Charles Schwab 2013 Annual Report Download - page 54

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THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
- 43 -
Market Risk
Market risk is the potential for changes in earnings or the value of financial instruments held by the Company as a result of
fluctuations in interest rates, equity prices or market conditions. Included in market risk is interest rate risk, which is the risk
to earnings or capital arising from movement of interest rates. For discussion of the Company’s market risk, see “Item 7A –
Quantitative and Qualitative Disclosures About Market Risk.”
Liquidity Risk
Liquidity risk arises from the inability to meet obligations when they come due without incurring unacceptable losses. It is
the risk that valuations will be negatively affected by changes in demand and the underlying market for a financial
instrument. Limits and contingency funding scenarios have been established for the Company to support liquidity levels and
quality during both expected and stressed scenarios. The Company seeks to maintain client confidence in its balance sheet
and the safety of client assets by maintaining liquidity and diversity of funding sources to allow the firm to meet its
obligations under both expected and stressed scenarios. See Item 7 – Management’s Discussion and Analysis – Liquidity and
Capital Resources” for additional detail on the Company’s liquidity requirements.
Compliance Risk
The Company faces significant compliance risk in its business, that is, the risk of legal or regulatory sanctions, fines or
penalties, financial loss, or damage to reputation resulting from the failure to comply with laws, regulations, rules, or other
regulatory requirements. Among other things, compliance risks relate to the suitability of client investments, conflicts of
interest, disclosure obligations and performance expectations for Company products and services, supervision of employees,
and the adequacy of the Company’s controls. The Company and its affiliates are subject to extensive regulation by federal,
state and foreign regulatory authorities, including SROs. Such regulation is becoming increasingly extensive and complex,
regulatory proceedings and sanctions against financial services firms continue to increase.
The Company attempts to manage compliance risk through policies, procedures and controls reasonably designed to achieve
and/or monitor compliance with applicable legal and regulatory requirements. These procedures address issues such as
business conduct and ethics, sales and trading practices, marketing and communications, extension of credit, client funds and
securities, books and records, anti-money laundering, client privacy, and employment policies. Despite the Company’s
efforts to maintain an effective compliance program and internal controls, legal breaches and rule violations could result in
reputational harm, significant losses and disciplinary sanctions, including limitations on the Company’s business activities.
Legal Risk
Legal risk is a consequence of operational failure – the risk of a claim for damages brought by clients, employees or other
third parties, alleging error that amounts to a breach of legal requirements or other duties under law. The financial services
industry is subject to substantial litigation risk, and the firm incurs legal claims in the ordinary course of business. Increased
litigation costs or substantial legal liability relating to an extraordinary claim or incidence of claims could have a material
adverse effect on the Company’s business and financial condition. For information about the Company’s legal risk, see “Item
1A – Risk Factors,” and “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial
Statements – 14. Commitments and Contingencies.”
Capital Planning
The capital plan considers significant risks to meeting the Company’s capital goals over time and through evolving
economic, financial, and business environments. Internal guidelines are set, for both the Company and regulated subsidiaries,
to ensure continued regulatory compliance as well as to meet expectations of investors and rating agencies.
The capital plan also considers the potential effects of a sudden and sustained systemic economic downturn, idiosyncratic
events which are uniquely impactful to the Company, and sensitivity analyses applied to significant assumptions that are
either quantitative or qualitative in nature. The comprehensive Capital Contingency Plan was developed by the Company to