Bank of Montreal 2010 Annual Report Download - page 127

Notes
BMO Financial Group 193rd Annual Report 2010 125
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
payments 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 $10,163 million as at October 31, 2010
($11,384 million in 2009). None of the letters of credit or guarantees
had an investment rating in 2010 or 2009. Collateral requirements
for standby letters of credit and guarantees are consistent with our
collateral requirements for loans. A large majority of these commitments
expire without being drawn upon. As a result, the total contractual
amounts may not be representative of the funding likely to be required
for these commitments.
As at October 31, 2010, $9 million ($nil in 2009) was included
in other liabilities related to a guaranteed party that was unable
to meet its obligation to a third party (see Note 4). No other amount
was included in our Consolidated Balance Sheet as at October 31, 2010
and 2009 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 $14,009 million as at October 31, 2010
($19,108 million in 2009), of which $11,036 million relates to facilities
that are investment grade, $625 million that are non-investment grade
and $2,348 million that are not rated ($15,405 million, $649 million and
$3,054 million, respectively, in 2009). As at October 31, 2010, $292 million
was outstanding from facilities drawn in accordance with the terms
of the backstop liquidity facilities ($185 million in 2009), of which
$251 million (US$246 million) ($158 million or US$146 million in 2009)
related to our U.S. customer securitization vehicle discussed in Note 9.
Credit Enhancement Facilities
Where warranted, we provide partial credit enhancement facilities
to transactions within ABCP programs administered by either us or third
parties. Credit enhancement facilities 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. As at October 31, 2010,
$5,097 million had been drawn ($7,230 million in 2009) in accordance
with the terms of the funding facilities related to the SIVs. As at Octo-
ber 31, 2010, $nil had been drawn down in accordance with the terms of
Note 7: Guarantees
the funding facility provided to our credit protection vehicle ($112 million
in 2009). Further information on these funding facilities is provided in
Note 9.
In addition to our investment in the notes subject to the
Montreal Accord, we have provided a senior loan facility of $300 million.
No amounts were drawn as at October 31, 2010.
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.
In order to reduce our exposure to these derivatives, we enter into
contracts that hedge the related risks.
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
$40,650 million as at October 31, 2010 ($51,072 million in 2009), of which
$37,764 million relates to swaps that are investment grade, $2,622 mil-
lion that are non-investment grade and $264 million that are not rated
($45,843 million, $5,034 million and $195 million, respectively, in
2009). The terms of these contracts range from one day to 12 years.
The fair value of the related derivative liabilities included in derivative
instruments in our Consolidated Balance Sheet was $933 million as
at October 31, 2010 ($2,159 million in 2009).
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 $599 million
as at October 31, 2010 ($667 million in 2009), none of which have an
investment rating (none of which had an investment rating in 2009).
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 11 months to 25 years. The fair value of the
related derivative liabilities included in derivative instruments in our
Consolidated Balance Sheet was $87 million as at October 31, 2010
($118 million in 2009), none of which have an investment rating (none
of which were rated in 2009).
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, 2010 and 2009 related to these indemnifications.