Charles Schwab 2015 Annual Report Download - page 64

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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)
- 44 -
Foreign Holdings
The Company has exposure to non-sovereign financial and non-financial institutions in foreign countries. The majority of the
Company’s foreign investments, at fair value, of $1.5 billion, $1.4 billion and $1.1 billion are in Canada, Australia and
France, respectively, at December 31, 2015. These exposures are based on which country the issuer or counterparty is
domiciled. The Company has no direct exposure to sovereign foreign governments. The Company does not have unfunded
commitments to counterparties in foreign countries, nor does it have exposure as a result of credit default protection
purchased or sold separately as of December 31, 2015.
In addition to direct holdings in foreign companies, the Company also has indirect exposure to foreign countries through its
investments in Schwab sponsored money market funds (collectively, the Funds) resulting from clearing activities. At
December 31, 2015, the Company had $261 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 foreign
countries.
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 Company to meet its
obligations under both expected and stressed scenarios. See “Liquidity” for additional detail on the Company’s liquidity
requirements.
LIQUIDITY
CSC’s liquidity needs are primarily driven by the liquidity and capital needs of Schwab Bank and Schwab, the amount of
dividend payments on CSC’s common and preferred stock and principal and interest due on corporate debt. The liquidity
needs of its brokerage subsidiaries are primarily driven by client activity including trading and margin borrowing activities
and capital expenditures; and the liquidity needs of its bank subsidiary are primarily driven by lending and investment
activities and client withdrawals of deposits.
The Company has established liquidity policies to support the successful execution of its business strategies, while ensuring
ongoing and sufficient liquidity to meet its operational needs and satisfy applicable regulatory requirements under both
normal and stress conditions.
The Company employs a variety of methodologies to monitor and manage liquidity. The Company conducts regular liquidity
stress testing to develop a consolidated view of liquidity risk exposures and to ensure the Company’s ability to maintain
sufficient liquidity during market-related or company-specific liquidity stress events. Liquidity is also tested at key
subsidiaries and results are reported on a monthly basis to the Company’s Corporate Asset-Liability Management and Pricing
Committee. A number of early warning indicators are monitored to help identify emerging liquidity stresses in the market or
within the Company and are reviewed with management as appropriate.