TD Bank 2014 Annual Report Download - page 84

TD BANK GROUP ANNUAL REPORT 2014 MANAGEMENT’S DISCUSSION AND ANALYSIS82
MARKET RISK IN TRADING ACTIVITIES
The overall objective of TD’s trading businesses is to provide wholesale
banking services, including facilitation and liquidity, to clients of the
Bank. TD must take on risk in order to provide effective service in
markets where its clients trade. In particular, the Bank needs to hold
inventory, act as principal to facilitate client transactions, and under-
write new issues. The Bank also trades in order to have in-depth
knowledge of market conditions to provide the most efficient and
effective pricing and service to clients, while balancing the risks
inherent in its dealing activities.
WHO MANAGES MARKET RISK IN TRADING ACTIVITIES
Primary responsibility for managing market risk in trading activities
lies with Wholesale Banking, with oversight from Market Risk Control
within Risk Management. The Market Risk and Capital Committee
meets regularly to conduct a review of the market risk profile and trad-
ing results of the Bank’s trading businesses, recommend changes to
risk policies, review underwriting inventories, and review the usage of
capital and assets in Wholesale Banking. The committee is chaired by
the Senior Vice President, Market Risk and Model Development, and
includes Wholesale Banking senior management.
There were no significant reclassifications between trading and
non-trading books during fiscal 2014.
HOW TD MANAGES MARKET RISK IN TRADING ACTIVITIES
Market risk plays a key part in the assessment of any trading business
strategy. The Bank launches new trading initiatives or expands existing
ones only if the risk has been thoroughly assessed, and is judged to be
within the Bank’s risk appetite and business expertise, and if the
appropriate infrastructure is in place to monitor, control, and manage
the risk. The Trading Market Risk Framework outlines the management
of trading market risk and incorporates risk appetite, risk governance
structure, risk identification, measurement, and control. The Trading
Market Risk Framework is maintained by Risk Management and
supports alignment with TD’s Risk Appetite for trading market risk.
Trading Limits
The Bank sets trading limits that are consistent with the approved
busi
ness strategy for each business and its tolerance for the associated
market risk, aligned to its market risk appetite. In setting limits, the
Bank
takes into account market volatility, market liquidity, organiza-
tional experience, and business strategy. Limits are prescribed at the
Wholesale Banking level in aggregate, as well as at more granular levels.
The core market risk limits are based on the key risk drivers in the
business and includes notional, credit spread, yield curve shift, price,
and volatility limits.
Another primary measure of trading limits is VaR, which the Bank
uses to monitor and control overall risk levels and to calculate the
regulatory capital required for market risk in trading activities. VaR
measures the adverse impact that potential changes in market rates
and prices could have on the value of a portfolio over a specified
period of time.
At the end of each day, risk positions are compared with risk limits,
and any excesses are reported in accordance with established market
risk policies and procedures.
Calculating VaR
TD computes total VaR on a daily basis by combining the General
Market Risk (GMR) and Idiosyncratic Debt Specific Risk (IDSR) associ-
ated with the Bank’s trading positions.
GMR is determined by creating a distribution of potential changes
in the market value of the current portfolio using historical simulation.
The Bank values the current portfolio using the market price and rate
changes of the most recent 259 trading days for equity, interest rate,
foreign exchange, credit, and commodity products. GMR is computed
as the threshold level that portfolio losses are not expected to exceed
more than one out of every 100 trading days. A one-day holding
period is used for GMR calculation, which is scaled up to ten days
for regulatory capital calculation purposes.
IDSR measures idiosyncratic (single-name) credit spread risk for
credit exposures in the trading portfolio using Monte Carlo simulation.
The IDSR model is based on the historical behaviour of five-year
idiosyncratic credit spreads. Similar to GMR, IDSR is computed as the
threshold level that portfolio losses are not expected to exceed more
than one out of every 100 trading days. IDSR is measured for a ten-day
holding period.
The following graph discloses daily one-day VaR usage and trading-
related revenue within Wholesale Banking. Trading-related revenue
is the total of trading revenue reported in other income and the net
interest income on trading positions reported in net interest income,
and is reported on a taxable equivalent basis. For the year ending
October 31, 2014, there were 20 days of trading losses and trading-
related revenue was positive for 92% of the trading days, reflecting
normal trading activity and underwriting. Losses in the year did not
exceed VaR on any trading day.
TOTAL VALUE-AT-RISK AND TRADING-RELATED REVENUE
(millions of Canadian dollars)
80
40
20
0
$100
60
(40)
(20)
Trading-related Revenue
Total Value-at-Risk
Nov 1, 2013 Nov 8, 2013
Nov 15, 2013 Nov 22, 2013 Nov 29, 2013
Dec 6, 2013
Dec 13, 2013 Dec 20, 2013 Dec 27, 2013
Jan 3, 2014
Jan 10, 2014 Jan 17, 2014 Jan 24, 2014 Jan 31, 2014
Feb 7, 2014
Feb 14, 2014 Feb 21, 2014 Feb 28, 2014
Mar 7, 2014
Mar 14, 2014 Mar 21, 2014 Mar 28, 2014
Apr 4, 2014
Apr 11, 2014 Apr 18, 2014 Apr 25, 2014
May 2, 2014 May 9, 2014
May 16, 2014 May 23, 2014 May 30, 2014
Jun 6, 2014
Jun 13, 2014 Jun 20, 2014 Jun 27, 2014
Jul 4, 2014
Jul 11, 2014 Jul 18, 2014 Jul 25, 2014
Aug 1, 2014 Aug 8, 2014
Aug 15, 2014 Aug 22, 2014 Aug 29, 2014
Sep 5, 2014
Sep 12, 2014 Sep 19, 2014 Sep 26, 2014
Oct 3, 2014
Oct 10, 2014 Oct 17, 2014 Oct 24, 2014 Oct 31, 2014