Charles Schwab 2014 Annual Report Download - page 92

THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
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Guarantees and indemnifications: In the normal course of business, the Company provides certain indemnifications (i.e.,
protection against damage or loss) to counterparties in connection with the disposition of certain of its assets. Such
indemnifications are generally standard contractual terms with various expiration dates and typically relate to title to the
assets transferred, ownership of intellectual property rights (e.g., patents), accuracy of financial statements, compliance with
laws and regulations, failure to pay, satisfy or discharge any liability, or to defend claims, as well as errors, omissions, and
misrepresentations. The maximum potential future liability under these indemnifications cannot be estimated. The Company
has not recorded a liability for these indemnifications and believes that the occurrence of events that would trigger payments
under these agreements is remote.
The Company has clients that sell (i.e., write) listed option contracts that are cleared by the Options Clearing Corporation – a
clearing house that establishes margin requirements on these transactions. The Company partially satisfies the margin
requirements by arranging unsecured standby LOCs, in favor of the Options Clearing Corporation, which are issued by
multiple banks. At December 31, 2014, the aggregate face amount of these LOCs totaled $240 million. There were no funds
drawn under any of these LOCs at December 31, 2014. In connection with its securities lending activities, the Company is
required to provide collateral to certain brokerage clients. The Company satisfies the collateral requirements by providing
cash as collateral.
The Company also provides guarantees to securities clearing houses and exchanges under standard membership agreements,
which require members to guarantee the performance of other members. Under the agreements, if another member becomes
unable to satisfy its obligations to the clearing houses and exchanges, other members would be required to meet shortfalls.
The Company’s liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as
collateral. However, the potential requirement for the Company to make payments under these arrangements is remote.
Accordingly, no liability has been recognized for these guarantees.
Legal contingencies: The Company is subject to claims and lawsuits in the ordinary course of business, including
arbitrations, class actions and other litigation, some of which include claims for substantial or unspecified damages. The
Company is also the subject of inquiries, investigations, and proceedings by regulatory and other governmental agencies.
The Company believes it has strong defenses in all significant matters currently pending and is contesting liability and any
damages claimed. Nevertheless, some of these matters may result in adverse judgments or awards, including penalties,
injunctions or other relief, and the Company may also determine to settle a matter because of the uncertainty and risks of
litigation. Described below are certain matters in which there is a reasonable possibility that a material loss could be incurred
or where the matter may otherwise be of significant interest to stockholders. Unless otherwise noted, the Company is unable
to provide a reasonable estimate of any potential liability given the stage of proceedings in the matter.
With respect to all other pending matters, based on current information and consultation with counsel, it does not appear
reasonably possible that the outcome of any such matter would be material to the financial condition, operating results or
cash flows of the Company. However, predicting the outcome of a litigation or regulatory matter is inherently difficult,
requiring significant judgment and evaluation of various factors, including the procedural status of the matter and any recent
developments; prior experience and the experience of others in similar cases; available defenses, including potential
opportunities to dispose of a case on the merits or procedural grounds before trial (e.g., motions to dismiss or for summary
judgment); the progress of fact discovery; the opinions of counsel and experts regarding potential damages; potential
opportunities for settlement and the status of any settlement discussions; and potential insurance coverage and
indemnification. It may not be possible to reasonably estimate potential liability, if any, or a range of potential liability until
the matter is closer to resolution – pending, for example, further proceedings, the outcome of key motions or appeals, or
discussions among the parties. Numerous issues may have to be developed, such as discovery of important factual matters
and determination of threshold legal issues, which may include novel or unsettled questions of law. Reserves are established
or adjusted or further disclosure and estimates of potential loss are provided as the matter progresses and more information
becomes available.
Auction Rate Securities: As disclosed previously, Schwab has been responding to a civil complaint filed on August 17, 2009,
in New York state court by the Attorney General of the State of New York (NYAG) alleging misrepresentations in sales of
auction rate securities to clients. In 2011, the court granted Schwab’s motion to dismiss the complaint with prejudice. After
part of the case was reinstated on appeal in 2013, Schwab filed a motion for summary judgment of the NYAG’s remaining