TD Bank 2011 Annual Report Download - page 113

TD BANK GROUP ANNUAL REPORT 2011 FINANCIAL RESULTS 111
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 $5.5 billion as at October 31, 2011
(2010 – $5.3 billion). Further, the Bank has committed to an additional
$2.1 billion (2010 – $1.8 billion) in liquidity facilities for ABCP that
could potentially be issued by the conduits. As at October 31, 2011,
the Bank also provided deal-specific credit enhancement in the amount
of $17 million (2010 – $73 million).
Single-Seller Conduits
The Bank uses single-seller conduits to enhance its liquidity position,
to diversify its sources of funding, and to optimize management of its
balance sheet.
As at October 31, 2011, the single-seller conduits had $5.1 billion
(2010 – $5.1 billion) of commercial paper outstanding. While the prob-
ability of loss is negligible, the Bank’s maximum potential exposure to
loss for these conduits through the sole provision of liquidity facilities
(similar to multi-seller conduits mentioned above) was $5.1 billion
(2010 – $5.1 billion); $1.1 billion (2010 – $1.1 billion) of the assets
held by conduits are personal loans that are government insured.
Additionally, the Bank had retained interests of $120 million (2010 –
$121 million) relating to excess spread.
Other Financing Transactions
In April 2010, the Bank exited certain transactions where it provided
cost-efficient financing to U.S. corporate clients through VIEs. The
Bank no longer provides financing to these corporate clients under
these arrangements and as at October 31, 2011 and 2010, had no
exposure to these VIEs.
DERIVATIVES
NOTE 7
Derivative financial instruments are financial contracts that derive their
value from underlying changes in interest rates, foreign exchange rates,
credit spreads, commodity prices, equities, or other financial measures.
Such instruments include interest rate, foreign exchange, equity,
commodity and credit derivative contracts. The Bank uses these instru-
ments for trading purposes and non-trading purposes to manage the
risks associated with its funding and investment strategies.
DERIVATIVES HELD FOR TRADING PURPOSES
The Bank enters into trading derivative contracts to meet the needs of
its customers, to enter into trading positions, and in certain cases, to
manage risks related to its trading portfolio. Trading derivatives are
recorded at fair value with the resulting realized and unrealized gains
or losses recognized immediately in trading income.
DERIVATIVES HELD FOR NON-TRADING
When derivatives are held for non-trading purposes and when the
transactions meet the requirements of Section 3865, Hedges, they are
classified by the Bank as non-trading derivatives and receive hedge
accounting treatment, as appropriate. Certain derivative instruments
that are held for economic hedging purposes, and do not meet the
requirements of Section 3865, are also classified as non-trading deriva-
tives but the change in fair value of these derivatives is recognized in
non-interest income.
HEDGING RELATIONSHIPS
Hedge Accounting
At the inception of a hedging relationship, the Bank documents the
relationship between the hedging instrument and the hedged item, its
risk management objective and its strategy for undertaking the hedge.
The Bank also requires a documented assessment, both at hedge
inception and on an ongoing basis, of whether or not the derivatives
that are used in hedging transactions are highly effective in offsetting
the changes attributable to the hedged risks in the fair values or cash
flows of the hedged items. In order to be deemed effective, the hedging
instrument and the hedged item must be highly and inversely correlated
such that the changes in the fair value of the hedging instrument will
substantially offset the effects of the hedged exposure to the Bank
throughout the term of the hedging relationship. If a hedging relation-
ship becomes ineffective, it no longer qualifies for hedge accounting
and any subsequent change in the fair value of the hedging instrument
is recognized in earnings, without any mitigating impact in earnings,
where appropriate.
The change in fair value relating to the derivative component
excluded from the assessment of hedge effectiveness is recognized
immediately in the Consolidated Statement of Income.
When derivatives are designated as hedges, the Bank classifies them
either as: (i) hedges of the change in fair value of recognized assets
or liabilities or firm commitments (fair value hedges); (ii) hedges of the
variability in highly probable future cash flows attributable to a recog-
nized asset or liability, or a forecasted transaction (cash flow hedges);
or (iii) hedges of net investments in a foreign operation (net invest-
ment hedges).
Fair Value Hedges
The Bank’s fair value hedges principally consist of interest rate swaps
that are used to protect against changes in the fair value of fixed-
rate long-term financial instruments due to movements in market
interest rates.
Changes in the fair value of derivatives that are designated and
qualify as fair value hedging instruments are recorded in the Consoli-
dated Statement of Income, along with changes in the fair value of the
assets, liabilities or group thereof that are attributable to the hedged
risk. Any change in fair value relating to the ineffective portion of the
hedging relationship is recognized immediately in the Consolidated
Statement of Income in other income.
The cumulative adjustment to the carrying amount of the hedged
item (the basis adjustment) is amortized to the Consolidated Statement
of Income based on a recalculated effective interest rate over the
remaining expected life of the hedged item, with amortization beginning
no later than when the hedged item ceases to be adjusted for changes
in its fair value attributable to the hedged risk. Where the hedged item
has been derecognized, the basis adjustment is immediately released
to the Consolidated Statement of Income.
Cash Flow Hedges
The Bank is exposed to variability in future cash flows that are denomi-
nated in foreign currencies, as well as variability in future cash flows
of non-trading assets and liabilities that bear interest at variable rates,
or are expected to be refunded or reinvested in the future. The
amounts and timing of future cash flows are projected for each
hedged exposure on the basis of their contractual terms and other
relevant factors, including estimates of prepayments and defaults. The
aggregate cash flows across all hedged exposures over time form the
basis for identifying the effective portion of gains and losses on the
derivatives designated as cash flow hedges of forecasted transactions.
The effective portion of changes in the fair value of derivatives that
are designated and qualify as cash flow hedges is recognized in other
comprehensive income. Any change in fair value relating to the ineffec -
tive portion is recognized immediately in the Consolidated Statement
of Income in other income.
Amounts accumulated in other comprehensive income are reclassi-
fied to the Consolidated Statement of Income in the period in which
the hedged item affects income.
When a hedging instrument expires or is sold, or when a hedge no
longer meets the criteria for hedge accounting, any cumulative gain
or loss existing in other comprehensive income at that time remains in
other comprehensive income until the forecasted transaction is even-
tually recognized in the Consolidated Statement of Income. When a
forecasted transaction is no longer expected to occur, the cumulative