Note 13

Designated accounting hedges

Hedge accounting

We apply hedge accounting as part of managing the market risk of certain non-trading portfolios arising from changes due to interest rates, foreign exchange rates, and equity market prices. Please see the shaded sections of the “Non-trading activities” on page 68 of the MD&A for further information on our risk management strategy for these risks. See Note 12 for further information on the derivatives used by CIBC.

Interest rate risk

The majority of our derivative contracts used to hedge certain exposures to benchmark interest rate risk are interest rate swaps. For fair value hedges, we convert our fixed interest rate exposures from the hedged financial instruments to floating interest rate exposures. For cash flow hedges, we convert certain exposures to cash flow variability from our variable rate instruments to fixed interest rate exposures.

Foreign currency risk

For our fair value hedges, we mainly use various combinations of cross-currency interest rate swaps and interest rate swaps to hedge our exposures to foreign currency risk together with interest rate risk, converting our fixed foreign currency rate exposures to floating functional currency rate exposures.

For our cash flow hedges, the majority of our derivative contracts are used to hedge our exposures to cash flow variability arising from fluctuations in foreign exchange rates, and mainly consist of cross-currency interest rate swaps. We also use foreign exchange forwards and synthetic forwards created from interest rate swaps to hedge certain foreign currency contractual expenses.

For NIFO hedges, we use a combination of foreign denominated deposit liabilities and foreign exchange forwards to manage our foreign currency exposure of our NIFOs with a functional currency other than the Canadian dollar.

Equity price risk

We use cash settled total return swaps in designated cash flow hedge relationships to hedge changes in CIBC’s share price in respect of certain cash-settled share-based compensation awards. Note 17 provides details on our cash-settled share-based compensation plans.

For the hedge relationships above, hedge effectiveness is assessed at the inception of the hedge relationship and on an ongoing basis, primarily using the dollar offset method. The sources of hedge ineffectiveness are mainly attributed to the following:

•

Utilization of hedging instruments that have a non-zero fair value at the inception of the hedge relationship;

•

Differences in fixed rates, when contractual coupons of the fixed rate hedged items are designated;

•

Differences in the discounting factors between the hedged item and the hedging instruments arising from different rate reset frequencies and timing of cash flows; and

•

Differences in the discount curves to determine the basis adjustments of the hedged items and the fair value of the hedging derivatives, including from the application of OIS and CVA to the valuation of derivatives when they are applicable.

Designated hedging instruments

The following table provides a summary of financial instruments designated as hedging instruments:


$ millions, as at October 31, 2018	Notional amount of the hedging instrument ⁽¹⁾		Maturity range						Fair value of the hedging derivatives				Gains (losses) on changes in fair value used for calculating hedge ineffectiveness
$ millions, as at October 31, 2018	Notional amount of the hedging instrument ⁽¹⁾		Less than 1 year		1-5 years		Over 5 years		Assets		Liabilities
Cash flow hedges
Foreign exchange risk
Foreign exchange forwards	$	138	$	138	$	–	$	–	$	2	$	–	$	(5	)
Cross-currency interest rate swaps		18,421		13,377		5,044		–		351		234		82
Interest rate risk
Interest rate swaps		4,468		395		4,073		–		–		15		(57	)
Equity share price risk
Equity swaps		1,406		173		1,233		–		–		89		26
	$	24,433	$	14,083	$	10,350	$	–	$	353	$	338	$	46
NIFO hedges
Foreign exchange risk
Foreign exchange forwards	$	193	$	193	$	–	$	–	$	11	$	6	$	(4	)
Deposits ⁽²⁾		17,158		17,158		–		–		n/a		n/a		(388	)
	$	17,351	$	17,351	$	–	$	–	$	11	$	6	$	(392	)
Fair value hedges
Interest rate risk
Interest rate swaps	$	174,556	$	50,347	$	110,948	$	13,261	$	380	$	164	$	(36	)
Foreign exchange / interest rate risk
Cross-currency interest rate swaps		36,308		15,528		19,267		1,513		799		795		(63	)
Interest rate swaps		17,310		3,850		12,817		643		23		–		(15	)
	$	228,174	$	69,725	$	143,032	$	15,417	$	1,202	$	959	$	(114	)
	$	269,958	$	101,159	$	153,382	$	15,417	$	1,566	$	1,303	$	(460	)

(1)	For some hedge relationships, we apply a combination of derivatives to hedge the underlying exposures, therefore, the notional amounts of the derivatives generally exceed the carrying amount of the hedged items.

(2)	Notional amount represents the principal amount of deposits as at October 31, 2018.

n/a	Not applicable.

The following table provides the average rate or price of the hedging derivatives:

As at October 31, 2018

Average
exchange rate ⁽¹⁾

Average fixed
interest rate

Average
share price

Cash flow hedges

Foreign exchange risk

Foreign exchange forwards

USD – CAD

1.29

n/a

Cross-currency interest rate swaps

EUR – CAD

1.51

n/a

GBP – CAD

1.72

n/a

USD – CAD

1.28

n/a

Interest rate risk

Interest rate swaps

n/a

CAD

2.45

n/a

USD

2.16

n/a

Equity share price risk

Equity swaps

n/a

109.52

NIFO hedges

Foreign exchange risk

Foreign exchange forwards

AUD – CAD

0.93

n/a

HKD – CAD

0.17

n/a

JPY – CAD

0.01

n/a

Fair value hedges

Interest rate risk

Interest rate swaps

n/a

CAD

1.84

n/a

Foreign exchange / interest rate risk

Cross-currency interest rate swaps

EUR – CAD

1.49

0.10

n/a

GBP – CAD

1.60

1.06

n/a

USD – CAD

1.30

2.36

n/a

Interest rate swaps

n/a

EUR

0.05

n/a

GBP

0.78

n/a

(1)	Includes average foreign exchange rates and interest rates relating to significant hedging relationships.

n/a	Not applicable.

Designated hedged items

The following table provides information on designated hedged items:

Carrying amount of
the hedged item

Accumulated amount
of fair value hedge
adjustments on the
hedged item

Gains (losses) on
changes in fair
value used for
calculating hedge
ineffectiveness

$ millions, as at or for the year ended October 31, 2018

Assets

Liabilities

Assets

Liabilities

Cash flow hedges ⁽¹⁾

Foreign exchange risk

Forecasted expenses

n/a

Deposits

–

13,456

n/a

(81

)

Interest rate risk

Loans

4,463

–

n/a

Equity share price risk

Share-based payment

–

1,186

n/a

(27

)

4,463

14,642

n/a

(46

)

NIFO hedges

17,351

–

n/a

392

Fair value hedges ⁽²⁾

Interest rate risk

Securities

17,046

–

(370

)

–

(338

)

Loans

61,363

–

(1,036

)

–

(626

)

Deposits

–

72,839

–

(1,205

)

907

Subordinated indebtedness

–

3,893

–

(48

)

Foreign exchange / interest rate risk

Loans

–

Deposits

–

19,844

–

(112

)

78,416

96,576

(1,404

)

(1,364

)

(1)	As at October 31, 2018, the amount remaining in AOCI related to the discontinued cash flow hedges was immaterial.

(2)	As at October 31, 2018, the accumulated fair value hedge net liability adjustment remaining on the consolidated balance sheet related to discontinued fair value hedges was $153 million.

n/a	Not applicable.

Hedge accounting gains (losses) on the consolidated statement of income and consolidated statement of comprehensive income


$ millions, for the year ended October 31, 2018	Beginning balance of AOCI – hedge reserve (after-tax)			Change in the value of the hedging instrument recognized in OCI (before-tax)			Amount reclassified from accumulated OCI to income (before-tax) ⁽¹⁾			Tax benefit (expense)		Ending balance of AOCI hedge reserve (after-tax)			Hedge ineffectiveness gains (losses) recognized in income
Cash flow hedges
Foreign exchange risk	$	5		$	6		$	(6	)	$	–	$	5		$	–
Interest rate risk		(3	)		(56	)		(2	)		16		(45	)		–
Equity share price risk		31			17			(27	)		1		22			(1	)
	$	33		$	(33	)	$	(35	)	$	17	$	(18	)	$	(1	)
NIFO hedges – foreign exchange risk
Hedges of net investment in foreign operations	$	(780	)	$	(392	)	$	–		$	43	$	(1,129	)	$	–

(1)	During the year ended October 31, 2018, the amount reclassified from AOCI to net income for cash flow hedges of forecasted transactions that were no longer expected to occur was nil.


$ millions, for the year ended October 31, 2018	Gains (losses) on the hedging instruments			Gains (losses) on the hedged items attributed to hedged risk		Hedge Ineffectiveness gains (losses) recognized in income
Fair value hedges
Interest rate risk	$	(36	)	$	1	$	(35	)
Foreign exchange / interest rate risk		(78	)		82		4
	$	(114	)	$	83	$	(31	)

The following table provides the notional and carrying values of the derivatives designated as the hedging instruments in 2017:


	Derivatives notional amount		Carrying value
$ millions, as at October 31, 2017	Derivatives notional amount		Positive		Negative
Fair value hedges	$	210,019	$	1,717	$	907
Cash flow hedges		23,332		419		315
NIFO hedges		5,712		318		–
	$	239,063	$	2,454	$	1,222

In addition, as at October 31, 2017, foreign currency denominated deposit liabilities of $45 million and $17.9 billion had been designated as hedging instruments in fair value hedges of foreign exchange risk and NIFO hedges, respectively.

The following table presents hedge ineffectiveness gains (losses) recognized in the consolidated statement of income for 2017 and 2016:


$ millions, for the year ended October 31	2017			2016
Fair value hedges ⁽¹⁾
Gains (losses) on hedging instruments	$	(24	)	$	(520	)
Gains (losses) on hedged items attributable to hedged risks		73			458
	$	49		$	(62	)
Cash flow hedges ⁽²⁾⁽³⁾	$	–		$	–

(1)	Recognized in Net interest income.

(2)	Recognized in Non-interest income – Other and Non-interest expenses – Other.

(3)	Includes NIFO hedges.

Portions of derivative gains (losses) that by designation were excluded from the assessment of hedge effectiveness for fair value, cash flow, and NIFO hedging activities are included in the consolidated statement of income, and are not significant for the years ended October 31, 2017 and 2016.

As at October 31, 2017, the cash flows designated as hedged items were expected to occur as follows:

$ millions, as at October 31, 2017

Within

1 year

1 – 3

years

3 – 8

years

Over
8 years

Net cash flows

(465

)

(921

)

–

As at October 31, 2017, cash flows designated in cash flow hedges of $332 million, $189 million and $8 million were expected to affect net income in the next 12 months, 1 to 3 years and 3 to 8 years, respectively.