eTrade 2007 Annual Report Download - page 136

NOTE 21—REGULATORY REQUIREMENTS
Registered Broker-Dealers
The Company’s U.S. broker-dealer subsidiaries are subject to the Uniform Net Capital Rule (the “Rule”)
under the Securities Exchange Act of 1934 administered by the SEC and FINRA, which requires the maintenance
of minimum net capital. The minimum net capital requirements can be met under either the Aggregate
Indebtedness method or the Alternative method. Under the Aggregate Indebtedness method, a broker-dealer is
required to maintain minimum net capital of the greater of 6
2
⁄ 3 % of its aggregate indebtedness, as defined, or a
minimum dollar amount. Under the Alternative method, a broker-dealer is required to maintain net capital equal
to the greater of $250,000 or 2% of aggregate debit balances arising from customer transactions. The method
used depends on the individual U.S. broker-dealer subsidiary. The Company’s international broker-dealer
subsidiaries, located in Canada, Europe and Asia, are subject to capital requirements determined by their
respective regulators.
As of December 31, 2007, all of the Company’s significant broker-dealer subsidiaries met minimum net
capital requirements. Total required net capital was $0.2 billion at December 31, 2007. In addition, the
Company’s broker-dealer subsidiaries had excess net capital of $0.7 billion at December 31, 2007.
The table below summarizes the minimum excess capital requirements for the Company’s broker-dealer
subsidiaries (dollars in thousands):
December 31, 2007
Required
Net
Capital
Net
Capital
Excess
Net
Capital
E*TRADE Clearing LLC(1) $144,471 $690,240 $545,769
E*TRADE Securities LLC(1) 250 21,307 21,057
E*TRADE Capital Markets, LLC(2) 2,858 20,944 18,086
E*TRADE Global Asset Management, Inc.(2)(3) 155 38,459 38,304
International broker-dealers 41,742 149,360 107,618
Total $189,476 $920,310 $730,834
(1) Elected to use the Alternative method to compute net capital.
(2) Elected to use the Aggregate Indebtedness method to compute net capital.
(3) Broker-dealer registration withdrawal effective January 1, 2008.
Banking
During the first quarter of 2007, ETC became a wholly-owned operating subsidiary of E*TRADE Bank.
ETC continues to be an SEC-registered broker-dealer and is included in the minimum net capital requirements
under the Rule. E*TRADE Bank is subject to various regulatory capital requirements administered by Federal
banking agencies. Failure to meet minimum capital requirements can trigger certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a direct material effect on
E*TRADE Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, E*TRADE Bank must meet specific capital guidelines that involve quantitative
measures of E*TRADE Bank’s assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. E*TRADE Bank’s capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require E*TRADE Bank to
maintain minimum amounts and ratios of Total and Tier I Capital to Risk-weighted assets and Tier I Capital to
Adjusted total assets. As shown in the table below, at December 31, 2007, the OTS categorized E*TRADE Bank
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