eTrade 2011 Annual Report Download - page 80

forecasted transactions are considered cash flow hedges. In order to qualify for hedge accounting treatment,
documentation must indicate the intention to designate the derivative as a hedge of a specific asset or liability or
a future cash flow. Effectiveness of the hedge must be monitored over the life of the derivative instrument.
Each derivative instrument is recorded on the consolidated balance sheet at fair value as a freestanding asset
or liability. Fair value hedges are accounted for by recording the fair value of the derivative instrument and the
fair value of the asset or liability being hedged on the consolidated balance sheet. Changes in the fair value of
both of the derivatives and the underlying assets or liabilities are recognized in the gains on loans and securities,
net line item in the consolidated statement of income (loss). To the extent that the hedge is ineffective, the
changes in the fair values will not offset and the difference, or hedge ineffectiveness, is reflected in the gains on
loans and securities, net line item in the consolidated statement of income (loss). Cash flow hedges are accounted
for by recording the fair value of the derivative instrument on the consolidated balance sheet. The effective
portion of the changes in fair value of the derivative instrument in a cash flow hedge 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 forecasted transaction affects earnings. The ineffective portion of the changes in fair value of
the derivative instrument in a cash flow hedge is reported in the gains on loans and securities, net line item in the
consolidated statement of income (loss).
Cash flow hedge relationships are treated as effective hedges as long as the hedged forecasted transactions
remain probable and the hedges continue to meet the requirements of derivatives and hedging accounting
guidance. 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). As
of December 31, 2011, we had an unrealized pre-tax loss reported in accumulated other comprehensive loss of
$734.2 million related to cash flow hedges.
Judgments
The future issuances of liabilities underlying cash flow hedge relationships, including repurchase
agreements, are largely dependent on the market demand and liquidity in the wholesale borrowings market. As of
December 31, 2011, we believe the forecasted issuance of all liabilities in cash flow hedge relationships is
probable. However, unexpected changes in market conditions in future periods could impact our ability to issue
these liabilities. We believe the forecasted issuance of liabilities in the form of repurchase agreements is most
susceptible to an unexpected change in market conditions.
Effects if Actual Results Differ
If our hedging strategies were to no longer meet the effectiveness criterion or our assumptions about the
nature and timing of forecasted transactions were to be inaccurate, we could no longer apply hedge accounting
and our reported results would be significantly affected. For example, if we determined that the forecasted
issuance of repurchase agreements associated with our cash flow hedges was no longer probable, the $595.2
million pre-tax loss in accumulated other comprehensive loss related to cash flow hedges on repurchase
agreements would be reclassified into the gains on loans and securities, net line item in the consolidated
statement of income (loss) in the period in which this determination was made. This loss would have a material
adverse effect on our regulatory capital position and results of operations.
Fair Value Measurements
Description
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. As of December 31, 2011, 33% and
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