Edgar Filing: TD AMERITRADE HOLDING CORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

AMTD_2015.3.31_10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended March 31, 2015



¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from to

Commission file number: 1-35509

TD Ameritrade Holding Corporation

(Exact name of registrant as specified in its charter)



Delaware		82-0543156
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

200 South 108th Avenue, Omaha, Nebraska, 68154

(Address of principal executive offices) (Zip Code)

(402) 331-7856

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

As of April 29, 2015, there were 543,584,758 outstanding shares of the registrant’s common stock.

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TD AMERITRADE HOLDING CORPORATION

INDEX



		Page No.

	PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements
	Report of Independent Registered Public Accounting Firm	3
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Income	5
	Condensed Consolidated Statements of Comprehensive Income	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48

Item 4.	Controls and Procedures	49

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	49

Item 1A.	Risk Factors	49

Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	49

Item 6.	Exhibits	50

	Signatures	51

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PART I – FINANCIAL INFORMATION

Item 1. – Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

TD Ameritrade Holding Corporation

We have reviewed the condensed consolidated balance sheet of TD Ameritrade Holding Corporation and subsidiaries (the Company) as of March 31, 2015, and the related condensed consolidated statements of income and comprehensive income for the three-month and six-month periods ended March 31, 2015 and 2014, and the condensed consolidated statements of cash flows for the six-month periods ended March 31, 2015 and 2014. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of TD Ameritrade Holding Corporation and subsidiaries as of September 30, 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated November 21, 2014. In our opinion, the accompanying condensed consolidated balance sheet of TD Ameritrade Holding Corporation and subsidiaries as of September 30, 2014, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ ERNST & YOUNG LLP

Chicago, Illinois

May 7, 2015

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TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



	March 31, 2015			September 30, 2014
	(In millions)
ASSETS
Cash and cash equivalents	$	1,280		$	1,460
Short-term investments available-for-sale, at fair value	505			4
Cash and investments segregated and on deposit for regulatory purposes	4,243			5,116
Receivable from brokers, dealers and clearing organizations	949			1,108
Receivable from clients, net	12,463			11,639
Receivable from affiliates	106			99
Other receivables, net	146			147
Securities owned, at fair value	531			332
Property and equipment at cost, net	534			543
Goodwill	2,467			2,467
Acquired intangible assets, net	706			751
Other assets	166			165
Total assets	$	24,096		$	23,831
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Payable to brokers, dealers and clearing organizations	$	2,398		$	2,421
Payable to clients	13,955			14,497
Accounts payable and other liabilities	691			595
Payable to affiliates	6			5
Notes payable	—			150
Long-term debt	1,864			1,101
Deferred income taxes	308			314
Total liabilities	19,222			19,083
Stockholders’ equity:
Preferred stock, $0.01 par value; 100 million shares authorized, none issued	—			—
Common stock, $0.01 par value; one billion shares authorized; 631 million shares issued; March 31, 2015 - 543 million shares outstanding; September 30, 2014 - 545 million shares outstanding	6			6
Additional paid-in capital	1,630			1,618
Retained earnings	4,789			4,551
Treasury stock, common, at cost: March 31, 2015 - 88 million shares; September 30, 2014 - 86 million shares	(1,525		)	(1,409		)
Accumulated other comprehensive loss	(26		)	(18		)
Total stockholders’ equity	4,874			4,748
Total liabilities and stockholders’ equity	$	24,096		$	23,831

See notes to condensed consolidated financial statements.

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TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	Three Months Ended March 31,						Six Months Ended March 31,
	2015			2014			2015			2014
	(In millions, except per share amounts)
Revenues:
Transaction-based revenues:
Commissions and transaction fees	$	350		$	374		$	708		$	702
Asset-based revenues:
Interest revenue	151			148			314			276
Brokerage interest expense	(2		)	(2		)	(3		)	(4		)
Net interest revenue	149			146			311			272
Insured deposit account fees	205			202			412			410
Investment product fees	85			75			168			147
Total asset-based revenues	439			423			891			829
Other revenues	14			15			22			33
Net revenues	803			812			1,621			1,564
Operating expenses:
Employee compensation and benefits	208			193			406			376
Clearing and execution costs	37			34			72			63
Communications	30			28			61			56
Occupancy and equipment costs	39			40			81			77
Depreciation and amortization	23			24			46			48
Amortization of acquired intangible assets	22			22			45			45
Professional services	41			37			77			75
Advertising	82			94			145			157
Other	25			17			48			37
Total operating expenses	507			489			981			934
Operating income	296			323			640			630
Other expense:
Interest on borrowings	9			6			17			12
Other	—			—			1			—
Total other expense	9			6			18			12
Pre-tax income	287			317			622			618
Provision for income taxes	98			123			221			232
Net income	$	189		$	194		$	401		$	386
Earnings per share - basic	$	0.35		$	0.35		$	0.74		$	0.70
Earnings per share - diluted	$	0.35		$	0.35		$	0.73		$	0.70
Weighted average shares outstanding - basic	544			551			544			551
Weighted average shares outstanding - diluted	547			556			547			555
Dividends declared per share	$	0.15		$	0.12		$	0.30		$	0.74

See notes to condensed consolidated financial statements.

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TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended March 31,					Six Months Ended March 31,
	2015		2014			2015			2014
	(In millions)
Net income	$	189	$	194		$	401		$	386
Other comprehensive income (loss), before tax:
Cash flow hedging instruments:
Net unrealized loss	—		(9		)	(15		)	(9		)
Reclassification adjustment for portion of realized loss amortized to net income	1		—			2			—
Total other comprehensive income (loss), before tax	1		(9		)	(13		)	(9		)
Income tax effect	—		3			5			3
Total other comprehensive income (loss), net of tax	1		(6		)	(8		)	(6		)
Comprehensive income	$	190	$	188		$	393		$	380

See notes to condensed consolidated financial statements.

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TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Six Months Ended March 31,
	2015			2014
	(In millions)
Cash flows from operating activities:
Net income	$	401		$	386
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	46			48
Amortization of acquired intangible assets	45			45
Deferred income taxes	(1		)	2
Stock-based compensation	19			16
Excess tax benefits on stock-based compensation	(13		)	(8		)
Other, net	—			(1		)
Changes in operating assets and liabilities:
Cash and investments segregated and on deposit for regulatory purposes	873			678
Receivable from brokers, dealers and clearing organizations	159			234
Receivable from clients, net	(824		)	(2,266		)
Receivable from/payable to affiliates, net	(6		)	2
Other receivables, net	1			(14		)
Securities owned, at fair value	(198		)	(68		)
Other assets	38			(25		)
Payable to brokers, dealers and clearing organizations	(23		)	1,059
Payable to clients	(542		)	32
Accounts payable and other liabilities	87			66
Net cash provided by operating activities	62			186
Cash flows from investing activities:
Purchase of property and equipment	(38		)	(37		)
Purchase of short-term investments	(501		)	—
Proceeds from sale of investments	1			13
Other	3			1
Net cash used in investing activities	(535		)	(23		)

See notes to condensed consolidated financial statements.

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TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)

(Unaudited)



	Six Months Ended March 31,
	2015			2014
	(In millions)
Cash flows from financing activities:
Proceeds from issuance of long-term debt	$	1,248		$	—
Payment of debt issuance costs	(11		)	—
Principal payments on long-term debt	(514		)	—
Proceeds from notes payable	—			155
Principal payments on notes payable	(150		)	(40		)
Payment of cash dividends	(163		)	(408		)
Proceeds from exercise of stock options: Six months ended March 31, 2015 - 0.7 million shares; 2014 - 0.4 million shares	12			7
Purchase of treasury stock: Six months ended March 31, 2015 - 4.4 million shares; 2014 - 0.5 million shares	(142		)	(14		)
Excess tax benefits on stock-based compensation	13			8
Net cash provided by (used in) financing activities	293			(292		)
Net decrease in cash and cash equivalents	(180		)	(129		)
Cash and cash equivalents at beginning of period	1,460			1,062
Cash and cash equivalents at end of period	$	1,280		$	933
Supplemental cash flow information:
Interest paid	$	14		$	15
Income taxes paid	$	137		$	127

See notes to condensed consolidated financial statements.

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TD AMERITRADE HOLDING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Month and Six Month Periods Ended March 31, 2015 and 2014

(Unaudited)

1. BASIS OF PRESENTATION

The condensed consolidated financial statements include the accounts of TD Ameritrade Holding Corporation (the "Parent") and its wholly-owned subsidiaries (collectively, the “Company”). Intercompany balances and transactions have been eliminated.

These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments, which are all of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles ("GAAP"). These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report filed on Form 10-K for the fiscal year ended September 30, 2014.

2. CASH AND CASH EQUIVALENTS

The Company’s cash and cash equivalents is summarized in the following table (dollars in millions):



	March 31, 2015		September 30, 2014
Corporate	$	618	$	298
Broker-dealer subsidiaries	538		1,090
Futures commission merchant subsidiary	33		—
Trust company subsidiary	76		53
Investment advisory subsidiaries	15		19
Total	$	1,280	$	1,460

Capital requirements may limit the amount of cash available for dividend from the broker-dealer, futures commission merchant ("FCM") and trust company subsidiaries to the parent company. Most of the trust company cash and cash equivalents arises from client transactions in the process of settlement, and therefore is generally not available for corporate purposes. Cash and cash equivalents of the investment advisory subsidiaries is generally not available for corporate purposes.

3. CASH AND INVESTMENTS SEGREGATED AND ON DEPOSIT FOR REGULATORY PURPOSES

Cash and investments segregated and on deposit for regulatory purposes consists of the following (dollars in millions):



	March 31, 2015		September 30, 2014
U.S. government debt securities	$	2,332	$	3,070
Reverse repurchase agreements (collateralized by U.S. government debt securities)	1,286		1,193
Cash in demand deposit accounts	519		617
U.S. government debt securities on deposit with futures commission merchant	76		50
Cash on deposit with futures commission merchants	30		186
Total	$	4,243	$	5,116

4. INCOME TAXES

The Company’s effective income tax rate for the six months ended March 31, 2015 was 35.5%, compared to 37.5% for the six months ended March 31, 2014. The provision for income taxes for the six months ended March 31, 2015 was significantly lower than normal primarily due to $19 million of favorable resolutions of state income tax matters. This favorably impacted the Company's earnings for the six months ended March 31, 2015 by approximately three cents per share. The provision for income taxes for the six months ended March 31, 2014 was slightly lower than normal primarily due to $9 million of favorable resolutions of state income tax matters, partially offset by $2 million of unfavorable deferred income tax adjustments resulting from state income tax law changes. These items had a net favorable impact on the Company’s earnings for the six months ended March 31, 2014 of approximately one cent per share.

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5. NOTES PAYABLE AND LONG-TERM DEBT

Notes payable and long-term debt consist of the following (dollars in millions):



March 31, 2015	Face Value		Unamortized Discount			Fair Value Adjustment ⁽¹⁾		Net Carrying Value
Long-term debt:
Senior Notes:
5.600% Notes due 2019	$	500	$	—		$	39	$	539
2.950% Notes due 2022	750		(2		)	—		748
3.625% Notes due 2025	500		—			22		522
Secured Loan:
Variable-rate Note due 2019	55		—			—		55
Total long-term debt	$	1,805	$	(2	)	$	61	$	1,864



September 30, 2014	Face Value		Unamortized Discount		Fair Value Adjustment ⁽¹⁾		Net Carrying Value
Notes payable:
Parent Revolving Facility	$	150	$	—	$	—	$	150
Long-term debt:
Senior Notes:
4.150% Notes due 2014	500		—		2		502
5.600% Notes due 2019	500		—		30		530
Secured Loan:
Variable-rate Note due 2019	69		—		—		69
Subtotal – Long-term debt	1,069		—		32		1,101
Total notes payable and long-term debt	$	1,219	$	—	$	32	$	1,251


(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 - On October 17, 2014, the Company sold, through a public offering, $500 million aggregate principal amount of unsecured 3.625% Senior Notes due April 1, 2025 (the “2025 Notes”). Interest on the 2025 Notes will be payable in arrears semi-annually on April 1 and October 1 of each year. The Company used the net proceeds from the issuance of the 2025 Notes, together with cash on hand, to repay in full the outstanding principal under the Company's 4.150% Senior Notes (the "2014 Notes") that matured on December 1, 2014.

On March 4, 2015, the Company sold, through a public offering, $750 million aggregate principal amount of unsecured 2.950% Senior Notes due April 1, 2022 (the “2022 Notes”). Interest on the 2022 Notes will be payable in arrears semi-annually on April 1 and October 1 of each year, beginning on October 1, 2015. The Company issued the 2022 Notes for general corporate purposes, including liquidity for operational contingencies.

Fair Value Hedging – The Company is exposed to changes in the fair value of its fixed-rate Senior Notes resulting from interest rate fluctuations. To hedge a portion of this exposure, the Company has entered into fixed-for-variable interest rate swaps on its 5.600% Senior Notes due December 1, 2019 (the "2019 Notes") and 2025 Notes. Each fixed-for-variable interest rate swap has a notional amount of $500 million and a maturity date matching the maturity date of the respective Senior Notes. During December 2014, the Company paid in full the outstanding principal under the 2014 Notes and the interest rate swap on the 2014 Notes expired.

The interest rate swaps effectively change the fixed-rate interest on the 2019 Notes and 2025 Notes to variable-rate interest. Under the terms of the interest rate swap agreements, the Company receives semi-annual fixed-rate interest payments based on the same rates applicable to the Senior Notes, and makes quarterly variable-rate interest payments based on three-month LIBOR plus (a) 2.3745% for the swap on the 2019 Notes and (b) 1.1022% for the swap on the 2025 Notes. As of March 31, 2015, the weighted average effective interest rate on the aggregate principal balance of the 2019 Notes and 2025 Notes was 2.00%.

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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,
	2015			2014			2015			2014
Gain (loss) on fair value of interest rate swaps	$	18		$	(1	)	$	29		$	(12	)
Gain (loss) on fair value of hedged fixed-rate debt	(18		)	1			(29		)	12
Net gain (loss) recorded in interest on borrowings	$	—		$	—		$	—		$	—

Cash Flow Hedging – On January 17, 2014, the Company entered into forward-starting interest rate swap contracts with an aggregate notional amount of $500 million, to hedge against changes in the benchmark interest rate component of future interest payments resulting from the anticipated refinancing of the 2014 Notes. The Company designated the contracts as a cash flow hedge of the future interest payments.

Under cash flow hedge accounting, until settlement the swap contracts are carried at fair value and, to the extent they are an effective hedge, any unrealized gains or losses are recorded in other comprehensive income (loss). Any ineffective portion of the unrealized gains or losses is immediately recorded into earnings. Upon settlement, any realized gain or loss that has been recorded in other comprehensive income (loss) is amortized into earnings over the term of the newly-issued fixed-rate debt.

On October 17, 2014, the Company sold $500 million of 2025 Notes as described under “Senior Notes” above, and paid approximately $45 million to settle the forward-starting interest rate swap contracts. As of October 17, 2014, the Company recorded $0.5 million of pre-tax loss immediately into earnings to reflect ineffectiveness resulting from the issuance of the 2025 Notes slightly earlier than forecast. As of March 31, 2015, the Company expects to amortize $4.4 million of pre-tax losses, that were reported in accumulated other comprehensive income (loss), into interest on borrowings on the Condensed Consolidated Statements of Income within the next 12 months.

The following table summarizes pre-tax losses resulting from changes in the fair value of the forward-starting interest rate swaps for the periods indicated (dollars in millions):



	Amount of Loss Recognized in Other Comprehensive Income (Loss) (Effective Portion)
	Three Months Ended March 31,					Six Months Ended March 31,
	2015		2014			2015			2014
Forward-starting interest rate swaps	$	—	$	(9	)	$	(15	)	$	(9	)

Balance Sheet Impact of Hedging Instruments — The following table summarizes the fair value of outstanding derivatives designated as hedging instruments on the Condensed Consolidated Balance Sheets (dollars in millions):



	Balance Sheet Location	March 31, 2015		September 30, 2014
Interest rate contracts:
Pay-variable interest rate swaps designated as fair value hedges	Other assets	$	61	$	32
Forward-starting interest rate swaps designated as cash flow hedges	Accounts payable and other liabilities	$	—	$	(29	)

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, 2015 and September 30, 2014, the pay-variable interest rate swap counterparties had pledged $71 million and $47 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, 2014 the Company had pledged $43 million of collateral to the forward-starting interest rate swap

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counterparties in the form of cash. An asset for collateral pledged to the swap counterparties in the form of cash is recorded in other assets on the Condensed Consolidated Balance Sheets.

TD Ameritrade Holding Corporation Credit Agreement — On June 11, 2014, the Parent entered into a credit agreement consisting of a senior unsecured revolving credit facility in the aggregate principal amount of $300 million (the “Parent Revolving Facility”). The maturity date of the Parent Revolving Facility is June 11, 2019.

The applicable interest rate under the Parent Revolving Facility is calculated as a per annum rate equal to, at the option of the Parent, (a) LIBOR plus an interest rate margin (“Parent LIBOR loans”) or (b) (i) the highest of (x) the prime rate, (y) the federal funds effective rate plus 0.50% or (z) one-month LIBOR plus 1.00%, plus (ii) an interest rate margin (“Base Rate loans”). The interest rate margin ranges from 0.875% to 1.75% for Parent LIBOR loans and from 0% to 0.75% for Base Rate loans, determined by reference to the Company’s public debt ratings. The Parent is obligated to pay a commitment fee ranging from 0.10% to 0.25% on any unused amount of the Parent Revolving Facility, determined by reference to the Company's public debt ratings.

As of March 31, 2015, the interest rate margin would have been 1.25% for Parent LIBOR loans and 0.25% for Base Rate loans, and the commitment fee was 0.15%, each determined by reference to the Company's public debt ratings. There were no borrowings outstanding under the Parent Revolving Facility as of March 31, 2015. As of September 30, 2014, there was $150 million of borrowings outstanding under the Parent Revolving Facility, consisting of Parent LIBOR loans. As of September 30, 2014, the commitment fee was 0.15% and the interest rate margin was 1.25%, each determined by reference to the Company’s public debt ratings, and the interest rate was 1.40%, based on one-month LIBOR plus the interest rate margin.

The obligations under the Parent Revolving Facility are guaranteed by TD Ameritrade Online Holdings Corp. (“TDAOH”), a wholly-owned subsidiary of the Company, and each “significant subsidiary” (as defined in SEC Rule 1-02(w) of Regulation S-X) of the Parent, other than broker-dealer subsidiaries, FCM subsidiaries and controlled foreign corporations. Currently, the only subsidiary guarantor of the obligations under the Parent Revolving Facility is TDAOH.

The Parent Revolving Facility contains negative covenants that limit or restrict, subject to certain exceptions, the incurrence of liens, indebtedness of subsidiaries, mergers, consolidations, transactions with affiliates, change in nature of business and the sale of all or substantially all of the assets of the Company. The Parent is also required to maintain compliance with a maximum consolidated leverage ratio covenant and a minimum consolidated interest coverage ratio covenant, and the Company's broker-dealer and FCM subsidiaries are required to maintain compliance with a minimum regulatory net capital covenant. The Company was in compliance with all covenants under the Parent Revolving Facility as of March 31, 2015.

TD Ameritrade Clearing, Inc. Credit Agreement - On June 11, 2014, TD Ameritrade Clearing, Inc. (“TDAC”), the Company’s clearing broker-dealer subsidiary, entered into a credit agreement consisting of a senior unsecured revolving credit facility in the aggregate principal amount of $300 million (the “TDAC Revolving Facility”). The maturity date of the TDAC Revolving Facility is June 11, 2019.

The applicable interest rate under the TDAC Revolving Facility is calculated as a per annum rate equal to, at the option of TDAC, (a) LIBOR plus an interest rate margin (“TDAC LIBOR loans”) or (b) the federal funds effective rate plus an interest rate margin (“Fed Funds Rate loans”). The interest rate margin ranges from 0.75% to 1.50% for both TDAC LIBOR loans and Fed Funds Rate loans, determined by reference to the Company’s public debt ratings. TDAC is obligated to pay a commitment fee ranging from 0.08% to 0.20% on any unused amount of the TDAC Revolving Facility, determined by reference to the Company’s public debt ratings. As of March 31, 2015, the interest rate margin would have been 1.00% for both TDAC LIBOR loans and Fed Funds Rate loans, and the commitment fee was 0.125%, each determined by reference to the Company’s public debt ratings. There were no borrowings outstanding under the TDAC Revolving Facility as of March 31, 2015 and September 30, 2014.

The TDAC Revolving Facility contains negative covenants that limit or restrict, subject to certain exceptions, the incurrence of liens, indebtedness of TDAC, mergers, consolidations, change in nature of business and the sale of all or substantially all of the assets of TDAC. TDAC is also required to maintain minimum tangible net worth and is required to maintain compliance with minimum regulatory net capital requirements. TDAC was in compliance with all covenants under the TDAC Revolving Facility as of March 31, 2015.

Intercompany Credit Agreements — During March 2015, the Parent entered into credit agreements with each of its primary broker-dealer and FCM subsidiaries as described below.

The intercompany credit agreement with TDAC was established on March 31, 2015 and will terminate on March 1, 2022. Under this agreement, TDAC may borrow up to $700 million in cash or securities from the Parent under a committed facility. In addition, the Parent is permitted, but under no obligation, to make loans of up to $300 million in cash or securities to TDAC under an uncommitted facility. Loans under both the committed and uncommitted facilities bear interest at the same rate as borrowings under the TDAC Revolving Facility and must be repaid with interest on or before the termination date.

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The intercompany credit agreement with TD Ameritrade, Inc., the Company's introducing broker-dealer subsidiary, was established on March 31, 2015 and will terminate on March 1, 2022. Under this agreement, TD Ameritrade, Inc. may borrow up to $50 million in cash or securities from the Parent under a committed facility. In addition, the Parent is permitted, but under no obligation, to make loans of up to $300 million in cash or securities to TD Ameritrade, Inc. under an uncommitted facility. Loans under both the committed and uncommitted facilities bear interest at the same rate as borrowings under the TDAC Revolving Facility and must be repaid with interest on or before the termination date.

The intercompany credit agreement with TD Ameritrade Futures & Forex, LLC ("TDAFF"), the Company's FCM subsidiary, was established on March 29, 2015 and has an initial term of five years. The agreement will automatically renew for an additional five-year term, unless either party provides notice to the other of its intent to terminate not less than 30 days before the end of the then current term. Under this agreement, TDAFF may borrow from the Parent, under a committed facility, up to 75% of TDAFF's "residual interest target" as determined by TDAFF in accordance with applicable rules and regulations. As of March 31, 2015, TDAFF's residual interest target was $18 million and the corresponding loan commitment amount was $13.5 million. Loans under this facility bear interest at the prime rate plus 1.00% and must be repaid with interest not later than 60 calendar days following the date of the borrowing.

There were no borrowings outstanding under any of the intercompany credit agreements as of March 31, 2015.

6. CAPITAL REQUIREMENTS

The Company’s broker-dealer subsidiaries are subject to the SEC Uniform Net Capital Rule (Rule 15c3-1 under the Securities Exchange Act of 1934, or the “Exchange Act”), administered by the SEC and the Financial Industry Regulatory Authority (“FINRA”), which requires the maintenance of minimum net capital, as defined. Net capital and the related net capital requirement may fluctuate on a daily basis. TDAC, the Company’s clearing broker-dealer subsidiary, and TD Ameritrade, Inc., the Company’s introducing broker-dealer subsidiary, compute net capital under the alternative method as permitted by Rule 15c3-1. TDAC is required to maintain minimum net capital of the greater of $1.5 million, which is based on the type of business conducted by the broker-dealer, or 2% of aggregate debit balances arising from client transactions.

Under Rule 15c3-1, TD Ameritrade, Inc. is required to maintain minimum net capital of the greater of $250,000 or 2% of aggregate debit balances. As an FCM registered with the CFTC, TD Ameritrade, Inc. is also subject to CFTC Regulation 1.17 under the Commodity Exchange Act, administered by the CFTC and the National Futures Association ("NFA"), which requires the maintenance of minimum net capital of the greatest of (a) $1.0 million, (b) its futures risk-based capital requirement, equal to 8% of the total risk margin requirement for all futures positions carried by the FCM in client and nonclient accounts, or (c) its Rule 15c3-1 net capital requirement. TD Ameritrade, Inc. transferred its futures and foreign exchange business to TDAFF effective March 29, 2015. On March 30, 2015, the Company filed an application to withdraw TD Ameritrade, Inc.'s registration as an FCM. The application is pending approval by the NFA.

Under the alternative method, a broker-dealer may not repay any subordinated borrowings, pay cash dividends or make any unsecured advances or loans to its parent company or employees if such payment would result in a net capital amount of (a) less than 5% of aggregate debit balances, (b) less than 110% of its risk-based capital requirement under CFTC Regulation 1.17, or (c) less than 150% of its minimum dollar requirement. An FCM, such as TDAFF, that is not registered as a securities broker-dealer must provide notice to the CFTC if its net capital amounts to less than (a) 110% of its risk-based capital requirement under CFTC Regulation 1.17 or (b) less than 150% of its minimum dollar requirement. These broker-dealer and FCM net capital thresholds, which are specified in Exchange Act Rule 17a-11 and CFTC Regulation 1.12, are typically referred to as “early warning” net capital thresholds.

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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		Net Capital in Excess of Early Warning Threshold (5% of Aggregate Debit Balances)		Ratio of Net Capital to Aggregate Debit Balances
March 31, 2015	$	1,610	$	291	$	1,319	$	883	11.07	%
September 30, 2014	$	1,569	$	280	$	1,289	$	868	11.19	%



TD Ameritrade, Inc.
Date	Net Capital		Required Net Capital (8% of Total Risk Margin or Minimum Dollar Requirement)		Net Capital in Excess of Required Net Capital		Net Capital in Excess of Early Warning Threshold (110% or 150% of Required Net Capital)
March 31, 2015	$	266	$	1	$	265	$	264
September 30, 2014	$	347	$	17	$	330	$	328

During October 2014, TDAFF registered as an FCM with the CFTC. TDAFF is subject to CFTC Regulation 1.17 under the Commodity Exchange Act, which requires the maintenance of minimum net capital as described above. Net capital and net capital requirements for TDAFF are summarized in the following table (dollars in millions):

TD Ameritrade Futures & Forex LLC

Date

Net

Capital

Required
Net Capital
(8% of Total
Risk Margin)

Net Capital

in Excess of

Required

Net Capital

Net Capital in

Excess of

Early Warning

Threshold

(110% of

Required

Net Capital)

March 31, 2015

September 30, 2014

N/A

The Company’s non-depository trust company subsidiary, TD Ameritrade Trust Company (“TDATC”), is subject to capital requirements established by the State of Maine, which require TDATC to maintain minimum Tier 1 capital, as defined. TDATC’s Tier 1 capital was $29 million and $27 million as of March 31, 2015 and September 30, 2014, respectively, which exceeded the required Tier 1 capital by $13 million and $12 million, respectively.

7. COMMITMENTS AND CONTINGENCIES

Legal and Regulatory Matters

Order Routing Litigation – Five putative class action complaints have been filed regarding TD Ameritrade’s routing of client orders. The cases are pending in the U.S. District Court for the District of Nebraska: Jay Zola et al. v. TD Ameritrade, Inc., et al.; Tyler Verdieck v. TD Ameritrade, Inc.; Bruce Lerner v. TD Ameritrade, Inc.; Michael Sarbacker v. TD Ameritrade Holding Corporation, et al.; Gerald Klein v. TD Ameritrade Holding Corporation, et al. The complaints in Zola, Klein and Sarbacker allege that the defendants failed to provide clients with “best execution” and routed orders to the market venue that paid the most for its order flow. The complaints in Verdieck and Lerner allege that the defendant routed its clients’ non-marketable limit orders to the venue paying the highest rates of maker rebates, and that clients did not receive best execution on these kinds of orders. The complaints variously include claims of breach of contract, breach of fiduciary duty, breach of the duty of best execution, fraud, negligent misrepresentation, violations of Section 10(b) and 20 of the Exchange Act and SEC Rule 10b-5, violation of Nebraska’s Consumer Protection Act, violation of Nebraska’s Uniform Deceptive Trade Practices Act, aiding and abetting, unjust enrichment and declaratory judgment. The complaints seek various kinds of relief including damages, restitution, disgorgement, injunctive relief, equitable relief and other relief. The Company intends to vigorously defend against these lawsuits. The Company is unable to predict the outcome or the timing of the ultimate resolution of these lawsuits, or the potential losses, if any, that may result.

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Reserve Yield Plus Fund Litigation – During September 2008, The Reserve, an independent mutual fund company, announced that the net asset value of the Reserve Yield Plus Fund declined below $1.00 per share. The Yield Plus Fund was not a money market mutual fund, but its stated objective was to maintain a net asset value of $1.00 per share. TD Ameritrade, Inc.’s clients continue to hold shares in the Yield Plus Fund (now known as “Yield Plus Fund – In Liquidation”), which is being liquidated.

In November 2008, a purported class action lawsuit was filed with respect to the Yield Plus Fund. The lawsuit is captioned Ross v. Reserve Management Company, Inc. et al. and is pending in the U.S. District Court for the Southern District of New York. The Ross lawsuit is on behalf of persons who purchased shares of Reserve Yield Plus Fund. On November 20, 2009, the plaintiffs filed a first amended complaint naming as defendants the fund’s advisor, certain of its affiliates and the Company and certain of its directors, officers and shareholders as alleged control persons. The complaint alleges claims of violations of the federal securities laws and other claims based on allegations that false and misleading statements and omissions were made in the Reserve Yield Plus Fund prospectuses and in other statements regarding the fund. On March 19, 2015, the plaintiffs entered into an agreement with Reserve Management Company, Inc. and related defendants to settle the claims against them, subject to court approval. On March 26, 2015, the Company and the plaintiffs reached an agreement in principle to resolve the claims against the Company and its directors, officers and shareholders named as defendants, subject to definitive written terms that will require court approval. Under the agreement, the Company will make a cash contribution of $3.75 million toward a class settlement fund.

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. Accounting Standards Codification (“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 $30 million as of March 31, 2015. 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 cases as to which an estimate can be made. For certain cases, the Company does not believe an estimate can currently be made, as some cases are in preliminary stages and some cases have no specific amounts claimed. The Company’s estimate involves significant judgment, given the varying stages of the proceedings and the inherent uncertainty of predicting outcomes. The estimated range will change from time to time as the underlying matters, stages of proceedings and available information change. Actual losses may vary significantly from the current estimated range.

The Company believes, based on its current knowledge and after consultation with counsel, that the ultimate disposition of these legal and regulatory matters, individually or in the aggregate, is not likely to have a material adverse effect on the financial condition or cash flows of the Company. However, in light of the uncertainties involved in such matters, the Company is unable to predict the outcome or the timing of the ultimate resolution of these matters, or the potential losses, fines, penalties or equitable relief, if any, that may result, and it is possible that the ultimate resolution of one or more of these matters may be material to the Company’s results of operations for a particular reporting period.

Income Taxes

The Company’s federal and state income tax returns are subject to examination by taxing authorities. Because the application of tax laws and regulations to many types of transactions is subject to varying interpretations, amounts reported in the condensed consolidated financial statements could be significantly changed at a later date upon final determinations by taxing authorities. The Toronto-Dominion Bank (“TD”) has agreed to indemnify the Company for tax obligations, if any, pertaining to activities of TD Waterhouse Group, Inc. (“TD Waterhouse”) prior to the Company’s acquisition of TD Waterhouse in January 2006.

General Contingencies

In the ordinary course of business, there are various contingencies that are not reflected in the condensed consolidated financial statements. These include the Company’s broker-dealer and FCM subsidiaries’ client activities involving the execution, settlement and financing of various client securities, options, futures and foreign exchange transactions. These activities may expose the Company to credit risk in the event the clients are unable to fulfill their contractual obligations.

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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 executes and clears client transactions involving the sale of securities not yet purchased (“short sales”). Such margin-related transactions may expose the Company to credit risk in the event a client’s assets are not sufficient to fully cover losses that the client may incur. Leverage involves securing a large potential future obligation with a lesser amount of cash and securities. 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 purchase or sell financial instruments in the client’s account at prevailing market prices in order to fulfill the client’s obligations. However, during periods of rapid market movements, clients who utilize margin credit or leverage and who have collateralized their obligations with securities may find that the securities have a rapidly depreciating value and may not be sufficient to cover their obligations in the event of liquidation. The Company seeks to mitigate the risks associated with its client margin and leverage activities by requiring clients to maintain margin collateral in compliance with various regulatory and internal guidelines. The Company monitors required margin levels throughout each trading day and, pursuant to such guidelines, requires clients to deposit additional collateral, or to reduce positions, when necessary.

The Company loans securities temporarily to other broker-dealers in connection with its broker-dealer business. The Company receives cash as collateral for the securities loaned. Increases in securities prices may cause the market value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its client obligations. The Company mitigates this risk by requiring credit approvals for counterparties, by monitoring the market value of securities loaned on a daily basis and requiring additional cash as collateral when necessary, and by participating in a risk-sharing program offered through the Options Clearing Corporation (“OCC”).

The Company borrows securities temporarily from other broker-dealers in connection with its broker-dealer business. The Company deposits cash as collateral for the securities borrowed. Decreases in securities prices may cause the market value of the securities borrowed to fall below the amount of cash deposited as collateral. In the event the counterparty to these transactions does not return the cash deposited, the Company may be exposed to the risk of selling the securities at prevailing market prices. The Company mitigates this risk by requiring credit approvals for counterparties, by monitoring the collateral values on a daily basis and requiring collateral to be returned by the counterparties when necessary, and by participating in a risk-sharing program offered through the OCC.

The Company transacts in reverse repurchase agreements (securities purchased under agreements to resell) in connection with its broker-dealer business. The Company’s policy is to take possession or control of securities with a market value in excess of the principal amount loaned, plus accrued interest, in order to collateralize resale agreements. The Company monitors the market value of the underlying securities that collateralize the related receivable on resale agreements on a daily basis and may require additional collateral when deemed appropriate.

The Company has accepted collateral in connection with client margin loans and securities borrowed. Under applicable agreements, the Company is generally permitted to repledge securities held as collateral and use them to enter into securities lending arrangements. The following table summarizes the fair values of client margin securities and stock borrowings that were available to the Company to utilize as collateral on various borrowings or for other purposes, and the amount of that collateral loaned or repledged by the Company (dollars in billions):



	March 31, 2015		September 30, 2014
Client margin securities	$	17.3	$	16.2
Stock borrowings	0.8		1.0
Total collateral available	$	18.1	$	17.2

Collateral loaned	$	2.4	$	2.4
Collateral repledged	2.1		2.5
Total collateral loaned or repledged	$	4.5	$	4.9

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The Company is subject to cash deposit and collateral requirements with clearinghouses based on its clients’ trading activity. The following table summarizes cash deposited with and securities pledged to clearinghouses by the Company (dollars in millions):



Assets	Balance Sheet Classification	March 31, 2015		September 30, 2014
Cash	Receivable from brokers, dealers and clearing organizations	$	95	$	104
U.S. government debt securities	Securities owned, at fair value	306		181
Total		$	401	$	285

Guarantees

The Company is a member of and provides guarantees to securities clearinghouses and exchanges in connection with client trading activities. Under related agreements, the Company is generally required to guarantee the performance of other members. Under these agreements, if a member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet shortfalls. The Company’s liability under these arrangements is not quantifiable and could exceed the cash and securities it has posted to the clearinghouse as collateral. However, the potential for the Company to be required to make payments under these agreements is considered remote. Accordingly, no contingent liability is carried on the Condensed Consolidated Balance Sheets for these guarantees.

The Company clears its clients’ futures transactions on an omnibus account basis through unaffiliated clearing firms. The Company has agreed to indemnify the unaffiliated clearing firms for any loss that they may incur for the client transactions introduced to them by the Company.

See “Insured Deposit Account Agreement” in Note 12 for a description of a guarantee included in that agreement.

8. FAIR VALUE DISCLOSURES

Fair Value Measurement — Definition and Hierarchy

ASC 820-10, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.

ASC 820-10 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability, developed based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:


•	Level 1— Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. This category includes active exchange-traded funds, money market mutual funds, mutual funds and equity securities.

•

Level 2— Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Such inputs include quoted prices in markets that are not active, quoted prices for similar assets and liabilities in active and inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means. This category includes most debt securities and other interest-sensitive financial instruments.


•	Level 3 — Unobservable inputs for the asset or liability, where there is little, if any, observable market activity or data for the asset or liability.

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The following tables present the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 and September 30, 2014 (dollars in millions):



	As of March 31, 2015
	Level 1		Level 2		Level 3		Fair Value
Assets:
Cash equivalents:
Money market mutual funds	$	1,088	$	—	$	—	$	1,088
Short-term investments available-for-sale:
U.S. government debt securities	—		505		—		505
Investments segregated for regulatory purposes:
U.S. government debt securities	—		2,408		—		2,408
Securities owned:
Money market and other mutual funds	—		—		2		2
U.S. government debt securities	—		526		—		526
Other	—		3		—		3
Subtotal - Securities owned	—		529		2		531
Other assets:
Pay-variable interest rate swaps⁽¹⁾	—		61		—		61
Auction rate securities	—		—		1		1
Subtotal - Other assets	—		61		1		62
Total assets at fair value	$	1,088	$	3,503	$	3	$	4,594
Liabilities:
Accounts payable and other liabilities:
Securities sold, not yet purchased:
Equity securities	$	11	$	—	$	—	$	11


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

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	As of September 30, 2014
	Level 1		Level 2		Level 3		Fair Value
Assets:
Cash equivalents:
Money market mutual funds	$	1,284	$	—	$	—	$	1,284
Short-term investments available-for-sale:
U.S. government debt securities	—		4		—		4
Investments segregated for regulatory purposes:
U.S. government debt securities	—		3,120		—		3,120
Securities owned:
Money market and other mutual funds	—		—		1		1
U.S. government debt securities	—		326		—		326
Other	2		3		—		5
Subtotal - Securities owned	2		329		1		332
Other assets:
Pay-variable interest rate swaps⁽¹⁾	—		32		—		32
Auction rate securities	—		—		1		1
Subtotal - Other assets	—		32		1		33
Total assets at fair value	$	1,286	$	3,485	$	2	$	4,773
Liabilities:
Accounts payable and other liabilities:
Forward-starting interest rate swaps⁽²⁾	$	—	$	29	$	—	$	29
Securities sold, not yet purchased:
Equity securities	1		—		—		1
Total liabilities at fair value	$	1	$	29	$	—	$	30


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


(2)	See “Cash Flow Hedging” in Note 5 for details.

There were no transfers between any levels of the fair value hierarchy during the periods covered by this report.

Valuation Techniques

In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology applies to the Company’s Level 1 assets and liabilities. If quoted prices in active markets for identical assets and liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable, either directly or indirectly. This pricing methodology applies to the Company’s Level 2 assets and liabilities.

Level 2 Measurements:

Debt Securities – Fair values for debt securities are based on prices obtained from an independent pricing vendor. The primary inputs to the valuation include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. The Company validates the vendor pricing by periodically comparing it to pricing from another independent pricing service. The Company has not adjusted prices obtained from the independent pricing vendor for any periods presented in the condensed consolidated financial statements because no significant pricing differences have been observed.

Interest Rate Swaps – These derivatives are valued by the Company using a valuation model provided by a third party service that incorporates interest rate yield curves, which are observable for substantially the full term of the contract. The valuation model

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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 material assets or liabilities classified as Level 3 of the fair value hierarchy.

Fair Value of Financial Instruments Not Recorded at Fair Value

Cash and cash equivalents, receivable from/payable to brokers, dealers and clearing organizations, receivable from/payable to clients, receivable from/payable to affiliates, other receivables, accounts payable and other liabilities and notes payable are short-term in nature and accordingly are carried at amounts that approximate fair value. Cash and cash equivalents include cash and highly-liquid investments with an original maturity of three months or less (categorized as Level 1 of the fair value hierarchy). Receivable from/payable to brokers, dealers and clearing organizations, receivable from/payable to clients, receivable from/payable to affiliates, other receivables, accounts payable and other liabilities and notes payable are recorded at or near their respective transaction prices and historically have been settled or converted to cash at approximately that value (categorized as Level 2 of the fair value hierarchy).

Cash and investments segregated and on deposit for regulatory purposes includes reverse repurchase agreements (securities purchased under agreements to resell). Reverse repurchase agreements are treated as collateralized financing transactions and are carried at amounts at which the securities will subsequently be resold, plus accrued interest. The Company’s reverse repurchase agreements generally have a maturity of seven days and are collateralized by U.S. Treasury securities in amounts exceeding the carrying value of the resale agreements. Accordingly, the carrying value of reverse repurchase agreements approximates fair value (categorized as Level 2 of the fair value hierarchy). In addition, this category includes cash held in demand deposit accounts and on deposit with a futures commission merchant, for which the carrying values approximate the fair value (categorized as Level 1 of the fair value hierarchy). See Note 3 for a summary of cash and investments segregated and on deposit for regulatory purposes.

Long-term debt – As of March 31, 2015, the Company’s Senior Notes had an aggregate estimated fair value, based on quoted market prices (categorized as Level 1 of the fair value hierarchy), of approximately $1.873 billion, compared to the aggregate carrying value of the Senior Notes on the Condensed Consolidated Balance Sheet of $1.809 billion. As of September 30, 2014, the Company’s Senior Notes had an aggregate estimated fair value, based on quoted market prices, of approximately $1.081 billion, compared to the aggregate carrying value of the Senior Notes on the Condensed Consolidated Balance Sheet of $1.032 billion.

The carrying value of the Company's variable-rate secured loan approximates fair value because of the frequent repricing of the loan based on market interest rates (categorized as Level 2 of the fair value hierarchy).

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9. OFFSETTING ASSETS AND LIABILITIES

Substantially all of the Company’s reverse repurchase agreements, securities borrowing and securities lending activity and derivative financial instruments are transacted under master agreements that may allow for net settlement in the ordinary course of business, as well as offsetting of all contracts with a given counterparty in the event of default by one of the parties. However, for financial statement purposes, the Company does not net balances related to these financial instruments.

The following tables present information about the potential effect of rights of setoff associated with the Company’s recognized assets and liabilities as of March 31, 2015 and September 30, 2014 (dollars in millions):



	March 31, 2015
							Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
	Gross Amounts of Recognized Assets and Liabilities		Gross Amounts Offset in the Condensed Consolidated Balance Sheet		Net Amounts Presented in the Condensed Consolidated Balance Sheet		Financial Instruments⁽³⁾			Collateral Received or Pledged (Including Cash) ⁽⁴⁾			Net Amount ⁽⁵⁾
Assets:
Investments segregated for regulatory purposes:
Reverse repurchase agreements	$	1,286	$	—	$	1,286	$	—		$	(1,286	)	$	—
Receivable from brokers, dealers and clearing organizations:
Deposits paid for securities borrowed ⁽¹⁾	846		—		846		(52		)	(768		)	26
Other assets:
Pay-variable interest rate swaps	61		—		61		—			(61		)	—
Total	$	2,193	$	—	$	2,193	$	(52	)	$	(2,115	)	$	26
Liabilities:
Payable to brokers, dealers and clearing organizations:
Deposits received for securities loaned ⁽²⁾	$	2,351	$	—	$	2,351	$	(52	)	$	(2,049	)	$	250

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	September 30, 2014
							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⁽³⁾			Collateral Received or Pledged (Including Cash) ⁽⁴⁾			Net Amount ⁽⁵⁾
Assets:
Investments segregated for regulatory purposes:
Reverse repurchase agreements	$	1,193	$	—	$	1,193	$	—		$	(1,193	)	$	—
Receivable from brokers, dealers and clearing organizations:
Deposits paid for securities borrowed ⁽¹⁾	995		—		995		(69		)	(900		)	26
Other assets:
Pay-variable interest rate swaps	32		—		32		—			(32		)	—
Total	$	2,220	$	—	$	2,220	$	(69	)	$	(2,125	)	$	26
Liabilities:
Payable to brokers, dealers and clearing organizations:
Deposits received for securities loaned ⁽²⁾	$	2,384	$	—	$	2,384	$	(69	)	$	(2,015	)	$	300
Accounts payable and other liabilities:
Forward-starting interest rate swaps	29		—		29		—			(29		)	—
Total	$	2,413	$	—	$	2,413	$	(69	)	$	(2,044	)	$	300


(1)	Included in the gross amounts of deposits paid for securities borrowed is $417 million and $616 million as of March 31, 2015 and September 30, 2014, respectively, transacted through a risk-sharing program with the OCC, which guarantees the return of cash to the Company.


(2)	Included in the gross amounts of deposits received for securities loaned is $870 million and $754 million as of March 31, 2015 and September 30, 2014, respectively, transacted through a risk-sharing program with the OCC, which guarantees the return of securities to the Company.


(3)	Amounts represent recognized assets and liabilities that are subject to enforceable master agreements with rights of setoff.

(4)

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, 2015 and September 30, 2014, the Company had received total collateral with a fair value of $2,203 million and $2,231 million, respectively, and pledged total collateral with a fair value of $2,099 million and $2,124 million, respectively.


(5)	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.

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10. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table presents the net change in fair value recorded in other comprehensive income (loss) before and after income tax for the periods indicated (dollars in millions):



	Three Months Ended March 31,
	2015						2014
	Before Tax		Tax Effect		Net of Tax		Before Tax			Tax Effect		Net of Tax
Cash flow hedging instruments:
Net unrealized loss	$	—	$	—	$	—	$	(9	)	$	3	$	(6	)
Reclassification adjustment for portion of realized loss amortized to net income ⁽¹⁾	1		—		1		—			—		—
Other comprehensive income (loss)	$	1	$	—	$	1	$	(9	)	$	3	$	(6	)




	Six Months Ended March 31,
	2015								2014
	Before Tax			Tax Effect		Net of Tax			Before Tax			Tax Effect		Net of Tax
Cash flow hedging instruments:
Net unrealized loss	$	(15	)	$	5	$	(10	)	$	(9	)	$	3	$	(6	)
Reclassification adjustment for portion of realized loss amortized to net income ⁽¹⁾	2			—		2			—			—		—
Other comprehensive loss	$	(13	)	$	5	$	(8	)	$	(9	)	$	3	$	(6	)

(1) The before tax reclassification adjustment amount and the related tax effect are included in interest on borrowings and provision for income taxes, respectively, on the Condensed Consolidated Statements of Income.

The following table presents after-tax changes in accumulated other comprehensive loss (dollars in millions):



	Three Months Ended March 31,						Six Months Ended March 31,
	2015			2014			2015			2014
Cash flow hedging instruments:
Beginning balance	$	(27	)	$	—		$	(18	)	$	—
Other comprehensive loss before reclassification	—			(6		)	(10		)	(6		)
Amount reclassified from accumulated other comprehensive loss	1			—			2			—
Current period change	1			(6		)	(8		)	(6		)
Ending balance	$	(26	)	$	(6	)	$	(26	)	$	(6	)

11. EARNINGS PER SHARE

The difference between the numerator and denominator used in the computation of basic and diluted earnings per share consists of common stock equivalent shares related to stock-based compensation for all periods presented. There were no material antidilutive awards for the three and six months ended March 31, 2015 and 2014.

12. RELATED PARTY TRANSACTIONS

Transactions with TD and Affiliates

As a result of the Company’s acquisition of TD Waterhouse during fiscal 2006, TD became an affiliate of the Company. TD owned approximately 41% of the Company’s common stock as of March 31, 2015. Pursuant to the Stockholders Agreement among TD, the Company and certain other stockholders, TD has the right to designate five of twelve members of the Company’s board of directors. The Company transacts business and has extensive relationships with TD and certain of its affiliates. Transactions with TD and its affiliates are discussed and summarized below.

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Insured Deposit Account Agreement

The Company is party to an insured deposit account (“IDA”) agreement with TD Bank USA, N.A. (“TD Bank USA”), TD Bank, N.A. and TD. Under the IDA agreement, TD Bank USA and TD Bank, N.A. (together, the “TD Depository Institutions”) make available to clients of the Company FDIC-insured money market deposit accounts as either designated sweep vehicles or as non-sweep deposit accounts. The Company provides marketing, recordkeeping and support services for the TD Depository Institutions with respect to the money market deposit accounts. In exchange for providing these services, the TD Depository Institutions pay the Company an aggregate marketing fee based on the weighted average yield earned on the client IDA assets, less the actual interest paid to clients, a servicing fee to the TD Depository Institutions and the cost of FDIC insurance premiums.

The current IDA agreement became effective as of January 1, 2013 and has an initial term expiring July 1, 2018. It is automatically renewable for successive five-year terms, provided that it may be terminated by either the Company or the TD Depository Institutions by providing written notice of non-renewal at least two years prior to the initial expiration date or the expiration date of any subsequent renewal period.

The fee earned on the IDA agreement is calculated based on two primary components: (a) the yield on fixed-rate “notional” investments, based on prevailing fixed rates for identical balances and maturities in the interest rate swap market (generally LIBOR-based) at the time such investments were added to the IDA portfolio (including any adjustments required to adjust the variable rate leg of such swaps to a one-month reset frequency and the overall swap payment frequency to monthly) and (b) the yield on floating-rate investments. As of March 31, 2015, the IDA portfolio was comprised of approximately 77% fixed-rate notional investments and 23% 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 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 potential for the marketing fee calculation to result in a negative amount is remote. Accordingly, no contingent liability is carried on the Condensed Consolidated Balance Sheets for the IDA agreement.

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In addition, the Company has various other services agreements and transactions with TD and its affiliates. The following tables summarize revenues and expenses resulting from transactions with TD and its affiliates for the periods indicated (dollars in millions):



		Revenues from TD and Affiliates
	Statement of Income Classification	Three months ended March 31,				Six months ended March 31,
Description	Statement of Income Classification	2015		2014		2015		2014
Insured Deposit Account Agreement	Insured deposit account fees	$	205	$	202	$	412	$	410
Referral and Strategic Alliance Agreement	Various	3		3		6		6
Other	Various	1		2		3		3
Total revenues		$	209	$	207	$	421	$	419



		Expenses to TD and Affiliates
	Statement of Income Classification	Three months ended March 31,				Six months ended March 31,
Description	Statement of Income Classification	2015		2014		2015		2014
Canadian Call Center Services Agreement	Professional services	$	5	$	5	$	9	$	9
Other	Various	2		2		2		2
Total expenses		$	7	$	7	$	11	$	11

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, 2015		September 30, 2014

Assets:
Receivable from brokers, dealers and clearing organizations	$	—	$	1
Receivable from affiliates	106		99

Liabilities:
Payable to brokers, dealers and clearing organizations	$	92	$	96
Payable to affiliates	6		5

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

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13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The 2019 Notes are jointly and severally and fully and unconditionally guaranteed by TDAOH, a wholly-owned subsidiary of the Company. Presented below is condensed consolidating financial information for the Company, its guarantor subsidiary and its non-guarantor subsidiaries for the periods indicated. Because all other comprehensive income (loss) activity occurred on the parent company for all periods presented, condensed consolidating statements of comprehensive income are not presented.

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF MARCH 31, 2015

(Unaudited)



	Parent		Guarantor Subsidiary		Non-Guarantor Subsidiaries		Eliminations			Total
	(In millions)
ASSETS
Cash and cash equivalents	$	480	$	1	$	799	$	—		$	1,280
Short-term investments available-for-sale	501		3		1		—			505
Cash and investments segregated and on deposit for regulatory purposes	—		—		4,243		—			4,243
Receivable from brokers, dealers and clearing organizations	—		—		949		—			949
Receivable from clients, net	—		—		12,463		—			12,463
Investments in subsidiaries	5,739		5,625		—		(11,364		)	—
Receivable from affiliates	3		3		107		(7		)	106
Goodwill	—		—		2,467		—			2,467
Acquired intangible assets, net	—		146		560		—			706
Other, net	154		13		1,268		(58		)	1,377
Total assets	$	6,877	$	5,791	$	22,857	$	(11,429	)	$	24,096
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Payable to brokers, dealers and clearing organizations	$	—	$	—	$	2,398	$	—		$	2,398
Payable to clients	—		—		13,955		—			13,955
Accounts payable and other liabilities	135		—		569		(13		)	691
Payable to affiliates	4		—		9		(7		)	6
Long-term debt	1,864		—		—		—			1,864
Deferred income taxes	—		52		301		(45		)	308
Total liabilities	2,003		52		17,232		(65		)	19,222
Stockholders’ equity	4,874		5,739		5,625		(11,364		)	4,874
Total liabilities and stockholders’ equity	$	6,877	$	5,791	$	22,857	$	(11,429	)	$	24,096

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CONDENSED CONSOLIDATING BALANCE SHEET

AS OF SEPTEMBER 30, 2014

(Unaudited)

Parent

Guarantor

Subsidiary

Non-Guarantor

Subsidiaries

Eliminations

Total

(In millions)

ASSETS

Cash and cash equivalents