TD Bank 2009 Annual Report Download - page 66

TD BANK FINANCIAL GROUP ANNUAL REPORT 2009 MANAGEMENT’S DISCUSSION AND ANALYSIS62
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 are discussed in the “Managing Risk”
section of this MD&A. Off-balance sheet arrangements are generally
undertaken for risk management, capital management, and funding
management purposes and include securitizations, contractual obliga-
tions, and certain commitments and guarantees.
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, the entity must be consolidated by the primary benefici-
ary. See Note 6 to the Consolidated Financial Statements for further
information regarding the accounting for VIEs.
Securitizations are an 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 an 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 Bank-origi-
nated assets, securitization of third party-originated assets, and other
investment and financing products.
Certain of the Bank’s securitizations of Bank-originated assets and
of third party-originated assets are structured through QSPEs. QSPEs
are trusts or other legal vehicles that are demonstrably 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 Reputa-
tional Risk Committee. The Committee is responsible for the review
of structured transactions and complex credit arrangements 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 and commer-
cial mortgages to enhance its liquidity position, to diversify sources of
funding and to optimize the management of the balance sheet. All
products securitized by the Bank were originated in Canada and sold to
Canadian securitization structures or Canadian non-SPE third parties.
Details of securitization exposures through significant unconsolidated
SPEs and significant unconsolidated QSPEs are as follows:
(millions of Canadian dollars) 200922008
Significant Significant Significant Significant
unconsolidated unconsolidated unconsolidated unconsolidated
QSPEs SPEs QSPEs SPEs
Carrying Carrying Carrying Carrying
value of value of value of value of
Securitized retained Securitized retained Securitized retained Securitized retained
assets interests assets interests assets interests assets interests
Residential mortgage loans $ – $ – $ 21,939 $ 558 $ – $ – $ 24,332 $ 421
Personal loans 6,962 121 – – 8,100 80 – –
Commercial mortgage loans 113 2 – – 148 4 – –
Total exposure $ 7,075 $ 123 $ 21,939 $ 558 $ 8,248 $ 84 $ 24,332 $ 421
EXPOSURES SECURITIZED BY THE BANK AS AN ORIGINATOR1
TABLE 36
1In all the securitization transactions that the Bank has undertaken for its own
assets, it has acted as an originating bank and retained securitization exposure.
2Excluded from this table as at October 31, 2009 are $18,962 million of securitized
assets (residential mortgage loans – $18,958 million, commercial mortgage loans –
$4 million) and $658 million of carrying value of retained interests (residential
mortgage loans – $658 million) due to securitizations through Canadian non-SPE
third parties.
Residential mortgage loans
The Bank may be exposed to the risks of transferred loans to the secu ri-
tization vehicles through retained interests. There are no expected
credit losses on the retained interests of the securitized residential
mortgages as the mortgages are all government guaranteed.
Personal loans
The Bank securitizes personal loans through QSPEs, as well as through
single-seller conduits via QSPEs. As at October 31, 2009, the single-
seller conduits had $5.1 billion (2008 – $5.1 billion) of commercial paper
outstanding while another Bank-sponsored QSPE had $2.9 billion
(2008 – $3.0 billion) of term notes outstanding. While the probability
of loss is negligible as at October 31, 2009, the Bank’s maximum
potential exposure to loss for these conduits through the sole provision
of liquidity facilities was $5.1 billion (2008 – $5.1 billion) of which
$1.1 billion (2008 – $1.1 billion) of underlying personal loans was
government insured. Additionally, the Bank had retained interests of
$121 million (2008 – $80 million) relating to excess spread.
Commercial mortgage loans
As at October 31, 2009, the Bank’s maximum potential exposure to
loss was $2 million (2008 – $4 million) through retained interests in
the excess spread and cash collateral account of the QSPE.
SECURITIZATION OF THIRD PARTY-ORIGINATED ASSETS
The Bank administers multi-seller conduits and provides liquidity
facilities as well as securities distribution services; it may also provide
credit enhancements. Third party-originated assets are securitized
through Bank-sponsored SPEs, which are not consolidated by the Bank.
The Bank’s maximum potential exposure to loss due to its ownership
interest in commercial paper and through the provision of liquidity
facilities for multi-seller conduits was $7.5 billion as at October 31,
2009 (2008 – $10.7 billion). Further, the Bank has committed an
additional $1.0 billion (2008 – $1.8 billion) in liquidity facilities for
asset-backed commercial paper (ABCP) that could potentially be
issued by the conduits. As at October 31, 2009, the Bank also provided
deal-specific credit enhancement in the amount of $134 million
(2008 – $78 million).