NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Month and Six Month Periods Ended March 31, 2020 and 2019
(Unaudited)
1. Basis of Presentation, Organization and Recent Accounting Pronouncements
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, 2019.
Organization
The Company provides securities brokerage services, including trade execution, clearing services and margin lending, through its broker-dealer subsidiaries; futures and foreign exchange trade execution services through its futures commission merchant ("FCM") and forex dealer member ("FDM") subsidiary; and bundled retirement plan solutions to plan sponsors and their advisors through its state-chartered trust company subsidiary. The Company also provides cash sweep and deposit account products through third-party relationships, including relationships with affiliates.
In March 2020, the World Health Organization declared the spread of the coronavirus ("COVID-19") a worldwide pandemic. The pandemic has negatively impacted the global economy and is affecting financial markets, causing significant market volatility and erosion of market value. The Company is actively monitoring the impact of COVID-19 on its business, financial condition, liquidity, operations, employees, clients and business partners. In response to the pandemic and for the protection of the Company's employees, clients and business partners, the Company has implemented remote work arrangements for nearly 100% of its employees, has restricted business travel and has temporarily closed its retail branches. To date, with the Company's ability to meet a vast majority of its clients' needs through its technology-based platforms and services, these arrangements have not materially affected the Company's ability to maintain its business operations, including the operation of financial reporting systems, internal control over financial reporting, and disclosure controls and procedures. Based on information available as of the date of this report, the Company does not expect the pandemic to have a material adverse impact to its results of operations and cash flows in the near term; although, given the daily evolution of the pandemic and the global responses to curb its spread, the Company is currently unable to estimate the long-term effects of the pandemic on its financial condition, results of operations or cash flows.
On November 24, 2019, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with The Charles Schwab Corporation ("Schwab") and Americano Acquisition Corp., a wholly-owned subsidiary of Schwab. The Merger Agreement was included as Exhibit 2.1 to the Company's Form 8-K filed with the SEC on November 27, 2019. Upon the terms and subject to the conditions of the Merger Agreement, Americano Acquisition Corp. will merge with and into the Company (the "Merger"), with the Company surviving as a wholly-owned subsidiary of Schwab. Pursuant to and subject to the terms of the Merger Agreement, at the effective time of the Merger, each share of the Company's common stock, $0.01 par value, issued and outstanding immediately prior to the effective time of the Merger (other than treasury shares held by the Company and certain shares held by Schwab), will be converted into the right to receive 1.0837 shares of Schwab's voting common stock, $0.01 par value (the "Merger Consideration"); however, if the Merger Consideration issuable in respect of shares of the Company's common stock owned by The Toronto-Dominion Bank ("TD") and its affiliates as of immediately prior to the effective time of the Merger, together with any other shares of Schwab common stock then owned by TD and its affiliates, would equal a number of shares of Schwab common stock exceeding 9.9% (or such lower percentage of shares of Schwab common stock as the Federal Reserve Board permits TD to acquire in the Merger consistent with a determination that TD does not control Schwab for purposes of the Bank Holding Company Act of 1956, as amended, or the Home Owners' Loan Act of 1933, as amended) of the issued and outstanding shares of Schwab common stock as of immediately following the effective time of the Merger, then TD will receive one share of nonvoting common stock of Schwab in lieu of each such excess share of Schwab common stock. Completion of the Merger is subject to certain conditions, including obtaining the necessary approvals from stockholders of both the Company and Schwab, the satisfaction of certain regulatory approvals and other customary closing conditions. The parties expect the transaction to close during the second half of calendar year 2020.
For the three and six months ended March 31, 2020, the Company incurred $8 million and $34 million, respectively, of costs related to the proposed Merger, which are included in professional services on the Condensed Consolidated Statements of Income.
Recently Adopted Accounting Pronouncements
ASU 2016-02 — On October 1, 2019, the Company adopted Accounting Standards Update ("ASU") 2016-02, Leases, by applying the standard at the adoption date, recognizing a cumulative-effect adjustment to the opening balance of retained earnings. As a result, restated financial information and the additional disclosures required under the new standard will not be provided for the comparative periods presented. The new guidance requires quantitative and qualitative disclosures that provide information about the amounts related to leasing arrangements recorded in the condensed consolidated financial statements. The Company elected a package of practical expedients available under the new guidance, which allows an entity to not reassess prior conclusions related to existing contracts containing leases, lease classification and initial direct costs. In addition, the Company has elected to apply the short-term lease exception for lease arrangements with a maximum term of 12 months or less. Upon the adoption of the lease standard, the Company recognized a right-of-use ("ROU") asset and a lease liability on the Condensed Consolidated Balance Sheet related to non-cancelable operating leases.
The cumulative effect of the changes made to the Company's Condensed Consolidated Balance Sheet as of October 1, 2019 for the adoption of ASU 2016-02 were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019
|
|
Adjustments from Adoption of
ASU 2016-02
|
|
Balance at
October 1, 2019
|
Assets:
|
|
|
|
|
|
|
Other assets
|
|
$
|
308
|
|
|
$
|
341
|
|
(1
|
)
|
$
|
649
|
|
Liabilities:
|
|
|
|
|
|
|
Accounts payable and other liabilities
|
|
884
|
|
|
342
|
|
(2
|
)
|
1,226
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
Retained earnings
|
|
8,580
|
|
|
(1
|
)
|
(3
|
)
|
8,579
|
|
(1) Adjustments include the following: (a) an increase of $347 million for the recognition of the ROU asset and (b) a decrease of $6 million for lease payments made to lessors at or before the commencement date, which were reclassified to the ROU lease liability upon the adoption of the lease standard.
(2) Adjustments include the following: (a) an increase of $379 million for the recognition of the ROU lease liability and (b) decreases of $30 million for deferred rent and $7 million related to the early termination of lease obligations, which were reclassified to the ROU asset upon the adoption of the lease standard.
|
|
(3)
|
Represents the impact of a lease obligation which had no future benefit upon the adoption of the lease standard.
|
The adoption of this standard did not have a material impact on the Company's results of operations or cash flows. See Note 6 for additional information regarding the Company's operating leases.
Recently Issued Accounting Pronouncements
ASU 2020-04 — In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting if certain criteria are met. The amendments in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022. The Company is evaluating the guidance and the potential impact of adopting ASU 2020-04 on its condensed consolidated financial statements.
ASU 2019-12 — In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in Accounting Standards Codification ("ASC") Topic 740, Income Taxes. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 will be effective for the Company's fiscal year beginning October 1, 2021, with early adoption permitted. The transition requirements are dependent upon each amendment within this update and will be applied either prospectively or retrospectively. The Company does not expect this ASU to have a material impact on its condensed consolidated financial statements.
ASU 2016-13 — In June 2016, the FASB issued 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 an entity's
expected credit losses on financial instruments and other commitments to extend credit 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. Subsequent to issuing ASU 2016-13, the FASB has issued additional standards for the purpose of clarifying certain aspects of ASU 2016-13, as well as providing codification improvements and targeted transition relief under the standard. The subsequently issued ASUs have the same effective date and transition requirements as ASU 2016-13. ASU 2016-13 will be effective for the Company's fiscal year beginning October 1, 2020, using a modified retrospective approach. Early adoption is permitted. The Company is currently assessing the impact this ASU will have on its condensed consolidated financial statements.
2. Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
The Company's cash and cash equivalents is summarized in the following table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
September 30,
2019
|
Broker-dealer subsidiaries
|
|
$
|
1,870
|
|
|
$
|
2,260
|
|
Corporate
|
|
1,657
|
|
|
366
|
|
Futures commission merchant and forex dealer member subsidiary
|
|
96
|
|
|
94
|
|
Trust company subsidiary
|
|
53
|
|
|
124
|
|
Investment advisory subsidiaries
|
|
53
|
|
|
8
|
|
Total cash and cash equivalents
|
|
$
|
3,729
|
|
|
$
|
2,852
|
|
Capital requirements may limit the amount of cash available for dividend from the broker-dealer, FCM/FDM and trust company subsidiaries to the Parent.
The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported within the Condensed Consolidated Balance Sheets to the total of the same amounts shown in the Condensed Consolidated Statements of Cash Flows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
September 30,
2019
|
Cash and cash equivalents
|
|
$
|
3,729
|
|
|
$
|
2,852
|
|
Restricted cash and restricted cash equivalents included in cash and investments segregated and on deposit for regulatory purposes
|
|
16,625
|
|
|
7,341
|
|
Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the Condensed Consolidated Statements of Cash Flows
|
|
$
|
20,354
|
|
|
$
|
10,193
|
|
Amounts included in restricted cash and restricted cash equivalents consist primarily of qualified deposits in special reserve bank accounts for the exclusive benefit of clients under Rule 15c3-3 of the Securities Exchange Act of 1934 (the "Exchange Act") and other regulations. Restricted cash equivalents consists of highly-liquid investments with an original maturity of three months or less.
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):
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
September 30,
2019
|
U.S. government debt securities
|
|
$
|
9,368
|
|
|
$
|
4,369
|
|
Cash in demand deposit accounts
|
|
6,789
|
|
|
2,304
|
|
U.S. government agency mortgage-backed securities
|
|
2,114
|
|
|
1,318
|
|
Reverse repurchase agreements (collateralized by U.S. government debt securities)
|
|
1,000
|
|
|
500
|
|
Cash on deposit with futures commission merchants
|
|
230
|
|
|
168
|
|
U.S. government debt securities on deposit with futures commission merchant
|
|
—
|
|
|
25
|
|
Total
|
|
$
|
19,501
|
|
|
$
|
8,684
|
|
4. Investments Available-for-Sale
The following tables present the amortized cost and fair value of available-for-sale securities (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
U.S. Treasury securities(1)
|
|
$
|
1,590
|
|
|
$
|
206
|
|
|
$
|
—
|
|
|
$
|
1,796
|
|
(1) As of March 31, 2020, the Company had pledged $1.2 billion of available-for-sale securities as collateral for repurchase agreements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
1,591
|
|
|
$
|
77
|
|
|
$
|
—
|
|
|
$
|
1,668
|
|
The following table presents the contractual maturities of available-for-sale securities as of March 31, 2020 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Fair Value
|
Available-for-sale U.S. Treasury securities:
|
|
|
|
|
Due within one to five years
|
|
$
|
583
|
|
|
$
|
644
|
|
Due within five to ten years
|
|
618
|
|
|
692
|
|
Due after ten years
|
|
389
|
|
|
460
|
|
Total available-for-sale U.S. Treasury securities
|
|
$
|
1,590
|
|
|
$
|
1,796
|
|
5. Income Taxes
The Company's effective income tax rate for the six months ended March 31, 2020 and 2019 was 24.4% and 23.7%, respectively. The provision for income taxes for the six months ended March 31, 2020 included $7 million of net favorable adjustments related to state income tax matters. This item had a favorable impact on the Company's earnings for the six months ended March 31, 2020 of approximately $0.01 per share. The provision for income taxes for the six months ended March 31, 2019 included $18 million of favorable adjustments related to state income tax matters and a $3 million income tax benefit resulting from the vesting of equity-based compensation. These items had a favorable impact on the Company's earnings for the six months ended March 31, 2019 of approximately $0.04 per share.
6. Leases
The Company enters into various non-cancelable operating leases for certain facilities, including corporate offices, retail branches and data centers. The Company determines if an arrangement is a lease at inception. Operating leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement or remeasurement date of a lease based on the present value of lease payments over the lease term. The Company utilizes an incremental borrowing rate to determine the present value of lease payments for each lease, as the lease agreements do not provide an implicit rate. The estimated incremental borrowing rate reflects a secured rate and is based on the term of the lease and the interest rate environment at the lease commencement or remeasurement date. Operating lease ROU assets include (1) lease payments made at or before the commencement date and (2) initial indirect costs; and exclude lease incentives. The Company's lease terms may include options to extend or terminate the lease. Only those renewal and termination options which the Company is reasonably certain of exercising are included in the calculation of the lease liability.
The following tables present balance sheet and supplemental operating lease information (dollars in millions):
|
|
|
|
|
|
|
|
March 31, 2020
|
Balance Sheet Information:
|
|
|
Assets:
|
|
|
Other assets:
|
|
|
Operating lease right-of-use assets, net
|
|
$
|
325
|
|
Liabilities:
|
|
|
Accounts payable and other liabilities:
|
|
|
Operating lease liabilities
|
|
$
|
360
|
|
Supplemental Information:
|
|
|
Weighted-average remaining lease term (years)
|
|
8.3
|
|
Weighted-average discount rate
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2020
|
Supplemental Cash Flow Information:
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
33
|
|
Lease liabilities arising from obtaining right-of-use assets
|
|
$
|
15
|
|
The following table summarizes the amount and classification of operating lease expense for the periods indicated (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Condensed Consolidated
Statements of Income Classification
|
|
Three Months Ended March 31, 2020
|
|
Six Months Ended March 31, 2020
|
Operating lease costs, net (1)
|
|
Occupancy and equipment costs
|
|
$
|
19
|
|
|
$
|
38
|
|
|
|
(1)
|
Includes short-term lease costs and is net of sublease income. The short-term lease costs and sublease income are not material for the periods presented. Operating lease costs and sublease income include transactions with related parties, which are not material for the periods presented.
|
Operating lease expense is recognized on a straight-line basis over the lease term. The Company's lease agreements do not contain any material residual value guarantees or restrictive covenants.
The following table presents the maturities of lease liabilities as of March 31, 2020 (dollars in millions):
|
|
|
|
|
|
Fiscal Year
|
|
Operating Leases
|
2020 Remaining
|
|
$
|
8
|
|
2021
|
|
62
|
|
2022
|
|
54
|
|
2023
|
|
47
|
|
2024
|
|
44
|
|
Thereafter (to 2033)
|
|
192
|
|
Total lease payments
|
|
407
|
|
Amount representing interest
|
|
(47
|
)
|
Present value of lease liabilities
|
|
$
|
360
|
|
In accordance with the disclosure requirements for the adoption of ASU 2016-02, the Company is presenting its operating lease commitment table as of September 30, 2019, which was previously disclosed in Note 16 of the Company's annual report on Form 10-K for the fiscal year ended September 30, 2019 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Minimum Lease Payments
|
|
Sublease Income
|
|
Net Lease Commitments
|
2020
|
|
$
|
72
|
|
|
$
|
(2
|
)
|
|
$
|
70
|
|
2021
|
|
64
|
|
|
(1
|
)
|
|
63
|
|
2022
|
|
55
|
|
|
—
|
|
|
55
|
|
2023
|
|
49
|
|
|
—
|
|
|
49
|
|
2024
|
|
45
|
|
|
—
|
|
|
45
|
|
Thereafter (to 2033)
|
|
191
|
|
|
—
|
|
|
191
|
|
Total
|
|
$
|
476
|
|
|
$
|
(3
|
)
|
|
$
|
473
|
|
7. Long-term Debt and Other Borrowings
Long-term debt and other borrowings consist of the following (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
Face
Value
|
|
Unamortized Discounts and Debt Issuance Costs
|
|
Fair Value
Adjustment (1)
|
|
Net Carrying
Value
|
Other borrowings:
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
$
|
1,223
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,223
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
Senior Notes:
|
|
|
|
|
|
|
|
|
Variable-rate Notes due 2021
|
|
600
|
|
|
(2
|
)
|
|
—
|
|
|
598
|
|
2.950% Notes due 2022
|
|
750
|
|
|
(2
|
)
|
|
20
|
|
|
768
|
|
3.750% Notes due 2024
|
|
400
|
|
|
(3
|
)
|
|
—
|
|
|
397
|
|
3.625% Notes due 2025
|
|
500
|
|
|
(2
|
)
|
|
47
|
|
|
545
|
|
3.300% Notes due 2027
|
|
800
|
|
|
(8
|
)
|
|
88
|
|
|
880
|
|
2.750% Notes due 2029
|
|
500
|
|
|
(5
|
)
|
|
38
|
|
|
533
|
|
Subtotal - Long-term debt
|
|
3,550
|
|
|
(22
|
)
|
|
193
|
|
|
3,721
|
|
Total long-term debt and other borrowings
|
|
$
|
4,773
|
|
|
$
|
(22
|
)
|
|
$
|
193
|
|
|
$
|
4,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Face
Value
|
|
Unamortized Discounts and Debt Issuance Costs
|
|
Fair Value
Adjustment (1)
|
|
Net Carrying
Value
|
Senior Notes:
|
|
|
|
|
|
|
|
|
Variable-rate Notes due 2021
|
|
$
|
600
|
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
598
|
|
2.950% Notes due 2022
|
|
750
|
|
|
(3
|
)
|
|
6
|
|
|
753
|
|
3.750% Notes due 2024
|
|
400
|
|
|
(3
|
)
|
|
—
|
|
|
397
|
|
3.625% Notes due 2025
|
|
500
|
|
|
(3
|
)
|
|
25
|
|
|
522
|
|
3.300% Notes due 2027
|
|
800
|
|
|
(8
|
)
|
|
40
|
|
|
832
|
|
2.750% Notes due 2029
|
|
500
|
|
|
(5
|
)
|
|
(3
|
)
|
|
492
|
|
Total long-term debt
|
|
$
|
3,550
|
|
|
$
|
(24
|
)
|
|
$
|
68
|
|
|
$
|
3,594
|
|
|
|
(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.
|
Senior Notes — As of March 31, 2020 and September 30, 2019, the Company had $3.55 billion aggregate principal amount of unsecured Senior Notes (together, the "Senior Notes"). The fixed rate and variable rate Senior Notes pay interest semi-annually and quarterly, respectively, in arrears. Key information about the Senior Notes outstanding is summarized in the following table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
Description
|
|
Date Issued
|
|
Maturity Date
|
|
Aggregate Principal
|
|
Interest Rate
|
2021 Notes
|
|
October 30, 2018
|
|
November 1, 2021
|
|
$600
|
|
Variable
|
2022 Notes
|
|
March 4, 2015
|
|
April 1, 2022
|
|
$750
|
|
2.950%
|
2024 Notes
|
|
October 30, 2018
|
|
April 1, 2024
|
|
$400
|
|
3.750%
|
2025 Notes
|
|
October 17, 2014
|
|
April 1, 2025
|
|
$500
|
|
3.625%
|
2027 Notes
|
|
April 27, 2017
|
|
April 1, 2027
|
|
$800
|
|
3.300%
|
2029 Notes
|
|
August 13, 2019
|
|
October 1, 2029
|
|
$500
|
|
2.750%
|
Lines of Credit — TD Ameritrade Clearing, Inc. ("TDAC"), a clearing broker-dealer subsidiary of the Company, utilizes secured uncommitted lines of credit for short-term liquidity. Under these secured uncommitted lines, TDAC borrows on either a demand or short-term basis from two unaffiliated banks and pledges client margin securities as collateral. Advances under the secured uncommitted lines are dependent on TDAC having acceptable collateral as determined by each secured uncommitted credit agreement. At March 31, 2020, the terms of the secured uncommitted credit agreements do not specify borrowing limits. The availability of TDAC's secured uncommitted lines is subject to approval by the individual banks each time an advance is requested and may be denied. There were no borrowings outstanding under the secured uncommitted lines of credit as of March 31, 2020 and September 30, 2019.
Securities Sold Under Agreements to Repurchase (repurchase agreements) — Under repurchase agreements, the Company receives cash from the counterparty and provides U.S. government debt securities as collateral. The Company's repurchase agreements generally mature between seven and 90 days following the transaction date and are accounted for as secured borrowings. The remaining contractual maturities of the repurchase agreements with outstanding balances as of March 31, 2020 were less than seven days. The weighted average interest rate on the balances outstanding as of March 31, 2020 was 0.19%. There were no borrowings outstanding under repurchase agreements as of September 30, 2019. See "General Contingencies" in Note 9 for a discussion of the potential risks associated with repurchase agreements and how the Company mitigates those risks.
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 vast majority of this exposure, the Company has entered into fixed-for-variable interest rate swaps on each of the 2022 Notes, 2025 Notes, 2027 Notes and 2029 Notes (together, the "Hedged Senior Notes"). Each fixed-for-variable interest rate swap has a notional amount and a maturity date matching the aggregate principal amount and maturity date, respectively, for each of the respective Hedged Senior Notes.
The interest rate swaps effectively change the fixed-rate interest on the Hedged Senior 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 Hedged Senior Notes, and makes quarterly variable-rate interest payments based on three-month LIBOR plus (1) 0.9486% for the swap on the 2022 Notes, (2) 1.1022% for the swap on the 2025 Notes, (3) 1.0340% for the swap on the 2027 Notes and (4) 1.2000% for the swap on the 2029 Notes. As of March 31, 2020, the weighted average effective interest rate on the aggregate principal balance of the Senior Notes was 2.92%.
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 March 31,
|
|
Six Months Ended March 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Gain (loss) on fair value of interest rate swaps
|
|
$
|
165
|
|
|
$
|
34
|
|
|
$
|
125
|
|
|
$
|
86
|
|
Gain (loss) on fair value of hedged fixed-rate debt
|
|
(165
|
)
|
|
(34
|
)
|
|
(125
|
)
|
|
(86
|
)
|
Net gain (loss) recorded in interest on borrowings
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Balance Sheet Impact of Hedging Instruments — The following table summarizes the classification and the fair value of outstanding derivatives designated as hedging instruments on the Condensed Consolidated Balance Sheets (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
September 30,
2019
|
Pay-variable interest rate swaps designated as fair value hedges:
|
|
|
|
|
Other assets
|
|
$
|
193
|
|
|
$
|
71
|
|
Accounts payable and other liabilities
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
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 March 31, 2020 and September 30, 2019, the pay-variable interest rate swap counterparties had pledged $219 million and $86 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. As of September 30, 2019, the Company had pledged $3 million of collateral to the pay-variable interest rate swap counterparties in the form of cash. An asset for collateral pledged to the swap counterparties in the form of cash is recorded in other receivables on the Condensed Consolidated Balance Sheets.
TD Ameritrade Holding Corporation Senior Revolving Credit Facility — On April 21, 2017, the Parent entered into a credit agreement consisting of a senior unsecured committed revolving credit facility in the aggregate principal amount of $300 million (the "Parent Revolving Facility"). The maturity date of the Parent Revolving Facility is April 21, 2022. The obligations under the Parent Revolving Facility are not guaranteed by any subsidiary of the Parent.
The applicable interest rate under the Parent Revolving Facility is calculated as a per annum rate equal to, at the option of the Parent, (1) LIBOR plus an interest rate margin ("Parent Eurodollar loans") or (2) (i) the highest of (x) the prime rate, (y) the federal funds effective rate (or, if the federal funds effective rate is unavailable, the overnight bank funding rate) plus 0.50% or (z) the eurodollar rate assuming a one-month interest period plus 1.00%, plus (ii) an interest rate margin ("ABR loans"). The interest rate margin ranges from 0.875% to 1.50% for Parent Eurodollar loans and from 0% to 0.50% for ABR loans, determined by reference to the Company's public debt ratings. The Parent is obligated to pay a commitment fee ranging from 0.08% to 0.20% on any unused amount of the Parent Revolving Facility, determined by reference to the Company's public debt ratings. There were no borrowings outstanding under the Parent Revolving Facility as of March 31, 2020 and September 30, 2019. As of March 31, 2020, the interest rate margin would have been 1.125% for Parent Eurodollar loans and 0.125% for ABR loans, and the commitment fee was 0.125%, each determined by reference to the Company's public debt ratings.
TD Ameritrade Clearing, Inc. Senior Revolving Credit Facilities — As of March 31, 2020, TDAC had access to two senior unsecured committed revolving credit facilities with an aggregate principal amount of $1.45 billion, consisting of a $600 million (the "$600 Million Revolving Facility") and an $850 million (the "$850 Million Revolving Facility") senior revolving facility (together, the "TDAC Revolving Facilities"). The maturity dates of the $600 Million Revolving Facility and the $850 Million Revolving Facility are April 21, 2022 and May 14, 2020, respectively. On April 21, 2020, TDAC entered into an amendment to the $850 million Revolving Facility, which provides for a senior unsecured revolving credit facility in the aggregate principal amount of $850 million that matures on April 20, 2021 (the "Amended Credit Agreement"). For additional information regarding the Amended Credit Agreement, see Note 16, Subsequent Event.
The applicable interest rate under each of the TDAC Revolving Facilities is calculated as a per annum rate equal to, at the option of TDAC, (1) LIBOR plus an interest rate margin ("TDAC Eurodollar loans") or (2) the federal funds effective rate plus an interest rate margin ("Federal Funds Rate loans"). The interest rate margin ranges from 0.75% to 1.25% for both TDAC Eurodollar loans and Federal Funds Rate loans, determined by reference to the Company's public debt ratings. TDAC is obligated to pay commitment fees ranging from 0.07% to 0.175% and from 0.06% to 0.125% on any unused amounts of the $600 Million Revolving Facility and the $850 Million Revolving Facility, respectively, each determined by reference to the Company's public debt ratings. There were no borrowings outstanding under the TDAC Revolving Facilities as of March 31, 2020 and September 30, 2019. As of March 31, 2020, the interest rate margin under the TDAC Revolving Facilities would have been 1.00% for both TDAC Eurodollar loans and Federal Funds Rate loans, determined by reference to the Company's public debt ratings. As of March 31, 2020, the commitment fees under the $600 Million Revolving Facility and the $850 Million Revolving Facility were 0.10% and 0.08%, respectively, each determined by reference to the Company's public debt ratings.
8. Capital Requirements
The Company's broker-dealer subsidiaries are subject to the SEC Uniform Net Capital Rule (Rule 15c3-1 under the Exchange Act), administered by the SEC and the Financial Industry Regulatory Authority, which requires the maintenance of minimum net
capital, as defined. Net capital and the related net capital requirements may fluctuate on a daily basis. TDAC, the Company's clearing broker-dealer subsidiary, and TD Ameritrade, Inc., an introducing broker-dealer subsidiary of the Company, compute net capital under the alternative method as permitted by SEC 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 arising from client transactions. 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 net capital of less than (1) 5% of aggregate debit balances or (2) 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. As an FCM, TDAFF is required to maintain minimum adjusted net capital under CFTC Regulation 1.17 of the greater of (1) $1.0 million or (2) its futures risk-based capital requirement, equal to 8% of the total risk margin requirement for all futures and options on futures positions carried by the FCM in client and nonclient accounts. As an FDM, TDAFF is also subject to the net capital requirements under CFTC Regulation 5.7, which requires TDAFF to maintain minimum adjusted net capital of the greater of (1) any amount required under CFTC Regulation 1.17 as described above or (2) $20.0 million plus 5% of all foreign exchange liabilities owed to forex clients in excess of $10.0 million. In addition, an FCM and FDM must provide notice to the CFTC if its adjusted net capital amounts to less than (1) 110% of its risk-based capital requirement under CFTC Regulation 1.17, (2) 150% of its $1.0 million minimum dollar requirement or (3) 110% of $20.0 million plus 5% of all foreign exchange liabilities owed to forex clients in excess of $10.0 million.
Net capital and net capital requirements for the Company's broker-dealer 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
|
|
Ratio of Net
Capital to
Aggregate
Debit Balances
|
March 31, 2020
|
|
$
|
3,265
|
|
|
$
|
403
|
|
|
$
|
2,862
|
|
|
16.22
|
%
|
September 30, 2019
|
|
$
|
3,188
|
|
|
$
|
493
|
|
|
$
|
2,695
|
|
|
12.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TD Ameritrade, Inc.
|
Date
|
|
Net
Capital
|
|
Required
Net Capital
(Minimum Dollar
Requirement)
|
|
Net Capital
in Excess of
Required
Net Capital
|
March 31, 2020
|
|
$
|
331
|
|
|
$
|
0.25
|
|
|
$
|
331
|
|
September 30, 2019
|
|
$
|
289
|
|
|
$
|
0.25
|
|
|
$
|
289
|
|
Adjusted net capital and adjusted net capital requirements for the Company's FCM and FDM subsidiary are summarized in the following table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TD Ameritrade Futures & Forex LLC
|
Date
|
|
Adjusted Net
Capital
|
|
Required Adjusted Net Capital
($20 Million Plus 5% of All Foreign Exchange Liabilities Owed to Forex Clients in Excess of $10 Million)
|
|
Adjusted Net
Capital
in Excess of
Required
Adjusted Net
Capital
|
March 31, 2020
|
|
$
|
153
|
|
|
$
|
23
|
|
|
$
|
130
|
|
September 30, 2019
|
|
$
|
140
|
|
|
$
|
23
|
|
|
$
|
117
|
|
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. TDATC's Tier 1 capital was $43 million as of March 31, 2020 and September 30, 2019, which exceeded the required Tier 1 capital by $33 million and $22 million, respectively.
9. Commitments and Contingencies
Legal and Regulatory Matters
Order Routing Matters — In 2014, five putative class action complaints were filed regarding TD Ameritrade, Inc.'s routing of client orders and one putative class action was filed regarding Scottrade, Inc.'s routing of client orders. Five of the six cases were dismissed and the United States Court of Appeals, 8th Circuit, affirmed the dismissals in those cases that were appealed. The one remaining case is Roderick Ford (replacing Gerald Klein) v. TD Ameritrade Holding Corporation, et al., Case No. 8:14CV396 (U.S. District Court, District of Nebraska). In the remaining case, plaintiff alleges that, when routing client orders to various market centers, defendants did not seek best execution, and instead routed clients' orders to market venues that paid TD Ameritrade, Inc. the most money for order flow. Plaintiff alleges that defendants made misrepresentations and omissions regarding the Company's order routing practices. The complaint asserts claims of violations of Section 10(b) and 20 of the Exchange Act and SEC Rule 10b-5. The complaint seeks damages, injunctive relief, and other relief. Plaintiff filed a motion for class certification, which defendants opposed. On July 12, 2018, the Magistrate Judge issued findings and a recommendation that plaintiff's motion for class certification be denied. Plaintiff filed objections to the Magistrate Judge's findings and recommendation, which defendants opposed. On September 14, 2018, the District Judge sustained plaintiff's objections, rejected the Magistrate Judge's recommendation and granted plaintiff's motion for class certification. On September 28, 2018, defendants filed a petition requesting that the U.S. Court of Appeals, 8th Circuit, grant an immediate appeal of the District Court's class certification decision. The U.S. Court of Appeals, 8th Circuit, granted defendants' petition on December 18, 2018. Briefing on the appeal is complete. The Securities Industry and Financial Markets Association and the U.S. Chamber of Commerce have filed amicus curiae briefs in support of the Company's appeal. The Company intends to vigorously defend against this lawsuit and is unable to predict the outcome or the timing of the ultimate resolution of the lawsuit, or the potential loss, if any, that may result.
Litigation Relating to the Merger — Six complaints have been filed by purported stockholders of the Company challenging the Merger. The first, a putative class action complaint, was filed by Michael Kent in the United States District Court for the District of Delaware and is captioned Kent v. TD Ameritrade Holding Corporation et al., case number 1:20-cv-00388. The second complaint, filed in the United States District Court for the District of Delaware by Shiva Stein individually, is captioned Stein v. TD Ameritrade Holding Corporation et al., case number 1:20-cv-00410. The third complaint, filed in the United States District Court for the District of New Jersey by Marc Roth individually, is captioned Roth v. TD Ameritrade Holding Corporation et al., case number 2:20-cv-03425. The fourth complaint, filed in the United States District Court for the District of New Jersey by Harold Litwin individually, is captioned Litwin v. TD Ameritrade Holding Corporation et al., case number 2:20-cv-03569. The fifth, a putative class action complaint, filed in the United States District Court for the District of New Jersey by Audrey Bernstein, is captioned Bernstein v. TD Ameritrade Holding Corporation et al., case number 2:20-cv-03695. The sixth complaint, filed in the United States District Court for the Southern District of New York by Glenn Garrison individually, is captioned Garrison v. TD Ameritrade Holding Corporation et al., case number 1:20-cv-02850. The complaints generally allege, among other things, that the defendants named therein authorized the filing of a materially incomplete and misleading registration statement with the SEC. Among other remedies, the complaints seek to enjoin the stockholder vote at the TD Ameritrade special meeting to be held to approve the Merger and related matters and the closing of the Merger, as well as costs and attorneys' fees. The Company believes that the complaints are without merit but is unable to predict the outcome of the ultimate resolution of the lawsuits, or the potential loss, if any, that may result. In addition, a purported stockholder of the Company has made a demand pursuant to Section 220 of the Delaware General Corporation Law to inspect certain books and records of the Company relating to the proposed Merger. There can be no assurances that additional complaints or demands will not be filed or made with respect to the Merger.
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 $65 million as of March 31, 2020. 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.
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 and losses 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 connection with these activities, the Company also routes client orders for execution 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(s) 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 (or increasing value with respect to short positions) 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, options on 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 accounts 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 higher 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 lower 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 utilizes securities sold under agreements to repurchase (repurchase agreements) to finance its short-term liquidity and capital needs. Under these agreements, the Company receives cash from the counterparties and provides U.S. Treasury securities as collateral, allowing the counterparties the right to sell or repledge the collateral. These agreements expose the Company to credit losses in the event the counterparties cannot meet their obligations. The Company mitigates this risk by requiring credit approvals for counterparties, by monitoring the market value of pledged securities owned on a daily basis and requiring the counterparties to return cash or excess collateral pledged when necessary.
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):
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
September 30,
2019
|
Client margin securities
|
|
$
|
22.1
|
|
|
$
|
28.6
|
|
Stock borrowings
|
|
0.3
|
|
|
1.9
|
|
Total collateral available
|
|
$
|
22.4
|
|
|
$
|
30.5
|
|
|
|
|
|
|
Collateral loaned
|
|
$
|
1.6
|
|
|
$
|
3.2
|
|
Collateral repledged
|
|
7.7
|
|
|
4.6
|
|
Total collateral loaned or repledged
|
|
$
|
9.3
|
|
|
$
|
7.8
|
|
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
|
|
Condensed Consolidated Balance Sheet Classification
|
|
March 31,
2020
|
|
September 30,
2019
|
Cash
|
|
Receivable from brokers, dealers and clearing
organizations
|
|
$
|
1,158
|
|
|
$
|
545
|
|
U.S. government debt securities
|
|
Securities owned, at fair value
|
|
181
|
|
|
168
|
|
Total
|
|
$
|
1,339
|
|
|
$
|
713
|
|
The Company manages its sweep program through off-balance sheet arrangements with TD and unaffiliated third-party depository financial institutions (together, the "Sweep Program Counterparties"). The sweep program is offered to eligible clients whereby the client's uninvested cash is swept into FDIC-insured (up to specified limits) money market deposit accounts at the Sweep Program Counterparties. The Company earns revenue on client cash at the Sweep Program Counterparties based on the return of floating-rate and fixed-rate notional investments. The Company designates amounts and maturity dates for the fixed-rate notional investments within the sweep program portfolios, subject to certain limitations. In the event the Company instructs the Sweep Program Counterparties to withdraw a fixed-rate notional investment prior to its maturity, the Company may be required to reimburse the Sweep Program Counterparties for any losses incurred as a result of the early withdrawal. In order to mitigate the risk of potential loss due to an early withdrawal of fixed-rate notional investments, the Company maintains a certain level of short-term floating-rate investments within the sweep program portfolios to meet client cash demands. See "Insured Deposit Account Agreement" in Note 15 for a description of the sweep arrangement between the Company and TD.
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 likelihood that the Company would 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 and options on futures transactions on an omnibus account basis through unaffiliated FCMs. The Company also contracts with an external provider to facilitate foreign exchange trading for its clients. The Company has agreed to indemnify these unaffiliated FCMs and the external provider for any loss that they may incur from the client transactions introduced to them by the Company.
See "Insured Deposit Account Agreement" in Note 15 for a description of the guarantees included in that agreement.
10. 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, and are developed based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company's own assumptions about the assumptions other market participants would use in pricing the asset or liability, and are 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, U.S. government agency mortgage-backed securities, which consist of Ginnie Mae Conventional Residential Mortgages and Ginnie Mae Home Equity Conversion Mortgages, 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.
|
The following tables present the Company's fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and September 30, 2019 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
Assets:
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$
|
3,203
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,203
|
|
Investments segregated and on deposit for regulatory purposes:
|
|
|
|
|
|
|
|
|
U.S. government debt securities
|
|
—
|
|
|
9,368
|
|
|
—
|
|
|
9,368
|
|
U.S. government agency mortgage-backed securities
|
|
—
|
|
|
2,114
|
|
|
—
|
|
|
2,114
|
|
Subtotal - Investments segregated and on deposit for regulatory purposes
|
|
—
|
|
|
11,482
|
|
|
—
|
|
|
11,482
|
|
Securities owned:
|
|
|
|
|
|
|
|
|
U.S. government debt securities
|
|
—
|
|
|
411
|
|
|
—
|
|
|
411
|
|
Other
|
|
1
|
|
|
5
|
|
|
—
|
|
|
6
|
|
Subtotal - Securities owned
|
|
1
|
|
|
416
|
|
|
—
|
|
|
417
|
|
Investments available-for-sale:
|
|
|
|
|
|
|
|
|
U.S. government debt securities
|
|
—
|
|
|
1,796
|
|
|
—
|
|
|
1,796
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Pay-variable interest rate swaps(1)
|
|
—
|
|
|
193
|
|
|
—
|
|
|
193
|
|
Other
|
|
2
|
|
|
1
|
|
|
—
|
|
|
3
|
|
Subtotal - Other assets
|
|
2
|
|
|
194
|
|
|
—
|
|
|
196
|
|
Total assets at fair value
|
|
$
|
3,206
|
|
|
$
|
13,888
|
|
|
$
|
—
|
|
|
$
|
17,094
|
|
|
|
(1)
|
See "Fair Value Hedging" in Note 7 for details.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
Assets:
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$
|
2,486
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,486
|
|
Investments segregated and on deposit for regulatory purposes:
|
|
|
|
|
|
|
|
|
U.S. government debt securities
|
|
—
|
|
|
4,394
|
|
|
—
|
|
|
4,394
|
|
U.S. government agency mortgage-backed securities
|
|
—
|
|
|
1,318
|
|
|
—
|
|
|
1,318
|
|
Subtotal - Investments segregated and on deposit for regulatory purposes
|
|
—
|
|
|
5,712
|
|
|
—
|
|
|
5,712
|
|
Securities owned:
|
|
|
|
|
|
|
|
|
U.S. government debt securities
|
|
—
|
|
|
524
|
|
|
—
|
|
|
524
|
|
Other
|
|
2
|
|
|
6
|
|
|
—
|
|
|
8
|
|
Subtotal - Securities owned
|
|
2
|
|
|
530
|
|
|
—
|
|
|
532
|
|
Investments available-for-sale:
|
|
|
|
|
|
|
|
|
U.S. government debt securities
|
|
—
|
|
|
1,668
|
|
|
—
|
|
|
1,668
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Pay-variable interest rate swaps(1)
|
|
—
|
|
|
71
|
|
|
—
|
|
|
71
|
|
U.S. government debt securities
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Subtotal - Other assets
|
|
—
|
|
|
72
|
|
|
—
|
|
|
72
|
|
Total assets at fair value
|
|
$
|
2,488
|
|
|
$
|
7,982
|
|
|
$
|
—
|
|
|
$
|
10,470
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities:
|
|
|
|
|
|
|
|
|
Pay-variable interest rate swaps(1)
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
|
(1)
|
See "Fair Value Hedging" in Note 7 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.
U.S. government agency mortgage-backed securities — Fair values for mortgage-backed 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 and in markets that are not active, a market-derived prepayment curve, weighted average yields on the underlying collateral and spreads to benchmark indices. The Company validates the vendor pricing by periodically comparing it to pricing from two other
independent sources. 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 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 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. These financial instruments 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 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). Cash and investments segregated and on deposit for regulatory purposes also 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.
Securities sold under agreements to repurchase (repurchase agreements) included within other borrowings — Under repurchase agreements the Company receives cash from the counterparties and provides U.S. Treasury securities as collateral. The obligations to repurchase securities sold are reflected as a liability on the Condensed Consolidated Balance Sheets. Repurchase agreements are treated as collateralized financing transactions and are carried at amounts at which the securities will subsequently be repurchased, plus accrued interest. The Company's repurchase agreements are short-term in nature and accordingly the carrying value is a reasonable estimate of fair value (categorized as Level 2 of the fair value hierarchy).
Long-term debt — As of March 31, 2020, 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 $3.58 billion, compared to the aggregate carrying value of the Senior Notes on the Condensed Consolidated Balance Sheet of $3.72 billion. As of September 30, 2019, the Company's Senior Notes had an aggregate estimated fair value, based on quoted market prices, of approximately $3.67 billion, compared to the aggregate carrying value of the Senior Notes on the Condensed Consolidated Balance Sheet of $3.59 billion.
11. Offsetting Assets and Liabilities
Substantially all of the Company's securities sold under agreements to repurchase (repurchase agreements), 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 March 31, 2020 and September 30, 2019 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
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(5)
|
|
Collateral
Received or
Pledged
(Including
Cash)(6)
|
|
Net
Amount(7)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments segregated and on
deposit for regulatory purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse repurchase agreements
|
|
$
|
1,000
|
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
$
|
—
|
|
|
$
|
(1,000
|
)
|
|
$
|
—
|
|
Receivable from brokers, dealers
and clearing organizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits paid for
securities borrowed(1)
|
|
293
|
|
|
—
|
|
|
293
|
|
|
(49
|
)
|
|
(237
|
)
|
|
7
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-variable interest rate swaps
|
|
193
|
|
|
—
|
|
|
193
|
|
|
(193
|
)
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
1,486
|
|
|
$
|
—
|
|
|
$
|
1,486
|
|
|
$
|
(242
|
)
|
|
$
|
(1,237
|
)
|
|
$
|
7
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable to brokers, dealers
and clearing organizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits received for
securities loaned(2)(3)
|
|
$
|
1,625
|
|
|
$
|
—
|
|
|
$
|
1,625
|
|
|
$
|
(63
|
)
|
|
$
|
(1,277
|
)
|
|
$
|
285
|
|
Other borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase(4)
|
|
1,223
|
|
|
—
|
|
|
1,223
|
|
|
(1,223
|
)
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
2,848
|
|
|
$
|
—
|
|
|
$
|
2,848
|
|
|
$
|
(1,286
|
)
|
|
$
|
(1,277
|
)
|
|
$
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
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(5)
|
|
Collateral
Received or
Pledged
(Including
Cash)(6)
|
|
Net
Amount(7)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments segregated and on
deposit for regulatory purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse repurchase agreements
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
(500
|
)
|
|
$
|
—
|
|
Receivable from brokers, dealers
and clearing organizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits paid for
securities borrowed(1)
|
|
1,864
|
|
|
—
|
|
|
1,864
|
|
|
(38
|
)
|
|
(1,795
|
)
|
|
31
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-variable interest rate swaps
|
|
71
|
|
|
—
|
|
|
71
|
|
|
(71
|
)
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
2,435
|
|
|
$
|
—
|
|
|
$
|
2,435
|
|
|
$
|
(109
|
)
|
|
$
|
(2,295
|
)
|
|
$
|
31
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable to brokers, dealers
and clearing organizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits received for
securities loaned(2)(3)
|
|
$
|
3,189
|
|
|
$
|
—
|
|
|
$
|
3,189
|
|
|
$
|
(38
|
)
|
|
$
|
(2,821
|
)
|
|
$
|
330
|
|
Accounts payable and other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-variable interest rate swaps
|
|
3
|
|
|
—
|
|
|
3
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
3,192
|
|
|
$
|
—
|
|
|
$
|
3,192
|
|
|
$
|
(41
|
)
|
|
$
|
(2,821
|
)
|
|
$
|
330
|
|
|
|
(1)
|
Included in the gross amounts of deposits paid for securities borrowed is $90 million and $723 million as of March 31, 2020 and September 30, 2019, respectively, transacted through a risk-sharing program with the OCC, which guarantees the return of cash to the Company. See "General Contingencies" in Note 9 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 $1.04 billion and $2.48 billion as of March 31, 2020 and September 30, 2019, respectively, transacted through a risk-sharing program with the OCC, which guarantees the return of securities to the Company. See "General Contingencies" in Note 9 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 two business days. The following table summarizes the Company's gross liability for securities lending transactions by the class of securities loaned (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
September 30,
2019
|
Deposits received for securities loaned:
|
|
|
|
|
Equity securities
|
|
$
|
1,265
|
|
|
$
|
2,629
|
|
Exchange-traded funds
|
|
285
|
|
|
285
|
|
Closed-end funds
|
|
50
|
|
|
86
|
|
Real estate investment trusts
|
|
18
|
|
|
181
|
|
Other
|
|
7
|
|
|
8
|
|
Total
|
|
$
|
1,625
|
|
|
$
|
3,189
|
|
|
|
(4)
|
The collateral pledged includes available-for-sale U.S. government debt securities at fair value. All of the Company's repurchase agreements have a remaining contractual maturity of less than seven days and, upon default by either party, may be terminated at the option of the non-defaulting party. See "General Contingencies" in Note 9 for a discussion of the potential risks associated with repurchase agreements and how the Company mitigates those risks.
|
|
|
(5)
|
Amounts represent recognized assets and liabilities that are subject to enforceable master agreements with rights of setoff.
|
|
|
(6)
|
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 March 31, 2020 and September 30, 2019, the Company had received total collateral with a fair value of $1.52 billion and $2.43 billion, respectively, and pledged total collateral with a fair value of $2.57 billion and $2.86 billion, respectively.
|
|
|
(7)
|
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.
|
12. Accumulated Other Comprehensive Income (Loss)
The following tables present the net change in fair value recorded for each component of other comprehensive income before and after income tax for the periods indicated (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
|
|
Before Tax
|
|
Tax Effect
|
|
Net of Tax
|
|
Before Tax
|
|
Tax Effect
|
|
Net of Tax
|
Investments available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain
|
|
$
|
161
|
|
|
$
|
(39
|
)
|
|
$
|
122
|
|
|
$
|
9
|
|
|
$
|
(2
|
)
|
|
$
|
7
|
|
Cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for portion of realized loss amortized to net income(1)
|
|
1
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Other comprehensive income
|
|
$
|
162
|
|
|
$
|
(39
|
)
|
|
$
|
123
|
|
|
$
|
10
|
|
|
$
|
(2
|
)
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
|
2020
|
|
2019
|
|
|
Before Tax
|
|
Tax Effect
|
|
Net of Tax
|
|
Before Tax
|
|
Tax Effect
|
|
Net of Tax
|
Investments available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain
|
|
$
|
129
|
|
|
$
|
(31
|
)
|
|
$
|
98
|
|
|
$
|
25
|
|
|
$
|
(6
|
)
|
|
$
|
19
|
|
Cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for portion of realized loss amortized to net income(1)
|
|
2
|
|
|
—
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Other comprehensive income
|
|
$
|
131
|
|
|
$
|
(31
|
)
|
|
$
|
100
|
|
|
$
|
27
|
|
|
$
|
(6
|
)
|
|
$
|
21
|
|
(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 each component of accumulated other comprehensive income (loss) for the periods indicated (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Six Months Ended March 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Investments available-for-sale:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
34
|
|
|
$
|
5
|
|
|
$
|
58
|
|
|
$
|
(7
|
)
|
Other comprehensive income before reclassifications
|
|
122
|
|
|
7
|
|
|
98
|
|
|
19
|
|
Ending balance
|
|
$
|
156
|
|
|
$
|
12
|
|
|
$
|
156
|
|
|
$
|
12
|
|
Cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(16
|
)
|
|
$
|
(19
|
)
|
|
$
|
(17
|
)
|
|
$
|
(20
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
1
|
|
|
1
|
|
|
2
|
|
|
2
|
|
Ending balance
|
|
$
|
(15
|
)
|
|
$
|
(18
|
)
|
|
$
|
(15
|
)
|
|
$
|
(18
|
)
|
Total accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
18
|
|
|
$
|
(14
|
)
|
|
$
|
41
|
|
|
$
|
(27
|
)
|
Current period change
|
|
123
|
|
|
8
|
|
|
100
|
|
|
21
|
|
Ending balance
|
|
$
|
141
|
|
|
$
|
(6
|
)
|
|
$
|
141
|
|
|
$
|
(6
|
)
|
13. 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. There were no material antidilutive awards for the three and six months ended March 31, 2020 and 2019.
14. Revenue Recognition
The following tables set forth the disaggregation of the Company's revenue by major source for the periods indicated (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
Revenues:
|
|
|
|
|
Asset-based revenues:
|
|
|
|
|
Bank deposit account fees
|
|
$
|
444
|
|
|
$
|
430
|
|
Net interest revenue
|
|
332
|
|
|
362
|
|
Investment product fees
|
|
144
|
|
|
137
|
|
Total asset-based revenues
|
|
920
|
|
|
929
|
|
Transaction-based revenues:
|
|
|
|
|
Order routing revenue
|
|
220
|
|
|
119
|
|
Commissions (1)
|
|
206
|
|
|
326
|
|
Other
|
|
55
|
|
|
42
|
|
Total transaction-based revenues
|
|
481
|
|
|
487
|
|
Other revenues
|
|
79
|
|
|
35
|
|
Net revenues
|
|
$
|
1,480
|
|
|
$
|
1,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
|
2020
|
|
2019
|
Revenues:
|
|
|
|
|
Asset-based revenues:
|
|
|
|
|
Bank deposit account fees
|
|
$
|
899
|
|
|
$
|
858
|
|
Net interest revenue
|
|
690
|
|
|
737
|
|
Investment product fees
|
|
290
|
|
|
280
|
|
Total asset-based revenues
|
|
1,879
|
|
|
1,875
|
|
Transaction-based revenues:
|
|
|
|
|
Order routing revenue
|
|
355
|
|
|
248
|
|
Commissions(1)
|
|
338
|
|
|
690
|
|
Other
|
|
92
|
|
|
86
|
|
Total transaction-based revenues
|
|
785
|
|
|
1,024
|
|
Other revenues
|
|
108
|
|
|
68
|
|
Net revenues
|
|
$
|
2,772
|
|
|
$
|
2,967
|
|
(1) Effective October 3, 2019, the Company reduced its online exchange-listed stock, exchange traded funds (ETF) (domestic and Canadian) and option trade commissions from $6.95 to $0 per trade (plus $0.65 per contract and no exercise or assignment fees on option trades).
The amount of revenue recognized by the Company is measured based on the consideration specified in contracts with its clients. The Company recognizes revenue when a performance obligation is satisfied over time as the services are performed or at a point in time depending on the nature of the services provided as further discussed below.
Asset-Based Revenues
Asset-based revenues consists of bank deposit account fees, net interest revenue and investment product fees. The primary factors driving the Company's asset-based revenues are average balances and average rates. Average balances consist primarily of average client bank deposit account balances, average client margin balances, average segregated cash balances, average client credit balances, average fee-based investment balances and average securities borrowing and lending balances. Average rates consist of the average interest rates and fees earned and paid on such balances.
Bank deposit account fees
Bank deposit account fees consists of revenues earned and recognized over time resulting from a sweep program that is offered to eligible clients of the Company whereby clients' uninvested cash is swept off-balance sheet to FDIC-insured (up to specified limits) accounts with Sweep Program Counterparties participating in the program. These revenues are based on the return of floating-rate and fixed-rate notional investments, less the actual interest paid to clients and other applicable fees. Bank deposit account fees are collected from the Sweep Program Counterparties on a monthly basis. See "Insured Deposit Account Agreement" in Note 15 for a description of the sweep arrangement between the Company and TD.
Net interest revenue
Net interest revenue, which is generated from financial instruments covered by various other areas of GAAP, is not within the scope of ASC Topic 606, Revenue from Contracts with Customers, and is included in the table above to reconcile to net revenues disclosed within the Condensed Consolidated Statements of Income. Net interest revenue primarily consists of income generated by interest charged to clients on margin balances, net interest revenue from securities borrowed and securities loaned transactions and interest earned on client cash, net of interest paid to clients on their credit balances.
Investment product fees
Investment product fee revenue consists of revenues earned and recorded over time on client assets invested in money market mutual funds, other mutual funds and certain investment programs. Investment product fees also includes fees earned on client assets managed by independent registered investment advisors ("RIAs") utilizing the Company's trading and investing platforms. Investment product fees are collected from clients and RIAs on a monthly or quarterly basis. Primary revenue sources within investment product fees are described below.
The following tables present the significant components of investment product fees for the periods indicated (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
Investment product fees:
|
|
|
|
|
Mutual fund service fees
|
|
$
|
79
|
|
|
$
|
68
|
|
Investment program fees
|
|
63
|
|
|
61
|
|
Other
|
|
2
|
|
|
8
|
|
Total investment product fees
|
|
$
|
144
|
|
|
$
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
|
2020
|
|
2019
|
Investment product fees:
|
|
|
|
|
Mutual funds service fees
|
|
$
|
160
|
|
|
$
|
135
|
|
Investment program fees
|
|
127
|
|
|
129
|
|
Other
|
|
3
|
|
|
16
|
|
Total investment product fees
|
|
$
|
290
|
|
|
$
|
280
|
|
Mutual fund service fees includes shareholder services fees and SEC Rule 12b-1 service and distribution fees. Shareholder services fees are earned on the Company's client assets invested in money market mutual funds and other mutual funds for record-keeping and administrative services provided to these funds. The Company earns SEC Rule 12b-1 service and distribution fees for marketing and distribution services provided to these funds. The fees earned are based on contractual rates applied to the average daily net asset value of eligible shares of a respective fund held by the Company's clients. Shareholder services fees are earned over time and collected from the funds on a monthly or quarterly basis. SEC Rule 12b-1 fees are also earned over time and collected from the funds on a monthly or quarterly basis, as the variable consideration of a transaction price is no longer constrained and the value of consideration can be determined as discussed previously.
Investment program fees are earned through fees charged to clients enrolled in product offerings which are actively managed by TD Ameritrade Investment Management, LLC, a wholly-owned subsidiary of the Company. These fees are earned over time and are based on contractual rates applied to asset balances held by the Company's clients in these product offerings. Certain program fees are based on quarter-end balances and are collected from clients in advance, at the beginning of each calendar quarter. Revenues collected on a quarterly basis, less refunds for clients ceasing participation in the program, are recognized during the quarter as performance obligations are satisfied. Other program fees are based on average daily asset balances and collected from clients on a monthly basis.
The Company also earns investment program fees through referral and asset-based program fees on its client assets managed by independent RIAs utilizing the Company's platform. These fees are earned based on contractual rates applied to the client's average daily asset balances under management. Referral fees are earned over time and collected from the independent RIAs on a monthly or quarterly basis, as the variable consideration of a transaction price is no longer constrained and the value of consideration can be determined as discussed previously. Asset-based program fees are also earned over time and collected from the independent RIAs on a monthly or quarterly basis.
Transaction-Based Revenues
Transaction-based revenues primarily consists of order routing revenue and trading commissions earned on trade execution, net of promotional allowances. The primary factors driving the Company's transaction-based revenues are total trades and average commissions per trade. Commission rates are based on rates established by the Company, which vary by type of trade. Transaction-based revenues are earned and recognized at a point in time, on a trade-date basis, as clients execute trades. These trades are generally settled and trading commissions are collected from the Company's clients within one to two business days after the trade
date. Order routing revenues are generated from arrangements with market centers to receive cash payments and/or rebates in exchange for routing orders to these firms for execution and are generally collected from the market centers on a monthly basis. Securities owned by clients, including those that collateralize margin or similar transactions, are not reflected in the accompanying condensed consolidated financial statements.
Other Revenues
Other revenues primarily include proxy income, solicit and tender fees and other fees charged for ancillary services provided by the Company to its clients. In addition, other revenues include fair market value adjustments and gains/losses associated with investments held by the Company's broker-dealer subsidiaries. Other revenues generated from investments is covered by various other areas of GAAP, is not within the scope of ASC 606 and is included in the table above to reconcile to net revenues disclosed within the Condensed Consolidated Statements of Income. Proxy fee income is earned and collected at a point in time when the Company distributes proxy statements to its clients on behalf of a registrant and the revenue is based on the volume of proxies distributed and the rate per unit charged to each registrant. Solicit and tender fees are earned and collected from clients at a point in time when the Company has satisfied its obligation to maintain its client accounts holding securities affected by corporate actions.
Contract Balances
The following table presents the opening and closing balances of the Company's receivables from contracts with clients that are within the scope of ASC 606 on the Condensed Consolidated Balance Sheets (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Balances
|
|
|
Receivable from Clients
|
|
Receivable from Affiliates
|
|
Other Receivables
|
|
Total Receivables from
Contracts with Clients
|
Opening balance, September 30, 2019
|
|
$
|
25
|
|
|
$
|
7
|
|
|
$
|
125
|
|
|
$
|
157
|
|
Closing balance, March 31, 2020
|
|
26
|
|
|
3
|
|
|
183
|
|
|
212
|
|
Increase (decrease)
|
|
$
|
1
|
|
|
$
|
(4
|
)
|
|
$
|
58
|
|
|
$
|
55
|
|
The difference between the opening and closing balances of the Company's total receivables from contracts with clients primarily results from the timing difference between the Company's performance and the receipt of payments. No other significant contract assets or liabilities exist as of March 31, 2020 and September 30, 2019.
Unsatisfied Performance Obligations
The Company does not have any unsatisfied performance obligations subject to a practical expedient election under ASC 606.
15. Related Party Transactions
Transactions with TD and its Affiliates
As a result of the Company's acquisition of TD Waterhouse Group, Inc. during fiscal year 2006, TD became an affiliate of the Company. TD owned approximately 43% of the Company's common stock as of March 31, 2020. Pursuant to the stockholders agreement between TD and the Company, TD has the right to designate five of the 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 (up to specified limits) 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 had 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 was automatically renewed for an additional five-year term on July 1, 2018.
The fee earned on the IDA agreement is calculated based on two primary components: (1) 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 (2) the yield on floating-rate investments. As of March 31, 2020, the IDA portfolio was comprised of approximately 67% fixed-rate notional investments and 33% 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.
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 likelihood that the marketing fee calculation would result in a negative amount is remote. Accordingly, no contingent liability is carried on the Condensed Consolidated Balance Sheets for the IDA agreement. In the event the Company withdraws a notional investment prior to its maturity, the Company is required to reimburse the TD Depository Institutions an amount equal to the economic replacement value of the investment, as defined in the IDA agreement. See "General Contingencies" in Note 9 for a discussion of how the Company mitigates the risk of losses due to the early withdrawal of fixed-rate notional investments.
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 its Affiliates
|
|
|
Condensed Consolidated
Statement of Income Classification
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
Description
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Insured Deposit Account Agreement
|
|
Bank deposit account fees
|
|
$
|
417
|
|
|
$
|
398
|
|
|
$
|
842
|
|
|
$
|
800
|
|
Order Routing Agreement
|
|
Other revenues
|
|
9
|
|
|
6
|
|
|
15
|
|
|
12
|
|
Other
|
|
Various
|
|
5
|
|
|
2
|
|
|
7
|
|
|
17
|
|
Total revenues
|
|
$
|
431
|
|
|
$
|
406
|
|
|
$
|
864
|
|
|
$
|
829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses to TD and its Affiliates
|
|
|
Condensed Consolidated
Statement of Income Classification
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
Description
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Order Routing Agreement
|
|
Other expense
|
|
$
|
8
|
|
|
$
|
4
|
|
|
$
|
12
|
|
|
$
|
9
|
|
Other
|
|
Various
|
|
2
|
|
|
2
|
|
|
4
|
|
|
4
|
|
Total expenses
|
|
$
|
10
|
|
|
$
|
6
|
|
|
$
|
16
|
|
|
$
|
13
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
September 30,
2019
|
Assets:
|
|
|
|
|
Receivable from brokers, dealers and clearing organizations
|
|
$
|
68
|
|
|
$
|
—
|
|
Receivable from affiliates
|
|
89
|
|
|
112
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Payable to brokers, dealers and clearing organizations
|
|
$
|
27
|
|
|
$
|
44
|
|
Payable to affiliates
|
|
5
|
|
|
5
|
|
Accounts payable and other liabilities
|
|
2
|
|
|
2
|
|
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.
TD, along with other financial institutions, is participating as a lender under the Parent Revolving Facility and the TDAC Revolving Facilities. For additional information regarding the Company's revolving facilities, see Note 7, Long-term Debt and Other Borrowings. As of March 31, 2020 and September 30, 2019, the total lending commitment received from TD under these credit facilities was $221 million.
16. Subsequent Event
On April 21, 2020, TDAC entered into an amendment to the $850 million Revolving Credit Facility, which provides for a senior unsecured revolving credit facility in the aggregate principal amount of $850 million that matures on April 20, 2021 (the "Amended Credit Agreement"). Borrowings under the Amended Credit Agreement may be used for working capital needs and for general corporate purposes.
The applicable interest rate under the Amended Credit Agreement is calculated as a per annum rate equal to, at the option of TDAC, (1) LIBOR plus an interest rate margin ("Amended Eurodollar loans") or (2) the federal funds effective rate plus an interest rate margin ("Amended Federal Funds Rate loans"). The interest rate margin will range from 1.00% to 1.50% for both Amended Eurodollar loans and Amended Federal Funds Rate loans, determined by reference to the Company's public debt ratings. TDAC will be obligated to pay a commitment fee ranging from 0.20% to 0.35% on any unused amount of the Amended Credit Agreement, determined by reference to the Company's public debt ratings.
The Amended Credit Agreement contains negative covenants that limit or restrict, subject to certain exceptions, the incurrence of liens, indebtedness of TDAC, changes in nature of business, mergers, consolidations, and the sale of all or substantially all of the assets of TDAC. TDAC is also required to maintain minimum consolidated tangible net worth and is required to maintain compliance with minimum regulatory net capital requirements. The Amended Credit Agreement also contains customary affirmative covenants, including, but not limited to, compliance with applicable law, payment of taxes, maintenance of insurance, preservation of corporate existence, keeping of proper books of record and account and maintenance of properties.