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MD&A
BMO Financial Group 191st Annual Report 2008 | 67
Exposure to Other Select Financial Instruments,
including Collateralized Debt Obligations (CDOs)
The following table provides additional detail on select financial
instruments that are held in our investment and trading books. Most of
our CDOs and CLOs are fully hedged with other large financial institu-
tions. Net CDO exposure is minimal at $29 million, consisting of the
$12 million carrying value of unhedged and wrapped instruments and
a $17 million cumulative net loss on hedged investments. Net CLO
exposure is also modest, at $107 million, consisting of the $83 million
carrying value of unhedged and wrapped investments and a
$24 million net loss on hedged instruments.
BMO has invested only in senior and super-senior tranches
of CDOs and CLOs. Tranche ratings in the table use the lowest external
rating available provided by S&P, Moody’s or Fitch. The differences
between hedged investment amounts and carrying value of hedged
investment amounts reflect mark-to-market adjustments, which
are generally recoverable through total return or credit default swaps.
The underlying securities are a wide range of assets. BMO’s investments
typically represent about 20% of the pool but can be as low as 5%
and as high as 50%. Approximately 70% of the hedged investment
amounts have been hedged through swaps with three financial
institution counterparties rated A– to AA. The value of BMO’s interest
in those hedges is supported by collateral held, with the exception
of relatively modest amounts, as permitted under counterparty agre
e-
ments. The remainder of the hedged investment amounts is hedged
through three monoline insurer counterparties rated A to AAA.
counterparties and corresponding CDS protection provided to other financial institutions in
our role as intermediary.
(3) Certain ratings are under review.
(4) Wrapped MBS have an insurance guarantee attached and are rated inclusive of the wrap
protection. RMBS included in the hedged investment amounts of $367 million have
exposure to approximately $179 million of underlying U.S. subprime loans.
FIs = Financial Institutions
(1) Most of the unhedged and wrapped investments were transferred to the available-for-sale
portfolio effective August 1, 2008.
(2) CDOs include indirect exposure to approximately $0.7 billion of U.S. subprime residential
mortgages. As noted above, this exposure is hedged via total return swaps with three large
non-monoline financial institutions. Amounts exclude the $1.5 billion notional value of CDO
credit default swap (CDS) protection purchases from two credit derivative product company
Exposure to Other Select Financial Instruments ($ millions) (Note 1)
Carrying Carrying
value of value of Cumulative
unhedged and Hedged hedged loss in value Cumulative Net losses
Tranche wrapped investment investment of hedged gain on on hedged
As at October 31, 2008 rating investments amounts amounts investments hedges investments
CDOs (2) AAA 12 Sundry securities
AAA 805 542 (263) 263 – Hedged with FIs rated A– or better
AAA 308 274 (34) 17 (17) Hedged with monolines rated AAA (3)
A– to AA+ 1,250 724 (526) 526 – Hedged with FIs rated A– or better
B– to BB+ 184 117 (67) 67 – Hedged with FIs rated A– or better
CCC or worse 18 (18) 18 – Hedged with FIs rated AA– or better
12 2,565 1,657 (908) 891 (17)
CLOs AAA 83 Mostly U.K. and European mid-size corporate loans
AAA 836 773 (63) 63 – Hedged with FIs rated A or better (3)
AAA 1,201 1,082 (119) 95 (24) Hedged with monolines rated A or better (3)
83 2,037 1,855 (182) 158 (24)
Residential MBS (4)
No subprime AAA 37 Mostly U.K. and Australian mortgages
U.S. subprime –wrapped
AAA 4Wrapped with monolines rated AAA (3)
A– to AA+ 17 Wrapped with monolines rated A
B– to BB+ 9Wrapped with monolines rated BB (3)
U.S. subprime AAA 257 184 (73) 73 – Hedged with FIs rated AA or better
A– to AA+ 110 76 (34) (34) Hedged with FIs rated AA or better
B– to BB+ 2Mostly low loan-to-value or older U.S. mortgages
69 367 260 (107) 73 (34)
Commercial MBS AAA 49 European, U.K. and U.S. commercial real estate loans
A– to AA+ 95
Mostly Canadian commercial and multi-use residential loans
144
Asset-backed AAA 220 Mostly Canadian credit card receivables and auto loans
securities (ABS) AAA 120 120 – Hedged with monolines rated AAA
A– to AA+ 111 Mostly Canadian credit card receivables and auto loans
BBB– to BBB+ 68 Collateral notes on Canadian credit card receivables
399 120 120 –