eTrade 2011 Annual Report Download - page 137

Cash Flow Hedges
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 discontinued hedges. Amounts are included in net operating interest income as a yield adjustment in
the same period the hedged forecasted transaction affects earnings. The ineffective portion of changes in fair
value of the derivative instrument, which is equal to the excess of the cumulative change in the fair value of the
actual derivative over the cumulative change in the fair value of a hypothetical derivative which is created to
match the exact terms of the underlying instruments being hedged, is reported in the gains on loans and
securities, net line item in the consolidated statement of income (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 would be immediately reclassified into the
gains on loans and securities, net line item in the consolidated statement of income (loss). If hedge accounting is
discontinued because a derivative instrument is sold, terminated or otherwise de-designated, amounts included in
accumulated other comprehensive loss related to the specific hedging instrument continue to be reported in
accumulated other comprehensive loss until the forecasted transaction affects earnings.
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, 2011, 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.
The following table summarizes the effect of interest rate contracts designated and qualifying as hedging
instruments in cash flow hedges on accumulated other comprehensive loss and on the consolidated statement of
income (loss) (dollars in thousands):
For the Year Ended December 31,
2011 2010 2009
Gains (losses) on derivatives recognized in OCI (effective portion), net of tax $(216,302) $(77,724) $101,886
Losses reclassified from AOCI into earnings (effective portion), net of tax $ 66,847 $ 47,774 $ 37,055
Cash flow hedge ineffectiveness gains (losses)(1) $ (491) $ (265) $ 579
(1) The cash flow hedge ineffectiveness is reflected in the gains on loans and securities, net line item on the statement of consolidated
income (loss).
During the upcoming twelve months, the Company expects to include a pre-tax amount of approximately
$66.8 million of net unrealized losses that are currently reflected in accumulated other comprehensive loss in net
operating interest income as a yield adjustment in the same periods in which the related items affect earnings.
The maximum length of time over which transactions are hedged is 11 years.
The following table shows the balance in accumulated other comprehensive loss attributable to active and
discontinued cash flow hedges (dollars in thousands):
December 31,
2011 2010
Accumulated other comprehensive loss balance (net of tax) related to:
Discontinued cash flow hedges $(279,091) $(271,595)
Active cash flow hedges (178,862) (36,903)
Total cash flow hedges $(457,953) $(308,498)
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