eTrade 2008 Annual Report Download - page 125

De-designated Fair Value Hedges
During the years ended December 31, 2008 and 2007, certain fair value hedges were de-designated;
therefore, hedge accounting was discontinued during those periods. The net gain or loss on the underlying
transactions being hedged is amortized to operating interest expense or operating interest income over the
original forecasted period at the time of de-designation. Changes in the fair value of these derivative instruments
after de-designation of fair value hedge accounting are recorded in the gain (loss) on loans and securities, net line
item in the consolidated statement of income (loss).
Cash Flow Hedges
The Company uses a combination of interest rate swaps, forward-starting swaps and purchased options on
caps and floors to hedge the variability of future cash flows associated with existing variable-rate liabilities and
assets and forecasted issuances of liabilities. These cash flow hedge relationships are treated as effective hedges
as long as the future issuances of liabilities remain probable and the hedges continue to meet the requirements of
SFAS No. 133, as amended. The future issuance of these liabilities, including securities sold under agreements to
repurchase, are largely dependent on the market demand and liquidity in the wholesale borrowings market.
Additionally, the Company enters into forward purchase and sale agreements, which are considered cash flow
hedges, when the terms of the commitments exactly match the terms of the securities purchased or sold.
As of December 31, 2008, the Company believes the forecasted issuance of all debt in cash flow hedge
relationships is probable. However, unexpected changes in market conditions in future periods could impact the
ability to issue this debt. The Company believes the forecasted issuance of debt in the form of repurchase
agreements is most susceptible to an unexpected change in market conditions.
Changes in the fair value of derivatives that hedge cash flows associated with repurchase agreements, FHLB
advances and home equity lines of credit are reported in accumulated other comprehensive loss as unrealized
gains or losses, for both active and terminated hedges. If the derivatives are determined to be effective hedges,
the amounts in accumulated other comprehensive loss are included in operating interest expense or operating
interest income as a yield adjustment during the same periods in which the related interest on the funding affects
earnings. If the derivatives are determined not to be effective hedges, the amount recorded in other
comprehensive income would be reclassified into the gain (loss) on loans and securities, net line item in the
consolidated statement of income (loss). During the upcoming twelve months, the Company expects to include a
pre-tax amount of approximately $96 million of net unrealized loss that are currently reflected in accumulated
other comprehensive loss in operating interest expense as a yield adjustment in the same periods in which the
related items affect earnings.
122