| 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, 2019 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 $ – $ 22,283 $ – $ – $ 16,062 $ 16,062 $ 38,345 $ 38,345 Securities Trading 137,600 8,934 – – – – 146,534 146,534 Investment, net of applicable allowance – – 57,223 463 44,784 45,104 102,470 102,790 137,600 8,934 57,223 463 44,784 45,104 249,004 249,324 Assets purchased under reverse repurchase agreements and securities borrowed 246,068 – – – 60,893 60,894 306,961 306,962 Loans, net of applicable allowance Retail 275 242 95 – 423,469 424,416 424,081 425,028 Wholesale 7,055 1,856 451 – 185,413 184,645 194,775 194,007 7,330 2,098 546 – 608,882 609,061 618,856 619,035 Other Derivatives 101,560 – – – – – 101,560 101,560 Other assets (1) 3,156 – – – 50,375 50,375 53,531 53,531 Financial liabilities Deposits Personal $ 140 $ 17,394 $ 277,198 $ 277,353 $ 294,732 $ 294,887 Business and government (2) 151 111,389 453,942 452,536 565,482 564,076 Bank (3) – 3,032 22,759 22,773 25,791 25,805 291 131,815 753,899 752,662 886,005 884,768 Other Obligations related to securities sold short 35,069 – – – 35,069 35,069 Obligations related to assets sold under repurchase agreements and securities loaned – 218,612 7,974 7,974 226,586 226,586 Derivatives 98,543 – – – 98,543 98,543 Other liabilities (4) (1,209 ) 91 61,039 61,024 59,921 59,906 Subordinated debentures – – 9,815 9,930 9,815 9,930 As at October 31, 2018 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 $ – $ 20,274 $ – $ – $ 16,197 $ 16,197 $ 36,471 $ 36,471 Securities Trading 121,031 7,227 – – – – 128,258 128,258 Investment, net of applicable allowance – – 48,093 406 46,109 45,367 94,608 93,866 121,031 7,227 48,093 406 46,109 45,367 222,866 222,124 Assets purchased under reverse repurchase agreements and securities borrowed 219,108 – – – 75,494 75,490 294,602 294,598 Loans, net of applicable allowance Retail 69 190 94 – 397,102 394,051 397,455 394,404 Wholesale 7,129 1,540 458 – 170,236 168,087 179,363 177,214 7,198 1,730 552 – 567,338 562,138 576,818 571,618 Other Derivatives 94,039 – – – – – 94,039 94,039 Other assets (1) 1,373 – – – 46,205 46,205 47,578 47,578 Financial liabilities Deposits Personal $ 150 $ 14,602 $ 255,402 $ 255,115 $ 270,154 $ 269,867 Business and government (2), (3) (11 ) 102,597 430,936 431,158 533,522 533,744 Bank (4) – 7,072 25,449 25,462 32,521 32,534 139 124,271 711,787 711,735 836,197 836,145 Other Obligations related to securities sold short 32,247 – – – 32,247 32,247 Obligations related to assets sold under repurchase agreements and securities loaned – 201,839 4,975 4,976 206,814 206,815 Derivatives 90,238 – – – 90,238 90,238 Other liabilities (3), (5) (1,434 ) 18 55,766 55,729 54,350 54,313 Subordinated debentures – – 9,131 9,319 9,131 9,319 (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) Commencing Q4 2019, the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in deposits is presented in other liabilities. Amounts have been reclassified to conform with this presentation. (4) Bank deposits refer to deposits from regulated banks and central banks. (5) 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 years ended October 31, 2019 and October 31, 2018, there were no significant changes in the fair value of the loans and receivables designated as FVTPL attributable to changes in credit risk. As at October 31, 2019, the extent to which credit derivatives or similar instruments mitigate the maximum exposure to credit risk was $514 million (October 31, 2018 – $nil) . 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, 2019 (1) (Millions of Canadian dollars) Contractual Carrying Difference Changes in fair value attributable During the period Cumulative (2) Term deposits Personal $ 17,307 $ 17,394 $ 87 $ 3 $ 22 Business and government (3) 110,763 111,389 626 (76 ) 210 Bank ( 4 3,031 3,032 1 – – 131,101 131,815 714 (73 ) 232 Obligations related to assets sold under repurchase agreements and securities loaned 218,604 218,612 8 – – Other liabilities 91 91 – – – $ 349,796 $ 350,518 $ 722 $ (73 ) $ 232 . As at or for the year ended October 31, 2018 (1) (Millions of Canadian dollars) Contractual Carrying Difference Changes in fair value attributable During the period Cumulative (2) Term deposits Personal $ 14,726 $ 14,602 $ (124 ) $ (41 ) $ 19 Business and government (3), (5) 102,640 102,597 (43 ) (134 ) 285 Bank (4) 7,067 7,072 5 – – 124,433 124,271 (162 ) (175 ) 304 Obligations related to assets sold under repurchase agreements and securities loaned 201,924 201,839 (85 ) – – Other liabilities 18 18 – – – $ 326,375 $ 326,128 $ (247 ) $ (175 ) $ 304 (1) There are no changes in fair value attributable to changes in credit risk included in net income for positions still held. (2) The cumulative change is measured from the initial designation of the liabilities as FVTPL. For the year ended October 31, 2019, $4 million of fair value losses previously included in OCI relate to financial liabilities derecognized during the year (October 31, 2018 – $7 million fair value losses). (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. (5) Commencing Q4 2019, the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in deposits is presented in other liabilities. Amounts have been reclassified to conform with this presentation. 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) $ 3,564 $ (265 ) Designated as fair value through profit or loss (3), (4) (1,821 ) 2,067 $ 1,743 $ 1,802 By product line (1) Interest rate and credit (4), (5) $ 1,534 $ 1,535 Equities (144 ) (164 ) Foreign exchange and commodities 353 431 $ 1,743 $ 1,802 (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 gains from financial instruments designated as FVTPL of $1,303 million (October 31, 2018 – losses of $400 million). (2) Excludes derivatives designated in a hedging relationship. Refer to Note 8 for net gains (losses) on these derivatives. (3) For the year ended October 31, 2019, $1,810 million of net fair value losses on financial liabilities designated as FVTPL, other than those attributable to changes in our own credit risk, were included in Non-interest (4) Commencing Q4 2019, the interest component of the valuation of certain deposits carried at FVTPL previously presented in trading revenue is presented in net interest income. Comparative amounts have been reclassified to conform with this presentation. (5) 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 (1) Interest and dividend income (2), (3) Financial instruments measured at fair value through profit or loss (4) $ 12,103 $ 7,800 Financial instruments measured at fair value through other comprehensive income 1,132 802 Financial instruments measured at amortized cost 28,098 24,419 41,333 33,021 Interest expense (2) Financial instruments measured at fair value through profit or loss (4) $ 10,507 $ 6,542 Financial instruments measured at amortized cost 11,077 8,527 21,584 15,069 Net interest income $ 19,749 $ 17,952 (1) Amounts have been revised from those previously presented. (2) Excludes the following amounts related to our insurance operations and included in Insurance premiums, investment and fee income in the Consolidated Statements of Income: Interest income of $486 million (October 31, 2018 – $479 million), and Interest expense of $4 million (October 31, 2018 – $4 million). (3) Includes dividend income for the year ended October 31, 2019 of $2,057 million (October 31, 2018 – $1,561 million), which is presented in Interest and dividend income in the Consolidated Statements of Income. (4) Commencing Q4 2019, the interest component of the valuation of certain deposits carried at FVTPL previously presented in trading revenue is presented in net interest income. Comparative amounts have been reclassified to conform with this presentation. Fee income arising from financial instruments For the year ended October 31, 2019, we earned $5,270 million in fees from banking services (October 31, 2018 – $5,426 million). For the year ended October 31, 2019, we also earned $12,117 million in fees from investment management, trust, custodial, underwriting, brokerage and other similar fiduciary services to retail and institutional clients (October 31, 2018 – $11,944 million). These fees are included in 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, 2019 October 31, 2018 Fair value measurements using Netting adjustments Fair value Fair value measurements using 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 $ – $ 22,283 $ – $ $ 22,283 $ – $ 20,274 $ – $ $ 20,274 Securities Trading Debt issued or guaranteed by: Canadian government (1) Federal 14,655 5,474 – 20,129 8,342 6,231 – 14,573 Provincial and municipal – 11,282 – 11,282 – 11,350 – 11,350 U.S. state, municipal and agencies (1) 2,050 39,584 58 41,692 2,068 31,030 66 33,164 Other OECD government (2) 2,786 3,710 – 6,496 1,151 9,018 – 10,169 Mortgage-backed securities (1) – 482 – 482 – 1,001 – 1,001 Asset-backed securities Non-CDO – 1,333 2 1,335 – 1,023 110 1,133 Corporate debt and other debt 1 23,643 21 23,665 2 22,303 21 22,326 Equities 38,309 1,925 1,219 41,453 30,847 2,547 1,148 34,542 57,801 87,433 1,300 146,534 42,410 84,503 1,345 128,258 Investment Debt issued or guaranteed by: Canadian government (1) Federal – 657 – 657 – 238 – 238 Provincial and municipal – 2,898 – 2,898 – 1,554 – 1,554 U.S. state, municipal and agencies (1) 210 20,666 – 20,876 – 18,136 – 18,136 Other OECD government – 4,251 – 4,251 – 1,470 – 1,470 Mortgage-backed securities (1) – 2,675 27 2,702 – 2,174 – 2,174 Asset-backed securities CDO – 7,300 – 7,300 – 6,239 – 6,239 Non-CDO – 849 – 849 – 863 – 863 Corporate debt and other debt – 17,537 153 17,690 – 17,227 192 17,419 Equities 42 127 294 463 42 127 237 406 252 56,960 474 57,686 42 48,028 429 48,499 Assets purchased under reverse repurchase agreements and securities borrowed – 246,068 – 246,068 – 219,108 – 219,108 Loans – 9,294 680 9,974 – 8,929 551 9,480 Other Derivatives Interest rate contracts 1 46,095 349 46,445 1 33,862 222 34,085 Foreign exchange contracts – 40,768 48 40,816 – 43,253 53 43,306 Credit derivatives – 169 – 169 – 38 – 38 Other contracts 2,852 12,674 11 15,537 5,868 11,654 296 17,818 Valuation adjustments – (712 ) 15 (697 ) – (631 ) 6 (625 ) Total gross derivatives 2,853 98,994 423 102,270 5,869 88,176 577 94,622 Netting adjustments (710 ) (710 ) (583 ) (583 ) Total derivatives 101,560 94,039 Other assets 1,119 1,960 77 3,156 1,020 288 65 1,373 $ 62,025 $ 522,992 $ 2,954 $ (710 ) $ 587,261 $ 49,341 $ 469,306 $ 2,967 $ (583 ) $ 521,031 Financial liabilities Deposits Personal $ – $ 17,378 $ 156 $ $ 17,534 $ – $ 14,362 $ 390 $ $ 14,752 Business and government (4) – 111,540 – 111,540 – 102,591 (5 ) 102,586 Bank – 3,032 – 3,032 – 7,072 – 7,072 Other Obligations related to securities sold short 20,512 14,557 – 35,069 17,732 14,515 – 32,247 Obligations related to assets sold under repurchase agreements and securities loaned – 218,612 – 218,612 – 201,839 – 201,839 Derivatives Interest rate contracts – 39,165 934 40,099 – 29,620 726 30,346 Foreign exchange contracts – 40,183 27 40,210 – 41,836 32 41,868 Credit derivatives – 282 – 282 – 94 – 94 Other contracts 2,675 15,776 206 18,657 4,369 13,730 380 18,479 Valuation adjustments – 12 (7 ) 5 – 29 5 34 Total gross derivatives 2,675 95,418 1,160 99,253 4,369 85,309 1,143 90,821 Netting adjustments (710 ) (710 ) (583 ) (583 ) Total derivatives 98,543 90,238 Other liabilities 102 (1,280 ) 60 (1,118 ) 170 (1,654 ) 68 (1,416 ) $ 23,289 $ 459,257 $ 1,376 $ (710 ) $ 483,212 $ 22,271 $ 424,034 $ 1,596 $ (583 ) $ 447,318 (1) As at October 31, 2019, residential and commercial mortgage-backed securities (MBS) included in all fair value levels of trading securities were $22,365 million and $nil (October 31, 2018 – $16,776 million and $nil), respectively, and in all fair value levels of Investment securities were $6,474 million and $2,046 million (October 31, 2018 – $4,713 million and $1,348 million), respectively. (2) OECD stands for Organisation for Economic Co-operation (3) CDO stands for collateralized debt obligations. (4) Commencing Q4 2019, the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in deposits is presented in other liabilities. Comparative amounts have been reclassified to conform with this presentation. 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. 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. 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 (Canadian Dealer Offered Rate, LIBOR 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. 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 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, valuation techniques used to determine their fair values, ranges and weighted averages of unobservable inputs. As at October 31, 2019 (Millions of Canadian dollars, except for prices, percentages and ratios) Fair value Range of input values Products Reporting line in the fair value hierarchy table Assets Liabilities Valuation techniques Significant unobservable inputs (3) Low High Weighted / Inputs Non-derivative Auction rate securities Discounted cash flows Discount margins 1.60% 3.00% 1.65% U.S. state, municipal and agencies debt 58 Default rates 3.00% 3.00% 3.00% Asset-backed securities 2 Prepayment rates 8.00% 8.00% 8.00% Recovery rates 96.50% 96.50% 96.50% Corporate debt Price-based Prices $ 20.00 $131.78 $ 110.30 Corporate debt and other debt 24 Discounted cash flows Credit spread 1.02% 11.34% 6.18% Loans 680 Credit enhancement 11.82% 15.75% 13.13% Government debt and municipal bonds Price-based Prices $ 65.50 $100.00 $ 65.67 U.S. state, municipal and agencies debt – Discounted cash flows Yields 4.70% 6.63% 5.80% Mortgage-backed securities 27 Corporate debt and other debt 150 Private equities, hedge fund investments and related equity derivatives Market comparable EV/EBITDA multiples 4.00X 24.90X 10.23X Equities 1,513 Price-based P/E multiples 9.70X 29.90X 16.11X Derivative related liabilities 10 Discounted cash flows EV/Rev multiples 0.90X 5.93X 3.55X Liquidity discounts (4) 10.00% 40.00% 17.6 4 Discount rate 10.00% 12.00% 10.45% NAV / prices (5) n.a. n.a. n.a. Derivative financial instruments Interest rate derivatives and interest-rate-linked structured notes (7) Derivative related assets 380 Discounted cash flows Interest rates 1.27% 2.16% Even Derivative related liabilities 943 Option pricing model CPI swap rates 1.40% 2.00% Even 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 (7) Discounted cash flows Dividend yields 0.10% 8.77% Lower Derivative related assets 11 Option pricing model Equity (EQ)-EQ 34.00% 95.40% Middle Deposits 156 EQ-FX (71.40)% 30.50% Middle Derivative related liabilities 180 EQ volatilities 4.00% 110.00% Upper Other Derivative related assets 32 Other assets 77 Deposits – Derivative related liabilities 27 Other liabilities 60 Total $ 2,954 $ 1,376 As at October 31, 2018 (Millions of Canadian dollars, except for prices, percentages and ratios) Fair value Significant Range of input values (1), (2) Products Reporting line in the fair value Assets Liabilities Valuation Low High Weighted Non-derivative Auction rate securities Discounted cash flows Discount margins 1.32% 2.70% 1.95% U.S. state, municipal and agencies debt 45 Default rates 3.00% 3.00% 3.00% Asset-backed securities 110 Prepayment rates 4.00% 5.50% 4.56% Recovery rates 96.50% 97.50% 96.59% Corporate debt Price-based Prices $ 72.00 $ 123.06 $ 103.84 Corporate debt and other debt 28 Discounted cash flows Credit spread 0.90% 11.30% 4.50% Loans 551 Credit enhancement 11.80% 15.80% 13.10% Government debt and municipal bonds Price-based Prices $ 65.50 $ 100.00 $ 66.41 U.S. state, municipal and agencies debt 21 Discounted cash flows Yields 3.50% 7.60% 5.75% Mortgage-backed securities – Corporate debt and other debt 185 Private equities, hedge fund investments and related equity derivatives Market comparable EV/EBITDA multiples 6.16X 17.80X 14.46X Equities 1,385 Price-based P/E multiples 9.10X 26.41X 18.26X Derivative related liabilities 24 Discounted cash flows EV/Rev multiples 0.90X 6.63X 4.86X Liquidity discounts (4) 10.00% 40.00% 18.27% Discount rate 10.52% 10.52% 10.52% NAV / prices (5) n.a. n.a. n.a. Derivative financial instruments Interest rate derivatives and interest-rate-linked structured notes (7) Derivative related assets 260 Discounted cash flows Interest rates 2.30% 3.00% Even Derivative related liabilities 740 Option pricing model CPI swap rates 1.90% 2.10% Even 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 (7) Discounted cash flows Dividend yields 0.30% 8.40% Lower Derivative related assets 281 Option pricing model Equity (EQ)-EQ correlations (55.00 )% 100.00% Middle Deposits 390 EQ-FX (71.40)% 30.50% Middle Derivative related liabilities 328 EQ volatilities 8.00% 164.00% Upper Other Derivative related assets 36 Other assets 65 Deposits (5 ) Derivative related liabilities 51 Other liabilities 68 Total $ 2,967 $ 1,596 (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 acronyms stand for 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 $255 million (October 31, 2018 – $207 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 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 po |
