eTrade 2009 Annual Report Download - page 122

participant. As such, even when market assumptions are not readily available, the Company’s own assumptions
reflect those that market participants would use in pricing the asset or liability at the measurement date. The fair
value measurement accounting guidance describes the following three levels used to classify fair value
measurements:
• Level 1—Quoted prices in active markets for identical assets or liabilities.
• Level 2—Quoted prices in markets that are not active or for which all significant inputs are observable,
either directly or indirectly.
• Level 3—Unobservable inputs that are significant to the fair value of the assets or liabilities.
The availability of observable inputs can vary and in certain cases, the inputs used to measure fair value
may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is
based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of
the significance of a particular input to a fair value measurement requires judgment and consideration of factors
specific to the asset or liability.
Recurring Fair Value Measurement Techniques
U.S. Treasuries and Agency Debentures
The fair value measurements of U.S. Treasuries are classified as Level 1 of the fair value hierarchy as they
are based on quoted market prices in active markets. The fair value measurements of agency debentures are
classified as Level 2 of the fair value hierarchy as they are based on quoted market prices that can be derived
from assumptions observable in the marketplace.
Agency Mortgage-Backed Securities and Collateralized Mortgage Obligations
The fair value of agency mortgage-backed securities is determined using quoted market prices, recent
market transactions and spread data for similar instruments. Agency mortgage-backed securities are generally
categorized in Level 2 of the fair value hierarchy. Agency CMOs are collateralized mortgage obligations backed
by agency-guaranteed loans. The fair value of agency CMOs is determined using recent market transactions.
Agency CMOs are generally categorized in Level 2 of the fair value hierarchy.
Non-Agency Collateralized Mortgage Obligations
Non-agency CMOs are valued using market observable data, when available, including recent market
transactions. The Company also utilized a pricing service to corroborate the market observability of the
Company’s inputs used in the fair value measurements. The valuations of non-agency CMOs reflect the
Company’s best estimate of what market participants would consider in pricing the financial instruments. The
Company considers the price transparency for these financial instruments to be a key determinant of the degree
of judgment involved in determining the fair value. As of December 31, 2009, the majority of the Company’s
non-agency CMOs were categorized in Level 3 of the fair value hierarchy.
Municipal Bonds and Corporate Bonds
For municipal bonds and corporate bonds, the Company’s valuation utilized pricing service valuations
corroborated by recent market transactions for similar or identical bonds. Municipal bonds and corporate bonds
are generally categorized in Level 2 of the fair value hierarchy.
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