eTrade 2010 Annual Report Download - page 106

Similarly, the Company reports gains (losses) on sales of investments, net separately from gains (losses) on
loans and securities, net. The Company believes reporting these two items separately provides a clearer picture of
the financial performance of its operations than would a presentation that combined these two items. Gains
(losses) on loans and securities, net are the result of activities in the Company’s operations, namely its balance
sheet management segment. Gains (losses) on sales of investments, net relate to investments of the Company at
the corporate level and are not related to the ongoing business of the Company’s operating subsidiaries.
Related Party—Citadel is the largest holder of the Company’s common stock, and based upon the
Company’s review of publicly available information, the Company believes that Citadel owns approximately
9.9% of its outstanding common stock or approximately 27% of its common stock assuming conversion of
convertible debentures held by Citadel. Although Citadel is not required to disclose the amount of the Company’s
outstanding debt securities it owns, the Company believes it owns in the aggregate approximately $590 million
of the non-interest-bearing convertible debentures. In addition, Kenneth Griffin, President and CEO of Citadel,
joined the Board of Directors on June 8, 2009 pursuant to a director nomination right granted to Citadel in 2007.
In addition, the Company routed substantially all of its customer orders in exchange-listed options and 40% of its
customer orders in Regulation NMS Securities to an affiliate of Citadel for order handling and execution for the
years ended December 31, 2010, 2009 and 2008.
Use of Estimates—The consolidated financial statements were prepared in accordance with GAAP, which
require management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and related notes for the periods presented. Actual results could differ from management’s
estimates. Certain significant accounting policies are noteworthy because they are based on estimates and
assumptions that require complex and subjective judgments by management. Changes in these estimates or
assumptions could materially impact our financial condition and results of operations. Material estimates in
which management believes near-term changes could reasonably occur include: allowance for loan losses; fair
value measurements; classification and valuation of certain investments; accounting for derivative instruments;
estimates of effective tax rates, deferred taxes and valuation allowances; valuation of goodwill and other
intangibles; and valuation and expensing of share-based payments.
Financial Statement Descriptions and Related Accounting Policies—Below are descriptions and
accounting policies for certain of the Company’s financial statement categories.
Cash and Equivalents—For the purpose of reporting cash flows, the Company considers all highly liquid
investments with original or remaining maturities of three months or less at the time of purchase that are not
required to be segregated under federal or other regulations to be cash and equivalents. Cash and equivalents
included $1.4 billion and $2.4 billion at December 31, 2010 and 2009, respectively, of overnight cash deposits
that the Company maintains with the Federal Reserve Bank.
Cash and Investments Required to be Segregated Under Federal or Other Regulations—Cash and
investments required to be segregated under federal or other regulations consist of cash accounts and U.S.
Treasuries. Certain cash balances and investments, related to collateralized financing transactions by the
Company’s brokerage subsidiaries, are required to be segregated for the exclusive benefit of the Company’s
brokerage customers.
Trading Securities—Trading securities are bought and held principally for the purpose of selling them in the
near term and are carried at fair value. Realized and unrealized gains and losses on securities classified as trading
held by the Bank are included in the gains (losses) on loans and securities, net line item and are derived using the
specific identification method. Realized and unrealized gains and losses on trading securities from market
making activities are included in the principal transactions line item and are also derived by the specific
identification method.
Available-for-Sale Securities—Available-for-sale securities consist of debt securities, primarily residential
mortgage-backed securities, as of December 31, 2010. Securities classified as available-for-sale are carried at fair
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