Bank of Montreal 2010 Annual Report Download - page 162

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes
160 BMO Financial Group 193rd Annual Report 2010
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) 2010 2009
Cash resources 3,048 965
Securities
Issued or guaranteed by Canada 14,231 11,095
Issued or guaranteed by a Canadian
province, municipality or school
corporation 3,087 2,986
Other securities 29,547 24,266
Mortgages, securities borrowed or
purchased under resale agreements
and other 29,562 31,525
Total assets pledged 79,475 70,837
Excludes restricted cash resources disclosed in Note 2.
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 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. These fair 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
that may change in subsequent reporting periods due to market
con ditions 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 calculations represent management’s best estimates based on a
range of methodologies and assumptions; since they involve uncertain-
ties, 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.
Note 29: Fair Value of Financial Instruments
(Canadian $ in millions) 2010 2009
Assets pledged to: (1)
Clearing systems, payment systems
and depositories 1,025 1,714
Bank of Canada 2,305 1,200
Foreign governments and central banks 936 1,017
Assets pledged in relation to:
Obligations related to securities lent
or sold under repurchase agreements 38,097 39,796
Securities borrowing and lending 16,911 11,498
Derivatives transactions 7,620 7,000
Mortgages 9,927 5,878
Other 2,654 2,734
Total 79,475 70,837
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.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
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 assump tion
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.