CHARLES SCHWAB FUTURES, INC. (FIRM NFA I.D. NO )

Transcription

1 (FIRM NFA I.D. NO ) Statement of Financial Condition as of December 31, 2017, and Report of Independent Registered Public Accounting Firm PUBLIC DOCUMENT (Pursuant to Code of Federal Regulations Title 17 Part 1 General Regulations under the Commodity Exchange Act 1.10(g)(1))

2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholder and the Board of Directors of Charles Schwab Futures, Inc. Opinion on the Financial Statement We have audited the accompanying statement of financial condition of Charles Schwab Futures, Inc. (the Company ) (a wholly-owned subsidiary of optionsxpress Holdings, Inc., which is a wholly-owned subsidiary of The Charles Schwab Corporation) as of December 31, 2017, and the related notes (collectively referred to as the financial statement ). In our opinion, the financial statement presents fairly, in all material respects, the financial position of the Company as of December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion The financial statement is the responsibility of the Company s management. Our responsibility is to express an opinion on this financial statement based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB), and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statement, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statement. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement. We believe that our audit of the financial statement provides a reasonable basis for our opinion. Report on Supplemental Schedules The supplemental schedules on pages 19 through 20 have been subjected to audit procedures performed in conjunction with the audit of the Company s statement of financial condition. The supplemental schedules are the responsibility of the Company s management. Our audit procedures included determining whether the supplemental schedules reconcile to the financial statement or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental schedules. In forming our opinion on the supplemental schedules, we evaluated whether the supplemental schedules, including their

3 form and content, are presented in compliance with Regulation 1.16 under the Commodity Exchange Act. In our opinion, such schedules are fairly stated, in all material respects, in relation to the statement of financial condition as a whole. February 28, 2018 We have served as the Company s auditor since

4 STATEMENT OF FINANCIAL CONDITION DECEMBER 31, 2017 (In thousands, except share and per share amounts) Assets Cash and cash equivalents $ 248,162 Cash and other assets segregated and on deposit for regulatory purposes 115,053 Receivables from brokers, dealers, and clearing organizations 1,999 Receivables from brokerage clients 138 Income taxes receivable 6,815 Deferred tax assets 131 Other assets 948 Total assets $ 373,246 Liabilities and Stockholder s Equity Payables to brokerage clients $ 63,652 Accrued expenses and other liabilities 2,724 Payables to affiliates 4,979 Total liabilities 71,355 Stockholder s equity: Common stock 25,000,000 shares authorized $0.01 par value per share; 1,000 shares issued and outstanding $ Additional paid-in capital 179,166 Retained earnings 122,725 Total stockholder s equity 301,891 Total liabilities and stockholder s equity $ 373,246 See Notes to Statement of Financial Condition - 3 -

5 1. Organization and Nature of Business In October 2017, Charles Schwab Futures, Inc. (CS Futures or the Company), formerly known as optionsxpress, Inc., a whollyowned subsidiary of optionsxpress Holdings, Inc. (the Parent), which is a wholly-owned subsidiary of The Charles Schwab Corporation (CSC), transferred all of its retail brokerage customer accounts along with the related operations and goodwill to Charles Schwab & Co., Inc. (CS&Co). No consideration was paid by CS&Co to the Company for the purpose of the acquisition of the Company s retail brokerage business. Both the Company and CS&Co are wholly-owned subsidiaries of CSC; therefore, the transfer of the retail brokerage business from the Company to CS&Co was accounted for as a common control transaction for financial reporting purposes. For a summary of the transaction, balances transferred to CS&Co, see Note 11. After the transfer, the Company de-registered as a broker-dealer but remains a Futures Commission Merchant (FCM) providing internetbased futures brokerage services to retail clients located throughout the U.S. and certain foreign countries. CS Futures is a registered FCM with the Commodity Futures Trading Commission (CFTC) and is a member of the National Futures Association (NFA). The primary regulator of the Company is the NFA. The Company clears all of our futures accounts transactions as a non-clearing futures commission merchant through an omnibus account arrangement with clearing futures commission merchants (clearing FCM). 2. Summary of Significant Accounting Policies Basis of presentation The accompanying statement of financial condition have been prepared in conformity with accounting principles generally accepted in the United States (U.S.), which require management to make certain estimates and assumptions that affect the reported amounts in the accompanying statement of financial condition. Certain estimates relate to valuation of tax accruals and legal and regulatory reserves. Actual results may differ from those estimates. Client transactions Clients securities transactions, excluding futures activity, are recorded on a settlement-date basis. Futures transactions are recorded on a trade-date basis. Securities owned by clients, including those that collateralize margin or similar transactions, are not reflected in the statement of financial condition. Cash and cash equivalents The Company considers all highly liquid investments that mature in three months or less from the time of acquisition and that are not segregated and on deposit for regulatory purposes to be cash equivalents. Cash and cash equivalents include money market funds and deposits with banks. Cash and investments segregated and on deposit for regulatory purposes Cash and other assets segregated and on deposit for regulatory purposes include interest-bearing cash deposits, including open trade equity and cash deposits with a clearing FCM, that have been segregated or secured for the benefit of futures clients according to the regulations of the CFTC governing a futures commission merchant. Cash and investments segregated and on deposit for regulatory purposes for the Company s discontinued operations include interest-bearing cash deposits from clients security accounts held in a special reserve bank account in accordance with Rule 15c3-3 of the Securities Exchange Act of

6 Receivables from brokerage clients The Company s discontinued operations, include receivables from brokerage clients related to margin loans. Margin loans are collateralized by client securities and are carried at the amount receivable, net of an allowance for doubtful accounts. The Company monitors margin levels and requires clients to deposit additional collateral, or reduce margin positions to meet minimum collateral requirements if the fair value of the collateral changes. Receivables from brokerage clients that remain unsecured or partially secured for more than 30 days are fully reserved for in the allowance for doubtful accounts, except in the case of confirmed fraud, which is reserved immediately. Clients with margin loans have agreed to allow the Company to pledge collateralized securities in accordance with federal regulations. The collateral is not reflected in the statement of financial condition. Securities borrowed and securities loaned The Company s discontinued operations include securities borrowed and securities loaned. Securities borrowed require the Company to deliver cash to the lender in exchange for securities and are included in receivables from brokers, dealers, and clearing organizations. For securities loaned, the Company receives collateral in the form of cash in an amount equal to or greater than the market value of securities loaned. Securities loaned are included in payables to brokers, dealers, and clearing organizations. The Company monitors the market value of securities borrowed and loaned, with additional collateral obtained or refunded to ensure full collateralization. Goodwill The Company s discontinued operations include goodwill. Goodwill represents the fair value of acquired businesses in excess of the fair value of the individually identified net assets acquired. Goodwill is not amortized but is tested for impairment annually or whenever indications of impairment exist. The Company s annual impairment testing date is April 1st. The Company can elect to qualitatively assess goodwill for impairment if it is more likely than not that the fair value of a reporting unit exceeds its carrying value. If the Company elects to bypass qualitatively assessing goodwill, or it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, management estimates the fair values of each of the Company s reporting units (defined as the Company s businesses for which financial information is available and reviewed regularly by management) and compares it to their carrying values. Based on the Company s analysis, fair value significantly exceeded the carrying value of the Company as of its annual testing date. Guarantees and indemnifications The Company recognizes, at the inception of a guarantee, a liability equal to the estimated fair value of the obligation undertaken in issuing the guarantee. The fair values of obligations relating to guarantees are estimated based on transactions for similar guarantees or expected present value measures. Income taxes The Company is included in the consolidated federal income tax return of CSC. The Company provides for income taxes on all transactions that have been recognized in the statement of financial condition on a pro rata basis with CSC s other subsidiaries in the consolidated income tax return. Accordingly, deferred tax assets are adjusted to reflect the tax rates at which future taxable amounts will likely be settled or realized. The effects of tax rate changes on future deferred tax assets and deferred tax liabilities, as well as other changes in income tax laws, are recorded in earnings in the period during which such changes are enacted

7 Fair values of assets and liabilities Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement accounting guidance describes the fair value hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are based on market pricing data obtained from sources independent of the Company. A quoted price in an active market provides the most reliable evidence of fair value and is generally used to measure fair value whenever available. Unobservable inputs reflect management s judgment about the assumptions market participants would use in pricing the asset or liability. Where inputs used to measure fair value of an asset or liability are from different levels of the hierarchy, the asset or liability is categorized based on the lowest level input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input requires judgment. The fair value hierarchy includes three levels based on the objectivity of the inputs as follows: Level 1 inputs are quoted prices in active markets as of the measurement date for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates, benchmark yields, issuer spreads, new issue data, and collateral performance. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The Company s policy is to recognize transfers of financial instruments between levels as of the beginning of the reporting period in which a transfer occurs. Assets and liabilities measured at fair value on a recurring basis The Company s assets and liabilities measured at fair value on a recurring basis include certain cash equivalents, certain investments segregated and on deposit for regulatory purposes, and securities owned. The Company uses the market approach to determine the fair value of assets and liabilities. When available, the Company uses quoted prices in active markets to measure the fair value of assets and liabilities. When utilizing market data and bid-ask spread, the Company uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, the Company uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. Our primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar to-be-issued securities. The Company does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material difference in the recorded amounts. Fair value of other financial instruments Descriptions of the valuation methodologies and assumptions used to estimate the fair value of other financial instruments are described below. Our financial instruments not recorded at fair value but for which fair value can be approximated and disclosed include: Cash and cash equivalents are short-term in nature and accordingly are recorded at amounts that approximate fair value

8 Cash and investments segregated and on deposit for regulatory purposes are short-term in nature and accordingly are recorded at amounts that approximate fair value. Receivables from/payables to brokers, dealers, and clearing organizations are short-term in nature, recorded at contractual amounts and historically have been settled at those values. Accordingly, the carrying values of these financial instruments approximate their fair values. Receivables from/payables to brokerage clients - net are short-term in nature, recorded at contractual amounts and historically have been settled at those values. Accordingly, the carrying values of these financial instruments approximate their fair values. Financial instruments included in other assets primarily consist of cost method investments and other loans and advances whose carrying values approximate fair value

9 New Accounting Standards Adoption of New Accounting Standards Standard ASU , Stock Compensation - Improvements to Employee Share-Based Payment Accounting (Topic 718) Description Requires entities to recognize the income tax effects for the difference between GAAP and federal income tax treatment (i.e., excess tax benefit or deficiency) of share-based awards in the income statement when the awards vest or are settled, rather than recording such effects in additional paid-in capital. Provides entities with an accounting policy election to account for the impact of forfeitures of awards on compensation expense as they occur or continue with the current practice of estimating forfeitures at the grant date to determine the number of awards expected to vest and adjusting that estimate as necessary. Required Date of Adoption January 1, 2017 Effects on the Statement of Financial Condition or Other Significant Matters This ASU has no impact on the Company s continuing operations

10 New Accounting Standards Not Yet Adopted Standard ASU , Revenue from Contracts with Customers (Topic 606) and related ASUs Description Clarifies that revenue from contracts with clients should be recognized in a manner that depicts the timing of the related transfer of goods or performance of services at an amount that reflects the expected consideration. Adoption allows either full or modified retrospective transition. Full retrospective transition will require a cumulative effect adjustment to retained earnings as of the earliest comparative period presented. Modified retrospective transition will require a cumulative effect adjustment to retained earnings as of the beginning of the reporting period in which the entity first applies the new guidance. Required Date of Adoption January 1, 2018 Effects on the Statement of Financial Condition or Other Significant Matters The Company adopted the revenue recognition guidance as of January 1, 2018 using the modified retrospective method. This guidance did not have a material impact on the Company s statement of financial condition. The Company s implementation work is now substantially complete. ASU , Financial Instruments - Overall (Subtopic ) Requires: (i) equity investments to be measured at fair value, with changes in fair value recognized in net income, unless the equity method is applied or the equity investments do not have readily determinable fair values in which case a practical alternative may be elected; (ii) use of an exit price when measuring the fair value of financial instruments for disclosures; (iii) separate presentation of financial assets and liabilities by measurement category and form of instrument on the balance sheet or in the accompanying notes. Adoption requires a cumulative effect adjustment to the balance sheet as of the beginning of the year of initial application, except for certain changes that require prospective adoption. January 1, 2018 The Company does not expect this guidance will have a material impact on its statement of financial condition

11 Standard Description Required Date of Adoption Effects on the Statement of Financial Condition or Other Significant Matters ASU , Leases (Topic 842) Amends the accounting for leases by lessees and lessors. The primary change from the new guidance is the recognition of right-ofuse assets and lease liabilities by lessees for those leases classified as operating leases. Additional changes include accounting for lease origination and executory costs, required lessee reassessments during the lease term due to changes in circumstances, and expanded lease disclosures. Adoption requires modified retrospective transition as of the beginning of the earliest comparative period presented in the financial statements in which the entity first applies the new standard. Certain transition relief is permitted if elected by the entity. January 1, 2019 The Company expects this will result in a gross up of the statement of financial condition due to recognition of right-of-use assets and lease liabilities. The Company is evaluating its adoption method due to a recently proposed ASU that provides an alternative adoption method. The Company is refining its methodology to estimate the right of use assets and lease liabilities and working on system updates to apply the lease accounting changes. The full population of contracts that may be subject to balance sheet recognition is still being evaluated, but is nearly complete. The Company has further work to perform related to disclosures

12 Standard ASU , Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Description Provides guidance for recognizing impairment of most debt instruments measured at amortized cost, including loans and held to maturity (HTM) debt securities. Requires estimating current expected credit losses (CECL) over the remaining life of an instrument or a portfolio of instruments with similar risk characteristics based on relevant information about past events, current conditions, and reasonable forecasts. The initial estimate of, and the subsequent changes in, CECL will be recognized as credit loss expense through current earnings and will be reflected as an allowance for credit losses offsetting the carrying value of the financial instrument(s) on the balance sheet. Amends the other-than-temporary impairment (OTTI) model for available for sale (AFS) debt securities by requiring the use of an allowance, rather than directly reducing the carrying value of the security, and eliminating consideration of the length of time such security has been in an unrealized loss position as a factor in concluding whether a credit loss exists. Adoption requires a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the entity applies the new guidance except that a prospective transition is required for AFS debt securities for which an OTTI has been recognized prior to the effective date. Required Date of Adoption January 1, 2020 Effects on the Statement of Financial Condition or Other Significant Matters The Company does not expect this guidance will have a material impact on its statement of financial condition

13 3. Receivables from Brokers, Dealers, and Clearing Organizations Amounts receivable from brokers, dealers, and clearing organizations consisted of the following at December 31, 2017: Ending cash balance at clearing FCM $ 1,416 Deposits with clearing organizations 583 Total receivables from brokers, dealers, and clearing organizations $ 1, Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consisted of the following at December 31, 2017: Income taxes payable $ 1,786 Accrued expenses and other 938 Total accrued expenses and other liabilities $ 2, Commitments and Contingencies Guarantees and indemnifications: The Company clears its clients futures transactions on an omnibus basis through a futures commission merchant. The Company has agreed to indemnify its third-party clearing futures commission merchants for losses they may sustain for the client accounts introduced to them by the Company. The Company provides guarantees to its clearing organizations and exchanges under standard membership agreements, which require members to guarantee the performance of other members. Under the agreements, if another member becomes unable to satisfy its obligations to the clearing houses and exchanges, other members would be required to meet shortfalls. The Company s liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral. The potential requirement for the Company to make payments under these arrangements is remote. Accordingly, no liability has been recognized for these guarantees. Legal contingencies: The Company is subject to claims and lawsuits in the ordinary course of business, including arbitrations, class actions and other litigation, some of which include claims for substantial or unspecified damages. The Company is also the subject of inquiries, investigations, and proceedings by regulatory and other governmental agencies. The Company believes it has strong defenses in all significant matters currently pending and is contesting liability and any damages claimed. Nevertheless, some of these matters may result in adverse judgments or awards, including penalties, injunctions or other relief, and the Company may also determine to settle a matter because of the uncertainty and risks of litigation. Based on current information and consultation with counsel, it does not appear reasonably possible that the outcome of any such matter would be material to the financial condition of the Company. Predicting the outcome of a litigation or regulatory matter is inherently difficult, requiring significant judgment and evaluation of various factors, including the procedural status of the matter and any recent developments; prior experience and the experience of others in similar cases; available defenses, including potential opportunities to dispose of a case on the merits or procedural grounds before trial (e.g., motions to dismiss or for summary judgment); the progress of fact discovery; the opinions of counsel and experts regarding potential damages; potential opportunities for settlement and the status of any settlement discussions; and potential insurance coverage and indemnification. It may not be possible to reasonably estimate potential liability, if any, or a range of potential liability until the matter is closer to resolution pending, for example, further proceedings, the outcome of key motions or appeals, or discussions among the parties. Numerous issues may have to be developed, such as discovery of important factual matters and determination of threshold legal issues, which may include novel or unsettled questions of law. Reserves are established or

14 adjusted or further disclosure and estimates of potential loss are provided as the matter progresses and more information becomes available. 6. Fair Values of Assets and Liabilities For a description of the fair value hierarchy and the Company s fair value methodologies, including the use of independent third-party pricing services, see Note 2. The Company did not transfer any assets or liabilities between Level 1, Level 2, or Level 3 during In addition, the Company did not adjust prices received from the primary independent third-party pricing service at December 31, The Company did not have any assets or liabilities recorded at fair value on a recurring basis as of December 31, Fair Value of Other Financial Instruments Descriptions of the valuation methodologies and assumptions used to estimate the fair value of other financial instruments are also described in Note 2. There were no significant changes in these methodologies or assumptions during The following table presents the fair value hierarchy for other financial instruments at December 31, 2017: Assets: Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Balance at Fair Value Cash and cash equivalents $ 248,162 $ $ 248,162 $ $ 248,162 Cash and other assets segregated and on deposit for regulatory purposes 115, , ,053 Receivables from brokers, dealers, and clearing organizations 1,999 1,999 1,999 Receivables from brokerage clients net Other assets Total $ 366,300 $ $ 366,300 $ $ 366,300 Liabilities: Payables to brokerage clients 63,652 63,652 63,652 Total $ 63,652 $ $ 63,652 $ $ 63, Related-Party Transactions Several of the following related-party transactions have been affected by the transfer of the brokerage business from the Company to CS&Co. For further information on the transfer, see Note 11. Certain related-party transactions between the Company, CSC, and our affiliates are described below. Based on the relationships discussed below, the accompanying statement of financial condition is not necessarily indicative of the conditions that would exist or the results of operations that would prevail if the Company were operated as an unaffiliated entity. We provided securities and futures clearing services on a fully disclosed basis to our affiliate broker-dealers, Charles Schwab Australia, Pty Limited, and Charles Schwab Singapore Pte. Ltd., prior to transferring the broker-dealer business

15 The Company paid rent for office facilities that were leased by the Parent prior to transferring the broker-dealer business. We also had a payable of $1,249 due to the Parent related to taxes, which is included in payables to affiliates. Prior to transferring the broker-dealer business the Company enabled clients to sweep excess cash held in brokerage accounts into deposit accounts at Charles Schwab Bank, a subsidiary of CSC. We have an unsecured credit facility with CSC of $200,000. This facility is scheduled to expire in December Borrowings under this facility do not qualify as regulatory capital for the Company and are included in payables to affiliates. There were no borrowings outstanding under this facility at December 31, CSC and CS&Co provide administrative, technology, support, and other services to us and other affiliates. At December 31, 2017, we had accrued a payable of $1,422 related to these services to CS&Co and $2,308 to CSC, which are included in payables to affiliates. During the year ended December 31, 2017, certain intercompany amounts outstanding between the Company and the Parent totaling $6,631 were forgiven as deemed returns of capital to the Parent. 8. Employee Incentive, Retirement and Stock Incentive Plans Employees, officers, and directors of the Company participate in stock incentive plans sponsored by CSC. CSC s share-based incentive plans provide for granting options and restricted stock units to employees, officers, and directors. In addition, CSC offers retirement and employee stock purchase plans to eligible employees. CSC issues shares for stock options and restricted stock units from treasury stock. At December 31, 2017, CSC was authorized to grant up to 44 million common shares under its existing stock incentive plans. Additionally, at December 31, 2017, CSC had 37 million shares reserved for future issuance under its employee stock purchase plan. As of December 31, 2017, there was $268 million of total unrecognized compensation cost related to outstanding stock options and restricted stock units, which is expected to be recognized through 2021 with a remaining weighted-average service period of 1.9 years for stock options, 2.4 years for restricted stock units, and 0.3 years for performance stock units. Stock Option Plan Options are granted for the purchase of shares of common stock at an exercise price not less than market value on the date of grant, and expire within ten years from the date of grant. Options generally vest annually over a one- to four-year period from the date of grant. CSC s stock option activity is summarized below: Number of Options (in millions) Weighted - Average Average Exercise Price per Share Weighted - Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in millions) Outstanding at December 31, $ $ 814 Vested and expected to vest at December 31, $ $ 811 Vested and exercisable at December 31, $ $

16 The aggregate intrinsic value in the table above represents the difference between CSC s closing stock price and the exercise price of each in-the-money option on the last trading day of the period presented. Information on CSC s stock options granted and exercised for the year ended December 31, 2017 is presented below: Weighted-average fair value of options granted per share $ Cash received from options exercised (in millions) 171 Tax benefit realized on options exercised (in millions) 70 Aggregate intrinsic value of options exercised (in millions) 241 CSC s management uses an option pricing model to estimate the fair value of options granted. The model takes into account the contractual term of the stock option, expected volatility, dividend yield, and risk-free interest rate. Expected volatility is based on the implied volatility of publicly-traded options on CSC s stock. Dividend yield is based on the average historical CSC dividend yield. The risk-free interest rate is based on the yield of a U.S. Treasury zero-coupon issue with a remaining term similar to the contractual term of the option. CSC s management uses historical option exercise data, which includes employee termination data, to estimate the probability of future option exercises. The Black-Scholes model is used to solve for the expected life of options. The assumptions used to value CSC s options granted during 2017 and their expected lives were as follows: Weighted-average expected dividend yield 1.06% Weighted-average expected volatility 34% Weighted-average risk-free interest rate 2.1% Expected life (in years) Restricted Stock Units Restricted stock units are awards that entitle the holder to receive shares of CSC s common stock following a vesting period. Restricted stock units are restricted from transfer or sale and generally vest annually over a three- to five-year period, while performance-based restricted stock units also require the Company achieve certain financial or other measures prior to vesting. The fair value of restricted stock units is based on the market price of the Company s stock on the date of grant. The grant date fair value is amortized to compensation expense on a straight-line basis over the requisite service period. The fair value of the restricted stock units that vested during 2017 was $127 million. CSC s restricted stock units activity is summarized below: Restricted Stock Units Number of Units (in millions) Weighted- Average Grant Date Fair Value per unit Outstanding at December 31, $ Retirement Plan Employees of the Company can participate in CSC s qualified retirement plan, the SchwabPlan Retirement Savings and Investment Plan. CSC may match certain employee contributions or make additional contributions to this plan at its discretion

17 9. Taxes on Income On December 22, 2017, P.L , known as the Tax Cuts and Jobs Act (the Tax Act), was signed into law. Among other things, the Tax Act lowers the federal corporate income tax rate from 35% to 21%, effective for tax years including or commencing January 1, As a result of the reduction of the federal corporate income tax rate, net deferred tax assets were remeasured, and other tax adjustments were made related to the Tax Act in the fourth quarter of 2017, as allowed by SAB 118. The temporary differences that created deferred tax assets and liabilities for continuing operations are detailed below: Deferred tax assets: State and local taxes $ 55 Reserves and allowances 76 Total deferred tax assets 131 Deferred tax liabilities: Total deferred tax liabilities Deferred tax assets net $ 131 Unrecognized tax benefits totaled $2,388 as of December 31, 2017, $2,332 of which if recognized, would affect the annual effective tax rate. We had approximately $68 for the payment of interest and penalties accrued at December 31, CSC s consolidated federal income tax returns for 2011 through 2016 remain subject to examination. The years open to examination by state and local governments vary by jurisdiction. 10. Regulatory Requirements The Company is subject to the CFTC Regulation 1.17 (Reg. 1.17) under the Commodity Exchange Act, administered by the CFTC and the NFA, which requires the maintenance of minimum net capital. The Company, as a futures commission merchant, is required to maintain minimum net capital equal to the greater of its net capital requirement under Reg ($1,000), or the sum of 8% of the total risk margin requirements for all positions carried in client accounts and 8% of the total risk margin requirements for all positions carried in non-client accounts, as defined in Reg At December 31, 2017, 8% of the total risk margin requirements for all positions carried in client and non-client accounts was $3,999, which exceeded the minimum dollar requirement for the Company of $1,000. At December 31, 2017, the Company's net capital was $293,122, which was $289,123 in excess of its minimum required net capital. Additional amounts are segregated in accordance with the regulations of the CFTC governing futures commission merchants. The Company had $104,167 segregated relating to clients domestic commodity futures positions, and $3,852 segregated relating to clients foreign commodity futures positions pursuant to CFTC Regulation 30.7 as of December 31, Discontinued Operations On October 9, 2017, the Company transferred all of its retail brokerage customer accounts along with the related operations and goodwill to CS&Co. No consideration was paid by CS&Co to the Company for the transfer of the Company s retail brokerage business. The transaction was accounted for as a common control transaction, and no gain or loss was recognized on the transfer. The Company has no continuing involvement in the discontinued business

18 Assets and liabilities of the retail brokerage business which consist of non-cash and cash related items transferred to CS&Co are as follows: Assets Cash and cash equivalents $ 64,505 Cash and other assets segregated and on deposit for regulatory purposes 646,821 Receivables from brokers, dealers, and clearing organizations 12,122 Receivables from brokerage clients net 156,765 Equipment and office facilities net 427 Goodwill 62,824 Other assets 1,410 Total assets $ 944,874 Liabilities Payables to brokers, dealers, and clearing organizations 2,079 Payables to brokerage clients 872,697 Accrued expenses and other liabilities 7,448 Deferred tax liabilities 6,807 Payables to affiliates 210 Total liabilities $ 889,241 Net assets transferred $ 55, Subsequent Events On January 30 th, 2018, the Company returned capital of $80,000 to the Parent and distributed a dividend to the Parent in the amount of $120,000. **********

19 Supplemental Schedules

20 STATEMENT OF SEGREGATION REQUIREMENTS AND FUNDS IN SEGREGATION FOR CUSTOMERS TRADING ON U.S. COMMODITY EXCHANGES AS OF DECEMBER 31, 2017 (In thousands) SEGREGATION REQUIREMENTS (Section 4d(2) of the CEAct) Net ledger balance: Cash $ 59,259 Securities (at market) Net unrealized profit in open futures contracts traded on a contract market 2,905 Exchange traded options: Market value of open option contracts purchased on a contract market 11,778 Less Market value of open option contracts granted (sold) on a contract market (17,337) Net equity 56,605 Accounts liquidating to a deficit and accounts with debit balances gross 138 Amount required to be segregated $ 56,743 FUNDS IN SEGREGATED ACCOUNTS Deposited in segregated funds bank accounts: Cash $ 44,015 Net equities with other futures commission merchants: Net liquidating equity 60,152 Securities held for particular customers or options customers in lieu of cash (at market) Total amount in segregation $ 104,167 Excess funds in segregation $ 47,424 Management Target Amount for Excess funds in segregation 8,511 Excess funds in segregation over Management Target Amount Excess $ 38,913 There are no material differences between the amounts reported above and amounts reported in the Company s unaudited FOCUS Report, Part II, as of December 31, Therefore, no reconciliation of the two computations is deemed necessary

21 STATEMENT OF SECURED AMOUNTS AND FUNDS HELD IN SEPARATE ACCOUNTS FOR FOREIGN FUTURES AND FOREIGN OPTIONS CUSTOMERS PURSUANT TO COMMISSION REGULATION 30.7 AS OF DECEMBER 31, 2017 (In thousands) FOREIGN FUTURES AND FOREIGN OPTIONS SECURED AMOUNTS - SUMMARY Net ledger balance Foreign Futures and Foreign Option Trading All Customers: Cash $ 1,203 Net unrealized profit in open futures contracts traded on a foreign board of trade 139 Net equity 1,342 Accounts liquidating to a deficit and accounts with debit balances gross Amount required to be segregated $ 1,342 FUNDS IN SEPARATE REGULATION 30.7 ACCOUNTS Equities with registered futures commission merchants: Cash 3,652 Unrealized gain on open futures contracts 200 Total funds in separate section 30.7 accounts $ 3,852 Excess set Aside Funds for Secured Amount $ 2,510 Management Target Amount for Excess funds in separate section 30.7 accounts 201 Excess funds in separate 30.7 accounts over Management Target $ 2,309 There are no material differences between the amounts reported above and amounts reported in the Company s unaudited FOCUS Report, Part II, as of December 31, Therefore, no reconciliation of the two computations is deemed necessary

22 February 28, 2018 Charles Schwab Futures, Inc. San Francisco, California In planning and performing our audit of the financial statements of Charles Schwab Futures, Inc. (the Company ) (a wholly-owned subsidiary of optionsxpress Holdings, Inc., which is a wholly-owned subsidiary of The Charles Schwab Corporation) as of and for the year ended December 31, 2017 (on which we issued our report dated February 28, 2018, and such report expressed an unqualified opinion on those financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America, we considered the Company s internal control over financial reporting ( internal control ) as a basis for designing our auditing procedures for the purpose of expressing an opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control. Accordingly, we do not express an opinion on the effectiveness of the Company s internal control. Also, as required by Regulation 1.16 of the Commodity Futures Trading Commission (CFTC), we have made a study of the practices and procedures followed by the Company, including consideration of control activities for safeguarding customer and firm assets. This study included tests of such practices and procedures that we considered relevant to the objectives stated in Regulation 1.16, in (1) making the periodic computations of minimum financial requirements pursuant to Regulation 1.17; (2) making the daily computations of the segregation requirements of Section 4d(a)(2) of the Commodity Exchange Act and the regulations thereunder, and the segregation of funds based on such computations; and (3) making the daily computations of the foreign futures and foreign options secured amount requirements pursuant to Regulation 30.7 of the CFTC. The management of the Company is responsible for establishing and maintaining internal control and the practices and procedures referred to in the preceding paragraph. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of controls and of the practices and procedures referred to in the preceding paragraphs and to assess whether those practices and procedures can be expected to achieve the CFTC s above-mentioned objectives. Two of the objectives of internal control and the practices and procedures are to provide management with reasonable but not absolute assurance (1) that assets for which the Company has responsibility are safeguarded against loss from unauthorized use or disposition and (2) that transactions are executed in accordance with management s authorization and recorded properly to permit the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America. Regulation 1.16(d)(2) lists additional objectives of the practices and procedures listed in the preceding paragraph. Because of inherent limitations in internal control and the practices and procedures referred to above, error or fraud may occur and not be detected. Also, projection of any evaluation of them to future periods is subject to the risk that they may become inadequate because of changes in conditions or that the effectiveness of their design and operation may deteriorate.

23 A deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A deficiency in design exists when (a) a control necessary to meet the control objective is missing or (b) an existing control is not properly designed so that, even if the control operates as designed, the control objective would not be met. A deficiency in operation exists when a properly designed control does not operate as designed, or when the person performing the control does not possess the necessary authority or competence to perform the control effectively. A significant deficiency is a deficiency, or combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness yet important enough to merit attention by those responsible for oversight of the Company s financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company s financial statements will not be prevented or detected on a timely basis. Our consideration of internal control was for the limited purpose described in the first and second paragraphs and would not necessarily identify all deficiencies in internal control that might be material weaknesses. We did not identify any deficiencies in internal control and control activities for safeguarding certain regulated commodity customer and firm assets that we consider to be material weaknesses, as defined above. We understand that practices and procedures that accomplish the objectives referred to in the second paragraph of this report are considered by the CFTC to be adequate for its purposes in accordance with the Commodity Exchange Act, and related regulations, and that practices and procedures that do not accomplish such objectives in all material respects indicate a material inadequacy for such purposes. Based on this understanding and on our study, we believe that the Company s practices and procedures, as described in the second paragraph of this report, were adequate at December 31, 2017, to meet the CFTC s objectives. This report is intended solely for the information and use of the Board of Directors, management, the CFTC, the National Futures Association and other regulatory agencies that rely on Regulation 1.16 of the CFTC in their regulation of registered futures commission merchants and is not intended to be and should not be used by anyone other than these specified parties. Yours truly, - 2 -