eTrade 2010 Annual Report Download - page 64

Interest Rate Risk Management
Interest rate risks are monitored and managed by ALCO. The analysis of interest sensitivity to changes in
market interest rates under various scenarios is reviewed by ALCO. The scenarios assume both parallel and
non-parallel shifts in the yield curve. See Item 7A. Quantitative and Qualitative Disclosures about Market Risk
for additional information about our interest rate risks.
Operational Risk Management
Operational risks exist in most areas of the Company from clearing to customer service. While we make
every effort to protect against failures in the internal controls system, no system is completely fail proof.
Loss of company and customer assets due to fraud represents one of our most significant operational risks.
Fraud losses typically result from unauthorized use of customer and corporate funds and resources. We monitor
customer transactions and use scoring tools which prevent a significant number of fraudulent transactions on a
daily basis. However, new techniques and strategies are constantly being developed by perpetrators to commit
fraud. In order to minimize this threat, we offer our customers various security measures, including a token based
multi-factor verification system. This token creates a unique password which changes every sixty seconds and
must be used along with the customer’s self-selected password to access their account. We believe this system is
an extremely effective tool for preventing unauthorized access to a customer’s account.
The failure of a third party vendor to adequately meet its responsibilities could result in financial loss and
impact our reputation. The Vendor Management group monitors our vendor relationships and arrangements. The
vendor risk identification process includes reviews of contracts, financial soundness of providers, information
security and business continuity.
Processing issues and external events may result in opportunity loss depending on the situation. These types
of losses include issues resulting from human error, equipment failures, significant weather events or other
related types of events. External events resulting in actual losses could be due to Internet performance issues,
litigation, change in public policy and our reputation.
CONCENTRATIONS OF CREDIT RISK
Loans
We track and review factors to predict and monitor credit risk in our loan portfolio, which primarily consists
of loans secured by residential real estate. These factors include: loan type, estimated current loan-to-value
(“LTV”) ratios, documentation type, borrowers’ credit scores, housing prices, acquisition channel, loan vintage
and geographic location of the property. In economic conditions in which housing prices generally appreciate, we
believe that loan type, LTV ratios, documentation type and credit scores are the key factors in determining future
loan performance. In a housing market with declining home prices and less credit available for refinance, we
believe the LTV ratio becomes a more important factor in predicting and monitoring credit risk.
Our home equity loan portfolio is primarily second lien loans(1) on residential real estate properties, which
have a higher level of credit risk than first lien mortgage loans. We believe home equity loans with a combined
loan-to-value (“CLTV”) of 90% or higher or a Fair Isaac Credit Organization (“FICO”) score below 700 are the
loans with the highest levels of credit risk in our portfolios.
(1) Approximately 14% of the home equity portfolio was in the first lien position as of December 31, 2010.
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