eTrade 2010 Annual Report Download - page 118
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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. The majority of the Company’s non-agency CMOs
were categorized in Level 2 of the fair value hierarchy as of December 31, 2010.
Other Debt Securities
The fair value measurement of other agency debt securities was determined using market and income
approaches along with the Company’s own trading activities for identical instruments and is generally
categorized in Level 2 of the fair value hierarchy. The Company’s municipal bonds are revenue bonds issued by
state and other local government agencies. The valuation of corporate bonds is impacted by the credit worthiness
of the corporate issuer. The majority of the Company’s municipal bonds and corporate bonds were rated
investment grade as of December 31, 2010. These securities are valued using a market approach with pricing
service valuations corroborated by recent market transactions for similar or identical bonds. Municipal bonds and
corporate bonds were categorized in Level 2 of the fair value hierarchy.
Derivative Instruments
Interest rate swap and option contracts were valued with an income approach using pricing models that are
commonly used by the financial services industry. The market observable inputs used in the pricing models
include the swap curve, the volatility surface and prime basis from a financial data provider. 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 Company’s derivative instruments were categorized in
Level 2 of the fair value hierarchy. The consideration of credit risk, the Company’s or the counterparty’s, did not
result in an adjustment to the valuation of its derivative instruments in the periods presented.
Securities Owned and Securities Sold, Not Yet Purchased
Securities transactions entered into by a broker-dealer subsidiary are included in trading securities and
securities sold, not yet purchased in the Company’s fair value disclosures. For equity securities, the Company’s
definition of actively traded was based on average daily volume and other market trading statistics. The fair value
of securities owned and securities sold, not yet purchased is determined using listed or quoted market prices and
were categorized in Level 1 or Level 2 of the fair value hierarchy.
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