Charles Schwab 2011 Annual Report Download - page 59

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THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
- 31 -
CSC also has direct access to $750 million of the $875 million uncommitted, unsecured bank credit lines discussed below,
that are primarily utilized by Schwab to manage short-term liquidity. These lines were not used by CSC during 2011.
In addition, Schwab provides CSC with a $1.0 billion credit facility maturing in December 2014. This facility replaced a
similar facility that expired in December 2011. There were no funds drawn under this facility at December 31, 2011.
Schwab
Schwab is subject to regulatory requirements that are intended to ensure the general financial soundness and liquidity of
broker-dealers. These regulations prohibit Schwab from repaying subordinated borrowings from CSC, paying cash dividends,
or making unsecured advances or loans to its parent company or employees if such payment would result in a net capital
amount of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement of $250,000. At
December 31, 2011, Schwab’s net capital was $1.2 billion (10% of aggregate debit balances), which was $948 million in
excess of its minimum required net capital and $588 million in excess of 5% of aggregate debit balances.
Most of Schwab’s assets are readily convertible to cash, consisting primarily of short-term (i.e., less than 150 days)
investment-grade, interest-earning investments (the majority of which are segregated for the exclusive benefit of clients
pursuant to regulatory requirements), receivables from brokerage clients, and receivables from brokers, dealers, and clearing
organizations. Client margin loans are demand loan obligations secured by readily marketable securities. Receivables from
and payables to brokers, dealers, and clearing organizations primarily represent current open transactions, which usually
settle, or can be closed out, within a few business days.
Liquidity needs relating to client trading and margin borrowing activities are met primarily through cash balances in
brokerage client accounts, which were $33.5 billion and $29.9 billion at December 31, 2011 and 2010, respectively.
Management believes that brokerage client cash balances and operating earnings will continue to be the primary sources of
liquidity for Schwab.
Schwab has a finance lease obligation related to an office building and land under a 20-year lease. The remaining finance
lease obligation of $100 million at December 31, 2011, is being reduced by a portion of the lease payments over the
remaining lease term of 13 years.
To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank credit lines with a group of six banks
totaling $875 million at December 31, 2011. The need for short-term borrowings arises primarily from timing differences
between cash flow requirements, scheduled liquidation of interest-earnings investments, and movements of cash to meet
regulatory brokerage client cash segregation requirements. Schwab borrowed an average of $41 million per day for nine days
in 2011 under these lines. There were no borrowings outstanding under these lines at December 31, 2011.
To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation (OCC),
Schwab has unsecured standby letter of credit agreements (LOCs) with eight banks in favor of the OCC aggregating
$350 million at December 31, 2011. In connection with its securities lending activities, Schwab is required to provide
collateral to certain brokerage clients. Schwab satisfies the collateral requirements by arranging LOCs, in favor of these
brokerage clients, which are issued by multiple banks. At December 31, 2011, the aggregate face amount of these LOCs
totaled $78 million. There were no funds drawn under any of these LOCs during 2011.
To manage Schwab’s regulatory capital requirement, CSC provides Schwab with a $1.4 billion subordinated revolving credit
facility, which is scheduled to expire in March 2012. The amount outstanding under this facility at December 31, 2011, was
$245 million. Borrowings under this subordinated lending arrangement qualify as regulatory capital for Schwab.
In addition, CSC provides Schwab with a $2.5 billion credit facility, which is scheduled to expire in December 2014. This
facility replaced a similar facility that expired in December 2011. Borrowings under this facility do not qualify as regulatory
capital for Schwab. There were no funds drawn under this facility at December 31, 2011.