TD Bank 2003 Annual Report Download - page 39

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TD BANK FINANCIAL GROUP ANNUAL REPORT 2003 • Management’s Discussion and Analysis 37
At the end of every day, Risk Management reviews daily trad-
ing exposure reports and compares the risks with their limits. If
a trading limit has been exceeded, the trading desk must immedi-
ately bring the position within the limit, unless Risk Management
or a designated business head approves an exception. An escala-
tion process has been established for approving exceptions to
established limits. If, during the day, it appears that a trading
limit will be exceeded, the trader must receive approval before
carrying the position overnight.
Calculating VaR
First we estimate VaR by creating a distribution of potential
changes in the market value of the current portfolio. We value
the current portfolio using the most recent 259 trading days of
market price and rate changes. Then we calculate the VaR as the
threshold level which potential portfolio losses are not expected
to exceed more than one out of every 100 trading days.
The graph below compares net revenues in our trading busi-
nesses to daily VaR usage. Our VaR on October 31, 2003 was
$15.6 million, up $1.0 million from October 31, 2002. The
average VaR for fiscal year 2003 was $17.4 million. Increases in
VaR are attributable to the addition of credit spread risk to the
Bank’s VaR model.
The graph below shows the frequency distribution of our
net trading revenue for fiscal 2003. Daily net trading revenues
in 2003 were positive on 94.6% 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
approximately $12.8 million. The distribution of trading revenues
reflects the broad diversification of trading activities in Wholesale
Banking and shows that the probability of 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. Our trading business
is subject to an overall global stress test limit and each global
business has a stress test limit. Also, each broad risk class has an
overall stress limit. Stress tests are produced and reviewed each
week with the EVP and Chief Risk Officer. They are reviewed with
the Market Risk and Capital Committee every two weeks and
throughout the year with the Risk Committee of the Board.
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 following graph is a history of our weekly stress test
results, which shows the instantaneous impact of large market
disturbances. Our credit trading businesses modified their
exposure in the first half of 2003, in response to an improving
credit environment.
Market risk in our investment activities
In the Bank’s own investment portfolio and in the Merchant
Banking business, we are exposed to market risk.
Risks are managed by identifying our specific risks, determin-
ing their potential impact, and then establishing policies and
procedures to monitor, measure, and mitigate those risks.
Who manages market risk in our investment activities
The Risk Committee of the Board reviews and approves the
investment policies for the Bank’s own portfolio and for the
Merchant Banking business.
The Investment Committee meets regularly to review the
performance of the Bank’s investments and to assess the
performance of the portfolio managers.
How we manage market risk in our investment activities
We use advanced systems and related measurement tools
to manage portfolio risk. Risk intelligence is imbedded in the
investment decision making process by the integration of
performance targets, risk/return tradeoffs, and quantified risk
tolerances. Performance attribution identifies performance
drivers such as sector and security exposures, as well as the
impact of certain processes like trade execution.
Market risk in our non-trading banking transactions
We are exposed to market risk when we enter into non-trading
banking transactions with our customers. These transactions
primarily include deposit taking and lending, which are also
referred to as our “asset and liability” positions.
Oct. 31/03Jul. 31/03Apr. 30/03Jan. 31/03Nov. 1/02
Net trading related revenue vs. Value at Risk
(millions of dollars)
Value at Risk
Actual revenue
$30
-30
20
10
0
-10
-20
>3
0
2520151050-510$ <(15)
Distribution of daily net trading revenues
(number of days)
40
0
20
10
30
(millions of dollars)
Oct. 31/03July 30/03Apr. 30/03Jan. 29/03Nov. 1/02
Stress test history
(millions of dollars)
$0
-300
-250
-200
-150
-100
-50
Stress test loss