eTrade 2011 Annual Report Download - page 117

Non-agency CMOs were valued using market and income approaches with market observable data,
including recent market transactions when available. 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 following table presents additional information about the underlying loans and
significant inputs for the valuation of non-agency CMOs as of December 31, 2011:
Weighted
Average Range
Underlying loans:
Coupon rate 3.99% 2.43%-6.83%
Maturity (years) 23 11-26
Significant inputs:
Yield 4% 2% -18%
Default rate(1) 14% 1%-65%
Loss severity 43% 0%-96%
Prepayment rate 7% 0%-37%
(1) The default rate reflects the implied rate necessary to equate market price to the book yield given the market credit assumption.
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, 2011, the majority of the
Company’s non-agency CMOs were categorized in Level 2 of the fair value hierarchy.
Other Debt Securities
The fair value measurements of other agency debt securities were determined using market and income
approaches along with the Company’s own trading activities for identical or similar instruments and were
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, 2011. These securities were valued using a market approach with pricing
service valuations corroborated by recent market transactions for identical or similar 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 or overnight indexed swap 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 broker-dealer subsidiaries 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 is based on average daily volume and other market trading statistics. The fair value
of the majority of securities owned and securities sold, not yet purchased was determined using listed or quoted
market prices and were mostly categorized in Level 1 of the fair value hierarchy.
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