TD Bank 2011 Annual Report Download - page 70

TD BANK GROUP ANNUAL REPORT 2011 MANAGEMENT’S DISCUSSION AND ANALYSIS68
• 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, and including 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 underwriting inventories,
and review the usage of capital and assets in Wholesale Banking.
HOW WE MANAGE MARKET RISK IN TRADING ACTIVITIES
Market risk plays a key part in the assessment of any trading business
strategy. We launch new trading initiatives or expand existing ones
only if the risk has been thoroughly assessed and is judged to be
within our risk appetite and business expertise, and if the appropriate
infrastructure is in place to monitor, control, and manage the risk.
Trading Limits
We set trading limits that are consistent with the approved business
strategy for each business and our tolerance for the associated market
risk, aligned to TD’s market risk appetite. In setting limits, we take into
account market volatility, market liquidity, organizational experience
and business strategy. Limits are prescribed at the portfolio level,
business line level, and in Wholesale Banking in aggregate.
The core market risk limits are based on the key risk drivers in the
business and include notional limits, credit spread limits, yield curve
shift limits, price, and volatility shift limits.
Another primary measure of trading limits is Value-at-Risk (VaR),
which we use to monitor and control overall risk levels and to calculate
the regulatory capital required for market risk in trading activities. VaR
measures the adverse impact that potential changes in market rates
and prices could have on the value of a portfolio over a specified
period of time.
At the end of each day, risk positions are compared with risk limits,
and any excesses are reported in accordance with established market
risk policies and procedures.
Other Credit Risk Exposures
Non-trading Equity Exposures
Our non-trading equity exposures are at a level that represents less
than 5% of our combined Tier 1 and Tier 2 capital. As a result, we
use OSFI-prescribed risk weights to calculate our RWA on non-trading
equity exposures.
Securitization Exposures
For externally rated securitization exposures, we use both the Standardized
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 portfo-
lios, 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 TD 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, 2011 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.
sheet exposures consist primarily of outstanding loans, acceptances,
non-trading securities, derivatives, and certain other repo-style transac-
tions. 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:
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
(millions of Canadian dollars) As at Oct. 31, 2011 As at Oct. 31, 2010
Standardized AIRB Total Standardized AIRB Total
Retail
Residential secured $ 17,242 $ 161,116 $ 178,358 $ 13,486 $ 146,777 $ 160,263
Qualifying revolving retail – 42,736 42,736 – 40,940 40,940
Other retail 25,139 30,520 55,659 17,943 28,205 46,148
42,381 234,372 276,753 31,429 215,922 247,351
Non-retail
Corporate 53,165 123,292 176,457 50,436 114,603 165,039
Sovereign 23,559 64,432 87,991 8,872 63,633 72,505
Bank 20,363 119,683 140,046 20,916 112,003 132,919
97,087 307,407 404,494 80,224 290,239 370,463
Gross credit risk exposures $ 139,468 $ 541,779 $ 681,247 $ 111,653 $ 506,161 $ 617,814
1 Gross credit risk exposures represent EAD and are before the effects of credit risk
mitigation. This table excludes securitization and equity exposures.
GROSS CREDIT RISK EXPOSURE – BASEL II: STANDARDIZED AND AIRB APPROACHES1
TABLE 50