eTrade 2011 Annual Report Download - page 136

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NOTE 7—ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company enters into derivative transactions primarily to protect against interest rate risk on the value of
certain assets, liabilities and future cash flows. Cash flow hedges, which include a combination of interest rate
swaps and purchased options, including caps and floors, are used primarily to reduce the variability of future
cash flows associated with existing variable-rate assets and liabilities and forecasted issuances of liabilities. Fair
value hedges, which include interest rate swaps, forward-starting swaps and swaptions, are used to offset
exposure to changes in value of certain fixed-rate assets and liabilities. The Company also recognizes certain
contracts and commitments as derivatives when the characteristics of those contracts and commitments meet the
definition of a derivative. Each derivative is recorded on the consolidated balance sheet at fair value as a
freestanding asset or liability. The following table summarizes the fair value amounts of derivatives designated as
hedging instruments reported in the consolidated balance sheet (dollars in thousands):
Fair Value
Notional Asset(1) Liability(2) Net(3)
December 31, 2011
Interest rate contracts:
Cash flow hedges:
Purchased options $2,625,000 $ 33,959 $ — $ 33,959
Pay-fixed rate swaps 2,165,000 — (281,071) (281,071)
Total cash flow hedges 4,790,000 33,959 (281,071) (247,112)
Fair value hedges:
Pay-fixed rate swaps 1,093,860 — (77,132) (77,132)
Receive-fixed rate swaps 725,950 32,575 — 32,575
Total fair value hedges 1,819,810 32,575 (77,132) (44,557)
Total derivatives designated as hedging
instruments(4) $6,609,810 $ 66,534 $(358,203) $(291,669)
December 31, 2010
Interest rate contracts:
Cash flow hedges:
Purchased options $4,230,000 $123,561 $ — $ 123,561
Pay-fixed rate swaps 1,925,000 15,314 (87,494) (72,180)
Purchased forward-starting swaps 200,000 — (581) (581)
Total cash flow hedges 6,355,000 138,875 (88,075) 50,800
Fair value hedges:
Pay-fixed rate swaps 1,156,561 63,404 (689) 62,715
Purchased swaptions 1,495,000 46,632 — 46,632
Receive-fixed rate swaps 725,950 — (18,099) (18,099)
Total fair value hedges 3,377,511 110,036 (18,788) 91,248
Total derivatives designated as hedging
instruments(4) $9,732,511 $248,911 $(106,863) $ 142,048
(1) Reflected in the other assets line item on the consolidated balance sheet.
(2) Reflected in the other liabilities line item on the consolidated balance sheet.
(3) Represents derivative assets net of derivative liabilities for disclosure purposes only.
(4) All derivatives were designated as hedging instruments as of December 31, 2011 and 2010.
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