SecProbe.io

CORRESP
1
filename1.htm

Document

October 11, 2023

Securities and Exchange Commission

Division of Corporation Finance

Office of Finance

100 F Street NE

Washington, D.C. 20549

Attention:

Re: The Charles Schwab Corporation

 Form 10-K for the Fiscal Year Ended December 31, 2022

 Form 10-Q for the Quarterly Period Ended June 30, 2023

 File No. 001-09700

Ladies and Gentlemen:

We acknowledge and agree that the areas covered by the comments of the Staff (the “Staff”) of the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) are of particular importance to investors in the current economic and financial services environment that has been impacted by the Federal Reserve raising short-term rates at the fastest pace in 40 years. We have been continually evaluating and enhancing our disclosures in these areas, including interest rate risk, risk management and its governance, liquidity, and risk factors, as further detailed in our responses to the Staff’s comments.

We have set forth below the responses of The Charles Schwab Corporation (referred to herein together with its consolidated subsidiaries as “Schwab” or the “Company” and referenced by terms such as “we,” “us,” or “our”) to the comments of the Staff detailed in the letter to Mr. Peter Crawford dated September 21, 2023, with respect to the above referenced periodic reports. The Staff’s comments are repeated in italics below.

Form 10-K for the fiscal year ended December 31, 2022 (the “2022 Form 10-K”)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Market Risk

Economic Value of Equity Simulation, page 51

Comment:

1.We note that you state that management uses Economic Value of Equity to measure interest rate risk. However, you do not present any quantitative or qualitative analysis of your EVE during the period, nor the key assumptions that management uses to evaluate and manage exposure to this risk. Provide us with your analysis supporting your decision not to provide information related this measure of market risk. Please refer to Item 305 of Regulation S-K. Also, revise your disclosure to address the key metrics management uses in evaluating EVE to manage your exposure to market risk, and explain any significant changes made as a result of monitoring EVE in reducing your exposure to market risk.

Response:

Schwab utilizes multiple approaches to manage interest rate risk, which are described on pages 50-51 of the 2022 Form 10-K. Thus, while management monitors changes in economic value of equity (EVE) sensitivity over time, EVE is only one factor taken into consideration in the management of market risk. As disclosed, the Company utilizes interest rate risk simulations, including net interest revenue and EVE simulations. The Company believes that the disclosure regarding net interest revenue simulations are particularly useful and satisfy the quantitative disclosure requirements of Item 305 of Regulation S-K. The results of the net interest revenue simulation sensitivity analyses provide an easily understandable number – that is, the simulated impacts to net interest revenue. In

1

addition, the modeling, assumptions, and parameters employed in the net interest revenue simulations are, by definition, relatively consistent from period-to-period and thus allow for comparisons of that number over time.

We believe that disclosing qualitative information regarding our use of EVE also provides helpful information regarding the Company’s interest rate risk management program. We disclosed in our 2022 Form 10-K that in the management of interest rate risk we establish limits on net interest revenue risk and EVE risk, and to remain within these limits, we manage the maturity, repricing, and cash flow characteristics of the investment portfolios. We stated further that management monitors established guidelines to stay within the Company’s risk appetite. We also presented our key assumptions in our EVE calculation in the 2022 Form 10-K and 2023 Form 10-Qs: specifically, projection of interest rate scenarios with rate floors, prepayment speeds of mortgage-related investments, term structure models of interest rates, non-maturity deposit behavior, and pricing assumptions.

EVE is dependent on model assumptions under a variety of market and economic environments, as discussed on page 51 of the 2022 Form 10-K. The simplicity of the result (i.e., discounted value of net cash flows) belies the dependency of the calculation on assumptions and model inputs. With these extensive model dependencies and the reality of ongoing adjustments in the modeling often from quarter to quarter as we have additional experience with rate environments, understanding changes in modeled EVE and the practical implications can be difficult, and comparability of EVE across periods and among financial firms may not be useful to investors.

Conversations with the investment community indicate that they don’t focus on EVE in their evaluation of the Company’s risk profile and sensitivity to changes in rates, preferring instead quantification of net interest revenue sensitivity. Investors have, however, inquired about other related information that Schwab has either historically disclosed or recently began disclosing (e.g., effective duration), including trends and drivers related to net interest revenue and balance sheet management. In consideration of these and other factors, the Company has historically chosen to present only qualitative information regarding the Company’s use of EVE in managing interest rate risk.

Particularly in light of the banking industry turmoil that occurred in the first quarter of 2023, the Company carefully considered its disclosures related to market risk and liquidity risk, and expanded certain disclosures beginning in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the “Q1 2023 Form 10-Q”), including those related to interest rate risk management. Beginning in the first quarter of 2023, the Company added disclosures regarding effective duration of components of its balance sheet (see page 16 of our Q1 2023 Form 10-Q), which had become a topic of greater interest with investors. We believe this supplemental disclosure provides additional information for investors regarding the Company’s management of interest rate risk and enables more useful comparisons over time and across firms. Also beginning in our Q1 2023 Form 10-Q, the Company supplemented its qualitative disclosures regarding its interest rate risk simulations and enhanced many disclosures regarding liquidity and changes in its mix of funding sources, including in pages 16-19.

We will continue to evaluate the Company’s disclosures related to interest rate risk management, and will continue to evaluate in future filings the potential need for additional or modified disclosures based on the facts and circumstances present at such time.

Form 10-Q for the quarterly period ended June 30, 2023

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Risk Management

Market Risk, page 18

Comment:

2.We note the disclosure that beginning in 2023, you began to utilize interest rate swap derivative instruments to assist with managing interest rate risk; however, we do not see fulsome disclosure discussing and quantifying the use of derivatives used to manage your interest rate risk. Please provide a qualitative discussion of how derivatives are used to manage interest rate risk, including the volume and types of derivatives and any additional details regarding the changes in strategy during the periods presented. See Item 305(b)(1)(ii) of Regulation S-K. Additionally, consider disclosing quantitative

2

information about the impact the use of derivatives had on managing your interest rate risk and clarify whether the disclosed outputs from your NIR and EVE simulation reflect the impact of any derivatives used to manage interest rate risk.

Response:

In 2023, the Company began to utilize interest rate swaps as part of its interest rate risk management program, and include these derivative instruments in its interest rate risk simulations. As the program began in early 2023, the impact of the use of derivative instruments on the Company’s management of interest rate risk was not material through June 30, 2023. As a result, the Company did not provide disclosures regarding the impact of the use of derivative instruments in its management of interest rate risk.

In the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 (the “Q2 2023 Form 10-Q” and together with the Q1 2023 Form 10-Q, the “2023 Form 10-Qs”), Schwab provided in Part I – Item 1 – Financial Information – Notes to Condensed Consolidated Financial Statements (“Item 1”) Note 11 Derivative Instruments and Hedging Activities (“Note 11”) discussion of the types of derivatives used by the Company as well as quantitative information to provide investors with an understanding of the sizing and effects of our derivative instruments. As part of the market risk disclosures, on page 18 of the Q2 2023 Form 10-Q, the Company provided a cross reference to Note 11 to avoid duplication of certain disclosures. Note 11 also provides cross references to other footnotes that provide additional disclosure related to our derivative instruments, including to Item 1 – Note 2 Summary of Significant Accounting Policies and New Accounting Standards which provides further discussion of the Company’s accounting for such derivatives.

As part of our disclosure in Note 11, the following statement referenced the size of our outstanding derivative instruments used for interest rate risk management: “The Company had outstanding interest rate swaps with aggregate notional amounts of $8.9 billion at June 30, 2023 that were designated as fair value hedges of interest rate risk.” Note 11 also discloses that the Company’s only outstanding derivative instruments used for hedging purposes as of June 30, 2023 were fair value interest rate swaps on available for sale (AFS) securities. The notional amount of derivative instruments outstanding represented approximately 7% of the $136.9 billion total amortized cost of the Company’s AFS investment securities as of June 30, 2023. Note 11 also disclosed that the impact of our interest rate swaps was $122 million for the six months ended June 30, 2023, or approximately 2% of net interest revenue, though due to the application of hedge accounting, the net impact to net interest revenue of our interest rate risk management (i.e., the combined impact of the interest rate swaps and the hedged AFS securities) was less than $1 million for the six months ended June 30, 2023. In sum, we believe our disclosure clearly shows that the impact of the Company’s use of derivative instruments during the respective periods was immaterial.

In future filings, the Company will clarify that our interest rate risk simulations include the impact of derivative instruments, and additional disclosure will be provided to the extent the impacts of our use of derivative instruments become material to our interest rate risk management program and financial results.

Comment:

3.We also note that key assumptions in your interest rate sensitivity analysis include the projection of interest rate scenarios with rate floors, rates and balances of non-maturity client cash held on the balance sheet, prepayment speeds of mortgage-related investments, repricing of financial instruments, and reinvestment of matured or paid-down securities and loans. Please revise your disclosures in future filings to describe and define the various identified assumptions, whether you use proprietary or third-party data, how the data are used in your modeling and any unique facts and circumstances about them, such as how they have or may respond to unknown facts and circumstances, such as exogenous events. Additionally, please disclose changes in any assumptions used for any comparative period, including changes to the data source used or significant changes in the actual assumption itself due to, and for example, internal data, market conditions or significant changes in the judgments and determinations made by management as you refine your modeling over time. Please see Item 305(a)(1)(ii)(B) of Regulation S-K.

3

Response:

In addition to the portion of our interest rate sensitivity analysis disclosures referenced in the Staff’s comment, we note that we have provided extensive additional disclosure in the subsequent paragraphs on pages 18-19 of the Company’s Q2 2023 Form 10-Q regarding, among other items: the significant components of the Company’s interest-earning assets and interest-bearing liabilities; internal and external factors that influence interest rates on our interest-earning assets and interest-bearing liabilities, including hypothetical directional movement variations in interest revenue compared with interest expense as a result of market interest rate fluctuations; limitations of the simulations such as the use of a statically sized balance sheet; and factors such as those recently experienced in the rising interest rate environment and the Company’s current reliance on higher-cost funding sources.

In regard to changes in assumptions used for comparative periods, the Company has also provided on pages 18-19 of the Company’s Q2 2023 Form 10-Q discussion of material drivers of the changes in net interest revenue sensitivity for comparative periods, including commentary regarding internal and external factors, which, for the periods presented, primarily related to changes in the size and composition of the balance sheet and market interest rates. The Company also included quantitative historical disclosure of interest-earning assets and funding sources as a component of MD&A (see pages 9-10 of the Company’s Q2 2023 Form 10-Q), which provide additional insight into factors influencing the Company’s net interest revenue.

In future filings, the Company will clarify its use of proprietary or third-party data in its interest rate sensitivity analysis and will evaluate the potential need for other modification to the disclosure based on the facts and circumstances present at such time.

Comment:

4.In your 10-K you state that the Chief Risk Officer, Global Risk Committee and its sub-committees, and the Board Risk Committee have significant roles in monitoring and providing oversight for risk management and responding to emerging risks. We also note that during 2023, you have seen significant fluctuations in the composition of your funding sources as clients have moved away from keeping money in your deposit products, and seen a decline in your net interest revenue. We also note the statement in the press release furnished as an exhibit to the April 17, 2023 Form 8-K attributing the reduction in deposit volumes to your clients’ preference for other products within the Schwab family.

Revise your disclosure in future filings to discuss the roles of your risk management oversight process in identifying and addressing changes to the mix of Schwab products held by your clients during the reported period. Discuss any instances where the relevant committee or sub-committee had to approve a change in order to maintain compliance with your established risk profile, or accepted an increased risk exposure compared to your tolerances set before the Federal Reserve began increasing rates and your clients allocation preferences changed.

Note: The remainder of this comment and the Company’s responses are provided below.

Response:

Schwab’s risk management oversight process has focused on identifying and addressing changes to our funding sources that result from changes to the mix of Schwab products held by our clients. As we have disclosed, Schwab’s primary funding source is cash generated by client activity which includes bank deposits and cash