TD Bank 2014 Annual Report Download - page 167

TD BANK GROUP ANNUAL REPORT 2014 FINANCIAL RESULTS 165
sellers’ continued exposure to variable returns, as described below. The
Bank provides administration and securities distribution services to its
sponsored securitization conduits, which may result in it holding an
investment in the ABCP issued by these entities. The ABCP inventory
held is monitored as part of the ongoing consolidation assessment
process. In some cases, the Bank may also provide credit enhancements
or may transact derivatives with securitization conduits. The Bank
earns fees from the conduits which are recognized when earned.
The Bank sells assets to single-seller conduits which it controls and
consolidates. Control results from the Bank’s power over the entity’s
key economic decisions, predominantly, the mix of assets sold into the
conduit; and exposure to the variable returns of the transferred assets,
usually through a derivative or the provision of credit mitigation in the
form of cash reserves, over-collateralization, or guarantees over the
performance of the entity’s portfolio of assets.
Multi-seller conduits provide customers with alternate sources of
financing through the securitization of their assets. The customers sell
their receivables to the conduit and the conduit funds its purchase of
the receivables through the issuance of short-term commercial paper
to third party investors. These conduits are similar to single-seller
conduits except that assets are received from more than one seller
and comingled into a single portfolio of assets. The Bank is typically
deemed to have power over the entity’s key economic decisions,
namely, the selection of sellers and related assets sold as well as other
decisions related to the management of risk in the vehicle. Sellers of
assets in multi-seller conduits typically continue to be exposed to the
variable returns of their portion of transferred assets, through deriva-
tives or the provision of credit mitigation. The Bank’s exposure to the
variable returns of multi seller conduits from its provision of liquidity
facilities and any related commitments is mitigated by the sellers’
continued exposure to variable returns from the entity. While the
Bank may have power over multi-seller conduits, it is not exposed to
significant variable returns and does not consolidate such entities.
Investment Funds and other Asset Management Entities
As part of its asset management business, the Bank creates investment
funds and trusts (including mutual funds), enabling it to provide its
clients with a broad range of diversified exposure to different risk
profiles, in accordance with the client’s risk appetite. Such entities
may be actively managed or may be passively directed, for example,
through the tracking of a specified index, depending on the entity’s
investment strategy. Financing for these entities is obtained through the
issuance of securities to investors, typically in the form of fund units.
Based on each entity’s specific strategy and risk profile, the proceeds
from this issuance are used by the entity to purchase a portfolio of
assets. An entity’s portfolio may contain investments in securities,
derivatives, or other assets, including cash. At the inception of a new
investment fund or trust, the Bank will typically invest an amount of
seed capital in the entity, allowing it to establish a performance history
in the market. Over time, the Bank sells its seed capital holdings to
third party investors, as the entity’s assets under management (AUM)
increases. As a result, the Bank’s holding of seed capital investment in
its own sponsored investment funds and trusts is typically not signifi-
cant to the Consolidated Financial Statements. Aside from any seed
capital investments, the Bank’s interest in these entities is generally
limited to fees earned for the provision of asset management services.
The Bank does not typically provide guarantees over the performance
of these funds.
The Bank also sponsors the TD Mortgage Fund (the “Fund”), which is
a mutual fund containing a portfolio of Canadian residential mortgages
sold by the Bank into the fund. The Bank has a put option with the
TD Mortgage Fund under which it is required to repurchase defaulted
mortgage loans at their carrying amount from the fund. The Bank’s
exposure under this put option is mitigated as the mortgages in the
Fund are collateralized and government guaranteed. In addition to the
put option, the Bank provides a liquidity facility to the TD Mortgage
Fund for the benefit of fund unit investors. Under the liquidity facility,
the Bank is obligated to repurchase mortgages at their fair value to
enable the Fund to honour unit-holder redemptions in the event that
the Fund experiences a liquidity event. During fiscal 2014, the fair
value of the mortgages repurchased as a result of a liquidity event was
$84 million (2013 – $192 million). Generally, the term of these agree-
ments do not exceed five years. While the Bank has power over the
TD Mortgage Fund, it does not absorb a significant proportion of variable
returns from the Fund, as the variability in the fund relates primarily
to the credit risk of the underlying mortgages which are government
guaranteed. As a result, the Bank does not consolidate the Fund.
The Bank is typically considered to have power over the key
economic decisions of sponsored asset management entities; however,
it does not consolidate an entity unless it is also exposed to significant
variable returns of the entity. This determination is made on a case-by-
case basis, in accordance with the Bank’s consolidation policy.
Financing Vehicles
The Bank may use structured entities to provide a cost-effective means
of financing its operations, including raising capital or obtaining fund-
ing. These structured entities include: (1) TD Capital Trust III and
TD Capital Trust IV (together the “CaTS Entities”); and (2) TD Covered
Bond Guarantor Limited Partnership and TD Covered Bond (Legislative)
Guarantor Limited Partnership (together the “Covered Bond Entities”).
The CaTS Entities issued innovative capital securities which currently
count as Tier 1 Capital of the Bank but, under Basel III, are considered
non-qualifying capital instruments and are subject to the Basel III
phase-out rules. The proceeds from these issuances were invested in
assets purchased from the Bank which generate income for distribu-
tion to investors. The Bank is considered to have decision-making
power over the key economic activities of the CaTS Entities; however,
it does not consolidate an entity unless it is also exposed to significant
variable returns of the entity. The Bank is exposed to the risks and
returns from certain CaTS Entities as it holds the residual risks in those
entities, typically through retaining all the voting securities of the
entity. Where the entity’s portfolio of assets are exposed to risks which
are not related to the Bank’s own credit risk, the Bank is considered to
be exposed to significant variable returns of the entity and consolidates
the entity. However, certain CaTS Entities hold assets which are only
exposed to the Bank’s own credit risk. In this case, the Bank does
not absorb significant variable returns of the entity as it is ultimately
exposed only to its own credit risk, and does not consolidate. Refer
to Note 20, Capital Trust Securities for further details.
The Bank issues, or has issued, debt under its covered bond
programs where the principal and interest payments of the notes
are guaranteed by a covered bond entity, with such guarantee secured
by a portfolio of assets held by the entity. Investors in the Bank’s
covered bonds may have recourse to the Bank should the assets of
the covered bond entity be insufficient to satisfy the covered bond
liabilities. The Bank consolidates the Covered Bond Entities as it has
power over the key economic activities and retains all the variable
returns in these entities.