BGC PARTNERS The following discussion ofBGC Partners' financial condition and results of operations should be read together withBGC Partners, Inc.'s unaudited condensed consolidated financial statements and notes to those statements, as well as the cautionary statements relating to forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act, included in this report. When used herein, the terms "BGC Partners ," "BGC," the "Company," "we," "us" and "our" refer toBGC Partners, Inc. , including consolidated subsidiaries. This discussion summarizes the significant factors affecting our results of operations and financial condition as of and during the three months endedMarch 31, 2020 . This discussion is provided to increase the understanding of, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this report.
OVERVIEW AND BUSINESS ENVIRONMENT
We are a leading global brokerage and financial technology company servicing the global financial markets.
Through brands including BGC®, GFI®, Sunrise™, Besso™, Ed Broking®,Poten & Partners™ and RP Martin™, among others, our businesses specialize in the brokerage of a broad range of products, including fixed income such as government bonds, corporate bonds, and other debt instruments, as well as related interest rate derivatives and credit derivatives. We also broker products across FX, equities, energy and commodities, insurance, and futures. Our businesses also provide a wide variety of services, including trade execution, brokerage services, clearing, trade compression, post-trade, information, and other back-office services to a broad assortment of financial and non-financial institutions. Our integrated platform is designed to provide flexibility to customers with regard to price discovery, execution and processing of transactions, and enables them to use Voice, Hybrid, or in many markets, Fully Electronic brokerage services in connection with transactions executed either OTC or through an exchange. Through our Fenics® group of electronic brands, we offer a number of market infrastructure and connectivity services, Fully Electronic marketplaces, and the Fully Electronic brokerage of certain products that also may trade via Voice and Hybrid execution. The full suite of Fenics® offerings include market data and related information services, Fully Electronic brokerage, compression and other post-trade services, analytics related to financial instruments and markets, and other financial technology solutions. Fenics® brands operate under the names Fenics®, BGC Trader™, CreditMatch®, Fenics MD™, BGC Market Data™, kACE2®, EMBonds®, Capitalab®, Swaptioniser®, CBID® and Lucera®.
We previously offered real estate services through our publicly traded
subsidiary,
BGC,BGC Partners , BGC Trader, GFI, GFI Ginga, CreditMatch,Fenics , Fenics.com, Sunrise Brokers,Besso ,Ed Broking ,Poten & Partners , RP Martin, kACE2, EMBonds, Capitalab, Swaptioniser, CBID and Lucera are trademarks/service marks, and/or registered trademarks/service marks ofBGC Partners, Inc. and/or its affiliates. Our customers include many of the world's largest banks, broker-dealers, investment banks, trading firms, hedge funds, governments, corporations, and investment firms. We have dozens of offices globally in major markets includingNew York andLondon , as well as inBahrain ,Beijing ,Bermuda , Bogotá,Brisbane ,Buenos Aires ,Chicago ,Copenhagen ,Dubai ,Dublin ,Frankfurt ,Geneva ,Hong Kong ,Houston ,Istanbul ,Johannesburg ,Madrid ,Melbourne ,Mexico City ,Moscow , Nyon,Paris ,Rio de Janeiro ,Santiago , São Paulo,Seoul ,Shanghai ,Singapore ,Sydney ,Tel Aviv ,Tokyo andToronto .
As of
Newmark IPO, Separation and Spin-Off
OnNovember 30, 2018 , we completed the Spin-Off of the shares of Newmark Class A and Class B common stock held by us to our stockholders as of the close of business on the Record Date through a special pro-rata stock dividend pursuant to which shares of Newmark Class A common stock held by BGC were distributed to holders of BGC Class A common stock and shares of Newmark Class B common stock held by BGC were distributed to holders of BGC Class B common stock (which holders of BGC Class B common stock were Cantor and another entity controlled by our CEO,Howard W. Lutnick ). Following the Spin-Off, BGC no longer holds any interest in Newmark. See Note 1-"Organization and Basis of Presentation" to our consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , for further information regarding the transactions related to the Newmark IPO, Separation and Spin-Off.
GFI Merger
OnJanuary 12, 2016 , we completed our acquisition of GFI, a leading intermediary and provider of trading technologies and support services to the global OTC and listed markets, via the GFI Merger. GFI serves institutional clients in operating electronic and hybrid markets for cash and derivative products across multiple asset classes. 60
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Nasdaq Transaction
OnJune 28, 2013 , we completed the sale of certain assets to Nasdaq, which purchased certain assets and assumed certain liabilities from us and our affiliates, including the eSpeed brand name and various assets comprising the Fully Electronic portion of our benchmark on-the-runU.S. Treasury brokerage, market data and co-location service businesses. Refer to "Nasdaq Transaction" under "Overview and Business Environment" in Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 for further information.
Fully Electronic (
For the purposes of this document and subsequentSEC filings, all of our Fully Electronic businesses are referred to asFenics . TheFenics business includes our group of electronic brands offering a number of market infrastructure and connectivity services, Fully Electronic marketplaces, and the Fully Electronic brokerage of certain products that also may trade via Voice and Hybrid execution. The full suite ofFenics offerings include market data and related information services, Fully Electronic brokerage, compression and other post-trade services, analytics related to financial instruments and markets, and other financial technology solutions. Historically, our technology-based product growth has led to higher margins and greater profits over time for exchanges and wholesale financial intermediaries alike, even if overall Company revenues remain consistent. This is largely because automated and electronic trading efficiency allows the same number of employees to manage a greater volume of trades as the marginal cost of incremental trading activity falls. Over time, the conversion of exchange-traded and OTC markets to Fully Electronic trading has also led, on average, to volumes increasing by enough to offset commission declines, and thus often to similar or higher overall revenues. We have been a pioneer in creating and encouraging Hybrid and Fully Electronic execution, and we continually work with our customers to expand such trading across more asset classes and geographies. Outside ofU.S. Treasuries and spot FX, the banks and financial firms that dominate the OTC markets had, until recent years, generally been hesitant in adopting electronically traded products. However, the banks, broker-dealers, and other professional trading firms are now much more active in Hybrid and Fully Electronically traded markets across various OTC products, including credit derivative indices, FX derivatives, non-U.S. sovereign bonds, corporate bonds, and interest rate derivatives. These electronic markets have grown as a percentage of overall industry volumes for the past few years as firms like BGC have invested in the kinds of technology favored by our customers. Regulation inAsia ,Europe and theU.S. regarding banking, capital markets, and OTC derivatives has accelerated the adoption of Fully Electronic execution, and we expect this to continue. We also believe that new clients, beyond our large bank customer base, will primarily transact electronically across ourFenics platform. The combination of more market acceptance of Hybrid and Fully Electronic execution and our competitive advantage in terms of technology and experience has contributed to our strong gains in electronically traded products. We continue to invest in Hybrid and Fully Electronic technology broadly across our product categories, not only launching existing product pools but also launching new platforms with market leading protocols and functionality, which we believe will be game changing in the sector.Fenics has exhibited strong growth over the past several years, and we believe that this growth has outpaced the wholesale brokerage industry as a whole. We expect this trend to accelerate as we convert more of our Voice and Hybrid brokerage into Fully Electronic brokerage across ourFenics platform. We expect to benefit from the secular trend towards electronic trading, increased demand for market data, and the need for increased automation and post-trade services. We continue to onboard new customers as the opportunities created by electronic and algorithmic trading continue to transform our industry. We continue to roll out our next-genFenics brokerage platforms across more products and geographies with the goal of seamlessly integrating Voice liquidity with customer electronic orders either by a graphical user interface or application programming interface, and we expect to have continued success converting Voice/Hybrid desks over time as we roll out these platforms across more products and geographies.
We have continued to invest in our new
•
buy-side clients' access to venues, trading counterparties and exchanges.
This subscription SaaS improves their workflow and liquidity through data
aggregation, pre-trade information analysis, and execution facilitation.
We expect to integrate this business with our existing
connectivity subscription service in order to provide both data and
execution capabilities directly between banks/dealers and their buy-side
customers;
• Fenics GO, our new electronic trading platform, which provides live,
real-time and tradeable two-way electronic liquidity for exchange-listed
futures and options, such as Eurex EURO STOXX 50 Index Options,
225, and related
added
electronic liquidity providers;
• Fenics UST, which generated notional volume growth of more than 300%
year-on-year in the first quarter of 2020. This compares with an increase
of 14% for overall primary dealer
volumes are based on data from the Securities Industry and Financial
for U.S. Treasuries. CLOB market share is based on BGC's estimates and
data from Greenwich Associates for the U.S. Treasury volumes of Fenics
UST, CME BrokerTec, Nasdaq Fixed Income, and Dealerweb . Including these
CLOB platforms as well as the volumes of platforms using other fully
electronic U.S. Treasury trading protocols, Fenics UST increased its
market share from 1.8% to 6.0% year-on-year in
Associates.
• Our expanded Fenics FX platforms, including MidFX, Spot, FX Options, and
non-deliverable and FX forwards;
• Lucera, which is our software-defined network, offering the trading
community direct connectivity to each other; and
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• Capitalab's
partnership with the Singapore Exchange.
Collectively, our newerFenics offerings, such as those listed above, are not yet fully up to scale, and are not yet generating significant revenues. BGC continues to expect the 2020 net investment cost associated with its newer standaloneFenics businesses to be under$40 million and continues to expect these businesses will breakeven in 2021. Over time, we expect these new products and services to become profitable, high-margin businesses as their scale and revenues increase, all else equal. Net revenues in our Fully Electronic businesses across brokerage, data, software, and post-trade decreased 1.7% to$75.5 million for the three months endedMarch 31, 2020 , compared to the prior year period. Within ourFenics business, total revenues from our high-margin data, software, and post-trade business were up 8.3% over the prior year period. Going forward, we expectFenics to become an even more valuable part of BGC as it continues to grow. We continue to analyze how to optimally configure our Voice/Hybrid and Fully Electronic businesses.
Possible Corporation Conversion
The Company continues to explore a possible conversion of its UP-C partnership structure into a more simple corporate structure. If the Company determines to execute such a conversion, it would be subject to the approval of the Board of Directors, relevant committees, and be completed no earlier than year-end 2020. Any such transaction would be subject to tax, accounting, regulatory, and other considerations and approvals.
Cost Reduction Program
The Company is continuing to examine how best to operate our business with the goal of reducing expenses. During the first quarter of 2020, we implemented a cost reduction program to reduce our compensation-related cost base and streamline our operations, which resulted in$22.7 million ofU.S. GAAP compensation charges recorded in the quarter. This program is expected to reduce the Company's compensation expenses by over$35 million for the remainder of 2020.U.S. GAAP items recorded may include:
• Certain severance charges incurred in connection with headcount reductions
as part of broad restructuring plans; and
• Certain compensation and non-compensation-related charges incurred as part
of broad restructuring plans. Such
exiting leases and/or other long-term contracts as part of cost-saving
initiatives.
Financial Services Industry
The financial services industry has grown historically due to several factors.
One factor was the increasing use of derivatives to manage risk or to take
advantage of the anticipated direction of a market by allowing users to protect
gains and/or guard against losses in the price of underlying assets without
having to buy or sell the underlying assets. Derivatives are often used to
mitigate the risks associated with interest rates, equity ownership, changes in
the value of FX, credit defaults by corporate and sovereign debtors and changes
in the prices of commodity products. Over this same timeframe, demand from
financial institutions, financial services intermediaries and large corporations
have increased volumes in the wholesale derivatives market, thereby increasing
the business opportunity for financial intermediaries.
Another key factor in the historical growth of the financial services industry
has been the increase in the number of new financial products. As market
participants and their customers strive to mitigate risk, new types of equity
and fixed income securities, futures, options and other financial instruments
have been developed. Most of these new securities and derivatives were not
immediately ready for more liquid and standardized electronic markets, and
generally increased the need for trading and required broker-assisted execution.
Due largely to the impacts of the global financial crises of 2008-2009, our
businesses had faced more challenging market conditions from 2009 until the
second half of 2016. Accommodative monetary policies were enacted by several
major central banks, including the Federal Reserve, Bank of England , Bank of
Japan and the European Central Bank , in response to the global financial crises.
These policies have resulted in historically low levels of volatility and
interest rates across many of the financial markets in which we operate. The
global credit markets also faced structural issues, such as increased bank
capital requirements under Basel III. Consequently, these factors contributed to
lower trading volumes in our rates and credit asset classes across most
geographies in which we operated.
Since mid-2016, the overall financial services industry has benefited from
sustained economic growth, a lower unemployment rate, higher consumer spending,
the modification or repeal of certain U.S. regulations, and higher investment
income. In addition, the secular trend towards digitalization and
electronification within the industry has contributed to higher overall volumes
and transaction count in Fully Electronic execution. Looking ahead, concerns
about the future trade relationship between the U.K. and the EU after Brexit, a
slowdown in global growth driven by the outbreak of COVID-19, and an increase in
trade protectionism are tempered by expectations of monetary and fiscal
stimulus.
COVID-19
Impact of COVID-19 on Employees
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As a global intermediary to financial markets, BGC has been considered an
essential business in many of its various global locations where key employees
are thus able to operate out of its primary offices around the world. The
Company has nonetheless taken proactive measures intended to protect its
employees and clients during this global pandemic. These policies and practices
seek to protect the health, safety and welfare of the Company's workforce while
enabling employees to maintain a high level of performance in compliance with
applicable "shelter-in-place" orders. Certain of these items are summarized
below:
• The Company activated its Business Continuity Plan, and a majority of BGCstaff members are working from home, while many other employees work from
back-up locations. In all cases, the Company has mandated appropriate social
distancing measures.
• The Company provides ongoing informational COVID-19 related messages and
notices.
• Where applicable, BGC is applying more frequent and vigorous cleaning and
sanitation measures and providing personal protective equipment (PPE).
• Internal and external meetings are generally conducted virtually or viaphone calls.
• There is a ban on nonessential business travel since the beginning of March
this year while personal travel is discouraged.
• BGC has and is deferring corporate events and participation in industry
conferences.
• BGC is deploying clinical staff internally to support its employees and
requiring self-quarantine.
• The Company's medical plans have waived applicable member cost sharing for
all diagnostic testing related to COVID-19.
• BGC continues to pay medical, dental, vision, and life insurance
contributions for furloughed employees.
• The Company also introduced zero co-pay telemedicine visits for general
medicine for participants in the
BGC has encouraged the use of telemedicine during the pandemic.
• The Company has reminded employees about its
the ways it can assist them during this challenging time.
• BGC provides paid leave in accordance with its policies and applicable
COVID-19-related laws and regulations.
Impact of COVID-19 on the Company's Results
BGC has recorded and is likely to record amounts for certainU.S. GAAP items that could be higher than they otherwise would have due to the overall impact of the pandemic. Some of these items include: • Non-cash amortization of intangibles with respect to acquisitions; • Non-cash asset impairment charges with respect to goodwill or other intangible assets; • Non-cash mark-to-market adjustments for non-marketable investments;
• Certain severance charges incurred in connection with headcount reductions
as part of broad restructuring plans;
• Certain compensation and non-compensation-related charges incurred as part
of broad restructuring plans. Such
exiting leases and/or other long-term contracts as part of cost-saving
initiatives;
• Expenses relating to setting up and maintaining remote and/or back-up
locations; and
• Communication expenses related to additional voice and data connections.
Some of the above items may be partially offset by certain tax benefits. It is difficult to predict the amounts of any these items or when they might be recorded because they may depend on the duration, severity, and overall impact of the pandemic.
In addition, the uncertain macroeconomic environment and the overall impact of the pandemic may affect the Company's revenues in the following ways:
Voice/Hybrid and/or Fully Electronic Brokerage
• Revenues across rates, credit, FX, equities, energy, and commodities are
correlated with corresponding industry volumes.
• BGC benefitted from higher industry volumes from mid-February through the
end of March in 2020, and may further benefit from higher industry volumes
in the future. However, there can be no assurance that such conditions will
continue.
• The long-term tailwind from government and corporate debt issuance currently
underway is expected to benefit BGC's rates and credit businesses.
• Conversely, additional quantitative easing measures taken by central banks
around the world may lower market volumes.
• An extended period of historically low oil prices and demand for commodities
could lead to lower demand for hedging and increased risk aversion, which
may lower market volumes across energy and commodities.
Overall Fenics •
execution and opportunities created by algorithmic trading and automation.
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• BGC's clients have indicated that the dislocations caused by COVID-19 has
resulted in an even greater demand for the Company's electronic execution.
The driver of this demand is the best-in-class market liquidity that only
integrated global firms like BGC can provide.
• This benefit may be tempered by temporary shifts by traders toward Voice
execution in certain markets during periods of market turbulence.
• The pace of adoption of certain financial technology offerings may slow in
the short-term due to physical dislocations experienced by BGC's employees
and clients. The Company's medium-to longer-term overall strategy with
respect to Fenics is not expected to be impacted.
• BGC's data, software, connectivity, and post-trade business includes a large
percentage of predictable and recurring revenues.
Insurance Brokerage
• This industry typically generates significant amounts of predictable
revenues at specific times of the year as different categories of clients
sign or renew policies.
• Although certain clients may be facing financial hardship or dislocation due
to the pandemic, the insurance brokerage industry has generally performed
well during past economic downturns.
• BGC expects certain insurance market participants to have an even greater
demand for the types of policies it brokers.
Brexit
OnJune 23, 2016 , theU.K. held a referendum regarding continued membership in the EU. The exit from the EU is commonly referred to as Brexit. The Brexit vote passed by 51.9% to 48.1%. TheU.K. subsequently formally left the EU onJanuary 31, 2020 , but its relationship with the bloc will remain in a transition period untilDecember 31, 2020 . During this period, theU.K. will, with some exceptions, remain subject to EU law. It will also maintain access to the EU's single market. If both theU.K. and the EU agree, this transition period may be extended once by up to two years, meaning it could remain in place untilDecember 31, 2022 . Such an extension must however be agreed upon beforeJuly 1, 2020 . TheU.K. government has ruled out any extension of the transition period and has legislated for a commitment not to agree to any extension. The government would then only be able to reverse that provision through new legislation. While theUK government's position is that the COVID-19 pandemic will not impact the timing of these negotiations, no assurances can be given. TheU.K. and EU are currently negotiating a trade deal which, once signed, should determine the new bilateral trade relationship going forward. In case no new trade deal (or one incorporating financial services) is in place by the end of the transition period, absent mitigating legislative measures, this could hinder current levels of mutual market access. While other trade deals are being considered, for example between theU.K. and theU.S. , these may also prove challenging to negotiate and may not replace or compensate for a reduction, if any, inU.K. and EU trade at least in the short term. Further, the terms of aU.K. and EU trade deal may adversely impact the negotiation and terms of such other deals and vice versa. Given the current uncertainty around the future trade relationship and/or the length of the transition period, the consequences for the economies of theU.K. and the EU member states as a result of theU.K.'s withdrawal from the EU are unknown and unpredictable. Given the lack of comparable precedent, it is unclear what the broader macro-economic and financial implications theU.K. leaving the EU with no agreements in place would have. This uncertainty could adversely impact investor confidence which could result in additional market volatility. Historically, elevated volatility has often led to increased volumes in the financial services markets in which we broker, which could be beneficial for our businesses. At other times, increased volatility has led to many market participants curtailing trading activity. Furthermore, any future trade deal might lead to a fragmented regulatory environment, which could disrupt our operations, increase the costs of our operations, and result in a loss of existing levels of cross-border market access. While we have implemented plans to ensure continuity of service inEurope and continue to have regulated entities and offices in place in many of the major European markets, our European headquarters and largest operations are inLondon , and these and other risks and uncertainties could have a material adverse effect on our customers, counterparties, businesses, prospects, financial condition and results of operations.
Regulation
Regulators in theU.S. have finalized most of the new rules across a range of financial marketplaces, including OTC derivatives, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Many of these rules became effective in prior years, while ongoing phase-ins are anticipated over coming years. We believe that theNovember 2016 U.S. Presidential election results make it possible that parts of the Dodd-Frank Act rules may be modified or repealed, which could be a net positive for our business and its largest customers. Along these lines, theU.S. Treasury , in a report released inJune 2017 , called for streamlining of rules and easing regulatory burdens on banks. However, there can be no assurance that these rules will be amended, and we continue to expect the industry to be more heavily regulated than it was prior to the financial crisis of 2008-2009, and we are prepared to operate under a variety of regulatory regimes.
In addition to regulations in the
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Requirements Directive IV for prudential standards. Over the past years,
European policymakers have launched various reviews of post-crisis legislation,
leading to legislative updates such as EMIR Regulatory Fitness and Performance
and CRD V. Furthermore, they introduced a new prudential regime tailored
specifically to investment firms such as our firm -the Investment Firm Review.
As all these rules take effect, they will continue to alter the environment in
which we operate. We note that various internal and external factors have made
the EU more rigid in its approach to non-EU countries which could impact the
ease with which the global financial system is connected.
In 2019, a new European Commission took office which may over the course of its
five-year mandate or introduce new legislative proposals for the Financial
Services Sector. We are unable to predict how any of these new laws and proposed
rules and regulations in the U.S. or the U.K. will be implemented or in what
form, or whether any additional or similar changes to statutes or rules and
regulations, including the interpretation or implementation thereof or a
relaxation or other amendment of existing rules and regulations, will occur in
the future. Any such action could affect us in substantial and unpredictable
ways, including important changes in market infrastructure, increased reporting
costs and a potential rearrangement in the sources of available revenue in a
more transparent market. Certain enhanced regulations could subject us to the
risk of fines, sanctions, enhanced oversight, increased financial and capital
requirements and additional restrictions or limitations on our ability to
conduct or grow our businesses, and could otherwise have an adverse effect on
our businesses, financial condition, results of operations and prospects. We
believe that uncertainty and potential delays around the final form of such new
rules and regulations may negatively impact our customers and trading volumes in
certain markets in which we transact, although a relaxation of existing rules
and requirements could potentially have a positive impact in certain markets.
Increased capital requirements may also diminish transaction velocity.
BGC Derivative Markets and GFI Swaps Exchange, our subsidiaries, began operating
as SEFs on October 2, 2013 . Both BGC Derivative Markets and GFI Swaps Exchange
received permanent registration approval from the CFTC as SEFs on January 22,
2016 . Mandatory Dodd-Frank Act compliant execution on SEFs by eligible U.S.
persons commenced in February 2014 for "made available to trade" products, and a
wide range of other rules relating to the execution and clearing of derivative
products were finalized with implementation periods in 2016 and beyond. We also
own ELX, which became a dormant contract market on July 1, 2017 . As these rules
require authorized execution facilities to maintain robust front-end and
back-office IT capabilities and to make large and ongoing technology
investments, and because these execution facilities may be supported by a
variety of voice and auction-based execution methodologies, we expect our Hybrid
and Fully Electronic trading capability to perform strongly in such an
environment.
In November 2018 , the CFTC issued proposed rules that would significantly revise
CFTC Rule Part 37, which relates to SEFs. The proposed rules would significantly
affect the trading of swaps and the facilities offering swaps trading by
allowing for trading through "any means of interstate commerce" rather than the
two (central limit order book and request for quote) methods prescribed under
the current rules. The proposed rules may also expand the number and type of
swaps required to be executed on SEFs. If these rules are passed, our SEFs will
need to make numerous changes to facilitate trading under a new regulatory
framework. A new CFTC Chairman was sworn in on July 15, 2019 , and this change in
leadership could impact these proposals.
See "Regulation" included in Part I, Item 1 of our Annual Report on Form 10-K
for the year ended December 31, 2019 for additional information related to our
regulatory environment.
Industry Consolidation
In recent years, there has been significant consolidation among the
interdealer-brokers and wholesale brokers with which we compete. We expect to
continue to compete with the electronic markets, post-trade and information
businesses of NEX, that are part of CME now, through the various offerings on
our Fenics platform. We will also continue to compete with TP ICAP across
various Voice/Hybrid brokerage marketplaces as well as via Fenics . There has
also been significant consolidation among smaller non-public wholesale brokers,
including our acquisitions of RP Martin, Heat Energy Group , Remate Lince and
Sunrise Brokers Group . We view the recent consolidation in the industry
favorably, as we expect it to provide additional operating leverage to our
businesses in the future.
Growth Drivers
As a wholesale intermediary in the financial services industry, our businesses are driven primarily by overall industry volumes in the markets in which we broker, the size and productivity of our front-office headcount (including brokers, salespeople, managers and other front-office personnel), regulatory issues, and the percentage of our revenues we are able to generate by Fully Electronic means.
Below is a brief analysis of the market and industry volumes for some of our products, including our overall Hybrid and Fully Electronic execution activities.
Overall Market Volumes and Volatility
Volume is driven by a number of factors, including the level of issuance for
financial instruments, price volatility of financial instruments, macro-economic
conditions, creation and adoption of new products, regulatory environment, and
the introduction and adoption of new trading technologies. Historically,
increased price volatility has often increased the demand for hedging
instruments, including many of the cash and derivative products that we broker.
Rates volumes in particular are influenced by market volumes and, in certain
instances, volatility. Historically low and negative interest rates across the
globe have significantly reduced the overall trading appetite for rates
products. As a result of central bank policies
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and actions, as well as continued expectations of low inflation rates, many
sovereign bonds continue to trade at or close to negative yields, especially in
real terms. In addition, also weighing on yields and rates volumes are global
central bank quantitative easing programs. The programs depress rates volumes
because they entail central banks buying government securities or other
securities in the open market - particularly longer-dated instruments - in an
effort to promote increased lending and liquidity and bring down long-term
interest rates. When central banks hold these instruments, they tend not to
trade or hedge, thus lowering rates volumes across cash and derivatives markets
industry-wide. Following the market dislocation and ongoing pandemic, major
central banks such as the U.S. Federal Reserve , ECB , Bank of Japan, Bank of
England , and Swiss National Bank have or are expected to restart quantitative
easing programs, and continue to maintain historically low interest rates, keep
key short-term interest rates low, or a combination of both. The overall dollar
value of balance sheets of the G-4 (the U.S. , Eurozone , Japan , and U.K. ) is
expected to remain high as a percentage of G-4 GDP over the medium-to-long-term.
Largely as a result of quantitative easing and expectations of continued low
inflation, the yield on Germany's 10-year bond was (0.471)% and the yield on
Japan's 10-year bond was 0.012% as of the end of the first quarter of 2020.
Additional factors have weighed down market volumes in the products we broker.
For example, the Basel III accord, implemented in late 2010 by the G-20 central
banks, is a global regulatory framework on bank capital adequacy, stress testing
and market liquidity risk that was developed with the intention of making banks
more stable in the wake of the financial crisis by increasing bank liquidity and
reducing bank leverage. The accord, which is expected to be fully phased in as
of January 1, 2022 , has already required most large banks in G-20 nations to
hold approximately three times as much Tier 1 capital as was required under the
previous set of rules. These capital rules have made it more expensive for banks
to hold non-sovereign debt assets on their balance sheets, and as a result,
analysts say that banks have reduced their proprietary trading activity in
corporate and asset-backed fixed income securities as well as in various other
OTC cash and derivative instruments. We believe that this has further reduced
overall market exposure and industry volumes in many of the products we broker,
particularly in credit.
During the three months ended March 31, 2020 , industry volumes were generally
higher year-over-year across, fixed income, FX, equities, credit, and
commodities. BGC's brokerage revenues, excluding insurance, were up by 9%
year-on-year in the quarter, with March up by more than twice this percentage.
This reflected substantially higher global volumes and volatility across every
financial asset class in the last 6 weeks of the quarter. Below is an expanded
discussion of the volume and growth drivers of our various brokerage product
categories.
Rates Volumes and Volatility
Our rates business is influenced by a number of factors, including global
sovereign issuances, secondary trading and the hedging of these sovereign debt
instruments. The amount of global sovereign debt outstanding remains high by
historical standards, and the level of secondary trading and related hedging
activity was higher during 2020. In addition, according to Bloomberg and the
Federal Reserve Bank of New York , the average daily volume of various U.S.
Treasuries, excluding Treasury bills, among primary dealers was 18% higher in
the first quarter of 2020 as compared to a year earlier. Additionally, interest
rate derivative volumes were up 28% and 34% at ICE and the CME, respectively,
all according to company press releases. In comparison, our revenue from Fenics
Fully Electronic rates decreased 4.3%, while our overall rates revenues were up
7.5% as compared to a year earlier to $167.2 million .
Our rates revenues, like the revenues for most of our products, are not fully
dependent on market volumes and, therefore, do not always fluctuate consistently
with industry metrics. This is largely because our Voice, Hybrid, and Fully
Electronic desks in rates often have volume discounts built into their price
structure, which results in our rates revenues being less volatile than the
overall industry volumes.
Overall, analysts and economists expect the absolute level of sovereign debt
outstanding to remain at elevated levels for the foreseeable future as
governments finance their future deficits and roll over their sizable existing
debt. Meanwhile, economists expect that the effects of various forms of
quantitative easing previously and currently being undertaken by the various
major central banks over the past several years will continue to negatively
impact financial market volumes, as economic growth remains weak in most OECD
countries. As a result, we expect long-term tailwinds in our rates business from
continuing high levels of government debt, but continued near-term headwinds due
to the current low interest rate environment and continued accommodative
monetary policies globally.
FX Volumes and Volatility
Global FX volumes were generally higher during the first quarter of 2020. Spot FX volumes at CME, Refinitiv (formerly the Financial & Risk business ofThomson Reuters), and EBS were up 22%, 6%, and 23%, respectively, during the quarter. In comparison, our overall FX revenues decreased by 7.1% to$94.4 million . However, Fenics Fully Electronic FX volumes increased by 23% compared with a year earlier, as the market has continued to embrace electronic execution in this asset class and as our FX offerings such as Fenics FX, MidFX, and Fenics Direct gained further market share. Insurance Our overall insurance brokerage business now includesEd Broking , as well as our newly established aviation and space insurance brokerage business, whose producers are not yet generating meaningful revenue. Therefore, these newer insurance businesses are not yet up to scale. The pre-tax loss relating to our insurance brokerage business was$8.5 million and$3.0 million for the three months endedMarch 31, 2020 and 2019, respectively. We expect reduced insurance near-term earnings because of the scale of recent new hires. We anticipate this division's second quarter results to be well below the second quarter of 2019 and to improve in the third and fourth quarters but remain just below breakeven. We expect insurance brokerage to operate profitably in 2021, and to reach approximately 15% margins on profitability by 2022, including additional new hires. 66
-------------------------------------------------------------------------------- We believe that our insurance brokerage platform is worth materially more than our investment in it. Our goal is to maximize value for our investors, and we are exploring ways to do so with respect to this business.
Equities and Other Asset Classes
Global equity volumes were generally up during the first quarter of 2020. Research fromRaymond James indicated that the average daily volumes ofU.S. cash equities andU.S. options were both up 46% year-on-year, while average daily volume of European cash equities shares were up 23% (in notional value). Over the same timeframe, Eurex average daily volumes of equity derivatives were up 36%. Our overall revenues from equities, and other asset classes increased by 18.1% to$83.0 million . Credit Volumes The cash portion of our credit business is impacted by the level of global corporate bond issuance, while both the cash and credit derivatives sides of this business are impacted by sovereign and corporate issuance. The global credit derivative market turnover has declined over the last few years due to the introduction of rules and regulations around the clearing of credit derivatives in theU.S. and elsewhere, along with non-uniform regulation across different geographies. In addition, many of our large bank customers continue to reduce their inventory of bonds and other credit products in order to comply with Basel III and other international financial regulations. During the first quarter of 2020, primary dealer average daily volume for corporate bonds (excluding commercial paper) was up by 7% according to Bloomberg and theFederal Reserve Bank of New York . Total notional traded credit derivatives as reported by theInternational Swaps and Derivatives Association - a reflection of the OTC derivatives market - were up by 68%, from a year earlier. In comparison, our overall credit revenues were up by 13.4% to$97.2 million .
Energy and Commodities
Energy and commodities volumes were generally higher during the first quarter of 2020 compared with the year earlier. According to theFutures Industry Association , the total contracts traded in energy and commodities futures were up 45% year-on-year in the quarter. Similarly, total contracts traded in energy and commodities options were up 69% in the same period. In comparison, BGC's energy and commodities revenues increased by 18.2% to$82.6 million .
Summary of Results from Operations
During the three months endedMarch 31, 2020 , BGC's revenues increased 10.7% to$603.2 million compared to the same period in 2019. This growth was largely due to an increase in brokerage revenues, which were up by 10.6% to$569.2 million for the three months endedMarch 31, 2020 compared to the same period in 2019. In addition, for the three months endedMarch 31, 2020 , our data, software, and post-trade revenues increased by 8.3% to$19.4 million compared to the same period in 2019. For the three months endedMarch 31, 2020 , income from operations before income taxes decreased by$87.3 million to$29.7 million , primarily due to a$47.0 million decrease in Other income (losses), net and a$30.1 million increase in Equity-based compensation and allocations of net income to limited partnership units and FPUs, compared to the same period in the prior year. REGULATORY ENVIRONMENT
See "Regulation" in Part I, Item 1 of our Annual Report on Form 10-K for additional information related to our regulatory environment.
LIQUIDITY
See "Liquidity and Capital Resources" herein for information related to our liquidity and capital resources.
HIRING AND ACQUISITIONS
Key drivers of our revenue are front-office producer headcount and average revenue per producer. We believe that our strong technology platform and unique partnership structure have enabled us to use both acquisitions and recruiting to profitably increase our front-office staff at a faster rate than our largest competitors since our formation in 2004. We have invested significantly to capitalize on the current business environment through acquisitions, technology spending and the hiring of new brokers, salespeople, managers and other front-office personnel. The business climate for these acquisitions has been competitive, and it is expected that these conditions will persist for the foreseeable future. We have been able to attract businesses and brokers, salespeople, managers and other front-office personnel to our platform as we believe they recognize that we have the scale, technology, experience and expertise to succeed in the current business environment. Our average revenue per front-office employee has historically declined year-over-year for the period immediately following significant headcount increases, and the additional brokers and salespeople generally achieve significantly higher productivity levels in their second or third year with the Company. Excluding our insurance brokerage business, as ofMarch 31, 2020 , our front-office headcount was 67
-------------------------------------------------------------------------------- 2,515 brokers, salespeople, managers and other front-office personnel, down 2% from 2,574 a year ago. Compared to the prior year period, average revenue per front-office employee for the three months endedMarch 31, 2020 increased by 8% to$213 thousand from$197 thousand . On a stand-alone basis, our total insurance brokerage headcount increased by 23% to 428 from 349 a year ago. The laws and regulations passed or proposed on both sides of theAtlantic concerning OTC trading seem likely to favor increased use of technology by all market participants, and are likely to accelerate the adoption of both Hybrid and Fully Electronic execution. We believe these developments will favor the larger inter-dealer brokers over smaller, non-public local competitors, as the smaller players generally do not have the financial resources to invest the necessary amounts in technology. We believe this will lead to further consolidation across the wholesale financial brokerage industry, and thus allow us to profitably grow our front-office headcount.
Since 2018, our acquisitions have included
OnNovember 15, 2018 , we acquiredPoten & Partners , a leading ship brokerage, consulting and business intelligence firm specializing in LNG, tanker and LPG markets. Founded over 80 years ago and with 170 employees worldwide,Poten & Partners provides its clients with valuable insight into the international oil, gas and shipping markets. OnJanuary 31, 2019 , we completed the acquisition ofEd Broking , an independentLloyd's of London insurance broker with a strong reputation across accident and health, aerospace, cargo, energy, financial and political risks, marine, professional and executive risks, property and casualty, specialty and reinsurance.Ed Broking has become part of the Company's overall insurance brokerage business. OnMarch 12, 2019 , we completed the acquisition of Ginga Petroleum. Ginga Petroleum provides a comprehensive range of broking services for physical and derivative energy products, including naphtha, liquefied petroleum gas, fuel oil, biofuels, middle distillates, petrochemicals and gasoline. OnMarch 6, 2020 , we completed the acquisition ofAlgomi , a software company that provides technology to bond market participants to improve their workflow and liquidity by data aggregation, pre-trade information analysis and execution facilitation. FINANCIAL HIGHLIGHTS For the three months endedMarch 31, 2020 , we had income (loss) from operations before income taxes of$29.7 million compared to$117.1 million in the year earlier period. This decrease was largely a result of increased compensation expense, as well as significant gains in the three months endedMarch 31, 2019 , which included the gain on sale ofCSC Commodities , and gains related to fair value adjustments on investments. Total revenues for the three months endedMarch 31, 2020 increased$58.4 million to$603.2 million , led primarily by our insurance, energy and commodities, equities and other asset classes, rates, and credit businesses, and slightly offset by lower revenue from our FX business. While we benefited from generally higher industry volumes, this was partially offset by the dislocation faced by BGC's employees and clients due to COVID-19. But for these disruptions, we believe that our revenue improvement would have been greater. Brokerage revenues for the three months endedMarch 31, 2020 increased by$54.8 million , or 10.6% from the same period in 2019. Our top line was primarily driven by organic growth. Our energy and commodities and equities platforms were up by 18.2% and 18.1%, respectively, while our rates and credit businesses grew by 7.5%, and 13.4%, respectively. BGC's insurance brokerage revenues increased 42.8% mainly due to the acquisition ofEd Broking . Net revenues in our Fully Electronic businesses across brokerage, data, software, and post-trade decreased 1.7% to$75.5 million for the three months endedMarch 31, 2020 , compared to the prior year period. Within ourFenics business, total revenues from our high-margin data, software, and post-trade business were up 8.3% over the prior year period. OurFenics financial technology businesses consist of three business lines. First, the technology which operates our integrated voice and electronic liquidity pools and enables electronic execution. Second, our fully electronic marketplaces, and third, our data, connectivity, software, and post-trade businesses. As we have said in the past, during periods of market turbulence, our clients often value the insight our brokers provide. As a result, voice brokers added more liquidity and market share over these past several months in many areas where clients had access to our liquidity equally via voice or electronics. This dynamic caused what we believe was a temporary shift by traders toward voice execution in many markets. This was due to both the extreme levels of volatility across many asset classes, as well as the disruptive physical dislocations faced by our brokers, clients, and the customers of our clients. However, our clients have indicated that, looking forward, the dislocations caused by COVID-19 have resulted in an even greater desire on the part of market participants to integrate our electronic execution, because of the best-in-class market liquidity only integrated global firms like BGC can provide. We expect this trend to improve our electronic brokerage revenues and profitability over time. Total expenses increased$98.7 million to$568.4 million , primarily due to an$86.8 million increase in compensation expenses driven by the impact of higher variable compensation, the implementation of a cost reduction program designed to reduce future expenses and streamline operations, and an increase in equity-based compensation. The increase in non-compensation expenses was primarily driven by the interest expense related to the 3.750% Senior Notes, which were issued inSeptember 2019 , as well as an increase in commissions and floor brokerage expenses. OnMay 4, 2020 , our Board declared a1 cent dividend for the first quarter. The Board took the step of reducing the quarterly dividend out of an abundance of caution in order to strengthen the Company's balance sheet as the global capital markets face difficult and unprecedented macroeconomic conditions. Additionally,BGC Holdings will reduce its distributions to or on behalf of its partners. The distributions to or on behalf of partners will at least cover their related tax payments. Whether any given post-tax amount is equivalent to the amount received by a stockholder also on an after tax basis depends upon stockholders' and partners' domiciles and tax status. BGC believes that these steps will allow the Company to prioritize its financial strength. The Company expects to regularly review its capital return policy. 68
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RESULTS OF OPERATIONS
The following table sets forth our unaudited condensed consolidated statements
of operations data expressed as a percentage of total revenues for the periods
indicated (in thousands):
Three Months Ended March 31,
2020 2019
Percentage Percentage
Actual of Total Actual of Total
Results Revenues Results Revenues
Revenues:
Commissions $ 455,855 75.6 % $ 430,182 78.8 %
Principal transactions 113,311 18.8 84,230 15.5
Total brokerage revenues 569,166 94.4 514,412 94.3
Fees from related parties 5,521 0.9 5,795 1.1
Data, software and post-trade 19,398 3.2 17,910 3.3
Interest income 4,161 0.7 3,665 0.7
Other revenues 4,921 0.8 2,969 0.6
Total revenues 603,167 100.0 544,751 100.0
Expenses:
Compensation and employee
benefits 344,749 57.2 288,000 52.9
Equity-based compensation and
allocations
of net income to limited partnership
units
and FPUs (1) 42,204 7.0 12,141 2.2
Total compensation and employee benefits 386,953 64.2 300,141 55.1
Occupancy and equipment 51,074 8.5 46,002 8.4
Fees to related parties 5,435 0.9 2,927 0.5
Professional and consulting fees 19,956 3.3 20,005 3.7
Communications 30,521 5.1 30,411 5.6
Selling and promotion 18,699 3.1 18,402 3.4
Commissions and floor brokerage 19,277 3.2 14,618 2.7
Interest expense 17,334 2.9 13,198 2.4
Other expenses 19,188 3.1 24,015 4.4
Total expenses 568,437 94.3 469,719 86.2
Other income (losses), net:
Gains (losses) on divestitures and sale
of investments - - 20,054 3.7
Gains (losses) on equity method
investments 1,023 0.2 783 0.1
Other income (loss) (6,015 ) (1.0 ) 21,202 3.9
Total other income (losses), net (4,992 ) (0.8 ) 42,039 7.7
Income (loss) from operations
before income taxes 29,738 4.9 117,071 21.5 Provision (benefit) for income taxes 8,706 1.4 29,897 5.5 Consolidated net income (loss) 21,032 3.5 87,174 16.0 Less: Net income (loss) operations attributable to noncontrolling interest in subsidiaries 6,718 1.1 25,306 4.6
Net income (loss) available to
common stockholders$ 14,314 2.4 %$ 61,868 11.4 %
(1) The components of Equity-based compensation and allocations of net income
to limited partnership units and FPUs are as follows (in thousands):
69
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Three Months Ended March 31,
2020 2019
Percentage Percentage
Actual of Total Actual of Total
Results Revenues Results Revenues
Issuance of common stock and
exchangeability expenses $ 23,034 3.8 % $ 3,536 0.6 %
Allocations of net income 1,279 0.2 4,546 0.8
LPU amortization 16,309 2.7 3,045 0.6
RSU amortization 1,582 0.3 1,014 0.2Equity-based compensation and
allocations of net income to
limited partnership units and
FPUs $ 42,204 7.0 % $ 12,141 2.2 %
Three Months Ended
Revenues Brokerage Revenues Total brokerage revenues increased by$54.8 million , or 10.6%, to$569.2 million for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . Commission revenues increased by$25.7 million , or 6.0%, to$455.9 million for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . Principal transactions revenues increased by$29.1 million , or 34.5%, to$113.3 million for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . The increase in total brokerage revenues was primarily driven by increases in revenues from insurance, rates, equities, and other asset classes, energy and commodities, and credit, partially offset by a decrease in revenues from foreign exchange.
Our brokerage revenues from insurance increased by
Our brokerage revenues from rates increased by
Our brokerage revenues from equities and other asset classes increased by
Our brokerage revenues from energy and commodities increased by
Our credit revenues increased by$11.5 million , or 13.4%, to$97.2 million for the three months endedMarch 31, 2020 . This increase was mainly due to higher global volumes.
Our FX revenues decreased by
Fees from Related Parties
Fees from related parties decreased by
Data, Software and Post-Trade
Data, software and post-trade revenues increased by$1.5 million , or 8.3%, to$19.4 million for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . This increase was primarily driven by an increase inFenics software revenues and new business contracts.
Interest Income
Interest income increased by
Other Revenues
Other revenues increased by$2.0 million , or 65.7% to$4.9 million for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . This was primarily driven by an increase in consulting income forPoten & Partners . 70
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Expenses
Compensation and Employee Benefits
Compensation and employee benefits expense increased by$56.7 million , or 19.7%, to$344.7 million for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . The main drivers of this increase were the impact of higher brokerage revenues on variable compensation, costs associated with the implementation of a cost reduction program designed to reduce future expenses and streamline operations, as well as the impact of acquisitions and hires.
Equity-Based Compensation and Allocations of Net Income to Limited Partnership Units and FPUs
Equity-based compensation and allocations of net income to limited partnership units and FPUs increased by$30.1 million , to$42.2 million for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . This was primarily driven by an increase in charges related to equity-based compensation due higher combined grants of common stock and exchangeability and amortization. Occupancy and Equipment Occupancy and equipment expense increased by$5.1 million , or 11.0%, to$51.1 million for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . This increase was primarily driven by higher fixed asset impairments as well as an increase in amortization expense on developed software. Fees to Related Parties
Fees to related parties increased by
Professional and Consulting Fees
Professional and consulting fees slightly decreased by 0.2%, and remained steady at$20.0 million for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 .
Communications
Communications expense increased by
Selling and Promotion
Selling and promotion expense increased by
Commissions and Floor Brokerage
Commissions and floor brokerage expense increased by$4.7 million , or 31.9%, to$19.3 million for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . This line item tends to move in line with brokerage revenues as higher volumes result in increased commissions and floor brokerage costs. Interest Expense Interest expense increased by$4.1 million , or 31.3%, to$17.3 million for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . This increase was primarily driven by interest expense related to the 3.750% Senior Notes issued inSeptember 2019 and borrowings on BGC's Credit Facility.
Other Expenses
Other expenses decreased by
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Other Income (Losses), net
Gains (Losses) on Divestitures and Sale of Investments
We had no gains or losses from divestitures or sale of investments during the three months endedMarch 31, 2020 , compared to a gain of$20.1 million from the sale ofCSC Commodities during the three months endedMarch 31, 2019 .
Gains (Losses) on Equity Method Investments
Gains (losses) on equity method investments increased by$0.2 million , to a gain of$1.0 million , for the three months endedMarch 31, 2020 as compared to a gain of$0.8 million for the three months endedMarch 31, 2019 . Gains (losses) on equity method investments represent our pro-rata share of the net gains or losses on investments over which we have significant influence, but which we do not control. Other Income (Loss) Other income (loss) decreased by$27.2 million , due to a loss of$6.0 million for the three months endedMarch 31, 2020 as compared to income of$21.2 million the three months endedMarch 31, 2019 . This was primarily driven by fair value adjustments on investments carried under the measurement alternative in the three months endedMarch 31, 2019 . There was also a decrease related to the mark-to-market on marketable securities, as well as a decrease due to losses related to mark-to-market movements.
Provision (Benefit) for Income Taxes
Provision (benefit) for income taxes decreased by$21.2 million , or 70.9%, to$8.7 million for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . This decrease was primarily driven by lower pre-tax earnings as well as a change in the geographical and business mix of earnings, which can have an impact on our consolidated effective tax rate from period-to-period.
Net Income (Loss) Attributable to Noncontrolling Interest in Subsidiaries
Net income (loss) attributable to noncontrolling interest in subsidiaries
decreased by
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QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our unaudited quarterly results of operations for
the indicated periods (in thousands). Results of any period are not necessarily
indicative of results for a full year and may, in certain periods, be affected
by seasonal fluctuations in our business. Certain reclassifications have been
made to prior period amounts to conform to the current period's presentation.
March 31, December September June 30, March 31, December 31, September 30, June 30,
2020 31, 2019 30, 2019 2019 2019 20181 20181 20181
Revenues:
Commissions $ 455,855 $ 382,897 $ 409,765 $ 422,974 $ 430,182 $ 372,370 $ 352,292 $ 378,709
Principal transactions 113,311 71,725 75,536 90,432 84,230 62,787 73,360 84,988
Fees from related
parties 5,521 8,218 8,208 7,221 5,795 5,022 6,821 5,934
Data, software and
post-trade 19,398 18,151 18,364 18,741 17,910 18,169 16,547 15,370
Interest income 4,161 2,865 3,976 7,813 3,665 3,919 2,870 4,940
Other revenues 4,921 3,300 5,288 4,006 2,969 4,084 3,752 1,102
Total revenues 603,167 487,156 521,137 551,187 544,751 466,351 455,642 491,043
Expenses:
Compensation and
employee
benefits 344,749 271,296 278,544 290,071 288,000 249,951 221,575 252,250
Equity-based
compensation and
allocations of net
income to
limited partnership
units and
FPUs 42,204 69,389 40,330 43,752 12,141 85,178 34,901 45,602
Total compensation and
employee benefits 386,953 340,685 318,874 333,823 300,141 335,129 256,476 297,852
Occupancy and equipment 51,074 48,987 44,709 45,109 46,002 38,934 39,148 34,365
Fees to related parties 5,435 2,858 7,123 6,457 2,927 4,586 5,644 5,882
Professional and
consulting fees 19,956 27,553 21,262 23,347 20,005 23,865 22,329 20,001
Communications 30,521 29,715 29,882 29,974 30,411 26,808 29,078 30,729
Selling and promotion 18,699 21,432 20,320 21,491 18,402 19,112 16,146 17,855
Commissions and floor
brokerage 19,277 16,377 15,831 16,791 14,618 17,549 15,082 15,345
Interest expense 17,334 15,636 15,258 14,985 13,198 11,615 10,722 10,028
Other expenses 19,188 18,886 42,757 21,765 24,015 17,541 14,882 14,548
Total expenses 568,437 522,129 516,016 513,742 469,719 495,139 409,507 446,605
Other income (losses),
net:
Gain (loss) on
divestiture and
sale of investments - (14 ) - (1,619 ) 20,054 - - -
Gains (losses) on
equity method
investments 1,023 1,064 1,530 738 783 2,415 1,327 1,011
Other income (loss) (6,015 ) 9,462 2,095 194 21,202 2,453 15,123 1,481
Total other income
(losses), net (4,992 ) 10,512 3,625 (687 ) 42,039 4,868 16,450 2,492
Income (loss) from
operations
before income taxes 29,738 (24,461 ) 8,746 36,758 117,071 (23,920 ) 62,585 46,930
Provision (benefit) for
income
taxes 8,706 2,095 6,186 14,993 29,897 16,980 23,019 14,571
Consolidated net income
(loss)
from continuing
operations 21,032 (26,556 ) 2,560 21,765 87,174 (40,900 ) 39,566 32,359
Consolidated net income
(loss)
from discontinued
operations,
net of tax - - - - - 11,041 122,738 17,631
Consolidated net income
(loss) 21,032 (26,556 ) 2,560 21,765 87,174 (29,859 ) 162,304 49,990
Less: Net income (loss)
from
continuing operations
attributable to
noncontrolling
interest in
subsidiaries 6,718 (10,313 ) 6,089 8,154 25,306 (18,995 ) 7,956 12,358
Less: Net income (loss)
from discontinued
operations
attributable to
noncontrolling
interest in
subsidiaries - - - - - 5,879 34,062 2,429
Net income (loss)
available to
common stockholders $ 14,314 $ (16,243 ) $ (3,529 ) $ 13,611 $ 61,868 $ (16,743 ) $ 120,286 $ 35,203
1 Financial results have been retrospectively adjusted as a result of the
Spin-Off to reflect Newmark through November 30, 2018 as discontinued
operations for all periods presented.
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The table below details our brokerage revenues by product category for the indicated periods (in thousands):
March 31, December 31, September 30, June 30, March 31, December 31, September 30, June 30,
2020 2019 2019 2019 2019 2018 2018 2018
Brokerage revenue by
product:
Rates $ 167,240 $ 129,549 $ 156,765 $ 152,959 $ 155,611 $ 128,874 $ 121,984 $ 141,400
FX 94,366 80,369 86,492 101,899 101,558 94,706 96,988 102,307
Credit 97,189 70,438 72,382 78,166 85,727 67,484 67,111 75,526
Energy and commodities 82,582 70,954 72,335 73,430 69,865 53,799 57,974 56,277
Insurance 44,836 43,277 39,692 41,417 31,404 15,155 19,211 17,792
Equities and other
asset classes 82,953 60,035 57,635 65,535 70,247 75,139 62,384 70,395
Total brokerage revenues $ 569,166 $ 454,622 $ 485,301 $ 513,406 $ 514,412 $ 435,157 $ 425,652 $ 463,697
Brokerage revenue by
product (percentage):
Rates 29.4 % 28.5 % 32.3 % 29.8 % 30.2 % 29.6 % 28.6 % 30.5 %
FX 16.6 17.7 17.8 19.8 19.7 21.8 22.8 22.1
Credit 17.1 15.5 14.9 15.2 16.7 15.5 15.8 16.3
Energy and commodities 14.5 15.6 14.9 14.3 13.6 12.4 13.6 12.1
Insurance 7.9 9.5 8.2 8.1 6.1 3.5 4.5 3.8
Equities and other
asset classes 14.5 13.2 11.9 12.8 13.7 17.2 14.7 15.2
Total brokerage revenues 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Brokerage revenue by type:
Voice/Hybrid $ 513,101 $ 410,332 $ 436,841 $ 460,359 $ 455,582 $ 389,203 $ 382,272 $ 410,376
Fully Electronic 56,065 44,290 48,460 53,047 58,830 45,954 43,380 53,321
Total brokerage revenues
$ 463,697 Brokerage revenue by type (percentage): Voice/Hybrid 90.1 % 90.3 % 90.0 % 89.7 % 88.6 % 89.4 % 89.8 % 88.5 % Fully Electronic 9.9 9.7 10.0 10.3 11.4 10.6 10.2 11.5 Total brokerage revenues 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
LIQUIDITY AND CAPITAL RESOURCES
Balance Sheet
Our balance sheet and business model are not capital intensive. Our assets consist largely of cash, collateralized and uncollateralized short-dated receivables and less liquid assets needed to support our business. Longer-term capital (equity and notes payable) is held to support the less liquid assets and potential capital investment opportunities. Total assets as ofMarch 31, 2020 were$5.7 billion , an increase of 46.3% as compared toDecember 31, 2019 . The increase in total assets was driven primarily by increases in Receivables from broker-dealers, clearing organizations, customers and related broker-dealers as well as Cash and cash equivalents and Accrued commissions and other receivables, net. We maintain a significant portion of our assets in cash and Securities owned, with our liquidity (which we define as Cash and cash equivalents, Reverse repurchase agreements, Marketable securities and Securities owned, less Securities loaned and Repurchase Agreements) as ofMarch 31, 2020 of$512.3 million . See "Liquidity Analysis" below for a further discussion of our liquidity. Our Securities owned were$57.5 million as ofMarch 31, 2020 andDecember 31, 2019 . Our Marketable securities decreased to$0.2 million as ofMarch 31, 2020 , compared to$14.2 million as ofDecember 31, 2019 . We did not have any Reverse repurchase agreements as ofMarch 31, 2020 andDecember 31, 2019 . We had Securities loaned of$3.0 million and Repurchase Agreements of$0.5 million as ofMarch 31, 2020 . As ofDecember 31, 2019 , we had Securities loaned of$13.9 million and no Repurchase Agreements. OnMarch 19, 2018 , we entered into the BGC Credit Agreement with Cantor. The BGC Credit Agreement provides for each party and certain of its subsidiaries to issue loans to the other party or any of its subsidiaries in the lender's discretion in an aggregate principal amount up to$250.0 million outstanding at any time. The BGC Credit Agreement replaced the previous credit facility between BGC and an affiliate of Cantor, and was approved by theAudit Committee of BGC . OnAugust 6, 2018 , the Company entered into an amendment to the BGC Credit Agreement, which increased the aggregate principal amount that can be loaned to the other party or any of its subsidiaries from$250.0 million to$400.0 million that can be outstanding at any time. The BGC Credit Agreement will mature on the earlier to occur of (a)March 19, 2021 , after which the maturity date of the BGC Credit Agreement will continue to be extended for successive one-year periods unless prior written notice of non-extension is given by a lending party to a borrowing party at least six months in advance of such renewal date and (b) the termination of the BGC Credit Agreement by either party pursuant to its terms. The outstanding amounts under the BGC Credit Agreement will bear interest for any rate period at a per annum rate equal to the higher of BGC's or Cantor's short-term borrowing rate in effect at such time plus 1.00%. As ofMarch 31, 2020 , there were no borrowings by BGC or Cantor outstanding under this agreement. 74 -------------------------------------------------------------------------------- As part of our cash management process, we may enter into tri-party reverse repurchase agreements and other short-term investments, some of which may be with Cantor. As ofMarch 31, 2020 andDecember 31, 2019 , there were no reverse repurchase agreements outstanding. Additionally, inAugust 2013 , the Audit Committee authorized us to invest up to$350 million in an asset-backed commercial paper program for which certain Cantor entities serve as placement agent and referral agent. The program issues short-term notes to money market investors and is expected to be used from time to time as a liquidity management vehicle. The notes are backed by assets of highly rated banks. We are entitled to invest in the program so long as the program meets investment policy guidelines, including policies relating to ratings. Cantor will earn a spread between the rate it receives from the short-term note issuer and the rate it pays to us on any investments in this program. This spread will be no greater than the spread earned by Cantor for placement of any other commercial paper note in the program. As ofMarch 31, 2020 andDecember 31, 2019 , we had no investments in the program.
Funding
Our funding base consists of longer-term capital (equity and notes payable), collateralized financings, shorter-term liabilities and accruals that are a natural outgrowth of specific assets and/or our business model, such as matched fails and accrued compensation. We have limited need for short-term unsecured funding in our regulated entities for their brokerage business. Contingent liquidity needs are largely limited to potential cash collateral that may be needed to meet clearing bank, clearinghouse, and exchange margins and/or to fund fails. Capital expenditures tend to be cash neutral and approximately in line with depreciation. Current cash balances exceed our potential normal course contingent liquidity needs. We believe that cash in and available to our largest regulated entities, inclusive of financing provided by clearing banks and cash segregated under regulatory requirements, is adequate for potential cash demands of normal operations, such as margin or fail financing. We expect our operating activities going forward to generate adequate cash flows to fund normal operations, including any dividends paid pursuant to our dividend policy. However, we continually evaluate opportunities for us to maximize our growth and further enhance our strategic position, including, among other things, acquisitions, strategic alliances and joint ventures potentially involving all types and combinations of equity, debt and acquisition alternatives. As a result, we may need to raise additional funds to: • increase the regulatory net capital necessary to support operations; • support continued growth in our businesses;
• effect acquisitions, strategic alliances, joint ventures and other
transactions;
• develop new or enhanced products, services and markets; and
• respond to competitive pressures.
Acquisitions and financial reporting obligations related thereto may impact our
ability to access longer term capital markets funding on a timely basis and may
necessitate greater short-term borrowings in the interim. This may impact our
credit rating or the interest rates on our debt. We may need to access
short-term capital sources to meet business needs from time to time, including,
but not limited to, conducting operations; hiring or retaining brokers,
salespeople, managers and other front-office personnel; financing acquisitions;
and providing liquidity, including in situations where we may not be able to
access the capital markets in a timely manner when desired by us. Accordingly,
we cannot guarantee that we will be able to obtain additional financing when
needed on terms that are acceptable to us, if at all.
As described earlier in this document, on November 30, 2018 , we completed the
Spin-Off of Newmark. As set forth in the Separation and Distribution Agreement,
Newmark assumed certain BGC indebtedness and repaid such indebtedness.
As discussed above, our liquidity was $512.3 million as of March 31, 2020 . Our
liquidity remains strong and the steps taken during the first quarter of 2020
were intended to prevent unwarranted financial stress during this extraordinary
COVID-19 period. Our decision to reduce our dividend and draw down additional
funds on the Revolving Credit Facility was a result of preparing for the unknown
in the current extraordinary macroeconomic/social environment and was not taken
to meet an external demand for liquidity, but rather to strengthen our balance
sheet. We continue to operate soundly without stress and do not have any
Company-specific financial issues. The reduction of the dividend was an
internally driven, precautionary step to ensure the financial security of the
company in uncertain times. We have no meaningful debt maturities due until May
2021 . The proceeds from the revolving credit facility may be used for general
corporate purposes.
75
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Notes Payable, Other and Short-term Borrowings
Unsecured Senior Revolving Credit Agreement
OnNovember 28, 2018 , we entered into a new Revolving Credit Agreement withBank of America, N.A ., as administrative agent, and a syndicate of lenders, which replaced the existing committed unsecured senior revolving credit agreement. The maturity date of the new Revolving Credit Agreement wasNovember 28, 2020 and the maximum revolving loan balance is$350.0 million . Borrowings under this agreement bear interest at either LIBOR or a defined base rate plus additional margin. OnDecember 11, 2019 , we entered into an amendment to the new unsecured Revolving Credit Agreement. Pursuant to the amendment, the maturity date was extended toFebruary 26, 2021 . OnFebruary 26, 2020 , the Company entered into a second amendment to the unsecured revolving credit agreement, pursuant to which, the maturity date was extended by two years toFebruary 26, 2023 . The size of the Revolving Credit Agreement, along with the interest rate on the borrowings therefrom, remained unchanged. As ofMarch 31, 2020 , there was$297.2 million of borrowings outstanding, net of deferred financing costs of$2.8 million , under the new unsecured Revolving Credit Agreement. As ofDecember 31, 2019 , there was$68.9 million of borrowings outstanding, net of deferred financing costs of$1.1 million , under the new unsecured Revolving Credit Agreement. The average interest rate on the outstanding borrowings was 3.446 % for the three months endedMarch 31, 2020 . 5.125% Senior Notes OnMay 27, 2016 , we issued an aggregate of$300.0 million principal amount of 5.125% Senior Notes. The 5.125% Senior Notes are general senior unsecured obligations of the Company. The 5.125% Senior Notes bear interest at a rate of 5.125% per year, payable in cash onMay 27 andNovember 27 of each year, commencingNovember 27, 2016 . The 5.125% Senior Notes will mature onMay 27, 2021 . The Company may redeem some or all of the notes at any time or from time to time for cash at certain "make-whole" redemption prices (as set forth in the Indenture). If a "Change of Control Triggering Event" (as defined in the Indenture) occurs, holders may require the Company to purchase all or a portion of its notes for cash at a price equal to 101% of the principal amount of the notes to be purchased plus any accrued and unpaid interest to, but excluding, the purchase date. Cantor purchased$15.0 million of such senior notes and still holds such notes as ofMarch 31, 2020 . The initial carrying value of the 5.125% Senior Notes was$295.8 million , net of the discount and debt issuance costs of$4.2 million , of which$0.5 million were underwriting fees payable to CF&Co and$18 thousand were underwriting fees payable toCastleOak Securities, L.P. The carrying value of the 5.125% Senior Notes as ofMarch 31, 2020 was$298.9 million . OnAugust 16, 2016 , we filed a Registration Statement on Form S-4 which was declared effective by theSEC onSeptember 13, 2016 . OnSeptember 15, 2016 , BGC launched an exchange offer in which holders of the 5.125% Senior Notes, issued in a private placement onMay 27, 2016 could exchange such notes for new registered notes with substantially identical terms. The exchange offer closed onOctober 12, 2016 at which point the initial 5.125% Senior Notes were exchanged for new registered notes with substantially identical terms.
5.375% Senior Notes due 2023
OnJuly 24, 2018 , we issued an aggregate of$450.0 million principal amount of 5.375% Senior Notes due 2023. The 5.375% Senior Notes due 2023 are general senior unsecured obligations of the Company. The 5.375% Senior Notes due 2023 bear interest at a rate of 5.375% per year, payable in cash onJanuary 24 andJuly 24 of each year, commencingJanuary 24, 2019 . The 5.375% Senior Notes due 2023 will mature onJuly 24, 2023 . We may redeem some or all of the 5.375% Senior Notes due 2023 at any time or from time to time for cash at certain "make-whole" redemption prices (as set forth in the indenture related to the 5.375% Senior Notes due 2023). If a "Change of Control Triggering Event" (as defined in the indenture related to the 5.375% Senior Notes due 2023) occurs, holders may require the Company to purchase all or a portion of their notes for cash at a price equal to 101% of the principal amount of the notes to be purchased plus any accrued and unpaid interest to, but excluding, the purchase date. The initial carrying value of the 5.375% Senior Notes due 2023 was$444.2 million , net of the discount and debt issuance costs of$5.8 million , of which$0.3 million were underwriting fees paid to CF&Co and$41 thousand were underwriting fees paid toCastleOak Securities, L.P. We also paid CF&Co an advisory fee of$0.2 million in connection with the issuance. The issuance costs are amortized as interest expense and the carrying value of the 5.375% Senior Notes due 2023 will accrete up to the face amount over the term of the notes. The carrying value of the 5.375% Senior Notes as ofMarch 31, 2020 was$445.6 million . OnJuly 31, 2018 , we filed a Registration Statement on Form S-4 which was declared effective by theSEC onAugust 10, 2018 . OnAugust 10, 2018 , BGC launched an exchange offer in which holders of the 5.375% Senior Notes, issued in a private placement onJuly 24, 2018 could exchange such notes for new registered notes with substantially identical terms. The exchange offer closed onSeptember 17, 2018 at which point the initial 5.375% Senior Notes were exchanged for new registered notes with substantially identical terms.
3.750% Senior Notes
OnSeptember 27, 2019 , we issued an aggregate of$300.0 million principal amount of 3.750% Senior Notes. The 3.750% Senior Notes are general unsecured obligations of the Company. The 3.750% Senior Notes bear interest at a rate of 3.750% per annum, payable on eachApril 1 andOctober 1 , commencingApril 1, 2020 . The 3.750% Senior Notes will mature onOctober 1, 2024 . We may redeem some or all of the 3.750% Senior Notes at any time or from time to time for cash at certain "make-whole" redemption prices (as set forth in the indenture related to the 3.750% Senior Notes). If a "Change of Control Triggering Event" (as defined in the indenture related to the 3.750% Senior Notes) occurs, holders may require the Company to purchase all or a portion of their notes for cash at a price equal to 101% of the principal amount of the notes to be purchased plus any accrued and unpaid interest to, but excluding, the purchase date. The initial carrying value of the 3.750% Senior Notes was$296.1 million , net of discount and debt issuance costs of$3.9 million , of which$0.2 million were underwriting fees payable to CF&Co and$36 thousand were underwriting fees payable toCastleOak Securities, L.P. The issuance costs will 76 -------------------------------------------------------------------------------- be amortized as interest expense and the carrying value of the 3.750% Senior Notes will accrete up to the face amount over the term of the notes. The carrying value of the 3.750% Senior Notes was$296.3 million as ofMarch 31, 2020 . OnOctober 11, 2019 , we filed a Registration Statement on Form S-4, which was declared effective by theSEC onOctober 24, 2019 . OnOctober 28, 2019 , BGC launched an exchange offer in which holders of the 3.750% Senior Notes, issued in a private placement onSeptember 27, 2019 may exchange such notes for new registered notes with substantially identical terms. The exchange offer closed onDecember 9, 2019 at which point the initial 3.750% Senior Notes were exchanged for new registered notes with substantially identical terms.
Collateralized Borrowings
OnMarch 13, 2015 , we entered into a secured loan arrangement of$28.2 million under which it pledged certain fixed assets as security for a loan. This arrangement incurred interest at a fixed rate of 3.70% per year and matured onMarch 13, 2019 , therefore there were no borrowings outstanding as ofDecember 31, 2019 orMarch 31, 2020 . OnMay 31, 2017 , we entered into a secured loan arrangement of$29.9 million under which it pledged certain fixed assets as security for a loan. This arrangement incurs interest at a fixed rate of 3.44% per year and matures onMay 31, 2021 . As ofMarch 31, 2020 andDecember 31, 2019 , we had$9.8 million and$11.7 million , respectively, outstanding related to this secured loan arrangement. The book value of the fixed assets pledged as ofMarch 31, 2020 was$1.7 million . The book value of the fixed assets pledged as ofDecember 31, 2019 was$2.3 million . OnApril 8, 2019 , we entered into a secured loan arrangement of$15.0 million , under which we pledged certain fixed assets as security for a loan. This arrangement incurs interest at a fixed rate of 3.77% and matures onApril 8, 2023 . As ofMarch 31, 2020 , we had$12.4 million outstanding related to this secured loan arrangement. The book value of the fixed assets pledged as ofMarch 31, 2020 was$6.2 million . As ofDecember 31, 2019 , we had$13.2 million outstanding related to this secured loan arrangement. The net book value of the fixed assets pledged as ofDecember 31, 2019 was$8.1 million . Also, onApril 19, 2019 , we entered into a secured loan arrangement of$10.0 million , under which we pledged certain fixed assets as security for a loan. This arrangement incurs interest at a fixed rate of 3.89% and matures onApril 19, 2023 . As ofMarch 31, 2020 , we had$8.1 million outstanding related to this secured loan arrangement. The book value of the fixed assets pledged as ofMarch 31, 2020 was$4.9 million . As ofDecember 31, 2019 , we had$8.8 million outstanding related to this secured loan arrangement. The book value of the fixed assets pledged as ofDecember 31, 2019 was$5.7 million .
Weighted-average Interest Rate
For the three months endedMarch 31, 2020 and 2019, the weighted-average interest rate of our total Notes payable and other borrowings, which include our Unsecured Senior Revolving Credit Agreement, Senior Notes, and Collateralized Borrowings, was 4.43% and 5.05%, respectively.
Short-term Borrowings
OnAugust 22, 2017 , we entered into a committed unsecured loan agreement withItau Unibanco S.A. The credit agreement provides for short-term loans of up to$3.8 million (BRL 20.0 million ). The maturity date of the agreement isAugust 20, 2020 . Borrowings under this facility bear interest at the BrazilianInterbank offering rate plus 3.30%. As ofMarch 31, 2020 , there were$3.8 million (BRL 20.0 million ) of borrowings outstanding under the facility. As ofDecember 31, 2019 , there were$5.0 million (BRL 20.0 million ) of borrowings outstanding under the facility. As ofMarch 31, 2020 , the interest rate was 7.1%. OnAugust 23, 2017 , we entered into a committed unsecured credit agreement withItau Unibanco S.A. The credit agreement provides for an intra-day overdraft credit line up to$9.7 million (BRL 50.0 million ). The maturity date of the agreement isJune 12, 2020 . This facility bears a fee of 1.00% per year. As ofMarch 31, 2020 andDecember 31, 2019 , there were no borrowings outstanding under this facility. CREDIT RATINGS As ofMarch 31, 2020 , our public long-term credit ratings and associated outlooks are as follows: Rating Outlook Fitch Ratings Inc. BBB- Stable Standard & Poor's BBB- Stable Credit ratings and associated outlooks are influenced by a number of factors, including but not limited to: operating environment, earnings and profitability trends, the prudence of funding and liquidity management practices, balance sheet size/composition and resulting leverage, cash flow coverage of interest, composition and size of the capital base, available liquidity, outstanding borrowing levels and the firm's competitive position in the industry. A credit rating and/or the associated outlook can be revised upward or downward at any time by a rating agency if such rating agency decides that circumstances warrant such a change. Any reduction in our credit ratings and/or the associated outlooks could adversely affect the availability of debt financing on terms acceptable to us, as well as the cost and other terms upon which we are able to obtain any such financing. In addition, credit ratings and associated outlooks may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions. In connection with certain agreements, we may be required to provide additional collateral in the event of a credit ratings downgrade. 77
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LIQUIDITY ANALYSIS
We consider our liquidity to be comprised of the sum of Cash and cash equivalents, Reverse repurchase agreements, Marketable securities, and Securities owned, less Securities loaned and Repurchase agreements. The discussion below describes the key components of our liquidity analysis, including earnings, dividends and distributions, net investing and funding activities, including repurchases and redemptions of BGC Class A common stock and partnership units, security settlements, changes in securities held and marketable securities, and changes in our working capital.
We consider the following in analyzing changes in our liquidity.
Our liquidity analysis includes a comparison our Consolidated net income (loss) adjusted for certain non-cash items (e.g., Equity-based compensation) as presented on the cash flow statement. Dividends and distributions are payments made to our holders of common shares and limited partnership interests and are related to earnings from prior periods. These timing differences will impact our cash flows in a given period. Our investing and funding activities represent a combination of our capital raising activities, including short-term borrowings and repayments, issuances of shares under our CEO Program (net), BGC Class A common stock repurchases and partnership unit redemptions, purchases and sales of securities, dispositions, and other investments (e.g. acquisitions, forgivable loans to new brokers and capital expenditures-all net of depreciation and amortization). Our securities settlement activities primarily represent deposits with clearing organizations. In addition, when advantageous, we may elect to facilitate the settlement of matched principal transactions by funding failed trades, which results in a temporary secured use of cash and is economically beneficial to us.
Other changes in working capital represent changes primarily in receivables and payables and accrued liabilities that impact our liquidity.
Changes in Reverse repurchase agreements, Securities owned, and Marketable securities may result from additional cash investments or sales, which will be offset by a corresponding change in Cash and cash equivalents and, accordingly, will not result in a change in our liquidity. Conversely, changes in the market value of such securities are reflected in our earnings or other comprehensive income (loss) and will result in changes in our liquidity. AtDecember 31, 2019 , the Company completed the calculation of the one-time transition tax on the deemed repatriation of foreign subsidiaries' earnings pursuant to the Tax Act and previously recorded a net cumulative tax expense of$25.0 million , net of foreign tax credits. An installment election can be made to pay the taxes over eight years with 40% paid in equal installments over the first five years and the remaining 60% to be paid in installments of 15%, 20% and 25% in years six, seven and eight, respectively. The cumulative remaining balance as ofMarch 31, 2020 is$15.8 million .
As of
Discussion of the three months ended
The table below presents our Liquidity Analysis:
March 31, 2020 December 31, 2019
(in millions)
Cash and cash equivalents $ 455.0 $ 415.4
Securities owned 57.5 57.5
Marketable securities 1 0.3 0.3
Repurchase Agreements (0.5 ) -
Total $ 512.3 $ 473.2
1As of December 31, 2019 $13.9 million of Marketable securities on our balance
sheet had been lent in a Securities loaned transaction and, therefore, are not
included in this Liquidity Analysis.
78
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The $39.0 million increase in our liquidity position from $473.2 million as of
December 31, 2019 to $512.3 million as of March 31, 2020 , was primarily related
to the $230.0 million draw down on the Revolving Credit Agreement, partially
offset by ordinary movements in working capital (including settlement of
payables to related parties), cash paid with respect to annual employee bonuses
and associated tax and compensation expenses, cost reduction charges, year-end
taxes, acquisitions and our continued investment in new revenue generating
hires.
Discussion of the three months ended
The table below presents our Liquidity Analysis:
March 31, 2019 December 31, 2018
(in millions)
Cash and cash equivalents $ 331.7 $ 336.5
Securities owned 60.1 58.4
Marketable securities 1 4.9 17.0
Repurchase Agreements (4.3 ) (1.0 )
Total $ 392.4 $ 410.9
1 As of
respectively, of Marketable securities on our balance sheet had been lent in
a Securities loaned transaction and therefore are not included in this
Liquidity Analysis.
The$18.5 million decrease in our liquidity position from$410.9 million as ofDecember 31, 2018 to$392.4 million as ofMarch 31, 2019 was primarily related to the financing of acquisitions, cash paid with respect to annual employee bonuses, ordinary movements in working capital, and the Company continuing to invest in new revenue generating hires. These out flows were partially offset by the Company drawing$250.0 million from its$350.0 million revolving credit facility
CLEARING CAPITAL
InNovember 2008 , we entered into a clearing capital agreement with Cantor to clearU.S. Treasury andU.S. government agency securities transactions on our behalf. Pursuant to the terms of this agreement, so long as Cantor is providing clearing services to us, Cantor shall be entitled to request from us, and we shall post as soon as practicable, cash or other property acceptable to Cantor in the amount reasonably requested by Cantor under the clearing capital agreement. Cantor had not requested any cash or other property from us as collateral as ofMarch 31, 2020 .
REGULATORY REQUIREMENTS
Our liquidity and available cash resources are restricted by regulatory requirements of our operating subsidiaries. Many of these regulators, includingU.S. and non-U.S. government agencies and self-regulatory organizations, as well as state securities commissions in theU.S. , are empowered to conduct administrative proceedings that can result in civil and criminal judgments, settlements, fines, penalties, injunctions, enhanced oversight, remediation, or other relief. In addition, self-regulatory organizations, such as theFINRA and the NFA, along with statutory bodies such as theFCA , theSEC , and the CFTC require strict compliance with their rules and regulations. The requirements imposed by regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with broker-dealers and are not designed to specifically protect stockholders. These regulations often serve to limit our activities, including through net capital, customer protection and market conduct requirements. The final phase of Basel III (unofficially called "Basel IV") is a global prudential regulatory standard designed to make banks more resilient and increase confidence in the banking system. Its wide scope includes reviewing market, credit and operational risk along with targeted changes to leverage ratios. Basel IV includes updates to the calculation of bank capital requirements with the aim of making outcomes more comparable across banks globally. Most of the requirements are expected to be implemented by national and regional authorities by around 2023. The adoption of these proposed rules could restrict the ability of our large bank and broker-dealer customers to operate trading businesses and to maintain current capital market exposures under the present structure of their balance sheets, and will cause these entities to need to raise additional capital in order to stay active in our marketplaces. TheFCA is the relevant statutory regulator in theU.K. TheFCA's objectives are to protect customers, maintain the stability of the financial services industry and promote competition between financial services providers. It has broad rule-making, investigative and enforcement powers derived from the Financial Services and Markets Act 2000 and subsequent and derivative legislation and regulations. In addition, the majority of our other foreign subsidiaries are subject to similar regulation by the relevant authorities in the countries in which they do business. Certain other of our foreign subsidiaries are required to maintain non-U.S. net capital requirements. For example, inHong Kong ,BGC Securities (Hong Kong ), LLC,GFI (HK) Securities LLC and Sunrise Broker (Hong Kong ) Limited are regulated by theSecurities and Futures Commission .BGC Capital Markets (Hong Kong ), Limited andGFI (HK) Brokers Ltd are regulated by TheHong Kong Monetary Authority . All are subject toHong Kong net capital requirements. InFrance ,Aurel BGC andBGC France Holdings ; inAustralia ,BGC Partners (Australia) Pty Limited ,BGC (Securities) Pty Limited andGFI Australia Pty Ltd. ; inJapan ,BGC Shoken Kaisha Limited's Tokyo branch andBGC Capital Markets Japan LLC's Tokyo Branch; inSingapore ,BGC Partners (Singapore) Limited , and GFI 79
--------------------------------------------------------------------------------Group Pte Ltd ; inKorea ,BGC Capital Markets & Foreign Exchange Broker (Korea) Limited andGFI Korea Money Brokerage Limited ; and inTurkey ,BGC Partners Menkul Degerler AS, all have net capital requirements imposed upon them by local regulators. In addition, BGC is a member of clearing houses such asLondon Metals Exchange, which may impose minimum capital requirements. InLatin America , BGC Liquidez Distribuidora De Titulos E Valores Mobiliarios Ltda. (Brazil ) has net capital requirements imposed upon it by local regulators. These subsidiaries may also be prohibited from repaying the borrowings of their parents or affiliates, paying cash dividends, making loans to their parent or affiliates or otherwise entering into transactions, in each case, that result in a significant reduction in their regulatory capital position without prior notification or approval from their principal regulator. See Note 22-"Regulatory Requirements" to our unaudited condensed consolidated financial statements for further details on our regulatory requirements. As ofMarch 31, 2020 ,$683.8 million of net assets were held by regulated subsidiaries. As ofMarch 31, 2020 , these subsidiaries had aggregate regulatory net capital, as defined, in excess of the aggregate regulatory requirements, as defined, of$395.5 million . InApril 2013 , theBoard and Audit Committee authorized management to enter into indemnification agreements with Cantor and its affiliates with respect to the provision of any guarantees provided by Cantor and its affiliates from time to time as required by regulators. These services may be provided from time to time at a reasonable and customary fee. BGC Derivative Markets and GFI Swaps Exchange, our subsidiaries, began operating as SEFs onOctober 2, 2013 . Both BGC Derivative Markets and GFI Swaps Exchange received permanent registration approval from the CFTC as SEFs onJanuary 22, 2016 . Mandatory Dodd-Frank Act compliant execution on SEFs by eligibleU.S. persons commenced inFebruary 2014 for "made available to trade" products, and a wide range of other rules relating to the execution and clearing of derivative products have been finalized with implementation periods in 2016 and beyond. We also own ELX, which became a dormant contract market onJuly 1, 2017 . Much of our global derivatives volumes continue to be executed by non-U.S. based clients outside theU.S. and subject to local prudential regulations. As such, we will continue to operate a number of European regulated venues in accordance with EU orU.K. legislation and licensed by theFCA or EU-based national supervisors. These venues are also operated for non-derivative instruments for these clients. MiFID II was published by theEuropean Securities and Markets Authority inSeptember 2015 , and implemented inJanuary 2018 and introduced important infrastructural changes. MiFID II requires a significant part of the market in these instruments to trade on trading venues subject to transparency regimes, not only in pre- and post-trade prices, but also in fee structures and access. In addition, it has impacted a number of key areas, including corporate governance, transaction reporting, pre- and post-trade transparency, technology synchronization, best execution and investor protection. MiFID II is intended to help improve the functioning of the EU single market by achieving a greater consistency of regulatory standards. By design, therefore, it is intended that EU member states should have very similar regulatory regimes in relation to the matters addressed to MiFID. MiFID II has also introduced a new regulated execution venue category known as an OTF that captures much of the Voice-and Hybrid-oriented trading in EU. Much of our existing EU derivatives and fixed income execution business now take place on OTFs. Further to its decision to leave the EU, theU.K. has implemented MIFID II's requirements into its own domestic legislation. Brexit may impact future market structures and MiFID II rulemaking and implementation due to potential changes in mutual passporting between theU.K. and EU member states. In addition, the GDPR came into effect in the EU onMay 25, 2018 and creates new compliance obligations in relation to personal data. The GDPR may affect our practices, and will increase financial penalties for non-compliance significantly.
See "Regulation" in Part I, Item 1 of our Annual Report on Form 10-K for the
year ended
EQUITY
Class A Common Stock
Changes in shares of BGC Class A common stock outstanding were as follows (in
thousands):
Three Months Ended March 31,
2020 2019
Shares outstanding at beginning of period 307,915 291,475
Share issuances:
Redemptions/exchanges of limited partnership interests1 2,105 1,821
Vesting of RSUs 697 240
Acquisitions 270 18
Other issuances of BGC Class A common stock 72 61
Treasury stock repurchases - (233 )
Shares outstanding at end of period 311,059 293,382
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1 Included in redemption/exchanges of limited partnership interests for the
three months ended
common stock granted in connection with the cancellation of 1.4 million
LPUs. Included in redemption/exchanges of limited partnership interests for
the three months ended
A common stock granted in connection with the cancellation of 0.1 million
LPUs. Because LPUs are included in the Company's fully diluted share count,
if dilutive, redemptions or exchanges in connection with the issuance of
shares of BGC Class A common stock would not materially impact the fully
diluted number of shares and units outstanding.
Class B Common Stock
The Company did not issue any shares of BGC Class B common stock during the
three months ended
Unit Redemptions and Share Repurchase Program
The Board and Audit Committee have authorized repurchases of BGC Class A common stock and redemptions of limited partnership interests or other equity interests in our subsidiaries. OnAugust 1, 2018 , the Company'sBoard and Audit Committee again increased the Company's share repurchase and unit redemption authorization to$300.0 million , which may include purchases from Cantor, its partners or employees or other affiliated persons or entities. As ofMarch 31, 2020 , the Company had$255.7 million remaining from its share repurchase and unit redemption authorization. From time to time, the Company may actively continue to repurchase shares and/or redeem units. The table below represents the units redeemed and/or shares repurchased for cash and does not include units redeemed/cancelled in connection with the grant of shares of BGC Class A common stock nor the limited partnership interests exchanged for shares of BGC Class A common stock. The gross unit redemptions and share repurchases of BGC Class A common stock during the three months endedMarch 31, 2020 were as follows (in thousands, except for weighted-average price data): Approximate Dollar Value Total Number of Units and of Units Shares That May Redeemed Weighted-Average Price Yet Be Redeemed/ or Shares Paid per Unit Purchased Period Repurchased or Share Under the Program Redemptions1 January 1, 2020-March 31, 2020 235 $
4.30
Repurchases2
January 1, 2020-March 31, 2020 - $ - Total Repurchases - - Total Redemptions and Repurchases 235 $ 4.30 $ 255,678 1. During the three months endedMarch 31, 2020 , the Company redeemed
0.2 million LPUs at an aggregate redemption price of
average price of
months ended
the Company redeemed 1.2 million LPUs at an aggregate redemption price of
FPUs at an aggregate redemption price of
weighted-average price of
units redeemed/cancelled in connection with the grant of 1.4 million and 0.1
million shares of BGC Class A common stock during the three months ended
exchanged for 0.6 million and 0.9 million shares of BGC Class A common stock
during the three months ended
2. The Company did not repurchase any shares of BGC Class A common stock during
the three months ended
common stock at an aggregate price of
price of $5.30 per share.
The weighted-average share count, including securities that were anti-dilutive for our earnings per share calculation was as follows (in thousands):
Three Months Ended March 31, 2020
Common stock outstanding1 358,001
Partnership units2 178,393
RSUs (Treasury stock method) 708
Other 1,340
Total3 538,442
81
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1 Common stock consisted of shares of BGC Class A common stock, shares of BGC
Class B common stock and contingent shares for which all necessary
conditions have been satisfied except for the passage of time. For the
quarter ended
Class A common stock was 312.1 million and shares of BGC Class B common
stock was 45.9 million.
2 Partnership units collectively include FPUs, LPUs, and Cantor units (see
Note 2-"Limited Partnership Interests in BGC Holdings and NewmarkHoldings," to our unaudited condensed consolidated financial statements in
Part I, Item 1 of this Quarterly Report on Form 10-Q for more information).
3 For the three months ended
securities were not included in the computation of fully diluted EPS
because their effect would have been anti-dilutive. Also as of March 31,
2020 , 18.2 million shares of contingent BGC Class A common stock and LPUswere excluded from fully diluted EPS computations because the conditions
for issuance had not been met by the end of the period. The contingent BGC
Class A common stock is recorded as a liability and included in "Accounts
payable, accrued and other liabilities" in our unaudited condensed
consolidated statement of financial condition as of March 31, 2020 .
The fully diluted period-end spot share count was as follows (in thousands):
As of March 31, 2020
Common stock outstanding 356,943
Partnership units 179,637
RSUs (Treasury stock method) 708
Other 1,289
Total 538,577
On June 5, 2015 , we entered into the Exchange Agreement with Cantor providing
Cantor, CFGM and other Cantor affiliates entitled to hold BGC Class B common
stock the right to exchange from time to time, on a one-to-one basis, subject to
adjustment, up to an aggregate of 34,649,693 shares of BGC Class A common stock
now owned or subsequently acquired by such Cantor entities for up to an
aggregate of 34,649,693 shares of BGC Class B common stock. Such shares of BGC
Class B common stock, which currently can be acquired upon the exchange of
Cantor units owned in BGC Holdings , are already included in our fully diluted
share count and will not increase Cantor's current maximum potential voting
power in the common equity. The Exchange Agreement enabled the Cantor entities
to acquire the same number of shares of BGC Class B common stock that they were
already entitled to acquire without having to exchange its Cantor units in BGC
Holdings . The Audit Committee and Board have determined that it was in the best
interests of us and our stockholders to approve the Exchange Agreement because
it will help ensure that Cantor retains its Cantor units in BGC Holdings , which
is the same partnership in which our partner employees participate, thus
continuing to align the interests of Cantor with those of the partner employees.
On November 23, 2018 , in the Class B Issuance , BGC issued 10,323,366 shares of
BGC Class B common stock to Cantor and 712,907 shares of BGC Class B common
stock to CFGM, an affiliate of Cantor, in each case in exchange for shares of
BGC Class A common stock from Cantor and CFGM, respectively, on a one-to-one
basis pursuant to the Exchange Agreement. Pursuant to the Exchange Agreement, no
additional consideration was paid to BGC by Cantor or CFGM for the Class B
Issuance . The Class B issuance was exempt from the Securities Act. Following
this exchange, Cantor and its affiliates only have the right to exchange under
the Exchange Agreement up to an aggregate of 23,613,420 shares of BGC Class A
common stock, now owned or subsequently acquired, or its Cantor units in BGC
Holdings , into shares of BGC Class B common stock. As of March 31, 2020 , Cantor
and CFGM do not own any shares of BGC Class A common stock.
We and Cantor have agreed that any shares of BGC Class B common stock issued in
connection with the Exchange Agreement would be deducted from the aggregate
number of shares of BGC Class B common stock that may be issued to the Cantor
entities upon exchange of Cantor units in BGC Holdings . Accordingly, the Cantor
entities will not be entitled to receive any more shares of BGC Class B Stock
under this agreement than they were previously eligible to receive upon exchange
of Cantor units.
On November 4, 2015 , partners of BGC Holdings created five new classes of
non-distributing partnership units (collectively with the NPSUs, "N Units").
These new N Units carry the same name as the underlying unit with the insertion
of an additional "N" to designate them as the N Unit type and are designated as
NREUs, NPREUs, NLPUs, NPLPUs and NPPSUs. The N Units are not entitled to
participate in partnership distributions, will not be allocated any items of
profit or loss and may not be made exchangeable into shares of BGC Class A
common stock. The Eleventh Amendment was approved by the Audit Committee and by
the Board.
Subject to the approval of the Compensation Committee or its designee, certain N
Units may be converted into the underlying unit type (i.e. an NREU will be
converted into an REU) and will then participate in partnership distributions,
subject to terms and conditions determined by the general partner of BGC
Holdings in its sole discretion, including that the recipient continue to
provide substantial services to the Company and comply with his or her
partnership obligations. Such N Units are not included in the fully diluted
share count.
On December 14, 2016 , partners of BGC Holdings amended certain terms and
conditions of the partnership's N Units in order to provide flexibility to the
Company and the Partnership in using such N Units in connection with
compensation arrangements and practices. The amendment provides for a minimum
$5 million gross revenue requirement in a given quarter as a condition for an N
Unit to be replaced by another type of partnership unit in accordance with the
Partnership Agreement and the grant documentation. The amendment was approved by
the Audit Committee.
82
-------------------------------------------------------------------------------- OnDecember 13, 2017 , theAmended and Restated BGC Holdings Partnership Agreement was amended and restated a second time to include prior standalone amendments and to make certain other changes related to the Separation. The Second Amended and Restated BGC Holdings Partnership Agreement, among other things, reflects changes resulting from the division in the Separation ofBGC Holdings intoBGC Holdings andNewmark Holdings , including:
• an apportionment of the existing economic attributes (including, among
others, capital accounts and post-termination payments) of each BGC
Holdings limited partnership interests outstanding immediately prior to
the Separation between such Legacy BGC Holdings Unit and the fraction of a
Newmark Holdings LPU issued in the Separation in respect of such Legacy
BGC Holdings Unit, based on the relative value of BGC and Newmark as of
after the Newmark IPO;
• an adjustment of the exchange mechanism between the Newmark IPO and the
Distribution so that one exchangeable
number of exchangeable
the Newmark Holdings Exchange Ratio as of such time, must be exchanged in
order to receive one share of BGC Class A common stock; and
• a right of the employer of a partner (whether it be Newmark or BGC) todetermine whether to grant exchangeability with respect to Legacy BGC
Holdings Units or Legacy Newmark Holdings Units held by such partner.
The Second Amended and Restated BGC Holdings Partnership Agreement also removes certain classes ofBGC Holdings units that are no longer outstanding, and permits the general partner ofBGC Holdings to determine the total number of authorizedBGC Holdings units. The Second Amended and Restated BGC Holdings Limited Partnership Agreement was approved by the Audit Committee.
Registration Statements
We currently have in place an effective equity shelf registration statement on Form S-3 filed onMarch 9, 2018 with respect to the issuance and sale of up to an aggregate of$300.0 million of shares of BGC Class A common stock from time to time on a delayed or continuous basis. OnMarch 9, 2018 , we entered into theMarch 2018 Sales Agreement, pursuant to which we may offer and sell up to an aggregate of$300.0 million of shares of BGC Class A common stock. Proceeds from shares of BGC Class A common stock sold under this CEO Program Sales Agreement may be used for redemptions of limited partnership interests inBGC Holdings , as well as for general corporate purposes, including acquisitions and the repayment of debt. CF&Co is a wholly owned subsidiary of Cantor and an affiliate of us. Under this Sales Agreement, we have agreed to pay CF&Co up to 2% of the gross proceeds from the sale of shares. For additional information on the Company's CEO Program sales agreements, see Note 14-"Related Party Transactions" to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. As ofMarch 31, 2020 , we have issued and sold 17.6 million shares of BGC Class A common stock (or$210.6 million ) under theMarch 2018 Sales Agreement. We intend to use the net proceeds of any shares of BGC Class A common stock sold for general corporate purposes for potential acquisitions, redemptions of LPUs and FPUs inBGC Holdings and repurchases of shares of BGC Class A common stock from partners, executive officers and other employees of ours or our subsidiaries and of Cantor and its affiliates. Certain of such partners will be expected to use the proceeds from such sales to repay outstanding loans issued by, or credit enhanced by, Cantor, orBGC Holdings . In addition to general corporate purposes, these sales along with our share repurchase authorization are designed as a planning device in order to facilitate the redemption process. Going forward, we may redeem units and reduce our fully diluted share count under our repurchase authorization or later sell shares of BGC Class A common stock under theMarch 2018 Sales Agreement. Further, we have an effective registration statement on Form S-4 filed onSeptember 3, 2010 , with respect to the offer and sale of up to 20 million shares of BGC Class A common stock from time to time in connection with business combination transactions, including acquisitions of other businesses, assets, properties or securities. As ofMarch 31, 2020 , we have issued an aggregate of 14.1 million shares of BGC Class A common stock under this Form S-4 registration statement. Additionally, onSeptember 13, 2019 , we filed a registration statement on Form S-4, with respect to the offer and sale of up to 20 million shares of Class A common stock from time to time in connection with business combination transactions, including acquisitions of other businesses, assets, properties or securities. As ofMarch 31, 2020 , we have not issued any shares of BGC Class A common stock under this Form S-4 registration statement. We also have an effective shelf registration statement on Form S-3 pursuant to which we can offer and sell up to 10 million shares of BGC Class A common stock under theBGC Partners, Inc. Dividend Reinvestment and Stock Purchase Plan. As ofMarch 31, 2020 , we have issued 0.7 million shares of BGC Class A common stock under the Dividend Reinvestment and Stock Purchase Plan. The Compensation Committee may grant stock options, stock appreciation rights, deferred stock such as RSUs, bonus stock, performance awards, dividend equivalents and other equity-based awards, including to provide exchange rights for shares of BGC Class A common stock upon exchange of LPUs. OnJune 22, 2016 , at our Annual Meeting of Stockholders, our stockholders approved our Equity Plan to increase from 350 million to 400 million the aggregate number of shares of BGC Class A common stock that may be delivered or cash-settled pursuant to awards granted during the life of the Equity Plan. As ofMarch 31, 2020 , the limit on the aggregate number of shares authorized to be delivered allowed for the grant of future awards relating to 134.5 million shares of BGC Class A common stock. OnDecember 16, 2019 , we filed a registration statement on Form S-3 pursuant to which CF&Co may make offers and sales of our 5.125% Senior Notes, 5.375% Senior Notes due 2023 and 3.750% Senior Notes in connection with ongoing market-making transactions which may occur from time to time. Such market-making transactions in these securities may occur in the open market or may be privately negotiated at prevailing market prices at a time of resale or at related or negotiated prices. Neither CF&Co, nor any other of our affiliates, has any obligation to make a market in our securities, and CF&Co or any such other affiliate may discontinue market-making activities at any time without notice. 83
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CONTINGENT PAYMENTS RELATED TO ACQUISITIONS
Since 2016, the Company has completed acquisitions whose purchase price included an aggregate of approximately 2.2 million shares of the Company's Class A common stock (with an acquisition date fair value of approximately$9.2 million ), 0.1 million LPUs (with an acquisition date fair value of approximately$0.2 million ), 0.2 million RSUs (with an acquisition date fair value of approximately$1.2 million ) and$34.3 million in cash that may be issued contingent on certain targets being met through 2022.
As of
As of
DERIVATIVE SUIT
OnOctober 5, 2018 , Roofers Local 149Pension Fund filed a putative derivative complaint in theDelaware Chancery Court , captioned Roofers Local 149Pension Fund vs.Howard Lutnick , et al. (Case No. 2018-0722), alleging breaches of fiduciary duty against (i) the members of the Board, (ii)Howard Lutnick , CFGM, and Cantor as controlling stockholders of BGC, and (iii)Howard Lutnick as an officer of BGC. The complaint challenges the transactions by which BGC (i) completed theBerkeley Point acquisition from CCRE for$875 million and (ii) committed to invest$100 million for a 27% interest inReal Estate, L.P. (collectively, the "Transaction"). Among other things, the complaint alleges that (i) the price BGC paid in connection with the Transaction was unfair, (ii) the process leading up to the Transaction was unfair, and (iii) the members of the special committee of the Board were not independent. It seeks to recover for the Company unquantified damages, disgorgement of any payments received by defendants, and attorneys' fees. A month later, onNovember 5, 2018 , the same plaintiffs' firm filed an identical putative derivative complaint against the same defendants seeking the same relief on behalf of a second client,Northern California Pipe Trades Trust Funds. The cases have been consolidated into a single action, captioned In reBGC Partners, Inc. Derivative Litigation (Consolidated C.A. No. 2018-0722-AGB), and the complaint filed by Roofers Local 149Pension Fund onOctober 5, 2018 was designated as the operative complaint. In response to motions to dismiss filed by all defendants inDecember 2018 , Plaintiffs filed a motion for leave to amend the operative complaint inFebruary 2019 , requesting that the Court allow them to supplement their allegations, which the Court granted. The amended complaint alleges the same purported breaches of fiduciary duty as the operative complaint, raises no new claims, and seeks identical relief, but includes additional allegations, including alleged reasons for plaintiffs' failure to make a demand on the Board, which was the basis of defendants' motion to dismiss. OnMarch 19, 2019 , all defendants filed motions to dismiss the amended complaints, again on demand grounds. OnSeptember 30, 2019 , the Court denied defendants' motions to dismiss, permitting the case to move forward into discovery. In its ruling, the Court determined that the amended complaint sufficiently pled that plaintiffs were not required to make demand on the Board in order to file a derivative suit, but did not make findings of fact with respect to the underlying merits of plaintiffs' allegations concerning the Transaction.
The Company continues to believe that the allegations pled against the defendants in the amended complaint are without merit and intends to defend against them vigorously as the case moves forward. However, as in any litigated matter, the outcome cannot be determined with certainty.
PURCHASE OF LIMITED PARTNERSHIP INTERESTS
Cantor has the right to purchase limited partnership interests (Cantor units) fromBGC Holdings upon redemption of non-exchangeable FPUs redeemed byBGC Holdings upon termination or bankruptcy of the Founding/Working Partner. In addition, pursuant to Article Eight, Section 8.08, of the Second Amended and Restated BGC Holdings Limited Partnership Agreement (previously the sixth amendment) and Article Eight, Section 8.08, of the Newmark Holdings Limited Partnership Agreement, where either current, terminating, or terminated partners are permitted by the Company to exchange any portion of their FPUs and Cantor consents to such exchangeability, the Company shall offer to Cantor the opportunity for Cantor to purchase the same number of new exchangeable limited partnership interests (Cantor units) inBGC Holdings at the price that Cantor would have paid for the FPUs had the Company redeemed them. Any such Cantor units purchased by Cantor are currently exchangeable for up to 23,613,420 shares of BGC Class B common stock or, at Cantor's election or if there are no such additional shares of BGC Class B common stock, shares of BGC Class A common stock, in each case on a one-for-one basis (subject to customary anti-dilution adjustments). As ofMarch 31, 2020 , there were 2,101,783 FPUs inBGC Holdings remaining, which the partnerships had the right to redeem or exchange and with respect to which Cantor had the right to purchase an equivalent number of Cantor units.
JOINT SERVICES AGREEMENT WITH CANTOR
InFebruary 2019 , the Audit Committee authorized us to enter into a short-term services agreement with Cantor pursuant to which Cantor would be responsible for clearing, settling and processing certain transactions executed on behalf of customers in exchange for a 33% revenue share based on net transaction revenue and the payment by BGC of the fully allocated cost of certain salespersons related thereto. 84
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GUARANTEE AGREEMENT FROM CF&CO
Under rules adopted by the CFTC, all foreign introducing brokers engaging in transactions withU.S. persons are required to register with the NFA and either meet financial reporting and net capital requirements on an individual basis or obtain a guarantee agreement from a registered Futures Commission Merchant. Our European-based brokers engage from time to time in interest rate swap transactions withU.S. -based counterparties, and therefore we are subject to the CFTC requirements. CF&Co has entered into guarantees on our behalf (and on behalf of GFI), and we are required to indemnify CF&Co for the amounts, if any, paid by CF&Co on our behalf pursuant to this arrangement. During the three months endedMarch 31, 2020 , the Company recorded expenses of$31 thousand with respect to these guarantees. NEWMARK SUBLEASE TO BGC InMay 2020 , theAudit Committee of the Company authorized BGCU.S. OpCo to enter into an arrangement to sublease excess space fromRKF Retail Holdings LLC , a subsidiary of Newmark. The deal is a one-year sublease of approximately 21,000 rentable square feet inNew York City .
EQUITY METHOD INVESTMENTS
The Company was authorized to enter into loans, investments or other credit support arrangements for Aqua (see Note 14- "Related Party Transactions," to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q); such arrangements are proportionally and on the same terms as similar arrangements between Aqua and Cantor. OnFebruary 5, 2020 , the Company'sBoard and Audit Committee increased the authorized amount by an additional$2.0 million . The Company has been further authorized to provide counterparty or similar guarantees on behalf of Aqua from time to time, provided that liability for any such guarantees, as well as similar guarantees provided by Cantor, would be shared proportionally with Cantor.
UNIT REDEMPTIONS AND EXCHANGES-EXECUTIVE OFFICERS
OnMarch 2, 2020 , the Company grantedStephen M. Merkel 360,065 exchange rights with respect to 360,065 non-exchangeable LPUs that were previously granted toMr. Merkel . The resulting 360,065 exchangeable LPUs were immediately exchangeable byMr. Merkel for an aggregate of 360,065 shares of BGC Class A common stock. The grant was approved by the Compensation Committee. OnMarch 20, 2020 , the Company repurchased 185,300 of such 360,065 exchangeable LPUs held byMr. Merkel at the average price of shares of BGC Class A common stock sold under BGC's CEO Program fromMarch 10, 2020 toMarch 13, 2020 less 1% (approximately$4.0024 per LPU, for an aggregate purchase price of approximately$741,644 ). The transaction was approved by the Compensation Committee. Additionally, the Compensation Committee approved the right to exchange for cash 265,568 non-exchangeable PLPUs held byMr. Merkel , for a payment of$1,507,285 for taxes when the LPU units are exchanged. In connection with the repurchase of the 185,300 LPUs, 122,579 PLPUs were redeemed for$661,303 for taxes. OnMarch 27, 2019 , the Audit and Compensation Committees authorized the purchase by the Company fromMr. Merkel of up to 250,000 shares of BGC Class A common stock at the closing price onMarch 26, 2019 . Pursuant to this authorization, 233,172 shares of BGC Class A common stock were purchased by the Company onMarch 27, 2019 at$5.30 per share, the closing price onMarch 26, 2019 . OnFebruary 27, 2019 , the Audit Committee authorized the purchase byMr. Lutnick's retirement plan of up to$56,038 of BGC Class A common stock at the closing price onMarch 4, 2019 . Pursuant to this authorization, 8,980 shares of BGC Class A common stock were purchased by the plan onMarch 5, 2019 at$6.24 per share, the closing price onMarch 4, 2019 . MARKET SUMMARY
The following table provides certain volume and transaction count information for the quarterly periods indicated:
March 31, December 31, September 30, June 30, March 31,
2020 2019 2019 2019 2019
Notional Volume (in billions)
Total Fully Electronic volume $ 8,048 $ 5,975 $ 6,448 $ 5,825 $ 6,703
Total Hybrid volume 85,290 66,996 73,485 66,619 68,826
Total Fully Electronic and Hybrid
volume $ 93,338 $ 72,971 $ 79,933 $ 72,444 $ 75,529
Transaction Count (in thousands,
except for days)
Total Fully Electronic transactions 4,229 3,108 3,176 2,856 2,811
Total Hybrid transactions 1,513 1,165 1,265 1,283 1,265
Total Fully Electronic and Hybrid
transactions 5,742 4,273 4,441 4,139 4,076
Trading days 62 64 64 63 61
85
-------------------------------------------------------------------------------- Note: Certain information may have been recast with current estimates to reflect changes in reporting methodology. Such revisions have no impact on the Company's revenues or earnings. Fully Electronic volume, including new products, was$8.0 trillion for the three months endedMarch 31, 2020 , compared to$6.7 trillion for the three months endedMarch 31, 2019 . Our Hybrid volume for the three months endedMarch 31, 2020 was$85.3 trillion , compared to$68.8 trillion for the three months endedMarch 31, 2019 .
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, we enter into arrangements with unconsolidated entities, including variable interest entities. See Note 15-"Investments" to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to our investments in unconsolidated entities.
CRITICAL ACCOUNTING POLICIES and estimates
The preparation of our unaudited condensed consolidated financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in our unaudited condensed consolidated financial statements. These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our unaudited condensed consolidated statements of financial condition, unaudited condensed consolidated statements of operations and unaudited condensed consolidated statements of cash flows could be materially affected. We believe that the following accounting policies involve a higher degree of judgment and complexity.
Revenue Recognition
We derive our revenues primarily through commissions from brokerage services, the spread between the buy and sell prices on matched principal transactions, fees from related parties, data, software and post-trade services, and other revenues. See Note 3-"Summary of Significant Accounting Policies" to our consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , for further information regarding revenue recognition.
Equity-Based and Other Compensation
Discretionary Bonus: A portion of our compensation and employee benefits expense is comprised of discretionary bonuses, which may be paid in cash, equity, partnership awards or a combination thereof. We accrue expense in a period based on revenues in that period and on the expected combination of cash, equity and partnership units. Given the assumptions used in estimating discretionary bonuses, actual results may differ. Restricted Stock Units: We account for equity-based compensation under the fair value recognition provisions of theU.S. GAAP guidance. RSUs provided to certain employees are accounted for as equity awards, and in accordance with theU.S. GAAP, we are required to record an expense for the portion of the RSUs that is ultimately expected to vest. Further, forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Because assumptions are used in estimating employee turnover and associated forfeiture rates, actual results may differ from our estimates under different assumptions or conditions. The fair value of RSU awards to employees is determined on the date of grant, based on the fair value of BGC Class A common stock. Generally, RSUs granted by us as employee compensation do not receive dividend equivalents; as such, we adjust the fair value of the RSUs for the present value of expected forgone dividends, which requires us to include an estimate of expected dividends as a valuation input. This grant-date fair value is amortized to expense ratably over the awards' vesting periods. For RSUs with graded vesting features, we have made an accounting policy election to recognize compensation cost on a straight-line basis. The amortization is reflected as part of "Equity-based compensation and allocations of net income to limited partnership units and FPUs" in our unaudited condensed consolidated statements of operations. Restricted Stock: Restricted stock provided to certain employees is accounted for as an equity award, and as per theU.S. GAAP guidance, we are required to record an expense for the portion of the restricted stock that is ultimately expected to vest. We have granted restricted stock that is not subject to continued employment or service; however, transferability is subject to compliance with our and our affiliates' customary noncompete obligations. Such shares of restricted stock are generally saleable by partners in five to ten years. Because the restricted stock is not subject to continued employment or service, the grant-date fair value of the restricted stock is expensed on the date of grant. The expense is reflected as non-cash equity-based compensation expense in our unaudited condensed consolidated statements of operations. Limited Partnership Units: LPUs inBGC Holdings andNewmark Holdings are generally held by employees. Generally, such units receive quarterly allocations of net income, which are cash distributed on a quarterly basis and generally contingent upon services being provided by the unit holders. In addition, Preferred Units are granted in connection with the grant of certain LPUs, such as PSUs, that may be granted exchangeability or redeemed in connection with the grant of shares of common stock to cover the withholding taxes owed by the unit holder upon such exchange or grant. This is an acceptable alternative to the common practice among public companies of issuing the gross 86 -------------------------------------------------------------------------------- amount of shares to employees, subject to cashless withholding of shares to pay applicable withholding taxes. Our Preferred Units are not entitled to participate in partnership distributions other than with respect to a distribution at a rate of either 0.6875% (which is 2.75% per calendar year) or such other amount as set forth in the award documentation. The quarterly allocations of net income to such LPUs are reflected as a component of compensation expense under "Equity-based compensation and allocations of net income to limited partnership units and FPUs" in our unaudited condensed consolidated statements of operations. Certain of these LPUs entitle the holders to receive post-termination payments equal to the notional amount, generally in four equal yearly installments after the holder's termination. These LPUs are accounted for as post-termination liability awards under theU.S. GAAP. Accordingly, we recognize a liability for these units on our consolidated statements of financial condition as part of "Accrued compensation" for the amortized portion of the post-termination payment amount, based on the current fair value of the expected future cash payout. We amortize the post-termination payment amount, less an expected forfeiture rate, over the vesting period, and record an expense for such awards based on the change in value at each reporting period in our unaudited condensed consolidated statements of operations as part of "Equity-based compensation and allocations of net income to limited partnership units and FPUs." Certain LPUs are granted exchangeability into shares of BGC or Newmark Class A common stock or are redeemed in connection with the grant of BGC or Newmark Class A common stock issued; BGC Class A common stock is issued on a one-for-one basis, and Newmark Class A common stock is issued based on the number of LPUs exchanged or redeemed multiplied by the then Exchange Ratio. At the time exchangeability is granted or shares of BGC or Newmark Class A common stock are issued, we recognize an expense based on the fair value of the award on that date, which is included in "Equity-based compensation and allocations of net income to limited partnership units and FPUs" in our unaudited condensed consolidated statements of operations. During the three months endedMarch 31, 2020 and 2019, we incurred equity-based compensation expense of$23.0 million and$3.5 million , respectively. Certain LPUs have a stated vesting schedule and do not receive quarterly allocations of net income. Compensation expense related to these LPUs is recognized over the stated service period, and these units generally vest between two and five years. During the three months endedMarch 31, 2020 and 2019, we incurred compensation expense related to these LPUs of$16.3 million and$3.0 million , respectively. This expense is included in "Equity-based compensation and allocations of net income to limited partnership units and FPUs" in our unaudited condensed consolidated statements of operations. Employee Loans: We have entered into various agreements with certain employees and partners, whereby these individuals receive loans that may be either wholly or in part repaid from distributions that the individuals receive on some or all of their limited partnership interests or may be forgiven over a period of time. Cash advance distribution loans are documented in formal agreements and are repayable in timeframes outlined in the underlying agreements. We intend for these advances to be repaid in full from the future distributions on existing and future awards granted. The distributions are treated as compensation expense when made and the proceeds are used to repay the loan. The forgivable portion of any loans is recognized as compensation expense in our unaudited condensed consolidated statements of operations over the life of the loan. We review the loan balances each reporting period for collectability. If we determine that the collectability of a portion of the loan balances is not expected, we recognize a reserve against the loan balances. Actual collectability of loan balances may differ from our estimates. As of three months endedMarch 31, 2020 and 2019 andDecember 31, 2019 , the aggregate balance of employee loans, net of reserve, was$339.3 million and$315.6 million , respectively, and is included as "Loans, forgivable loans and other receivables from employees and partners, net" in our unaudited condensed consolidated statements of financial condition. Compensation expense (benefit) for the above-mentioned employee loans for the three months endedMarch 31, 2020 and 2019 was$14.6 million and$6.6 million , respectively. The compensation expense related to these loans was included as part of "Compensation and employee benefits" in our unaudited condensed consolidated statements of operations.
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. As prescribed in theU.S. GAAP guidance, Intangibles -Goodwill and Other, goodwill is not amortized, but instead is periodically tested for impairment. We review goodwill for impairment on an annual basis during the fourth quarter of each fiscal year or whenever an event occurs or circumstances change that could reduce the fair value of a reporting unit below its carrying amount. When reviewing goodwill for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If the results of the qualitative assessment are not conclusive, or if we choose to bypass the qualitative assessment, we perform a goodwill impairment analysis using a two-step process as follows. The first step involves comparing each reporting unit's estimated fair value to its carrying value, including goodwill. To estimate the fair value of the reporting units, we use a discounted cash flow model and data regarding market comparables. The valuation process requires significant judgment and involves the use of significant estimates and assumptions. These assumptions include cash flow projections, estimated cost of capital and the selection of peer companies and relevant multiples. Because assumptions and estimates are used in projecting future cash flows, choosing peer companies and selecting relevant multiples, actual results may differ from our estimates under different assumptions or conditions. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is deemed not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of potential impairment. The second step of the process involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated a potential impairment may exist. The implied fair value of goodwill is determined by measuring the excess of the estimated fair 87 -------------------------------------------------------------------------------- value of the reporting unit, as calculated in step one, over the estimated fair values of the individual assets, liabilities and identified intangibles. Events such as economic weakness, significant declines in operating results of reporting units, or significant changes to critical inputs of the goodwill impairment test (e.g., estimates of cash flows or cost of capital) could cause the estimated fair value of our reporting units to decline, which could result in an impairment of goodwill in the future.
CECL
We present financial assets that are measured at amortized cost net of an allowance for credit losses, which represents the amount expected to be collected over their estimated life. Expected credit losses for newly recognized financial assets carried at amortized cost, as well as changes to expected lifetime credit losses during the period, are recognized in earnings. The CECL methodology, which became effective for the Company onJanuary 1, 2020 , represents a significant change from priorU.S. GAAP and replaced the prior multiple impairment methods, which generally required that a loss be incurred before it was recognized. Within the life cycle of a loan or other financial asset in scope, the methodology generally results in the earlier recognition of the provision for credit losses and the related allowance for credit losses than under priorU.S. GAAP. The CECL methodology's impact on expected credit losses, among other things, reflects the Company's view of the current state of the economy, forecasted macroeconomic conditions and BGC's portfolios.
Income Taxes
We account for income taxes using the asset and liability method as prescribed in theU.S. GAAP guidance, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to basis differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Certain of our entities are taxed asU.S. partnerships and are subject to UBT in theCity of New York . Therefore, the tax liability or benefit related to the partnership income or loss except for UBT rests with the partners (see Note 2-"Limited Partnership Interests inBGC Holdings andNewmark Holdings " for a discussion of partnership interests), rather than the partnership entity. As such, the partners' tax liability or benefit is not reflected in our unaudited condensed consolidated financial statements. The tax-related assets, liabilities, provisions or benefits included in our unaudited condensed consolidated financial statements also reflect the results of the entities that are taxed as corporations, either in theU.S. or in foreign jurisdictions. We provide for uncertain tax positions based upon management's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. Management is required to determine whether a tax position is more likely than not to be sustained upon examination by tax authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Because significant assumptions are used in determining whether a tax benefit is more likely than not to be sustained upon examination by tax authorities, actual results may differ from our estimates under different assumptions or conditions. We recognize interest and penalties related to income tax matters in "Provision for income taxes" in our unaudited condensed consolidated statements of operations. A valuation allowance is recorded against deferred tax assets if it is deemed more likely than not that those assets will not be realized. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, the existence of cumulative losses in the most recent fiscal years, estimates of future taxable income and the feasibility of tax planning strategies. The measurement of current and deferred income tax assets and liabilities is based on provisions of enacted tax laws and involves uncertainties in the application of tax regulations in theU.S. and other tax jurisdictions. Because our interpretation of complex tax law may impact the measurement of current and deferred income taxes, actual results may differ from these estimates under different assumptions regarding the application of tax law. The Tax Act was enacted onDecember 22, 2017 , which includes the global intangible low-taxed income, GILTI, provision. This provision requires inclusion in the Company'sU.S. income tax return the earnings of certain foreign subsidiaries. The Company has elected to treat taxes associated with the GILTI provision using the Period Cost Method and thus has not recorded deferred taxes for basis differences under this regime. See Note 3-"Summary of Significant Accounting Policies" to our consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K as ofDecember 31, 2019 and Note 3-"Summary of Significant Accounting Policies" to our unaudited condensed consolidated financial statements for additional information regarding these critical accounting policies and other significant accounting policies.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1-"Organization and Basis of Presentation" to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding recent accounting pronouncements.
DIVIDEND POLICY
Our Board has authorized a dividend policy which provides that we expect to pay
a quarterly cash dividend to our common stockholders based on our post-tax
Adjusted Earnings per fully diluted share. Our Board declared a dividend of
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Company's balance sheet as the global capital markets face difficult and
unprecedented macroeconomic conditions. Additionally, BGC Holdings, L.P. will
reduce its distributions to or on behalf of its partners. The distributions to
or on behalf of partners will at least cover their related tax payments. Whether
any given post-tax amount is equivalent to the amount received by a stockholder
also on an after tax basis depends upon stockholders' and partners' domiciles
and tax status. BGC believes that these steps will allow the Company to
prioritize its financial strength. The Company expects to regularly review its
capital return policy.
We expect to pay such dividends, if and when declared by our Board, on a
quarterly basis. The dividend to our common stockholders is expected to be
calculated based on post-tax Adjusted Earnings allocated to us and generated
over the fiscal quarter ending prior to the record date for the dividend. No
assurance can be made, however, that a dividend will be paid each quarter.
The declaration, payment, timing and amount of any future dividends payable by
us will be at the sole discretion of our Board. We are a holding company, with
no direct operations, and therefore we are able to pay dividends only from our
available cash on hand and funds received from distributions from BGC U.S. OpCo
and BGC Global OpCo. Our ability to pay dividends may also be limited by
regulatory considerations as well as by covenants contained in financing or
other agreements. In addition, under Delaware law, dividends may be payable only
out of surplus, which is our net assets minus our capital (as defined under
Delaware law), or, if we have no surplus, out of our net profits for the fiscal
year in which the dividend is declared and/or the preceding fiscal year.
Accordingly, any unanticipated accounting, tax, regulatory or other charges
against net income may adversely affect our ability to declare and pay
dividends. While we intend to declare and pay dividends quarterly, there can be
no assurance that our Board will declare dividends at all or on a regular basis
or that the amount of our dividends will not change.
Non-GAAP Financial Measures
We use non-GAAP financial measures that differ from the most directly comparable measures calculated and presented in accordance withU.S. GAAP. Non-GAAP financial measures used by the Company include "Adjusted Earnings before noncontrolling interests and taxes", which is used interchangeably with "pre-tax Adjusted Earnings"; "Post-tax Adjusted Earnings to fully diluted shareholders", which is used interchangeably with "post-tax Adjusted Earnings"; and "Adjusted EBITDA". The definitions of these terms are below.
Adjusted Earnings Defined
BGC uses non-GAAP financial measures, including "Adjusted Earnings before noncontrolling interests and taxes" and "Post-tax Adjusted Earnings to fully diluted shareholders", which are supplemental measures of operating results used by management to evaluate the financial performance of the Company and its consolidated subsidiaries. BGC believes that Adjusted Earnings best reflect the operating earnings generated by the Company on a consolidated basis and are the earnings which management considers when managing its business. As compared with "Income (loss) from operations before income taxes" and "Net income (loss) for fully diluted shares", both prepared in accordance withU.S. GAAP, Adjusted Earnings calculations primarily exclude certain non-cash items and other expenses that generally do not involve the receipt or outlay of cash by the Company and/or which do not dilute existing stockholders. In addition, Adjusted Earnings calculations exclude certain gains and charges that management believes do not best reflect the ordinary results of BGC. Adjusted Earnings is calculated by taking the most comparableU.S. GAAP measures and adjusting for certain items with respect to compensation expenses, non-compensation expenses, and other income, as discussed below.
Calculations of Compensation Adjustments for Adjusted Earnings and Adjusted EBITDA
Treatment of Equity-Based Compensation Line Item for Adjusted Earnings and Adjusted EBITDA
The Company's Adjusted Earnings and Adjusted EBITDA measures exclude allU.S. GAAP charges included in the line item "Equity-based compensation and allocations of net income to limited partnership units and FPUs" (or "equity-based compensation" for purposes of defining the Company's non-GAAP results) as recorded on the Company'sU.S. GAAP Consolidated Statements of Operations andU.S. GAAP Consolidated Statements of Cash Flows. TheseU.S. GAAP equity-based compensation charges reflect the following items:
* Charges with respect to grants of exchangeability, which reflect the
right of holders of LPUs with no capital accounts, such as LPUs and
PSUs, to exchange these units into shares of common stock, or into
partnership units with capital accounts, such as HDUs, as wellas cash
paid with respect to taxes withheld or expected to be owed by the unit
holder upon such exchange. The withholding taxes related to the
exchange of certain non-exchangeable units without a capital account
into either common shares or units with a capital account may be
funded by the redemption of preferred units such as PPSUs.
* Charges with respect to preferred units. Any preferred units would not
be included in the Company's fully diluted share count because they
cannot be made exchangeable into shares of common stock and are
entitled only to a fixed distribution. Preferred units are granted in
connection with the grant of certain LPUs that may be granted
exchangeability or redeemed in connection with the grant of shares of
common stock at ratios designed to cover any withholding taxes
expected to be paid. This is an alternative to the commonpractice
among public companies of issuing the gross amount of shares to
employees, subject to cashless withholding of shares, to pay
applicable withholding taxes.
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* U.S. GAAP equity-based compensation charges with respect to the grant
of an offsetting amount of common stock or partnership units with
capital accounts in connection with the redemption ofnon-exchangeable
units, including PSUs and LPUs.
* Charges related to amortization of RSUs and LPUs.
* Charges related to grants of equity awards, including common stock or
partnership units with capital accounts.
* Allocations of net income to LPUs and FPUs. Such allocations represent
the pro-rata portion of post-tax U.S. GAAP earnings available to such
unit holders.
The amounts of certain quarterly equity-based compensation charges are based
upon the Company's estimate of such expected charges during the annual period,
as described further below under "Methodology for Calculating Adjusted Earnings
Taxes."
Virtually all of BGC's key executives and producers have equity or partnership
stakes in the Company and its subsidiaries and generally receive deferred equity
or LPUs as part of their compensation. A significant percentage of BGC's fully
diluted shares are owned by its executives, partners and employees. The Company
issues LPUs as well as other forms of equity-based compensation, including
grants of exchangeability into shares of common stock, to provide liquidity to
its employees, to align the interests of its employees and management with those
of common stockholders, to help motivate and retain key employees, and to
encourage a collaborative culture that drives cross-selling and revenue growth.
All share equivalents that are part of the Company's equity-based compensation
program, including REUs, PSUs, LPUs, HDUs, and other units that may be made
exchangeable into common stock, as well as RSUs (which are recorded using the
treasury stock method), are included in the fully diluted share count when
issued or at the beginning of the subsequent quarter after the date of grant.
Generally, LPUs other than Preferred Units are expected to be paid a pro-rata
distribution based on BGC's calculation of Adjusted Earnings per fully diluted
share. However, out of an abundance of caution and in order to strengthen the
Company's balance sheet due the uncertain macroeconomic conditions with respect
to the COVID-19 pandemic, BGC Holdings, L.P. will reduce its distributions to
its partners.
Compensation charges are also adjusted for certain other cash and non-cash
items, including those related to the amortization of GFI employee forgivable
loans granted prior to the closing of the January 11, 2016 back-end merger with
GFI.
Certain Other Compensation-Related Adjustments for Adjusted Earnings
BGC also excludes various otherU.S. GAAP items that management views as not reflective of the Company's underlying performance in a given period from its calculation of Adjusted Earnings. These may include compensation-related items with respect to cost-saving initiatives, such as severance charges incurred in connection with headcount reductions as part of broad restructuring plans.
Calculation of Non-Compensation Adjustments for Adjusted Earnings
Adjusted Earnings calculations may also exclude items such as:
* Non-cash
with respect to acquisitions;
* Acquisition related costs;
* Certain rent charges;
* Non-cash U.S. GAAP asset impairment charges; and
* Various other
of the Company's underlying performance in a given period, including
non-compensation-related charges incurred as part of broad
restructuring plans. Such U.S. GAAP items may include charges for
exiting leases and/or other long-term contracts as part of cost-saving
initiatives, as well as non-cash impairment charges related to assets,
goodwill and/or intangibles created from acquisitions.
Calculation of Adjustments for Other (income) losses for Adjusted Earnings
Adjusted Earnings calculations also exclude certain other non-cash, non-dilutive, and/or non-economic items, which may, in some periods, include:
* Gains or losses on divestitures;
* Fair value adjustment of investments;
* Certain other U.S. GAAP items, including gains or losses related to
BGC's investments accounted for under the equity method; and
* Any unusual, one-time, non-ordinary, or non-recurring gains or losses.
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Methodology for Calculating Adjusted Earnings Taxes
Although Adjusted Earnings are calculated on a pre-tax basis, BGC also reports post-tax Adjusted Earnings to fully diluted shareholders. The Company defines post-tax Adjusted Earnings to fully diluted shareholders as pre-tax Adjusted Earnings reduced by the non-GAAP tax provision described below and net income (loss) attributable to noncontrolling interest for Adjusted Earnings. The Company calculates its tax provision for post-tax Adjusted Earnings using an annual estimate similar to how it accounts for its income tax provision underU.S. GAAP. To calculate the quarterly tax provision underU.S. GAAP, BGC estimates its full fiscal yearU.S. GAAP income (loss) from operations before income taxes and noncontrolling interests in subsidiaries and the expected inclusions and deductions for income tax purposes, including expected equity-based compensation during the annual period. The resulting annualized tax rate is applied to BGC's quarterlyU.S. GAAP income (loss) from operations before income taxes and noncontrolling interests in subsidiaries. At the end of the annual period, the Company updates its estimate to reflect the actual tax amounts owed for the period. To determine the non-GAAP tax provision, BGC first adjusts pre-tax Adjusted Earnings by recognizing any, and only, amounts for which a tax deduction applies under applicable law. The amounts include charges with respect to equity-based compensation; certain charges related to employee loan forgiveness; certain net operating loss carryforwards when taken for statutory purposes; and certain charges related to tax goodwill amortization. These adjustments may also reflect timing and measurement differences, including treatment of employee loans; changes in the value of units between the dates of grants of exchangeability and the date of actual unit exchange; variations in the value of certain deferred tax assets; and liabilities and the different timing of permitted deductions for tax underU.S. GAAP and statutory tax requirements.
After application of these adjustments, the result is the Company's taxable income for its pre-tax Adjusted Earnings, to which BGC then applies the statutory tax rates to determine its non-GAAP tax provision. BGC views the effective tax rate on pre-tax Adjusted Earnings as equal to the amount of its non-GAAP tax provision divided by the amount of pre-tax Adjusted Earnings.
Generally, the most significant factor affecting this non-GAAP tax provision is the amount of charges relating to equity-based compensation. Because the charges relating to equity-based compensation are deductible in accordance with applicable tax laws, increases in such charges have the effect of lowering the Company's non-GAAP effective tax rate and thereby increasing its post-tax Adjusted Earnings. BGC incurs income tax expenses based on the location, legal structure and jurisdictional taxing authorities of each of its subsidiaries. Certain of the Company's entities are taxed asU.S. partnerships and are subject to the Unincorporated Business Tax ("UBT") inNew York City . AnyU.S. federal and state income tax liability or benefit related to the partnership income or loss, with the exception of UBT, rests with the unit holders rather than with the partnership entity. The Company's unaudited condensed consolidated financial statements includeU.S. federal, state and local income taxes on the Company's allocable share of theU.S. results of operations. Outside of theU.S. , BGC is expected to operate principally through subsidiary corporations subject to local income taxes. For these reasons, taxes for Adjusted Earnings are expected to be presented to show the tax provision the consolidated Company would expect to pay if 100 percent of earnings were taxed at global corporate rates.
Calculations of Pre- and Post-Tax Adjusted Earnings per Share
BGC's Pre- and Post-tax Adjusted Earnings per share calculations assume either
that:
* The fully diluted share count includes the shares related to any
dilutive instruments, but excludes the associated expense, net of tax,
when the impact would be dilutive; or
* The fully diluted share count excludes the shares related to these
instruments, but includes the associated expense, net of tax.
The share count for Adjusted Earnings excludes certain shares and share
equivalents expected to be issued in future periods but not yet eligible to
receive dividends and/or distributions. Each quarter, the dividend payable to
BGC's stockholders, if any, is expected to be determined by the Company's Board
of Directors with reference to a number of factors, including post-tax Adjusted
Earnings per share. BGC may also pay a pro-rata distribution of net income to
LPUs, as well as to Cantor for its noncontrolling interest. The amount of this
net income, and therefore of these payments per unit, would be determined using
the above definition of Adjusted Earnings per share on a pre-tax basis.
The declaration, payment, timing and amount of any future dividends payable by
the Company will be at the discretion of its Board of Directors using the fully
diluted share count. For more information on any share count adjustments, see
the table titled "Fully Diluted Weighted-Average Share Count under U.S. GAAP and
for Adjusted Earnings" in the Company's most recent financial results press
release.
Management Rationale for Using Adjusted Earnings
BGC's calculation of Adjusted Earnings excludes the items discussed above
because they are either non-cash in nature, because the anticipated benefits
from the expenditures are not expected to be fully realized until future
periods, or because the Company views results excluding these items as a better
reflection of the underlying performance of BGC's ongoing operations. Management
uses Adjusted
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BGC also provides an additional non-GAAP financial performance measure, "Adjusted EBITDA", which it defines as GAAP "Net income (loss) available to common stockholders", adjusted to add back the following items:
* Provision (benefit) for income taxes;
* Net income (loss) attributable to noncontrolling interest in subsidiaries;
* Interest expense;
* Fixed asset depreciation and intangible asset amortization;
* Equity-based compensation and allocations of net income to limited
partnership units and FPUs;
* Impairment of long-lived assets;
* (Gains) losses on equity method investments; and
* Certain other non-cash GAAP items, such as non-cash charges of
amortized rents incurred by the Company for its new U.K. based
headquarters.
The Company's management believes that its Adjusted EBITDA measure is useful in
evaluating BGC's operating performance, because the calculation of this measure
generally eliminates the effects of financing and income taxes and the
accounting effects of capital spending and acquisitions, which would include
impairment charges of goodwill and intangibles created from acquisitions. Such
items may vary for different companies for reasons unrelated to overall
operating performance. As a result, the Company's management uses this measure
to evaluate operating performance and for other discretionary purposes. BGC
believes that Adjusted EBITDA is useful to investors to assist them in getting a
more complete picture of the Company's financial results and operations.
Since BGC's Adjusted EBITDA is not a recognized measurement under GAAP,
investors should use this measure in addition to GAAP measures of net income
when analyzing BGC's operating performance. Because not all companies use
identical EBITDA calculations, the Company's presentation of Adjusted EBITDA may
not be comparable to similarly titled measures of other companies. Furthermore,
Adjusted EBITDA is not intended to be a measure of free cash flow or GAAP cash
flow from operations because the Company's Adjusted EBITDA does not consider
certain cash requirements, such as tax and debt service payments.
For more information regarding Adjusted EBITDA, see the section in the Company's
most recent financial results press release titled "Reconciliation of GAAP Net
Income (Loss) Available to Common Stockholders to Adjusted EBITDA", including
the footnotes to the same, for details about how BGC's non-GAAP results are
reconciled to those under GAAP.
OUR ORGANIZATIONAL STRUCTURE
Stock Ownership
As ofMarch 31, 2020 , there were 311,058,905 shares of BGC Class A common stock outstanding. OnJune 21, 2017 , Cantor pledged 10,000,000 shares of BGC Class A common stock in connection with a partner loan program. OnNovember 23, 2018 , those shares of BGC Class A common stock were converted into 10,000,000 shares of BGC Class B common stock and remain pledged in connection with the partner loan program. OnNovember 23, 2018 ,BGC Partners issued 10,323,366 shares of BGC Class B common stock to Cantor and 712,907 shares of BGC Class B common stock to CFGM, an affiliate of Cantor, in each case in exchange for shares of BGC Class A common stock from Cantor and CFGM, respectively, on a one-to-one basis pursuant to Cantor's and CFGM's right to exchange such shares under the letter 92 -------------------------------------------------------------------------------- agreement, dated as ofJune 5, 2015 , by and betweenBGC Partners and Cantor. Pursuant to the Exchange Agreement, no additional consideration was paid toBGC Partners by Cantor or CFGM for the ClassB Issuance . The ClassB Issuance was exempt from registration pursuant to Section 3(a)(9) of the Securities Act. As ofMarch 31, 2020 , Cantor and CFGM did not own any shares of BGC Class A common stock. Each share of BGC Class A common stock is entitled to one vote on matters submitted to a vote of our stockholders. In addition, as ofMarch 31, 2020 , Cantor and CFGM held 45,884,380 shares of BGC Class B common stock (which represents all of the outstanding shares of BGC Class B common stock), representing approximately 59.6% of our voting power on such date. Each share of BGC Class B common stock is generally entitled to the same rights as a share of BGC Class A common stock, except that, on matters submitted to a vote of our stockholders, each share of Class B common stock is entitled to ten votes. The BGC Class B common stock generally votes together with the BGC Class A common stock on all matters submitted to a vote of our stockholders. ThroughMarch 31, 2020 , Cantor has distributed to its current and former partners an aggregate of 20,836,626 shares of BGC Class A common stock, consisting of (i) 19,372,634 April 2008 distribution rights shares, and (ii) 1,463,992 February 2012 distribution rights shares. As ofMarch 31, 2020 , Cantor is still obligated to distribute to its current and former partners an aggregate of 15,770,345 shares of BGC Class A common stock, consisting of 13,999,110 April 2008 distribution rights shares and 1,771,235 February 2012 distribution rights shares. We received shares of Newmark in connection with the Separation, and Newmark completed the Newmark IPO onDecember 19, 2017 . However, on the Distribution Date, we completed our previously announced Spin-Off to our stockholders of all of the shares of common stock of Newmark owned by us as of immediately prior to the effective time of the Spin-Off. Following the Spin-Off, we ceased to be Newmark's controlling stockholder, and we and our subsidiaries no longer held any shares of Newmark's common stock or other equity interests in Newmark or its subsidiaries. For more information on the Spin-Off of Newmark, see Note 1-"Organization and Basis of Presentation" to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview and Business Environment -Newmark IPO, Separation and Spin-Off."
From time to time, we may actively continue to repurchase shares of our Class A common stock including from Cantor, Newmark, our executive officers, other employees, partners and others.
We are a holding company with no direct operations, and our business is operated through two operating partnerships, BGCU.S. OpCo, which holds ourU.S. businesses, and BGC Global OpCo, which holds our non-U.S. businesses. The limited partnership interests of the two operating partnerships are held by us andBGC Holdings , and the limited partnership interests ofBGC Holdings are currently held by LPU holders,Founding Partners , and Cantor. We hold theBGC Holdings general partnership interest and theBGC Holdings special voting limited partnership interest, which entitle us to remove and appoint the general partner ofBGC Holdings , and serve as the general partner ofBGC Holdings , which entitles us to controlBGC Holdings .BGC Holdings , in turn, holds the BGCU.S. OpCo general partnership interest and the BGCU.S. OpCo special voting limited partnership interest, which entitle the holder thereof to remove and appoint the general partner of BGCU.S. OpCo, and the BGC Global OpCo general partnership interest and the BGC Global OpCo special voting limited partnership interest, which entitle the holder thereof to remove and appoint the general partner of BGC Global OpCo, and serves as the general partner of BGCU.S. OpCo and BGC Global OpCo, all of which entitleBGC Holdings (and thereby us) to control each of BGCU.S. OpCo and BGC Global OpCo.BGC Holdings holds its BGC Global OpCo general partnership interest through a company incorporated in theCayman Islands ,BGC Global Holdings GP Limited . As ofMarch 31, 2020 , we held directly and indirectly, through wholly-owned subsidiaries, 356,943,285 BGCU.S. OpCo limited partnership units and 356,943,285 BGC Global OpCo limited partnership units, representing approximately 68.3% of the outstanding limited partnership units in both BGCU.S. OpCo and BGC Global OpCo. As of that date,BGC Holdings held 166,037,785 BGCU.S. OpCo limited partnership units and 166,037,785 BGC Global OpCo limited partnership units, representing approximately 31.7% of the outstanding limited partnership units in both BGCU.S. OpCo and BGC Global OpCo. LPU holders,Founding Partners , and Cantor directly holdBGC Holdings limited partnership interests. SinceBGC Holdings in turn holds BGCU.S. OpCo limited partnership interests and BGC Global OpCo limited partnership interests, LPU holders,Founding Partners , and Cantor indirectly have interests in BGCU.S. OpCo limited partnership interests and BGC Global OpCo limited partnership interests. Further, in connection with the Separation and Distribution Agreement, limited partnership interests inNewmark Holdings were distributed to the holders of limited partnership interests inBGC Holdings , whereby each holder ofBGC Holdings limited partnership interests who at that time held aBGC Holdings limited partnership interest received a correspondingNewmark Holdings limited partnership interest, equal in number to aBGC Holdings limited partnership interest divided by 2.2 (i.e., 0.4545 of a unit inNewmark Holdings ). Accordingly, existing partners at the time of the Separation inBGC Holdings are also partners inNewmark Holdings and hold corresponding units issued at the applicable ratio. Thus, such partners now also have an indirect interest in Newmark OpCo.
As of
We may in the future effect additional redemptions of BGC Holdings LPUs and
FPUs, and concurrently grant shares of BGC Class A common stock. We may also
continue our earlier partnership restructuring programs, whereby we redeemed or
repurchased certain LPUs and FPUs in exchange for new units, grants of
exchangeability for BGC Class A common stock or cash and, in many cases,
obtained modifications or extensions of partners' employment arrangements. We
also generally expect to continue to grant exchange rights with
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respect to outstanding non-exchangeable LPUs and FPUs, and to repurchase BGC
Holdings partnership interests from time to time, including from Cantor, our
executive officers, and other employees and partners, unrelated to our
partnership restructuring programs.
Cantor units in BGC Holdings are generally exchangeable under the Exchange
Agreement for up to 23,613,420 shares of BGC Class B common stock (or, at
Cantor's option or if there are no such additional authorized but unissued
shares of our Class B common stock, BGC Class A common stock) on a one-for-one
basis (subject to adjustments). Upon certain circumstances, Cantor may have the
right to acquire additional Cantor units in connection with the redemption of or
grant of exchangeability to certain non-exchangeable BGC Holdings FPUs owned by
persons who were previously Cantor partners prior to our 2008 acquisition of the
BGC business from Cantor. Cantor has exercised this right from time to time.
As of March 31, 2020 , there were 2,101,783 FPUs remaining which BGC Holdings ,
had the right to redeem or exchange and with respect to which Cantor had the
right to purchase an equivalent number of Cantor units.
In order to facilitate partner compensation and for other corporate purposes,
the BGC Holdings limited partnership agreement provides for Preferred Units,
which are Working Partner units that may be awarded to holders of, or
contemporaneous with the grant of, PSUs, PSIs, PSEs, LPUs, APSUs, APSIs, APSEs,
REUs, RPUs, AREUs, and ARPUs. These Preferred Units carry the same name as the
underlying unit, with the insertion of an additional "P" to designate them as
Preferred Units.
Such Preferred Units may not be made exchangeable into BGC Class A common stock
and accordingly will not be included in the fully diluted share count. Each
quarter, the net profits of BGC Holdings are allocated to such Units at a rate
of either 0.6875% (which is 2.75% per calendar year) of the allocation amount
assigned to them based on their award price, or such other amount as set forth
in the award documentation, before calculation and distribution of the quarterly
Partnership distribution for the remaining Partnership units. The Preferred
Units will not be entitled to participate in Partnership distributions other
than with respect to the Preferred Distribution. As of March 31, 2020 , there
were 26,421,050 such units granted and outstanding in BGC Holdings .
On June 5, 2015 , we entered into an agreement with Cantor providing Cantor, CFGM
and other Cantor affiliates entitled to hold BGC Class B common stock the right
to exchange from time to time, on a one-to-one basis, subject to adjustment, up
to an aggregate of 34,649,693 shares of BGC Class A common stock now owned or
subsequently acquired by such Cantor entities for up to an aggregate of
34,649,693 shares of BGC Class B common stock. Such shares of BGC Class B common
stock, which currently can be acquired upon the exchange of exchangeable LPUs
owned in our Holdings, are already included in the Company's fully diluted share
count and will not increase Cantor's current maximum potential voting power in
the common equity. The Exchange Agreement will enable the Cantor entities to
acquire the same number of shares of BGC Class B common stock that they were
already entitled to acquire without having to exchange their exchangeable LPUs
in our Holdings.
Under the Exchange Agreement, Cantor and CFGM have the right to exchange shares
of BGC Class A common stock owned by them for the same number of shares of BGC
Class B common stock. As of March 31, 2020 , Cantor and CFGM do not own any
shares of BGC Class A common stock. Cantor and CFGM would also have the right to
exchange any shares of BGC Class A common stock subsequently acquired by either
of them for shares of BGC Class B common stock, up to 23,613,420 shares of BGC
Class B common stock.
We and Cantor have agreed that any shares of BGC Class B common stock issued in
connection with the Exchange Agreement would be deducted from the aggregate
number of shares of BGC Class B common stock that may be issued to the Cantor
entities upon exchange of exchangeable LPUs in BGC Holdings . Accordingly, the
Cantor entities will not be entitled to receive any more shares of BGC Class B
common stock under this agreement than they were previously eligible to receive
upon exchange of exchangeable LPUs.
Non-distributing partnership units, or N Units, carry the same name as the
underlying unit with the insertion of an additional "N" to designate them as the
N Unit type and are designated as NREUs, NPREUs, NLPUs, NPLPUs and NPPSUs. The N
Units are not entitled to participate in Partnership distributions, will not be
allocated any items of profit or loss and may not be made exchangeable into
shares of BGC Class A common stock. Subject to the approval of the Compensation
Committee or its designee, certain N Units may be converted into the underlying
unit type (i.e. an NREU will be converted into an REU) and will then participate
in Partnership distributions, subject to terms and conditions determined by the
general partner of BGC Holdings , in its sole discretion, including that the
recipient continue to provide substantial services to the Company and comply
with his or her partnership obligations.
On December 13, 2017 , the Amended and Restated BGC Holdings Partnership
Agreement was amended and restated a second time to include prior standalone
amendments and to make certain other changes related to the Separation. The
Second Amended and Restated BGC Holdings Partnership Agreement, among other
things, reflects changes resulting from the division in the Separation of BGC
Holdings into BGC Holdings and Newmark Holdings , including:
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• an apportionment of the existing economic attributes (including, among
others, capital accounts and post-termination payments) of each BGC
Holdings LPU outstanding immediately prior to the Separation between such
Legacy BGC Holdings Unit and the 0.4545 of a Newmark Holdings LPU issued
in the Separation in respect of each such Legacy BGC Holdings Unit, based
on the relative value of BGC and Newmark as of after the Newmark IPO; and
• a right of the employer of a partner to determine whether to grant
exchangeability with respect to Legacy BGC Holdings Units held by such
partner.
The Second Amended and Restated BGC Holdings Partnership Agreement also removes
certain classes of BGC Holdings units that are no longer outstanding, and
permits the general partner of BGC Holdings to determine the total number of
authorized BGC Holdings units. The Second Amended and Restated BGC Holdings
Limited Partnership Agreement was approved by the Audit Committee of the Board
of Directors of the Company.
The following diagram illustrates our organizational structure as of March 31,
2020 , following the Spin-Off. The diagram does not reflect the various
subsidiaries of BGC, BGC U.S. OpCo, BGC Global OpCo, or Cantor, or the
noncontrolling interests in our consolidated subsidiaries other than Cantor's
units in BGC Holdings .*
95
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STRUCTURE OF BGC PARTNERS, INC. AS OF MARCH 31, 2020
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* Shares of BGC Class B common stock are convertible into shares of BGC Class A
common stock at any time in the discretion of the holder on a one-for-one basis.
Accordingly, if Cantor and CFGM converted all of their BGC Class B common stock
into BGC Class A
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-------------------------------------------------------------------------------- common stock, Cantor would hold 12.6% of the voting power, CFGM would hold 0.2% of the voting power, and the public stockholders would hold 87.1% of the voting power (and Cantor and CFGM's indirect economic interests in BGCU.S. and BGC Global would remain unchanged). The diagram does not reflect certain BGC Class A common stock andBGC Holdings partnership units as follows: (a) any shares of BGC Class A common stock that may become issuable upon the conversion or exchange of any convertible or exchangeable debt securities that may in the future be sold under our shelf Registration Statement on Form S-3 (Registration No. 333-180331); (b) 26,421,050 Preferred Units granted and outstanding toBGC Holdings partners (see "BGC Partners, Inc. Partnership Structure" herein); and (c) 34,322,691 N Units granted and outstanding toBGC Holdings partners. The diagram reflects BGC Class A common stock andBGC Holdings partnership unit activity fromJanuary 1, 2020 throughMarch 31, 2020 as follows: (a) an aggregate of 6,998,106 LPUs granted byBGC Holdings ; (b) 185,300 shares of BGC Class A common stock sold by us under theMarch 2018 Sales Agreement pursuant to our Registration Statement on Form S-3 (Registration No. 333-223550), but not the remaining$89.4 million of stock remaining for sale by us under such sales agreement; (c) 696,507 shares of BGC Class A common stock issued for vested restricted stock units; (d) 270,496 shares of Class A common stock issued by us under our acquisition shelf Registration Statement on Form S-4 (Registration No. 333-169232), but not the 5,898,379 of such shares remaining available for issuance by us under such Registration Statement; (e) 71,663 shares issued by us under our Dividend Reinvestment and Stock Purchase Plan shelf Registration Statement on Form S-3 (Registration No. 333-173109), but not the 9,296,659 of such shares remaining available for issuance by us under shelf Registration Statement on Form S-3 (Registration No. 333-196999); (f) 24,537 shares sold by selling stockholders under our resale shelf Registration Statement on Form S-3 (Registration No. 333-175034), but not the 444,254 of such shares remaining available for sale by selling stockholders under such Registration Statement; (g) 8,421 shares sold by selling stockholders under our resale shelf Registration Statement on Form S-3 (Registration No. 333-167953), but not the 136,975 shares remaining available for sale by selling stockholders under such Registration Statement. AsMarch 31, 2020 , we have not issued any shares of BGC Class A common stock under our 2019 Form S-4 Registration Statement (Registration No. 333-233761).
Possible Corporation Conversion
The Company continues to explore a possible conversion of its UP-C partnership structure into a more simple corporate structure. If the Company determines to execute such a conversion, it would be subject to the approval of the Board of Directors, relevant committees, and be completed no earlier than year-end 2020. Any such transaction would be subject to tax, accounting, regulatory, and other considerations and approvals.
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