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TD BANK GROUP ANNUAL REPORT 2011 FINANCIAL RESULTS98
Sensitivity Analysis of Level 3 Financial Assets and Liabilities
(millions of Canadian dollars) 2011 2010
Impact to net assets Impact to net assets
Decrease in Increase in Decrease in Increase in
fair value fair value fair value fair value
FINANCIAL ASSETS
Trading securities
Government and government related securities
Canadian government debt
Federal $ – $ – $ – $ –
Provinces – – – –
U.S. federal, state, municipal governments, and agencies debt – – 1 1
Other OECD government guaranteed debt – – – –
Other debt securities
Canadian issuers – – 1 1
Other issuers 1 1 – –
Equity securities
Common shares – – – –
Retained interests 45 47 52 54
Total trading securities 46 48 54 56
Available-for-sale securities
Government and government related securities
U.S. federal, state, municipal governments, and agencies debt – – – –
Debt securities reclassified from trading 4 4 1 1
Total available for sale securities 4 4 1 1
Loans – – 2 2
Derivatives 12 24 3 25
FINANCIAL LIABILITIES
Trading deposits 3 6 3 2
Obligations related to securities sold short – – 1 1
Derivatives 58 36 49 24
Total $ 123 $ 118 $ 113 $ 111
A Level 3 financial asset or liability is first recognized at its transaction
price. The difference between the transaction price at initial recognition
and the value determined at that date using a valuation technique is
not recognized in income until the non-observable inputs used to value
these instruments become observable. The following table summarizes
the aggregate difference yet to be recognized in net income due to the
difference between the transaction price and the amount determined
using valuation techniques with significant non-observable market inputs.
(millions of Canadian dollars) 2011 2010
Balance at beginning of year $ 12 $ 19
New transactions 19 11
Recognized in the Consolidated Statement
of Income during the year (7) (18)
Balance at end of year $ 24 $ 12
The following table summarizes the potential effect of using reasonable
possible alternative assumptions for financial assets and financial liabilities
held, as at October 31, 2011 and 2010, that are classified in Level 3
of the fair value hierarchy. The Bank used the following approach to
develop the sensitivity analysis assumptions for Level 3 financial assets
and financial liabilities: For interest rate derivatives, the sensitivity is
calculated by shocking the volatility of unobservable spreads. For credit
derivatives, unobservable credit spreads are shocked using assumptions
derived from the underlying bond position credit spreads. For equity
derivatives, the sensitivity is calculated by shocking volatility, dividends,
correlation, or the price of the underlying equity instrument. For retained
interests, the sensitivity analysis is described in more detail in Note 5,
and is calculated by changing the estimates of prepayment rates.