Charles Schwab 2014 Annual Report Download - page 61

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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 -
European Holdings
The Company has exposure to non-sovereign financial and non-financial institutions in Europe. The following table shows
the balances of this exposure by each country in Europe in which the issuer or counterparty is domiciled. The Company has
no direct exposure to sovereign governments in Europe. The Company does not have unfunded commitments to
counterparties in Europe, nor does it have exposure as a result of credit default protection purchased or sold separately as of
December 31, 2014.
The determination of the domicile of exposure varies by the type of investment. For time deposits and certificates of deposit,
the exposure is grouped in the country in which the financial institution is chartered under the regulatory framework of the
European country. For asset-backed commercial paper, the exposure is grouped by the country of the sponsoring bank that
provides the credit and liquidity support for such instruments. For corporate debt securities, the exposure is grouped by the
country in which the issuer is domiciled. In situations in which the Company invests in a corporate debt security of a U.S.
subsidiary of a European parent company, such holdings will be attributable to the European country only if significant
reliance is placed on the European parent company for credit support underlying the security. For substantially all of the
holdings listed below, the issuers or counterparties were financial institutions. All of the Company’s resale agreements,
which are included in investments segregated and on deposit for regulatory purposes, are collateralized by U.S. government
securities. Additionally, the Company’s securities lending activities are collateralized by cash. Therefore, the Company’s
resale agreements and securities lending activities are not included in the table below even if the counterparty is a European
institution.
Fair Value as of December 31, 2014
United
France Netherlands Norway Sweden Switzerland Kingdom Total
Cash equivalents $ 200 $ - $ - $ - $ - $ - $ 200
Securities available for sale 86 35 75 521 509 500 1,726
Total fair value $ 286 $ 35 $ 75 $ 521 $ 509 $ 500 $ 1,926
Total amortized cos
t
$ 285 $ 35 $ 75 $ 520 $ 509 $ 500 $ 1
,
924
Maturities:
Overnight $ 200 $ - $ - $ - $ - $ - $ 200
1 day – < 6 months - - - - 184 - 184
6 months – < 1 year - - - - 275 150 425
1 year – 2 years - - - 371 50 200 621
> 2 years 86 35 75 150 - 150 496
Total fair value $ 286 $ 35 $ 75 $ 521 $ 509 $ 500 $ 1,926
In addition to the direct holdings of European companies listed above, the Company also has indirect exposure to Europe
through its investments in Schwab sponsored money market funds (collectively, the Funds) resulting from clearing activities.
At December 31, 2014, the Company had $224 million in investments in these Funds. Certain of the Funds’ positions include
certificates of deposits, time deposits, commercial paper and corporate debt securities issued by counterparties in Europe.
Management mitigates exposure to European holdings by employing a separate team of credit analysts that evaluate each
issuer, counterparty, and country. Management monitors its exposure to European issuers by 1) performing risk assessments
of the foreign countries, which include evaluating the size of the country and economy, currency trends, political landscape
and the countries’ regulatory environment and developments; 2) performing ad hoc stress tests that evaluate the impact of
sovereign governments’ debt write-downs on financial issuers and counterparties the Company has exposure to through its
investments; 3) reviewing publicly available stress tests that are published by various regulators in the European market; 4)
establishing credit and maturity limits by issuer; and 5) establishing and monitoring aggregate credit limits by geography and
sector.
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