TD Bank 2009 Annual Report Download - page 106

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TD BANK FINANCIAL GROUP ANNUAL REPORT 2009 FINANCIAL RESULTS102
SECURITIES DESIGNATED AS TRADING UNDER THE
FAIR VALUE OPTION
Certain securities that support insurance reserves within certain of the
Bank’s insurance subsidiaries have been designated as trading under the
fair value option. The actuarial valuation of the insurance reserve is
based on a discount factor using the market yield of the assets support-
ing the insurance reserve, with changes in the discount factor being
recorded in the Consolidated Statement of Income. By designating the
securities as trading under the fair value option, the unrealized gain or
loss on the securities is recognized in the Consolidated Statement of
Income in the same period as the loss or income resulting from changes
to the discount rate used to value the insurance reserves.
Certain government and government insured securities have been
combined with derivatives to form economic hedging relationships.
These securities are being held as part of the Bank’s overall interest
rate risk management strategy and have been designated as trading
under the fair value option. The derivatives are carried at fair value,
with the change in fair value recognized in the Consolidated State-
ment of Income.
The total fair value of these securities was $3,236 million as at
October 31, 2009 (2008 – $6,402 million). These securities are
recorded in trading securities on the Consolidated Balance Sheet.
BUSINESS AND GOVERNMENT LOANS DESIGNATED AS
TRADING UNDER THE FAIR VALUE OPTION
Certain business and government loans held within a trading portfolio
are designated as trading under the fair value option if the criteria
described above are met. These loans are fair valued using broker quotes
where available. Where broker quotes are not available or reliable, fair
value is determined using valuation techniques which maximize the use
of observable market inputs.
The total fair value of these loans was $210 million as at October
31, 2009 (2008 – $510 million). These loans are recorded in business
and government loans on the Consolidated Balance Sheet.
As at October 31, 2009, the maximum credit exposure of loans
designated as trading under the fair value option amounted to
$210 million (2008 – $510 million). These loans are managed as
part of a trading portfolio with risk limits that have been approved
by the Bank’s risk management group and are hedged with various
financial instruments, including credit derivatives. The Bank also
uses other instruments within this trading portfolio to hedge its total
maximum exposure to loss. The change in fair value of these loans
attributable to changes in credit risk that was recorded for the period
was a loss of $16 million (2008 – $(109) million), calculated by
determining the changes in credit spread implicit in the fair value
of the loans.
INCOME (LOSS) FROM FINANCIAL INSTRUMENTS DESIGNATED
AS TRADING UNDER THE FAIR VALUE OPTION
During the year ended October 31, 2009, income (loss) representing
net changes in the fair value of financial assets and financial liabilities
designated as trading under the fair value option was $256 million
(2008 – $(137) million; 2007 – $(55) million). Income (loss) from finan-
cial instruments designated as trading under the fair value option is
included in other income. This income (loss) is primarily offset by the
changes in the fair value of derivatives used to economically hedge
these assets and is recorded in other income (loss).
When loan receivables are transferred in a securitization to a special
purpose entity under terms that transfer control to third parties, and
consideration other than beneficial interest in the transferred assets is
received, the transaction is recognized as a sale and the related loan
assets are removed from the Consolidated Balance Sheet. For control
to have transferred, (1) the transferred loans must be isolated from
the seller, even in the event of bankruptcy or receivership of the seller,
(2) the purchaser must have the right to sell or pledge the transferred
loans or, if the purchaser is a Qualifying Special Purpose Entity (QSPE)
as defined in the CICA Accounting Guideline 12, Transfers of Receiv-
ables, the investors of the QSPE must have the right to sell or pledge
their ownership interest in the QSPE, and (3) the seller cannot retain
the right to repurchase the loans and receive more than trivial benefit.
As part of the securitization, certain financial assets are retained
and may consist of an interest-only strip, servicing rights and, in some
cases, a cash reserve account.
A gain or loss on sale of the loan receivables is recognized immedi-
ately in other income after the effects of hedges on the assets sold, if
applicable. The amount of the gain or loss recognized depends on the
previous carrying values of the receivables involved in the transfer,
allocated between the assets sold and the retained interests based on
their relative fair values at the date of transfer. To obtain fair value,
quoted market prices are used, where available. However, as market
prices are generally not available for retained interests, fair value is
determined by estimating the present value of future expected cash
flows using management’s best estimates of key assumptions – credit
losses, prepayment rates, forward yield curves and discount rates –
commensurate with the risks involved.
Where the Bank retains the servicing rights, the benefits of servicing
are assessed against market expectations. When the benefits of servic-
ing are more than adequate, a servicing asset is recognized. When
the benefits of servicing are less than adequate, a servicing liability is
recognized. Other retained interests are classified as trading securities
and are carried at fair value with the changes in fair value recorded in
trading income.
In most cases, the Bank retained the responsibility for servicing the
assets securitized. The following table summarizes the Bank’s securiti-
zation activity.
LOAN SECURITIZATIONS
NOTE 5
Securitization Activity
(millions of Canadian dollars) 2009 2008 2007
Residential Credit Commercial Residential Credit Commercial
mortgage Personal card mortgage mortgage Personal card mortgage
loans loans loans loans Total loans loans loans loans Total Total
Gross proceeds $ 28,624 $ 3,429 $ – $ 4 $ 32,057 $ 12,070 $ 5,599 $ 1,600 $ 2 $ 19,271 $ 19,911
Retained interests recognized 1,100 20 – – 1,120 305 51 12 – 368 325
Cash flows received on
retained interests 519 72 – 2 593 221 90 43 2 356 364