Bank of Montreal 2010 Annual Report Download - page 131

Notes
BMO Financial Group 193rd Annual Report 2010 129
U.S. Customer Securitization Vehicle
Our exposure to our U.S. customer securitization vehicle is summarized
in the preceding table. As part of our services in support of the ongoing
operations of the vehicle, we may advance funds under backstop
liquidity facilities. We use our credit adjudication process in deciding
whether to do so just as we do when extending credit in the form
of
a loan. During the year ended October 31, 2010, we provided funding
of $310 million (US$304 million) in accordance with the terms of these
liquidity facilities, of which $179 million (US$176 million) was outstanding
as at October 31, 2010. The amount outstanding related to funding
advanced in years prior to 2010 was $72 million (US$71 million) as at
October 31, 2010. These amounts are included in the preceding table.
We assess whether we are required to consolidate this vehicle
based on a quantitative analysis of expected losses that could be absorbed
by us. In doing this analysis, we consider our significant variable interests,
primarily the backstop liquidity facilities, as well as fees for services
we provide. We are not required to consolidate our U.S. customer securi-
tization vehicle.
Bank Securitization Vehicles
We use bank securitization vehicles to securitize our Canadian mortgage
loans and Canadian credit card loans in order to obtain alternate sources
of funding. The structure of these vehicles limits the types of activities
they can undertake and the types of assets they can hold, and they have
limited decision-making authority. These vehicles issue ABCP or term
asset-backed securities to fund their activities.
We are not required to consolidate our bank securitization
vehicles based on the structure of these vehicles. More information
on our invest ments, rights and obligations related to these vehicles
can be found in Note 8. Our variable interests in these vehicles are
summarized in the preceding table. Derivative contracts entered into
with these vehicles enable the vehicles to manage their exposure
to interest rate fluctuations.
We provide global style backstop liquidity facilities to some of our
bank securitization vehicles that have objective criteria for determining
when they can be drawn upon. We use our credit adjudication process
in deciding whether to enter into these agreements just as we do when
extending credit in the form of a loan.
Credit Protection Vehicle
We sponsor a credit protection vehicle, Apex Trust (“Apex”), that
provides credit protection to investors on investments in corporate
debt portfolios through credit default swaps. In May 2008, upon
the restructuring of Apex, we entered into credit default swaps with
swap counterparties and offsetting swaps with Apex. Since the swaps
are classified as trading instruments and have similar terms, changes
in the fair value of the swaps held with Apex are offset by changes in
the fair value of the swaps held with the swap counterparties. The fair
value of the swaps with Apex is included in the preceding table along
with our holdings of notes issued by Apex and a senior funding facility.
As at October 31, 2010, we have hedged our exposure to our holdings
of notes as well as the first $515 million of exposure under the senior
funding facility. Since 2008, a third party has held its exposure to Apex
through a total return swap with us on $600 million of notes.
We assess whether we are required to consolidate this vehicle based
on a quantitative analysis of expected losses that could be absorbed
by us. In doing this analysis, we consider our net exposure from significant
variable interests in Apex, primarily securities issued by Apex and the
senior funding facility we provide and their related hedges. We are not
required to consolidate Apex.
Structured Investment Vehicles
Structured investment vehicles (“SIVs”) provide investment opportunities
in customized, diversified debt portfolios in a variety of asset and
rating classes. We hold interests in two SIVs, Links Finance Corporation
(“Links”) and Parkland Finance Corporation (“Parkland”), and act
as asset manager. Our exposure to loss is summarized in the table
above. We provide senior-ranked support for the funding of Links and
Parkland through our liquidity facilities. The facilities permit the SIVs
to continue the strategy of selling assets in an orderly manner. Other
than our current commitment, which is included in the preceding
table, we are not obligated to provide additional facilities to the SIVs.
We use our credit adjudication process in deciding whether to do so
just as we do when extending credit in the form of a loan.
We assess whether we are required to consolidate these vehicles
based on a quantitative analysis of expected losses that could be
absorbed by us. In doing this analysis, we consider our significant
variable
interests in the vehicles through our liquidity facilities and our
holdings of capital notes. We are not required to consolidate these VIEs.
Structured Finance Vehicles
We facilitate development of investment products by third parties,
including mutual funds, unit investment trusts and other investment
funds that are sold to retail investors. We enter into derivatives
with these funds to provide the investors their desired exposure, and
we hedge our exposure related to these derivatives by investing in
other funds. We consolidate those VIEs in which our interests expose us
to a majority of the expected losses or residual returns, or both, unless
the exposure to expected losses and residual returns has been passed
on to the retail investor through the derivative arrangement. We base
this assessment on our holdings of units issued by these VIEs. Our
exposure to loss from non-consolidated VIEs is limited to the amount
of our investment.
Capital and Funding Trusts
BMO Capital Trust II (“Trust II”) was created in 2009 to issue $450 million
of BMO Tier 1 Notes – Series A. Trust II used the proceeds of the offering
to purchase a senior deposit note from us. We are not required to
con solidate Trust II based on our assessment of our variable interests.
See Note 18 for further infor mation related to Trust II.
BMO Covered Bond Trust (“CB Trust”) was created in 2007 to
guarantee payments due to the bondholders in respect of €1 billion and
US$2 billion of BMO Covered Bonds we have since issued. We sell assets
to CB Trust in exchange for a promissory note. The assets of CB Trust
have been pledged to secure payment of the bonds we issued. CB Trust
is a VIE that we are required to consolidate as we are exposed to the
majority of its expected losses and residual returns, based on our
assessment of our variable interests.
BMO Subordinated Notes Trust (“SN Trust”) was created in 2007 to
issue $800 million of BMO Trust Subordinated Notes – Series A. SN Trust
used the proceeds of the offering to purchase a senior deposit note from
us. We are not required to consolidate SN Trust based on our assessment
of our variable interests. See Note 17 for further information related
to SN Trust.
BMO Capital Trust (the “Trust”) was created to issue BMO Capital
Trust Securities (“BMO BOaTS”). The Trust is a VIE that we are required to
consolidate based on our assessment of our variable interests. Securities
outstanding as at October 31, 2010 were $1.9 billion ($2.2 billion as at
October 31, 2009), and are reported as either non-controlling interest or
capital trust securities in our Consolidated Balance Sheet. See Note 18
for further information related to the Trust.
Compensation Trusts
We have established trusts in order to administer our employee
share ownership plan. Under this plan, we match 50% of employees’
contributions when they choose to contribute a portion of their gross
salary toward the purchase of our common shares. Our matching
contributions are paid into trusts, which purchase our shares on the open
market for distribution to employees once employees are entitled to
the shares under the terms of the plan. Total assets held by our