Charles Schwab 2015 Annual Report Download - page 102

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THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
- 82 -
disgorgement and penalties in an amount which would not be material. The Company continues to dispute the allegations and
is appealing the decision.
16. Financial Instruments Subject to Off-Balance Sheet Credit Risk or Concentration Risk
Off-Balance Sheet Credit Risk
Resale and repurchase agreements: Schwab enters into collateralized resale agreements principally with other broker-
dealers, which could result in losses in the event the counterparty fails to purchase the securities held as collateral for the cash
advanced and the fair value of the securities declines. To mitigate this risk, Schwab requires that the counterparty deliver
securities to a custodian, to be held as collateral, with a fair value in excess of the resale price. Schwab also sets standards for
the credit quality of the counterparty, monitors the fair value of the underlying securities as compared to the related
receivable, including accrued interest, and requires additional collateral where deemed appropriate. At December 31, 2015
and 2014, the fair value of collateral received in connection with resale agreements that are available to be repledged or sold
was $8.2 billion and $10.4 billion, respectively. Schwab utilizes the collateral provided under these resale agreements to meet
obligations under broker-dealer client protection rules, which place limitations on its ability to access such segregated
securities. For Schwab to repledge or sell this collateral, it would be required to deposit cash and/or securities of an equal
amount into its segregated reserve bank accounts in order to meet its segregated cash and investment requirement. The
Company’s resale agreements are not subject to master netting arrangements.
Securities lending: The Company loans client securities temporarily to other brokers in connection with its securities lending
activities and receives cash as collateral for the securities loaned. Increases in security prices may cause the fair value of the
securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does
not return the loaned securities or provide additional cash collateral, the Company may be exposed to the risk of acquiring the
securities at prevailing market prices in order to satisfy its client obligations. The Company mitigates this risk by requiring
credit approvals for counterparties, monitoring the fair value of securities loaned, and requiring additional cash as collateral
when necessary. The fair value of client securities pledged in securities lending transactions to other broker-dealers was
$1.9 billion and $1.3 billion at December 31, 2015 and 2014, respectively. The Company has also pledged a portion of its
securities owned in connection with securities lending transactions to other broker-dealers. Additionally, the Company
borrows securities from other broker-dealers to fulfill short sales by clients and delivers cash to the lender in exchange for the
securities. The fair value of these borrowed securities was $72 million and $88 million at December 31, 2015 and 2014,
respectively. All of the Company’s securities lending transactions are subject to enforceable master netting arrangements
with other broker-dealers. However, the Company does not net securities lending transactions and therefore, the Company’s
securities loaned and securities borrowed are presented gross in the consolidated balance sheets.