eTrade 2012 Annual Report Download - page 147

NOTE 6—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. Cash flow 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. Fair value hedges, which include interest rate swaps and swaptions, are used to offset exposure to
changes in value of certain fixed-rate assets and liabilities. 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. The following table summarizes the fair value amounts of derivatives designated as hedging instruments
reported in the consolidated balance sheet at December 31, 2012 and 2011 (dollars in thousands):
Fair Value
Notional Asset(1) Liability(2) Net(3)
December 31, 2012
Interest rate contracts:
Cash flow hedges:
Purchased options $2,325,000 $13,391 $ — $ 13,391
Pay-fixed rate swaps 2,205,000 — (310,079) (310,079)
Total cash flow hedges 4,530,000 13,391 (310,079) (296,688)
Fair value hedges:
Pay-fixed rate swaps 514,180 1,343 (18,385) (17,042)
Total derivatives designated as hedging
instruments(4) $5,044,180 $14,734 $(328,464) $(313,730)
December 31, 2011
Interest rate contracts:
Cash flow hedges:
Purchased options $2,625,000 $33,959 $ — $ 33,959
Pay-fixed rate swaps 2,165,000 — (281,071) (281,071)
Total cash flow hedges 4,790,000 33,959 (281,071) (247,112)
Fair value hedges:
Pay-fixed rate swaps 1,093,860 — (77,132) (77,132)
Receive-fixed rate swaps 725,950 32,575 — 32,575
Total fair value hedges 1,819,810 32,575 (77,132) (44,557)
Total derivatives designated as hedging
instruments(4) $6,609,810 $66,534 $(358,203) $(291,669)
(1) Reflected in the other assets line item on the consolidated balance sheet.
(2) Reflected in the other liabilities line item on the consolidated balance sheet.
(3) Represents derivative assets net of derivative liabilities for disclosure purposes only.
(4) All derivatives were designated as hedging instruments as of December 31, 2012 and 2011.
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).
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