TD Bank 2009 Annual Report Download - page 68

TD BANK FINANCIAL GROUP ANNUAL REPORT 2009 MANAGEMENT’S DISCUSSION AND ANALYSIS64
The Bank does not have any exposure to U.S. subprime mortgages
via the CDOs disclosed above. The CDOs are referenced to corporate
debt securities. The hedges on the similar reference portfolio are not
entered into with monoline insurers; rather, they are entered into with
global financial institutions, such as universal banks or broker-dealers.
All exposures are managed with risk limits that have been approved by
the Bank’s risk management group and are hedged with various finan-
cial instruments, including credit derivatives and bonds within the
trading portfolio, not included in this table. Counterparty exposure on
hedges is collateralized under Credit Support Agreements (CSAs) and
netting arrangements, consistent with other over-the-counter (OTC)
derivative contracts. The Bank’s CDO positions are fair valued using
valuation techniques with significant non-observable market inputs. The
potential effect of using reasonable possible alternative assumptions
for valuing these CDO positions would range from a reduction in the
fair value by $7.5 million to an increase in the fair value by $7.7 million.
A sensitivity analysis was performed for all items fair valued using
valuation techniques with significant non-observable market inputs
and is disclosed in the “Critical Accounting Estimates” – “Fair Value
of Financial Instruments” section of this MD&A.
COMMITMENTS
The Bank enters into various commitments to meet the financing needs
of the Bank’s clients and to earn fee income. Significant commitments
of the Bank include financial and performance standby letters of credit,
documentary and commercial letters of credit and commitments to
extend credit. These products may expose the Bank to liquidity, credit
and reputational risks. There are adequate risk management and control
processes in place to mitigate these risks. Certain commitments still
remain off-balance sheet. Note 32 to the Bank’s 2009 Consolidated
Financial Statements provides detailed information about the maximum
amount of additional credit the Bank could be obligated to extend.
Leveraged Finance Credit Commitments
Also included in “Commitments to extend credit” in Note 32 to
the 2009 Consolidated Financial Statements are leveraged finance
commitments. Leveraged finance commitments are agreements that
provide funding to a wholesale borrower with higher levels of debt,
measured by the ratio of debt capital to equity capital of the borrower,
relative to the industry in which it operates. The Bank’s exposure to
leveraged finance commitments as at October 31, 2009, was not
significant (2008 – $3.3 billion).
CAPITAL TRUSTS
The Bank sponsors SPEs to raise capital, including TD Capital Trust II
Securities – Series 2012-1 (TD CaTS II) issued by TD Capital Trust II
(Trust II) and TD Capital Trust IV Notes (TD CaTS IV Notes) issued by
TD Capital Trust IV (Trust IV), both of which are VIEs. As the Bank is not
the primary beneficiary of Trust II or Trust IV, the Bank does not consoli-
date them for accounting purposes. For further details on capital trust
activity and the terms of TD CaTS II and TD CaTS IV Notes issued and
outstanding, see Note 16 to the Consolidated Financial Statements.
GUARANTEES
In the normal course of business, the Bank enters into various guarantee
contracts to support its clients. The Bank’s significant types of guarantee
products are financial and performance standby letters of credit, assets
sold with recourse, credit enhancements, and indemnification agree-
ments. Certain guarantees remain off-balance sheet. See Note 32 to
the Consolidated Financial Statements for further information regarding
the accounting for guarantees.
GROUP FINANCIAL CONDITION
Related-party Transactions
TRANSACTIONS WITH OFFICERS AND DIRECTORS
AND THEIR AFFILIATES
The Bank makes loans to its officers and directors and their affiliates.
Loans to directors and officers are on market terms and conditions
unless, in the case of banking products and services for officers, other-
wise stipulated under approved policy guidelines that govern all
employees. The amounts outstanding are as follows:
(millions of Canadian dollars) 2009 2008
Personal loans, including mortgages $9 $11
Business loans 175 110
Total $ 184 $ 121
In addition, the Bank offers deferred share and other plans to non-
employee directors, executives, and certain other key employees. See
Note 24 and Note 35 to the 2009 Consolidated Financial Statements
for more details.
In the ordinary course of business, the Bank also provides various
banking services to associated and other related corporations on terms
similar to those offered to non-related parties.
TRANSACTIONS WITH EQUITY-ACCOUNTED INVESTEES
TD AMERITRADE
Pursuant to a Stockholders Agreement in relation to the Bank’s equity
investment in TD Ameritrade, the Bank designated four of eleven
members to TD Ameritrade’s Board of Directors and has the ability to
designate a 12th director. A description of significant transactions of
the Bank and its affiliates with TD Ameritrade is set forth below.
Money Market Deposit Account Agreement
The Bank is party to a money market deposit account (MMDA) agree-
ment with TD Ameritrade, pursuant to which the Bank makes available
to clients of TD Ameritrade MMDAs as designated sweep vehicles.
TD Ameritrade provides marketing and support services with respect
to the MMDA. The Bank paid fees of $653.7 million in 2009 (2008 –
$657.0 million; 2007 – $592.3 million) to TD Ameritrade for the deposit
accounts. The fee paid by the Bank is based on the average balance
of deposits during the period with a portion of the fee tied to the actual
yield earned by the Bank on the investments, with the balance based
on an agreed rate of return.
As at October 31, 2009, amounts receivable from TD Ameritrade
were $39.8 million (2008 – $225.1 million). As at October 31, 2009,
amounts payable to TD Ameritrade were $73.8 million (2008 –
$115.3 million).
TRANSACTIONS WITH SYMCOR
The Bank has a one-third ownership in Symcor Inc. (Symcor), a North
American provider of business process outsourcing services for the
financial services industry, including cheque and payment processing,
statement production and document management. The Bank accounts
for Symcor’s results using the equity method of accounting. During the
year, the Bank paid $134.7 million (2008 – $164.0 million; 2007 –
$128.7 million) for these services. As at October 31, 2009, the amount
payable to Symcor was $12.3 million (2008 – $38.4 million).