eTrade 2000 Annual Report Download - page 98

the customer’ s account. As customers write option contracts or sell securities short, the Company may incur losses if the customers do
not fulfill their obligations and the collateral in customer accounts is not sufficient to fully cover losses which customers may incur
from these strategies. To control this risk, the Company monitors required margin levels daily, and customers are required to deposit
additional collateral, or reduce positions, when necessary.
Through its broker-dealer subsidiaries, the Company loans securities temporarily to other brokers in connection with its securities
lending activities. The Company receives cash as collateral for the securities loaned. Increases in security prices may cause the market
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, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in
order to satisfy its
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customer obligations. The Company controls this risk by requiring credit approvals for counterparties, by monitoring the market value
of securities loaned on a daily basis and by requiring deposits of additional cash as collateral when necessary.
The Company is obligated to settle transactions with brokers and other financial institutions even if its customers fail to meet their
obligations to the Company. Customers are required to complete their transactions on settlement date, generally three business days
after trade date. If customers do not fulfill their contractual obligations, the Company may incur losses. The Company has established
procedures to reduce this risk by requiring that customers deposit cash and/or securities into their account prior to placing an order.
The Company may at times maintain inventories in equity securities on both a long and short basis. While long inventory positions
represent the Company’ s ownership of securities, short inventory positions represent obligations of the Company. Accordingly, both
long and short inventory positions may result in losses or gains to the Company as market values of securities fluctuate. To mitigate the
risk of losses, long and short positions are marked to market daily and are continuously monitored by the Company. 22. FAIR
VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The fair value information for financial instruments that is provided below is based on the requirements of SFAS No. 107, Disclosure
About Fair Value of Financial Instruments . Much of the information used to determine fair value is subjective and judgmental in
nature. Therefore, fair value estimates, especially for less marketable securities, may vary. In addition, the amounts actually realized or
paid upon settlement or maturity could be significantly different. The following methods and assumptions were used to estimate the
fair value of each class of financial instrument for which it is reasonable to estimate that value:
Cash and interest-bearing deposits —Fair value is estimated to be carrying value.
Investment securities —Fair value is estimated by using quoted market prices for most securities. For illiquid securities, market prices
are estimated by obtaining market price quotes on similar liquid securities and adjusting the price to reflect differences between the
two securities, such as credit risk, liquidity, term coupon, payment characteristics, and other information.
Brokerage receivables-net —Fair value is estimated to be carrying value.
Mortgage-backed securities —Fair value is estimated using quoted market prices. For illiquid securities, market prices are estimated
by obtaining market price quotes on similar liquid securities and adjusting the price to reflect differences between the two securities,
such as credit risk, liquidity, term coupon, payment characteristics, and other information.
Loans receivable— For certain residential mortgage loans, fair value is estimated using quoted market prices for similar types of
products. The fair value of certain other types of loans is estimated using quoted market prices for securities backed by similar loans.
The fair value for loans that could not be reasonably established using the previous two methods was estimated by discounting future
cash flows using current rates for similar loans. Management adjusts the discount rate to reflect the individual characteristics of the
loan, such as credit risk, coupon, term, payment characteristics, and the liquidity of the secondary market for these types of loans.
Trading securities— Fair value is estimated using quoted market prices. For illiquid securities, market prices are estimated by
obtaining market price quotes on similar securities and adjusting the price to reflect differences between the two securities, such as
credit risk, liquidity, term, coupon, payment characteristics, and other information.
Brokerage payables— Fair value is estimated to be carrying value.
Retail deposits —For passbook savings, checking and money market accounts, fair value is estimated at carrying value. For fixed
maturity certificates of deposit, fair value is estimated by discounting future cash flows at the currently offered rates for deposits of
2002. EDGAR Online, Inc.