eTrade 2009 Annual Report Download - page 135

NOTE 8—ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company enters into derivative transactions primarily to protect against interest rate risk on the value of
certain assets, liabilities and future cash flows. Derivative instruments designated in hedging relationships that
mitigate exposure to the variability in expected future cash flows or other forecasted transactions are considered
cash flow hedges. Derivative instruments in hedging relationships that mitigate exposure to changes in the fair
value of assets or liabilities are considered fair value hedges. The Company also recognizes certain contracts and
commitments as derivatives when the characteristics of those contracts and commitments meet the definition of a
derivative. Each derivative is recorded on the consolidated balance sheet at fair value as a freestanding asset or
liability. Cash flow and fair value hedge ineffectiveness is re-measured on a quarterly basis. The following table
summarizes the location and fair value amounts of derivative instruments reported in the consolidated balance
sheet (dollars in thousands):
Fair Value
Asset(1) Liability(2) Net(3)
December 31, 2009
Derivatives designated as hedging instruments:
Interest rate contracts:
Cash flow hedges $87,534 $(143,602) $(56,068)
Fair value hedges 5,863 — 5,863
Total derivatives designated as hedging
instruments(4) $93,397 $(143,602) $(50,205)
(1) Reflected in the other assets line item on the consolidated balance sheet.
(2) Reflected in the accounts payable, accrued and other liabilities line item on the consolidated balance sheet.
(3) Represents derivative assets net of derivative liabilities for presentation purposes only.
(4) There were no derivatives not designated as hedging instruments as of December 31, 2009.
Cash Flow Hedges
The majority of the Company’s derivative instruments as of December 31, 2009 and 2008 were designated
as cash flow hedges. These hedges, which include a combination of interest rate swaps, forward-starting swaps
and purchased options, including caps and floors, are used primarily to reduce the variability of future cash flows
associated with existing variable-rate assets and liabilities and forecasted issuances of liabilities.
The effective portion of changes in fair value of the derivative instruments that hedge cash flows is reported
as a component of accumulated other comprehensive loss, net of tax in the consolidated balance sheet, for both
active and terminated hedges. Amounts are then included in net operating interest income as a yield adjustment
in the same period the hedged transaction affects earnings. The ineffective portion of changes in fair value of the
derivative instruments is reported as a fair value adjustment in the gains (losses) on loans and securities, net line
item in the consolidated statement of loss.
If it becomes probable that a hedged forecasted transaction will not occur, amounts included in accumulated
other comprehensive loss related to the specific hedging instruments are reclassified into the gains (losses) on
loans and securities, net line item in the consolidated statement of loss. If hedge accounting is discontinued
because a derivative instrument ceases to be a highly effective hedge; or is sold, terminated or de-designated,
amounts included in accumulated other comprehensive loss related to the specific hedging instrument continue to
be reported in other comprehensive income or loss until the forecasted transaction affects earnings. Derivative
instruments no longer in hedging relationships continue to be recorded at fair value with changes in fair value
reported in the gains (losses) on loans and securities, net line item in the consolidated statement of loss.
The future issuances of liabilities, including repurchase agreements, are largely dependent on the market
demand and liquidity in the wholesale borrowings market. As of December 31, 2009, the Company believes the
forecasted issuance of all debt in cash flow hedge relationships is probable. However, unexpected changes in
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