Charles Schwab 2014 Annual Report Download - page 53

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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)
- 35 -
Schwab Bank maintains policies and procedures necessary to access this funding and tests borrowing procedures annually. At
December 31, 2014, $9.0 billion was available under this facility. There were no funds drawn under this facility during 2014.
optionsXpress, Inc.
optionsXpress, Inc.’s liquidity needs relating to client trading and margin borrowing activities are met primarily through cash
balances in brokerage client accounts, which were $942 million at December 31, 2014. Management believes that brokerage
client cash balances and operating earnings will continue to be the primary sources of liquidity for optionsXpress, Inc.
optionsXpress, Inc., is subject to regulatory requirements of the Uniform Net Capital Rule that are intended to ensure the
general financial soundness and liquidity of broker-dealers. These regulations prohibit optionsXpress, Inc. from paying cash
dividends or making unsecured advances or loans to its parent company or employees if such payment would result in a net
capital amount of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement of $250,000.
At December 31, 2014, optionsXpress Inc.’s net capital was $123 million (38% of aggregate debit balances), which was
$117 million in excess of its minimum required net capital and $107 million in excess of 5% of aggregate debit balances.
optionsXpress, Inc. is also subject to Commodity Futures Trading Commission Regulation 1.17 (Reg. 1.17) under the
Commodity Exchange Act, which also requires the maintenance of minimum net capital. optionsXpress, Inc. as a futures
commission merchant, is required to maintain minimum net capital equal to the greater of its net capital requirement under
Reg. 1.17 ($1 million), or the sum of 8% of the total risk margin requirements for all positions carried in customer accounts
and 8% of the total risk margin requirements for all positions carried in non-customer accounts (as defined in Reg. 1.17). At
December 31, 2014, optionsXpress, Inc. met the requirements of Reg. 1.17.
Additionally, optionsXpress, Inc. is subject to Rule 15c3-3 under the Securities Exchange Act of 1934 and other applicable
regulations that require it to maintain cash or qualified securities in a segregated reserve account for the exclusive benefit of
clients. These funds are included in cash and investments segregated and on deposit for regulatory purposes in the
Company’s consolidated balance sheets and are not available as a general source of liquidity.
To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation,
optionsXpress, Inc. has an unsecured standby LOC with one bank in favor of the Options Clearing Corporation in the amount
of $15 million at December 31, 2014. There were no funds drawn under this LOC during 2014.
CSC provides optionsXpress, Inc. with a $200 million credit facility. In December 2014, CSC and optionsXpress, Inc. agreed
to extend the expiration date of this facility from December 2014 to December 2016. Borrowings under this facility do not
qualify as regulatory capital for optionsXpress, Inc. There were no borrowings outstanding under this facility at
December 31, 2014.
optionsXpress has a term loan with CSC, of which $12 million was outstanding at December 31, 2014, and it matures in
December 2017.
Capital Resources
The Company’s cash position (reported as cash and cash equivalents on its consolidated balance sheets) and cash flows are
affected by changes in brokerage client cash balances and the associated amounts required to be segregated under regulatory
guidelines. Timing differences between cash and investments actually segregated on a given date and the amount required to
be segregated for that date may arise in the ordinary course of business, and are addressed by the Company in accordance
with applicable regulations. Other factors which affect the Company’s cash position and cash flows include investment
activity in security portfolios, levels of capital expenditures, acquisition and divestiture activity, banking client deposit
activity, brokerage and banking client loan activity, financing activity in long-term debt, payments of dividends, and
repurchases and issuances of CSC’s preferred and common stock. The combination of these factors can cause significant
fluctuations in the cash position during specific time periods.