eTrade 2005 Annual Report Download - page 80

Table of Contents
Interest Rate Risk Management
Interest rate risk is the risk of loss from adverse changes in interest rates. Interest rate risks are monitored and managed by the Bank
Asset Liability Management Committee (“ALCO”.) The Asset Liability Management Committee reviews balance sheet trends, market
interest rate and sensitivity analyses. The analysis of interest sensitivity to changes in market interest rates under various scenarios is
reviewed by ALCO. The scenarios assume both parallel and non-parallel shifts in the yield curve. See Item7A. Quantitative and
Qualitative Disclosures about Market Risk for additional information about our interest rate risks.
Operational Risk Management
Operational risk is the risk of loss resulting from fraud, inadequate controls or the failure of the internal control process, third party
vendor issues, processing issues and external events. Operational risks exist in most areas of the Company from advertising to
customer service. While we make every effort to protect against failures in the internal controls system, no system is completely fail
proof.
The failure of a third party vendor to adequately meet its responsibilities could result in financial losses and reputation risks. The
Vendor Risk Management group monitors our vendor relationships. Third party vendor arrangements are screened by the Legal
department and are overseen by the Vendor Risk Management group. The vendor risk identification process includes evaluating
contracts, renewal options and vendor performance. To ensure the financial soundness of providers, we conducted financial reviews
of our large providers. In addition, onsite operational audits are conducted annually for significant providers.
Fraud losses result from unauthorized use of customer and corporate funds and resources. We have a sophisticated system that
monitors customer transaction and identifies the most fraudulent transactions before they occur. However, the world is a changing
place and new techniques are constantly being developed by both the perpetrators to commit fraud and our efforts to stop fraud.
We are one of the few in the industry that offers customers digital security tokens. Digital security tokens work in conjunction with a
password. The tokens display a number that changes every 60 seconds. The number on the display and a password must be used
together to access the customers account. This system makes fraudulent entry into a customer’s account virtually impossible. This
security system is part of our efforts to mitigate fraudulent transactions and entry into customer accounts.
Processing issues and external events may result in opportunity loss or actual losses depending on the situation. These types of
losses include issues resulting from inadequate staffing, equipment failures, significant weather events or other related types of
events. External events resulting in opportunity or actual losses could include the failure of a competitor to meet its customers’ needs,
Internet performance issues, legal, reputation, public policy and strategic risks.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements,
which have been prepared in conformity with accounting principles generally accepted in the United States of America. Note 1 to the
Consolidated Financial Statements contains a summary of our significant accounting policies, many of which require the use of
estimates and assumptions. We believe that of our significant accounting policies, the following are noteworthy because they are
based on estimates and assumptions that require complex, subjective judgments by management, which can materially impact reported
results. Changes in these estimates or assumptions could materially impact our financial condition and results of operation.
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2006. EDGAR Online, Inc.