TD Bank 2006 Annual Report Download - page 105

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Financial Results 101
Credit Exposure of Derivative Financial Instruments
(millions of Canadian dollars) 2006 2005
Current Credit Risk- Current Credit Risk-
replace- equivalent weighted replace- equivalent weighted
ment cost1amount amount ment cost1amount amount
Interest rate contracts
Forward rate agreements $6$32$7$28 $ 47 $ 10
Swaps 10,123 15,513 3,491 12,429 17,468 4,077
Options purchased 1,133 1,535 371 1,030 1,409 297
Total interest rate contracts 11,262 17,080 3,869 13,487 18,924 4,384
Foreign exchange contracts
Forward contracts 3,261 7,263 1,673 5,217 9,618 2,154
Swaps 3,008 3,781 998 2,786 3,603 1,032
Cross-currency interest rate swaps 4,981 13,135 2,775 5,111 12,543 2,761
Options purchased 442 866 192 857 1,725 358
Total foreign exchange contracts 11,692 25,045 5,638 13,971 27,489 6,305
Credit derivatives 210 8,850 1,836 332 5,994 1,329
Other contracts24,757 10,502 3,066 5,426 10,378 3,050
Total derivative financial instruments $27,921 $61,477 $14,409 $33,216 $62,785 $15,068
Less impact of master netting agreements and collateral 17,123 31,857 7,762 19,282 31,145 7,900
Total $10,798 $29,620 $ 6,647 $13,934 $31,640 $ 7,168
1Exchange traded instruments and forward foreign exchange contracts
with an original maturity of 14 days or less are excluded in accordance
with the guidelines of the Office of the Superintendent of Financial
Institutions Canada.
The total positive fair value of the excluded contracts at October 31, 2006
was $1,753 million (2005 – $2,250 million).
2Includes equity and commodity derivatives.
DERIVATIVE-RELATED RISKS
Market Risk
Derivative instruments, in the absence of any compensating
upfront cash payments, generally have no market value at incep-
tion. They obtain value, positive or negative, as relevant interest
rates, foreign exchange rates, equity, commodity or credit prices
or indices change, such that the previously contracted terms of
the derivative transactions have become more or less favourable
than what can be negotiated under current market conditions
for contracts with the same terms and the same remaining period
to expiry. The potential for derivatives to increase or decrease in
value as a result of the foregoing factors is generally referred to
as market risk. This market risk is managed by senior officers
responsible for the Bank’s trading business and is monitored
independently by the Bank’s Risk Management Group.
Credit Risk
Credit risk on derivative financial instruments is the risk of a
financial loss occurring as a result of a default of a counterparty
on its obligation to the Bank. The treasury credit area is responsi-
ble for the implementation of and compliance with credit policies
established by the Bank for the management of derivative credit
exposures. Derivative-related credit risks are subject to the same
credit approval, limit and monitoring standards that are used for
managing other transactions that create credit exposure. This
includes evaluation of counterparties as to creditworthiness, and
managing the size, diversification and maturity structure of the
portfolios. The credit risk of derivatives traded over-the-counter is
limited by dealing with counterparties that are creditworthy, and
by actively pursuing risk mitigation opportunities through the use
of multi-product derivative master netting agreements, collateral
and other credit mitigation techniques. In the following table,
the current replacement cost, which is the positive fair value of
all outstanding derivative financial instruments, represents the
Bank’s maximum derivative credit exposure. The credit equivalent
amount is the sum of the current replacement cost and the
potential future exposure, which is calculated by applying factors
supplied by the Office of the Superintendent of Financial
Institutions Canada to the notional principal amount of the
instruments. The risk-weighted amount is determined by applying
standard measures of counterparty credit risk to the credit equiv-
alent amount.