TD Bank 2012 Annual Report Download - page 117

TD BANK GROUP ANNUAL REPORT 2012 FINANCIAL RESULTS 115
FINANCIAL ASSETS AND LIABILITIES DESIGNATED
AT FAIR VALUE
Loans Designated at Fair Value through Profit or Loss
Certain business and government loans held within a trading portfolio
or economically hedged with derivatives are designated at fair value
through profit or loss if the criteria described in Note 2 are met. The
fair value of loans designated at fair value through profit or loss was
$13 million as at October 31, 2012 (October 31, 2011 – $14 million;
November 1, 2010 – $85 million), which represents their maximum
credit exposure.
These loans are managed within risk limits that have been approved
by the Bank’s risk management group and are hedged for credit risk
with credit derivatives.
As at October 31, 2012, the notional value of credit derivatives
used to mitigate the maximum exposure to credit risk on these loans
was $140 million (October 31, 2011 – $140 million; November 1, 2010
– $153 million) and fair value was $(15) million (October 31, 2011 –
$(11) million; November 1, 2010 – $(8) million). The Bank also uses
other instruments within this portfolio to hedge its total maximum
exposure to loss.
As at October 31, 2012, October 31, 2011, and November 1, 2010,
the cumulative change in fair value of these loans attributable to
changes in credit risk was $12 million, $9 million and nil, respectively,
calculated by determining the changes in credit spread implicit in the
fair value of the loans. As at the same dates, the cumulative change in
fair value of the credit derivatives hedging these loans used to mitigate
credit risk was $(15) million, $(11) million and $(8) million, respectively.
During the year ended October 31, 2012, income (loss) representing
net changes in the fair value of these loans due to changes in credit
risk of the loans was $5 million (October 31, 2011– $4 million). During
the same period, the net changes in fair value of the credit derivatives
hedging these loans which were used to mitigate credit risk were
$(12) million (October 31, 2011 – $(12) million).
Securities Designated at Fair Value through Profit or Loss
Certain securities that support insurance reserves within certain of
the Bank’s insurance subsidiaries have been designated at fair value
through profit or loss. The actuarial valuation of the insurance reserve
is measured using a discount factor which is based on the yield of the
supporting invested assets, with changes in the discount factor being
recognized in the Consolidated Statement of Income. By designating
the securities at fair value through profit or loss, the unrealized gain or
loss on the securities is recognized in the Consolidated Statement of
Income in the same period as a portion of the loss or income resulting
from changes to the discount rate used to value the insurance liabilities.
In addition, certain government and government insured securities
have been combined with derivatives to form economic hedging rela-
tionships. These securities are being held as part of the Bank’s overall
interest rate risk management strategy and have been designated at
fair value through profit or loss. The derivatives are carried at fair value,
with the change in fair value recognized in non-interest income.
Securitization Liabilities at Fair Value
Securitization liabilities at fair value include securitization liabilities
classified as trading and those designated at fair value through profit
or loss. The fair value of a financial liability incorporates the credit risk
of that financial liability. The holders of the securitization liabilities are
not exposed to credit risk of the Bank and accordingly, changes in the
Bank’s own credit do not impact the determination of fair value.
The amount that the Bank would be contractually required to pay
at maturity for all securitization liabilities designated at fair value
through profit or loss was $445 million less than the carrying amount
as at October 31, 2012, $811 million as at October 31, 2011 and
$923 million as at November 1, 2010.
Other Liabilities Designated at Fair Value through Profit or Loss
The Bank issues certain loan commitments to customers to provide a
mortgage at a fixed rate. These commitments are economically hedged
with derivatives and other financial instruments where the changes in
fair value are recognized in non-interest income. The designation of
these loan commitments at fair value through profit or loss eliminates
an accounting mismatch that would otherwise arise. Due to the short
term nature of these loan commitments, changes in the Bank’s
own credit do not have a significant impact on the determination of
fair value.
Income (Loss) from Changes in Fair Value of Financial Assets and
Liabilities Designated at Fair Value through Profit or Loss
During the year ended October 31, 2012 the income (loss) represent-
ing net changes in the fair value of financial assets and liabilities
designated at fair value through profit or loss was $(5) million (2011 –
$(306) million).
SECURITIES
NOTE 6
tax) was recorded relating to the reclassified debt securities. The
increase in fair value of these securities during the year ended
October 31, 2012 of $26 million after tax, (October 31, 2011 –
decrease of $186 million after tax) was recorded in other comprehen-
sive income. Had the Bank not reclassified these debt securities, the
change in the fair value of these debt securities would have been
included as part of trading income, the impact of which would have
resulted in an increase in net income for the year ended October 31,
2012 of $26 million after tax (October 31, 2011 – decrease in net
income of $186 million after tax). During the year ended October 31,
2012, reclassified debt securities with a fair value of $789 million
(October 31, 2011 – $2,162 million) were sold or matured, and
$23 million after tax (October 31, 2011 – $69 million after tax) was
recorded in net gains from available-for-sale securities.
RECLASSIFICATION OF CERTAIN DEBT SECURITIES –
TRADING TO AVAILABLE-FOR-SALE
During 2008, the Bank changed its trading strategy with respect to
certain debt securities as a result of deterioration in markets and
severe dislocation in the credit market. These debt securities were
initially recorded as trading securities measured at fair value with any
changes in fair value as well as any gains or losses realized on disposal
recognized in trading income. Since the Bank no longer intended to
actively trade in these debt securities, the Bank reclassified these debt
securities from trading to available-for-sale effective August 1, 2008.
The fair value of the reclassified debt securities was $1,264 million
as at October 31, 2012 (October 31, 2011 – $1,986 million; November 1,
2010 – $4,228 million). For the year ended October 31, 2012, net
interest income of $90 million (October 31, 2011 – $183 million after