REGULATORY REQUIREMENTS

Broker-Dealer and FCM Capital Requirements

The Company’s U.S. broker-dealer subsidiaries are subject to the Uniform Net Capital Rule under the Securities Exchange Act of 1934 administered by the SEC and FINRA, which requires the maintenance of minimum net capital. The minimum net capital requirements can be met under either the Aggregate Indebtedness method or the Alternative method. Under the Aggregate Indebtedness method, a broker-dealer is required to maintain minimum net capital of the greater of 6²/₃% of its aggregate indebtedness, as defined, or a minimum dollar amount. Under the Alternative method, a broker-dealer is required to maintain net capital equal to the greater of $250,000 or 2% of aggregate debit balances arising from customer transactions. The method used depends on the individual U.S. broker-dealer subsidiary. As FCMs, the Company’s U.S. broker-dealer subsidiaries are also subject to CFTC net capital requirements, including the maintenance of adjusted net capital equal to or in excess of the greater of (1) $1,000,000 (2) the FCM's risk-based capital requirement, computed as 8% of the total risk margin requirements for all positions carried in customer and non-customer accounts, (3) the amount of adjusted net capital required by the NFA or (4) the amount of net capital required by the SEC's net capital rule. The Company’s international broker-dealer subsidiary is subject to capital requirements determined by its respective regulator.

At June 30, 2017 and December 31, 2016, all of the Company’s broker-dealer subsidiaries met minimum net capital requirements. The tables below summarize the minimum capital requirements and excess capital for the Company’s broker-dealer subsidiaries at June 30, 2017 and December 31, 2016 (dollars in millions):



	Required Net Capital		Net Capital		Excess Net Capital
June 30, 2017:
E*TRADE Securities⁽¹⁾⁽²⁾	$	181	$	1,062	$	881
OptionsHouse⁽³⁾	1		37		36
Other broker-dealer	—		23		23
Total	$	182	$	1,122	$	940
December 31, 2016:
E*TRADE Securities⁽¹⁾	$	158	$	969	$	811
OptionsHouse⁽³⁾	1		22		21
Other broker-dealer	—		21		21
Total	$	159	$	1,012	$	853


(1)	Elected to use the Alternative method to compute required net capital.


(2)	E*TRADE Securities paid dividends of $120 million to the parent company during the six months ended June 30, 2017.


(3)	Elected to use the Aggregate Indebtedness method to compute net capital; however, as OptionsHouse is an FCM, the prescribed fixed-dollar minimum capital requirement is $1 million.

Bank Capital Requirements

E*TRADE Financial and E*TRADE Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on E*TRADE Financial’s and E*TRADE Bank’s financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, E*TRADE Financial and E*TRADE Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. In addition, E*TRADE Bank may not pay dividends to the parent company without the non-objection, or in certain cases the approval, of its regulators, and any loans by E*TRADE Bank to the parent company and its other non-bank subsidiaries are subject to various quantitative, arm’s length, collateralization and other requirements. E*TRADE Financial’s and E*TRADE Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require E*TRADE Financial and E*TRADE Bank to meet minimum Tier 1 leverage, common equity Tier 1 capital, Tier 1 risk-based capital and total risk-based capital ratios. Events beyond management's control, such as deterioration in credit markets, could adversely affect future earnings and E*TRADE Financial’s and E*TRADE Bank’s ability to meet future capital requirements. E*TRADE Financial and E*TRADE Bank were categorized as "well capitalized" under the regulatory framework for prompt corrective action for the periods presented in the table below (dollars in millions):



	June 30, 2017										December 31, 2016
	Actual				Well Capitalized Minimum Capital				Excess Capital		Actual				Well Capitalized Minimum Capital				Excess Capital
	Amount		Ratio		Amount		Ratio		Amount		Amount		Ratio		Amount		Ratio		Amount
E*TRADE Financial⁽¹⁾
Tier 1 leverage	$	4,045	7.5	%	$	2,711	5.0	%	$	1,334	$	3,610	7.8	%	$	2,316	5.0	%	$	1,294
Common equity Tier 1 capital	$	3,775	35.0	%	$	701	6.5	%	$	3,074	$	3,483	37.0	%	$	612	6.5	%	$	2,871
Tier 1 risk-based capital	$	4,045	37.5	%	$	862	8.0	%	$	3,183	$	3,610	38.3	%	$	754	8.0	%	$	2,856
Total risk-based capital	$	4,575	42.4	%	$	1,078	10.0	%	$	3,497	$	4,148	44.0	%	$	942	10.0	%	$	3,206



	June 30, 2017										December 31, 2016
	Actual				Well Capitalized Minimum Capital				Excess Capital		Actual				Well Capitalized Minimum Capital				Excess Capital
	Amount		Ratio		Amount		Ratio		Amount		Amount		Ratio		Amount		Ratio		Amount
E*TRADE Bank⁽¹⁾
Tier 1 leverage	$	3,453	8.0	%	$	2,172	5.0	%	$	1,281	$	3,132	8.8	%	$	1,786	5.0	%	$	1,346
Common equity Tier 1 capital	$	3,453	35.1	%	$	640	6.5	%	$	2,813	$	3,132	38.3	%	$	532	6.5	%	$	2,600
Tier 1 risk-based capital	$	3,453	35.1	%	$	787	8.0	%	$	2,666	$	3,132	38.3	%	$	655	8.0	%	$	2,477
Total risk-based capital	$	3,569	36.3	%	$	984	10.0	%	$	2,585	$	3,237	39.5	%	$	819	10.0	%	$	2,418

(1)

The Basel III final rule introduces a capital conservation buffer that limits a banking organization’s ability to make capital distributions and discretionary bonus payments to executive officers if a banking organization fails to maintain a Common Equity Tier 1 capital conservation buffer of more than 2.5%, on a fully phased-in basis, of total risk-weighted assets above each of the following minimum risk-based capital ratio requirements: Common Equity Tier 1 capital (4.5%), Tier 1 (6.0%), and total risk-based capital (8.0%). This requirement was effective beginning on January 1, 2016, and will be fully phased-in by 2019. Certain new regulatory deductions and adjustments are subject to a phase-in period over a four year period, beginning at 40% in 2015 and fully implemented at 100% in 2018.