Bank of Montreal 2015 Annual Report Download - page 92

MD&A
Linkages between Balance Sheet Items and Market Risk Disclosures
The table below presents items reported in our Consolidated Balance Sheet that are subject to market risk, comprised of balances that are subject to
either traded risk or non-traded risk measurement techniques.
As at October 31, 2015 As at October 31, 2014
Subject to market risk Subject to market risk
(Canadian $ in millions)
Consolidated
Balance Sheet
Traded
risk (1)
Non-traded
risk (2)
Not subject to
market risk
Consolidated
Balance Sheet
Traded
risk (1)
Non-traded
risk (2)
Not subject to
market risk
Main risk factors
for non-traded risk
balances
Assets Subject to Market Risk
Cash and cash equivalents 40,295 – 40,295 – 28,386 – 28,386 – Interest rate
Interest bearing deposits with banks 7,382 1,212 6,170 – 6,110 930 5,180 – Interest rate
Securities
Trading 72,460 65,066 7,394 – 85,022 78,997 6,025 – Interest rate,
credit spread
Available-for-sale 48,006 – 48,006 – 46,966 – 46,966 – Interest rate,
credit spread
Held-to-maturity 9,432 – 9,432 – 10,344 – 10,344 – Interest rate
Other 1,020 – 1,020 – 987 – 987 – Equity
Securities borrowed or purchased
under resale agreements 68,066 – 68,066 – 53,555 – 53,555 – Interest rate
Loans and acceptances (net of
allowance for credit losses) 334,024 – 334,024 – 303,038 – 303,038 – Interest rate,
foreign exchange
Derivative instruments 38,238 35,924 2,314 – 32,655 31,627 1,028 – Interest rate,
foreign exchange
Other assets 22,958 – 8,195 14,763 21,596 – 7,787 13,809 Interest rate
Total Assets 641,881 102,202 524,916 14,763 588,659 111,554 463,296 13,809
Liabilities Subject to Market Risk
Deposits 438,169 9,429 428,740 – 393,088 7,639 385,449 – Interest rate,
foreign exchange
Derivative instruments 42,639 39,907 2,732 – 33,657 32,312 1,345 – Interest rate,
foreign exchange
Acceptances 11,307 – 11,307 – 10,878 – 10,878 – Interest rate
Securities sold but not yet
purchased 21,226 21,226 – – 27,348 27,348 – – Interest rate
Securities lent or sold under
repurchase agreements 39,891 – 39,891 – 39,695 – 39,695 – Interest rate
Other liabilities 44,320 – 44,218 102 43,676 – 43,263 413 Interest rate
Subordinated debt 4,416 – 4,416 – 4,913 – 4,913 – Interest rate
Total Liabilities 601,968 70,562 531,304 102 553,255 67,299 485,543 413
(1) Primarily comprised of BMO’s balance sheet items that are subject to the trading and underwriting risk management framework and fair valued through profit or loss.
(2) Primarily comprised of BMO’s balance sheet items that are subject to the structural balance sheet and insurance risk management framework, or are available-for-sale securities.
Certain comparative figures have been reclassified to conform to the current year’s presentation.
Structural (Non-Trading) Market Risk
Structural market risk is comprised of interest rate risk arising from our banking activities (loans and deposits) and foreign exchange risk arising from
our foreign currency operations.
Structural Market Risk Governance
The RRC has oversight of the management of structural market risk, annually approves the structural market risk strategy and limits, and regularly
reviews structural market risk positions. The RMC and Balance Sheet and Capital Management Committee (BSCMC) regularly review structural market
risk positions and provide senior management oversight.
In addition to Board-approved limits on earnings and economic value exposure, more granular management limits are in place to guide
day-to-day management of this risk. BMO’s Corporate Treasury group is responsible for the ongoing management of structural market risk across
the enterprise, with independent oversight provided by the Market Risk group.
Structural Market Risk Measurement
Interest Rate Risk
Structural interest rate risk arises when changes in interest rates affect the cash flows, earnings and values of assets and liabilities from our banking
activities. The objective of structural interest rate risk management is to maintain high-quality earnings and maximize sustainable product spreads.
Structural interest rate risk is primarily comprised of interest rate mismatch risk and product embedded option risk.
Interest rate mismatch risk arises when there are differences in the scheduled maturities, repricing dates or reference rates of assets, liabilities
and derivatives. The net interest rate mismatch, representing residual assets funded by common shareholders’ equity, is managed to a target profile
through interest rate swaps and securities.
Product embedded option risk arises when product features allow customers to alter cash flows, such as scheduled maturity or repricing dates,
usually in response to changes in market conditions. Product embedded options include loan prepayments, deposit redemption privileges and
committed rates on unadvanced mortgages. Product embedded options are generally managed to low risk levels through a dynamic hedging process
or with purchased options.
Material presented in a blue-tinted font above is an integral part of the 2015 annual consolidated financial statements (see page 86).
BMO Financial Group 198th Annual Report 2015 103