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Interest Rate Risk
−Removed: Our exposure to changes in interest rates primarily relates to interest earned on our cash and cash equivalents, cash and cash equivalents segregated under federal and other regulations, deposits with clearing organizations, restricted cash, investments in debt securities and margin loans.
−Removed: We use a net interest sensitivity analysis to evaluate the effect that changes in interest rates might have on total net revenues.
−Removed: The results of the analysis based on our financial position as of December 31, 2022 indicate that a hypothetical 100 basis point increase or decrease in interest rates would have had a positively correlated impact of approximately 10% on total net revenues.
−Removed: We also have exposure to change in interest rates related to our variable-rate credit facilities, which are described in Note 12 - Financing Activities and Off-Balance Sheet Risk, to our consolidated financial statements in this Annual Report.
+Added: Our exposure to changes in interest rates primarily relates to interest revenue earned on our interest-earning assets that are subject to floating interest rates.
+Added: Interest revenue is affected by various factors such as the distribution and composition of interest-earning assets and the federal funds rate.
+Added: We use a net interest sensitivity analysis, which applies hypothetical 50, 100 or 150 basis point increases or decreases in interest rates to the period end balances of our interest-earning assets and liabilities, to evaluate the effect that changes in interest rates might have on total net revenues, net income (loss), and cash flows, prior to any income tax effects, over the next 12 months.
+Added: The sensitivity analysis assumes the asset and liability structure of the consolidated balance sheets would not change as a result of a simulated changes in interest rates.
+Added: For our Cash Sweep program, we earn a net interest spread on Cash Sweep balances based on the interest rate offered by the partner banks less the interest rate given to users, as stated in our program terms.
+Added: For the vast majority of the Cash Sweep program, we have the ability to manage our net interest spread by adjusting the rate given to users as a result of changes in rates received from partner banks.
+Added: As such, we do not consider the Cash Sweep balance to be subject to short-term interest rate risk and the sensitivity analysis excludes Cash Sweep balances.
+Added: The impact to total net revenues, net income (loss), and cash flows, prior to any income tax effects, as a result of a hypothetical interest rate change at the end of each reporting period would be:
+Added: (in millions) 2022 2023
+Added: 50 basis point
+Added: 100 basis point
+Added: 150 basis point
+Added: The change to total net revenues, net income (loss), and cash flows, prior to any income tax effects, would be the same as total net revenues includes net interest revenue, which captures both the impact of any incremental interest revenue and interest expense, and changes in interest rates do not have a direct impact on operating expenses.
+Added: The impact related to the change in interest rates is positively correlated, linear, and proportional.
+Added: The change in the sensitivity analysis from prior year is in line with the change in interest-earning asset balances.
+Added: Our investment policy and strategy are focused on the preservation of capital and supporting our liquidity requirements.
+Added: We invest in highly-rated debt securities that were considered held-to-maturity investments with average duration in the portfolio less than a year and the maximum maturity of two years.
+Added: To provide a meaningful assessment of the interest rate risk associated with our investment portfolio, we performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of the investment portfolio assuming a 100 basis point parallel shift in the yield curve.
+Added: Based on investment positions as of December 31, 2023, a hypothetical 100 basis point increase in interest rates across all maturities would not be significant.
+Added: Any losses would only be realized if we sold the investments prior to maturity.
+Added: We also have exposure to change in interest rates related to our variable-rate credit facilities, which are described in Note 13 - Financing Activities and Off-Balance Sheet Risk, to our consolidated financial
+Added: statements in this Annual Report.
However, as there were no outstanding borrowings under our credit facilities as of December 31, 2023 and 2022, we had limited financial exposure associated with changes in interest rates as of such dates.
+Added: We have established a comprehensive interest rate risk management policy, which formalizes our approach to managing interest rate risk arising in connection with the operation of our businesses.
+Added: The policy sets forth policies and procedures pursuant to which we will identify interest rate risk exposure, identify and implement appropriate hedging strategies and hedging instruments, and analyze the effectiveness of our hedging strategies.
+Added: Interest rate instruments will be used for hedging purposes only and not for speculation.
Our measurement of interest rate risk involves assumptions that are inherently uncertain and, as a result, our analysis might not precisely estimate the actual impact of changes in interest rates on net interest revenues.
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We continuously monitor customer accounts to detect excessive concentration, large orders or positions, and other activities that indicate increased risk to us.
−Removed: We manage risks associated with our securities lending activities by requiring credit approvals for counterparties, by monitoring the market value of securities loaned and collateral values for securities borrowed on a daily basis, by requiring additional cash as collateral for securities loaned or
−Removed: return of collateral for securities borrowed when necessary, and by participating in a risk-sharing program offered through the OCC.
+Added: We manage risks associated with our securities lending activities by requiring credit approvals for counterparties, by monitoring the market value of securities loaned and collateral values for securities borrowed on a daily basis, by requiring additional cash as collateral for securities loaned or return of collateral for securities borrowed when necessary, and by participating in a risk-sharing program offered through the OCC.
Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.