16.Financial Instruments Subject to Off-Balance Sheet Credit Risk or Concentration Risk

Off-Balance Sheet Credit Risk

Resale and repurchase agreements: Schwab enters into collateralized resale agreements principally with other broker-dealers, which could result in losses in the event the counterparty fails to purchase the securities held as collateral for the cash advanced and the fair value of the securities declines. To mitigate this risk, Schwab requires that the counterparty deliver securities to a custodian, to be held as collateral, with a fair value in excess of the resale price. Schwab also sets standards for the credit quality of the counterparty, monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest, and requires additional collateral where deemed appropriate. At December 31, 2015 and 2014, the fair value of collateral received in connection with resale agreements that are available to be repledged or sold was $8.2 billion and $10.4 billion, respectively. Schwab utilizes the collateral provided under these resale agreements to meet obligations under broker-dealer client protection rules, which place limitations on its ability to access such segregated securities. For Schwab to repledge or sell this collateral, it would be required to deposit cash and/or securities of an equal amount into its segregated reserve bank accounts in order to meet its segregated cash and investment requirement. The Company’s resale agreements are not subject to master netting arrangements.

Securities lending: The Company loans client securities temporarily to other brokers in connection with its securities lending activities and receives cash as collateral for the securities loaned. Increases in security prices may cause the fair 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 or provide additional cash collateral, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its client obligations. The Company mitigates this risk by requiring credit approvals for counterparties, monitoring the fair value of securities loaned, and requiring additional cash as collateral when necessary. The fair value of client securities pledged in securities lending transactions to other broker-dealers was $1.9 billion and $1.3 billion at December 31, 2015 and 2014, respectively. The Company has also pledged a portion of its securities owned in connection with securities lending transactions to other broker-dealers. Additionally, the Company borrows securities from other broker-dealers to fulfill short sales by clients and delivers cash to the lender in exchange for the securities. The fair value of these borrowed securities was $72 million and $88 million at December 31, 2015 and 2014, respectively. All of the Company’s securities lending transactions are subject to enforceable master netting arrangements with other broker-dealers. However, the Company does not net securities lending transactions and therefore, the Company’s securities loaned and securities borrowed are presented gross in the consolidated balance sheets.

The following table presents information about the Company’s resale agreements and securities lending activity to enable the users of the Company’s financial statements to evaluate the potential effect of rights of setoff between these recognized assets and recognized liabilities.


							Gross Amounts Not Offset in the
			Gross Amounts		Net Amounts		Consolidated Balance Sheet
		Gross	Offset in the		Presented in the
		Assets/	Consolidated		Consolidated		Counterparty						Net
		Liabilities	Balance Sheet		Balance Sheet		Offsetting		Collateral				Amount
December 31, 2015
Assets:
Resale agreements (1)	$	8,088	$	-	$	8,088	$	-	$	(8,088)	(2)	$	-
Securities borrowed (3)		198		-		198		(70)		(127)			1
Total	$	8,286	$	-	$	8,286	$	(70)	$	(8,215)		$	1
Liabilities:
Securities loaned (4,5)	$	2,233	$	-	$	2,233	$	(70)	$	(1,990)		$	173
Total	$	2,233	$	-	$	2,233	$	(70)	$	(1,990)		$	173

December 31, 2014
Assets:
Resale agreements (1)	$	10,186	$	-	$	10,186	$	-	$	(10,186)	(2)	$	-
Securities borrowed (3)		187		-		187		(69)		(117)			1
Total	$	10,373	$	-	$	10,373	$	(69)	$	(10,303)		$	1
Liabilities:
Securities loaned (4,5)	$	1,477	$	-	$	1,477	$	(69)	$	(1,293)		$	115
Total	$	1,477	$	-	$	1,477	$	(69)	$	(1,293)		$	115

(1)	Included in cash and investments segregated and on deposit for regulatory purposes in the Company’s consolidated balance sheets.
(2)	Actual collateral was greater than or equal to 102% of the related assets.
(3)	Included in receivables from brokers, dealers, and clearing organizations in the Company’s consolidated balance sheets.
(4)	Included in payables to brokers, dealers, and clearing organizations in the Company’s consolidated balance sheets.
(5)	Securities loaned are predominantly comprised of equity securities with overnight and continuous remaining contractual maturities.

Client trade settlement: The Company is obligated to settle transactions with brokers and other financial institutions even if the Company’s clients fail to meet their obligations to the Company. Clients are required to complete their transactions on settlement date, generally three business days after the trade date. If clients do not fulfill their contractual obligations, the Company may incur losses. The Company has established procedures to reduce this risk by requiring deposits from clients in excess of amounts prescribed by regulatory requirements for certain types of trades, and therefore the potential to make payments under these client transactions is remote. Accordingly, no liability has been recognized for these transactions.

Margin lending: The Company provides margin loans to its clients which are collateralized by securities in their brokerage accounts and may be liable for the margin requirement of its client margin securities transactions. As clients write options or sell securities short, the Company may incur losses if the clients do not fulfill their obligations and the collateral in client accounts is insufficient to fully cover losses which clients may incur from these strategies. To mitigate this risk, the Company monitors required margin levels and requires clients to deposit additional collateral, or reduce positions to meet minimum collateral requirements. The contractual value of margin loans to clients was $15.8 billion and $14.3 billion at December 31, 2015 and 2014, respectively.

Clients with margin loans have agreed to allow the Company to pledge collateralized securities in their brokerage accounts in accordance with federal regulations. Under such regulations, the Company was allowed to pledge securities with a fair value of $22.4 billion and $20.4 billion at December 31, 2015 and 2014, respectively. The fair value of client securities pledged to fulfill the short sales of its clients was $1.3 billion and $1.5 billion at December 31, 2015 and 2014, respectively. The fair value of client securities pledged to fulfill the Company’s proprietary short sales, which resulted from facilitating clients’ dividend reinvestment elections, was $303 million and $216 million at December 31, 2015 and 2014, respectively. The Company may also pledge client securities to fulfill client margin requirements for open option contracts established with the Options Clearing Corporation. The fair value of these pledged securities to the Options Clearing Corporation was $1.5 billion and $1.3 billion at December 31, 2015 and 2014, respectively.

Financial Guarantees: See “Notes – 15. Commitments and Contingencies.”

Concentration Risk

The Company has exposure to concentration risk when holding large positions of financial instruments collateralized by assets with similar economic characteristics or in securities of a single issuer or industry.

The fair value of the Company’s investments in mortgage-backed securities totaled $72.3 billion at December 31, 2015. Of these, $71.0 billion were issued by U.S. agencies and $1.3 billion were issued by private entities (non-agency securities). The fair value of the Company’s investments in mortgage-backed securities totaled $53.8 billion at December 31, 2014. Of these, $52.5 billion were issued by U.S. agencies and $1.3 billion were non-agency securities. These U.S. agency and non-agency securities are included in securities available for sale and securities held to maturity in the consolidated balance sheets.

The fair value of the Company’s investments in corporate debt securities and commercial paper totaled $11.1 billion and $8.1 billion at December 31, 2015 and 2014, respectively, with the majority issued by institutions in the financial services industry. These securities are included in securities available for sale, cash and cash equivalents, and other securities owned.

The Company’s bank loans include $7.5 billion and $7.4 billion of adjustable rate First Mortgages at December 31, 2015 and 2014, respectively. At December 31, 2015, approximately 39% of these mortgages consisted of loans with interest-only payment terms. At December 31, 2015, the interest rates on approximately 53% of these interest-only loans are not scheduled to reset for three or more years. For additional detail on concentrations in bank loans, see “Notes – 6. Bank Loans and Related Allowance for Loan Losses.”

No single client accounted for more than 10% of the Company’s net revenues in 2015, 2014, or 2013. Substantially all of the Company’s revenues and assets are generated or located in the U.S. The percentage of Schwab’s total client accounts located in California was 23% at December 31, 2015, 2014, and 2013.

The Company also has exposure to concentration risk from its margin and securities lending activities collateralized by securities of a single issuer or industry. This concentration risk is mitigated by collateral arrangements that require the fair value of such collateral exceeds the amounts loaned, as described above.