TD Bank 2009 Annual Report Download - page 115

TD BANK FINANCIAL GROUP ANNUAL REPORT 2009 FINANCIAL RESULTS 111
Derivative Financial Instruments by Term to Maturity
(billions of Canadian dollars) 2009 2008
Remaining term to maturity
Over Over Over
Within 1 year 3 years 5 years Over
1 year to 3 years to 5 years to 10 years 10 years Total Total
Notional principal
Interest rate contracts
Futures $ 145.9 $ 27.6 $ 0.1 $ – $ 0.1 $ 173.7 $ 127.6
Forward rate agreements 105.0 6.2 – – – 111.2 90.6
Swaps 391.3 338.1 261.2 159.9 53.4 1,203.9 1,322.5
Options written 54.8 5.2 1.7 4.1 0.5 66.3 57.5
Options purchased 71.8 6.3 2.1 4.3 2.0 86.5 83.3
Total interest rate contracts 768.8 383.4 265.1 168.3 56.0 1,641.6 1,681.5
Foreign exchange contracts
Futures 6.2 8.5 – – – 14.7 2.6
Forward contracts 289.0 34.5 12.9 0.3 – 336.7 429.7
Swaps 3.1 6.3 2.8 6.6 2.6 21.4 20.8
Cross-currency interest rate swaps 58.5 81.9 61.2 85.2 21.7 308.5 283.5
Options written 34.9 1.7 0.2 0.1 – 36.9 30.8
Options purchased 30.3 1.8 0.3 0.1 – 32.5 26.5
Total foreign exchange contracts 422.0 134.7 77.4 92.3 24.3 750.7 793.9
Credit derivatives
Credit default swaps – protection purchased 7.9 13.8 9.3 9.9 – 40.9 124.2
Credit default swaps – protection sold 5.8 10.7 7.0 7.4 – 30.9 105.9
Other ––––––0.2
Total credit derivative contracts 13.7 24.5 16.3 17.3 – 71.8 230.3
Other contracts
Equity contracts 41.2 15.1 7.4 0.1 – 63.8172.1
Commodity contracts 8.5 2.8 0.3 – – 11.6 16.8
Total $ 1,254.2 $ 560.5 $ 366.5 $ 278.0 $ 80.3 $ 2,539.5 $ 2,794.6
1In 2009, $7.6 billion of non-trading derivatives were reclassified from deposits
to derivatives.
DERIVATIVE-RELATED RISKS
Market Risk
Derivative instruments, in the absence of any compensating up-front
cash payments, generally have no market value at inception. 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, also known as counter-
party credit risk, is the risk of a financial loss occurring as a result
of the failure of a counterparty to meet its obligation to the Bank.
The Treasury Credit area within the Wholesale Bank is responsible for
implementing and ensuring 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 evaluating the
creditworthiness of counterparties, and managing the size, diversifi-
cation and maturity structure of the portfolios. The Bank actively
engages in risk mitigation strategies through the use of multi-product
derivative master netting agreements, collateral and other risk mitiga-
tion techniques. Master netting agreements reduce risk to the Bank by
allowing the Bank to close out and net transactions with counterpar-
ties subject to such agreements upon the occurrence of certain events.
The effect of these master netting agreements is shown in the table
below entitled “Credit Exposure of Derivative Financial Instruments”.
Also shown in the table entitled “Credit Exposure of Derivative
Financial Instruments”, is the current replacement cost, which is the
positive fair value of all outstanding derivative financial instruments,
and 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 OSFI to the notional principal amount of the instru-
ments. The risk-weighted amount is determined by applying standard
measures of counterparty credit risk to the credit equivalent amount.
The following table discloses derivative financial instruments based
on their contractual terms to maturity.