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Derivative instruments

12 Months Ended

Oct. 31, 2019


Note 12		Derivative instruments

As described in Note 1, in the normal course of business, we use various derivative instruments for both trading and ALM purposes. These derivatives limit, modify or give rise to varying degrees and types of risk.

$ millions, as at October 31			2019				2018
	Assets		Liabilities		Assets		Liabilities
Trading (Note 2)	$	22,738	$	23,799	$	19,318	$	19,204
ALM (Note 2) (1)		1,157		1,314		2,113		1,769
	$	23,895	$	25,113	$	21,431	$	20,973

(1)	Comprised of derivatives that qualify for hedge accounting under IAS 39 and derivatives used for economic hedges.

Derivatives used by CIB

The majority of our derivative contracts are OTC transactions

, which

consist of: (i) contracts that are bilaterally negotiated and settled between CIBC and the counterparty to the contract; and (ii) contracts that are bilaterally negotiated and then cleared through a central counterparty (CCP). Bilaterally negotiated and settled contracts are usually traded under a standardized International Swaps and Derivatives Association (ISDA) agreement with collateral posting arrangements between CIBC and its counterparties. Terms are negotiated directly with counterparties and the contracts have industry-standard settlement mechanisms prescribed by ISDA. Centrally cleared contracts are generally bilaterally negotiated and then novated to, and cleared through, a CCP. The industry promotes the use of CCPs to clear OTC trades. The central clearing of derivative contracts generally facilitates the reduction of credit exposures due to the ability to net settle offsetting positions. Consequently, derivative contracts cleared through CCPs generally attract less capital relative to those settled with non-CCPs.

The remainder of our derivative contracts are exchange-traded derivatives, which are standardized in terms of their amounts and settlement dates, and are bought and sold on organized and regulated exchanges. These exchange-traded derivative contracts consist primarily of options and futures.

Interest rate derivatives

Forward rate agreements are OTC contracts that effectively fix a future interest rate for a period of time. A typical forward rate agreement provides that at a pre-determined future date, a cash settlement will be made between the counterparties based upon the difference between a contracted rate and a market rate to be determined in the future, calculated on a specified notional principal amount. No exchange of principal amount takes place. Certain forward rate agreements are bilaterally transacted and then novated and settled through a clearing house which acts as a CCP.

Interest rate swaps are OTC contracts in which two counterparties agree to exchange cash flows over a period of time based on rates applied to a specified notional principal amount. A typical interest rate swap would require one counterparty to pay a fixed market interest rate in exchange for a variable market interest rate determined from time to time, with both calculated on a specified notional principal amount. No exchange of principal amount takes place. Certain interest rate swaps are bilaterally transacted and then novated and settled through a clearing house which acts as a CCP.

Interest rate options are contracts in which one party (the purchaser of an option) acquires from another party (the writer of an option), in exchange for a premium, the right, but not the obligation, to either buy or sell, on a specified future date or within a specified time, a specified financial instrument at a contracted price. The underlying financial instrument has a market price which varies in response to changes in interest rates. Options are transacted in both OTC and exchange-traded markets.

Interest rate futures are standardized contracts transacted on an exchange. They are based upon an agreement to buy or sell a specified quantity of a financial instrument on a specified future date, at a contracted price. These contracts differ from forward rate agreements in that they are in standard amounts with standard settlement dates and are transacted through an exchange.

Foreign exchange derivatives

Foreign exchange forwards are OTC contracts in which one counterparty contracts with another to exchange a specified amount of one currency for a specified amount of a second currency, at a future date or range of dates.

Foreign exchange futures contracts are similar in mechanics to foreign exchange forward contracts except that they are in standard currency amounts with standard settlement dates and are transacted through an exchange.

Foreign exchange swap contracts comprise foreign exchange swaps and cross-currency interest rate swaps. Foreign exchange swaps are transactions in which a currency is simultaneously purchased in the spot market and sold for a different currency in the forward market, or vice versa. Cross-currency interest rate swaps are transactions in which counterparties exchange principal and interest flows in different currencies over a period of time. These contracts are used to manage both currency and interest rate exposures.

Credit derivatives

Credit derivatives are OTC contracts designed to transfer the credit risk in an underlying financial instrument (usually termed as a reference asset) from one counterparty to another. The most common credit derivatives are CDS and certain TRS.

CDS contracts provide protection against the decline in value of a reference asset as a result of specified credit events such as default or bankruptcy. These derivatives are similar in structure to an option whereby the purchaser pays a premium to the seller of the CDS contract in return for payment contingent on the occurrence of a credit event. The protection purchaser has recourse to the protection seller for the difference between the face value of the CDS contract and the fair value of the reference asset at the time of settlement. Neither the purchaser nor the seller under the CDS contract has recourse to the entity that issued the reference asset. Certain CDS contracts are cleared through a CCP.

In credit derivative TRS contracts, one counterparty agrees to pay or receive cash amounts based on the returns of a reference asset, including interest earned on these assets in exchange for amounts that are based on prevailing market funding rates. These cash settlements are made regardless of whether there is a credit event. Upon the occurrence of a credit event, the parties may either exchange cash payments according to the value of the defaulted assets or exchange cash based on the notional amount for physical delivery of the defaulted assets.

Equity derivatives

Equity swaps are OTC contracts in which one counterparty agrees to pay, or receive from the other, cash amounts based on changes in the value of a stock index, a basket of stocks or a single stock in exchange for amounts that are based either on prevailing market funding rates or changes in the value of a different stock index, basket of stocks or a single stock. These contracts generally include payments in respect of dividends.

Equity options give the purchaser of the option, for a premium, the right, but not the obligation, to buy from or sell to the writer of an option, an underlying stock index, basket of stocks, or a single stock at a contracted price. Options are transacted in both OTC and exchange markets.

Equity index futures are standardized contracts transacted on an exchange. They are based on an agreement to pay or receive a cash amount based on the difference between the contracted price level of an underlying stock index and its corresponding market price level at a specified future date. There is generally no actual delivery of stocks that comprise the underlying index. These contracts are in standard amounts with standard settlement dates.

Precious metal and other commodity derivatives

We also transact in other derivative products, including commodity forwards, futures, swaps and options, such as precious metal and energy-related products in both OTC and exchange markets.

Notional amounts

The notional amounts are not recorded as assets or liabilities, as they represent the face amount of the contract to which a rate or price is applied to determine the amount of cash flows to be exchanged. In most cases, notional amounts do not represent the potential gain or loss associated with market or credit risk of such instruments.

The following table presents the notional amounts of derivative instruments:

$ millions, as at October 31											2019				2018
	Residual term to contractual maturity
	Less than 1 year		1 to 5 years		Over 5 years		Total notional amounts		Trading		ALM		Trading		ALM (1)
Interest rate derivatives
Over-the-counter
Forward rate agreements	$	10,565	$	506	$	–	$	11,071	$	8,591	$	2,480	$	5,925	$	464
Centrally cleared forward rate agreements		284,672		35,446		–		320,118		320,118		–		273,528		–
Swap contracts		69,635		169,947		76,013		315,595		275,418		40,177		242,620		52,077
Centrally cleared swap contracts		1,377,618		1,308,226		450,208		3,136,052		2,780,206		355,846		2,264,721		308,915
Purchased options		9,788		4,046		1,407		15,241		12,883		2,358		8,697		3,091
Written options		10,152		4,711		818		15,681		14,670		1,011		10,417		1,841
		1,762,430		1,522,882		528,446		3,813,758		3,411,886		401,872		2,805,908		366,388
Exchange-traded
Futures contracts		113,047		25,633		213		138,893		136,627		2,266		99,156		2,148
Purchased options		14,613		3		–		14,616		14,616		–		7,273		–
Written options		5,755		3		–		5,758		5,758		–		2,500		–
		113,415		25,639		213		159,267		157,001		2,266		108,929		2,148
Total interest rate derivatives		1,895,845		1,548,521		528,659		3,973,025		3,568,8 8 7		404,138		2,914,837		368,536
Foreign exchange derivatives
Over-the-counter
Forward contracts		892,730		10,961		1,266		904,957		892,117		12,840		387,509		21,189
Swap contracts		338,753		72,274		32,745		443,772		398,262		45,510		299,073		59,209
Purchased options		17,823		1,408		54		19,285		19,285		–		20,562		2
Written options		22,243		1,684		20		23,947		23,947		–		22,513		30
		1,271,549		86,327		34,085		1,391,961		1,333,611		58,350		729,657		80,430
Exchange-traded
Futures contracts		26		–		–		26		26		–		11		–
Total foreign exchange derivatives		1,271,575		86,327		34,085		1,391,987		1,333,637		58,350		729,668		80,430
Credit derivatives
Over-the-counter
Total return swap contracts – protection sold		–		–		–		–		–		–		–		–
Credit default swap contracts – protection purchased		65		600		377		1,042		940		102		634		125
Centrally cleared credit default swap contracts – protection purchased		–		835		296		1,131		973		158		443		158
Credit default swap contracts – protection sold		177		201		–		378		328		50		157		102
Centrally cleared credit default swap contracts – protection sold		–		33		148		181		181		–		211		–
Total credit derivatives		242		1,669		821		2,732		2,422		310		1,445		385
Equity derivatives
Over-the-counter		59,325		18,350		428		78,103		74,756		3,347		100,762		1,484
Exchange-traded		71,094		18,272		163		89,529		89,529		–		82,038		–
Total equity derivatives		130,419		36,622		591		167,632		164,285		3,347		182,800		1,484
Precious metal derivatives
Over-the-counter		9,445		369		–		9,814		9,814		–		4,899		–
Exchange-traded		3,214		21		–		3,235		3,235		–		1,091		–
Total precious metal derivatives		12,659		390		–		13,049		13,049		–		5,990		–
Other commodity derivatives
Over-the-counter		18,229		16,061		2,529		36,819		36,819		–		33,261		–
Centrally cleared commodity derivatives		59		43		–		102		102		–		29		–
Exchange-traded		14,552		8,245		289		23,086		23,086		–		26,952		–
Total other commodity derivatives		32,840		24,349		2,818		60,007		60,007		–		60,242		–
Total notional amount of which:	$	3,343,580	$	1,697,878	$	566,974	$	5,608,432	$	5,142,287	$	466,145	$	3,894,982	$	450,835
Over-the-counter (2)		3,121,279		1,645,701		566,309		5,333,289		4,869,410		463,879		3,675,961		448,687
Exchange-traded		222,301		52,177		665		275,143		272,877		2,266		219,021		2,148

(1)	Certain prior period amounts have been revised from those previously presented.

(2)

For OTC derivatives that are not centrally cleared, $1,596.7 billion (2018: $1,064.5 billion) are with counterparties that have

two-way

collateral posting arrangements, $94.2 billion (2018: $33.8 billion) are with counterparties that have

one-way

collateral posting arrangements, and $184.8 billion (2018: $185.8 billion) are with counterparties that have no collateral posting arrangements. All counterparties with whom we have

one-way

collateral posting arrangements are sovereign entities.

Risk

In the following sections, we discuss the risks related to the use of derivatives and how we manage these risks.

Market risk

Derivatives are financial instruments where valuation is linked to changes in interest rates, foreign exchange rates, equity, commodity, credit prices or indices. Changes in value as a result of the aforementioned risk factors is referred to as market risk.

Market risk arising from derivative trading activities is managed in order to mitigate risk in line with CIBC’s risk appetite. To manage market risk, we set market risk limits and may enter into hedging transactions.

Credit risk

Credit risk arises from the potential for a counterparty to default on its contractual obligations and the possibility that prevailing market conditions are such that a loss would occur in replacing the defaulted transaction.

We limit the credit risk of OTC derivatives through the use of ISDA master netting agreements, collateral, CCPs and other credit mitigation techniques. We clear eligible derivatives through CCPs in accordance with various global initiatives. Where feasible, we novate existing bilaterally negotiated and settled derivatives to a CCP in an effort to reduce CIBC’s credit risk exposure. We establish counterparty credit limits and limits for CCP exposures based on a counterparty’s creditworthiness and the type of trading relationship with each counterparty (underlying agreements, business volumes, product types, tenors, etc.).

We negotiate netting agreements to contain the build-up of credit exposure resulting from multiple transactions with more active counterparties. Such agreements provide for the simultaneous close-out and netting of all transactions with a counterparty, in the case of a counterparty default. A number of these agreements incorporate a Credit Support Annex, which is a bilateral security agreement that, among other things, provides for the exchange of collateral between parties in the event that one party’s exposure to the other exceeds agreed upon thresholds.

Written OTC options, including CDS, generally have no credit risk for the writer if the counterparty has already performed in accordance with the terms of the contract through payment of the premium at inception. These written options will, however, have some credit risk to the extent of any unpaid premiums.

Credit risk on exchange-traded futures and options is limited, as these transactions are standardized contracts executed on established exchanges, whose CCPs assume the obligations of both counterparties. Similarly, swaps that are centrally cleared represent limited credit risk because these transactions are novated to the CCP, which assumes the obligations of the original bilateral counterparty. All exchange-traded and centrally cleared contracts are subject to initial margin and daily settlement of variation margins, designed to protect participants from losses incurred from a counterparty default.

A CVA is determined using the fair value based exposure we have on derivative contracts. We believe that we have made appropriate fair value adjustments to date. The establishment of fair value adjustments involves estimates that are based on accounting processes and judgments by management. We evaluate the adequacy of the fair value adjustments on an ongoing basis. Market and economic conditions relating to derivative counterparties may change in the future, which could result in significant future losses.

The following table summarizes our credit exposure arising from derivatives, which includes the current replacement cost, credit equivalent amount and risk-weighted amount. In 2019, we prospectively adopted the Standardized Approach for Counterparty Credit Risk (SA-CCR) for the determination of capital requirements relating to counterparty credit risk, which impacted the calculation of replacement cost, credit equivalent amount and risk-weighted assets, as summarized below.

The current replacement cost is the estimated cost to replace all contracts that have a positive market value, representing an unrealized gain to us. The replacement cost of an instrument is dependent upon its terms relative to prevailing market prices, and will fluctuate as market prices change and as the derivative approaches its scheduled maturity. Beginning in 2019, replacement cost also includes the impact of certain collateral amounts and the impact of master netting agreements. Prior to 2019, these amounts were previously excluded from this calculation.

Beginning in 2019, the credit equivalent amount is calculated as the sum of replacement cost and the potential future exposure, multiplied by an alpha of 1.4, and is reduced by CVA losses. Prior to 2019, the credit equivalent amount was the sum of the current replacement cost and the potential credit exposure, adjusted for master netting agreements and the i

pact of collateral. The potential credit exposure was an estimate of the amount by which the current replacement cost could increase over the remaining term of each transaction, based on a formula prescribed by OSFI. The credit equivalent amount was then multiplied by counterparty risk variables to arrive at the risk-weighted amount. The risk-weighted amount is used in determining the regulatory capital requirements for derivatives.


$ millions, as at October 31									2019 (1)											2018
	Current replacement cost						Credit equivalent amount		Risk- weighted amount		Current replacement cost							Credit equivalent amount		Risk- weighted amount
	Trading		ALM		Total		Credit equivalent amount		Risk- weighted amount		Trading		ALM		Total			Credit equivalent amount		Risk- weighted amount
Interest rate derivatives
Over-the-counter
Forward rate agreements	$	–	$	13	$	13	$	69	$	9	$	113	$	–	$	113		$	39	$	2
Swap contracts		2,503		155		2,658		7,1 40		2,507		4,603		773		5,376			5,359		539
Purchased options		17		–		17		87		67		92		11		103			20		8
		2,520		168		2,688		7, 296		2,583		4,808		784		5,592			5,418		549
Exchange-traded		4		–		4		192		5		1		–		1			170		5
		2,524		168		2,692		7,48 8		2,588		4,809		784		5,593			5,588		554
Foreign exchange derivatives
Over-the-counter
Forward contracts		939		4		943		7,136		1,737		2,916		117		3,033			3,793		1,017
Swap contracts		735		4		739		3,546		687		4,825		1,205		6,030			4,528		886
Purchased options		84		–		84		471		143		240		–		240			259		83
		1,758		8		1,766		11,153		2,567		7,981		1,322		9,303			8,580		1,986
Credit derivatives
Over-the-counter
Credit default swap contracts
– protection purchased		2		1		3		25		7		115		–		115			46		9
– protection sold		–		–		–		2		2		3		–		3			3		–
		2		1		3		27		9		118		–		118			49		9
Equity derivatives
Over-the-counter		265		5		270		4,83 2		1,018		1,951		7		1,958			2,259		535
Exchange-traded		682		–		682		3,59 3		103		1,659		–		1,659			4,131		116
		947		5		952		8,425		1,121		3,610		7		3,617			6,390		651
Precious metal derivatives
Over-the-counter		51		–		51		332		115		63		–		63			62		23
Exchange-traded		4		–		4		171		7		143		–		143			17		1
		55		–		55		503		122		206		–		206			79		24
Other commodity derivatives
Over-the-counter		697		62		759		3,928		1,195		2,527		–		2,527			4,046		1,523
Exchange-traded		9		–		9		1,200		48		67		–		67			1,480		59
		706		62		768		5,128		1,243		2,594		–		2,594			5,526		1,582
Non-trade exposure related to central counterparties										245											224
Common equity tier 1 (CET1) CVA charge										6,990											4,236
Total derivatives before netting		5,992		244		6,236		32,72 4		14,885		19,318		2,113		21,431			26,212		9,266
Less: effect of netting						n/a										(11,789	)
Total derivatives					$	6,236	$	32,72 4	$	14,885					$	9,642		$	26,212	$	9,266

(1)	In 2019, we adopted SA-CCR for the determination of capital requirements relating to counterparty credit risk, which impacted the calculation of replacement cost, credit equivalent amount and risk-weighted assets. Comparative amounts presented have not been restated.

n/a	Not applicable.

The following table presents the current replacement cost of derivatives by geographic region based on the location of the derivative counterparty:

$ millions, as at October 31							2019											2018 (1)
	Canada		U.S.		Other countries		Total		Canada			U.S.			Other countries			Total
Derivative instruments
By counterparty type
Financial institutions		$ 534		$ 1,063		$ 549		$ 2,146	$	4,864		$	5,206		$	4,947		$	15,017
Governments		891		–		8		899		3,361			–			9			3,370
Corporate		951		1,017		1,223		3,191		1,268			993			783			3,044
		2,376		2,080		1,780		6,236		9,493			6,199			5,739			21,431
Less: effect of netting		n/a		n/a		n/a		n/a		(5,673	)		(3,252	)		(2,864	)		(11,789	)
Total derivative instruments		$ 2,376	$	2,080		$ 1,780		$ 6,236	$	3,820		$	2,947		$	2,875		$	9,642

(1)	Prior period amounts have been restated to include exchange-traded derivatives to align to the current period presentation.

n/a	Not applicable.