TD Bank 2012 Annual Report Download - page 60

TD BANK GROUP ANNUAL REPORT 2012 MANAGEMENT’S DISCUSSION AND ANALYSIS58
In the normal course of operations, the Bank engages in a variety of
financial transactions that, under IFRS, are either not recorded on the
Consolidated Balance Sheet or are recorded in amounts that differ
from the full contract or notional amounts. These off-balance sheet
arrangements involve, among other risks, varying elements of market,
credit, and liquidity risk which are discussed in the “Managing Risk”
section of this MD&A. Off-balance sheet arrangements are generally
undertaken for risk management, capital management, and funding
management purposes and include securitizations, contractual obliga-
tions, and certain commitments and guarantees.
SPECIAL PURPOSE ENTITIES
The Bank carries out certain business activities via arrangements with
special purpose entities (SPEs). We use SPEs to raise capital, obtain
sources of liquidity by securitizing certain of the Bank’s financial assets,
to assist our clients in securitizing their financial assets, and to create
investment products for our clients. SPEs may take the form of a
corporation, trust, partnership or unincorporated entity. SPEs are
consolidated by the Bank where the substance of the relationship
between the Bank and the entity indicates control. Potential indicators
of control include, amongst others, an assessment of the Bank’s expo-
sure to the risks and rewards of the SPE. The potential consolidation
of SPEs is assessed at inception of each entity, and has been revisited
upon transition to IFRS. Additionally, the consolidation analysis is revis-
ited at least quarterly if a change in circumstance would indicate that a
reassessment is necessary. For example, this would occur if subsequent
to the initial assessment the Bank appears to gain additional control or
decision making power over the SPE, a reassessment is performed
to determine whether the SPE is consolidated. Securitizations are an
important part of the financial markets, providing liquidity by facilitating
investor access to specific portfolios of assets and risks. In a typical
securitization structure, the Bank sells assets to an SPE and the SPE
funds the purchase of those assets by issuing securities to investors.
SPEs are typically set up for a single, discrete purpose, are not operat-
ing entities and usually have no employees. The legal documents that
govern the transaction describe how the cash earned on the assets held
in the SPE must be allocated to the investors and other parties that
have rights to these cash flows. The Bank is involved in SPEs through
the securitization of Bank-originated assets, securitization of third
party-originated assets, and other investment and financing products.
Securitization of Bank-Originated Assets
The Bank securitizes residential mortgages, personal loans, automobile
loans, credit card loans, and business and government loans to
enhance its liquidity position, to diversify sources of funding and to
optimize the management of the balance sheet. Certain automobile
loans acquired by the Bank as part of the acquisition of Chrysler
Financial were originated in the U.S. and sold to U.S. securitization
structures. All other products securitized by the Bank were originated
in Canada and sold to Canadian securitization structures or Canadian
non-SPE third parties. Details of securitization exposures through
significant unconsolidated and consolidated SPEs, and non-SPE third
parties are as follows:
GROUP FINANCIAL CONDITION
Securitization and Off-Balance Sheet Arrangements
(millions of Canadian dollars) Significant
Significant consolidated
unconsolidated SPEs SPEs Non-SPE third-parties
Carrying Carrying
value of value of
Securitized retained Securitized Securitized retained
assets interests assets assets2 interests2
October 31, 2012
Residential mortgage loans $ 21,176 $ – $ – $ 23,446 $ –
Consumer instalment and other personal loans3,4 – – 5,461 – –
Business and government loans 79 – – 2,388 53
Credit card loans – – 1,251 – –
Total exposure $ 21,255 $ – $ 6,712 $ 25,834 $ 53
October 31, 2011
Residential mortgage loans $ 21,953 $ – $ – $ 22,917 $ –
Consumer instalment and other personal loans3,4 – – 7,175 – –
Business and government loans 95 – – 2,311 52
Credit card loans – – – – –
Total exposure $ 22,048 $ – $ 7,175 $ 25,228 $ 52
EXPOSURES SECURITIZED BY THE BANK AS ORIGINATOR1
TABLE 47
1 Included in the table above are all assets securitized by the Bank, irrespective
of whether they are on- or off-balance sheet for accounting purposes, including
those that did not qualify for derecognition.
2 Retained interest relating to multi-unit residential and social housing mortgage
loans were reclassified from residential mortgage loans to business and govern-
ment loans. Securitized mortgages corresponding to these retained interests have
also been included in business and government loans. These changes have been
applied retroactively.
Residential Mortgage Loans
The Bank securitizes residential mortgage loans through significant
unconsolidated SPEs and Canadian non-SPE third-parties. Residential
mortgage loans securitized by the Bank may give rise to full or partial
derecognition of the financial assets depending on the individual
arrangement of each transaction. In instances where the Bank either
3 Included in personal loans as at October 31, 2012 are $361 million of automobile
loans acquired as part of the Bank’s acquisition of Chrysler Financial (October 31,
2011 – $2,075 million).
4 In securitization transactions that the Bank has undertaken for its own assets,
it has acted as an originating bank and retained securitization exposure from
a capital perspective.
fully or partially derecognizes residential mortgage loans, the Bank may
be exposed to the risks of transferred loans through retained interests.
As at October 31, 2012, the Bank has not recognized any retained
interests due to the securitization of residential mortgage loans on
its Consolidated Balance Sheet.