OXPS Optionsxpress Holdings, Inc. (MM)

Charles Schwab Corp. (SCHW) Chief Executive Walt Bettinger said any potential acquirer of E*Trade Financial Corp. (ETFC) would have many issues to address in such a deal.

At Schwab's business update for institutional investors, the San-Francisco-based discount brokerage's Chief Financial Officer Joe Martinetto also issued a higher forecast for money market fund fee waivers for the remainder of 2011--an issue that's been a thorn in the company's side the past few years.

If interest rates remain low, Martinetto said Schwab could waive $150 million in such fees per quarter in the second half of 2011.

With rock-bottom rates, Schwab is waiving those fees so client yields don't turn negative. In its second-quarter report, the company said it waived $128 million in such fees, up 13% from a year earlier. Year-to-date, the fee waivers are roughly flat with the first six months of 2010, at $240 million.

Martinetto said the fee waiver issue is a "double-edged sword," adding that if Schwab elected to move money out of the funds and onto its balance sheet, it would "require additional capital."

Commenting on E*Trade, Bettinger said a potential deal for the company would include "the purchase price of the transaction, capital holes that need to be filled under purchase accounting rules, [E*Trade's] dependency on transactions and the vulnerability it would create." E*Trade is one Schwab's main publicly traded rivals in online brokerage.

Earlier this week, E*Trade disclosed that it received a letter from Citadel LLC, its largest shareholder, requesting that it explore a potential sale of the company. The letter asked E*Trade to call a special shareholder meeting to discuss maximizing shareholder value as well as remove two of its directors and hold an election to choose independent replacements.

While E*Trade has a solid brokerage franchise, it is seen as an acquisition candidate because of its bank's mortgage portfolio, which posted heavy losses amid rising delinquencies, though credit trends have improved in recent quarters.

Analysts have long suggested E*Trade's main rivals Schwab and TD Ameritrade Holding Corp. (AMTD) could be candidates to buy the firm, though Schwab is in the midst of completing its own purchase of optionsXpress Holdings Inc. (OXPS), slated to close in the third quarter.

Shares of Charles Schwab recently traded down 1.4% to $15.42. The stock is down 9.9% year-to-date, but up 2% over the past 52 weeks.

At the update, Bettinger also said Schwab is making progress toward opening a handful of independent branch locations by the end of 2011. Schwab unveiled its plan for such a push in February.

Bettinger said Schwab is "getting 10 to 12 leads a day from people interested in opening those franchises." A slide in his presentation said the company launched a website to "provide a primary initial destination for candidates" and said it has nearly 500 leads collected.

Addressing the company's European exposure, Martinetto said Charles Schwab's money market funds don't have any holdings in Greece, Spain, Italy, Ireland and Portugal--some of the European nations that sparked concerns in the market--as of June 30. However, he said the funds "do hold securities issued by financial institutions in various other European countries."

Commenting on the optionsXpress deal, he said that if the deal closes as expected, Schwab would take $20 million of the $55 million in integration costs in the second half of 2011. Earlier Friday, the company filed a document with regulators announcing a special meeting of optionsXpress shareholders on Aug. 30. Stockholders will vote on the deal at that meeting.

-By Brett Philbin, Dow Jones Newswires; 212-416-2173; brett.philbin@dowjones.com

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