TD Bank 2014 Annual Report Download - page 175

TD BANK GROUP ANNUAL REPORT 2014 FINANCIAL RESULTS 173
The following table discloses the notional principal amount of over-
the-counter derivatives and exchange-traded derivatives based on
their contractual terms to maturity.
Derivatives by Term to Maturity
(billions of Canadian dollars) As at
October 31 October 31
2014 2013
Remaining term to maturity
Over Over Over
Within 1 year to 3 years to 5 years to Over
Notional Principal 1 year 3 years 5 years 10 years 10 years Total Total
Interest rate contracts
Futures $ 179 $ 47 $ 2 $ – $ – $ 228 $ 301
Forward rate agreements 251 32 – – – 283 173
Swaps 1,179 1,314 944 713 106 4,256 3,087
Options written 27 5 2 1 1 36 42
Options purchased 30 5 2 2 2 41 43
Total interest rate contracts 1,666 1,403 950 716 109 4,844 3,646
Foreign exchange contracts
Futures 20 15 1 – – 36 38
Forward contracts 498 37 14 – – 549 426
Swaps 1 – – – – 1 –
Cross-currency interest rate swaps 121 144 108 103 19 495 446
Options written 19 – – – – 19 13
Options purchased 19 – – – – 19 12
Total foreign exchange contracts 678 196 123 103 19 1,119 935
Credit derivatives
Credit default swaps – protection purchased 1 3 2 1 – 7 9
Credit default swaps – protection sold – 1 – – – 1 4
Total credit derivative contracts 1 4 2 1 – 8 13
Other contracts
Equity contracts 42 23 31 1 – 97 87
Commodity contracts 17 6 1 – – 24 31
Total other contracts 59 29 32 1 – 121 118
Total $ 2,404 $ 1,632 $ 1,107 $ 821 $ 128 $ 6,092 $ 4,712
DERIVATIVE-RELATED RISKS
Market Risk
Derivatives, in the absence of any compensating upfront cash
payments, generally have no market value at inception. They obtain
value, positive or negative, as relevant interest rates, foreign exchange
rates, equity, commodity or credit prices or indices change, such that
the previously contracted terms of the derivative transactions have
become more or less favourable than what can be negotiated under
current market conditions for contracts with the same terms and the
same remaining period to expiry.
The potential for derivatives to increase or decrease in value as a
result of the foregoing factors is generally referred to as market risk.
This market risk is managed by senior officers responsible for the
Bank’s trading business and is monitored independently by the Bank’s
risk management group.
Credit Risk
Credit risk on derivatives, also known as counterparty credit risk, is
the risk of a financial loss occurring as a result of the failure of a
counterparty to meet its obligation to the Bank. The Treasury Credit
area within Wholesale Banking is responsible for implementing and
ensuring compliance with credit policies established by the Bank for
the management of derivative credit exposures.
Derivative-related credit risks are subject to the same credit
approval, limit and monitoring standards that are used for managing
other transactions that create credit exposure. This includes evaluating
the creditworthiness of counterparties, and managing the size,
diversification and maturity structure of the portfolios. The Bank
actively engages in risk mitigation strategies through the use of
multi-product derivative master netting agreements, collateral and
other risk mitigation techniques. Master netting agreements reduce
risk to the Bank by allowing the Bank to close out and net transactions
with counterparties subject to such agreements upon the occurrence
of certain events. The effect of these master netting agreements is
shown in the following table. Also shown in this table, is the current
replacement cost, which is the positive fair value of all outstanding
derivatives, and represents the Bank’s maximum derivative credit
exposure. The credit equivalent amount is the sum of the current
replacement cost and the potential future exposure, which is calcu-
lated by applying factors supplied by OSFI to the notional principal
amount of the derivatives. The risk weighted amount is determined
by applying standard measures of counterparty credit risk to the
credit equivalent amount.