eTrade 2005 Annual Report Download - page 17

Table of Contents
transfer funds to or from our subsidiaries. Many of our subsidiaries are subject to laws and regulations that authorize regulatory
bodies to block or reduce the flow of funds to us, or that prohibit such transfers altogether in certain circumstances. These laws and
regulations may hinder our ability to access funds that we may need to make payments on our obligations.
We rely heavily on technology to deliver products and services
We rely on technology, particularly the Internet, to conduct most of our activity, and our success is dependent upon our ability to
process information received through the Internet. Our technology operations are vulnerable to disruptions from human error, natural
disasters, power loss, computer viruses, spam attacks, unauthorized access and other similar events. Disruptions to or instability of
our technology, including an actual or perceived breach of the security of our technology, could harm our business and our
reputation. In addition, recent computer viruses attacking the computers of our customers could create losses for our customers even
without any breach in the security of our systems, and could thereby harm our business and our reputation.
Our business and reputation may also be harmed by events that indirectly affect us. For example, changes in technology and the
volume of transactions on the Internet could cause information delays resulting in slow trade execution which could in turn cause
declines in customer satisfaction and loss of customers. In addition, a significant disruption to or the instability of technology systems
other than ours, including an actual or perceived breach of the security of a competitor’s system, could have a negative effect on our
customer behavior and harm our business.
Downturns in the securities markets increase the credit risk associated with margin lending or stock loan transactions
We permit customers to purchase securities on margin. A downturn in securities markets may impact the value of collateral held in
connection with margin loans and may reduce its value below the amount borrowed, potentially creating collections issues with our
margin loans. In addition, we frequently borrow securities from and lend securities to other broker-dealers. Under regulatory
guidelines, when we borrow or lend securities, we must generally simultaneously disburse or receive cash deposits. A sharp change in
security market values may result in losses if counterparties to the borrowing and lending transactions fail to honor their commitments.
We may be unsuccessful in managing the effects of changes in interest rates and the interest-earning banking assets in our portfolio
Net interest income has become an increasingly important source of our revenue, and will continue to grow in importance as our
business model develops. Our ability to manage interest rate risk could impact our financial condition. Our results of operations
depend, in part, on our level of net interest income and our effective management of the impact of changing interest rates and varying
asset and liability maturities. We use derivatives to help manage interest rate risk. However, the derivatives we utilize may not be
completely effective at managing this risk and changes in market interest rates and the yield curve could reduce the value of our
financial assets and reduce net interest income. Many factors affect interest rates, including governmental monetary policies and
domestic and international economic and political conditions.
The diversification of our asset portfolio may increase the level of charge-offs
As we diversify our asset portfolio through purchases and originations of higher-yielding asset classes, such as credit card portfolios
and other consumer loans, we will have to manage assets that carry a higher risk of default than our mortgage portfolio. Consequently,
the level of charge-offs associated with these assets may be higher than what we have previously experienced given our asset mix. In
addition, if the overall economy weakens, we could experience higher levels of charge-offs. If expectations of future charge-offs
increase, a corresponding increase in the amount of our allowance for loan loss would be required. The increased level of
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2006. EDGAR Online, Inc.