eTrade 2005 Annual Report Download - page 116

Table of Contents
receivables from customers upon settlement of their trades. Receivable from non-customers represent credit extended to principal
officers and directors of the Company to finance their purchase of securities by borrowing against securities owned by them.
Brokerage receivables are recorded net of allowance for doubtful accounts. Securities owned by customers and non-customers are
held as collateral for amounts due on brokerage receivables, the value of which is not reflected in the consolidated balance sheets. In
many cases, the Company is permitted to sell or repledge these securities held as collateral and use the securities to enter into
securities lending transactions, to collateralize borrowings or for delivery to counterparties to cover customer short positions.
Receivables from brokers, dealers and clearing organizations result from the Company’s stock borrowing activities.
Brokerage payables include payables from customers, non-customers, brokers, dealers and clearing organizations. Brokerage payables
to customers and non-customers represent credit balances in customer accounts arising from deposits of funds and sales of securities,
also referred to as free credit balances, and other funds pending completion of securities transactions. The Company pays interest on
certain free credit balances. Payables from brokers, dealers and clearing organizations also result from the Company’s stock lending
activities.
Deposits paid for securities borrowed and deposits received for securities loaned are recorded at the amount of cash collateral
advanced or received, which are included in brokerage receivables, net and brokerage payables, respectively, on the consolidated
balance sheets. Deposits paid for securities borrowed transactions require the Company to deposit cash with the counterparty. This
cash is included in cash and investments required to be segregated under federal or other regulations. With respect to deposits
received for securities loaned, the Company receives collateral in the form of cash in an amount generally in excess of the market value
of the securities loaned. Interest income and interest expense are recorded on an accrual basis. The Company monitors the market
value of the securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded, as necessary.
Trading Securities
—Certain trading securities and financial derivative instruments, that are not designated for hedge accounting, are
bought and held principally for the purpose of selling them in the near term and are carried at estimated fair value based on quoted
market prices. Realized and unrealized gains and losses on securities classified as trading held by the Bank are included in gain on
sales of loans and securities, net and are derived using the specific identification cost method. Realized and unrealized gains and
losses on trading securities held by broker-dealers are recorded in principal transactions and are also derived by the specific
identification method.
Available-for-Sale Mortgage-Backed and Investment Securities
—The Company classified its debt, mortgage-backed securities and
marketable equity securities as either trading or available-for-sale. None of the Company’s mortgage-backed or investment securities
were classified as held-to-maturity at December31, 2005 or 2004.
Available-for-sale securities consist of mortgage-backed securities, asset-backed securities, corporate bonds, municipal bonds,
publicly traded equity securities, retained interests from securitizations and other debt securities. Securities classified as
available-for-sale are carried at fair value, with the unrealized gains and losses reflected as a component of accumulated other
comprehensive income (“AOCI”), net of tax. Fair value is based on quoted market prices, when available. For illiquid securities, fair
value is estimated by obtaining market price quotes on similar liquid securities and adjusting the price to reflect differences between
the two securities, such as credit risk, liquidity, term, coupon, payment characteristics and other information. Realized and unrealized
gains or losses on available-for-sale securities, except for publicly traded equity securities, are computed using the specific
identification cost method. Amortization or accretion of premiums and discounts are recognized in interest income using the interest
method over the expected life of the security. Realized and unrealized gains or losses on publicly traded equity securities are computed
using the average cost method. Realized gains and losses and declines in fair value judged to be other-than-temporary are included in
gain on sales of loans and securities,
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2006. EDGAR Online, Inc.