| Fair value measurement | Note 3 Fair value measurement This note presents the fair values of financial instruments and explains how we determine those values. Note 1, “Basis of preparation and summary of significant accounting policies”, sets out the accounting treatment for each measurement category of financial instruments. Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, between market participants in an orderly transaction in the principal market at the measurement date under current market conditions (i.e., the exit price). The determination of fair value requires judgment and is based on market information, where available and appropriate. Fair value measurements are categorized into three levels within a fair value hierarchy (Level 1, 2 or 3) based on the valuation inputs used in measuring the fair value, as outlined below.
• Level 1 – Unadjusted quoted market prices in active markets for identical assets or liabilities we can access at the measurement date. Bid prices, ask prices or prices within the bid and ask, which are the most representative of the fair value, are used as appropriate to measure fair value. Fair value is best evidenced by an independent quoted market price for the same instrument in an active market. An active market is one where transactions are occurring with sufficient frequency and volume to provide quoted prices on an ongoing basis.
• Level 2 – Quoted prices for identical assets or liabilities in markets that are inactive or observable market quotes for similar instruments, or use of valuation techniques where all significant inputs are observable. Inactive markets may be characterized by a significant decline in the volume and level of observed trading activity or through large or erratic bid/offer spreads. In instances where traded markets do not exist or are not considered sufficiently active, we measure fair value using valuation models.
• Level 3 – Non-observable or indicative prices or use of valuation techniques where one or more significant inputs are non-observable. For a significant portion of our financial instruments, quoted market prices are not available because of the lack of traded markets, and even where such markets do exist, they may not be considered sufficiently active to be used as a final determinant of fair value. When quoted market prices in active markets are not available, we would consider using valuation models. The valuation model and technique we select maximizes the use of observable market inputs to the extent possible and appropriate in order to estimate the price at which an orderly transaction would take place at the measurement date. In an inactive market, we consider all reasonably available information, including any available pricing for similar instruments, recent arm’s-length market transactions, any relevant observable market inputs, indicative dealer or broker quotations, and our own internal model-based estimates. Valuation adjustments are an integral component of our fair valuation process. We apply judgment in establishing valuation adjustments that take into account various factors that may have an impact on the valuation. Such factors primarily include, but are not limited to, the bid-offer spreads, illiquidity due to lack of market depth, parameter uncertainty and other market risk, model risk and credit risk of our derivative assets and liabilities, as well as adjustments for valuing our uncollateralized derivative assets and liabilities based on an estimated market cost of funds curve. such as benchmark and government yield curves and spread differentials observed through independent dealers, brokers, and third-party multi-contributor consensus pricing sources. Asset-backed securities (ABS) and mortgage-backed securities (MBS) not issued or guaranteed by a government are valued using discounted cash flow models making maximum use of market observable inputs, such as broker quotes on identical or similar securities and other pricing information obtained from third-party pricing sources adjusted for the characteristics and the performance of the underlying collateral. Other key inputs used include prepayment and liquidation rates, credit spreads, and discount rates commensurate with the risks involved. These assumptions factor in information that is derived from actual transactions, underlying reference asset performance, external market research, and market indices, where appropriate. Privately issued debt and equity securities, which include certain Community Reinvestment Act equity investments and Federal Home Loan Bank (FHLB) stock, are valued using recent market transactions, where available. Otherwise, fair values are derived from valuation models using a market or income approach. These models consider various factors, including projected cash flows, earnings, revenue or other third-party evidence as available. The fair value of limited partnership investments is based upon net asset values published by third-party fund managers and is adjusted for more recent information, where available and appropriate. The carrying value of Community Reinvestment Act equity investments and FHLB stock approximates fair value. Generally, the unit of account for a financial instrument is the individual instrument, and valuation adjustments are applied at an individual instrument level, consistent with that unit of account. In cases where we manage a group of financial assets and liabilities that consist of substantially similar and offsetting risk exposures, the fair value of the group of financial assets and liabilities is measured on the basis of the net open risks. We apply judgment in determining the most appropriate inputs and the weighting we ascribe to each such input as well as in our selection of valuation methodologies. Regardless of the valuation technique we use, we incorporate assumptions that we believe market participants would make for credit, funding, and liquidity considerations. When the fair value of a financial instrument at inception is determined using a valuation technique that incorporates one or more significant inputs that are non-observable, no inception profit or loss (the difference between the determined fair value and the transaction price) is recognized at the time the asset or liability is initially recorded. Any gains or losses at inception are deferred and recognized only in future periods over the term of the instruments or when the inputs become significantly observable. We have an ongoing process for evaluating and enhancing our valuation techniques and models. Where enhancements are made, they are applied prospectively, so that fair values reported in prior periods are not recalculated on the new basis. Valuation models used, including analytics for the construction of yield curves and volatility surfaces, are vetted and approved, consistent with our model risk policy. To ensure that valuations are appropriate, we have established internal guidance on fair value measurement, which is reviewed periodically in recognition of the dynamic nature of markets and the constantly evolving pricing practices in the market. A number of policies and controls are put in place to ensure that the internal guidance on fair value measurement is being applied consistently and appropriately, including independent validation of valuation inputs to external sources such as exchange quotes, broker quotes or other management-approved independent pricing sources. Key model inputs, such as yield curves and volatilities, are independently verified. The results from the independent price validation and any valuation adjustments are reviewed by the Independent Price Verification Committee on a monthly basis. This includes, but is not limited to, reviewing fair value adjustments and methodologies, independent price verification results, limits and valuation uncertainty. Due to the judgment used in applying a wide variety of acceptable valuation techniques and models, as well as the use of estimates inherent in this process, estimates of fair value for the same or similar assets may differ among financial institutions. The calculation of fair value is based on market conditions as at each consolidated balance sheet date and may not be reflective of ultimate realizable value. Methods and assumptions Financial instruments with fair value equal to carrying value For financial instruments that are not carried on the consolidated balance sheet at fair value and where we consider the carrying value to be a reasonable approximation of fair value due to their short-term nature and generally negligible credit risk, the fair values disclosed for these financial instruments are assumed to equal their carrying values. These financial instruments are: cash and non-interest-bearing deposits with banks; short-term interest-bearing deposits with banks; cash collateral on securities borrowed; securities purchased under resale agreements; customers’ liability under acceptances; cash collateral on securities lent; obligations related to securities sold under repurchase agreements; acceptances; deposits with demand features; and certain other financial assets and liabilities. S The fair value of debt or equity securities and obligations related to securities sold short is based on quoted bid or ask market prices where available in an active market. Securities for which quotes in an active market are not available are valued using all reasonably available market information as described below. The fair value of government issued or guaranteed securities that are not traded in an active market is calculated by applying valuation techniques such as discounted cash flow models using implied yields derived from the prices of actively traded government securities and most recently observable spread differentials. The fair value of corporate debt securities is determined using the most recently executed transaction prices, and where appropriate, adjusted to the price of these securities obtained from independent dealers, brokers, and third-party multi-contributor consensus pricing sources. When observable price quotations are not available, fair value is determined based on discounted cash flow models using observable discounting curves Loans The fair value of variable-rate loans and loans for which interest rates are repriced or reset frequently is assumed to be equal to their carrying value. The fair value for fixed-rate loans is estimated using a discounted cash flow calculation that uses market interest rates. The ultimate fair value of loans disclosed is net of the associated allowance for credit losses. The fair value of loans is not adjusted for the value of any credit derivatives used to manage the credit risk associated with them. The fair value of these credit derivatives is disclosed separately. Other assets and other liabilities Other assets and other liabilities mainly comprise accrued interest receivable or payable, brokers’ client accounts receivable or payable, precious metals and accounts receivable or payable. The fair values of other assets and other liabilities are primarily assumed to be at cost or amortized cost as we consider the carrying value to be a reasonable approximation of fair value, except for the fair value of precious metals, which is quoted in an active market. Other assets also include investment in bank-owned life insurance carried at the cash surrender value, which is assumed to be a reasonable approximation of fair value. Deposits T Certain deposits designated at FVTPL are structured notes that have coupons or repayment terms linked to the performance of commodities, debt or equity securities. The fair value of these structured notes is estimated using internally vetted valuation models for the debt and embedded derivative portions of the notes by incorporating market observable prices of the referenced securities or comparable securities, and other inputs such as interest rate yield curves, equity prices or indices, market volatility levels, foreign exchange rates and changes in our own credit risk, where appropriate. Where observable prices or inputs are not available, management judgment is required to determine fair values by assessing other relevant sources of information such as historical data, proxy information from similar transactions, and through extrapolation and interpolation techniques. Appropriate market risk valuation adjustments for such inputs are assessed in all such instances. The fair value of secured borrowings, which comprises liabilities issued by or as a result of activities associated with the securitization of residential mortgages, the Covered Bond Programme, and consolidated securitization vehicles, is based on identical or proxy market observable quoted bond prices or determined by discounting the contractual cash flows using maximum market observable inputs, such as market interest rates, or credit spreads implied by debt instruments of similar credit quality, as appropriate. Subordinated indebtedness The fair value of subordinated indebtedness is determined by reference to market prices for the same or similar debt instruments. Derivative instruments The fair value of exchange-traded derivatives such as options and futures is based on quoted market prices. OTC derivatives primarily consist of interest rate swaps, foreign exchange forwards, equity and commodity derivatives, interest rate and currency derivatives, and credit derivatives. For such instruments, where quoted market prices or third-party consensus pricing information are not available, valuation techniques are employed to estimate fair value on the basis of pricing models. Such vetted pricing models incorporate current market measures for interest rates, foreign exchange rates, equity and commodity prices and indices, credit spreads, corresponding market volatility levels, and other market-based pricing factors. In order to reflect the observed market practice of pricing collateralized and uncollateralized derivatives, our valuation approach uses overnight indexed swap (OIS) curves as the discount rate for valuing collateralized derivatives and uses an estimated market cost of funds curve as the discount rate for valuing uncollateralized derivatives. For most collateralized derivatives that are cleared through central clearing houses, changes to market discounting conventions were implemented in 2020 to support the global market efforts to transition IBOR to the new benchmark rates. Certain centrally cleared collateralized derivatives have transitioned to the use of the new benchmark replacement rates as the overnight index discount rates, including USD derivatives cleared through London Clearing House (LCH) or Chicago Mercantile Exchange (CME), which have transitioned their discounting from the US Fed Funds rate to the SOFR. Uncollateralized derivatives are valued based on an estimated market cost of funds curve, which reduces the fair value of uncollateralized derivative assets incremental to the reduction in fair value for credit risk already reflected through the credit valuation adjustment (CVA). In contrast, the use of a market cost of funds curve reduces the fair value of uncollateralized derivative liabilities in a manner that generally includes adjustments for our own credit. As market practices continue to evolve in regard to derivative valuation, further adjustments may be required in the future. In determining the fair value of complex and customized derivatives, such as equity, credit, and commodity derivatives written in reference to indices or baskets of reference, we consider all reasonably available information including any relevant observable market inputs, third-party consensus pricing inputs, indicative dealer and broker quotations, and our own internal model-based estimates, which are vetted and pre-approved in accordance with our model risk policy, and are regularly and periodically calibrated. The model calculates fair value based on inputs specific to the type of contract, which may include stock prices, correlation for multiple assets, interest rates, foreign exchange rates, yield curves, and volatility surfaces. Where observable prices or inputs are not available, management judgment is required to determine fair values by assessing other relevant sources of information such as historical data, proxy information from similar transactions, and through extrapolation and interpolation techniques. Appropriate parameter uncertainty and market risk valuation adjustments for such inputs and other model risk valuation adjustments are assessed in all such instances. In addition to reflecting estimated market funding costs in our valuation of uncollateralized derivative receivables, we also consider whether a CVA is required to recognize the risk that any given derivative counterparty may not ultimately be able to fulfill its obligations. The CVA is driven off market-observed credit spreads or proxy credit spreads and our assessment of the net counterparty credit risk (CCR) exposure. In assessing this exposure, we also take into account credit mitigants such as collateral, master netting arrangements, and settlements through clearing houses. As noted above, the fair value of uncollateralized derivative liabilities based on market cost of funding generally includes adjustments for our own credit. Mortgage commitments The fair value of mortgage commitments designated at FVTPL is for fixed-rate residential mortgage commitments and is based on changes in market interest rates for the loans between the commitment and the consolidated balance sheet dates. The valuation model takes into account the expected probability that outstanding commitments will be exercised as well as the length of time the commitment is offered. Fair value of financial instruments
Carrying value
$ millions, as at October 31 Amortized cost Mandatorily measured at FVTPL Designated at FVTPL Fair value through OCI Total Fair value Fair value over (under) carrying value
2021 Financial assets
Cash and deposits with banks $ 56,701 $ 296 $ – $ – $ 56,997 $ 56,997 $ –
Securities 35,159 72,192 53 53,997 161,401 161,712 311
Cash collateral on securities borrowed 12,368 – – – 12,368 12,368 –
Securities purchased under resale agreements 60,482 7,090 – – 67,572 67,572 –
Loans
Residential mortgages 251,230 16 – – 251,246 249,786 (1,460 )
Personal 41,129 – – – 41,129 41,114 (15 )
Credit card 10,509 – – – 10,509 10,509 –
Business and government 123,054 25,651 332 – 149,037 148,960 (77 )
Derivative instruments – 35,912 – – 35,912 35,912 –
Customers’ liability under acceptances 10,958 – – – 10,958 10,958 –
Other assets 21,054 – – – 21,054 21,054 –
Financial liabilities
Deposits
Personal $ 205,461 $ – $ 8,471 $ – $ 213,932 $ 213,949 $ 17
Business and government 334,632 – 9,756 – 344,388 345,533 1,145
Bank 20,246 – – – 20,246 20,246 –
Secured borrowings 41,539 – 1,053 – 42,592 42,838 246
Derivative instruments – 32,101 – – 32,101 32,101 –
Acceptances 10,961 – – – 10,961 10,961 –
Obligations related to securities sold short – 22,790 – – 22,790 22,790 –
Cash collateral on securities lent 2,463 – – – 2,463 2,463 –
Obligations related to securities sold under repurchase agreements 67,905 – 3,975 – 71,880 71,880 –
Other liabilities 16,854 113 51 – 17,018 17,018 –
Subordinated indebtedness 5,539 – – – 5,539 5,820 281
2020 Financial assets
Cash and deposits with banks $ 61,570 $ 948 $ – $ – $ 62,518 $ 62,518 $ –
Securities 31,800 62,576 117 54,553 149,046 149,599 553
Cash collateral on securities borrowed 8,547 – – – 8,547 8,547 –
Securities purchased under resale agreements 58,090 7,505 – – 65,595 65,595 –
Loans
Residential mortgages 220,739 63 – – 220,802 222,920 2,118
Personal 41,390 – – – 41,390 41,452 62
Credit card 10,722 – – – 10,722 10,722 –
Business and government 110,220 23,291 357 – 133,868 134,097 229
Derivative instruments – 32,730 – – 32,730 32,730 –
Customers’ liability under acceptances 9,606 – – – 9,606 9,606 –
Other assets 15,940 – – – 15,940 15,940 –
Financial liabilities
Deposits
Personal $ 199,593 $ – $ 2,559 $ – $ 202,152 $ 202,345 $ 193
Business and government 301,546 – 9,880 – 311,426 312,279 853
Bank 17,011 – – – 17,011 17,011 –
Secured borrowings 39,560 – 591 – 40,151 40,586 435
Derivative instruments – 30,508 – – 30,508 30,508 –
Acceptances 9,649 – – – 9,649 9,649 –
Obligations related to securities sold short – 15,963 – – 15,963 15,963 –
Cash collateral on securities lent 1,824 – – – 1,824 1,824 –
Obligations related to securities sold under repurchase agreements (1) 54,617 – 17,036 – 71,653 71,653 –
Other liabilities 15,282 133 9 – 15,424 15,424 –
Subordinated indebtedness 5,712 – – – 5,712 5,993 281
(1) Includes obligations related to securities sold under repurchase agreements supported by bearer deposit notes that are pledged as collateral under the Bank of Canada Term Repo Facility. Fair value of derivative instruments
$ millions, as at October 31 2021 2020
Positive Negative Net Positive Negative Net
Held for trading
Interest rate derivatives
Over-the-counter – Forward rate agreements $ 127 $ 79 $ 48 $ 108 $ 161 $ (53 )
– Swap contracts 8,365 7,928 437 12,296 9,309 2,987
– Purchased options 101 – 101 109 – 109
– Written options – 177 (177 ) – 129 (129 )
8,593 8,184 409 12,513 9,599 2,914
Exchange-traded – Purchased options 3 – 3 4 – 4
3 – 3 4 – 4
Total interest rate derivatives 8,596 8,184 412 12,517 9,599 2,918
Foreign exchange derivatives
Over-the-counter – Forward contracts 5,373 5,555 (182 ) 6,655 6,358 297
– Swap contracts 5,214 3,600 1,614 3,469 3,613 (144 )
– Purchased options 293 – 293 303 – 303
– Written options – 203 (203 ) – 214 (214 )
Total foreign exchange derivatives 10,880 9,358 1,522 10,427 10,185 242
Credit derivatives
Over-the-counter – Credit default swap contracts – 50 58 (8 ) 104 47 57
– Credit default swap contracts – 3 45 (42 ) 2 100 (98 )
Total credit derivatives 53 103 (50 ) 106 147 (41 )
Equity derivatives
Over-the-counter 1,842 5,356 (3,514 ) 1,995 3,427 (1,432 )
Exchange-traded 4,650 3,422 1,228 3,153 3,537 (384 )
Total equity derivatives 6,492 8,778 (2,286 ) 5,148 6,964 (1,816 )
Precious metal derivatives
Over-the-counter 132 147 (15 ) 283 366 (83 )
Total precious metal derivatives 132 147 (15 ) 283 366 (83 )
Other commodity derivatives
Over-the-counter 8,151 2,348 5,803 2,604 1,806 798
Exchange-traded 343 1,122 (779 ) 271 325 (54 )
Total other commodity derivatives 8,494 3,470 5,024 2,875 2,131 744
Total held for trading 34,647 30,040 4,607 31,356 29,392 1,964
Held for ALM
Interest rate derivatives
Over-the-counter – Forward rate agreements 148 37 111 – 1 (1 )
– Swap contracts 236 341 (105 ) 310 392 (82 )
– Purchased o 6 – 6 17 – 17
– Written options – – – 1 – 1
Total interest rate derivatives 390 378 12 328 393 (65 )
Foreign exchange derivatives
Over-the-counter – Forward contracts 22 40 (18 ) 14 14 –
– Swap contracts 805 1,641 (836 ) 1,021 684 337
Total foreign exchange derivatives 827 1,681 (854 ) 1,035 698 337
Credit derivatives
Over-the-counter – Credit default swap contracts – – 1 (1 ) – 1 (1 )
Total credit derivatives – 1 (1 ) – 1 (1 )
Equity derivatives
Over-the-counter 48 1 47 8 24 (16 )
Total equity derivatives 48 1 47 8 24 (16 )
Other commodity derivatives
Over-the-counter – – – 3 – 3
Total other commodity derivatives – – – 3 – 3
Total held for ALM 1,265 2,061 (796 ) 1,374 1,116 258
Total fair value 35,912 32,101 3,811 32,730 30,508 2,222
Less: effect of netting (16,585 ) (16,585 ) – (19,347 ) (19,347 ) –
$ 19,327 $ 15,516 $ 3,811 $ 13,383 $ 11,161 $ 2,222 Assets and liabilities not carried on the consolidated balance sheet at fair value The table below presents the fair values by level within the fair value hierarchy for those assets and liabilities in which fair value is not assumed to equal the carrying value:
Level 1 Level 2 Level 3
Quoted market price Valuation technique – Valuation technique – non-observable market inputs Total 2021 Total 2020
$ millions, as at October 31 2021 2020 2021 2020 2021 2020
Financial assets
Amortized cost securities $ – $ – $ 34,878 $ 31,773 $ 592 $ 580 $ 35,470 $ 32,353
Loans
Residential mortgages – – – – 249,770 222,857 249,770 222,857
Personal – – – – 41,114 41,452 41,114 41,452
Credit card – – – – 10,509 10,722 10,509 10,722
Business and government – – – – 122,977 110,449 122,977 110,449
Investment in equity-accounted associates (1) – 10 – – 89 83 89 93
Financial liabilities
Deposits
Personal $ – $ – $ 42,015 $ 52,648 $ 1,107 $ 1,282 $ 43,122 $ 53,930
Business and government – – 146,442 132,016 2,222 2,302 148,664 134,318
Bank – – 9,751 10,048 – – 9,751 10,048
Secured borrowings – – 40,050 38,275 1,735 1,720 41,785 39,995
Subordinated indebtedness – – 5,820 5,993 – – 5,820 5,993
(1) See Note 26 for details of our equity-accounted associates. Financial instruments carried on the consolidated balance sheet at fair value The table below presents the fair values of financial instruments by level within the fair value hierarchy:
Level 1 Level 2 Level 3
Quoted market price Valuation technique – observable market inputs Valuation technique – non-observable market inputs Total 2021 Total 2020
$ millions, as at October 31 2021 2020 2021 2020 2021 2020
Financial assets
Deposits with banks $ – $ – $ 296 $ 948 $ – $ – $ 296 $ 948
Securities mandatorily measured and designated
Government issued or guaranteed 3,015 3,917 24,737 (1) 25,091 (1) – – 27,752 29,008
Corporate equity 37,981 27,919 219 47 4 16 38,204 27,982
Corporate debt – – 3,997 3,525 2 25 3,999 3,550
Mortgage- and asset-backed – – 2,235 (2) 2,018 (2) 55 135 2,290 2,153
40,996 31,836 31,188 30,681 61 176 72,245 62,693
Loans mandatorily measured at FVTPL
Business and government – – 24,945 23,022 1,038 (3) 626 (3) 25,983 23,648
Residential mortgages – – 16 63 – – 16 63
– – 24,961 23,085 1,038 626 25,999 23,711
Debt securities measured at FVOCI
Government issued or guaranteed 5,309 3,912 38,122 41,269 – – 43,431 45,181
Corporate debt – – 7,833 6,224 – – 7,833 6,224
Mortgage- and asset-backed – – 1,897 2,563 – – 1,897 2,563
5,309 3,912 47,852 50,056 – – 53,161 53,968
Equity securities designated at FVOCI
Corporate equity 125 41 319 304 392 240 836 585
125 41 319 304 392 240 836 585
Securities purchased under resale agreements – – 7,090 7,505 – – 7,090 7,505
Derivative instruments
Interest rate 3 4 8,948 12,793 35 48 8,986 12,845
Foreign exchange – – 11,707 11,462 – – 11,707 11,462
Credit – – 4 8 49 98 53 106
Equity 4,650 3,153 1,877 1,791 13 212 6,540 5,156
Precious metal – – 132 283 – – 132 283
Other commodity 343 271 8,151 2,607 – – 8,494 2,878
4,996 3,428 30,819 28,944 97 358 35,912 32,730
Total financial assets $ 51,426 $ 39,217 $ 142,525 $ 141,523 $ 1,588 $ 1,400 $ 195,539 $ 182,140
Financial liabilities
Deposits and other liabilities (4) $ – $ – $ (18,702 ) $ (13,176 ) $ (742 ) $ 4 $ (19,444 ) $ (13,172 )
Obligations related to securities sold short (11,226 ) (5,363 ) (11,564 ) (10,600 ) – – (22,790 ) (15,963 )
Obligations related to securities sold under – – (3,975 ) (17,036 ) – – (3,975 ) (17,036 )
Derivative instruments
Interest rate – – (8,426 ) (9,964 ) (136 ) (28 ) (8,562 ) (9,992 )
Foreign exchange – – (11,039 ) (10,883 ) – – (11,039 ) (10,883 )
Credit – – (50 ) (41 ) (54 ) (107 ) (104 ) (148 )
Equity (3,422 ) (3,537 ) (5,280 ) (3,288 ) (77 ) (163 ) (8,779 ) (6,988 )
Precious metal – – (147 ) (366 ) – – (147 ) (366 )
Other commodity (1,122 ) (325 ) (2,348 ) (1,806 ) – – (3,470 ) (2,131 )
(4,544 ) (3,862 ) (27,290 ) (26,348 ) (267 ) (298 ) (32,101 ) (30,508 )
Total financial liabilities $ (15,770 ) $ (9,225 ) $ (61,531 ) $ (67,160 ) $ (1,009 ) $ (294 ) $ (78,310 ) $ (76,679 )
(1) Includes $49 million related to securities designated at FVTPL (2020: $57 million).
(2) Includes $4 million related to ABS designated at FVTPL (2020: $60 million).
(3) Includes $332 million related to loans designated at FVTPL (2020: $357 million).
(4) Comprises deposits designated at FVTPL of $18,530 million (2020: $13,419 million), net bifurcated embedded derivative liabilities of $750 million (2020: net bifurcated embedded derivative assets of $389 million), other liabilities designated at FVTPL of $51 million (2020: $9 million), and other financial liabilities measured at fair value of $113 million (2020: $133 million). Transfers between levels in the fair value hierarchy are deemed to have occurred at the beginning of the year in which the transfer occurred. Transfers between levels can occur as a result of additional or new information regarding valuation inputs and changes in their observability. During the year, we transferred $19 million of securities mandatorily measured at FVTPL (2020: $197 million) from Level 1 to Level 2 million (2020: nil) from Level 2 to Level 1, and nil of securities sold short (2020: The following table presents the changes in fair value of financial assets and liabilities in Level 3. These instruments are measured at fair value utilizing non-observable
Net gains (losses) included in income (1)
$ millions, for the year ended October 31 Opening Realized (2) Unrealized (2)(3) Net (4) Transfer Transfer Purchases/ Sales/ Closing
2021
Securities mandatorily measured and
Corporate equity $ 16 $ – $ (5 ) $ – $ – $ – $ 23 $ (30 ) $ 4
Corporate debt 25 – 13 – – – 2 (38 ) 2
Mortgage- and asset-backed 135 – – – – – 44 (124 ) 55
Loans mandatorily measured at FVTPL
Business and government 626 – (3 ) (51 ) – – 556 (90 ) 1,038
Equity securities designated at FVOCI
Corporate equity 240 – – 80 – – 137 (65 ) 392
Derivative instruments
Interest rate 48 – 1 – – (2 ) 3 (15 ) 35
Credit 98 (22 ) (27 ) – – – – – 49
Equity 212 (3 ) 2 – – (32 ) 10 (176 ) 13
Total assets $ 1,400 $ (25 ) $ (19 ) $ 29 $ – $ (34 ) $ 775 $ (538 ) $ 1,588
Deposits and other liabilities (5) $ 4 $ (340 ) $ (541 ) $ – $ (15 ) $ (14 ) $ (93 ) $ 257 $ (742 )
Derivative instruments
Interest rate (28 ) – (28 ) – (26 ) (6 ) (31 ) (17 ) (136 )
Credit (107 ) 22 34 – – – – (3 ) (54 )
Equity (163 ) (41 ) (6 ) – – 58 (69 ) 144 (77 )
Total liabilities $ (294 ) $ (359 ) $ (541 ) $ – $ (41 ) $ 38 $ (193 ) $ 381 $ (1,009 )
2020
Securities mandatorily measured and designated at FVTPL
Corporate equity $ 7 $ – $ (8 ) $ – $ 7 $ – $ 10 $ – $ 16
Corporate debt 23 – 2 – – – – – 25
Mortgage- and asset-backed 173 – – – – – 118 (156 ) 135
Loans mandatorily measured at FVTPL
Business and government 831 – – 3 – – 1,270 (1,478 ) 626
Debt securities measured at FVOCI
Corporate debt – – – (3 ) 20 – 1 (18 ) –
Equity securities designated at FVOCI
Corporate equity 291 – – 63 – – 50 (164 ) 240
Derivative instruments
Interest rate 56 – 32 – – – 6 (46 ) 48
Credit 104 (7 ) 1 – – – – – 98
Equity 252 – (40 ) – – – 53 (53 ) 212
Total assets $ 1,737 $ (7 ) $ (13 ) $ 63 $ 27 $ – $ 1,508 $ (1,915 ) $ 1,400
Deposits and other liabilities (5) $ (601 ) $ – $ 512 $ – $ (42 ) $ 29 $ (72 ) $ 178 $ 4
Derivative instruments
Interest rate (1 ) – (33 ) – – – – 6 (28 )
Credit (112 ) 7 (2 ) – – – – – (107 )
Equity (155 ) – 14 – – – (60 ) 38 (163 )
Total liabilities $ (869 ) $ 7 $ 491 $ _ $ (42) $ 29 $ (132 ) $ 222 $ (294 )
(1) Cumulative AOCI gains or losses related to equity securities designated at FVOCI are reclassified from AOCI to retained earnings at the time of disposal or derecognition.
(2) Includes foreign currency gains and losses related to debt securities measured at FVOCI.
(3) Comprises unrealized gains and losses relating to these assets and liabilities held at the end of the reporting year.
(4) Foreign exchange translation on loans mandatorily measured at FVTPL held by foreign operations and denominated in the same currency as the foreign operations is included in OCI.
(5) Includes deposits designated at FVTPL of $90 million (2020: $137 million) , million) and other liabilities designated at FVTPL of $51 million (2020: nil). Quantitative information about significant non-observable inputs Valuation techniques using one or more non-observable inputs are used for a number of financial instruments. The following table discloses the valuation techniques and quantitative information about the significant non-observable inputs used in Level 3 financial instruments:
Range of inputs
$ millions, as at October 31 2021 Valuation techniques Key non-observable inputs Low High
Securities mandatorily measured and designated at FVTPL
Corporate equity and debt $ 6 Valuation multiple Earnings multiple 11.6 11.6
Mortgage- and asset-backed 55 Discounted cash flow Credit spread 2.0 % 2.0 %
Market proxy or direct broker quote Market proxy or direct broker quote 0.5 0.5
Equity securities designated at FVOCI
Corporate equity
Limited partnerships and private companies 392 Adjusted net asset |
