TD Bank 2009 Annual Report Download - page 76

TD BANK FINANCIAL GROUP ANNUAL REPORT 2009 MANAGEMENT’S DISCUSSION AND ANALYSIS72
In all but exceptional situations, we secure collateral by taking
possession and controlling it in a jurisdiction where we can legally
enforce our collateral rights. Exceptionally, and when demanded by
our counterparty, we hold or pledge collateral with a third-party
custodian. We document third-party arrangements with a Custody
and Control Agreement.
We may take guarantees to reduce the risk in credit exposures. We
only recognize guarantees that are provided by entities with a better
risk rating than that of the borrower or counterparty to the transaction.
The Bank makes use of credit derivatives to mitigate credit risk. The
credit, legal, and other risks associated with these transactions are
controlled through well established procedures. Our policy is to enter
into these transactions with investment grade financial institutions.
Credit risk to these counterparties is managed through the same
approval, limit and monitoring processes we use for all counterparties
to which we have credit exposure. We also use collateral and master
netting agreements to mitigate derivative counterparty exposure.
Other Credit Risk Exposures
Non-trading Equity Exposures
In 2009, we reduced our non-trading equity exposures to a level that
represents less than 10% of our combined Tier 1 and Tier 2 capital. As
a result, non-trading equity exposures are excluded from the Internal
Ratings Based (IRB) treatment and are assigned a risk weight of 100%.
Securitization Exposures
For externally rated securitization exposures, we use both the Standard-
ized
Approach and the Ratings Based Approach (RBA). Both approaches
assign risk weights to exposures using external ratings. We use ratings
assigned by one or more of Moody’s Investors Service, Standard & Poor’s,
Fitch and DBRS. The RBA also takes into account additional factors
including the time horizon of the rating (long-term or short-term),
the amount of detail available on the underlying asset pool and the
seniority of the position.
We use the Internal Assessment Approach (IAA) to calculate RWA
for our exposures relating to asset-backed commercial paper (ABCP)
securitizations that are not externally rated. Under the IAA, exposures
are multiplied by OSFI-prescribed risk weights to calculate RWA.
Market Risk
Market risk is the risk of loss in financial instruments or the balance
sheet due to adverse movements in market factors such as interest
and exchange rates, prices, credit spreads, volatilities and correlations.
We are exposed to market risk in our trading and investment port-
folios, as well as through our non-trading activities. In our trading and
investment portfolios, we are active participants in the market, seeking
to realize returns for the Bank through careful management of our
positions and inventories. In our non-trading activities, we are exposed
to market risk through the transactions that our customers execute
with us.
We comply with the Basel II market risk requirements as at October 31,
2009 using the Internal Model Method.
MARKET RISK IN TRADING ACTIVITIES
The four main trading activities that expose us to market risk are:
•
Market making – We provide markets for a large number of securities
and other traded products. We keep an inventory of these securities
to buy from and sell to investors, profiting from the spread between
bid and ask prices.
•Sales – We provide a wide variety of financial products to meet the
needs of our clients, earning money on these products from mark-
ups and commissions.
•Arbitrage – We take positions in certain markets or products and
offset the risk in other markets or products. Our knowledge of various
markets and products and how they relate to one another allows us
to identify and benefit from pricing anomalies.
•Positioning – We aim to make profits by taking positions in certain
financial markets in anticipation of changes in those markets.
WHO MANAGES MARKET RISK IN TRADING ACTIVITIES
Primary responsibility for managing market risk in trading activities lies
with Wholesale Banking with oversight from Trading Risk within Risk
Management. There is a Market Risk and Capital Committee chaired
by the Senior Vice President, Trading Risk Management and includes
Wholesale Banking senior management which meets regularly to
conduct a review of the market risk profile and trading results of our
trading businesses, recommend changes to risk policies, review under-
writing inventories, and review the usage of capital and assets in
Wholesale Banking.
Gross Credit Risk Exposure
Gross credit risk exposure, also referred to as exposure at default (EAD),
is the total amount we are exposed to at the time of default of a loan
and is measured before specific provisions or write-offs. Gross credit
risk exposure does not reflect the effects of credit risk mitigation and
includes both on- and off-balance sheet exposures. On-balance sheet
exposures consist primarily of outstanding loans, acceptances, non-
trading securities, derivatives and certain other repo-style transactions.
Off-balance sheet exposures consist primarily of undrawn commitments,
guarantees and certain other repo-style transactions.
Gross credit risk exposure for the two approaches we use to
measure
credit risk is given in the following table:
(millions of Canadian dollars) As at Oct. 31, 2009 As at Oct. 31, 2008
Standardized AIRB Total Standardized AIRB Total
Retail
Residential secured $ 10,606 $ 137,448 $ 148,054 $ 7,733 $ 134,930 $ 142,663
Qualifying revolving retail – 40,894 40,894 – 41,461 41,461
Other retail 17,252 23,636 40,888 15,386 20,415 35,801
Total retail 27,858 201,978 229,836 23,119 196,806 219,925
Non-retail
Corporate 45,277 99,856 145,133 44,991 113,119 158,110
Sovereign 2,144 57,958 60,102 305 57,856 58,161
Bank 18,144 91,089 109,233 8,302 91,635 99,937
Total non-retail 65,565 248,903 314,468 53,598 262,610 316,208
Gross credit risk exposures $ 93,423 $ 450,881 $ 544,304 $ 76,717 $ 459,416 $ 536,133
GROSS CREDIT RISK EXPOSURE1– BASEL II: STANDARDIZED AND AIRB APPROACHES
TABLE 39
1Gross credit risk exposures represent EAD and are before the effects of credit risk
mitigation. This table excludes securitization and equity exposures.