TORONTO - Toronto-Dominion Bank (TSX: TD.TO) disclosed Friday a $96-million loss caused by "incorrectly priced" financial investments at its operations in London.
Canada's second-biggest bank by assets said the employee involved at its TD Securities arm "is no longer with the company" and the Toronto bank is co-operating with Canadian and British regulators investigating the matter.
TD did not say if the losses were linked to trading mistakes or if any wrongdoing or criminal activity was involved.
TD spokeswoman Simone Philogene said she could provide little information about the former employee due to privacy considerations.
"What I can tell you is we had a senior trader in our London office leave our employ on Monday, June 23 and upon transitioning his accountabilities we identified incorrectly priced financial instruments," Philogene said.
The financial instruments were credit index swaps - complex futures or derivative contracts used by traders to spread credit risks.
In this instance, the trader most likely priced the instruments higher than their value, which means that TD was recognizing a profit when there wasn't any money being made.
"It's an account we trade for the bank, so there's no client money involved," Philogene said.
A source familiar with credit index trading suggested there are two frequent motivations for a rogue trader to incorrectly price financial investments above their actual worth.
The first is ego, or the trader wanting to be seen by their employee as a success, even if they lost money on the trade. The second is ensuring that money isn't lost on the trade so that the trader receives higher payouts, or monetary rewards, from their employer.
Neither potential motivation has been specifically linked to the TD Bank case, which one banking analyst said was more an embarrassment than a hit to the bank's bottom line.
"It's got to be disappointing for management at TD because they have prided themselves on having not had these issues, where many of their peers have had absolutely devastating related issues," said Brad Smith of Blackmont Capital.
TD Bank has spent the last year gliding relatively unscathed through a period where its Canadian peers have been slammed with massive writedowns related to credit losses tied to the U.S. subprime mortgage market.
The bank also managed to exit the asset-backed commercial paper market just before it crumbled last summer in Canada.
"We are very disappointed that this has occurred," TD Bank Financial Group chief executive officer Ed Clark said in a brief statement.
"Our company has a strong risk culture and we deeply regret this incident. We take this very seriously and will make every effort to ensure that this doesn't happen again."
The news had no discernible impact on the share price of the bank, which has $503.6 billion in assets and ranks behind Royal Bank among Canada's largest lenders.
TD shares were down 25 cents at $63.09 on the TSX, with a 52-week range between $77.10 and $58.57.
The bank's announcement echoed similar risk management troubles faced by the Bank of Montreal (TSX: BMO.TO) early last year when it reported $680 million of commodities-trading losses, mostly from natural gas trading.
The TD Bank charge is not a large one, amounting to only about 11 per cent of the bank's C$852 million net profit in the second quarter ended April 30.
TD will report its third-quarter results Aug. 28 and may include the latest charge in its finances at that time.
