TD Bank 2014 Annual Report Download - page 166

TD BANK GROUP ANNUAL REPORT 2014 FINANCIAL RESULTS164
STRUCTURED ENTITIES
NOTE 10
SPONSORED STRUCTURED ENTITIES
The following section outlines the Bank’s involvement with key
sponsored structured entities:
Securitizations
The Bank securitizes its own assets and facilitates the securitization of
client assets through structured entities, such as conduits, which issue
asset-backed commercial paper (ABCP) or other securitization entities
which issue longer-dated term securities. Securitizations are an impor-
tant source of liquidity for the Bank, allowing it to diversify its funding
sources and to optimize its balance sheet management approach.
Such securitizations serve a similar purpose for the Bank’s clients, who
transfer assets into the Bank’s securitization entities in return for cash
generated through the issuance of ABCP or term securities to third
party investors. The Bank has no rights to the assets as they are owned
by the securitization entity.
The Bank sponsors both single-seller and multi-seller securitization
conduits. Depending on the specifics of the entity, the variable returns
absorbed through ABCP may be significantly mitigated by variable
returns retained by the sellers. The Bank provides liquidity facilities to
certain single-seller and multi-seller conduits for the benefit of ABCP
investors. The liquidity agreements are structured as loan facilities
between the Bank, as the sole liquidity lender, and the Bank-sponsored
trusts. If a trust experiences difficulty issuing ABCP due to illiquidity in
the commercial market, the trust may draw on the loan facility, and
use the proceeds to pay maturing ABCP. The liquidity facilities cannot
be drawn if an entity is insolvent or bankrupt, preconditions that must
be satisfied preceding each advance (that is, draw-down on the facility).
These preconditions are in place so that the Bank does not provide
credit enhancement through the loan facilities to the conduit. The Bank’s
exposure to the variable returns of these conduits from its provision of
liquidity facilities and any related commitments is mitigated by the
A structured entity is typically created to accomplish a narrow, well-
defined objective and may take the form of a corporation, trust,
partnership, or unincorporated entity. The Bank uses structured entities
for a variety of purposes including: (1) to facilitate the transfer of
specified risks to clients; (2) as financing vehicles for itself or for clients;
or (3) to segregate assets on behalf of investors. The Bank is typically
restricted from accessing the assets of the structured entity under the
relevant arrangements.
Legal restrictions often impose limits on the decision-making power
that the entity’s governing board, trustee or management have over
the economic activities of the entity. Control over structured entities is
not typically determined on the basis of voting rights as any such
voting rights may not confer substantive power over the key economic
activities of the entity. As a result, structured entities are consolidated
when the substance of the relationship between the Bank and the
entity indicates that the entity is controlled by the Bank, in accordance
with the Bank’s accounting policy.
The Bank is involved with structured entities that it sponsors as
well as entities sponsored by third-parties. Factors assessed when
determining if the Bank is the sponsor of a structured entity include
whether the Bank is the predominant user of the entity; whether the
entity’s branding or marketing identity is linked with the Bank; and
whether the Bank provides an implicit or explicit guarantee of the
entity’s performance to investors or other third parties. The Bank is
not considered to be the sponsor of a structured entity if it only
provides arm’s-length services to the entity, for example, by acting
as administrator, distributor, custodian, or loan servicer. Sponsorship
of a structured entity may indicate that the Bank had power over
the entity at inception; however, this is not sufficient to determine if
the Bank consolidates the entity. Regardless of whether or not the
Bank sponsors an entity, consolidation is determined on a case-by-
case basis.
TRANSFERS OF FINANCIAL ASSETS QUALIFYING
FOR DERECOGNITION
Transferred financial assets that are derecognized in their
entirety but where the Bank has a continuing involvement
Continuing involvement may arise if the Bank retains any contractual
rights or obligations subsequent to the transfer of financial assets.
Certain business and government loans securitized by the Bank are
derecognized from the Bank’s Consolidated Balance Sheet. In instances
where the Bank fully derecognizes business and government loans,
the Bank may be exposed to the risks of transferred loans through a
retained interest. As at October 31, 2014, the fair value of retained
interests was $44 million (October 31, 2013 – $52 million). There are
no expected credit losses on the retained interests of the securitized
business and government loans as the mortgages are all government
insured. A gain or loss on sale of the loans is recognized immediately
in other income after considering the effect of hedge accounting
on the assets sold, if applicable. The amount of the gain or loss
recognized depends on the previous carrying values of the loans
involved in the transfer, allocated between the assets sold and
the retained interests based on their relative fair values at the
date of transfer. For the year ended October 31, 2014, the trading
income recognized on the retained interest was $3 million
(October 31, 2013 – $2 million).
Certain portfolios of U.S. residential mortgages originated by the
Bank are sold and derecognized from the Bank’s Consolidated Balance
Sheet. In certain instances, the Bank has a continuing involvement to
service those loans. As at October 31, 2014, the carrying value of these
servicing rights was $16 million (October 31, 2013 – $17 million) and the
fair value was $22 million (October 31, 2013 – $22 million). A gain or
loss on sale of the loans is recognized immediately in other income. The
gain (loss) on sale of the loans for the year ended October 31, 2014,
was $7 million (October 31, 2013 – $41 million).
TRANSFER OF DEBT SECURITIES CLASSIFIED AS LOANS
During the year ended October 31, 2014, the Bank did not sell
any of its non-agency collateralized mortgage obligation securities
(October 31, 2013 – sales of $539 million resulting in a gain of
$108 million recorded in Other income on the Consolidated
Statement of Income).