were commenced by these authorities against certain
parties that were involved in the commodities trading losses.
We are not a party to these proceedings. We are cooperating with
all of these authorities.
Bank of Montreal and its subsidiaries are party to other legal
proceedings, including regulatory investigations, in the ordinary course
of their businesses. While there is inherent difficulty in predicting
the outcome of these proceedings, management does not expect the
outcome of any of these other proceedings, individually or in the aggre-
gate, to have a material adverse effect on the consolidated financial
position or the results of operations of Bank of Montreal.
(b) Collateral
When entering into trading activities such as reverse repurchase
agreements, securities borrowing and lending activities or financing
and derivative transactions, we require our counterparty to provide
us with collateral that will protect us from losses in the event of the
counterparty’s default. The fair value of collateral that we are permitted
to sell or repledge (in the absence of default by the owner of the
collateral) was $27,411 million as at October 31, 2008 ($42,832 million
in 2007). The fair value of financial assets accepted as collateral that
we have sold or repledged was $23,196 million as at October 31, 2008
($34,216 million in 2007).
Collateral transactions are conducted under terms that are usual
and customary in standard trading activities. If there is no default,
the securities or their equivalent must be returned to the counterparty
at the end of the contract.
(c) Pledged Assets
In the normal course of our business, we pledge assets as security for
various liabilities that we incur. The following tables summarize our
pledged assets, to whom they are pledged and in relation to what activity:
(Canadian $ in millions) 2008 2007
Cash resources $ 684 $65
Securities
Issued or guaranteed by Canada 11,248 8,758
Issued or guaranteed by a Canadian province,
municipality or school corporation 4,263 3,648
Other securities 21,467 17,441
Mortgages, securities borrowed or purchased
under resale agreements and other 33,053 25,475
Total assets pledged $ 70,715 $ 55,387
Excludes restricted cash resources disclosed in Note 2.
(Canadian $ in millions) 2008 2007
Assets pledged to: (1)
Clearing systems, payment systems and depositories $ 1,898 $ 1,371
Bank of Canada 1,411 1,768
Foreign governments and central banks 1,624 1,381
Assets pledged in relation to:
Obligations related to securities lent
or sold under repurchase agreements 26,052 24,837
Securities borrowing and lending 16,960 19,435
Derivative transactions 8,588 3,959
Mortgages 5,338 –
Other 8,844 2,636
Total $ 70,715 $ 55,387
Excludes cash pledged with central banks disclosed as restricted cash in Note 2.
(1) Includes assets pledged in order to participate in clearing and payment systems and
depositories or to have access to the facilities of central banks in foreign jurisdictions.
Notes
BMO Financial Group 191st Annual Report 2008 | 147
Note 30: Fair Value of Financial Instruments
We record trading assets and liabilities, derivatives, available-for-sale
securities and securities sold but not yet purchased at fair value and
other non-trading assets and liabilities at their original amortized cost
less allowances or write-downs for impairment. Where there is no
quoted market value, fair value is determined using a variety of valuation
techniques and assumptions. The values are based upon the estimated
amounts for individual assets and liabilities and do not include an
estimate of the fair value of any of the legal entities or underlying
operations that comprise our business.
Fair value amounts disclosed represent point-in-time estimates tha
t
may change in subsequent reporting periods due to market conditions
or other factors. Fair value represents our estimate of the amounts for
which we could exchange the financial instruments with willing third
parties who were interested in acquiring the instruments. In most cases,
however, the financial instruments are not typically exchangeable
or exchanged and therefore it is difficult to determine their fair value.
In those cases, we have estimated fair value taking into account only
changes in interest rates and credit risk that have occurred since
we acquired them or entered into the underlying contracts. These cal-
culations represent management’s best estimates based on a range
of methodologies and assumptions; since they involve uncertainties,
the fair values may not be realized in an actual sale or immediate
settlement of the instruments.
Interest rate changes are the main cause of changes in the fair
value of our financial instruments.
Financial Instruments Whose Book Value
Approximates Fair Value
Fair value is assumed to equal book value for acceptance-related
liabilities and securities lent or sold under repurchase agreements, due
to the short-term nature of these assets and liabilities. Fair value is
also assumed to equal book value for our cash resources, certain other
assets and certain other liabilities.
Loans
In determining the fair value of our loans, we incorporate the following
assumption:
•For fixed rate and floating rate performing loans and customers’
liability under acceptances, we discount the remaining contractual
cash flows, adjusted for estimated prepayment, at market interest
rates currently offered for loans with similar terms.
The value of our loan balances determined using the above assumption
is further reduced by the allowance for credit losses to determine the
fair value of our loan portfolio.
Securities
The fair value of our securities, both trading and available-for-sale,
by instrument type and the methods used to determine fair value are
provided in Note 3.
Derivative Instruments
The methods used to determine the fair value of derivative instruments
are provided in Note 10.