TD Bank 2006 Annual Report Download - page 57

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Management’s Discussion and Analysis 53
As at October 31, 2006 Number of shares
Preferred shares
Class A preferred shares issued by the Bank
(thousands of shares):
Series M 14,000
Series N 8,000
Series O 17,000
Preferred shares issued by TD Mortgage
Investment Corporation (thousands of shares):
Non-cumulative preferred shares, Series A 350
Total preferred shares 39,350
Capital Trust Securities
Trust units issued by TD Capital Trust
(thousands of shares):
Series 2009 900
Total Capital Trust Securities 900
Common shares outstanding (millions of shares) 717.4
Stock options (millions of shares)
– vested 12.9
– non-vested 5.4
1For further details, including the principal amount, conversion and exchange
features, and distributions, see Notes 12, 13 and 14 to the Bank’s
Consolidated Financial Statements.
OUTSTANDING SHARE DATA1
TABLE 33 REVISED BASEL II CAPITAL ACCORD
In 2004, the Basel Committee on Banking Supervision finalized
the new Basel capital framework to replace the accord originally
introduced in 1988 and supplemented in 1996. The underlying
principles of the new framework are intended to be suitable for
application to banks of varying levels of complexity and sophisti-
cation. The framework will allow qualifying banks to determine
capital levels consistent with the manner in which they measure,
manage and mitigate risks. The new framework provides a
spectrum of methodologies, from simple to advanced, for
the measurement of both credit and operational risk. More
advanced measurement of risks should result in regulatory and
economic capital being more closely aligned. In addition, the
framework includes provisions for changes to the computation
of Tier 1 and total capital.
The objective of the framework is to reward more rigorous
and accurate risk management by reducing the regulatory
capital that is required under weaker or less sophisticated
approaches. While the overall objective of the new framework
is to neither increase nor decrease the level of overall capital in
the system, some financial institutions will see an increase in
regulatory capital, while others will see a decrease. The impact
will depend upon the particular institution’s asset mix, risk and
loss experience.
The Bank is in the process of collecting, analyzing and report-
ing the necessary data and is on track to meet the requirements
of the new framework as applied to the Canadian context by
our regulator. For Canadian banks, formal implementation is
expected in 2008.
GROUP FINANCIAL CONDITION
Off-balance Sheet
Arrangements
In the normal course of operations, the Bank engages in a
variety of financial transactions that, under GAAP, are either not
recorded on the Consolidated Balance Sheet or are recorded in
amounts that differ from the full contract or notional amounts.
These off-balance sheet arrangements involve, among other
risks, varying elements of market, credit and liquidity risk which
arediscussed in the Managing Risk section on pages 57 to 66
of this MD&A. Off-balance sheet arrangements are generally
undertaken for risk management, capital management and/or
funding management purposes and include securitizations,
commitments, guarantees, and contractual obligations.
SPECIAL PURPOSE ENTITIES
The Bank carries out certain business activities via arrangements
with special purpose entities (SPEs). We use SPEs to obtain
sources of liquidity by securitizing certain of the Bank’s financial
assets, to assist our clients in securitizing their financial assets,
and to create investment products for our clients. SPEs may be
organized as trusts, partnerships or corporations and they may
be formed as qualifying special purpose entities (QSPEs) or
variable interest entities (VIEs). When an entity is deemed a VIE,
under the CICA accounting guideline the entity must be consoli-
dated by the primary beneficiary.See Note 6to the Consolidated
Financial Statements for further information regarding the
accounting guideline for VIEs.
Securitizations arean important part of the financial markets,
providing liquidity by facilitating investor access to specific
portfolios of assets and risks. In a typical securitization structure,
the Bank sells assets to a SPE and the SPE funds the purchase of
those assets by issuing securities to investors. SPEs are typically
set up for a single, discrete purpose, are not operating entities
and usually have no employees. The legal documents that govern
the transaction describe how the cash earned on the assets held
in the SPE must be allocated to the investors and other parties
that have rights to these cash flows. The Bank is involved in SPEs
through the securitization of its own assets, securitization of
third-party assets and other financial transactions.
Certain of the Bank’s securitizations of its own assets and of
third-party assets are structured through QSPEs. QSPEs are trusts
or other legal vehicles that aredemonstrably distinct from the
Bank, have specified permitted activities, defined asset holdings
and may only sell or dispose of selected assets in automatic
response to limited conditions. QSPEs are not consolidated by
any party including the Bank.
The Bank monitors its involvement with SPEs through the
Reputational Risk Committee. The Committee is responsible for
the review of structured transactions and complex credits with
potentially significant reputational, legal, regulatory, accounting
or tax risks, including transactions involving SPEs.
SECURITIZATION OF BANK-ORIGINATED ASSETS
The Bank securitizes residential mortgages, personal loans,
credit card loans and commercial mortgages to enhance our
liquidity position, to diversify sources of funding and to optimize
the management of the balance sheet. Details of these securiti-
zations are as follows.