eTrade 2011 Annual Report Download - page 116

NOTE 4—FAIR VALUE DISCLOSURES
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. In determining fair value, the Company
may use various valuation approaches, including market, income and/or cost approaches. The fair value hierarchy
requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. Fair value is a market-based measure considered from the perspective of a market
participant. Accordingly, even when market assumptions are not readily available, the Company’s own
assumptions reflect those that market participants would use in pricing the asset or liability at the measurement
date. The fair value measurement accounting guidance describes the following three levels used to classify fair
value measurements:
• Level 1—Quoted prices in active markets for identical assets or liabilities.
• Level 2—Quoted prices in markets that are not active or for which all significant inputs are observable,
either directly or indirectly.
• Level 3—Unobservable inputs that are significant to the fair value of the assets or liabilities.
The availability of observable inputs can vary and in certain cases, the inputs used to measure fair value
may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is
based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of
the significance of a particular input to a fair value measurement requires judgment and consideration of factors
specific to the asset or liability.
Recurring Fair Value Measurement Techniques
U.S. Treasury Securities and Agency Debentures
The fair value measurements of U.S. Treasury securities were classified as Level 1 of the fair value
hierarchy as they were based on quoted market prices in active markets. The fair value measurements of agency
debentures were classified as Level 2 of the fair value hierarchy as they were based on quoted market prices that
were derived from assumptions observable in the marketplace.
Residential Mortgage-backed Securities
The Company’s residential mortgage-backed securities portfolio was comprised of agency mortgage-backed
securities and CMOs, which represented the majority of the portfolio, and non-agency CMOs. Agency mortgage-
backed securities and CMOs are guaranteed by U.S. government sponsored and federal agencies. The majority of
the Company’s non-agency CMOs were backed by first lien mortgages and were below investment grade or
non-rated as of December 31, 2011. The weighted average coupon rates for the residential mortgage-backed
securities as of December 31, 2011 are shown in the following table:
Weighted Average
Coupon Rate
Agency mortgage-backed securities 3.45 %
Agency CMOs 3.48 %
Non-agency CMOs 3.90 %
The fair value of agency mortgage-backed securities was determined using market and income approaches
with quoted market prices, recent market transactions and spread data for similar instruments. The fair value of
agency CMOs was determined using market and income approaches with the Company’s own trading activities
for identical or similar instruments. Agency mortgage-backed securities and CMOs were categorized in Level 2
of the fair value hierarchy.
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