| Fair value of financial instruments | Note 3 Fair value of financial instruments Carrying value and fair value of financial instruments The following tables provide a comparison of the carrying and fair values for each classification of financial instruments. Embedded derivatives are presented on a combined basis with the host contracts. For measurement purposes, they are carried at fair value when conditions requiring separation are met.
As at October 31, 2022
Carrying value and fair value Carrying value Fair value
(Millions of Canadian dollars) Financial Financial Financial Financial Financial Financial Total Total
Financial assets
Interest-bearing deposits with banks $ – $ 84,468 $ – $ – $ 23,543 $ 23,543 $ 108,011 $ 108,011
Securities
Trading 138,507 9,698 – – – – 148,205 148,205
Investment, net of applicable allowance – – 92,063 828 77,127 70,073 170,018 162,964
138,507 9,698 92,063 828 77,127 70,073 318,223 311,169
Assets purchased under reverse repurchase agreements and securities borrowed 264,665 – – – 53,180 53,180 317,845 317,845
Loans, net of applicable allowance
Retail 73 375 218 – 546,767 521,428 547,433 522,094
Wholesale 6,914 3,222 563 – 261,833 253,816 272,532 264,515
6,987 3,597 781 – 808,600 775,244 819,965 786,609
Other
Derivatives 154,439 – – – – – 154,439 154,439
Other assets (1) 3,377 – – – 73,084 73,084 76,461 76,461
Financial liabilities
Deposits
Personal $ 298 $ 21,959 $ 382,675 $ 380,396 $ 404,932 $ 402,653
Business and government (2) 447 152,119 607,304 605,102 759,870 757,668
Bank (3) – 7,196 36,816 36,758 44,012 43,954
745 181,274 1,026,795 1,022,256 1,208,814 1,204,275
Other
Obligations related to securities sold short 35,511 – – – 35,511 35,511
Obligations related to assets sold under repurchase agreements – 248,835 25,112 25,112 273,947 273,947
Derivatives 153,491 – – – 153,491 153,491
Other liabilities (4) (360 ) 69 90,348 90,160 90,057 89,869
Subordinated debentures – – 10,025 9,668 10,025 9,668
As at October 31, 2021
Carrying value and fair value Carrying value Fair value
(Millions of Canadian dollars) Financial Financial Financial Financial Financial Financial Total Total
Financial assets
Interest-bearing deposits with banks $ – $ 56,896 $ – $ – $ 22,742 $ 22,742 $ 79,638 $ 79,638
Securities
Trading 125,801 13,439 – – – – 139,240 139,240
Investment, net of applicable allowance – – 77,802 533 67,149 66,823 145,484 145,158
125,801 13,439 77,802 533 67,149 66,823 284,724 284,398
Assets purchased under reverse repurchase agreements and securities borrowed 265,011 – – – 42,892 42,892 307,903 307,903
Loans, net of applicable allowance
Retail – 241 327 – 500,621 502,277 501,189 502,845
Wholesale 8,428 2,769 813 – 204,376 204,683 216,386 216,693
8,428 3,010 1,140 – 704,997 706,960 717,575 719,538
Other
Derivatives 95,541 – – – – – 95,541 95,541
Other assets (1) 4,109 – – – 58,483 58,483 62,592 62,592
Financial liabilities
Deposits
Personal $ 321 $ 18,328 $ 343,839 $ 344,040 $ 362,488 $ 362,689
Business and government (2) 739 131,630 563,984 565,106 696,353 697,475
Bank (3) – 17,251 24,739 24,743 41,990 41,994
1,060 167,209 932,562 933,889 1,100,831 1,102,158
Other
Obligations related to securities sold short 37,841 – – – 37,841 37,841
Obligations related to assets sold under repurchase agreements and securities loaned – 236,147 26,054 26,054 262,201 262,201
Derivatives 91,439 – – – 91,439 91,439
Other liabilities (4) 654 171 64,746 64,749 65,571 65,574
Subordinated debentures – – 9,593 9,601 9,593 9,601
(1) Includes Customers’ liability under acceptances and financial instruments recognized in Other assets.
(2) Business and government deposits include deposits from regulated deposit-taking institutions other than banks.
(3) Bank deposits refer to deposits from regulated banks and central banks.
(4) Includes Acceptances and financial instruments recognized in Other liabilities. Financial assets designated as fair value through profit or loss For our financial assets designated as FVTPL, we measure the change in fair value attributable to changes in credit risk as the difference between the total change in the fair value of the instrument during the period and the change in fair value calculated using the appropriate risk-free yield curves. For the year ended October 31, 2022, the change in fair value during the period attributable to changes in credit risk for positions still held was a loss of $662 million and the cumulative change in fair value attributable to changes in credit risk for positions still held was a loss of $490 million. For the year ended October 31, 2021, the change in fair value during the period attributable to changes in credit risk for positions still held was a gain of $613 million and the cumulative change in fair value attributable to changes in credit risk for positions still held was a gain of $173 million. As at October 31, 2022, the extent to which credit derivatives or similar instruments mitigate the maximum exposure to credit risk was $589 million (October 31, 2021 – $484 million). Financial liabilities designated as fair value through profit or loss For our financial liabilities designated as FVTPL, we take into account changes in our own credit spread and the expected duration of the instrument to measure the change in fair value attributable to changes in credit risk.
As at or for the year ended October 31, 2022
Contractual amount Carrying value Difference maturity amount Changes in fair value attributable
(Millions of Canadian dollars) During the period Cumulative
Term deposits
Personal $ 22,328 $ 21,959 $ (369 ) $ (238 ) $ (166 )
Business and government (3) 160,775 152,119 (8,656 ) (2,135 ) (1,718 )
Bank (4) 7,208 7,196 (12 ) – –
190,311 181,274 (9,037 ) (2,373 ) (1,884 )
Obligations related to assets sold under repurchase agreements and securities loaned 248,963 248,835 (128 ) 1 1
Other liabilities 69 69 – – –
$ 439,343 $ 430,178 $ (9,165 ) $ (2,372 ) $ (1,883 )
As at or for the year ended October 31, 2021 (1)
Contractual amount Carrying value Difference maturity amount Changes in fair value attributable
(Millions of Canadian dollars) During the period Cumulative (2)
Term deposits
Personal $ 18,205 $ 18,328 $ 123 $ (17 ) $ 72
Business and government (3) 131,830 131,630 (200 ) (75 ) 416
Bank (4) 17,253 17,251 (2 ) – –
167,288 167,209 (79 ) (92 ) 488
Obligations related to assets sold under repurchase agreements and securities loaned 236,164 236,147 (17 ) (8 ) –
Other liabilities 171 171 – – –
$ 403,623 $ 403,527 $ (96 ) $ (100 ) $ 488
(1) $97 million in changes in fair value attributable to changes in credit risk were recognized in income for the year ended October 31, 2022, and $97 million in cumulative changes in credit risk were included in income for positions still held life-to-date (October 31, 2021 – $nil and $nil respectively).
(2) The cumulative change is measured from the initial designation of the liabilities as FVTPL. For the year ended October 31, 2022, $3 million of fair value gains previously included in OCI relate to financial liabilities derecognized during the year (October 31, 2021
(3) Business and government term deposits include amounts from regulated deposit-taking institutions other than regulated banks.
(4) Bank term deposits refer to amounts from regulated banks and central banks. Net gains (losses) from financial instruments classified and designated as fair value through profit or loss Financial instruments classified as FVTPL, which includes mainly trading securities, derivatives, trading liabilities, and financial assets and liabilities designated as FVTPL are measured at fair value with realized and unrealized gains and losses recognized in Non-interest
For the year ended
(Millions of Canadian dollars) October 31 October 31
Net gains (losses) (1)
Classified as fair value through profit or loss (2) $ (7,382 ) $ 3,447
Designated as fair value through profit or loss (3) 8,543 (1,407 )
$ 1,161 $ 2,040
By product line (1)
Interest rate and credit (4) $ 1,251 $ 1,033
Equities (843 ) 57
Foreign exchange and commodities 753 950
$ 1,161 $ 2,040
(1) Excludes the following amounts related to our insurance operations and included in Insurance premiums, investment and fee income in the Consolidated Statements of Income: Net losses from financial instruments designated as FVTPL of
(2) Excludes derivatives designated in a hedging relationship. Refer to Note 9 for net gains (losses) on these derivatives.
(3) For the year ended October 31, 2022, $8,536 Non-interest
(4) Includes gains (losses) recognized on cross currency interest rate swaps. Net interest income from financial instruments Interest and dividend income arising from financial assets and financial liabilities and the associated costs of funding are reported in Net interest income.
For the year ended
(Millions of Canadian dollars) October 31 October 31
Interest and dividend income (1), (2)
Financial instruments measured at fair value through profit or loss $ 10,999 $ 4,551
Financial instruments measured at fair value through other comprehensive income 1,177 375
Financial instruments measured at amortized cost 28,595 23,219
40,771 28,145
Interest expense (1)
Financial instruments measured at fair value through profit or loss $ 8,336 $ 2,865
Financial instruments measured at amortized cost (3) 9,718 5,278
18,054 8,143
Net interest income $ 22,717 $ 20,002
(1) Excludes
(2) Includes dividend income for the year ended October 31, 2022 of $2,954 million (October 31, 2021 – $2,436 million), which is presented in Interest and dividend income in the Consolidated Statements of Income.
(3) Includes interest expense on lease liabilities for the year ended October 31, 2022 of $112 million (October 31, 2021 Fee income arising from financial instruments For the year ended October 31, 2022, we earned $6,118 million million Non-interest Fair value of assets and liabilities measured at fair value on a recurring basis and classified using the fair value hierarchy
As at
October 31, 2022 October 31, 2021
Fair value Netting adjustments Fair value Fair value Netting adjustments Fair value
(Millions of Canadian dollars) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Financial assets
Interest-bearing deposits with banks $ – $ 84,468 $ – $ $ 84,468 $ – $ 56,896 $ – $ $ 56,896
Securities
Trading
Debt issued or guaranteed by:
Canadian government (1)
Federal 15,024 3,779 – 18,803 8,977 2,380 – 11,357
Provincial and municipal – 13,257 – 13,257 – 11,068 – 11,068
U.S. federal, state, municipal and agencies (1) , (2) 1,254 35,570 4 36,828 215 22,738 25 22,978
Other OECD government ( 3 1,325 3,452 – 4,777 2,729 5,730 – 8,459
Mortgage-backed securities (1) – 2 – 2 – 4 – 4
Asset-backed securities
Non-CDO 4 – 1,308 2 1,310 – 891 2 893
Corporate debt and other debt – 21,162 7 21,169 – 23,085 25 23,110
Equities 46,592 3,593 1,874 52,059 56,826 3,015 1,530 61,371
64,195 82,123 1,887 148,205 68,747 68,911 1,582 139,240
Investment
Debt issued or guaranteed by:
Canadian government (1)
Federal 1,226 2,555 – 3,781 1,973 1,730 – 3,703
Provincial and municipal – 2,124 – 2,124 – 3,132 – 3,132
U.S. federal, state, municipal and agencies (1) , (2) 440 43,918 – 44,358 12 34,815 – 34,827
Other OECD government – 5,144 – 5,144 – 5,956 – 5,956
Mortgage-backed securities (1) – 2,860 28 2,888 – 2,727 20 2,747
Asset-backed securities
CDO – 7,524 – 7,524 – 7,074 – 7,074
Non-CDO – 524 – 524 – 586 – 586
Corporate debt and other debt – 25,569 151 25,720 – 19,625 152 19,777
Equities 36 395 397 828 46 153 334 533
1,702 90,613 576 92,891 2,031 75,798 506 78,335
Assets purchased under reverse repurchase agreements and – 264,665 – 264,665 – 265,011 – 265,011
Loans – 9,673 1,692 11,365 – 11,501 1,077 12,578
Other
Derivatives
Interest rate contracts – 39,804 263 40,067 – 33,857 320 34,177
Foreign exchange contracts – 99,424 13 99,437 – 41,224 74 41,298
Credit derivatives – 388 – 388 – 34 – 34
Other contracts 3,939 14,786 62 18,787 3,175 17,955 26 21,156
Valuation adjustments – (2,100 ) 45 (2,055 ) – (819 ) 9 (810 )
Total gross derivatives 3,939 152,302 383 156,624 3,175 92,251 429 95,855
Netting adjustments (2,185 ) (2,185 ) (314 ) (314 )
Total derivatives 154,439 95,541
Other assets 1,221 2,141 15 3,377 1,474 2,635 – 4,109
$ 71,057 $ 685,985 $ 4,553 $ (2,185 ) $ 759,410 $ 75,427 $ 573,003 $ 3,594 $ (314 ) $ 651,710
Financial liabilities
Deposits
Personal $ – $ 22,016 $ 241 $ $ 22,257 $ – $ 18,498 $ 151 $ $ 18,649
Business and government – 152,566 – 152,566 – 132,369 – 132,369
Bank – 7,196 – 7,196 – 17,251 – 17,251
Other
Obligations related to securities sold short 16,383 19,128 – 35,511 18,345 19,496 – 37,841
Obligations related to assets sold under repurchase agreements and securities loaned – 248,835 – 248,835 – 236,147 – 236,147
Derivatives
Interest rate contracts – 39,592 1,122 40,714 – 28,566 955 29,521
Foreign exchange contracts – 94,310 145 94,455 – 40,484 27 40,511
Credit derivatives – 125 – 125 – 120 – 120
Other contracts 3,847 16,663 847 21,357 3,699 17,456 419 21,574
Valuation adjustments – (967 ) (8 ) (975 ) – 38 (11 ) 27
Total gross derivatives 3,847 149,723 2,106 155,676 3,699 86,664 1,390 91,753
Netting adjustments (2,185 ) (2,185 ) (314 ) (314 )
Total derivatives 153,491 91,439
Other liabilities 341 (632 ) – (291 ) 258 560 7 825
$ 20,571 $ 598,832 $ 2,347 $ (2,185 ) $ 619,565 $ 22,302 $ 510,985 $ 1,548 $ (314 ) $ 534,521
(1) As at October 31, 2022, residential and commercial mortgage-backed securities (MBS) included in all fair value levels of trading securities were $12,273 million and $nil (October 31, 2021 – $13,124 million and $nil), respectively, and in all fair value levels of Investment securities were $23,362 million and $2,755 million (October 31, 2021 – $13,542 million and $2,592 million), respectively.
(2) United States (U.S.).
(3) Organisation for Economic Co-operation
(4) Collateralized debt obligations (CDO). Fair values of our significant assets and liabilities measured on a recurring basis are determined and classified in the fair value hierarchy table using the following valuation techniques and inputs. Interest-bearing deposits with banks The majority of our Interest-bearing deposits with banks are designated as FVTPL. These FVTPL deposits are composed of short-dated deposits placed with banks, and are included in Interest-bearing deposits with banks in the fair value hierarchy table. The fair values of these instruments are determined using the discounted cash flow method. The inputs to the valuation models include interest rate swap curves and credit spreads, where applicable. They are classified as Level 2 instruments in the hierarchy as the inputs are observable. Government bonds (Canadian, U.S. and other OECD governments) Government bonds are included in Canadian government debt, U.S. federal, state, municipal and agencies debt, Other OECD government debt and Obligations related to securities sold short in the fair value hierarchy table. The fair values of government issued or guaranteed debt securities in active markets are determined by reference to recent transaction prices, broker quotes, or third-party vendor prices and are classified as Level 1 in the hierarchy. The fair values of securities that are not traded in active markets are based on either security prices, or valuation techniques using implied yields and risk spreads derived from prices of actively traded and similar government securities. Securities with observable prices or rate inputs as compared to transaction prices, dealer quotes or vendor prices are classified as Level 2 in the hierarchy. Securities where inputs are unobservable are classified as Level 3 in the hierarchy. Corporate and U.S. municipal bonds The fair values of corporate and U.S. municipal bonds, which are included in Corporate debt and other debt, U.S. federal, state, municipal and agencies debt and Obligations related to securities sold short in the fair value hierarchy table, are determined using either recently executed transaction prices, broker quotes, pricing services, or in certain instances, the discounted cash flow method using rate inputs such as benchmark yields (CDOR, Secured Overnight Financing Rate (SOFR) and other similar reference rates) and risk spreads of comparable securities. Securities with observable prices or rate inputs are classified as Level 2 in the hierarchy. Securities where inputs are unobservable are classified as Level 3 in the hierarchy. Asset-backed securities and Mortgage-backed securities Asset-backed securities (ABS) and MBS are included in Asset-backed securities, Mortgage-backed securities, Canadian government debt, U.S. federal, state, municipal and agencies debt, and Obligations related to securities sold short in the fair value hierarchy table. Inputs for valuation of ABS and MBS are, when available, traded prices, dealer or lead manager quotes, broker quotes and vendor prices of the identical securities. When prices of the identical securities are not readily available, we use industry standard models with inputs such as discount margins, yields, default, prepayment and loss severity rates that are implied from transaction prices, dealer quotes or vendor prices of comparable instruments. Where security prices and inputs are observable, ABS and MBS are classified as Level 2 in the hierarchy. Otherwise, they are classified as Level 3 in the hierarchy. Equities Equities consist of listed and unlisted common shares, private equities, mutual funds and hedge funds with certain redemption restrictions and are included in equities and obligations for securities sold short. The fair values of common shares are based on quoted prices in active markets, where available, and are classified as Level 1 in the hierarchy. Where quoted prices in active markets are not readily available, fair value is determined based on quoted market prices for similar securities or through valuation techniques, such as multiples of earnings and the discounted cash flow method with forecasted cash flows and discount rate as inputs. Private equities are classified as Level 3 in the hierarchy as their inputs are not observable. Hedge funds are valued using Net Asset Values (NAV). If we can redeem a hedge fund at NAV prior to the next quarter end, the fund is classified as Level 2 in the hierarchy. Otherwise, it is classified as Level 3 in the hierarchy. Loans Loans include base metal loans, corporate loans, banker acceptances and asset-backed financing loans. Fair values are determined based on market prices, if available, or discounted cash flow method using the following inputs: market interest rates, base metal commodity prices, market based spreads of assets with similar credit ratings and terms to maturity, LGD, expected default frequency implied from credit derivative prices, if available, and relevant pricing information such as contractual rate, origination and maturity dates, redemption price, coupon payment frequency and day count convention. Loans with market prices or observable inputs are classified as Level 2 in the hierarchy and loans with unobservable inputs that have significant impacts on the fair values are classified as Level 3 in the hierarchy. Derivatives The fair values of exchange-traded derivatives, such as interest rate and equity options and futures, are based on quoted market prices and are typically classified as Level 1 in the hierarchy. OTC derivatives primarily consist of interest rate contracts, foreign exchange contracts and credit derivatives. The exchange-traded or OTC interest rate, foreign exchange and equity derivatives are included in Interest rate contracts, Foreign exchange contracts and Other contracts, respectively, in the fair value hierarchy table. The fair values of OTC derivatives are determined using valuation models when quoted market prices or third-party consensus pricing information are not available. The valuation models, such as discounted cash flow method or Black-Scholes option model, incorporate observable or unobservable inputs for interest and foreign exchange rates, equity and commodity prices (including indices), credit spreads, corresponding market volatility levels, and other market-based pricing factors. Other adjustments to fair value include bid-offer, Securities borrowed or purchased under resale agreements and securities loaned or sold under repurchase agreements In the fair value hierarchy table, these instruments are included in Assets purchased under reverse repurchase agreements and securities borrowed, and Obligations related to assets sold under repurchase agreements and securities loaned. The fair values of these contracts are determined using valuation techniques such as the discounted cash flow method using interest rate curves as inputs. They are classified as Level 2 instruments in the hierarchy as the inputs are observable. Deposits A majority of our deposits are measured at amortized cost but certain deposits are designated as FVTPL. These FVTPL deposits include deposits taken from clients, issuances of certificates of deposits and promissory notes, and interest rate and equity linked notes. The fair values of these instruments are determined using the discounted cash flow method and derivative option valuation models. The inputs to the valuation models include benchmark yield curves, credit spreads, interest rates, equity and interest rate volatility, dividends and correlation, where applicable. They are classified as Level 2 or 3 instruments in the hierarchy, depending on the significance of the unobservable credit spreads, volatility, dividend and correlation rates. Quantitative information about fair value measurements using significant unobservable inputs (Level 3 Instruments) The following table presents fair values of our significant Level 3 financial instruments, v
As at October 31, 2022 (Millions of Canadian dollars, except for prices, percentages and ratios)
Fair value Range of input values
Products Reporting line in the fair value Assets Liabilities Valuation Significant Low High Weighted
Corporate debt and related derivatives Price-based Prices $ 1.00 $ 111.90 $ 85.64
Corporate debt and other debt $ 7 Discounted cash flows Credit spread 1.67% 10.73% 6.20%
Loans 1,692 Credit enhancement 11.70% 15.60% 13.00%
Derivative related liabilities $ 130
Government debt and municipal bonds
Corporate debt and other debt 151 Discounted cash flows Yields 7.85% 10.72% 8.92%
Private equities, hedge fund investments and related Market comparable EV/EBITDA multiples 3.97X 14.31X 8.59X
Equities 2,271 Price-based P/E multiples 8.47X 24.04X 12.46X
Derivative related liabilities 2 Discounted cash flows EV/Rev multiples 0.35X 5.77X 3.88X
Liquidity discounts (4) 10.00% 40.00% 17.35%
Discount rate 10.80% 10.80% 10.80%
NAV / prices (5) n.a. n.a. n.a.
Interest rate derivatives and interest-rate-linked structured notes (6), (7) Discounted cash flows Interest rates 1.88% 4.49% High
Derivative related assets 270 Option pricing model CPI swap rates 1.98% 2.59% Even
Derivative related liabilities 1,216 IR-IR 19.00% 67.00% Even
FX-IR 29.00% 56.00% Even
FX-FX 68.00% 68.00% Even
Equity derivatives and equity-linked structured notes (6), (7) Discounted cash flows Dividend yields (0.63)% 8.28% Lower
Derivative related assets 62 Option pricing model Equity (EQ)-EQ 33.00% 94.90% Middle
Deposits 241 EQ-FX (83.15)% 38.44% Middle
Derivative related liabilities 655 EQ volatilities 7.00% 129.00% Upper
Other (8)
Asset-backed securities 2
Derivative related assets 51
Other assets 15
Mortgage-backed securities 28
U.S. state, municipal and agencies 4
Derivative related liabilities 103
Other liabilities –
Total $ 4,553 $ 2,347
As at October 31, 2021 (Millions of Canadian dollars, except for prices, percentages and ratios)
Fair value Range of input values (1), (2)
Products Reporting line in the fair value Assets Liabilities Valuation Significant Low High Weighted
Corporate debt and related derivatives Price-based Prices $ 29.18 $ 127.09 $ 96.36
Corporate debt and other debt $ 27 Discounted cash flows Credit spread 1.15% 6.92% 4.04%
Loans 1,077 Credit enhancement 11.92% 15.90% 13.25%
Derivative related liabilities $ 9
Government debt and municipal bonds
Corporate debt and other debt 150 Discounted cash flows Yields 3.91 8.17% 5.91%
Private equities, hedge fund investments and related Market comparable EV/EBITDA multiples 8.82X 26.00X 9.16X
Equities 1,864 Price-based P/E multiples 9.40X 38.00X 10.96X
Derivative related liabilities 2 Discounted cash flows EV/Rev multiples 1.14X 20.80X 5.40X
Liquidity discounts (4) 10.00% 40.00% 16.40%
Discount rate 10.65% 10.65% 10.65%
NAV / prices (5) n.a. n.a. n.a.
Interest rate derivatives and interest-rate-linked structured Discounted cash flows Interest rates 0.13% 2.46% High
Derivative related assets 367 Option pricing model CPI swap rates 1.76% 2.42% Even
Derivative related liabilities 974 IR-IR 19.00% 67.00% Even
FX-IR 29.00% 56.00% Even
FX-FX 68.00% 68.00% Even
Equity derivatives and equity-linked structured Discounted cash flows Dividend yields 0.00% 6.37% Lower
Derivative related assets 25 Option pricing model Equity (EQ)-EQ correlations 32.00% 95.00% Middle
Deposits 151 EQ-FX (60.60)% 27.30% Middle
Derivative related liabilities 381 EQ volatilities 8.00% 128.00% Upper
Other (8)
Asset-backed securities 2
Derivative related assets 37
Other assets –
Mortgage-backed securities 20
U.S. state, municipal and agencies debt 25
Derivative related liabilities 24
Other liabilities 7
Total $ 3,594 $ 1,548
(1) The low and high input values represent the actual highest and lowest level inputs used to value a group of financial instruments in a particular product category. These input ranges do not reflect the level of input uncertainty, but are affected by the different underlying instruments within the product category. The input ranges will therefore vary from period to period based on the characteristics of the underlying instruments held at each balance sheet date. Where provided, the weighted average of the input values is calculated based on the relative fair values of the instruments within the product category. The weighted averages for derivatives are not presented in the table as they would not provide a comparable metric; instead, distribution of significant unobservable inputs within the range for each product category is indicated in the table.
(2) Price-based inputs are significant for certain debt securities and are based on external benchmarks, comparable proxy instruments or pre-quarter-end
(3) The significant unobservable inputs include the following: (i) Enterprise Value (EV); (ii) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA); (iii) Price / Earnings (P/E); (iv) Revenue (Rev); (v) Consumer Price Index (CPI); (vi) Interest Rate (IR); (vii) Foreign Exchange (FX); and (viii) Equity (EQ).
(4) Fair value of securities with liquidity discount inputs totalled $373 million (October 31, 2021 – $385 million).
(5) NAV of a hedge fund is total fair value of assets less liabilities divided by the number of fund units. Private equities are valued based on NAV or valuation techniques. The range for NAV per unit or price per share has not been disclosed for the hedge funds or private equities due to the dispersion of prices given the diverse nature of the investments.
(6) The level of aggregation and diversity within each derivative instrument category may result in certain ranges of inputs being wide and inputs being unevenly distributed across the range. In the table, we indicated whether the majority of the inputs are concentrated toward the upper, middle, or lower end of the range, or evenly distributed throughout the range.
(7) The structured notes contain embedded equity or interest rate derivatives with unobservable inputs that are similar to those of the equity or interest rate derivatives.
(8) Other primarily includes certain insignificant instruments such as auction rate securities, commodity derivatives, foreign exchange derivatives, contingent considerations, bank-owned life insurance and retractable shares.
n.a. not applicable Sensitivity to unobservable inputs and interrelationships between unobservable inputs Yield, credit spreads/discount margins A financial instrument’s yield is the interest rate used to discount future cash flows in a valuation model. An increase in the yield, in isolation, would result in a decrease in a fair value measurement and vice versa. A credit spread/discount margin is the difference between a debt instrument’s yield and a benchmark instrument’s yield. Benchmark instruments have high credit quality ratings, similar maturities and are often government bonds. The credit spread/discount margin therefore represents the discount rate used to determine the present value of future cash flows of an asset to reflect the market return required for uncertainty in the estimated cash flows. The credit spread/discount margin for an instrument forms part of the yield used in a discounted cash flow method. Funding spread Funding spreads are credit spreads specific to funding or deposit rates. A decrease in funding spreads, on its own, will increase the fair value of our liabilities, and vice versa. Default rates A default rate is the rate at which borrowers fail to make scheduled loan payments. A decrease in the default rate will typically increase the fair value of the loan, and vice versa. This effect will be significantly more pronounced for a non-government Prepayment rates A prepayment rate is the rate at which a loan will be repaid in advance of its expected amortization schedule. Prepayments change the future cash flows of a loan. An increase in the prepayment rate in isolation will result in an increase in fair value when the loan interest rate is lower than the current reinvestment rate, and a decrease in the prepayment rate in isolation will result in a decrease in fair value when the loan interest rate is lower than the current reinvestment rate. Prepayment rates are generally negatively correlated with interest rates. Recovery and loss severity rates A recovery rate is an estimation of the amount that can be collected in a loan default scenario. The recovery rate is the recovered amount divided by the loan balance due, expressed as a percentage. The inverse concept of recovery is loss severity. Loss severity rate is an estimation of the loan amount not collected when a loan defaults. The loss severity rate is the loss amount divided by the loan balance due, expressed as a percentage. Generally, an increase in the recovery rate or a decrease in the loss severity rate will increase the loan fair value, and vice versa. Volatility rates Volatility measures the potential variability of future prices and is often measured as the standard deviation of price movements. Volatility is an input to option pricing models used to value derivatives and issued structured notes. Volatility is used in valuing equity, interest rate, commodity and foreign exchange options. A higher volatility rate means that the underlying price or rate movements are more likely to occur. Higher volatility rates may increase or decrease an option’s fair value depending on the option’s terms. The determination of volatility rates is dependent on various factors, including but not limited to, the underlying’s market price, the strike price and maturity. Dividend yields A dividend yield is the underlying equity’s expected dividends expressed as an annual percentage of its price. Dividend yield is used as an input for forward equity price and option models. Higher dividend yields will decrease the forward price, and vice versa. A higher dividend yield will increase or decrease an option’s value, depending on the option’s terms. Correlation rates Correlation is the linear relationship between the movements in two different variables. Correlation is an input to the valuation of derivative contracts and issued structured notes when an instrument’s payout is determined by correlated variables. When variables are positively correlated, an increase in one variable will result in an increase in the other variable. When variables are negatively correlated, an increase in one variable will result in a decrease in the other variable. The referenced variables can be within a single asset class or market (equity, interest rate, commodities, credit and foreign exchange) or between variables in different asset classes (equity to foreign exchange, or interest rate to foreign exchange). Changes in correlation will either increase or decrease a financial instrument’s fair value depending on the terms of the instrument. Interest rates An interest rate is the percentage amount charged on a principal or notional amount. Increasing intere |
