eTrade 1999 Annual Report Download - page 12

Company also facilitates exercise of subscription rights on securities held for its customers. The Company arranges for the transmittal
of proxy, annual report and tender offer materials to customers. E*TRADE Securities relies upon certificate counts and microfilming
procedures as deterrents to theft of securities and, as required by the NASD and certain other regulatory authorities, carries fidelity
bonds covering loss or theft.
Lending and Borrowing Activities
Margin Lending. The Company makes loans to customers collateralized by customer securities. Margin lending by the Company is
subject to the margin rules of the Board of Governors of the Federal Reserve System, NASD margin requirements and the Company's
internal policies, which are more stringent than the Federal Reserve and NASD requirements. In permitting customers to purchase
securities on margin, the Company takes the risk of a market decline that could reduce the value of the collateral held by the Company
to below the customers' indebtedness before the collateral can be sold, which could result in losses to the Company. Under applicable
NASD rules, in the event of a decline in the market value of the securities in a margin account, the Company is obligated to require the
customer to deposit additional securities or cash in the account so that at all times the customer's equity in the account is at least 25%
of the value of the securities in the account. E*TRADE's current internal requirement, however, is that the customer's equity not fall
below 30%. In the event a customer's equity falls below 30%, the customer will be required to increase the account's equity to 35%.
Margin lending to customers constitutes the major portion of the basis on which net capital requirements of the Company are
determined under the SEC's Net Capital Rule. To the extent these activities expand, the Company's net capital requirements will
increase. See "Risk Factors--Risks Associated with Net Capital Requirements" and "Risk Factors--Risks Associated with the Securities
Industry; Concentration of Services."
Securities Lending and Borrowing. The Company borrows securities both to cover short sales and to complete customer transactions in
the event a customer fails to deliver securities by the required settlement date. The Company collateralizes such borrowings by
depositing cash or securities with the lender and receives a rebate (in the case of cash collateral) or pays a fee calculated to yield a
negotiated rate of return. When lending securities, the Company receives cash or securities and generally pays a rebate (in the case of
cash collateral) to the other party in the transaction. Securities lending and borrowing transactions are executed pursuant to written
agreements with counterparties that require that the securities borrowed be "marked-to- market" on a daily basis and that excess
collateral be refunded or that additional collateral be furnished in the event of changes in the market value of the
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securities. The securities usually are "marked-to-market" on a daily basis through the facilities of the various national clearing
organizations.
Order Processing
All listed market orders other than those with special qualifiers (subject to certain size limitations based on the size in the primary
market) are executed at the NBBO or better at the time of receipt by the third market firm or exchange. Eligible orders are exposed to
the marketplace for possible price improvement, but in no case are orders executed at a price inferior to the NBBO. Limit orders are
executed based on an indicated price and time priority. All Nasdaq market orders (subject to certain size limitations based on the
trading characteristics of the particular security) are executed at the Best Bid/Offer (Inside Market), or better at the time of receipt by
the market- maker. Eligible orders are subject to possible price improvement in the marketplace. See "Risk Factors--Risks Associated
with Systems Failure."
The market for online investing services, particularly over the Internet, is rapidly evolving and intensely competitive, and the Company
expects competition to continue to intensify in the future. See "Risk Factors--Risks Associated with Substantial Competition."
The securities industry in the United States is subject to extensive regulation under both federal and state laws. See "Risk
Factors--Risks Associated with Government Regulation" and "Risk Factors--Risks Associated with Net Capital Requirements."
Associates
At September 30, 1999, the Company had 1,735 associates. The Company's success has been, and will be, dependent to a large degree
on its ability to retain the services of its existing executive officers and to attract and retain qualified additional senior and middle
managers and key personnel in the future. There can be no assurance that the Company will be able to attract, assimilate or retain
qualified technical and managerial personnel in the future, and the failure of the Company to do so would have a material adverse
effect on the Company's business, financial condition and operating results. None of the Company's associates are subject to collective
bargaining agreements or are represented by a union. The Company considers its relations with its associates to be good.
Executive Officers of the Registrant
2002. EDGAR Online, Inc.