eTrade 2008 Annual Report Download - page 114

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pricing service fair value measurements. Municipal bonds are generally categorized in Level 2 of the fair value
hierarchy. The fair value of corporate bonds is estimated using market price quotes corroborated by recently
executed transactions observable in the market. Corporate bonds are generally categorized in Level 2 of the fair
value hierarchy.
Derivative Financial Instruments
The majority of the Company’s derivative financial instruments, interest rate swap and option contracts, are
valued with pricing models commonly used by the financial services industry using market observable pricing
inputs. The Company does not consider these models to involve significant judgment on the part of management
and corroborated the fair value measurements with counterparty valuations. The majority of the Company’s
derivative financial instruments are categorized in Level 2 of the fair value hierarchy. During the year ended
December 31, 2008, the consideration of credit risk, the Company’s or the counterparty’s, did not result in an
adjustment to the valuation of its derivative financial instruments.
U.S. Treasuries
The fair value of U.S. Treasuries is based on quoted market prices in active markets. U.S. Treasuries are
classified as Level 1 of the fair value hierarchy.
Securities Owned and Securities Sold, Not Yet Purchased
Securities transactions entered into by certain broker-dealer subsidiaries are included in trading securities
and securities sold, not yet purchased in the Company’s SFAS No. 157 disclosures. The fair value of securities
owned and securities sold, not yet purchased is determined using listed or quoted market prices and are generally
categorized in Level 1 or Level 2 of the fair value hierarchy.
Servicing Rights
On January 1, 2008, the Company elected to account for servicing rights under the fair value measurement
method in accordance with SFAS No. 156. The fair value of the servicing rights is determined using models that
include observable inputs, if available. To the extent observable inputs are not available, the Company estimates
fair value based on the present value of expected future cash flows using its best estimate of the key assumptions,
including anticipated loan prepayments and discount rates. Servicing rights are categorized as Level 3 in the fair
value hierarchy when unobservable inputs are significant to the fair value measurements.
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