v3.22.2.2
Derivative financial instruments and hedging activities
 12 Months Ended
Oct. 31, 2022
Text Block [Abstract]  
Derivative financial instruments and hedging activities
Note 9    Derivative financial instruments and hedging activities
Derivative instruments are categorized as either financial or
non-financial
derivatives. Financial derivatives are financial contracts whose value is derived from an underlying interest rate, foreign exchange rate, credit risk, and equity or equity index.
Non-financial
derivatives are contracts whose value is derived from a precious metal, commodity instrument or index. The notional amount of derivatives represents the contract amount used as a reference point to calculate payments. Notional amounts are generally not exchanged by counterparties, and do not reflect our EAD.
Financial derivatives
Forwards and futures
Forward contracts are
non-standardized
agreements that are transacted between counterparties in the OTC market, whereas futures are standardized contracts with respect to amounts and settlement dates, and are traded on regular futures exchanges. Examples of forwards and futures are described below.
Interest rate forwards (forward rate agreements) and futures are contractual obligations to buy or sell an interest-rate sensitive financial instrument on a predetermined future date at a specified price.
Foreign exchange forwards and futures are contractual obligations to exchange one currency for another at a specified price for settlement at a predetermined future date.
Equity forwards and futures are contractual obligations to buy or sell at a fixed value (the specified price) of an equity index, a basket of stocks or a single stock at a predetermined future date.
Swaps
Swaps are OTC contracts in which two counterparties exchange a series of cash flows based on agreed upon rates applied to a notional amount. Examples of swap agreements are described below.
Interest rate swaps are agreements where two counterparties exchange a series of payments based on different interest rates applied to a notional amount in a single currency. Certain interest rate swaps are transacted and settled through clearing houses which act as central counterparties. Cross currency swaps involve the exchange of fixed payments in one currency for the receipt of fixed payments in another currency. Cross currency interest rate swaps involve the exchange of both interest and notional amounts in two different currencies.
Equity swaps are contracts in which one counterparty agrees to pay or receive from the other cash flows based on changes in the value of an equity index, a basket of stocks or a single stock.
Options
Options are contractual agreements under which the seller (writer) grants the purchaser the right, but not the obligation, either to buy (call option) or sell (put option) a security, exchange rate, interest rate, or other financial instrument or commodity at a specified price, at or by a predetermined future date. The seller (writer) of an option can also settle the contract by paying the cash settlement value of the purchaser’s right. The seller (writer) receives a premium from the purchaser for this right. The various option agreements that we enter into include but are not limited to interest rate options, foreign currency options, equity options and index options.
Credit derivatives
Credit derivatives are OTC contracts that transfer credit risk related to an underlying financial instrument (referenced asset) from one counterparty to another. Credit derivatives include credit default swaps, credit default baskets and total return swaps.
Credit default swaps provide protection against the decline in the value of the referenced asset as a result of specified credit events such as default or bankruptcy. They are similar in structure to an option, whereby the purchaser pays a premium to the seller of the credit default swap in return for payment contingent on a credit event affecting the referenced asset.
Credit default baskets are similar to credit default swaps except that the underlying referenced financial instrument is a group of assets instead of a single asset.
Total return swaps are contracts where one counterparty agrees to pay or receive from the other cash amounts based on changes in the value of a referenced asset or group of assets, including any returns such as interest earned on these assets, in exchange for amounts that are based on prevailing market funding rates.
Other derivative products
Other contracts are stable value and equity derivative contracts.
Non-financial
derivatives
Other contracts also include
non-financial
derivative products such as precious metal and commodity derivative contracts in both the OTC and exchange markets.
Derivatives issued for trading purposes
Most of our derivative transactions relate to client-driven sales and trading activities, and associated market risk hedging. Sales activities include the structuring and marketing of derivative products to clients, enabling them to modify or reduce risks. Trading involves market-making, positioning and arbitrage activities. Market-making involves quoting bid and offer prices to other market participants with the intention of generating revenue based on spread and volume. Positioning involves the active management of derivative transactions with the expectation of profiting from favourable movements in prices, rates, or indices. Arbitrage activities involve identifying and profiting from price differentials between markets and product types. Any realized and unrealized gains or losses on derivatives used for trading purposes are recognized immediately in
Non-interest
income – Trading revenue.
Derivatives issued for other-than-trading purposes
We also use derivatives for purposes other than trading, primarily for hedging, in conjunction with the management of interest rate, credit, equity and foreign exchange risk related to our funding, lending, investment activities and asset/liability management.
Interest rate swaps are used to manage our exposure to interest rate risk by modifying the repricing or maturity characteristics of existing and/or forecasted assets and liabilities, including funding and investment activities. Purchased options are used to hedge redeemable deposits and other options embedded in consumer products. We manage our exposure to foreign currency risk with cross currency swaps and foreign exchange forward contracts. We predominantly use credit derivatives to manage our credit exposures. We mitigate industry sector concentrations and single-name exposures related to our credit portfolio by purchasing credit derivatives to transfer credit risk to third parties.
Certain derivatives and cash instruments are specifically designated and qualify for hedge accounting. From time to time, we also enter into derivative transactions to economically hedge certain exposures that do not otherwise qualify for hedge accounting, or where hedge accounting is not considered economically feasible to implement. In such circumstances, changes in fair value are reflected in Other income in
Non-interest
income.
Notional amount of derivatives by term to maturity (absolute amounts)
(1)
 
    
As at October 31, 2022
  
   
Term to maturity
              
             
(Millions of Canadian dollars)
  
Within
1 year
    
1 through
5 years
    
Over
5 years
    
Total
    
Trading
    
Other than
Trading
  
Over-the-counter
contracts
                                                
Interest rate contracts
                                                
Forward rate agreements
  
$
763,398
 
  
$
44,188
 
  
$
353
 
  
$
807,939
 
  
$
806,576
 
  
$
1,363
 
Swaps
  
 
4,994,006
 
  
 
6,934,996
 
  
 
4,781,148
 
  
 
16,710,150
 
  
 
16,001,414
 
  
 
708,736
 
Options purchased
  
 
100,504
 
  
 
577,780
 
  
 
151,084
 
  
 
829,368
 
  
 
829,368
 
  
 
–
 
Options written
  
 
108,770
 
  
 
556,652
 
  
 
182,841
 
  
 
848,263
 
  
 
848,263
 
  
 
–
 
Foreign exchange contracts
                                                
Forward contracts
  
 
2,187,124
 
  
 
86,136
 
  
 
2,648
 
  
 
2,275,908
 
  
 
2,230,901
 
  
 
45,007
 
Cross currency swaps
  
 
87,942
 
  
 
67,345
 
  
 
82,659
 
  
 
237,946
 
  
 
233,617
 
  
 
4,329
 
Cross currency interest rate swaps
  
 
518,244
 
  
 
1,572,490
 
  
 
879,541
 
  
 
2,970,275
 
  
 
2,918,063
 
  
 
52,212
 
Options purchased
  
 
58,075
 
  
 
18,061
 
  
 
3,199
 
  
 
79,335
 
  
 
79,335
 
  
 
–
 
Options written
  
 
62,266
 
  
 
16,623
 
  
 
3,274
 
  
 
82,163
 
  
 
82,163
 
  
 
–
 
Credit derivatives
(2)
  
 
1,143
 
  
 
35,621
 
  
 
6,751
 
  
 
43,515
 
  
 
42,785
 
  
 
730
 
Other contracts
(3)
  
 
228,709
 
  
 
93,431
 
  
 
19,392
 
  
 
341,532
 
  
 
327,860
 
  
 
13,672
 
Exchange-traded contracts
                                                
Interest rate contracts
                                                
Futures – long positions
  
 
148,032
 
  
 
50,869
 
  
 
–
 
  
 
198,901
 
  
 
197,251
 
  
 
1,650
 
Futures – short positions
  
 
233,941
 
  
 
98,763
 
  
 
65
 
  
 
332,769
 
  
 
332,320
 
  
 
449
 
Options purchased
  
 
56,353
 
  
 
12,173
 
  
 
–
 
  
 
68,526
 
  
 
68,526
 
  
 
–
 
Options written
  
 
16,394
 
  
 
6,168
 
  
 
–
 
  
 
22,562
 
  
 
22,562
 
  
 
–
 
Foreign exchange contracts
                                                
Futures – long positions
  
 
164
 
  
 
–
 
  
 
–
 
  
 
164
 
  
 
164
 
  
 
–
 
Other contracts
  
 
539,103
 
  
 
89,147
 
  
 
2,094
 
  
 
630,344
 
  
 
630,344
 
  
 
–
 
 
  
$
10,104,168
 
  
$
10,260,443
 
  
$
6,115,049
 
  
$
26,479,660
 
  
$
25,651,512
 
  
$
828,148
 
 
     As at October 31, 2021  
    Term to maturity              
             
(Millions of Canadian dollars)
   Within
1 year		     1 through
5 years		     Over
5 years		     Total     Trading     Other than
Trading		  
Over-the-counter
contracts
                                                
Interest rate contracts
                                                
Forward rate agreements
   $ 866,704     $ 161,835     $ 158     $ 1,028,697     $ 1,015,263     $ 13,434  
Swaps
     3,936,638       6,559,032       4,268,243       14,763,913       14,259,757       504,156  
Options purchased
     266,798       312,149       185,547       764,494       764,494       –  
Options written
     271,000       309,540       203,665       784,205       784,205       –  
Foreign exchange contracts
                                                
Forward contracts
     1,730,712       56,335       2,491       1,789,538       1,753,075       36,463  
Cross currency swaps
     82,316       57,968       72,864       213,148       204,789       8,359  
Cross currency interest rate swaps
     439,169       1,193,669       776,062       2,408,900       2,376,225       32,675  
Options purchased
     46,060       16,097       3,059       65,216       65,216       –  
Options written
     53,342       16,122       3,060       72,524       72,524       –  
Credit derivatives
(2)
     1,027       35,759       6,125       42,911       42,428       483  
Other contracts
(3)
     218,270       98,850       20,757       337,877       325,226       12,651  
Exchange-traded contracts
                                                
Interest rate contracts
                                                
Futures – long positions
     110,285       148,262       333       258,880       256,020       2,860  
Futures – short positions
     173,039       97,364       126       270,529       270,129       400  
Options purchased
     28,071       15,250       –       43,321       43,321       –  
Options written
     22,272       1,300       –       23,572       23,572       –  
Foreign exchange contracts
                                                
Futures – long positions
     129       –       –       129       129       –  
Other contracts
     391,339       84,135       1,175       476,649       476,649       –  
 
   $   8,637,171     $   9,163,667     $   5,543,665     $   23,344,503     $   22,733,022     $   611,481  
 
(1)   The derivative notional amounts are determined using the standardized approach for measuring counterparty credit risk
(SA-CCR)
in accordance with the Capital Adequacy Requirements (CAR).
(2)   Credit derivatives with a notional value of $
1
billion (October 31, 2021 – $1 billion) are economic hedges. Trading credit derivatives comprise protection purchased of $
26
 
billion (October 31, 2021 – $25 billion) and protection sold of $
17
billion (October 31, 2021 – $17 billion).
(3)   Other contracts exclude loan
 
un
derwriting commitm
ents
 of $
6
billion (October 31, 2021 – $9 billion), which are not classified as derivatives under CAR guidelines.
Fair value of derivative instruments
(1)
 
  
 
       As at
 
 
 
October 31, 2022
 
 
 
 
October 31, 2021
 
           
(Millions of Canadian dollars)
 
Positive
 
 
Negative
 
 
  
 
Positive
 
 
Negative
 
Held or issued for trading purposes
 
      
 
      
 
  
 
      
 
      
Interest rate contracts
 
      
 
      
 
  
 
      
 
      
           
Forward rate agreements
  
$
77
 
  
$
25
 
       $ 10     $ 11  
Swaps
  
 
25,690
 
  
 
21,608
 
         28,400       23,136  
Options purchased
  
 
12,056
 
  
 
–
 
         4,580       –  
Options written
  
 
–
 
  
 
12,201
 
  
 
     –       5,258  
 
  
 
37,823
 
  
 
33,834
 
  
 
     32,990       28,405  
Foreign exchange contracts
                                    
Forward contracts
  
 
37,734
 
  
 
37,631
 
         11,404       11,515  
Cross currency swaps
  
 
8,680
 
  
 
9,087
 
         4,469       4,929  
Cross currency interest rate swaps
  
 
49,758
 
  
 
38,230
 
         23,208       22,382  
Options purchased
  
 
2,623
 
  
 
–
 
         1,021       –  
Options written
  
 
–
 
  
 
2,571
 
  
 
     –       978  
 
  
 
98,795
 
  
 
87,519
 
  
 
     40,102       39,804  
Credit derivatives
  
 
388
 
  
 
125
 
         34       115  
Other contracts
  
 
18,474
 
  
 
21,084
 
  
 
     20,827       21,253  
 
  
 
155,480
 
  
 
142,562
 
  
 
     93,953       89,577  
Held or issued for other-than-trading purposes
                                    
Interest rate contracts
                                    
Swaps
  
 
2,244
 
  
 
6,880
 
  
 
     1,187       1,116  
 
  
 
2,244
 
  
 
6,880
 
  
 
     1,187       1,116  
Foreign exchange contracts
                                    
Forward contracts
  
 
268
 
  
 
237
 
         305       260  
Cross currency swaps
  
 
–
 
  
 
22
 
         32       –  
Cross currency interest rate swaps
  
 
374
 
  
 
6,677
 
  
 
     859       447  
 
  
 
642
 
  
 
6,936
 
  
 
     1,196       707  
Credit derivatives
  
 
–
 
  
 
–
           –       5  
Other contracts
  
 
313
 
  
 
273
 
  
 
     329       321  
 
  
 
3,199
 
  
 
14,089
 
  
 
     2,712       2,149  
Total gross fair values before:
  
 
158,679
 
  
 
156,651
 
         96,665       91,726  
Valuation adjustments determined on a pooled basis
  
 
(2,055
)
  
 
(975
)
         (810 )      27  
Impact of netting agreements that qualify for balance sheet offset
  
 
(2,185
)
  
 
(2,185
)
  
 
     (314 )      (314 ) 
 
  
$
   154,439
 
  
$
  153,491
 
  
 
   $ 95,541     $ 91,439  
 
(1)   The fair value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values as permitted by certain central counterparties.
 
Fair value of derivative instruments by term to maturity
(1)
 
  
 
        As at
 
 
 
October 31, 2022
 
 
 
 
October 31, 2021
 
(Millions of Canadian dollars)
 
  Less than
1 year
 
 
1 through
5 years
 
 
Over
5 years
 
 
Total
 
 
  
 
Less than
1 year
 
 
1 through
5 years
 
 
Over
5 years
 
 
Total
 
Derivative assets
  
$
  56,050
 
  
 
56,792
 
  
 
41,597
 
  
$
   154,439
 
       $   27,771       28,029       39,741     $   95,541  
Derivative liabilities
  
 
58,504
 
  
 
54,361
 
  
 
40,626
 
  
 
153,491
 
  
 
     26,766       27,938       36,735       91,439  
 
(1)
 
The fair value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values as permitted by certain central counterparties.
Interest rate benchmark reform
(1)
We use interest rate contracts in fair value hedges and cash flow hedges to manage our exposure to interest rate risk of our existing and/or forecast assets and liabilities. We also use foreign denominated deposit liabilities in net investment hedges to manage the foreign exchange risk arising from our investments in foreign operations. The hedging instruments designated to manage these risks reference IBORs in multiple jurisdictions and will be affected by the Reform as the markets transition to ABRs as discussed in Note 2.
The following table presents the notional or principal amount of our hedging instruments which reference IBORs that will be affected by the Reform as discussed in Note 2. The notional or principal amounts of our hedging instruments also approximates the extent of the risk exposure we manage through hedging relationships:
 
      As at      
    
October 31, 2022
           October 31, 2021  
       
(Millions of Canadian dollars)
   
Notional/Principal
amounts
           Notional/Principal
amounts		  
Interest rate contracts
                      
USD LIBOR
   
$
40,208
 
        $ 38,730  
GBP LIBOR
   
 
–
 
          290  
CDOR
   
 
114,159
 
          76,931  
Total Return Swaps
                      
CDOR
   
 
801
 
          390  
Non-derivative
instruments
                      
USD LIBOR
   
 
237
 
  
 
      215  
 
   
$
155,405
 
  
 
    $ 116,556  
 
(1)   Excludes interest rate contracts and
non-derivative
instruments which reference rates in multi-rate jurisdictions, including EURO Interbank Offered Rate and Australian Bank Bill Swap Rate (BBSW).
Derivative-related credit risk
Credit risk from derivative transactions is generated by the potential for the counterparty to default on its contractual obligations when one or more transactions have a positive market value to us. Therefore, derivative-related credit risk is represented by the positive fair value of the instrument and is normally a small fraction of the contract’s notional amount.
We subject our derivative transactions to the same credit approval, limit and monitoring standards that we use for managing other transactions that create credit exposure. This includes evaluating the creditworthiness of counterparties, and managing the size, diversification and maturity structure of the portfolio. Credit utilization for all products is compared with established limits on a continual basis and is subject to a standard exception reporting process. We use a single internal rating system for all credit risk exposure, as outlined in the internal ratings maps in the Credit risk section of Management’s Discussion and Analysis.
Offsetting is a technique that can reduce credit exposure from derivatives and is generally facilitated through the use of master netting agreements and achieved when specific criteria are met in accordance with our accounting policy in Note 2. A master netting agreement provides for a single net settlement of all financial instruments covered by the agreement in the event of default. However, credit risk is reduced only to the extent that our financial obligations to the same counterparty can be set off against obligations of the counterparty to us. We maximize the use of master netting agreements to reduce derivative-related credit exposure. Our overall exposure to credit risk that is reduced through master netting agreements may change substantially following the reporting date as the exposure is affected by each transaction subject to the agreement as well as by changes in underlying market rates. Measurement of our credit exposure arising out of derivative transactions is reduced to reflect the effects of netting in cases where the enforceability of that netting is supported by appropriate legal analysis as documented in our trading credit risk policies.
The use of collateral is another significant credit mitigation technique for managing derivative-related counterparty credit risk.
Mark-to-market
provisions in our agreements with some counterparties, typically in the form of a Credit Support Annex, provide us with the right to request that the counterparty pay down or collateralize the current market value of its derivatives positions when the value exceeds a specified threshold amount.
Replacement cost and credit equivalent amounts are determined in accordance with OSFI’s
non-modelled
regulatory
SA-CCR
under the CAR guidelines. The replacement cost represents the total fair value of all outstanding contracts in a gain position after factoring in the master netting agreements and applicable margins, scaled by a regulatory factor. The credit equivalent amount is defined as the replacement cost plus an additional amount for potential future credit exposure also scaled by a regulatory factor. The risk-weighted equivalent is determined by applying appropriate risk-weights to the credit equivalent amount, including those risk weights reflective of model approval under the internal ratings based approach.
 
Derivative-related credit
risk
(1)
 
  
 
As at   
 
 
 
October 31, 2022
 
 
 
 
  
October 31, 2021
 
               
(Millions of Canadian dollars)
 
Replacement
cost
 
  
Credit
equivalent
amount
 
  
Risk-weighted

equivalent 
(2)
 
 
  
 
  
Replacement
cost
 
  
Credit
equivalent
amount
 
  
Risk-weighted

equivalent 
(2)
 
Over-the-counter
contracts
                          
 
      
  
      
  
      
  
      
Interest rate contracts
                          
 
      
  
      
  
      
  
      
Forward rate agreements
  
$
46
 
   
$
76
 
   
$
5
 
 
      
  
 $ 9
 
  
 $ 64
 
  
 $ 20
 
Swaps
  
 
9,699
 
   
 
21,698
 
   
 
5,187
 
 
      
  
   4,519
 
  
   16,203
 
  
   4,569
 
Options purchased
  
 
108
 
   
 
426
 
   
 
119
 
 
      
  
   113
 
  
   403
 
  
   187
 
Options written
  
 
15
 
   
 
543
 
   
 
164
 
 
      
  
   23
 
  
   415
 
  
   141
 
Foreign exchange contracts
                          
 
      
  
      
  
      
  
      
Forward contracts
  
 
8,772
 
   
 
29,565
 
   
 
5,940
 
 
      
  
   3,085
 
  
   19,097
 
  
   4,232
 
Swaps
  
 
6,072
 
   
 
22,188
 
   
 
4,556
 
 
      
  
   2,621
 
  
   16,484
 
  
   4,092
 
Options purchased
  
 
536
 
   
 
1,111
 
   
 
340
 
 
      
  
   177
 
  
   510
 
  
   145
 
Options written
  
 
28
 
   
 
313
 
   
 
86
 
 
      
  
   2
 
  
   196
 
  
   43
 
Credit derivatives
  
 
299
 
   
 
766
 
   
 
114
 
 
      
  
   913
 
  
   2,234
 
  
   213
 
Other contracts
  
 
5,196
 
   
 
20,457
 
   
 
7,520
 
 
      
  
   7,668
 
  
   26,567
 
  
   10,480
 
Exchange-traded contracts
  
 
11,098
 
   
 
19,870
 
   
 
397
 
 
 
 
 
  
   1,814
 
  
   6,218
 
  
   124
 
 
  
$
41,869
 
   
$
117,013
 
   
$
24,428
 
 
 
 
 
  
 $ 20,944
 
  
 $   88,391
 
  
 $ 24,246
 
 
(1)   The amounts presented are net of master netting agreements in accordance with CAR guidelines.
(2)   The risk-weighted balances are calculated in accordance with CAR guidelines and exclude CVA of $16
billion
 
(October 31, 2021 – $18 billion).
Replacement cost of derivative instruments by risk rating and by counterparty type
 
 
 
 
 
As at October 31, 2022
 
 
 
Risk rating
(1)
 
 
 
 
 
Counterparty type
(2)
 
 
 
 
(Millions of Canadian dollars)
 
AAA, AA
 
 
A
 
 
BBB
 
 
BB or lower
 
 
Total
 
 
Banks
 
 
OECD
governments
 
 
Other
 
 
Total
 
Gross positive fair values
  
$
  39,001
 
  
$
  72,983
 
  
$
29,690
 
  
$
17,005
 
  
$
  158,679
 
  
$
  73,616
 
  
$
22,727
 
  
$
  62,336
 
  
$
  158,679
 
Impact of master netting agreements and applicable margins
  
 
21,552
    
 
62,614
    
 
21,818
    
 
10,826
    
 
116,810
 
  
 
71,582
    
 
22,597
    
 
22,631
    
 
116,810
 
Replacement cost (after netting agreements)
  
$
17,449
    
$
10,369
    
$
7,872
    
$
6,179
    
$
41,869
 
  
$
2,034
    
$
130
    
$
39,705
    
$
41,869
 
                                                                         
   
   
 
As at October 31, 2021
  
    Risk rating
(1)
           Counterparty type
(2)
        
                   
(Millions of Canadian dollars)
   AAA, AA     A     BBB     BB or lower     Total     Banks     OECD
governments		     Other     Total  
Gross positive fair values
   $   22,801     $   37,938     $ 16,333     $ 19,593     $   96,665     $   42,361     $ 15,964     $   38,340     $   96,665  
Impact of master netting agreements and applicable margins
     20,545       33,257       12,050       9,869       75,721       41,554       15,731       18,436       75,721  
Replacement cost (after netting agreements)
   $ 2,256     $ 4,681     $ 4,283    
$

 9,724     $ 20,944     $ 807     $ 233     $ 19,904     $ 20,944  
 
(1)   Our internal risk ratings of AAA, AA, A and BBB represent investment grade ratings and ratings of BB or lower represent
non-investment
grade ratings, as outlined in the internal ratings maps in the Credit risk section of Management’s Discussion and Analysis.
(2)   Counterparty type is defined in accordance with CAR guidelines.
Derivatives in hedging relationships
We apply hedge accounting to minimize volatility in earnings and capital caused by changes in interest rates or foreign exchange rates. Interest rate and currency fluctuations will either cause assets and liabilities to appreciate or depreciate in market value or cause variability in forecasted cash flows. When a hedging relationship is effective, gains, losses, revenue and expenses of the hedging instrument will offset the gains, losses, revenue and expenses of the hedged item.
Derivatives used in hedging relationships are recorded in Other Assets – Derivatives or Other Liabilities – Derivatives on the Balance Sheet. Foreign currency-denominated liabilities used in net investment hedging relationships are recorded in Deposits – Business and Government and Subordinated debentures on the Balance Sheet. Gains and losses relating to hedging ineffectiveness is recorded in
Non-Interest
income and amounts reclassified from hedge reserves in OCI to income is recorded in
Net-interest
income for cash flow hedges and
Non-interest
income for net Investment hedges.
We assess and measure the effectiveness of a hedging relationship based on the change in the fair value or cash flows of the derivative hedging instrument relative to the change in the fair value or cash flows of the hedged item attributable to the hedged risk. When cash instruments are designated as hedges of foreign exchange risks, only changes in their value due to foreign exchange risk are included in the assessment and measurement of hedge effectiveness.
Potential sources of ineffectiveness can be attributed to differences between hedging instruments and hedged items:
  •  
Mismatches in the terms of hedged items and hedging instruments, for example the frequency and timing of when interest rates are reset and frequency of payment.
  •  
Difference in the discounting factors between the hedged item and the hedging instrument, taking into consideration the different reset frequency of the hedged item and hedging instrument.
  •  
Hedging derivatives with a
non-zero
fair value at inception date of the hedging relationship, resulting in mismatch in terms with the hedged item.
Below is a description of our risk management strategy for each risk exposure that we decide to hedge:
Interest rate risk
We use interest rate contracts to manage our exposure to interest rate risk by modifying the repricing characteristics of existing and/or forecasted assets and liabilities, including funding and investment activities. The swaps are designated in either a fair value hedge or a cash flow hedge and predominantly reference IBORs across multiple jurisdictions. Certain swaps will be affected by the Reform as the market transitions to ABRs.
For fair value hedges, we use interest rate contracts to manage the fair value movements of our fixed-rate instruments due to changes in benchmark interest. The interest rate swaps are entered into on a
one-to-one
basis to manage the benchmark interest rate risk, and its terms are critically matched to the specified fixed rate instruments.
We also use interest rate swaps in fair value hedges to manage interest rate risk from residential mortgage assets and funding liabilities. Our exposure from this portfolio changes with the origination of new loans, repayments of existing loans, and sale of securitized mortgages. Accordingly, we have adopted dynamic hedging for that portfolio, in which the hedge relationship is rebalanced on a more frequent basis, such as on a
bi-weekly
or on a monthly basis.
For cash flow hedges, we use interest rate swaps to manage the exposure to cash flow variability of our variable rate instruments as a result of changes in benchmark interest rates. The variable rate instruments and forecast transactions which reference certain IBORs will be affected by the Reform. Whilst some of the interest rate derivatives are entered into on a
one-to-one
basis to manage a specific exposure, other interest rate derivatives may be entered into for managing interest rate risks of a portfolio of assets and liabilities.
Foreign exchange risk
We manage our exposure to foreign currency risk with cross currency swaps in a cash flow hedge, and foreign exchange forward contracts in a net investment hedge. Certain cash instruments may also be designated in a net investment hedge, where applicable.
For cash flow hedges, we use cross currency swaps and forward contracts to manage the cash flow variability arising from fluctuations in foreign exchange rates on our issued foreign denominated fixed rate liabilities and highly probable forecasted transactions. The maturity profile and repayment terms of these swaps are matched to those of our foreign denominated exposures to limit our cash flow volatility from changes in foreign exchange rates.
For net investment hedges, we use a combination of foreign exchange forwards and cash instruments, such as foreign denominated deposit liabilities, some of which reference IBORs that will be affected by the Reform, to manage our foreign exchange risk arising from our investments in foreign operations. Our most significant exposures include USD, GBP and Euro. When hedging net investments in foreign operations using foreign exchange forwards, only the undiscounted spot element of the foreign exchange forward is designated as the hedging instrument. Accordingly, changes in the fair value of the hedging instrument as a result of changes in forward rates and the effects of discounting are not included in the hedging effectiveness assessment. Foreign operations are only hedged to the extent of the principal of the foreign denominated deposit liabilities or notional amount of the derivative; we generally do not expect to incur significant ineffectiveness on hedges of net investments in foreign operations.
Equity price risk
We use total return swaps in cash flow hedges to mitigate the cash flow variability of the expected payment associated with our cash settled share-based compensation plan for certain key employees by exchanging interest payments for indexed RBC share price change and dividend returns.
Credit risk
We predominantly use credit derivatives to economically hedge our credit exposures. We mitigate industry sector concentrations and single-name exposures related to our credit portfolio by purchasing credit derivatives to transfer credit risk to third parties.
Derivative instruments designated in hedging relationships
The following table presents the fair values of the derivative instruments and the principal amounts of the
non-derivative
liabilities, categorized by their hedging relationships, as well as derivatives that are not designated in hedging relationships.
Derivatives and non-derivative instruments
(1)
 
        As at   
   
October 31, 2022
         October 31, 2021  
   
Designated as hedging instruments
in hedging relationships
    
Not designated
in a hedging
relationship
         Designated as hedging instruments
in hedging relationships		    
Not designated
in a hedging
relationship
  
(Millions of Canadian dollars)  
Fair value
    
Cash flow
    
Net
investment
          Fair value     Cash flow    
Net
investment
  
Assets
                                                                    
Derivative instruments
  
$
247
 
  
$
57
 
  
$
36
 
  
$
154,099
 
       $ 66     $ 9     $ 98     $ 95,368  
Liabilities
                                                                    
Derivative instruments
  
 
27
 
  
 
–
 
  
 
126
 
  
 
153,338
 
         131       20       18       91,270  
Non-derivative
instruments
  
 
–
 
  
 
–
 
  
 
25,798
 
  
 
n.a.
 
         –       –       27,157       n.a.  
 
(1)   The fair value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values as permitted by certain central counterparties.
n.a.   not applicable
The following tables provide the remaining term to maturity analysis of the notional amounts and the weighted average rates of the hedging instruments and their carrying amounts by types of hedging relationships:
Fair value hedges
 
  
 
As at October 31, 2022
 
 
 
Notional amounts
 
 
 
 
  
Carrying amount
(1)
 
               
(Millions of Canadian dollars, except average rates)
 
Within
1 year
 
  
1 through
5 years
 
  
Over
5 years
 
  
Total
 
 
  
 
  
Assets
 
  
Liabilities
 
Interest rate risk
 
      
  
      
  
      
  
      
 
      
  
      
  
      
Interest rate contracts
 
      
  
      
  
      
  
      
 
      
  
      
  
      
Hedge of fixed rate assets
  
$
9,083
 
   
$
32,173
 
   
$
  15,516
 
   
$
56,772
 
           
$
247
 
   
$
3
 
Hedge of fixed rate liabilities
  
 
13,231
 
   
 
69,419
 
   
 
10,094
 
   
 
92,744
 
           
 
–
 
   
 
24
 
Weighted average fixed interest rate
                                                             
Hedge of fixed rate assets
  
 
1.1%
 
   
 
2.5%
 
   
 
2.8%
 
   
 
2.3%
 
                          
Hedge of fixed rate liabilities
  
 
1.9%
 
   
 
1.8%
 
   
 
2.0%
 
   
 
1.9%
 
  
 
 
 
   
 
 
 
   
 
 
 
               
    
 
  
 
  
  
 
  
  
 
  
  
 
 
  
 
  
  
 
  
  
 
 
 
As at October 31, 2021
 
 
 
Notional amounts
 
 
 
 
  
Carrying amount
(
1)
 
               
(Millions of Canadian dollars, except average rates)
 
Within
1 year
 
  
1 through
5 years
 
  
Over
5 years
 
  
Total
 
 
  
 
  
Assets
 
  
Liabilities
 
Interest rate risk
 
      
  
      
  
      
  
      
 
      
  
      
  
      
Interest rate contracts
 
      
  
      
  
      
  
      
 
      
  
      
  
      
Hedge of fixed rate assets
   $ 10,503      $ 25,008      $ 6,568      $ 42,079              $ 19      $ 116  
Hedge of fixed rate liabilities
     8,939        44,870        11,646        65,455                47        15  
Weighted average fixed interest rate
                                                             
Hedge of fixed rate assets
     0.8%        0.7%        1.9%        0.9%                            
Hedge of fixed rate liabilities
     1.5%        1.2%        1.5%        1.3%    
 
 
 
   
 
 
 
   
 
 
 
 
(1)   The carrying value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values as permitted by certain central counterparties.
Cash flow hedges
 
  
 
As at October 31, 2022
 
 
 
Notional amounts
 
 
 
  
Carrying amount
(1)
 
               
(Millions of Canadian dollars, except average rates)
 
Within
1 year
 
  
1 through
5 years
 
  
Over
5 years
 
  
Total
 
 
  
  
Assets
 
  
Liabilities
 
Interest rate risk
 
      
  
      
  
      
  
      
 
  
  
      
  
      
Interest rate contracts
 
      
  
      
  
      
  
      
 
  
  
      
  
      
Hedge of variable rate assets
  
$
50,436
 
   
$
74,726
 
   
$
1,023
 
   
$
  126,185
 
       
$
–
 
   
$
–
 
Hedge of variable rate liabilities
  
 
6,221
 
   
 
42,830
 
   
 
24,024
 
   
 
73,075
 
       
 
–
 
   
 
–
 
Weighted average fixed interest rate
                                                         
Hedge of variable rate assets
  
 
3.3%
 
   
 
2.8%
 
   
 
2.5%
 
   
 
3.0%
 
                      
Hedge of variable rate liabilities
  
 
2.0%
 
   
 
1.5%
 
   
 
2.0%
 
   
 
1.7%
 
  
 
   
 
 
 
   
 
 
 
Foreign exchange risk
                                                         
Cross currency swaps
  
$
–
 
   
$
314
 
   
$
–
 
   
$
314
 
       
$
32
 
   
$
–
 
Weighted average
CAD-EUR
exchange rate
  
 
n.a.
 
   
 
1.44
 
   
 
n.a.
 
   
 
1.44
 
  
 
   
 
 
 
   
 
 
 
               
    
 
  
 
  
  
 
  
  
 
  
  
 
 
  
  
  
 
  
  
 
 
 
As at October 31, 2021
 
 
 
Notional amounts
 
 
 
  
Carrying amount
(1)
 
               
(Millions of Canadian dollars, except average rates)
 
Within
1 year
 
  
1 through
5 years
 
  
Over
5 years
 
  
Total
 
 
  
  
Assets
 
  
Liabilities
 
Interest rate risk
 
      
  
      
  
      
  
      
 
  
  
      
  
      
Interest rate contracts
 
      
  
      
  
      
  
      
 
  
  
      
  
      
Hedge of variable rate assets
   $ 57,304      $ 28,707      $ 4,112      $ 90,123          $ –      $ –  
Hedge of variable rate liabilities
     16,659        55,556        13,784        85,999            –        –  
Weighted average fixed interest rate
                                                         
Hedge of variable rate assets
     0.5%        1.0%        1.2%        0.7%                        
Hedge of variable rate liabilities
     0.8%        1.2%        1.5%        1.2%    
 
   
 
 
 
   
 
 
 
Foreign exchange risk
                                                         
Cross currency swaps
   $ –      $ 183      $ –      $ 183          $ 9      $ –  
Weighted average
CAD-EUR
exchange rate
     n.a.        1.52        n.a.        1.52    
 
   
 
 
 
   
 
 
 
 
(1)
 
The carrying value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values as permitted by certain central counterparties.
n.a.
 
not applicable
Net investment hedges
 
  
 
As at October 31, 2022
 
 
 
Notional/Principal
 
 
 
  
Carrying amount
 
               
(Millions of Canadian dollars, except average rates)
 
Within
1 year
 
  
1 through
5 years
 
  
Over
5 years
 
  
Total
 
 
  
  
Assets
 
  
Liabilities
 
Foreign exchange risk
 
      
  
      
  
      
  
      
 
  
  
      
  
      
Foreign currency liabilities
  
$
5,462
 
   
$
20,851
 
   
$
1,025
 
   
$
27,338
 
       
 
n.a.
 
   
$
25,798
 
Weighted average
CAD-USD
exchange rate
  
 
1.31
 
   
 
1.28
 
   
 
1.28
 
   
 
1.29
 
                      
Weighted average
CAD-EUR
exchange rate
  
 
–
 
   
 
1.51
 
   
 
1.48
 
   
 
1.51
 
                      
Weighted average
CAD-GBP
exchange rate
  
 
–
 
   
 
1.71
 
   
 
–
 
   
 
1.71
 
                      
Forward contracts
  
$
6,089
 
   
$
–
 
   
$
–
 
   
$
6,089
 
       
$
    36
 
   
$
126
 
Weighted average
CAD-USD
exchange rate
  
 
1.34
 
   
 
n.a.
     
 
n.a.
     
 
1.34
 
                      
Weighted average
CAD-EUR
exchange rate
  
 
1.36
 
   
 
n.a.
     
 
n.a.
     
 
1.36
 
                      
Weighted average
CAD-GBP
exchange rate
  
 
1.55
 
   
 
n.a.
     
 
n.a.
     
 
1.55
 
  
 
   
 
 
 
   
 
 
 
               
    
 
  
 
  
  
 
  
  
 
  
  
 
 
  
  
  
 
  
  
 
 
 
As at October 31, 2021
 
 
 
Notional/Principal
 
 
 
  
Carrying amount
 
               
(Millions of Canadian dollars, except average rates)
 
Within
1 year
 
  
1 through
5 years
 
  
Over
5 years
 
  
Total
 
 
  
  
Assets
 
  
Liabilities
 
Foreign exchange risk
 
      
  
      
  
      
  
      
 
  
  
      
  
      
Foreign currency liabilities
   $     433      $   26,294      $   401      $   27,128            n.a.      $ 27,157  
Weighted average
CAD-USD
exchange rate
     1.32        1.29        1.30        1.29                        
Weighted average
CAD-EUR
exchange rate
     –        1.51        1.48        1.51                        
Weighted average
CAD-GBP
exchange rate
     –        1.72        –        1.72                        
Forward contracts
   $ 4,951      $ –      $ –      $ 4,951          $     98      $ 18  
Weighted average
CAD-USD
exchange rate
     1.26        n.a.        n.a.        1.26                        
Weighted average
CAD-EUR
exchange rate
     1.45        n.a.        n.a.        1.45                        
Weighted average
CAD-GBP
exchange rate
     1.73        n.a.        n.a.        1.73    
 
   
 
 
 
   
 
 
 
 
n.a.   not applicable
The following tables present the details of the hedged items categorized by their hedging relationships:
Fair value hedges – assets and liabilities designated as hedged items

 
  
 
As at and for the year ended October 31, 2022
 
 
 
Carrying amount
 
 
Accumulated amount of fair
value adjustments on the
hedged item included in the
carrying amount
 
 
  
 
(Millions of Canadian dollars)
 
Assets
 
 
Liabilities
 
 
Assets
 
 
Liabilities
 
 
Balance sheet items:
 
Changes in fair
values used for
calculating hedge
ineffectiveness
 
Interest rate risk
 
 
 
 
 
 
             
Fixed rate assets
(1)
  
$
52,216
 
  
$
–
 
  
$
(3,285
) 
  
$
–
 
  
Securities – Investment, net of
applicable allowance; Loans – Retail;
Loans – Wholesale
  
$
(3,695
) 
Fixed rate liabilities
(1)
  
 
–
 
  
 
86,738
 
  
 
–
 
  
 
(5,924
) 
  
Deposits – Business and government;
Subordinated debentures
 
Deposits – Bank
  
 
5,742
 
 
     As at and for the year ended October 31, 2021  
    Carrying amount    
Accumulated amount of fair
value adjustments on the
hedged item included in the
carrying amount
         
             
(Millions of Canadian dollars)
   Assets     Liabilities     Assets     Liabilities     Balance sheet items:   Changes in fair
values used for
calculating hedge
ineffectiveness		  
Interest rate risk
                                            
Fixed rate assets
(1)
   $ 42,810     $ –     $ (78 )    $ –    
Securities – Investment, net of
applicable allowance; Loans – Retail;
Loans – Wholesale
   $ (1,027 ) 
Fixed rate liabilities
(1)
     –       65,355       –       (59 )    Deposits – Business and government;
Subordinated debentures		     1,842  
 
(1)   As at October 31, 2022, the accumulated amount of fair value hedge adjustments remaining in the Balance Sheet for hedged items that have ceased to be adjusted for hedging gains and losses is a loss of $486 million for fixed-rate assets and a loss of $25 million for fixed-rate liabilities (October 31, 2021 – gain of $125 million and loss of $62 million, respectively).
Cash flow and net investment hedges – assets and liabilities designated as hedged items
 
  
 
Balance sheet items:
 
Changes in fair
values used for
calculating hedge
ineffectiveness
 
 
Cash flow hedge/foreign
currency translation reserve
 
(Millions of Canadian dollars)
 
Continuing hedges
 
 
Discontinued
hedges
 
Cash flow hedges
 
  
 
      
 
      
 
      
Interest rate risk
 
  
 
      
 
      
 
      
Variable rate assets
  
Securities – Investment, net of
applicable allowance; Loans – Retail;
  
$
4,720
 
  
$
(1,777
) 
  
$
(2,668
) 
 
 
Interest bearing deposits with banks;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset purchased under reverse
 
 
 
 
 
 
 
 
 
 
 
 
 
 
repurchase agreements and securities borrowed
 
 
 
 
 
 
 
 
 
 
 
 
Variable rate liabilities
  
Deposits – Business and government;
Deposits – Personal;
  
 
(6,895
) 
  
 
5,471
 
  
 
2,231
 
   
Obligations related to assets sold under
                        
 
repurchase agreements and securities loaned
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange risk
                            
Fixed rate assets
  
Securities – Investment, net of
applicable allowance
  
 
(17
) 
  
 
7
 
  
 
–
 
Net investment hedges
                            
Foreign exchange risk
                            
Foreign subsidiaries
  
n.a.
  
 
1,927
 
  
 
(5,936
) 
  
 
(421
) 
 
  
 
Balance sheet items:
 
Changes in fair
values used for
calculating hedge
ineffectiveness
 
 
Cash flow hedge/foreign
currency translation reserve
 
(Millions of Canadian dollars)
 
Continuing hedges
 
 
Discontinued
hedges
 
Cash flow hedges
 
  
 
      
 
      
 
      
Interest rate risk
 
  
 
      
 
      
 
      
Variable rate assets
   Securities – Investment, net of applicable allowance; Loans –
Retail		   $ 614      $ (402 )    $ 206  
Variable rate liabilities
   Deposits – Business and government;
Deposits – Personal		     (2,641 )       1,310       (399 ) 
Foreign exchange risk
                             
Fixed rate assets
   Securities – Investment, net of applicable allowance; Loans – Retail     (98 )       1       –  
Net investment hedges
                             
Foreign exchange risk
                             
Foreign subsidiaries
   n.a.     (2,331 )       (4,032 )      (421 ) 
 
n.a.   not applicable
Effectiveness of designated hedging relationships
 
    
For the year ended October 31, 2022
  
         
(Millions of Canadian dollars)
  
Change in fair value
of hedging
instrument
    
Hedge
ineffectiveness
recognized in
income
(1)
    
Changes in the value of
the hedging instrument
recognized in OCI
    
Amount reclassified
from hedge reserves
to income
  
Fair value hedges
                                
Interest rate risk
                                
Interest rate contracts – fixed rate assets
  
$
3,650
 
  
$
(45
) 
  
 
n.a.
 
  
 
n.a.
 
Interest rate contracts – fixed rate liabilities
  
 
(5,713
) 
  
 
29
 
  
 
n.a.
 
  
 
n.a.
 
Cash flow hedges
                                
Interest rate risk
                                
Interest rate contracts – variable rate assets
  
 
(4,698
) 
  
 
(36
) 
  
$
(4,432
) 
  
$
(185
) 
Interest rate contracts – variable rate liabilities
  
 
6,713
 
  
 
37
 
  
 
6,673
 
  
 
(118
) 
Foreign exchange risk
                                
Cross currency swap – fixed rate assets
  
 
17
 
  
 
–
 
  
 
23
 
  
 
17
 
Net investment hedges
                                
Foreign exchange risk
                                
Foreign currency liabilities
  
 
(1,771
) 
  
 
(3
) 
  
 
(1,768
) 
  
 
–
 
Forward contracts
  
 
(159
) 
  
 
–
 
  
 
(159
) 
  
 
(23
) 
 
     For the year ended October 31, 2021  
         
(Millions of Canadian dollars)
  
Change in fair value
of hedging
instrument
    
Hedge
ineffectiveness
recognized in
income
(1)
    
Changes in the value of
the hedging instrument
recognized in OCI
    
Amount reclassified
from hedge reserves
to income
  
Fair value hedges
                                
Interest rate risk
                                
Interest rate contracts – fixed rate assets
   $ 929     $ (98 )      n.a.       n.a.  
Interest rate contracts – fixed rate liabilities
     (1,802 )      40       n.a.       n.a.  
Cash flow hedges
                                
Interest rate risk
                                
Interest rate contracts – variable rate assets
     (631 )      (17 )    $ (497 )    $ 279  
Interest rate contracts – variable rate liabilities
     2,579       9       1,949       (1,024 ) 
Foreign exchange risk
                                
Cross currency swap – fixed rate assets
     98       –       98       103  
Net investment hedges
                                
Foreign exchange risk
                                
Foreign currency liabilities
     1,882       –       1,882       –  
Forward contracts
     449       –       449       1  
 
(1)   Hedge ineffectiveness recognized in income included losses of $19 million that are excluded from the assessment of hedge effectiveness and are offset by economic hedges (October 31, 2021 – $101 million).
n.a.   not applicable
Reconciliation of components of equity
The following table provides a reconciliation by risk category of each component of equity and an analysis of other comprehensive income relating to hedge accounting:
 
    
For the year ended October 31, 2022
         
For the year ended October 31, 2021
  
           
(Millions of Canadian dollars)
  
Cash flow hedge
reserve
    
Foreign currency
translation reserve
         
Cash flow hedge
reserve
    
Foreign currency
translation reserve
  
Balance at the beginning of the year
  
$
566
 
  
$
2,055
 
       $ (1,079 )    $ 4,632  
Cash flow hedges
                                    
Effective portion of changes in fair value:
                                    
Interest rate risk
  
 
2,241
 
                 1,452          
Foreign exchange risk
  
 
23
 
                 100          
Equity price risk
  
 
(1
) 
                 306          
Net amount reclassified to profit or loss:
                                    
Ongoing hedges:
                                    
Interest rate risk
  
 
(227
) 
                 505          
Foreign exchange risk
  
 
(17
) 
                 (105 )         
Equity price risk
  
 
(23
) 
                 (271 )         
De-designated
hedges:
                                    
Interest rate risk
  
 
530
 
                 240          
H
edge
s
of net investment in foreign operations
                                    
Foreign exchange denominated debt
          
 
(1,768
) 
                 1,882  
Forward foreign exchange contracts
          
 
(159
) 
                 449  
Foreign currency translation differences for foreign operations
          
 
5,085
 
                 (4,308 ) 
Reclassification of losses (gains) on foreign currency translation to income
          
 
(18
) 
                 (7 ) 
Reclassification of losses (gains) on net investment hedging activities to income
          
 
23
 
                 (1 ) 
Tax on movements on reserves during the period
  
 
(698
) 
  
 
470
 
  
 
     (582 )      (592 ) 
Balance at the end of the year
  
$
2,394
 
  
$
5,688
 
  
 
   $ 566     $ 2,055