Bank of Montreal 2008 Annual Report Download - page 83

MD&A
BMO Financial Group 191st Annual Report 2008 | 79
Total Trading and Underwriting MVE Summary ($ millions)*
For the year ended October 31, 2008
(pre-tax Canadian equivalent) Year-end Average High Low
Commodity risk (0.9) (3.1) (6.8) (0.9)
Equity risk (7.3) (10.9) (18.5) (5.6)
Foreign exchange risk (1.4) (1.4) (4.3) (0.3)
Interest rate risk (mark-to-market) (30.6) (18.9) (35.0) (8.7)
Diversification 6.4 9.2 nm nm
Comprehensive risk (33.8) (25.1) (39.3) (14.5)
Interest rate risk (accrual) (11.6) (5.7) (12.5) (1.3)
Issuer risk (6.1) (5.2) (8.4) (2.6)
Total MVE (51.5) (36.0) (57.9) (24.0)
*One-day measure using a 99% confidence interval.
nm –not meaningful
For the year ended October 31, 2007
(pre-tax Canadian equivalent) Year-end Average High Low
Commodity risk (2.7) (6.4) (16.8) (2.7)
Equity risk (9.5) (10.2) (17.7) (5.1)
Foreign exchange risk (0.9) (1.2) (5.6) (0.2)
Interest rate risk (mark-to-market) (10.0) (5.8) (14.3) (2.8)
Diversification 9.1 7.7 12.6 2.8
Comprehensive risk (14.0) (15.9) (25.7) (8.0)
Interest rate risk (accrual) (9.1) (17.4) (26.8) (8.6)
Issuer risk (4.9) (5.2) (9.0) (3.2)
Total MVE (28.0) (38.5) (51.2) (27.9)
*One-day measure using a 99% confidence interval.
Also discussed: PXX
Our models are used to determine market risk economic capital
for each of the lines of business and to determine regulatory capital.
For capital calculation purposes, longer holding periods and/or higher
confidence levels are used than are employed for day-to-day risk
management. Models used to determine EV exposures are the same
as or similar to those used to determine VaR exposures. Prior to use,
models are subject to review under the Model Risk Corporate Standard
by our Model Risk & Vetting group. The Model Risk Corporate Standard
outlines minimum acceptable requirements for the identification,
assessment, monitoring and management of models and model risk
throughout the enterprise.
BMO measures the market risk for trading and underwriting
portfolios that meet our criteria for trading book regulatory capital
treatment using an internal models approach, as well as the
market risk for money market portfolios that are subject to accrual
accounting rules under GAAP and are accorded banking book
regulatory capital treatment.
For trading and underwriting portfolios covered by the internal
models approach, VaR is computed using BMO’S Comprehensive Value
at Risk model. Our Comprehensive Value at Risk model is a Monte Carlo
scenario simulation model, and its output is used for market risk
management and reporting of exposures. The model computes one-
day VaR results using a 99% confidence interval and reflects the
correlations between the different classes of market risk factors. For
money market accrual portfolios, VaR is computed using an Analytic
Value at Risk approach.
We use a variety of methods to ensure the integrity of our risk
models, including the application of backtesting against hypothetical
losses. This process assumes there are no changes in the previous day’s
closing positions. The process then isolates the effects of each day’s
price movements against these closing positions. Models are validated
by assessing how often the calculated hypothetical losses exceed the
MVE measure over a defined period. Results of this testing confirm the
reliability of our models.
Market risk exposures arising from trading and underwriting
activities are summarized in the following table. The correlations
and volatility data that underpin our models are updated quarterly.
The last update occurred in August 2008; as a consequence the
MVE measures are not fully reflective of fourth quarter volatility. However,
it is not expected that BMO’s trading market risk limits would have
been exceeded if the fourth quarter volatility was represented in the
MVE as at October 31, 2008. Trading and underwriting Market Value
Exposure has increased relative to last year, mainly due to higher
observed
volatilities for interest rates and credit spreads. To ensure
consistency with the regulatory definition of risk classifications, effective
for fiscal 2008, general credit spread risk and interest rate risk have been
combined and are now reported in Interest rate risk (mark-to-market)
in the Total Trading and Underwriting MVE Summary. This change does
not affect the Total MVE result, only the way in which the results are
reported. MVE data for October 31, 2007 has been restated to reflect this
change. Additionally, as discussed in Note 3 on page 109 of the financial
statements, in the fourth quarter, certain positions were transferred
from our trading portfolio to our available-for-sale portfolio. These posi-
tions, however, remained in our comprehensive VaR and Issuer risk
measures throughout the quarter, and are included in the MVE table
which follows, as well as the graphs.
i
SEE PG 73
(1) January 23, 2008: Primarily reflects the liquidation of positions with monoline insurer
ACA Financial Guaranty Corporation. Daily Net Revenue ($90) million.
(2) January 31, 2008: Primarily reflects valuation adjustments. Daily Net Revenue ($182) million.
(3) March 31, 2008: Primarily reflects valuation adjustments. Daily Net Revenue $111 million.
(4) April 30, 2008: Primarily reflects valuation adjustments and a fair valuation of traded
liabilities. Daily Net Revenue $66 million.
(5) May 30, 2008: Primarily reflects month-end credit valuation adjustments. Daily Net
Revenue $61 million.
(6) October 17, 2008: Primarily reflects mid-month credit valuation adjustments due to
widening credit spreads. Daily Net Revenue ($105) million.
(
(
(
)
)
)
)
)
Trading and Underwriting Net Revenues versus Market Value Exposure
November 1, 2007 to October 31, 2008 ($ millions)
Revenue Total mark-to-market and accrual risk
Mark-to-market risk
Jan 31
12
34
5
6
Nov 1
Jul 31
Oct 31
Apr 30
See notes
See notes
0
(25)
25
50