Document

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 2016
OR
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from              to             
Commission file number: 1-35509
 
TD Ameritrade Holding Corporation
(Exact name of registrant as specified in its charter)
 
Delaware
 
82-0543156
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
200 South 108th Avenue, Omaha, Nebraska, 68154
(Address of principal executive offices) (Zip Code)
(402) 331-7856
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.     Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.     Yes  x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
 
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Yes  ¨    No  x
As of July 27, 2016, there were 526,355,886 outstanding shares of the registrant’s common stock.
 


Table of Contents

TD AMERITRADE HOLDING CORPORATION
INDEX
 
 
 
Page No.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 


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Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. – Financial Statements
REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
TD Ameritrade Holding Corporation
We have reviewed the condensed consolidated balance sheet of TD Ameritrade Holding Corporation and subsidiaries (the Company) as of June 30, 2016, and the related condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods ended June 30, 2016 and 2015, and the condensed consolidated statements of cash flows for the nine-month periods ended June 30, 2016 and 2015. These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of TD Ameritrade Holding Corporation and subsidiaries as of September 30, 2015, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated November 20, 2015. In our opinion, the accompanying condensed consolidated balance sheet of TD Ameritrade Holding Corporation and subsidiaries as of September 30, 2015, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
August 5, 2016


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Table of Contents

TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
 
June 30,
2016
 
September 30,
2015
 
 
(In millions)
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
1,917

 
$
1,978

Short-term investments available-for-sale, at fair value
 
404

 
4

Cash and investments segregated and on deposit for regulatory purposes
 
7,064

 
6,305

Receivable from brokers, dealers and clearing organizations
 
1,293

 
862

Receivable from clients, net
 
12,162

 
12,770

Receivable from affiliates
 
96

 
93

Other receivables, net
 
132

 
144

Securities owned, at fair value
 
237

 
425

Property and equipment at cost, net
 
531

 
521

Goodwill
 
2,467

 
2,467

Acquired intangible assets, net
 
595

 
661

Other assets
 
209

 
145

Total assets
 
$
27,107

 
$
26,375

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Payable to brokers, dealers and clearing organizations
 
$
1,932

 
$
2,707

Payable to clients
 
17,504

 
16,035

Accounts payable and other liabilities
 
573

 
637

Payable to affiliates
 
5

 
6

Long-term debt
 
1,828

 
1,800

Deferred income taxes
 
293

 
287

Total liabilities
 
22,135

 
21,472

Stockholders' equity:
 
 
 
 
Preferred stock, $0.01 par value; 100 million shares authorized, none issued
 

 

Common stock, $0.01 par value; one billion shares authorized; 631 million shares issued;
June 30, 2016 - 527 million shares outstanding;
September 30, 2015 - 537 million shares outstanding
 
6

 
6

Additional paid-in capital
 
1,654

 
1,649

Retained earnings
 
5,423

 
5,038

Treasury stock, common, at cost:
June 30, 2016 - 104 million shares;
September 30, 2015 - 94 million shares
 
(2,088
)
 
(1,765
)
Accumulated other comprehensive loss
 
(23
)
 
(25
)
Total stockholders' equity
 
4,972

 
4,903

Total liabilities and stockholders' equity
 
$
27,107

 
$
26,375

See notes to condensed consolidated financial statements.


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Table of Contents

TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
(In millions, except per share amounts)
 
 
Revenues:
 
 
 
 
 
 
 
 
Transaction-based revenues:
 
 
 
 
 
 
 
 
Commissions and transaction fees
 
$
347

 
$
328

 
$
1,035

 
$
1,036

Asset-based revenues:
 
 
 
 
 
 
 
 
Insured deposit account fees
 
234

 
209

 
696

 
620

Net interest revenue
 
143

 
156

 
444

 
467

Investment product fees
 
96

 
85

 
276

 
253

Total asset-based revenues
 
473

 
450

 
1,416

 
1,340

Other revenues
 
18

 
16

 
46

 
39

Net revenues
 
838

 
794

 
2,497

 
2,415

Operating expenses:
 
 
 
 
 
 
 
 
Employee compensation and benefits
 
209

 
202

 
617

 
608

Clearing and execution costs
 
35

 
36

 
102

 
108

Communications
 
33

 
31

 
99

 
92

Occupancy and equipment costs
 
43

 
40

 
128

 
121

Depreciation and amortization
 
23

 
23

 
67

 
69

Amortization of acquired intangible assets
 
22

 
22

 
66

 
67

Professional services
 
47

 
43

 
121

 
120

Advertising
 
58

 
54

 
202

 
199

Other
 
20

 
18

 
61

 
66

Total operating expenses
 
490

 
469

 
1,463

 
1,450

Operating income
 
348

 
325

 
1,034

 
965

Other expense (income):
 
 
 
 
 
 
 
 
Interest on borrowings
 
14

 
13

 
39

 
30

Gain on sale of investments
 

 
(7
)
 

 
(7
)
Other
 

 

 

 
1

Total other expense (income)
 
14

 
6

 
39

 
24

Pre-tax income
 
334

 
319

 
995

 
941

Provision for income taxes
 
94

 
122

 
338

 
344

Net income
 
$
240

 
$
197

 
$
657

 
$
597

Earnings per share - basic
 
$
0.45

 
$
0.36

 
$
1.23

 
$
1.10

Earnings per share - diluted
 
$
0.45

 
$
0.36

 
$
1.23

 
$
1.09

Weighted average shares outstanding - basic
 
529

 
544

 
533

 
544

Weighted average shares outstanding - diluted
 
531

 
547

 
536

 
547

Dividends declared per share
 
$
0.17

 
$
0.15

 
$
0.51

 
$
0.45

See notes to condensed consolidated financial statements.

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TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
Three Months Ended 
 June 30,
 
Nine Months Ended 
 June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
(In millions)
 
 
Net income
 
$
240

 
$
197

 
$
657

 
$
597

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
 
Cash flow hedging instruments:
 
 
 
 
 
 
 
 
Net unrealized loss
 

 

 

 
(15
)
Reclassification adjustment for portion of realized loss amortized to net income
 
1

 
1

 
3

 
3

Total other comprehensive income (loss), before tax
 
1

 
1

 
3

 
(12
)
Income tax effect
 

 
(1
)
 
(1
)
 
4

Total other comprehensive income (loss), net of tax
 
1

 

 
2

 
(8
)
Comprehensive income
 
$
241

 
$
197

 
$
659

 
$
589

See notes to condensed consolidated financial statements.


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TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
Nine Months Ended June 30,
 
 
2016
 
2015
 
 
(In millions)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
657

 
$
597

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
67

 
69

Amortization of acquired intangible assets
 
66

 
67

Deferred income taxes
 
5

 
(11
)
Gain on sale investments
 

 
(7
)
Stock-based compensation
 
24

 
27

Excess tax benefits on stock-based compensation
 
(16
)
 
(14
)
Other, net
 
6

 
3

Changes in operating assets and liabilities:
 
 
 
 
Cash and investments segregated and on deposit for regulatory purposes
 
(759
)
 
691

Receivable from brokers, dealers and clearing organizations
 
(431
)
 
(36
)
Receivable from clients, net
 
608

 
(1,229
)
Receivable from/payable to affiliates, net
 
(4
)
 
(7
)
Other receivables, net
 
12

 
6

Securities owned, at fair value
 
188

 
(79
)
Other assets
 
(37
)
 
33

Payable to brokers, dealers and clearing organizations
 
(775
)
 
(7
)
Payable to clients
 
1,469

 
573

Accounts payable and other liabilities
 
(48
)
 
(33
)
Net cash provided by operating activities
 
1,032

 
643

Cash flows from investing activities:
 
 
 
 
Purchase of property and equipment
 
(78
)
 
(58
)
Purchase of short-term investments
 
(602
)
 
(503
)
Proceeds from sale and maturity of short-term investments
 
201

 
501

Proceeds from sale of investments
 

 
10

Other
 

 
3

Net cash used in investing activities
 
(479
)
 
(47
)
 
(Continued on following page)

See notes to condensed consolidated financial statements.

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TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(Unaudited)
 
 
 
Nine Months Ended June 30,
 
 
2016
 
2015
 
 
(In millions)
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of long-term debt
 
$

 
$
1,248

Payment of debt issuance costs
 

 
(11
)
Principal payments on long-term debt
 

 
(544
)
Principal payments on notes payable
 

 
(150
)
Payment of cash dividends
 
(272
)
 
(244
)
Proceeds from exercise of stock options: Nine months ended
June 30, 2015 - 0.7 million shares
 

 
12

Purchase of treasury stock: Nine months ended
June 30, 2016 - 10.7 million shares; 2015 - 3.9 million shares
 
(319
)
 
(126
)
Purchase of treasury stock for income tax withholding on stock-based compensation: Nine months ended June 30, 2016 - 0.9 million shares; 2015 - 0.6 million shares
 
(30
)
 
(22
)
Payment for future treasury stock purchases under accelerated stock repurchase agreement
 
(9
)
 

Excess tax benefits on stock-based compensation
 
16

 
14

Net cash provided by (used in) financing activities
 
(614
)
 
177

Net increase (decrease) in cash and cash equivalents
 
(61
)
 
773

Cash and cash equivalents at beginning of period
 
1,978

 
1,460

Cash and cash equivalents at end of period
 
$
1,917

 
$
2,233

Supplemental cash flow information:
 
 
 
 
Interest paid
 
$
46

 
$
23

Income taxes paid
 
$
377

 
$
355

See notes to condensed consolidated financial statements.


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Table of Contents

TD AMERITRADE HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Month and Nine Month Periods Ended June 30, 2016 and 2015
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of TD Ameritrade Holding Corporation (the "Parent") and its wholly-owned subsidiaries (collectively, the "Company"). Intercompany balances and transactions have been eliminated.
These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, reflect all adjustments, which are all of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles ("GAAP"). These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report filed on Form 10-K for the fiscal year ended September 30, 2015.
Recently Issued Accounting Pronouncements
ASU 2016-13 — In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2016-13, Measurement of Credit Losses on Financial Instruments. The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by an entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to develop credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. Therefore, ASU 2016-13 will be effective for the Company's fiscal year beginning on October 1, 2020, using a modified retrospective approach. The Company is currently assessing the impact this ASU will have on the Company's financial statements.
ASU 2016-09 — In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. The guidance in ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including: (1) all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement; (2) tax effects of exercised or vested awards should be treated as discrete items in the period in which they occur; (3) recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period; (4) excess tax benefits should be classified along with other income tax cash flows as an operating activity; (5) an entity can make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur; (6) the threshold to qualify for equity classification will permit withholding up to the maximum statutory rates in the applicable jurisdictions; and (7) cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity in the statement of cash flows. The transition requirements are dependent upon each amendment within this update and will be applied either prospectively, retrospectively or using a modified retrospective transition method. ASU 2016-09 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted. Therefore, ASU 2016-09 will be effective for the Company's fiscal year beginning October 1, 2017. The Company is currently assessing the impact this ASU will have on the Company's financial statements.
ASU 2016-02 — In February 2016, the FASB issued ASU 2016-02, Leases. This ASU will supersede the guidance in Accounting Standards Codification ("ASC") Topic 840, Leases. Under ASU 2016-02, for lease arrangements exceeding a 12 month term, a lessee will be required to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. ASU 2016-02 will retain a distinction between finance and operating leases; however, the principal difference from the previous guidance is that lease assets and liabilities arising from operating leases will be recognized in the statement of financial position. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will not significantly change from current GAAP. The accounting applied by a lessor will be largely unchanged from that applied under current GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and will require an entity to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Therefore, ASU 2016-02 will be effective for the Company's fiscal year beginning October 1, 2019. Early adoption is permitted. The Company is currently assessing the impact this ASU will have on the Company's financial statements.

ASU 2014-09 — In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, to clarify the principles of recognizing revenue from contracts with customers and to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. This ASU will supersede the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance. Entities are required to apply the

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following steps when recognizing revenue under ASU 2014-09: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and, (5) recognize revenue when (or as) the entity satisfies a performance obligation. This ASU also requires additional disclosures related to the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. An entity may apply the amendments by using one of the following two methods: (1) retrospective application to each prior reporting period presented or (2) a modified retrospective approach, requiring the standard be applied only to the most current period presented, with the cumulative effect of initially applying the standard recognized at the date of initial application. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Therefore, ASU 2014-09 will be effective for the Company's fiscal year beginning October 1, 2018. Early adoption is permitted for annual reporting periods beginning after December 15, 2016.

Subsequent to issuing ASU 2014-09, the FASB issued the following standards for the purpose of clarifying certain aspects of ASU 2014-09:
ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net);
ASU 2016-10, Identifying Performance Obligations and Licensing; and
ASU 2016-12, Narrow-Scope Improvements and Practical Expedients.
These subsequently issued ASU's have the same effective date and transition requirements as ASU 2014-09. The Company is currently assessing the impact that these new revenue recognition standards will have on the Company's financial statements and evaluating which adoption method to apply.
2. CASH AND CASH EQUIVALENTS
The Company's cash and cash equivalents is summarized in the following table (dollars in millions):
 
 
June 30,
2016
 
September 30,
2015
Broker-dealer subsidiaries
 
$
877

 
$
721

Corporate
 
829

 
1,069

Futures commission merchant and forex dealer member subsidiary
 
123

 
72

Trust company subsidiary
 
67

 
77

Investment advisory subsidiaries
 
21

 
39

Total
 
$
1,917

 
$
1,978

Capital requirements may limit the amount of cash available for dividend from the broker-dealer, futures commission merchant ("FCM")/forex dealer member ("FDM") and trust company subsidiaries to the parent company. Most of the trust company cash and cash equivalents arises from client transactions in the process of settlement, and therefore is generally not available for corporate purposes. Cash and cash equivalents of the investment advisory subsidiaries is generally not available for corporate purposes.
3. CASH AND INVESTMENTS SEGREGATED AND ON DEPOSIT FOR REGULATORY PURPOSES
Cash and investments segregated and on deposit for regulatory purposes consists of the following (dollars in millions):
 
 
June 30,
2016
 
September 30,
2015
U.S. government debt securities
 
$
4,954

 
$
3,706

Reverse repurchase agreements (collateralized by U.S. government debt securities)
 
1,390

 
1,586

Cash in demand deposit accounts
 
537

 
802

Cash on deposit with futures commission merchants
 
108

 
136

U.S. government debt securities on deposit with futures commission merchant
 
75

 
75

Total
 
$
7,064

 
$
6,305

4. INCOME TAXES
The Company's effective income tax rate for the nine months ended June 30, 2016 was 34.0%, compared to 36.6% for the nine months ended June 30, 2015. The provision for income taxes for the nine months ended June 30, 2016 was impacted by $38 million of net favorable adjustments to uncertain tax positions and related deferred income tax assets, which includes a favorable $33 million tax liability remeasurement related to a recent state court decision. The provision was also impacted by $5 million of net favorable deferred income tax adjustments due to the remeasurement of deferred tax assets and liabilities and the cumulative

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impact of the decline in the state tax rate. These items had a net favorable impact on the Company's earnings for the nine months ended June 30, 2016 of approximately eight cents per share. The provision for income taxes for the nine months ended June 30, 2015 includes $20 million of favorable resolutions of state income tax matters. This favorably impacted the Company's earnings for the nine months ended June 30, 2015 by approximately four cents per share.
5. LONG-TERM DEBT
Long-term debt consists of the following (dollars in millions):
June 30, 2016
 
Face
Value
 
Unamortized Discounts and Debt Issuance Costs
 
Fair Value
Adjustment (1)
 
Net Carrying
Value
Senior Notes:
 
 
 
 
 
 
 
 
5.600% Notes due 2019
 
$
500

 
$
(2
)
 
$
40

 
$
538

2.950% Notes due 2022
 
750

 
(6
)
 

 
744

3.625% Notes due 2025
 
500

 
(4
)
 
50

 
546

Total long-term debt
 
$
1,750

 
$
(12
)
 
$
90

 
$
1,828

September 30, 2015
 
Face
Value
 
Unamortized Discounts and Debt Issuance Costs
 
Fair Value
Adjustment (1)
 
Net Carrying
Value
Senior Notes:
 
 
 
 
 
 
 
 
5.600% Notes due 2019
 
$
500

 
$
(2
)
 
$
40

 
$
538

2.950% Notes due 2022
 
750

 
(7
)
 

 
743

3.625% Notes due 2025
 
500

 
(4
)
 
23

 
519

Total long-term debt
 
$
1,750

 
$
(13
)
 
$
63

 
$
1,800

 
(1)
Fair value adjustments relate to changes in the fair value of the debt while in a fair value hedging relationship. See "Fair Value Hedging" below.
Fair Value Hedging The Company is exposed to changes in the fair value of its fixed-rate Senior Notes resulting from interest rate fluctuations. To hedge a portion of this exposure, the Company has entered into fixed-for-variable interest rate swaps on the 2019 Notes and the 2025 Notes. Each fixed-for-variable interest rate swap has a notional amount of $500 million and a maturity date matching the maturity date of the respective Senior Notes.
The interest rate swaps effectively change the fixed-rate interest on the 2019 Notes and 2025 Notes to variable-rate interest. Under the terms of the interest rate swap agreements, the Company receives semi-annual fixed-rate interest payments based on the same rates applicable to the Senior Notes, and makes quarterly variable-rate interest payments based on three-month LIBOR plus (a) 2.3745% for the swap on the 2019 Notes and (b) 1.1022% for the swap on the 2025 Notes. As of June 30, 2016, the weighted average effective interest rate on the aggregate principal balance of the 2019 Notes and 2025 Notes was 2.39%.
The interest rate swaps are accounted for as fair value hedges and qualify for the shortcut method of accounting. Changes in the payment of interest resulting from the interest rate swaps are recorded in interest on borrowings on the Condensed Consolidated Statements of Income. Changes in fair value of the interest rate swaps are completely offset by changes in fair value of the related notes, resulting in no effect on net income. The following table summarizes gains and losses resulting from changes in the fair value of interest rate swaps designated as fair value hedges and the hedged fixed-rate debt for the periods indicated (dollars in millions):
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Gain (loss) on fair value of interest rate swaps
 
$
13

 
$
(24
)
 
$
27

 
$
5

Gain (loss) on fair value of hedged fixed-rate debt
 
(13
)
 
24

 
(27
)
 
(5
)
Net gain (loss) recorded in interest on borrowings
 
$

 
$

 
$

 
$

Cash Flow Hedging On January 17, 2014, the Company entered into forward-starting interest rate swap contracts with an aggregate notional amount of $500 million, to hedge against changes in the benchmark interest rate component of future interest

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payments resulting from the anticipated refinancing of its $500 million aggregate principal amount of unsecured 4.150% Senior Notes that matured on December 1, 2014. The Company designated the contracts as a cash flow hedge of the future interest payments.  
Under cash flow hedge accounting, until settlement the swap contracts are carried at fair value and, to the extent they are an effective hedge, any unrealized gains or losses are recorded in other comprehensive income (loss). Any ineffective portion of the unrealized gains or losses is immediately recorded into earnings. Upon settlement, any realized gain or loss that has been recorded in other comprehensive income (loss) is amortized into earnings over the term of the newly-issued fixed-rate debt.
On October 17, 2014, the Company sold $500 million of 2025 Notes and paid approximately $45 million to settle the forward-starting interest rate swap contracts. As of October 17, 2014, the Company recorded $0.5 million of pre-tax loss immediately into earnings to reflect ineffectiveness resulting from the issuance of the 2025 Notes slightly earlier than forecast. As of June 30, 2016, the Company expects to amortize $4.4 million of pre-tax losses, that were reported in accumulated other comprehensive loss, into interest on borrowings on the Condensed Consolidated Statements of Income within the next 12 months.
The following table summarizes pre-tax losses resulting from changes in the fair value of the forward-starting interest rate swaps for the periods indicated (dollars in millions):
 
 
Amount of Loss Recognized in Other Comprehensive Income (Loss)
(Effective Portion)
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Forward-starting interest rate swaps
 
$

 
$

 
$

 
$
(15
)
Balance Sheet Impact of Hedging Instruments — The following table summarizes the fair value of outstanding derivatives designated as hedging instruments on the Condensed Consolidated Balance Sheets (dollars in millions):
 
 
Balance Sheet Location
 
June 30,
2016
 
September 30,
2015
Interest rate contracts:
 
 
 
 
 
 
Pay-variable interest rate swaps designated as fair
value hedges
 
Other assets
 
$
90

 
$
63

The interest rate swaps are subject to counterparty credit risk. Credit risk is managed by limiting activity to approved counterparties that meet a minimum credit rating threshold, by entering into credit support agreements, or by utilizing approved central clearing counterparties registered with the Commodity Futures Trading Commission ("CFTC"). The interest rate swaps require daily collateral coverage, in the form of cash or U.S. Treasury securities, for the aggregate fair value of the interest rate swaps (including accrued interest). As of June 30, 2016 and September 30, 2015, the pay-variable interest rate swap counterparties had pledged $94 million and $77 million of collateral, respectively, to the Company in the form of cash. A liability for collateral pledged to the Company in the form of cash is recorded in accounts payable and other liabilities on the Condensed Consolidated Balance Sheets.
6. CAPITAL REQUIREMENTS
The Company's broker-dealer subsidiaries are subject to the SEC Uniform Net Capital Rule (Rule 15c3-1 under the Securities Exchange Act of 1934, or the "Exchange Act"), administered by the SEC and the Financial Industry Regulatory Authority ("FINRA"), which requires the maintenance of minimum net capital, as defined. Net capital and the related net capital requirement may fluctuate on a daily basis. TD Ameritrade Clearing, Inc. ("TDAC"), the Company's clearing broker-dealer subsidiary, and TD Ameritrade, Inc., the Company's introducing broker-dealer subsidiary, compute net capital under the alternative method as permitted by Rule 15c3-1. TDAC is required to maintain minimum net capital of the greater of $1.5 million, which is based on the type of business conducted by the broker-dealer, or 2% of aggregate debit balances arising from client transactions. TD Ameritrade, Inc. is required to maintain minimum net capital of the greater of $250,000 or 2% of aggregate debit balances. In addition, under the alternative method, a broker-dealer may not repay any subordinated borrowings, pay cash dividends or make any unsecured advances or loans to its parent company or employees if such payment would result in a net capital amount of less than (a) 5% of aggregate debit balances or (b) 120% of its minimum dollar requirement.
TD Ameritrade Futures & Forex LLC ("TDAFF"), the Company's FCM and FDM subsidiary registered with the CFTC, is subject to CFTC Regulations 1.17 and 5.7 under the Commodity Exchange Act, administered by the CFTC and the National Futures Association ("NFA"). As an FCM, TDAFF is required to maintain minimum net capital under CFTC Regulation 1.17 of the greatest of (a) $1.0 million or (b) its futures risk-based capital requirement, equal to 8% of the total risk margin requirement for all futures positions carried by the FCM in client and nonclient accounts. On February 16, 2016, TDAFF also became registered

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as an FDM, subject to the net capital requirements under CFTC Regulation 5.7, which requires TDAFF to maintain minimum net capital of the greatest of (a) any amount required under CFTC Regulation 1.17 as described above or (b) $20.0 million plus 5% of all foreign exchange liabilities owed to clients in excess of $10.0 million. An FCM and FDM, such as TDAFF, that is not registered as a securities broker-dealer must provide notice to the CFTC if its net capital amounts to less than (a) 110% of its risk-based capital requirement under CFTC Regulation 1.17, (b) 150% of its $1.0 million minimum dollar requirement, or (c) 110% of $20.0 million plus 5% of all foreign exchange liabilities owed to clients in excess of $10.0 million.
Net capital and net capital requirements for the Company's broker-dealer and FCM/FDM subsidiaries are summarized in the following tables (dollars in millions):
TD Ameritrade Clearing, Inc.
Date
 
Net
Capital
 
Required
Net Capital
(2% of
Aggregate
Debit Balances)
 
Net Capital
in Excess of
Required
Net Capital
 
Net Capital in
Excess of
Early Warning
Threshold (5%
of Aggregate
Debit Balances)
 
Ratio of Net
Capital to
Aggregate
Debit Balances
June 30, 2016
 
$
1,613

 
$
293

 
$
1,320

 
$
879

 
10.99
%
September 30, 2015
 
$
1,581

 
$
310

 
$
1,271

 
$
807

 
10.22
%
TD Ameritrade, Inc.
Date
 
Net
Capital
 
Net Capital
in Excess of
the $250,000
Minimum Dollar
Requirement
 
Net Capital in
Excess of
Early Warning
Threshold
(120% of
Required
Net Capital)
June 30, 2016
 
$
167

 
$
166

 
$
166

September 30, 2015
 
$
228

 
$
228

 
$
227

TD Ameritrade Futures & Forex LLC
Date
 
Net
Capital
 
Required Net Capital (8% of Total Risk Margin or $20 Million Plus 5% of All Foreign Exchange Liabilities Owed to Clients in Excess of $10 Million)
 
Net Capital
in Excess of
Required
Net Capital
 
Net Capital in
Excess of
Early Warning
Threshold
(110% of
Required
Net Capital)
June 30, 2016
 
$
110

 
$
22

 
$
88

 
$
86

September 30, 2015
 
$
90

 
$
12

 
$
78

 
$
78

The Company's non-depository trust company subsidiary, TD Ameritrade Trust Company ("TDATC"), is subject to capital requirements established by the State of Maine, which require TDATC to maintain minimum Tier 1 capital, as defined. TDATC's Tier 1 capital was $36 million and $32 million as of June 30, 2016 and September 30, 2015, respectively, which exceeded the required Tier 1 capital by $20 million and $17 million, respectively.
7. COMMITMENTS AND CONTINGENCIES
Legal and Regulatory Matters
Order Routing Matters – Five putative class action complaints were filed between August and October 2014 regarding TD Ameritrade's routing of client orders. The cases were filed in, or transferred to, the U.S. District Court for the District of Nebraska: Jay Zola et al. v. TD Ameritrade, Inc., et al.; Tyler Verdieck v. TD Ameritrade, Inc.; Bruce Lerner v. TD Ameritrade, Inc.; Michael Sarbacker v. TD Ameritrade Holding Corporation, et al.; Gerald Klein v. TD Ameritrade Holding Corporation, et al. The complaints in Zola, Klein and Sarbacker allege that the defendants failed to provide clients with "best execution" and routed orders to the market venue that paid the most for its order flow. The complaints in Verdieck and Lerner allege that the defendant routed its clients' non-marketable limit orders to the venue paying the highest rates of maker rebates, and that clients did not receive best execution on these kinds of orders. The complaints variously include claims of breach of contract, breach of fiduciary duty, breach of the duty of best execution, fraud, negligent misrepresentation, violations of Section 10(b) and 20 of the Exchange Act and SEC Rule 10b-5, violation of Nebraska's Consumer Protection Act, violation of Nebraska's Uniform Deceptive

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Trade Practices Act, aiding and abetting, unjust enrichment and declaratory judgment. The complaints seek various kinds of relief including damages, restitution, disgorgement, injunctive relief, equitable relief and other relief. The Company moved to dismiss each of the five putative class action complaints. The Magistrate Judge subsequently entered Findings and Recommendations with respect to each of the five actions, recommending that the District Judge dismiss each of the five lawsuits. On March 23, 2016, the District Judge entered an order dismissing all of the state law claims in the five actions, denying the motion to dismiss the federal securities claims in the Klein case, and permitting the plaintiffs in the other four actions to amend their complaints to assert a federal securities claim. None of the plaintiffs in the other four actions filed an amended complaint. The plaintiffs in the Zola, Sarbacker and Verdieck cases filed notices of appeal. The plaintiff in the Lerner case did not file a notice of appeal and that case is considered closed. The Klein case is proceeding in the District Court. The Company intends to vigorously defend against these lawsuits. The Company is unable to predict the outcome or the timing of the ultimate resolution of these lawsuits, or the potential losses, if any, that may result.
Certain regulatory authorities are conducting examinations and investigations regarding the routing of client orders. TD Ameritrade, Inc. and TDAC have received requests for documents and information from the regulatory authorities. TD Ameritrade, Inc. and TDAC are cooperating with the requests.
Other Legal and Regulatory Matters – The Company is subject to a number of other lawsuits, arbitrations, claims and other legal proceedings in connection with its business. Some of these legal actions include claims for substantial or unspecified compensatory and/or punitive damages. In addition, in the normal course of business, the Company discusses matters with its regulators raised during regulatory examinations or otherwise subject to their inquiry. These matters could result in censures, fines, penalties or other sanctions. ASC 450, Loss Contingencies, governs the recognition and disclosure of loss contingencies, including potential losses from legal and regulatory matters. ASC 450 categorizes loss contingencies using three terms based on the likelihood of occurrence of events that result in a loss: "probable" means that "the future event or events are likely to occur;" "remote" means that "the chance of the future event or events occurring is slight;" and "reasonably possible" means that "the chance of the future event or events occurring is more than remote but less than likely." Under ASC 450, the Company accrues for losses that are considered both probable and reasonably estimable. The Company may incur losses in addition to the amounts accrued where the losses are greater than estimated by management, or for matters for which an unfavorable outcome is considered reasonably possible, but not probable.
The Company estimates that the aggregate range of reasonably possible losses in excess of amounts accrued is from $0 to $45 million as of June 30, 2016. This estimated aggregate range of reasonably possible losses is based upon currently available information for those legal and regulatory matters in which the Company is involved, taking into account the Company’s best estimate of reasonably possible losses for those matters as to which an estimate can be made. For certain matters, the Company does not believe an estimate can currently be made, as some matters are in preliminary stages and some matters have no specific amounts claimed. The Company’s estimate involves significant judgment, given the varying stages of the proceedings and the inherent uncertainty of predicting outcomes. The estimated range will change from time to time as the underlying matters, stages of proceedings and available information change. Actual losses may vary significantly from the current estimated range.
The Company believes, based on its current knowledge and after consultation with counsel, that the ultimate disposition of these legal and regulatory matters, individually or in the aggregate, is not likely to have a material adverse effect on the financial condition or cash flows of the Company. However, in light of the uncertainties involved in such matters, the Company is unable to predict the outcome or the timing of the ultimate resolution of these matters, or the potential losses, fines, penalties or equitable relief, if any, that may result, and it is possible that the ultimate resolution of one or more of these matters may be material to the Company's results of operations for a particular reporting period.
Income Taxes
The Company's federal and state income tax returns are subject to examination by taxing authorities. Because the application of tax laws and regulations to many types of transactions is subject to varying interpretations, amounts reported in the condensed consolidated financial statements could be significantly changed at a later date upon final determinations by taxing authorities. The Toronto-Dominion Bank ("TD") has agreed to indemnify the Company for tax obligations, if any, pertaining to activities of TD Waterhouse Group, Inc. ("TD Waterhouse") prior to the Company's acquisition of TD Waterhouse in January 2006.
General Contingencies
In the ordinary course of business, there are various contingencies that are not reflected in the condensed consolidated financial statements. These include the Company's broker-dealer and FCM/FDM subsidiaries' client activities involving the execution, settlement and financing of various client securities, options, futures and foreign exchange transactions. These activities may expose the Company to credit risk in the event the clients are unable to fulfill their contractual obligations.
The Company extends margin credit and leverage to its clients. In margin transactions, the Company extends credit to the client, subject to various regulatory and internal margin requirements, collateralized by cash and securities in the client's account. In

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connection with these activities, the Company also executes and clears client transactions involving the sale of securities not yet purchased ("short sales"). Such margin-related transactions may expose the Company to credit risk in the event a client's assets are not sufficient to fully cover losses that the client may incur. Leverage involves securing a large potential future obligation with a lesser amount of collateral. The risks associated with margin credit and leverage increase during periods of rapid market movements, or in cases where leverage or collateral is concentrated and market movements occur. In the event the client fails to satisfy its obligations, the Company has the authority to liquidate certain positions in the client's account at prevailing market prices in order to fulfill the client's obligations. However, during periods of rapid market movements, clients who utilize margin credit or leverage and who have collateralized their obligations with securities may find that the securities have a rapidly depreciating value and may not be sufficient to cover their obligations in the event of liquidation. The Company seeks to mitigate the risks associated with its client margin and leverage activities by requiring clients to maintain margin collateral in compliance with various regulatory and internal guidelines. The Company monitors required margin levels throughout each trading day and, pursuant to such guidelines, requires clients to deposit additional collateral, or to reduce positions, when necessary.
The Company contracts with unaffiliated FCM, FDM and broker-dealer entities to clear and execute futures and foreign exchange transactions for its clients. This can result in concentrations of credit risk with one or more of these counterparties. This risk is partially mitigated by the counterparties' obligation to comply with rules and regulations governing FCMs, FDMs and broker-dealers in the United States. These rules generally require maintenance of net capital and segregation of client funds and securities. In addition, the Company manages this risk by requiring credit approvals for counterparties and by utilizing account funding and sweep arrangement agreements that generally specify that all client cash in excess of futures funding requirements be transferred back to the clients' securities brokerage account at the Company on a daily basis.
The Company loans securities temporarily to other broker-dealers in connection with its broker-dealer business. The Company receives cash as collateral for the securities loaned. Increases in securities prices may cause the market value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its client obligations. The Company mitigates this risk by requiring credit approvals for counterparties, by monitoring the market value of securities loaned on a daily basis and requiring additional cash as collateral when necessary, and by participating in a risk-sharing program offered through the Options Clearing Corporation ("OCC").
The Company borrows securities temporarily from other broker-dealers in connection with its broker-dealer business. The Company deposits cash as collateral for the securities borrowed. Decreases in securities prices may cause the market value of the securities borrowed to fall below the amount of cash deposited as collateral. In the event the counterparty to these transactions does not return the cash deposited, the Company may be exposed to the risk of selling the securities at prevailing market prices. The Company mitigates this risk by requiring credit approvals for counterparties, by monitoring the collateral values on a daily basis and requiring collateral to be returned by the counterparties when necessary, and by participating in a risk-sharing program offered through the OCC.
The Company transacts in reverse repurchase agreements (securities purchased under agreements to resell) in connection with its broker-dealer business. The Company's policy is to take possession or control of securities with a market value in excess of the principal amount loaned, plus accrued interest, in order to collateralize resale agreements. The Company monitors the market value of the underlying securities that collateralize the related receivable on resale agreements on a daily basis and may require additional collateral when deemed appropriate.
The Company has accepted collateral in connection with client margin loans and securities borrowed. Under applicable agreements, the Company is generally permitted to repledge securities held as collateral and use them to enter into securities lending arrangements. The following table summarizes the fair values of client margin securities and stock borrowings that were available to the Company to utilize as collateral on various borrowings or for other purposes, and the amount of that collateral loaned or repledged by the Company (dollars in billions):
 
 
June 30,
2016
 
September 30,
2015
Client margin securities
 
$
16.8

 
$
17.7

Stock borrowings
 
1.0

 
0.7

Total collateral available
 
$
17.8

 
$
18.4

 
 
 
 
 
Collateral loaned
 
$
1.9

 
$
2.7

Collateral repledged
 
3.0

 
3.8

Total collateral loaned or repledged
 
$
4.9

 
$
6.5



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The Company is subject to cash deposit and collateral requirements with clearinghouses based on its clients' trading activity. The following table summarizes cash deposited with and securities pledged to clearinghouses by the Company (dollars in millions):
Assets
 
Balance Sheet Classification
 
June 30,
2016
 
September 30,
2015
Cash
 
Receivable from brokers, dealers and clearing
organizations
 
$
282

 
$
190

U.S. government debt securities
 
Securities owned, at fair value
 
125

 
350

Total
 
$
407

 
$
540

Guarantees
The Company is a member of and provides guarantees to securities clearinghouses and exchanges in connection with client trading activities. Under related agreements, the Company is generally required to guarantee the performance of other members. Under these agreements, if a member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet shortfalls. The Company's liability under these arrangements is not quantifiable and could exceed the cash and securities it has posted to the clearinghouse as collateral. However, the potential for the Company to be required to make payments under these agreements is considered remote. Accordingly, no contingent liability is carried on the Condensed Consolidated Balance Sheets for these guarantees.
The Company clears its clients' futures transactions on an omnibus account basis through unaffiliated clearing firms. The Company also contracts with an external provider to facilitate foreign exchange trading for its clients. The Company has agreed to indemnify these unaffiliated clearing firms and the external provider for any loss that they may incur for the client transactions introduced to them by the Company.
See "Insured Deposit Account Agreement" in Note 13 for a description of a guarantee included in that agreement.
8. FAIR VALUE DISCLOSURES
Fair Value Measurement — Definition and Hierarchy
ASC 820-10, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
ASC 820-10 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability, developed based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company's own assumptions about the assumptions market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. This category includes active exchange-traded funds, money market mutual funds, mutual funds and equity securities.
Level 2 — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Such inputs include quoted prices in markets that are not active, quoted prices for similar assets and liabilities in active and inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means. This category includes most debt securities and other interest-sensitive financial instruments.
Level 3 — Unobservable inputs for the asset or liability, where there is little, if any, observable market activity or data for the asset or liability.

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The following tables present the Company's fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 and September 30, 2015 (dollars in millions):
 
 
As of June 30, 2016
 
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Assets:
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
$
1,717

 
$

 
$

 
$
1,717

Short-term investments available-for-sale:
 
 
 
 
 
 
 
 
U.S. government debt securities
 

 
404

 

 
404

Investments segregated for regulatory purposes:
 
 
 
 
 
 
 
 
U.S. government debt securities
 

 
5,029

 

 
5,029

Securities owned:
 
 
 
 
 
 
 
 
U.S. government debt securities
 

 
225

 

 
225

Other
 
6

 
6

 

 
12

Subtotal - Securities owned
 
6

 
231

 

 
237

Other assets:
 
 
 
 
 
 
 
 
Pay-variable interest rate swaps(1)
 

 
90

 

 
90

Auction rate securities
 

 

 
1

 
1

Subtotal - Other assets
 

 
90

 
1

 
91

Total assets at fair value
 
$
1,723

 
$
5,754

 
$
1

 
$
7,478

Liabilities:
 
 
 
 
 
 
 
 
Accounts payable and other liabilities:
 
 
 
 
 
 
 
 
Securities sold, not yet purchased:
 
 
 
 
 
 
 
 
Equity securities
 
$
32

 
$

 
$

 
$
32

 
(1)
See "Fair Value Hedging" in Note 5 for details.


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As of September 30, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Assets:
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
$
1,888

 
$

 
$

 
$
1,888

Short-term investments available-for-sale:
 
 
 
 
 
 
 
 
U.S. government debt securities
 

 
4

 

 
4

Investments segregated for regulatory purposes:
 
 
 
 
 
 
 
 
U.S. government debt securities
 

 
3,781

 

 
3,781

Securities owned:
 
 
 
 
 
 
 
 
Money market and other mutual funds
 

 

 
2

 
2

U.S. government debt securities
 

 
415

 

 
415

Other
 
3

 
5

 

 
8

Subtotal - Securities owned
 
3

 
420

 
2

 
425

Other assets:
 
 
 
 
 
 
 
 
Pay-variable interest rate swaps(1)
 

 
63

 

 
63

Auction rate securities
 

 

 
1

 
1

Subtotal - Other assets
 

 
63

 
1

 
64

Total assets at fair value
 
$
1,891

 
$
4,268

 
$
3

 
$
6,162

Liabilities:
 
 
 
 
 
 
 
 
Accounts payable and other liabilities:
 
 
 
 
 
 
 
 
Securities sold, not yet purchased:
 
 
 
 
 
 
 
 
Equity securities
 
$
23

 
$

 
$

 
$
23

 
 
(1)
See "Fair Value Hedging" in Note 5 for details.
There were no transfers between any levels of the fair value hierarchy during the periods covered by this report.
Valuation Techniques
In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology applies to the Company's Level 1 assets and liabilities. If quoted prices in active markets for identical assets and liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable, either directly or indirectly. This pricing methodology applies to the Company's Level 2 assets and liabilities.
Level 2 Measurements:
Debt Securities – Fair values for debt securities are based on prices obtained from an independent pricing vendor. The primary inputs to the valuation include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. The Company validates the vendor pricing by periodically comparing it to pricing from another independent pricing service. The Company has not adjusted prices obtained from the independent pricing vendor for any periods presented in the condensed consolidated financial statements because no significant pricing differences have been observed.
Interest Rate Swaps – These derivatives are valued by the Company using a valuation model provided by a third party service that incorporates interest rate yield curves, which are observable for substantially the full term of the contract. The valuation model is widely accepted in the financial services industry and does not involve significant judgment because most of the inputs are observable in the marketplace. Credit risk is not an input to the valuation because in each case the Company or counterparty has possession of collateral, in the form of cash or U.S. Treasury securities, in amounts equal to or exceeding the fair value of the

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interest rate swaps. The Company validates the third party service valuations by comparing them to valuation models provided by the swap counterparties.
Level 3 Measurements:
The Company has no material assets or liabilities classified as Level 3 of the fair value hierarchy.
Fair Value of Financial Instruments Not Recorded at Fair Value
Receivable from/payable to brokers, dealers and clearing organizations, receivable from/payable to clients, receivable from/payable to affiliates, other receivables and accounts payable and other liabilities are short-term in nature and accordingly are carried at amounts that approximate fair value. Receivable from/payable to brokers, dealers and clearing organizations, receivable from/payable to clients, receivable from/payable to affiliates, other receivables and accounts payable and other liabilities are recorded at or near their respective transaction prices and historically have been settled or converted to cash at approximately that value (categorized as Level 2 of the fair value hierarchy).
Cash and investments segregated and on deposit for regulatory purposes includes reverse repurchase agreements (securities purchased under agreements to resell). Reverse repurchase agreements are treated as collateralized financing transactions and are carried at amounts at which the securities will subsequently be resold, plus accrued interest. The Company's reverse repurchase agreements generally have a maturity of seven days and are collateralized by U.S. Treasury securities in amounts exceeding the carrying value of the resale agreements. Accordingly, the carrying value of reverse repurchase agreements approximates fair value (categorized as Level 2 of the fair value hierarchy). In addition, this category includes cash held in demand deposit accounts and on deposit with futures commission merchants, for which the carrying values approximate the fair value (categorized as Level 1 of the fair value hierarchy). See Note 3 for a summary of cash and investments segregated and on deposit for regulatory purposes.
Long-term debt – As of June 30, 2016, the Company's Senior Notes had an aggregate estimated fair value, based on quoted market prices (categorized as Level 1 of the fair value hierarchy), of approximately $1.88 billion, compared to the aggregate carrying value of the Senior Notes on the Condensed Consolidated Balance Sheet of $1.83 billion. As of September 30, 2015, the Company's Senior Notes had an aggregate estimated fair value, based on quoted market prices, of approximately $1.83 billion, compared to the aggregate carrying value of the Senior Notes on the Condensed Consolidated Balance Sheet of $1.80 billion.

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9. OFFSETTING ASSETS AND LIABILITIES
Substantially all of the Company's reverse repurchase agreements, securities borrowing and securities lending activity and derivative financial instruments are transacted under master agreements that may allow for net settlement in the ordinary course of business, as well as offsetting of all contracts with a given counterparty in the event of default by one of the parties. However, for financial statement purposes, the Company does not net balances related to these financial instruments.
The following tables present information about the potential effect of rights of setoff associated with the Company's recognized assets and liabilities as of June 30, 2016 and September 30, 2015 (dollars in millions):
 
 
June 30, 2016
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the
Condensed Consolidated
Balance Sheet
 
 
 
 
Gross Amounts
of Recognized
Assets and
Liabilities
 
Gross Amounts
Offset in the
Condensed
Consolidated
Balance Sheet
 
Net Amounts
Presented in
the Condensed
Consolidated
Balance Sheet
 
Financial
Instruments(4)
 
Collateral
Received or
Pledged
(Including
Cash) (5)
 
Net
Amount (6)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Investments segregated for
regulatory purposes:
 
 
 
 
 
 
 
 
 
 
 
 
Reverse repurchase agreements
 
$
1,390

 
$

 
$
1,390

 
$

 
$
(1,390
)
 
$

Receivable from brokers, dealers
   and clearing organizations:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits paid for
securities borrowed (1)
 
986

 

 
986

 
(82
)
 
(892
)
 
12

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
Pay-variable interest rate swaps
 
90

 

 
90

 

 
(90
)
 

Total
 
$
2,466

 
$

 
$
2,466

 
$
(82
)
 
$
(2,372
)
 
$
12

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Payable to brokers, dealers
and clearing organizations:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits received for
securities loaned (2)(3)
 
$
1,851

 
$

 
$
1,851

 
$
(82
)
 
$
(1,592
)
 
$
177

 
 
September 30, 2015
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the
Condensed Consolidated
Balance Sheet
 
 
 
 
Gross Amounts
of Recognized
Assets and
Liabilities
 
Gross Amounts
Offset in the
Condensed
Consolidated
Balance Sheet
 
Net Amounts
Presented in
the Condensed
Consolidated
Balance Sheet
 
Financial
Instruments(4)
 
Collateral
Received or
Pledged
(Including
Cash) (5)
 
Net
Amount (6)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Investments segregated for
regulatory purposes:
 
 
 
 
 
 
 
 
 
 
 
 
Reverse repurchase agreements
 
$
1,586

 
$

 
$
1,586

 
$

 
$
(1,586
)
 
$

Receivable from brokers, dealers
and clearing organizations:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits paid for
securities borrowed (1)
 
664

 

 
664

 
(70
)
 
(585
)
 
9

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
Pay-variable interest rate swaps
 
63

 

 
63

 

 
(63
)
 

Total
 
$
2,313

 
$

 
$
2,313

 
$
(70
)
 
$
(2,234
)
 
$
9

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Payable to brokers, dealers
and clearing organizations:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits received for
securities loaned (2)(3)
 
$
2,653

 
$

 
$
2,653

 
$
(70
)
 
$
(2,364
)
 
$
219


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Table of Contents

 
(1)
Included in the gross amounts of deposits paid for securities borrowed is $431 million and $332 million as of June 30, 2016 and September 30, 2015, respectively, transacted through a risk-sharing program with the OCC, which guarantees the return of cash to the Company. See "General Contingencies" in Note 7 for a discussion of the potential risks associated with securities borrowing transactions and how the Company mitigates those risks.
(2)
Included in the gross amounts of deposits received for securities loaned is $910 million and $1,164 million as of June 30, 2016 and September 30, 2015, respectively, transacted through a risk-sharing program with the OCC, which guarantees the return of securities to the Company. See "General Contingencies" in Note 7 for a discussion of the potential risks associated with securities lending transactions and how the Company mitigates those risks.
(3)
Substantially all of the Company's securities lending transactions have a continuous contractual term and, upon notice by either party, may be terminated within three business days. The following table summarizes the Company's gross liability for securities lending transactions by the class of securities loaned (dollars in millions):
 
 
June 30,
2016
 
September 30,
2015
Deposits received for securities loaned:
 
 
 
 
Equity securities
 
$
1,634

 
$
2,413

Exchange-traded funds
 
132

 
150

Closed-end funds
 
56

 
41

Other
 
29

 
49

Total
 
$
1,851

 
$
2,653

(4)
Amounts represent recognized assets and liabilities that are subject to enforceable master agreements with rights of setoff.
(5)
Represents the fair value of collateral the Company had received or pledged under enforceable master agreements, limited for table presentation purposes to the net amount of the recognized assets due from or liabilities due to each counterparty. At June 30, 2016 and September 30, 2015, the Company had received total collateral with a fair value of $2,487 million and $2,350 million, respectively, and pledged total collateral with a fair value of $1,668 million and $2,437 million, respectively.
(6)
Represents the amount for which, in the case of net recognized assets, the Company had not received collateral, and in the case of net recognized liabilities, the Company had not pledged collateral.
10. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables present the net change in fair value recorded in other comprehensive income (loss) before and after income tax for the periods indicated (dollars in millions):
 
 
Three Months Ended June 30,
 
 
2016
 
2015
 
 
Before Tax
 
Tax Effect
 
Net of Tax
 
Before Tax
 
Tax Effect
 
Net of Tax
Cash flow hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized loss
 
$

 
$

 
$

 
$

 
$

 
$

Reclassification adjustment for portion of realized loss amortized to net income (1)
 
1

 

 
1

 
1

 
(1
)
 

Other comprehensive income
 
$
1

 
$

 
$
1

 
$
1

 
$
(1
)
 
$


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Table of Contents

 
 
Nine Months Ended June 30,
 
 
2016
 
2015
 
 
Before Tax
 
Tax Effect
 
Net of Tax
 
Before Tax
 
Tax Effect
 
Net of Tax
Cash flow hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized loss
 
$

 
$

 
$

 
$
(15
)
 
$
5

 
$
(10
)
Reclassification adjustment for portion of realized loss amortized to net income (1)
 
3

 
(1
)
 
2

 
3

 
(1
)
 
2

Other comprehensive income (loss)
 
$
3

 
$
(1
)
 
$
2

 
$
(12
)
 
$
4

 
$
(8
)
 
(1)
The before tax reclassification amounts and the related tax effects are included in interest on borrowings and provision for income taxes, respectively, on the Condensed Consolidated Statements of Income.
The following table presents after-tax changes in accumulated other comprehensive loss for the periods indicated (dollars in millions):
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Cash flow hedging instruments:
 
 
 
 
 
 
 
 
Beginning balance
 
$
(24
)
 
$
(26
)
 
$
(25
)
 
$
(18
)
Other comprehensive loss before reclassification
 

 

 

 
(10
)
Amount reclassified from accumulated other
comprehensive loss
 
1

 

 
2

 
2

Current period change
 
1

 

 
2

 
(8
)
Ending balance
 
$
(23
)
 
$
(26
)
 
$
(23
)
 
$
(26
)
11. EARNINGS PER SHARE
The difference between the numerator and denominator used in the computation of basic and diluted earnings per share consists of common stock equivalent shares related to stock-based compensation for all periods presented. The Company excluded from the calculation of diluted earnings per share 0.6 million and 0.4 million shares underlying stock-based compensation awards for the three and nine months ended June 30, 2016, respectively, because their inclusion would have been antidilutive. There were no material antidilutive awards for the three and nine months ended June 30, 2015.
12. ACCELERATED STOCK REPURCHASE AGREEMENTS
On June 8, 2016, the Company entered into an accelerated stock repurchase ("ASR") agreement with an investment bank counterparty. The Company paid $42.5 million to the counterparty and received an initial delivery of 1.1 million shares of its common stock on June 9, 2016, representing 80% of the potential shares to be repurchased based on the closing stock price of $31.35 on June 8, 2016. Settlement of the transaction is scheduled to occur after the end of an averaging period and is subject to early termination by the counterparty. The averaging period began on June 9, 2016 and will end no earlier than July 19, 2016 or later than September 15, 2016. The total number of shares to be repurchased by the Company from the counterparty will be based on the average of the daily volume-weighted average share prices of the Company's common stock during the averaging period, less a pre-determined discount, up to a maximum of 2.7 million shares. If the total number of shares to be repurchased exceeds the number of shares delivered on June 9, 2016, the Company will receive the remaining balance of shares from the investment bank counterparty. If the total number of shares to be repurchased is less than the number of shares delivered on June 9, 2016, the Company has the contractual right to deliver to the investment bank counterparty either shares of its common stock or cash. The Company expects to receive additional shares upon final settlement of the June 8, 2016 ASR agreement.
On December 1, 2015, the Company entered into an ASR agreement with an investment bank counterparty. The Company paid $45 million to the counterparty and received an initial delivery of 1.0 million shares of its common stock on December 2, 2015, representing 80% of the potential shares to be repurchased based on the closing stock price of $36.92 on December 1, 2015. Settlement of the transaction was to occur after the end of an averaging period, which would end no later than March 1, 2016 and was subject to early termination by the counterparty. The averaging period began on December 2, 2015 and ended on January 12, 2016, at the election of the counterparty. The total number of shares the Company purchased from the counterparty was based on the average of the daily volume-weighted average share prices of the Company's common stock during the averaging period, less a pre-determined discount. Upon settlement, the Company received an additional 0.3 million shares on January 15, 2016. The

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Company ultimately repurchased a total of 1.3 million shares under the December 1, 2015 ASR agreement at a net weighted average price of $33.98 per share.
The Company has treated the ASR agreements as forward contracts indexed to its own common stock. The forward contracts have met all of the applicable criteria for equity classification, including the Company's right to settle in shares. The Company has reflected the shares received from the investment bank counterparties as treasury stock as of the dates the shares were delivered, which resulted in reductions of the outstanding shares used to calculate the weighted average common shares outstanding for both basic and diluted earnings per share during the respective periods.
13. RELATED PARTY TRANSACTIONS
Transactions with TD and Affiliates
As a result of the Company's acquisition of TD Waterhouse during fiscal 2006, TD became an affiliate of the Company. TD owned approximately 42% of the Company's common stock as of June 30, 2016. Pursuant to the stockholders agreement between TD and the Company, TD has the right to designate five of twelve members of the Company's board of directors. The Company transacts business and has extensive relationships with TD and certain of its affiliates. Transactions with TD and its affiliates are discussed and summarized below.
Insured Deposit Account Agreement
The Company is party to an insured deposit account ("IDA") agreement with TD Bank USA, N.A. ("TD Bank USA"), TD Bank, N.A. and TD. Under the IDA agreement, TD Bank USA and TD Bank, N.A. (together, the "TD Depository Institutions") make available to clients of the Company FDIC-insured money market deposit accounts as either designated sweep vehicles or as non-sweep deposit accounts. The Company provides marketing, recordkeeping and support services for the TD Depository Institutions with respect to the money market deposit accounts. In exchange for providing these services, the TD Depository Institutions pay the Company an aggregate marketing fee based on the weighted average yield earned on the client IDA assets, less the actual interest paid to clients, a servicing fee to the TD Depository Institutions and the cost of FDIC insurance premiums.
The current IDA agreement became effective as of January 1, 2013 and has an initial term expiring July 1, 2018. It is automatically renewable for successive five-year terms, provided that it may be terminated by either the Company or the TD Depository Institutions by providing written notice of non-renewal at least two years prior to the initial expiration date or the expiration date of any subsequent renewal period. As of July 1, 2016, notice of non-renewal was not provided by either party, therefore the IDA agreement will automatically renew on July 1, 2018.
The fee earned on the IDA agreement is calculated based on two primary components: (a) the yield on fixed-rate "notional" investments, based on prevailing fixed rates for identical balances and maturities in the interest rate swap market (generally LIBOR-based) at the time such investments were added to the IDA portfolio (including any adjustments required to adjust the variable rate leg of such swaps to a one-month reset frequency and the overall swap payment frequency to monthly) and (b) the yield on floating-rate investments. As of June 30, 2016, the IDA portfolio was comprised of approximately 74% fixed-rate notional investments and 26% floating-rate investments.
The IDA agreement provides that the Company may designate amounts and maturity dates for the fixed-rate notional investments in the IDA portfolio, subject to certain limitations. For example, if the Company designates that $100 million of deposits be invested in 5-year fixed-rate investments, and on the day such investment is confirmed by the TD Depository Institutions the prevailing fixed yield for the applicable 5-year U.S. dollar LIBOR-based swaps is 1.45%, then the Company will earn a gross fixed yield of 1.45% on that portion of the portfolio (before any deductions for interest paid to clients, the servicing fee to the TD Depository Institutions and the cost of FDIC insurance premiums). In the event that (1) the federal funds effective rate is established at 0.75% or greater and (2) the rate on 5-year U.S. dollar interest rate swaps is equal to or greater than 1.50% for 20 consecutive business days, then the rate earned by the Company on new fixed-rate notional investments will be reduced by 20% of the excess of the 5-year U.S. dollar swap rate over 1.50%, up to a maximum of 0.10%.
The yield on floating-rate investments is calculated daily based on the greater of the following rates published by the Federal Reserve: (1) the interest rate paid by Federal Reserve Banks on balances held in excess of required reserve balances and contractual clearing balances under Regulation D and (2) the daily effective federal funds rate.
The interest rates paid to clients are set by the TD Depository Institutions and are not linked to any index. The servicing fee to the TD Depository Institutions under the IDA agreement is equal to 25 basis points on the aggregate average daily balance in the IDA accounts, subject to adjustment as it relates to deposits of less than or equal to $20 billion kept in floating-rate investments or in fixed-rate notional investments with a maturity of up to 24 months ("short-term fixed-rate investments"). For such floating-rate and short-term fixed-rate investments, the servicing fee is equal to the difference of the interest rate earned on the investments less the FDIC premiums paid (in basis points), divided by two. The servicing fee has a floor of 3 basis points (subject to adjustment from time to time to reflect material changes to the TD Depository Institutions' leverage costs) and a maximum of 25 basis points.

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Table of Contents

In the event the marketing fee computation results in a negative amount, the Company must pay the TD Depository Institutions the negative amount. This effectively results in the Company guaranteeing the TD Depository Institutions revenue equal to the servicing fee on the IDA agreement, plus the reimbursement of FDIC insurance premiums. The marketing fee computation under the IDA agreement is affected by many variables, including the type, duration, principal balance and yield of the fixed-rate and floating-rate investments, the prevailing interest rate environment, the amount of client deposits and the yield paid on client deposits. Because a negative marketing fee computation would arise only if there were extraordinary movements in many of these variables, the maximum potential amount of future payments the Company could be required to make under this arrangement cannot be reasonably estimated. Management believes the potential for the marketing fee calculation to result in a negative amount is remote. Accordingly, no contingent liability is carried on the Condensed Consolidated Balance Sheets for the IDA agreement.
In addition, the Company has various other services agreements and transactions with TD and its affiliates. The following tables summarize revenues and expenses resulting from transactions with TD and its affiliates for the periods indicated (dollars in millions):
 
 
 
 
Revenues from TD and Affiliates
 
 
Statement of Income
Classification
 
Three months ended 
 June 30,
 
Nine months ended 
 June 30,
Description
 
2016
 
2015
 
2016
 
2015
Insured Deposit Account Agreement
 
Insured deposit account fees
 
$
234

 
$
209

 
$
696

 
$
620

Referral and Strategic Alliance Agreement
 
Various
 
4

 
3

 
10

 
9

Mutual Fund Agreements
 
Investment product fees
 
4

 

 
7

 

Other
 
Various
 
1

 
2

 
6

 
5

Total revenues
 
$
243

 
$
214

 
$
719

 
$
634

 
 
 
 
Expenses to TD and Affiliates
 
 
Statement of Income
Classification
 
Three months ended 
 June 30,
 
Nine months ended 
 June 30,
Description
 
 
2016
 
2015
 
2016
 
2015
Canadian Call Center Services Agreement
 
Professional services
 
$
4

 
$
5

 
$
13

 
$
14

Other
 
Various
 
1

 

 
2

 
2

Total expenses
 
$
5

 
$
5

 
$
15

 
$
16

The following table summarizes the classification and amount of receivables from and payables to TD and its affiliates on the Condensed Consolidated Balance Sheets resulting from related party transactions (dollars in millions):
 
 
June 30,
2016
 
September 30,
2015
Assets:
 
 
 
 
Receivable from brokers, dealers and clearing organizations
 
$
1

 
$

Receivable from affiliates
 
96

 
93

 
 
 
 
 
Liabilities:
 
 
 
 
Payable to brokers, dealers and clearing organizations
 
$
97

 
$
70

Payable to affiliates
 
5

 
6

Receivables from and payables to brokers, dealers and clearing organizations primarily relate to securities borrowing and lending activity and are settled in accordance with customary contractual terms. Receivables from and payables to TD affiliates resulting from client cash sweep activity are generally settled in cash the next business day. Other receivables from and payables to affiliates of TD are generally settled in cash on a monthly basis.

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Table of Contents

14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The 2019 Senior Notes are jointly and severally and fully and unconditionally guaranteed by TD Ameritrade Online Holdings Corp. ("TDAOH"), a wholly-owned subsidiary of the Company. Presented below is condensed consolidating financial information for the Company, its guarantor subsidiary and its non-guarantor subsidiaries for the periods indicated. Because all other comprehensive income (loss) activity occurred on the parent company for all periods presented, condensed consolidating statements of comprehensive income are not presented.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2016
(Unaudited)
 
 
Parent
 
Guarantor
Subsidiary
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
 
 
(In millions)
ASSETS
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
655

 
$
2

 
$
1,260

 
$

 
$
1,917

Short-term investments available-for-sale
 
400

 
3

 
1

 

 
404

Cash and investments segregated and on
deposit for regulatory purposes
 

 

 
7,064

 

 
7,064

Receivable from brokers, dealers and
clearing organizations
 

 

 
1,293

 

 
1,293

Receivable from clients, net
 

 

 
12,162

 

 
12,162

Investments in subsidiaries
 
5,754

 
5,640

 

 
(11,394
)
 

Receivable from affiliates
 
5

 
1

 
95

 
(5
)
 
96

Goodwill
 

 

 
2,467

 

 
2,467

Acquired intangible assets, net
 

 
146

 
449

 

 
595

Other, net
 
168

 
15

 
998

 
(72
)
 
1,109

Total assets
 
$
6,982

 
$
5,807

 
$
25,789

 
$
(11,471
)
 
$
27,107

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
Payable to brokers, dealers and
clearing organizations
 
$

 
$

</