TD Bank 2012 Annual Report Download - page 109

TD BANK GROUP ANNUAL REPORT 2012 FINANCIAL RESULTS 107
The fair value of loans carried at fair value through profit or loss,
which includes trading loans and loans designated at fair value
through profit or loss, is determined using observable market prices,
where available. Where the Bank is a market maker for loans traded in
the secondary market, fair value is determined using executed prices,
or prices for comparable trades. For those loans where the Bank is not
a market maker, the Bank obtains broker quotes from other reputable
dealers, and corroborates this information using valuation techniques
or obtaining consensus or composite prices from pricing services.
Commodities
The fair value of physical commodities is based on quoted prices in
active markets, where available. The Bank also transacts in commodity
derivative contracts which can be traded on an exchange or in OTC
markets. The fair value determination of derivative financial instruments
is described below.
Derivative Financial Instruments
The fair value of exchange-traded derivative financial instruments is
based on quoted market prices. The fair value of OTC derivative financial
instruments is estimated using well established valuation techniques,
such as discounted cash flow techniques, the Black-Scholes model, and
Monte Carlo simulation. The valuation models incorporate prevailing
market rates and prices of underlying instruments with similar maturities
and characteristics.
Prices derived by using models are recognized net of valuation
adjustments. The inputs used in the valuation models depend on the
type of derivative and the nature of the underlying instrument and are
specific to the instrument being valued. Inputs can include, but are not
limited to, interest rate yield curves, foreign exchange rates, dividend
yield projections, commodity spot and forward prices, recovery rates,
volatilities, spot prices, and correlation.
A credit risk valuation adjustment (CRVA) is recognized against the
model value of OTC derivatives to account for the uncertainty that
either counterparty in a derivative transaction may not be able to fulfill
its obligations under the transaction. In determining CRVA, the Bank
takes into account master netting agreements and collateral, and
considers the creditworthiness of the counterparty and the Bank itself,
in assessing potential future amounts owed to, or by the Bank.
In the case of defaulted counterparties, a specific provision is estab-
lished to recognize the estimated realizable value, net of collateral
held, based on market pricing in effect at the time the default is recog-
nized. In these instances, the estimated realizable value is measured by
discounting the expected future cash flows at an appropriate effective
interest rate immediately prior to impairment, after adjusting for the
value of collateral. The fair value of non-trading derivatives is deter-
mined on the same basis as for trading derivatives.
Deposits
The estimated fair value of term deposits is determined by discounting
the contractual cash flows using interest rates currently offered for
deposits with similar terms.
For deposits with no defined maturities, the Bank considers fair
value to equal carrying value, which is equivalent to the amount
payable on the balance sheet date.
For trading deposits, fair value is determined using discounted cash
flow valuation techniques which maximize the use of observable
market inputs such as benchmark yield curves and foreign exchange
rates. The Bank considers the impact of its own creditworthiness in the
valuation of these deposits by reference to observable market inputs.
Securitization Liabilities
The fair value of securitization liabilities is based on quoted market
prices or quoted market prices for similar financial instruments, where
available. Where quoted prices are not available, fair value is determined
using valuation techniques, which maximize the use of observable
inputs, such as Canada Mortgage Bond prices.
Obligations Related to Securities Sold Short
The fair value of these obligations is based on the fair value of the
underlying securities, which can include equity or debt securities. As
these obligations are fully collateralized, the method used to determine
fair value would be the same as that of the relevant underlying equity
or debt securities.
Securities Purchased Under Reverse Repurchase
Agreements and Obligations Related to Securities Sold
under Repurchase Agreements
Commodities purchased or sold with an agreement to sell or repur-
chase them at a later date at a fixed price are carried at fair value on
the Consolidated Balance Sheet. The fair value of these agreements is
based on valuation techniques such as discounted cash flow models
which maximize the use of observable market inputs such as interest
rate swap curves and commodity forward prices.
Subordinated Notes and Debentures
The fair value of subordinated notes and debentures are based on
quoted market prices for similar issues or current rates offered to the
Bank for debt of equivalent credit quality and remaining maturity.
Liabilities for Preferred Shares and Capital Trust Securities
The fair value for preferred share liabilities and capital trust
securities are based on quoted market prices of the same or similar
financial instruments.