Bank of Montreal 2015 Annual Report Download - page 141

Notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the carrying amount and fair value of transferred assets that did not qualify for derecognition and the associated
liabilities:
(Canadian $ in millions) 2015 (1) 2014
Carrying amount
of assets
Associated
liabilities
Carrying amount
of assets
Associated
liabilities
Residential mortgages 7,458 9,569
Other related assets (2) 10,181 8,382
Total 17,639 17,199 17,951 17,546
(1) The fair value of the securitized assets is $17,785 million and the fair value of the associated liabilities is $17,666 million, for a net position of $119 million. Securitized assets are those which we have
transferred to third parties, including other related assets.
(2) Other related assets represent payments received on account of loans pledged under securitization programs that have not yet been applied against the associated liabilities. The payments received
are held on behalf of the investors in the securitization vehicles until principal payments are required to be made on the associated liabilities. In order to compare all assets supporting the associated
liabilities, this amount is added to the carrying value of the securitized assets in the table above.
Securities Lent or Sold Under Repurchase Agreements
Securities lent or sold under repurchase agreements represent short-term funding transactions in which we sell securities that we own and
simultaneously commit to repurchase the same securities at a specified price on a specified date in the future. We retain substantially all of the risk
and rewards associated with the securities and we continue to recognize them in our Consolidated Balance Sheet with the obligation to repurchase
these securities recorded as secured borrowing transactions at the amount owing. The interest expense related to these liabilities is recorded on an
accrual basis. For further details, refer to Note 14.
Note 7: Structured Entities
We enter into certain transactions in the ordinary course of business which involve the establishment of structured entities (“SEs”) to facilitate or
secure customer transactions and to obtain alternative sources of funding. We are required to consolidate an SE if we control the entity. We control an
SE when we have power over the SE, exposure to variable returns as a result of our involvement, and the ability to exercise power to affect the
amount of our returns.
In assessing whether we control an SE, we consider the entire arrangement to determine the purpose and design of the SE, the nature of any
rights held through contractual arrangements and whether we are acting as a principal or agent.
We perform a re-assessment of consolidation if facts and circumstances indicate that there have been changes to one or more of the elements of
control over the SE.
Consolidated Structured Entities
Bank Securitization Vehicles
We use securitization vehicles to securitize our Canadian credit card loans in order to obtain alternate sources of funding. The structure of these
vehicles limits the activities they can undertake and the types of assets they can hold, and the vehicles have limited decision-making authority. The
vehicles issue term asset-backed securities to fund their activities. We control and consolidate these vehicles, as we have the key decision-making
powers necessary to obtain the majority of the benefits of their activities.
U.S. Customer Securitization Vehicle
We sponsor a customer securitization vehicle (also referred to as a bank-sponsored multi-seller conduit) that provides our customers with alternate
sources of funding through the securitization of their assets. This vehicle provides clients with access to financing in the asset-backed commercial
paper (“ABCP”) markets by allowing them to sell their assets into the vehicle, which then issues ABCP to investors to fund the purchases. We do not
sell assets to the customer securitization vehicle. We earn fees for providing services related to the securitizations, including liquidity, distribution and
financial arrangement fees for supporting the ongoing operations of the vehicle. We have determined that we control and therefore consolidate this
vehicle, as we are exposed to its variable returns and we have the key decision-making powers necessary to affect the amount of those returns in
our capacity as liquidity provider and servicing agent.
We provide liquidity facilities to this vehicle which may require that we provide additional financing to the vehicle in the event that certain
events occur. The total committed undrawn amount under these facilities at October 31, 2015 was $7,213 million ($5,236 million at October 31,
2014).
Credit Protection Vehicle
We sponsor a credit protection vehicle which provides credit protection to investors on investments in corporate debt portfolios through credit
default swaps. In May 2008, upon the restructuring of the vehicle, we entered into credit default swaps with swap counterparties and offsetting
swaps with the vehicle. In 2015, the vehicle redeemed $nil of its outstanding medium-term notes ($1,049 million in 2014, of which $678 million
were held by us). We continue to hold $256 million of outstanding medium-term notes which mature in September 2016. As at October 31, 2015 and
2014, we have hedged our exposure to our holdings of notes issued by the vehicle. A third party holds its exposure to the vehicle through a total
return swap with us on $108 million of notes. We control and therefore consolidate this vehicle.
Capital and Funding Vehicles
Capital and funding vehicles are created to issue notes or capital trust securities or to guarantee payments due to bondholders on bonds issued by us.
These vehicles may purchase notes issued by us, or we may sell assets to the vehicles in exchange for promissory notes.
For those trusts that purchase assets from us, we have determined that, based on the rights of the arrangements, we have significant exposure
to their variable returns as we are exposed to the variability of their underlying assets, and that we control and therefore consolidate these vehicles.
See Note 1 and Note 16 for further information related to capital trusts.
154 BMO Financial Group 198th Annual Report 2015