SCHW Schwab Charles Corp

Management Discussion

• (1) In the first quarter of 2020, order flow revenue was reclassified from other revenue to trading revenue. Prior period amounts have been reclassified to reflect this change.
• Revenue on interest-earning assets is affected by various factors, such as the composition of assets, prevailing interest rates and spreads at the time of origination or purchase, changes in interest rates on floating rate securities and loans, and changes in prepayment levels for mortgage-backed and other asset-backed securities and loans.
• Interest rates across maturities declined during the first three months of 2020 relative to the end of 2019. During the first quarter of 2020, the Federal Reserve cut the federal funds target overnight rate twice, for a total of 150 basis points to near zero; on the longer-end of the curve, the 10-year Treasury rate declined by over 120 basis points. The changes in the economic environment in the first quarter of 2020 resulting from the COVID-19 pandemic drove significantly higher levels of client cash sweep balances. Given the rapid accumulation of these balances, the Company initially placed a substantial amount in excess reserves at the Federal Reserve, which totaled $58.7 billion at March 31, 2020, up from $18.8 billion at the end of 2019. Similarly, from December 31, 2019 to March 31, 2020, payables to brokerage clients increased $10.0 billion while margin loan balances decreased $2.3 billion, contributing to growth in cash and investments segregated. Consistent with our existing asset-liability-management approach, we expect to invest the majority of the amounts currently held in excess reserves into higher yielding investments over the next several quarters.