eTrade 2009 Annual Report Download - page 13

borrowed, potentially creating collections issues with our margin receivables. In addition, we frequently borrow
securities from and lend securities to other broker-dealers. Under regulatory guidelines, when we borrow or lend
securities, we must generally simultaneously disburse or receive cash deposits. A sharp change in security market
values may result in losses if counterparties to the borrowing and lending transactions fail to honor their
commitments.
We may be unsuccessful in managing the effects of changes in interest rates and the enterprise interest-earning
assets in our portfolio.
Net operating interest income is an important source of our revenue. Our results of operations depend, in
part, on our level of net operating interest income and our effective management of the impact of changing
interest rates and varying asset and liability maturities. Our ability to manage interest rate risk could impact our
financial condition. We use derivatives to help manage interest rate risk. However, the derivatives we utilize may
not be completely effective at managing this risk and changes in market interest rates and the yield curve could
reduce the value of our financial assets and reduce net operating interest income. Among other items, we
periodically enter into repurchase agreements to support the funding and liquidity requirements of E*TRADE
Bank. Several market participants have reduced or terminated their participation in the repurchase agreement
market. If we are unsuccessful in maintaining our relationships with counterparties, we could recognize
substantial losses on the derivatives we utilized to hedge repurchase agreements.
If we do not successfully manage consolidation opportunities, we could be at a competitive disadvantage.
There has recently been significant consolidation in the financial services industry and this consolidation is
likely to continue in the future. Should we be excluded from or fail to take advantage of viable consolidation
opportunities, our competitors may be able to capitalize on those opportunities and create greater scale and cost
efficiencies to our detriment.
We have acquired a number of businesses and, although we are currently constrained by the terms of our
corporate debt and the memoranda of understanding we and E*TRADE Bank entered into with the OTS, may
continue to acquire businesses in the future. The primary assets of these businesses are their customer accounts.
Our retention of these assets and the customers of businesses we acquire may be impacted by our ability to
successfully continue to integrate the acquired operations, products (including pricing) and personnel. Diversion
of management attention from other business concerns could have a negative impact. If we are not successful in
our integration efforts, we may experience significant attrition in the acquired accounts or experience other issues
that would prevent us from achieving the level of revenue enhancements and cost savings that we expect with
respect to an acquisition.
Risks associated with principal trading transactions could result in trading losses.
A majority of our market-making revenues are derived from trading as a principal. We may incur trading
losses relating to the purchase, sale or short sale of securities for our own account, as well as trading losses in our
market maker stocks. From time to time, we may have large positions in securities of a single issuer or issuers
engaged in a specific industry. Sudden changes in the value of these positions could impact our financial results.
Reduced spreads in securities pricing, levels of trading activity and trading through market makers could harm
our market maker business.
Computer-generated buy/sell programs and other technological advances and regulatory changes in the
marketplace may continue to tighten securities spreads. Tighter spreads could reduce revenue capture per share
by our market maker, thus reducing revenues for this line of business.
Advisory services subject us to additional risks.
We provide advisory services to investors to aid them in their decision making and also provide full service
portfolio management. Investment decisions and suggestions are based on publicly available documents and
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