TD Bank 2001 Annual Report Download - page 29

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27
HOW WE PERFORMED IN 2001
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATING PERFORMANCE
The graph below compares net revenues in our trading
businesses to daily VaR usage. Our VaR on October 31, 2001
was $22.5 million, down $4.9 million from October 31, 2000.
The average VaR for fiscal year 2001 was $24.5 million.
Declines in the VaR during fiscal 2001 are due to the integration
of certain risks into our VaR model, in particular, the risks in our
convertible arbitrage and credit derivative businesses. This diver-
sification has resulted in the improvements in our reported VaR.
The graph below shows the frequency distribution of our net
trading revenue for fiscal 2001. Daily net trading revenues in
2001 were positive on 94% of the trading days in the year.
Losses never exceeded our statistically predicted VaR for the
total of our trading related businesses. Our worst daily loss was
less than $5 million. The distribution of trading revenues reflects
the broad diversification of trading activities in TD Securities and
shows that the probability of major losses exceeding our
reported VaR is low.
Stress testing
We use stress testing to quantify the largest quarterly loss we
are prepared to take in our trading activities and then limit
market risk accordingly.
Our trading business is subject to an overall global stress test
limit and each global business has a stress test limit. Stress
tests are produced and reviewed each week with the head of
Group Risk Management. They are reviewed with the Market
Risk Committee every two weeks and four times a year with
the Audit and Risk Management Committee of the Board of
Directors. Stress scenarios are designed to model extreme
economic events, replicate worst case historical experiences or
introduce large but plausible moves in key market risk factors.
The graph below is a history of our weekly stress test
results which shows the instantaneous impact of large market
disturbances. We significantly reduced our credit spread risk in
2001 by buying credit protection in the form of synthetic
collateralized debt obligations (CDOs) and credit default swaps.
As credit spread risk had dominated our stress scenarios in
previous years, this improved management of credit risk has
had a major positive impact on our risk profile.
ASSET LIABILITY MANAGEMENT
Asset liability management deals with managing the market
risks of our traditional banking activities. These transactions
primarily include interest rate risk and foreign exchange risk.
We are exposed to market risk when we enter into non-trading
banking transactions with our TD Canada Trust customers.
These transactions primarily include deposit taking and lending,
which are also referred to as our “asset and liability” positions.
Who is responsible for asset liability management
The Treasury and Balance Sheet Management function within
Group Finance measures and manages the market risks of our
non-trading banking activities. The Asset Liability Committee,
which is chaired by TD’s Chairman and Chief Executive Officer
and includes senior executives, oversees non-trading market
risk and directs Treasury and Balance Sheet Management.
The Audit and Risk Management Committee of the Board of
Directors reviews and approves all market risk policies and
procedures annually.
How we manage our asset and liability positions
We measure all product risks when products are issued, using
a fully hedged option-adjusted transfer pricing framework.
This framework allows Treasury and Balance Sheet Management
to measure and manage risk within a target risk profile. It
also ensures that TD Canada Trust’s business units engage in
risk-taking activities only if they are productive.
DISTRIBUTION OF DAILY NET TRADING REVENUES
(number of days)
(millions of dollars)
0
10
20
30
40
>302826242220181614121086420(2)(4)(6)<(8)
NET TRADING RELATED REVENUE VS. VALUE AT RISK
(millions of dollars)
Actual revenue
Value at Risk
-50
-25
0
25
50
Oct. 31/01Jul. 31/01Apr. 30/01Jan. 31/01Nov. 1/00
STRESS TEST HISTORY
(millions of dollars)
Stress test loss
-300
-250
-200
-150
-100
-50
0
Oct. 31/01Aug. 2/01May 3/01Feb. 2/01Nov. 2/00