Charles Schwab 2015 Annual Report Download - page 32

THE CHARLES SCHWAB CORPORATION
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made websites, mobile applications and email unavailable for periods of time. It could take an extended period of time to
restore full functionality to the Company’s technology or other operating systems in the event of an unforeseen event which
could affect the Company’s ability to process and settle client transactions. Moreover, instances of fraud or other misconduct,
might also negatively impact the Company’s reputation and client confidence in the Company, in addition to any direct losses
that might result from such instances. Despite the Company’s efforts to identify areas of risk, oversee operational areas
involving risk, and implement policies and procedures designed to manage these risks, there can be no assurance that the
Company will not suffer unexpected losses, reputational damage or regulatory action due to technology or other operational
failures or errors, including those of its vendors or other third parties.
While the Company devotes substantial attention and resources to the reliability, capacity and scalability of its systems,
extraordinary trading volumes could cause the Company’s computer systems to operate at unacceptably slow speeds or even
fail, affecting the Company’s ability to process client transactions and potentially resulting in some clients’ orders being
executed at prices they did not anticipate. Disruptions in service and slower system response times could result in substantial
losses and decreased client satisfaction. The Company is also dependent on the integrity and performance of securities
exchanges, clearing houses and other intermediaries to which client orders are routed for execution and settlement. Systems
failures and constraints and transaction errors at such intermediaries could result in delays and erroneous or unanticipated
execution prices, cause substantial losses for the Company and for its clients, and subject the Company to claims from its
clients for damages.
A significant decrease in the Company’s liquidity could negatively affect the Company’s business and financial
management as well as reduce client confidence in the Company.
Maintaining adequate liquidity is crucial to the business operations of the Company, including margin lending, mortgage
lending, and transaction settlement, among other liquidity needs. The Company meets its liquidity needs primarily through
cash generated by client activity and operating earnings, as well as cash provided by external financing. Fluctuations in client
cash or deposit balances, as well as changes in regulatory treatment of client deposits or market conditions, may affect the
Company’s ability to meet its liquidity needs. A reduction in the Company’s liquidity position could reduce client confidence
in the Company, which could result in the loss of client accounts, or could cause the Company to fail to satisfy its liquidity
requirements. In addition, if the Company’s broker-dealer or depository institution subsidiaries fail to meet regulatory capital
guidelines, regulators could limit the subsidiaries’ operations or their ability to upstream funds to CSC, which could reduce
CSC’s liquidity and adversely affect its ability to repay debt and pay cash dividends. In addition, CSC may need to provide
additional funding to such subsidiaries.
Factors which may adversely affect the Company’s liquidity position include fluctuations in cash held in banking or
brokerage client accounts, a dramatic increase in the Company’s client lending activities (including margin, mortgage-related,
and personal lending), unanticipated outflows of company cash, increased capital requirements, changes in regulatory
guidance or interpretations, other regulatory changes, or a loss of market or client confidence in the Company. Schwab may
also experience temporary liquidity demands due to timing differences between brokerage transaction settlements and the
availability of segregated cash balances.
When cash generated by client activity and operating earnings is not sufficient for the Company’s liquidity needs, the
Company must seek external financing. During periods of disruptions in the credit and capital markets, potential sources of
external financing could be reduced, and borrowing costs could increase. Although CSC and Schwab maintain committed
and uncommitted, unsecured bank credit lines and CSC has a commercial paper issuance program, as well as a universal
shelf registration statement filed with the SEC which can be used to sell securities, financing may not be available on
acceptable terms or at all due to market conditions or disruptions in the credit markets. In addition, a significant downgrade in
the Company’s credit ratings could increase its borrowing costs and limit its access to the capital markets.
The Company may suffer significant losses from its credit exposures.
The Company’s businesses are subject to the risk that a client, counterparty or issuer will fail to perform its contractual
obligations, or that the value of collateral held to secure obligations will prove to be inadequate. While the Company has
policies and procedures designed to manage this risk, the policies and procedures may not be fully effective. The Company’s
exposure mainly results from margin lending, clients’ options trading, securities lending, mortgage lending, pledged asset