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 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 ended
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™, RP Martin™, Fenics, Corant™, and Corant Global™, 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, equity derivatives and cash equities, energy and commodities, shipping, insurance, and futures and options. Our businesses also provide a wide variety of services, including trade execution, brokerage services, clearing, compression and other post-trade services, 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 Fully Electronic and Hybrid brokerage, market data and related information services, trade 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, Newmark (NASDAQ: NMRK). OnNovember 30, 2018 , we completed the Spin-Off of Newmark. 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, 2020 , for further information regarding the transactions related to the Newmark IPO, Separation and Spin-Off. BGC,BGC Partners , BGC Trader, GFI, GFI Ginga, CreditMatch, Fenics, Fenics.com, Sunrise Brokers, Corant, Corant Global,Besso ,Ed Broking ,Poten & Partners , RP Martin, kACE2, EMBonds, Capitalab, Swaptioniser, CBID, Aqua 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
Fenics
For the purposes of this document and subsequentSEC filings, all of our higher-margin, technology-driven businesses are referred to as Fenics. Beginning this quarter, we will categorize our Fenics businesses as Fenics Markets and Fenics Growth Platforms, and we have conformed our prior period comparisons of the components of our Fenics businesses to this new categorization. Fenics Markets includes the fully electronic portion of BGC's brokerage businesses, data, software and post-trade revenues that are unrelated to Fenics Growth Platforms, as well as Fenics Integrated revenues. Fenics Growth Platforms includes Fenics UST, Fenics GO, Lucera, Fenics FX and other newer standalone platforms. Revenue generated from data, software, and post-trade attributable to Fenics Growth Platforms are included within their related businesses. Historically, 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 typically led to an increase in volumes which offset lower commissions, 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. 56 -------------------------------------------------------------------------------- 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, 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 demand to continue. We also believe that new clients, beyond our large bank customer base, will primarily transact electronically across our Fenics platforms. The combination of wider adoption of Hybrid and Fully Electronic execution and our competitive advantage in terms of technology and experience has contributed to our strong growth in electronically traded products. We continue to invest in our high-growth, high-margin, technology-driven businesses, including our standalone Fully Electronic Fenics Growth Platforms, 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 execution into higher-margin, technology-driven execution across our Fenics platforms and grow our Fenics Growth Platforms. We expect to benefit from the secular trend towards electronic trading, increased demand for market data, and the need for increased connectivity, 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-gen Fenics 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, application programming interface, or web-based 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 Fenics Growth Platforms, which currently include:
• Fenics UST, for which average daily volumes grew by over 47% during the
quarter and is the second largest CLOB platform for
This compares with an increase of approximately 2% for overall primary
dealer U.S. Treasury volumes with maturities greater than 2 years.
Primary dealer volumes are based on data from the Securities Industry
and
across all Fully Electronic
platforms, such as Tradeweb, Bloomberg and MarketAxess, from 6.0% to
9.2% year-on-year in March 2021 as per Greenwich associates. CLOB market
share nearly doubled from 9% to over 18% during the same period. CLOB
market share is based on BGC's estimates and data from Greenwich
Associates . Nearly 70% of all it CLOB trades in the first quarter weretransacted at prices only offered on the Fenics UST platform, providing
a tremendous competitive advantage. Fenics UST is estimated to have
saved our clients over
by offering the tightest spreads in the market. As a result of our
continued technological innovations and strong client support, we expect
both volumes and market share to continue to outperform the overallmarket. Additionally, Fenics UST optimized its commercial agreements
going into 2021, which is expected to drive revenue growth. Advancing on
its success in
the end of the fourth quarter of 2020 and is expected to introduce
Repo products later in 2021;
• Fenics GO, our 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, Euro
Stoxx Banks Index Options, which launched in August 2020 , Nikkei 225
Index Options, Hang Seng Composite Index Options, which launched in
December 2020 , DAX Index Options, which launched in March 2021 , and
related Delta One strategies. In July of 2020, Fenics GO added
Susquehanna International Securities (SIG), which joined DRW,
Lighthouse,
Capital as electronic liquidity providers. Our Fenics GO Fully
Electronic options trading platform has increased its volumes by over
300% in the first quarter of 2021 from a year ago. Strong performance
across its index options offering, and recent launches of additional
European and Asian index products drove volumes and market share higher
during the first quarter of 2021. Fenics GO is the only anonymous
multilateral electronic platform for block-sized listed equity index
options, giving it a unique advantage in helping clients satisfy their
best execution requirements. In its short time since going live, we
estimate that, as of March 31, 2021 , Fenics GO commanded over 5.7% and
13.0% market share in Euro Stoxx 50 and Nikkei 225 front-month
block-sized options, respectively. Fenics GO's market share is based on
estimated Euro Stoxx 50 and
"front-month" option volume, which refers to the nearest expiration date
for an options contract (within 32 days of expiration);
• Lucera, which is our software-defined network, offering the trading
community direct connectivity to each other. Lucera has a fully built,
scalable infrastructure that provides clients electronic tradingconnectivity with their counterparties within two days, as opposed to
months, and at a significantly lower cost. Lucera Connect is quickly
becoming the industry standard for the FX market.
streaming to buy-side clients, and provides the buy-side aggregated
access to broad bank liquidity. This subscription SaaS improves their
workflow and liquidity through data aggregation, pre-trade information
analysis, and execution facilitation. We have rebranded Algomi to
LumeAlfa, a new product that combines the functionality of Algomi Alfa's
aggregation with Lucera's global bank and buyside connectivity, and
credit and rates execution, and are integrating this business with our
existing Lucera SaaS connectivity subscription service in order to
provide both data and execution capabilities directly between
banks/dealers and their buy-side customers;
• Our expanded Fenics FX platforms, including MidFX, Spot FX, and FX
Options, and non-deliverable forwards; and
• Capitalab, which businesses are included under both Fenics Markets and
Fenics Growth Platforms.
57
-------------------------------------------------------------------------------- Collectively, our newer Fenics offerings, such as those listed above, are not yet fully up to scale, and are not yet generating significant revenues. Fenics revenue comprised 20.5% overall total revenue, excluding Insurance brokerage, for the first quarter of 2021, representing its highest ever contribution. Additionally, revenue growth from Fenics Growth Platforms, including Fenics UST, Fenics GO and Lucera, continued to significantly outpace the overall business. Over time, we expect these new products and services to become profitable, high-margin businesses as their scale and revenues increase, all else equal. Fenics Markets includes Fenics Integrated, introduced during the second quarter of 2020, which seamlessly integrates hybrid liquidity with customer electronic orders either by GUI and/or API. Desks are categorized as "Fenics Integrated" if they utilize sufficient levels of technology such that significant amounts of their transactions can be or are executed without broker intervention and have expected pre-tax margins of at least 25%. Fenics brokerage revenues include revenues from Fenics Integrated from the second quarter of 2020 onward. We believe that Fenics Integrated will enhance profit margins by further incentivizing our brokers and clients to automate execution and create superior real-time information and improve the robustness and value of Fenics Market Data, which will accelerate our growth rate.
Revenues in our Fenics businesses increased 40.0% to
Total revenues from our high-margin data, software, and post-trade business, which is predominately comprised of recurring revenue, were up 13.3% for the three months endedMarch 31, 2021 , over the prior year period and Fenics brokerage revenues increased by 49.2% to$83.7 million . Going forward, we expect Fenics 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 Corporate Conversion
The Company continues to explore a possible conversion into a simpler corporate structure, weighing any significant change in taxation policy. In particular, the Company is awaiting insight into futureU.S. Federal tax policies, which remain uncertain under the newU.S. administration. Should the Company decide to move forward with a corporate conversion, it will continue to work with regulators, lenders, and rating agencies, and BGC's board and committees will review potential transaction arrangements.
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$35.0 million cost reduction program to reduce our compensation-related cost base and streamline our operations, which resulted in$1.7 million and$22.7 million ofU.S. GAAP compensation charges recorded under this program for the three months endedMarch 31, 2021 and 2020, respectively.U.S. GAAP items recorded may include: • Certain severance charges incurred in connection with headcount reductions as part of a broad cost reduction program; and
• Certain compensation and non-compensation-related charges incurred as
part of a broad cost reduction program. Such
charges for 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, large corporations and other end-users of financial products 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 crisis 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 theFederal Reserve, Bank ofEngland , Bank of Japan and theEuropean Central Bank , in response to the global financial crises. These policies 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. 58
-------------------------------------------------------------------------------- From mid-2016 until the first quarter of 2020, the overall financial services industry benefited from sustained economic growth, a lower unemployment rates in most major economies, higher consumer spending, the modification or repeal of certainU.S. regulations, and higher overall corporate profitability. In addition, the secular trend towards digitalization and electronification within the industry contributed to higher overall volumes and transaction count in Fully Electronic execution. From the second quarter of 2020 onward, concerns about the future trade relationship between theU.K. and the EU after Brexit, a slowdown in global growth driven by the outbreak of COVID-19, and an increase in trade protectionism were tempered by expectations of monetary and fiscal stimulus.
Impact of COVID-19
Impact of COVID-19 on Employees
As a global intermediary to financial markets, BGC is 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. We have nonetheless taken proactive measures intended to protect our employees and clients during this global pandemic. These policies and practices seek to protect the health, safety and welfare of our workforce while enabling employees to maintain a high level of performance. Certain of these items are summarized below:
• We activated our Business Continuity Plan in the first quarter of 2020.
While a majority of the front-office personnel are working in a firm
office currently, a majority of BGC staff members continue to work from
home, or other remote locations and disaster recovery venues. In all
cases, we have mandated appropriate social distancing measures.
• We provide ongoing informational COVID-19-related messages and notices.
• Where applicable, we are applying more frequent and vigorous cleaningand sanitation measures and providing personal protective equipment
(PPE).
• Internal and external meetings are generally conducted virtually or via
phone calls.
• We have deferred and are continuing to defer corporate events and
participation in industry conferences.
• We are deploying clinical staff internally to support its employees and
requiring self-quarantine.
• Our medical plans have waived applicable member cost sharing for all
medically necessary diagnostic testing related to COVID-19.
• We have reminded employees about our
ways it can assist them during this challenging time. There is a zero
co-pay for Teladoc mental health visits through June 30, 2021 .
• We update employees on vaccination availability as it becomes available
from state governmental agencies.
• We provide paid leave in accordance with its policies and applicable
COVID-19-related laws and regulations.
We continue to take significant steps to protect our employees. Even as re-opening continues for some workers and in some locations, changes in state work orders and virus surges may impact work arrangements of our employees, vendors and clients for the foreseeable future. While we have taken significant precautions to protect employees who work in our offices, no assurance can be given that measures will contain the spread of the virus.
Impact of COVID-19 on the Company's Results
Revenues
Voice/Hybrid and/or Higher-Margin, Technology-Driven Fenics Businesses
We recorded our second highest ever total revenue of$567.6 million , behind only the year ago period, where the COVID-19 pandemic drove market volatility and trading volumes to record levels.
For the three months ended
Certain key items are summarized below:
• Revenues across Rates, Credit, FX, Equity derivatives and cash equities,
Energy and commodities are generally correlated with corresponding
industry volumes.
• We recorded our second highest ever quarterly Rates brokerage revenue,
second only to the year ago period. The first quarter of 2021 provided a
favorable trading environment across many of the Rates products we
broker.
• Increasing
drove volatility higher and supported global Rates trading volumes.
• Conversely, additional quantitative easing measures taken by centralbanks around the world have lowered and may continue to lower market
volumes should these programs remain in place for a sustained period of
time.
59
-------------------------------------------------------------------------------- We expect record levels of global debt issuance, interest rate volatility, and an improvingU.S. and global economy to provide tailwinds to our Rates business going forward. Overall Fenics
• BGC's Fenics revenues increased 40.0% in the first quarter of 2021
compared to the prior year period.
• Fenics has benefited and is expected to continue to benefit from secular
trend towards electronic execution and opportunities created by
algorithmic trading and automation.
• The dislocations caused by COVID-19 have resulted in an even greater
demand for the Company's electronic execution. We believe that 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 extreme 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 as a result of the pandemic. Our medium-to
longer-term overall strategy with respect to Fenics is not expected to
be impacted.
• BGC's data, software, and post-trade businesses are predominantly
comprised of recurring revenues.
Insurance Brokerage (Corant)
• Our Insurance brokerage business benefitted from favorable pricing
trends and improved productivity from previously hired brokers and
salespeople, and generated record revenue during the first quarter of
• The insurance brokerage 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.
• Corant generated organic growth in the first quarter of 2021 as
previously hired brokers and salespeople ramped up production and the
business benefited from favorable pricing trends.
Expenses
BGC's compensation expenses declined in the first quarter of 2021 primarily due to the impact of lower revenues on variable compensation, lower headcount, as well as our cost reduction program. BGC's non-compensation expenses decreased due to management's tighter cost control, lower selling and promotion expenses as a result of the COVID-19 pandemic, reduced professional and consulting fees, and decreased commissions and floor brokerage expense.
BGC has recorded or may potentially record amounts for certain expenses that are higher than they otherwise would have been due to the overall impact of the pandemic. Some of these items include:
• Non-cash impairment charges with respect to assets; • Non-cash mark-to-market adjustments for non-marketable investments;
• Certain severance charges incurred in connection with headcount reductions
as part of a broad cost reduction program;
• Certain compensation and non-compensation-related charges incurred as part
of a broad cost reduction program. Such U.S. GAAP items may include
charges for 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.
60
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Capital and Liquidity
With the outbreak of COVID-19, we reduced our dividend and focused on strengthening our balance sheet. Effective with the first quarter of 2020 dividend, 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. OnApril 28, 2021 , our Board declared a$0.01 dividend for the first quarter. Additionally,BGC Holdings reduced 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. Our 2021 capital allocation priorities are to return capital to stockholders and to continue investing in our high growth Fenics businesses. Previously, we were deeply dividend-centric; going forward, we plan to prioritize share and unit repurchases over dividends and distributions. We plan to reassess our current dividend and distribution with an aim to nominally increase it toward the end of the year. The balance sheet as ofMarch 31, 2021 reflects ordinary movements in working capital, cash paid with respect to annual employee bonuses, taxes, and our continued investment in Fenics Growth Platforms and our insurance brokerage businesses. We continue to manage our business with a focus on its investment grade ratings. Brexit OnJune 23, 2016 , theU.K. held a referendum regarding continued membership of the EU. The exit from the EU is commonly referred to as Brexit. OnJanuary 1, 2021 , theU.K. formally left the EU andU.K. -EU trade became subject to a new agreement that was concluded in December of 2020. Financial services falls outside of the scope of this trade agreement. Instead, the relationship will largely be determined by a series of "equivalence decisions," each of which would grant mutual market access for a limited subset of financial services where either party finds the other party has a regulatory regime that achieves similar outcomes to its own. It is currently unknown if or when equivalence decisions will be taken. InMarch 2021 , theU.K. and EU agreed a Memorandum of Understanding on Financial Services Regulatory Cooperation which creates a structure for dialogue but does not include commitments on equivalence.
In light of ongoing uncertainties, market participants are still adjusting. The
exact impact of Brexit on the
We have implemented plans to ensure continuity of service inEurope and continue to have regulated entities in place in many of the major European markets. As part of our Brexit strategy, ownership of BGC Madrid,Copenhagen andFrankfurt & GFI Paris,Madrid and Dublin branches was transferred to Aurel BGC SAS (a French-based operation and therefore based in the EU) inJuly 2020 ,BGC's Insurance division (Corant) has established new brokerage platforms inCyprus andFrance , and we have been generally increasing our footprint in the EU. Regardless of these and other mitigating measures, our European headquarters and largest operations are inLondon , and market access risks and uncertainties have had and could continue to have a material adverse effect on our customers, counterparties, businesses, prospects, financial condition and results of operations. Furthermore, in the future theU.K. and EU's regulation may diverge, which could disrupt and increase the costs of our operations, and result in a loss of existing levels of cross-border market access.
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 certain 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. 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 theU.S. , legislators and regulators inEurope have crafted similar rules; MiFID II, which made sweeping changes to market infrastructure, European Market Infrastructure Regulation, which focused specifically on derivatives, and Capital 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 asEMIR 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 newEuropean Commission took office which may over the course of its five-year mandate or introduce new legislative proposals for the Financial Services Sector and change the Brexit landscape for EU andU.K. financial firms alike. We are unable to predict how any of these new laws and proposed rules and regulations in theU.S. or theU.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 61
-------------------------------------------------------------------------------- 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 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 were finalized with implementation periods in 2016 and beyond. We also own ELX, which became a dormant contract market onJuly 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. InNovember 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 onJuly 15, 2019 , and this change in leadership could impact these proposals. OnJune 25, 2020 , the CFTC approved a final rule prohibiting post-trade name give-up for swaps executed, prearranged or pre-negotiated anonymously on or pursuant to the rules of a SEF and intended to be cleared. The rule provides exemptions for package transactions that include a component transaction that is not a swap that is intended to be cleared. The rule went into effect onNovember 1, 2020 for swaps subject to the trade execution requirement under the Commodity Exchange Act Section 2(h)(8) andJuly 5, 2021 for swaps not subject to the trade execution requirement, but intended to be cleared. See "Regulation" included in Part I, Item 1 of our Annual Report on Form 10-K for the year endedDecember 31, 2020 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 and Tradition 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 secondary trading 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. BGC's revenues tend to have low correlation in the short and medium-term with global bank and broker-dealer sales and trading revenues, which reflect bid-ask spreads and mark-to-market movements, as well as industry volumes in both the primary and secondary markets.
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 and actions, as well as continued expectations of low inflation rates outside of theU.S. , many sovereign bonds continue to trade at or close to negative yields, especially in real terms. 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 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 62 -------------------------------------------------------------------------------- and ongoing pandemic, major central banks such as theU.S. Federal Reserve ,ECB , Bank of Japan,Bank of England , andSwiss National Bank have restarted or may 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 (theU.S. ,Eurozone ,Japan , andU.K. ) is expected to increase and remain high as a percentage of G-4 GDP over the medium-to-long-term. Additional factors have weighed on 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 ofJanuary 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 endedMarch 31, 2021 , industry volumes were generally lower year-over-year across Rates, FX, Credit derivatives, Energy & Commodities, and European equities and generally higher across cash credit products andU.S. Equity derivatives and cash equities. BGC's brokerage revenues, excluding Insurance, were down by 8.1% year-on-year in the quarter, which was primarily driven by record levels of volatility and volumes related to the onset of the COVID-19 pandemic in the first quarter of 2020. 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, however the level of secondary trading and related hedging activity was lower during the first quarter of 2021 due to the elevated levels of volatility and trading volume related to the onset of the COVID-19 pandemic during the first quarter of last year. In addition, according toSIFMA and theFederal Reserve Bank of New York , the average daily volume of variousU.S. Treasuries, excludingTreasury bills, among primary dealers was 5.9% lower in the first quarter of 2021 as compared to a year earlier. However, volumes of longer-datedU.S. Treasuries, with maturities greater than two years, increased 1.8% compared to the prior year. Additionally, interest rate derivative volumes were down 18% and 29% at ICE and the CME, respectively, all according to company press releases. In comparison, our revenue from Fenics Rates increased 76.1%, while our overall Rates revenues were down 3.3% as compared to a year earlier to$161.8 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 Rates desks 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. Additionally, yields on benchmarkU.S. Treasuries exhibited significant volatility during the first quarter of 2021 on future inflation concerns. While most economists expect that the effects of various forms of quantitative easing being undertaken by the various major central banks will continue to negatively impact financial market volumes, elevated levels of government debt issuance, coupled with risingU.S. interest rates and volatility, are expected to provide tailwinds to our Rates business.
FX Volumes and Volatility
Global FX volumes were generally lower during the first quarter of 2021. Volumes for CME FX futures and options, Refinitiv and CME EBS spot FX were down 21%, 15%, and 26%, respectively, during the quarter. In comparison, our overall FX revenues decreased by 11.6% to$83.4 million .
Insurance Brokerage
Our overall Insurance brokerage business (Corant) includesEd Broking andBesso , as well as our newly established aviation and space insurance brokerage business. The pre-tax loss relating to Corant was$0.4 million and$8.5 million for the three months endedMarch 31, 2021 and 2020, respectively. Corant posted record revenues of$52.4 million for the first quarter of 2021 as it continued to benefit from improved productivity from previously hired brokers and hardening pricing trends. Corant's growth was also driven by new business lines, including its aviation & aerospace business,Piiq Risk Partners , which won new key clients. 63
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Equity derivatives and cash equities
Global equity volumes were mixed during the first quarter of 2021. Research fromRaymond James indicated that the average daily volumes ofU.S. cash equities andU.S. options were up 34% and 49%, respectively, as compared to a year earlier, while average daily volume of European cash equities shares were down 18% (in notional value). Over the same timeframe, Eurex average daily volumes of equity derivatives were down 36% while Euronext equity derivative index volumes declined by 43%. BGC's equity business primarily consists of equity derivatives, which is why we have renamed this revenue line item Equity derivatives and cash equities. Our overall revenues from Equity derivatives and cash equities decreased by 13.9% to$70.5 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 parts of our business is impacted by corporate issuance. 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 2021, primary dealer average daily volume for corporate bonds (excluding commercial paper) was up by 16% 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 down by 33%, from a year earlier. In comparison, our overall Credit revenues decreased by 7.3% to$90.0 million .
Energy and Commodities
Energy and commodities volumes were generally lower during the first quarter of 2021 compared with the year earlier. CME and ICE energy futures and options volumes were down 26% and 14%, respectively. Historically lower sustained prices across energy and commodities reduced demand for underlying product hedges. In comparison, BGC's energy and commodities revenues decreased by 9.4% to$75.9 million . 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 compensation structure have enabled us to use both acquisitions and recruiting to profitably grow at a faster rate than our largest competitors since our formation in 2004. We have invested significantly through acquisitions 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. We have made significant investments in our Insurance brokerage business (Corant), including meaningful increases in front-office employees. 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 Corant, as ofMarch 31, 2021 , our front-office headcount was 2,238 brokers, salespeople, managers and other front-office personnel, down 10% from 2,491 a year ago. Compared to the prior year period, average revenue per front-office employee for the three months endedMarch 31, 2021 , increased by 4.2% to approximately$223 thousand , despite overall revenue being lower versus the prior year. On a stand-alone basis, our front-office Corant headcount increased by 21% to 546 from 452 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 grow profitably.
Since 2019, our acquisitions have included
64
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On January 31, 2019 , we completed the acquisition of Ed Broking , an independent
Lloyd'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.
On March 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.
On
FINANCIAL HIGHLIGHTS
For the three months endedMarch 31, 2021 , we had income (loss) from operations before income taxes of$74.1 million compared to$31.0 million in the year earlier period. This increase was largely a result of a decrease in both compensation and non-compensation expenses in the three months endedMarch 31, 2021 . Total revenues for the three months endedMarch 31, 2021 , decreased$35.6 million , or 5.9%, to$567.6 million , which was primarily driven by record levels of volatility and volumes related to the onset of the COVID-19 pandemic in the first quarter of 2020. We have made excellent progress this quarter with respect to our investments in Fenics and Corant. Our Fenics growth accelerated during the first quarter, with revenues increasing by 40.0% and represented 20.5% of our total revenues, excluding Corant, its highest ever contribution. The growth in our Fenics platforms continued to significantly outpace the overall business as we added new clients and expanded our product offerings. As we continue to grow our higher margin businesses, we are well positioned for increased profitability. Brokerage revenues for the three months endedMarch 31, 2021 decreased by$35.2 million , or 6.2% from the same period in 2020. Corant generated 16.8% growth, driven by new hires in aviation and reinsurance. Corant benefitted from favorable pricing trends and improved productivity from previously hired brokers and salespeople. The first quarter of 2020 was unique in that it reflected record market volatility and volumes driven by the onset of the COVID-19 pandemic. BGC recorded its second highest ever quarterly Rates brokerage revenues, second only to the year ago period. The first quarter of 2021 provided a favorable trading environment across many of the Rates products BGC brokers. IncreasingU.S. interest rates, particularly in longer-dated benchmarks, drove volatility higher and supported global Rates trading volumes. We expect record levels of global debt issuance and increasing interest rate volatility to provide long-term tailwinds to the overall Rates asset class. Revenues in our Fenics business increased 40.0% to$105.6 million for the three months endedMarch 31, 2021 , compared to the prior year period. Beginning this quarter, BGC will categorize its Fenics businesses as Fenics Markets and Fenics Growth Platforms. Fenics Markets includes the Fully Electronic portions of BGC's brokerage businesses, data, software and post-trade revenues that are unrelated to Fenics Growth Platforms, as well as Fenics Integrated revenues. Fenics Growth Platforms includes Fenics UST, Fenics GO, Lucera, Fenics FX and other newer standalone platforms. Revenues generated from data, software and post-trade attributable to Fenics Growth Platforms are included within their related businesses. Fenics Markets and Fenics Growth Platforms compete with companies such as CME, Tradeweb and MarketAxess. Fenics Markets revenues comprised of$95.1 million , an improvement of$25.4 million , or 36.5%, which reflected accelerating Rates and FX growth. Fenics Growth Platforms revenues comprised$10.6 million , an increase of$4.8 million , or 82.1%, driven by strong growth in Fenics UST, Lucera and Fenics GO. During the second quarter of 2020, we introduced Fenics Integrated, which seamlessly integrates hybrid liquidity with customer electronic orders. We believe that Fenics Integrated will enhance profit margins by further incentivizing the Company's brokers and clients to automate execution. We believe that Fenics Integrated will create superior real-time information, improving the robustness and value of Fenics Market Data, which will accelerate our growth. As we expand our product offerings, optimize our commercial agreements, and add new clients across our electronic platforms, we continue to expect profitability in our newer Fenics Growth Platforms, which includes Fenics UST, Fenics GO, Lucera, Fenics FX and other newer standalone platforms. Total expenses for the three months endedMarch 31, 2021 decreased$66.7 million to$500.4 million compared to the prior year period, primarily due to a$45.5 million decrease in total compensation expenses due to the impact of lower commissionable revenues on variable compensation as well as the cost reduction program which the Company implemented in the first quarter of 2020 to reduce its cost base to improve margins. The$21.3 million decrease in non-compensation expenses was primarily driven by a continued focus on tighter cost management as well as the impact of COVID-19, including lower selling and promotion expenses, reduced professional and consulting fees, as well as a decrease in commissions and floor brokerage expenses, which tend to move in line with commissionable revenue. Total other income (losses), net for the three months endedMarch 31, 2021 increased$11.9 million , to$6.9 million compared to the prior year period, primarily due to an increase related to mark-to-market movements on other assets, a gain recognized on a litigation resolution in the first quarter of 2021, and an increase due to an impairment of an equity method investment recorded in the first quarter of 2020 compared to no impairment recorded in the three months endedMarch 31, 2021 . In addition, for the three months endedMarch 31, 2021 , income from operations before income taxes increased by$93.5 million , to$74.1 million , compared to a loss from operations before income taxes of$19.5 million for the three months endedDecember 31, 2020 . Total revenues for the three months endedMarch 31, 2021 , increased$88.2 million , or 18.4%, to$567.6 million . This was principally a result of a$83.2 million increase in brokerage revenues, which was largely driven by an increase of$37.3 million in Rates revenues, a$21.2 million increase in Credit, and a$10.2 million increase in FX as the first quarter of 2021 provided a favorable trading environment across many of the products BGC brokers. Traditionally, the financial markets around the world generally experience lower volume during the late summer and at the end of the year due to a slowdown in the business environment around holiday seasons. Therefore, our revenues tend to be 65
-------------------------------------------------------------------------------- strongest in the first quarter and lowest in the fourth quarter. Total expenses for the three months endedMarch 31, 2021 decreased$2.0 million , to$500.4 million , compared to the three months endedDecember 31, 2020 , primarily due to a$4.4 million decrease in non-compensation expenses and partially offset by a$2.5 million increase in total compensation expenses. Within total compensation expenses, our Compensation and employee benefits increased$49.5 million , or 19.1%, to$308.2 million which was driven by the impact of higher commissionable revenues on variable compensation, while expenses for Equity-based compensation and allocations of net income to limited partnership units and FPUs decreased by$47.0 million , or 58.4%, to$33.5 million due to a decrease in charges related to grants of exchangeability and issuance of shares of BGC Class A common stock. Total other income (losses), net for the three months endedMarch 31, 2021 increased$3.4 million , to$6.9 million compared to the three months endedDecember 31, 2020 , primarily due to a gain recognized on a litigation resolution in the first quarter of 2021. OnApril 28, 2021 , our Board declared a$0.01 dividend for the first quarter. Effective with the first quarter of 2020 dividend, 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 reduced 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. Our 2021 capital allocation priorities are to return capital to stockholders and to continue investing in our high growth Fenics businesses. Previously, we were deeply dividend-centric; going forward, we plan to prioritize share and unit repurchases over dividends and distribution with an aim to nominally increase it toward the end of the year. 66
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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,
2021 2020
Percentage Percentage
Actual of Total Actual of Total
Results Revenues Results Revenues
Revenues:
Commissions $ 435,220 76.7 % $ 455,855 75.6 %
Principal transactions 98,763 17.4 113,311 18.8
Total brokerage revenues 533,983 94.1 569,166 94.4
Fees from related parties 3,785 0.7 5,521 0.9
Data, software and post-trade 21,986 3.9 19,398 3.2
Interest and dividend income 3,038 0.5 4,161 0.7
Other revenues 4,784 0.8 4,921 0.8
Total revenues 567,576 100.0 603,167 100.0
Expenses:
Compensation and employee benefits 308,162 54.3 344,928 57.2
Equity-based compensation and
allocations of net income to
limited
partnership units and FPUs (1) 33,495 5.9 42,204 7.0
Total compensation and employee
benefits 341,657 60.2 387,132 64.2
Occupancy and equipment 48,133 8.5 51,074 8.5
Fees to related parties 5,291 0.9 5,435 0.9
Professional and consulting fees 16,140 2.8 19,956 3.3
Communications 29,804 5.3 30,521 5.1
Selling and promotion 7,488 1.3 18,699 3.1
Commissions and floor brokerage 17,929 3.2 19,277 3.2
Interest expense 17,853 3.2 17,506 2.9
Other expenses 16,089 2.8 17,531 2.9
Total expenses 500,384 88.2 567,131 94.1
Other income (losses), net:
Gains (losses) on equity method
investments 1,466 0.2 1,023 0.2
Other income (loss) 5,406 1.0 (6,015 ) (1.0 )
Total other income (losses), net 6,872 1.2 (4,992 ) (0.8 )
Income (loss) from operations
before income taxes 74,064 13.0 31,044 5.1
Provision (benefit) for income
taxes 14,939 2.6 10,875 1.8
Consolidated net income (loss) $ 59,125 10.4 % $ 20,169 3.3 %
Less: Net income (loss) operations
attributable to noncontrolling
interest in subsidiaries 16,034 2.8 6,495 1.0
Net income (loss) available to
common stockholders $ 43,091 7.6 % $ 13,674 2.3 %
(1) The components of Equity-based compensation and allocations of net income
to limited partnership units and FPUs are as follows (in thousands):
Three Months Ended March 31,
2021 2020
Percentage Percentage
Actual of Total Actual of Total
Results Revenues Results Revenues
Issuance of common stock and
grants of exchangeability $ 7,854 1.4 % $ 23,034 3.8 %
Allocations of net income 5,631 1.0 1,279 0.2
LPU amortization 17,094 3.0 16,309 2.7
RSU amortization 2,916 0.5 1,582 0.3
Equity-based compensation and
allocations of net income
to limited partnership units and
FPUs $ 33,495 5.9 % $ 42,204 7.0 %
Three Months Ended
Revenues Brokerage Revenues Total brokerage revenues decreased by$35.2 million , or 6.2%, to$534.0 million for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . Commission revenues decreased by$20.6 million , or 4.5%, to$435.2 million for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . Principal transactions revenues decreased by$14.5 million , or 12.8%, to$98.8 million for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . 67 -------------------------------------------------------------------------------- The decrease in total brokerage revenues was primarily driven by decreases in revenues from Equity derivatives and cash equities,FX, Energy and commodities, Credit, and Rates, partially offset by an increase in revenues from Insurance. The decreases in BGC's brokerage revenues, excluding Insurance, were due to the elevated levels of volatility and trading volume related to the onset of the COVID-19 pandemic during the first quarter of 2020. Our brokerage revenues from Equity derivatives and cash equities decreased by$11.3 million , or 13.9%, to$70.5 million for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 .
Our FX revenues decreased by
Our brokerage revenues from Energy and commodities decreased by$7.9 million , or 9.4%, to$75.9 million for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . Our Credit revenues decreased by$7.1 million , or 7.3%, to$90.0 million for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 .
Our brokerage revenues from Rates decreased by
Our brokerage revenues from Insurance increased by$7.5 million , or 16.8%, to$52.4 million for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . This increase was primarily due to organic growth, as previously hired brokers and salespeople ramped up production and benefited from favorable pricing trends for insurance renewals.
Fees from Related Parties
Fees from related parties decreased by$1.7 million , or 31.4%, to$3.8 million for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 .
Data, Software and Post-Trade
Data, software and post-trade revenues increased by$2.6 million , or 13.3%, to$22.0 million for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . This increase was primarily driven by Lucera expanding their client base, the integration ofAlgomi , as well as an increase in revenues from post-trade services.
Interest and Dividend Income
Interest and dividend income decreased by$1.1 million , or 27.0%, to$3.0 million for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . This decrease was primarily due to lower interest income earned on employee loans and deposits.
Other Revenues
Other revenues decreased by
Expenses
Compensation and Employee Benefits
Compensation and employee benefits expense decreased by$36.8 million , or 10.7%, to$308.2 million for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . The main driver of this decrease was the impact of lower brokerage revenues on variable compensation, as well as costs associated with the cost reduction program which were significantly higher in the first quarter of 2020 compared to the first quarter of 2021.
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 decreased by$8.7 million , or 20.6%, to$33.5 million for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . This was primarily driven by a decrease in grants of exchangeability and issuance of Class A common stock. 68
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Occupancy and Equipment
Occupancy and equipment expense decreased by$2.9 million , or 5.8%, to$48.1 million for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . This was primarily driven by a decrease in fixed asset impairments. Fees to Related Parties
Fees to related parties decreased by
Professional and Consulting Fees
Professional and consulting fees decreased by$3.8 million , or 19.1%, to$16.1 million for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . This decrease was primarily driven by a decrease in consulting fees in the three months endedMarch 31, 2021 .
Communications
Communications expense decreased by
Selling and Promotion
Selling and promotion expense decreased by$11.2 million , or 60.0%, to$7.5 million for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . This decrease was primarily a result of a reduction in travel and entertainment expenses due to a continued focus on tighter cost management as well as the impact of COVID-19.
Commissions and Floor Brokerage
Commissions and floor brokerage expense decreased by$1.3 million , or 7.0%, to$17.9 million for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . This line item tends to move in line with brokerage revenues. Interest Expense Interest expense increased by$0.3 million , or 2.0%, to$17.9 million for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . This increase was primarily driven by interest expense related to the 4.375% Senior Notes issued inJuly 2020 , partially offset by lower interest expense related to borrowings on the Revolving Credit Agreement.
Other Expenses
Other expenses decreased by
Other Income (Losses), net
Gains (Losses) on Equity Method Investments
Gains (losses) on equity method investments increased by$0.4 million , or 43.3%, to a gain of$1.5 million , for the three months endedMarch 31, 2021 as compared to a gain of$1.0 million for the three months endedMarch 31, 2020 . 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) increased by$11.4 million , to$5.4 million for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . This was primarily driven by an increase related to mark-to-market movements on other assets, a gain recognized on a litigation resolution in the first quarter of 2021, and an increase due to an impairment of an equity method investment recorded in the first quarter of 2020 compared to no impairment recorded in the three months endedMarch 31, 2021 . 69
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Provision (Benefit) for Income Taxes
Provision (benefit) for income taxes increased by$4.1 million , or 37.4%, to$14.9 million for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . This increase was primarily driven by the change in the geographical and business mix of earnings, which can impact 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
increased 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 September June
2021 31, 2020 30, 2020 2020 2020 31, 2019 30, 2019 30, 2019
Revenues:
Commissions $ 435,220 $ 377,146 $ 352,027 $ 382,640 $ 455,855 $ 382,897 $ 409,765 $ 422,974
Principal
transactions 98,763 73,687 65,182 99,453 113,311 71,725 75,536 90,432
Fees from related
parties 3,785 4,857 8,814 6,562 5,521 8,218 8,208 7,221
Data, software and
post-trade 21,986 20,860 21,523 20,139 19,398 18,151 18,364 18,741
Interest and dividend
income 3,038 (783 ) 2,418 6,536 4,161 2,865 3,976 7,813
Other revenues 4,784 3,659 5,075 3,758 4,921 3,300 5,288 4,006
Total revenues 567,576 479,426 455,039 519,088 603,167 487,156 521,137 551,187
Expenses:
Compensation and
employee
benefits 308,162 258,687 244,419 283,616 344,928 268,696 278,744 290,271
Equity-based
compensation and
allocations of net
income to
limited partnership
units and
FPUs 33,495 80,515 33,007 27,819 42,204 69,389 44,093 45,002
Total compensation
and
employee benefits 341,657 339,202 277,426 311,435 387,132 338,085 322,837 335,273
Occupancy and
equipment 48,133 45,723 45,224 47,247 51,074 47,387 44,709 45,109
Fees to related
parties 5,291 4,954 7,610 5,194 5,435 2,858 7,123 6,457
Professional and
consulting fees 16,140 18,072 15,637 19,805 19,956 27,553 21,262 23,347
Communications 29,804 30,470 30,088 30,524 30,521 29,715 29,882 29,974
Selling and promotion 7,488 6,891 5,943 6,634 18,699 21,432 20,320 21,491
Commissions and floor
brokerage 17,929 13,646 12,933 13,520 19,277 16,377 15,831 16,791
Interest expense 17,853 21,811 19,665 17,625 17,506 16,354 15,403 15,136
Other expenses 16,089 21,574 28,348 21,480 17,531 29,487 42,257 21,354
Total expenses 500,384 502,343 442,874 473,464 567,131 529,248 519,624 514,932
Other income
(losses), net:
Gain (loss) on
divestiture and
sale of investments - 403 (9 ) - - (14 ) - (1,619 )
Gains (losses) on
equity method
investments 1,466 1,354 1,527 1,119 1,023 1,064 1,530 738
Other income (loss) 5,406 1,687 4,779 1,129 (6,015 ) 11,642 2,095 194
Total other income
(losses), net 6,872 3,444 6,297 2,248 (4,992 ) 12,692 3,625 (687 )
Income (loss) from
operations
before income taxes 74,064 (19,473 ) 18,462 47,872 31,044 (29,400 ) 5,138 35,568
Provision (benefit)
for income
taxes 14,939 (6,729 ) 8,558 8,599 10,875 4,075 6,691 13,261
Consolidated net
income (loss) $ 59,125 $ (12,744 ) $ 9,904 $ 39,273 $ 20,169 $ (33,475 ) $ (1,553 ) $ 22,307
Less: Net income
(loss)
attributable to
noncontrolling
interest in
subsidiaries 16,034 (10,406 ) 251 11,354 6,495 (12,914 ) 4,752 8,335
Net income (loss)
available to
common stockholders $ 43,091 $ (2,338 ) $ 9,653 $ 27,919 $ 13,674 $ (20,561 ) $ (6,305 ) $ 13,972
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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,
2021 2020 2020 2020 2020 2019 2019 2019
Brokerage revenue by product:
Rates $ 161,793 $ 124,495 $ 119,325 $ 133,034 $ 167,240 $ 129,549 $ 156,765 $ 152,959
Credit 90,047 68,882 68,053 95,780 97,189 70,438 72,382 78,166
FX 83,433 73,213 73,281 74,393 94,366 80,369 86,492 101,899
Energy and commodities 75,868 71,706 65,871 71,326 83,738 71,456 73,012 73,887
Equity derivatives and
cash equities 70,462 63,718 47,410 61,777 81,797 59,533 56,958 65,078
Insurance 52,380 48,819 43,269 45,783 44,836 43,277 39,692 41,417
Total brokerage revenues $ 533,983 $ 450,833 $ 417,209 $ 482,093 $ 569,166 $ 454,622 $ 485,301 $ 513,406
Brokerage revenue by
product (percentage):
Rates 30.3 % 27.6 % 28.6 % 27.6 % 29.4 % 28.5 % 32.3 % 29.8 %
Credit 16.9 15.3 16.3 19.9 17.1 15.5 14.9 15.2
FX 15.6 16.2 17.6 15.4 16.6 17.7 17.8 19.8
Energy and commodities 14.2 15.9 15.8 14.8 14.6 15.7 15.0 14.4
Equity derivatives and
cash equities 13.2 14.2 11.3 12.8 14.4 13.1 11.8 12.7
Insurance 9.8 10.8 10.4 9.5 7.9 9.5 8.2 8.1
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 $ 450,332 $ 388,388 $ 359,194 $ 423,697 $ 513,101 $ 410,332 $ 436,841 $ 460,359
Fully Electronic 83,651 62,445 58,015 58,396 56,065 44,290 48,460 53,047
Total brokerage revenues $ 533,983 $ 450,833 $ 417,209 $ 482,093 $ 569,166 $ 454,622 $ 485,301 $ 513,406
Brokerage revenue by type
(percentage):
Voice/Hybrid 84.3 % 86.1 % 86.1 % 87.9 % 90.1 % 90.3 % 90.0 % 89.7 %
Fully Electronic 15.7 13.9 13.9 12.1 9.9 9.7 10.0 10.3
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 and cash equivalents, 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, 2021 were$5.6 billion , an increase of 41.1% as compared toDecember 31, 2020 . 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 Accrued commissions and other receivables, net. We maintain a significant portion of our assets in Cash and cash equivalents 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, 2021 of$634.2 million . See "Liquidity Analysis" below for a further discussion of our liquidity. Our Securities owned were$59.5 million as ofMarch 31, 2021 andDecember 31, 2020 . Our Marketable securities were$0.3 million as ofMarch 31, 2021 andDecember 31, 2020 . Our Repurchase agreements as ofMarch 31, 2021 were$0.1 million . We did not have any Repurchase agreements as ofDecember 31, 2021 . We did not have any Securities loaned or Reverse repurchase agreements as ofMarch 31, 2021 andDecember 31, 2020 . 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, 2021 andDecember 31, 2020 , 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, 2021 andDecember 31, 2020 , we had no investments in the program. 72
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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. Current cash and cash equivalent balances exceed our potential normal
course contingent liquidity needs. We believe that cash and cash equivalents 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. In addition, as a result
of regulatory actions, our registration statements under the Securities Act will
be subject to SEC review prior to effectiveness, which may lengthen the time
required for us to raise capital, reducing our access to the capital markets or
increasing our cost of capital.
As discussed above, our liquidity remains strong at $634.2 million as of
March 31, 2021 . Our decision to reduce our dividend and draw down additional
funds on the Revolving Credit Agreement in the first quarter of 2020, 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. As of
the third quarter of 2020 we fully repaid the $225.0 million borrowings
then-outstanding under the Revolving Credit Agreement.
On
Notes Payable, Other and Short-term Borrowings
Unsecured Senior Revolving Credit Agreement
OnNovember 28, 2018 , we entered into the 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 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. OnJuly 14, 2020 , the Company repaid in full the$225.0 million borrowings outstanding under the Revolving Credit Agreement. As ofMarch 31, 2021 andDecember 31, 2020 , there were no borrowings outstanding under the new unsecured Revolving Credit Agreement. We may draw down on the Revolving Credit Agreement to provide flexibility in the normal course to meet ongoing operational cash needs, including as necessary to manage through the current extraordinary macroeconomic/business environment as a result of the COVID-19 pandemic. Our liquidity remains strong, and was$634.2 million as ofMarch 31, 2021 , as discussed below. 73
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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. OnAugust 5, 2020 , the Company commenced a cash tender offer for any and all$300.0 million outstanding aggregate principal amount of its 5.125% Senior Notes. OnAugust 11, 2020 , the Company's cash tender offer expired at5:00 p.m. ,New York City time. As of the expiration time,$44.0 million aggregate principal amount of the 5.125% Senior Notes were validly tendered. These notes were redeemed on the settlement date ofAugust 14, 2020 . The Company retained CF&Co as one of the dealer managers for the tender offer. As a result of this transaction,$14 thousand in dealer management fees were paid to CF&Co. Cantor tendered$15.0 million of such senior notes in the tender offer, and did not hold such notes as ofMarch 31, 2021 . 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, 2021 was$255.8 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
OnJuly 24, 2018 , we issued an aggregate of$450.0 million principal amount of 5.375% Senior Notes. The 5.375% Senior Notes are general senior unsecured obligations of the Company. The 5.375% Senior Notes 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 will mature onJuly 24, 2023 . We may redeem some or all of the 5.375% 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 5.375% Senior Notes). If a "Change of Control Triggering Event" (as defined in the indenture related to the 5.375% 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 5.375% Senior Notes 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 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, 2021 was$446.9 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 in cash 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 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$297.1 million as ofMarch 31, 2021 . 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. 74
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4.375% Senior Notes
OnJuly 10, 2020 , we issued an aggregate of$300.0 million principal amount of 4.375% Senior Notes. The 4.375% Senior Notes are general unsecured obligations of the Company. The 4.375% Senior Notes bear interest at a rate of 4.375% per year, payable in cash onJune 15 andDecember 15 , commencingDecember 15, 2020 . The 4.375% Senior Notes will mature onDecember 15, 2025 . We 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 related to the 4.375% Senior Notes). If a "Change of Control Triggering Event" (as defined in the indenture related to the 4.375% 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. Cantor purchased$14.5 million of such senior notes and still holds such notes as ofMarch 31, 2021 . The initial carrying value of the 4.375% Senior Notes was$296.8 million , net of discount and debt issuance costs of$3.2 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 carrying value of the 4.375% Senior Notes was$297.1 million as ofMarch 31, 2021 . OnAugust 28, 2020 , we filed a Registration Statement on Form S-4, which was declared effective by theSEC onSeptember 8, 2020 . OnSeptember 9, 2020 , BGC launched an exchange offer in which holders of the 4.375% Senior Notes, issued in a private placement onJuly 10, 2020 , may exchange such notes for new registered notes with substantially identical terms. The exchange offer closed onOctober 14, 2020 , at which point the initial 4.375% Senior Notes were exchanged for new registered notes with substantially identical terms.
Collateralized Borrowings
OnMay 31, 2017 , we entered into a secured loan arrangement of$29.9 million under which we 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, 2021 andDecember 31, 2020 , we had$2.0 million and$4.0 million , respectively, outstanding related to this secured loan arrangement. The book value of the fixed assets pledged as ofMarch 31, 2021 was$0.5 million . The book value of the fixed assets pledged as ofDecember 31, 2020 was$0.8 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, 2021 , we had$8.7 million outstanding related to this secured loan arrangement. The book value of the fixed assets pledged as ofMarch 31, 2021 was$0.6 million . As ofDecember 31, 2020 , we had$9.6 million outstanding related to this secured loan arrangement. The net book value of the fixed assets pledged as ofDecember 31, 2020 , was$1.2 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, 2021 , we had$5.6 million outstanding related to this secured loan arrangement. The book value of the fixed assets pledged as ofMarch 31, 2021 was$2.2 million . As ofDecember 31, 2020 , we had$6.3 million outstanding related to this secured loan arrangement. The book value of the fixed assets pledged as ofDecember 31, 2020 , was$2.7 million .
Weighted-average Interest Rate
For the three months endedMarch 31, 2021 and 2020, 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 4.71% and 4.43%, 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$3.5 million (BRL 20.0 million ). The maturity date of the agreement isAugust 19, 2021 . Borrowings under this agreement bear interest at the BrazilianInterbank offering rate plus 3.30%. As ofMarch 31, 2021 , there were$3.5 million (BRL 20.0 million ) of borrowings outstanding under the facility. As ofDecember 31, 2020 , there were$3.8 million (BRL 20.0 million ) of borrowings outstanding under the facility. As ofMarch 31, 2021 , the interest rate was 6.1%. 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$8.8 million (BRL 50.0 million ). The maturity date of the agreement isJune 9, 2021 . This agreement bears a fee of 1.48% per year. As ofMarch 31, 2021 andDecember 31, 2020 , there were no borrowings outstanding under this agreement. 75
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BGC Credit Agreement with Cantor
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, 2022 , 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, 2021 , there were no borrowings by BGC or Cantor outstanding under this Agreement. CREDIT RATINGS As ofMarch 31, 2021 , our public long-term credit ratings and associated outlooks are as follows: Rating Outlook Fitch Ratings Inc. BBB- Stable Standard & Poor's BBB- Stable
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.
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 of 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.
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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, 2021 is$15.8 million .
As of
Discussion of the three months ended
The table below presents our Liquidity Analysis:
March 31, 2021 December 31, 2020
(in thousands)
Cash and cash equivalents $ 574,384 $ 593,646
Securities owned 59,527 58,572
Marketable securities 338 349
Repurchase agreements (94 ) -
Total $ 634,155 $ 652,567
The $18.4 million decrease in our liquidity position from $652.6 million as of
December 31, 2020 to $634.2 million as of March 31, 2021 , was primarily related
to ordinary movements in working capital, cash paid with respect to annual
employee bonuses, tax payments, and our continued investment in Fenics Growth
Platforms and our insurance brokerage businesses.
Discussion of the three months ended
The table below presents our Liquidity Analysis:
March 31, 2020 December 31, 2019
(in thousands)
Cash and cash equivalents $ 455,016 $ 415,379
Securities owned 57,529 57,525
Marketable securities 1 245 326
Repurchase agreements (512 ) -
Total $ 512,278 $ 473,230
1 As of
sheet had been lent in a Securities loaned transaction and, therefore, are
not included in this Liquidity Analysis.
The$39.0 million increase in our liquidity position from$473.2 million as ofDecember 31, 2019 to$512.3 million as ofMarch 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.
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. InJune 2020 , this clearing capital agreement was amended to cover Cantor providing clearing services in all eligible financial products to us and not justU.S. Treasury andU.S. government agency securities. 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 cash or other property acceptable to Cantor in the amount reasonably requested by Cantor under the clearing capital agreement or Cantor will post cash or other property on our behalf for a commercially reasonable charge. Cantor had not requested any cash or other property from us as collateral as ofMarch 31, 2021 . 77
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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, with certain delays announced by regulators recently due to COVID-19. 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 ,GFI Group Pte Ltd andGinga Global Markets 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 asThe London Metal 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 21-"Regulatory Requirements" to our unaudited condensed consolidated financial statements for further details on our regulatory requirements. As ofMarch 31, 2021 ,$790.4 million of net assets were held by regulated subsidiaries. As ofMarch 31, 2021 , these subsidiaries had aggregate regulatory net capital, as defined, in excess of the aggregate regulatory requirements, as defined, of$466.7 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, operate as SEFs. 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 . 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. 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. 78 -------------------------------------------------------------------------------- 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. Both theU.K. and EU are in the process of reviewing their financial services rulebooks, which may lead to regulatory changes. 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. OnSeptember 30, 2020 , theSEC announced a settlement with BGC regarding alleged negligent disclosure violations related to one of BGC's non-GAAP financial measures for periods beginning with the first quarter of 2015 through the first quarter of 2016. All of the relevant disclosures related to those periods and pre-dated theSEC staff'sMay 2016 detailed compliance and disclosure guidance with respect to non-GAAP presentations. BGC revised its non-GAAP presentation beginning with the second quarter of 2016 as a result of theSEC's guidance, and theSEC has made no allegations with regard to any periods following the first quarter of 2016. In connection with theSEC settlement, BGC was ordered to cease and desist from any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, Section 13(a) of the Exchange Act and Rule 13a-11 thereunder, and Rule 100(b) of Regulation G, and agreed to pay a civil penalty of$1.4 million without admitting or denying theSEC's allegations.
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,
2021 2020
Shares outstanding at beginning of period 323,018 307,915
Share issuances: Redemptions/exchanges of limited partnership interests1 10,431 2,105 Vesting of RSUs 1,367 697 Acquisitions 251 270 Other issuances of BGC Class A common stock 262 72 Treasury stock repurchases (965 ) - Shares outstanding at end of period 334,364 311,059
1 Included in redemptions/exchanges of limited partnership interests for the
three months ended
Class A common stock granted in connection with the cancellation of 1.7
million LPUs, and 1.4 million shares of BGC Class A common stock granted in
connection with the cancellation of 1.4 million LPUs, respectively. Because
LPUs are included in the Company's fully diluted share count, if dilutive,
redemptions/exchanges in connection with the issuance of BGC Class A common
stock would not impact the fully diluted number of shares 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 , theBoard and Audit Committee 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, 2021 , the Company had$245.4 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. 79 -------------------------------------------------------------------------------- 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 unit redemptions and share repurchases of BGC Class A common stock during the three months endedMarch 31, 2021 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, 2021-March 31, 2021 20 $
4.40
Repurchases2
January 1, 2021-January 31, 2021 - $ - February 1, 2021-February 28, 2021 962
4.56
March 1 , 2021-March 31, 2021 3
4.29
Total Repurchases 965 $
4.56
Total Redemptions and Repurchases 985 $ 4.56 $ 245,422 1 During the three months endedMarch 31, 2021 , the Company redeemed 14 thousand LPUs at an aggregate redemption price of$61 thousand for a
weighted-average price of
31, 2021, the Company redeemed 6 thousand FPUs at an aggregate redemption
price of
the three months ended
at an aggregate redemption price of
of
31, 2020. The table above does not include units redeemed/cancelled in
connection with the grant of 1.6 million and 1.4 million shares of BGC Class
A common stock during the three months ended
respectively, nor the limited partnership interests exchanged for 9.1 million
and 0.6 million shares of BGC Class A common stock during the three months
ended
2 During the three months ended
million shares of BGC Class A common stock at an aggregate price of
million for a weighted-average price of
repurchase any shares of BGC Class A common stock during the three months
ended March 31, 2020 .
The weighted-average share count for our earnings per share calculation was as follows (in thousands):
Three Months Ended March 31, 2021
Common stock outstanding1 374,318
Partnership units2 178,117
RSUs (Treasury stock method) 3,413
Other 1,220
Total3 557,068
1 Common stock consisted of shares of BGC Class A common stock, shares of BGC
Class B common stock and contingent shares of our Class A common stock for
which all necessary conditions have been satisfied except for the passage of
time. For the quarter ended March 31, 2021 , the weighted-average number of
shares of BGC Class A common stock was 326.5 million and shares of BGC
Class B common stock was 45.9 million.
2 Partnership units collectively include FPUs, LPUs, including contingent units
of
for the passage of time, and Cantor units (see Note 2-"Limited Partnership
Interests in
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
million shares of contingent BGC Class A common stock, N units, RSUs, and
LPUs were 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, 2021 .
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The fully diluted period-end spot share count was as follows (in thousands):
As of March 31, 2021
Common stock outstanding 380,249
Partnership units 170,896
RSUs (Treasury stock method) 2,801
Other 3,051
Total 556,997
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 34.6 million shares of BGC Class A common
stock now owned or subsequently acquired by such Cantor entities for up to an
aggregate of 34.6 million 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 10.3 million shares of
BGC Class B common stock to Cantor and 0.7 million 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 . Following this exchange, Cantor and its affiliates only have the right
to exchange under the Exchange Agreement up to an aggregate of 23.6 million
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, 2021 , 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.
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:
• 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.
81
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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.
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 under the CEO Program. 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 2% of the gross proceeds from the sale of shares. For certain transactions during 2020, we paid CF&Co 1% of the gross proceeds from the sale of shares of our Class A common stock in our CEO program. As of the date of filing of this Form 10-Q, we have issued 17.6 million shares of BGC Class A common stock (or$210.8 million ) under theMarch 2018 Sales Agreement, and$89.2 million of stock is remaining for sale by us under theMarch 2018 Sales Agreement. For additional information on the Company's CEO Program sales agreements, see Note 13-"Related Party Transactions" to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. OnMarch 8, 2021 , we filed a replacement CEO Program shelf registration statement on Form S-3, which has not yet been declared effective, with respect to the issuance and sale of up to an aggregate of$300.0 million of shares of BGC Class A common stock (inclusive of the$89.2 million of shares remaining for sale under the current CEO Program) from time to time on a delayed or continuous basis. 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, 2021 , we have issued an aggregate of 14.5 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, 2021 , 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, 2021 , 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, 2021 , the limit on the aggregate number of shares authorized to be delivered allowed for the grant of future awards relating to 108.2 million shares of BGC Class A common stock. OnOctober 20, 2020 , we filed a registration statement on Form S-3, which was declared effective onOctober 28, 2020 , pursuant to which CF&Co may make offers and sales of our 5.125% Senior Notes, 5.375% Senior Notes, 3.750% Senior Notes and 4.375% 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.
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$37.5 million in cash that may be issued contingent on certain targets being met through 2023. As ofMarch 31, 2021 , the Company has issued 0.4 million shares of BGC Class A common stock, 0.1 million of RSUs and paid$20.0 million in cash related to such contingent payments. 82
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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. OnFebruary 11, 2021 , following the close of discovery, the Company and the independent directors of the Board filed motions for summary judgement seeking dismissal of the case based on the discovery record, which plaintiffs have opposed. If the Court does not rule in defendants' favor on these motions, trial is currently set forOctober 2021 .
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 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 theSecond Amended and Restated BGC Holdings Limited Partnership Agreement (previously the Sixth Amendment), 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 Cantor units inBGC Holdings at the price that Cantor would have paid for Cantor units had the Company redeemed the FPUs. If Cantor acquires any Cantor units as a result of the purchase or redemption byBGC Holdings of any FPUs, Cantor will be entitled to the benefits (including distributions) of such units it acquires from the date of termination or bankruptcy of the applicable Founding/Working Partner. In addition, any such Cantor units purchased by Cantor are currently exchangeable for up to 23.6 million 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). OnMarch 31, 2021 , Cantor purchased fromBGC Holdings an aggregate of 1,149,684 Cantor units for aggregate consideration of$2,104,433 as a result of the redemption of 1,149,684 FPUs, and 1,618,376 Cantor units for aggregate consideration of$3,040,411 as a result of the exchange of 1,618,376 FPUs. Each Cantor unit inBGC Holdings held by Cantor is exchangeable by Cantor at any time on a one-for-one basis (subject to adjustment) for shares of BGC Class A common stock. As ofMarch 31, 2021 , there were 0.5 million FPUs inBGC Holdings remaining, whichBGC Holdings had the right to redeem or exchange and with respect to which Cantor will have the right to purchase an equivalent number of Cantor units following such redemption or exchange.
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. InMay 2020 , the Audit Committee authorized us to extend the initial term of the short-term services agreement for an additional nine months. 83
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GUARANTEE AGREEMENT FROM MINT BROKERS
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. Mint Brokers has entered into guarantees on our behalf (and on behalf of GFI), and we are required to indemnify Mint Brokers for the amounts, if any, paid by Mint Brokers on our behalf pursuant to this arrangement. EffectiveApril 1, 2020 , these guarantees were transferred to Mint Brokers from CF&Co. During the three months endedMarch 31, 2021 , the Company recorded expenses of$31 thousand with respect to these guarantees.
BGC SUBLEASE FROM NEWMARK
InMay 2020 , BGCU.S. OpCo entered into an arrangement to sublease excess space fromRKF Retail Holdings LLC , a subsidiary of Newmark, which sublease was approved by the Audit Committee. The deal is a one-year sublease of approximately 21,000 rentable square feet inNew York City . Under the terms of the sublease, BGCU.S. OpCo will pay a fixed rent amount of$1.1 million in addition to all operating and tax expenses attributable to the lease. In connection with the sublease, BGCU.S. OpCo paid$0.3 million for the three months endedMarch 31, 2021 .
DEBT REPURCHASE PROGRAM
OnJune 11, 2020 , the Company's Board of Directors and its Audit Committee authorized a debt repurchase program for the repurchase by the Company of up to$50.0 million ofCompany Debt Securities . Repurchases ofCompany Debt Securities , if any, are expected to reduce future cash interest payments, as well as future amounts due at maturity or upon redemption. Under the authorization, the Company may make repurchases ofCompany Debt Securities for cash from time to time in the open market or in privately negotiated transactions upon such terms and at such prices as management may determine. Additionally, the Company is authorized to make any such repurchases ofCompany Debt Securities through CF&Co (or its affiliates), in its capacity as agent or principal, or such other broker-dealers as management shall determine to utilize from time to time, and such repurchases shall be subject to brokerage commissions which are no higher than standard market commission rates.
As of
EQUITY METHOD INVESTMENTS
The Company was authorized to enter into loans, investments or other credit support arrangements for Aqua (see Note 13- "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 andFebruary 25, 2021 , the Company'sBoard and Audit Committee increased the authorized amount by an additional$2.0 million and$1.0 million respectively, to an aggregate of$20.2 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
OnFebruary 22, 2021 , the Company grantedSean A. Windeatt 123,713 exchange rights with respect to 123,713 non-exchangeable LPUs that were previously granted toMr. Windeatt onFebruary 22, 2019 . The resulting 123,713 exchangeable LPUs are immediately exchangeable byMr. Windeatt for an aggregate of 123,713 shares of BGC Class A common stock. The grant was approved by the Compensation Committee. Additionally, the Compensation Committee approved the right to exchange for cash 28,477 non-exchangeable PLPUs held byMr. Windeatt , for a payment of$178,266 for taxes when the LPU units are exchanged. OnApril 8, 2021 , the Compensation Committee approved the repurchase by the Company onApril 23, 2021 of 123,713 exchangeable BGC Holdings LPU-NEWs held byMr. Windeatt at the price of$5.65 , which was the closing price of our Class A common stock onApril 23, 2021 , and the redemption of 28,477 exchangeable BGC Holdings PLPU-NEWs held byMr. Windeatt for$178,266 , less applicable taxes and withholdings.
On
OnApril 28, 2021 , the Compensation Committee approved an additional monetization opportunity forMr. Merkel . EffectiveApril 29, 2021 , 108,350 ofMr. Merkel's 273,612 non-exchangeable BGC Holdings PSUs were redeemed for zero, 101,358 ofMr. Merkel's 250,659 non- exchangeable BGC Holdings PPSUs were redeemed for a cash payment of$575,687 , and 108,350 shares of BGC Class A common stock were issued toMr. Merkel . OnApril 29, 2021 , the 108,350 shares of BGC Class A common stock were repurchased fromMr. Merkel at the closing price of our Class A common stock on that date, under our stock buyback program. 84 -------------------------------------------------------------------------------- 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. 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 were exchanged. OnMarch 20, 2020 , the Company redeemed 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 redemption price of approximately$741,644 ). This transaction was approved by the Compensation Committee. OnJuly 30, 2020 , the Company redeemed the remaining 174,765 exchangeable LPUs held byMr. Merkel at the price of$2.76 , the closing price of our Class A Common Stock onJuly 30, 2020 . This transaction was approved by the Compensation Committee. In connection with the redemption of the 185,300 exchangeable LPUs onMarch 20, 2020 , 122,579 PLPUs were redeemed for$661,303 for taxes. In connection with the redemption of the 174,765 LPUs onJuly 30, 2020 , 142,989 PLPUs were redeemed for$846,182 for taxes. OnMarch 2, 2020 , the Company grantedShaun D. Lynn 883,348 exchange rights with respect to 883,348 non-exchangeable LPUs that were previously granted toMr. Lynn . The resulting 883,348 exchangeable LPUs were immediately exchangeable byMr. Lynn for an aggregate of 883,348 shares of BGC Class A common stock. The grant was approved by the Compensation Committee. Additionally, the Compensation Committee approved the right to exchange for cash 245,140 non-exchangeable PLPUs held byMr. Lynn , for a payment of$ 1,099,599 for taxes when the LPU units are exchanged. OnJuly 30, 2020 , the Company redeemed 797,222 exchangeable LPUs held byMr. Lynn at the price of$2.76 , the closing price of our Class A Common Stock onJuly 30, 2020 . This transaction was approved by the Compensation Committee. In connection with the redemption of the 797,222 exchangeable LPUs, 221,239 exchangeable PLPUs were redeemed for$992,388 for taxes. In connection with the redemption,Mr. Lynn's remaining 86,126 exchangeable LPUs and 23,901 exchangeable PLPUs were redeemed for zero upon exchange in connection with his LLP status. OnMarch 2, 2020 , the Company grantedSean A. Windeatt 519,725 exchange rights with respect to 519,725 non-exchangeable LPUs that were previously granted toMr. Windeatt . The resulting 519,725 exchangeable LPUs were immediately exchangeable byMr. Windeatt for an aggregate of 519,725 shares of BGC Class A common stock. The grant was approved by the Compensation Committee. Additionally, the Compensation Committee approved the right to exchange for cash 97,656 non-exchangeable PLPUs held byMr. Windeatt , for a payment of$645,779 for taxes when the LPU units are exchanged. OnAugust 5, 2020 , the Company redeemed 436,665 exchangeable LPUs held byMr. Windeatt at the price of$2.90 , the closing price of our Class A common stock onAugust 5, 2020 . This transaction was approved by the Compensation Committee. In connection with the redemption of the 436,665 exchangeable LPUs, 96,216 exchangeable PLPUs were redeemed for$637,866 for taxes. In connection with the redemption, 20,849 exchangeable LPUs and 1,440 exchangeable PLPUs were redeemed for zero upon exchange in connection withMr. Windeatt's LLP status. Additionally, onAugust 5, 2020 , the Company grantedMr. Windeatt 40,437 exchange rights with respect to 40,437 non-exchangeable LPUs that were previously granted toMr. Windeatt . The resulting 40,437 exchangeable LPUs were immediately exchangeable byMr. Windeatt for an aggregate of 40,437 shares of BGC Class A common stock. The grant was approved by the Compensation Committee. Additionally, the Compensation Committee approved the right to exchange for cash 21,774 non-exchangeable PLPUs held byMr. Windeatt . OnAugust 5, 2020 , the Company redeemed these 40,437 exchangeable LPUs held byMr. Windeatt at the price of$2.90 , the closing price of our Class A common stock onAugust 5, 2020 . This transaction was approved by the Compensation Committee. In connection with the redemption of these 40,437 exchangeable LPUs, the 21,774 exchangeable PLPUs were redeemed for$136,305 for taxes. In addition to the foregoing, onAugust 6, 2020 ,Mr. Windeatt was granted exchange rights with respect to 43,890 non-exchangeable Newmark Holding LPUs that were previously granted toMr. Windeatt . Additionally,Mr. Windeatt was granted the right to exchange for cash 17,068 non-exchangeableNewmark Holdings PLPUs held byMr. Windeatt . As these Newmark Holdings LPUs and PLPUs were previously non-exchangeable, the Company took a transaction charge of$381,961 upon grant of exchangeability. OnAugust 6, 2020 , Newmark redeemed the 40,209Newmark Holdings exchangeable LPUs held byMr. Windeatt for an amount equal to the closing price of Newmark's Class A Common Stock onAugust 6, 2020 ($4.16 ) multiplied by 37,660 (the amount of shares of Newmark's Class A Common Stock the 40,209 Newmark Holdings LPUs were exchangeable into based on the Exchange Ratio atAugust 6, 2020 ). In connection with the redemption of these 40,209 exchangeable Newmark Holdings LPUs, 15,637 exchangeable Newmark Holdings PLPUs were redeemed for$194,086 for taxes. In connection with the redemption, 3,681 exchangeable Newmark Holding LPUs and 1,431 exchangeable Newmark Holdings PLPUs were redeemed for zero upon exchange in connection withMr. Windeatt's LLP status. 85 --------------------------------------------------------------------------------
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,
2021 2020 2020 2020 2020
Notional Volume (in billions)
Total Fully Electronic volume $ 11,802 $ 8,736 $ 8,426 $ 7,206 $ 8,020
Total Hybrid volume1 67,913 59,165 64,298 63,873 76,330
Total Fully Electronic and Hybrid
volume $ 79,715 $ 67,901 $ 72,724 $ 71,079 $ 84,350
Transaction Count (in thousands,
except for days)
Total Fully Electronic transactions 3,744 2,895 2,735 3,247 4,212
Total Hybrid transactions 1,348 1,129 1,115 1,333 1,591
Total Fully Electronic and Hybrid
transactions 5,092 4,024 3,850 4,580 5,803
Trading days 61 64 64 63 62
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.
1 Hybrid is defined as transactions involving some element of electronic
trading but executed by BGC's brokers, exclusive of voice-only transactions.
Fully electronic involves customer-to-customer trades, free from broker
execution.
Fully Electronic volume, including new products, was
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, we enter into arrangements with unconsolidated entities, including variable interest entities. See Note 14-"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, 2020 , 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. 86 -------------------------------------------------------------------------------- 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 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, 2021 and 2020, we incurred equity-based compensation expense of$7.9 million and$23.0 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, 2021 and 2020, we incurred equity-based compensation expense related to these LPUs of$17.1 million and$16.3 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 LPUs and from proceeds of the sale of the employees' shares of BGC Class A common stock 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 ofMarch 31, 2021 andDecember 31, 2020 , the aggregate balance of employee loans, net of reserve, was$419.6 million and$408.1 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, 2021 and 2020, was$15.6 million and$14.6 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. 87
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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 indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we choose to bypass the qualitative assessment, we perform a quantitative goodwill impairment analysis as follows. The quantitative goodwill impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss should be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is deemed not to be impaired. To estimate the fair value of the reporting unit, 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.
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. 88 -------------------------------------------------------------------------------- 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, 2020 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.
CAPITAL DEPLOYMENT PRIORITIES, DIVIDEND POLICY AND REPURCHASE AND REDEMPTION PROGRAM
BGC's 2021 capital allocation priorities are to return capital to stockholders and to continue investing in its high growth Fenics businesses. BGC plans to prioritize share and unit repurchases over dividends and distributions. The Company plans to reassess its current dividend and distribution with an aim to nominally increase it toward the end of the year. Traditionally, our dividend policy 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. Please see below for a detailed definition of post-tax Adjusted Earnings per fully diluted share. Beginning in the first quarter of 2020, and for all of the quarterly periods in 2020, the Board reduced the quarterly dividend to$0.01 per share out of an abundance of caution in order to strengthen the Company's balance sheet as the global capital markets faced difficult and unprecedented macroeconomic conditions related to the global pandemic. Additionally, during 2020,BGC Holdings, L.P. reduced its distributions to or on behalf of its partners. We plan to continue dividends and distributions at or near current levels through the balance of 2021 and prioritize our other capital allocation priorities. BGC believes that these steps will allow the Company to maintain its financial strength. Any dividends, if and when declared by our Board, will be paid 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. With respect to any distributions which are declared, amounts paid 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. 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 BGCU.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, underDelaware law, dividends may be payable only out of surplus, which is our net assets minus our capital (as defined underDelaware 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 with 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 comparable GAAP measures and adjusting for certain
items with respect to compensation expenses, non-compensation expenses, and
other income, as discussed below.
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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 all 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's GAAP Consolidated Statements of Operations and GAAP Consolidated Statements of Cash Flows. These GAAP equity-based compensation charges reflect the following items:
* Charges with respect to grants of exchangeability, which reflect the
right of holders of limited partnership units with no capital
accounts, such as LPUs and PSUs, to exchange these units into shares
of common stock, or into partnership units with capitalaccounts, such
as HDUs, as well as 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 ofpreferred
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 limited partnership units 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 alternativeto the
common practice among public companies of issuing the gross amount of
shares to employees, subject to cashless withholding of shares, to pay
applicable withholding taxes.
* 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 of non-exchangeable units,
including PSUs and LPUs.
* Charges related to amortization of RSUs and limited partnership units.
* Charges related to grants of equity awards, including common stock or
partnership units with capital accounts.
* Allocations of net income to limited partnership units and FPUs. Such
allocations represent the pro-rata portion of post-tax 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 limited partnership units 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 limited partnership units 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, limited partnership units 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. has reduced
its distributions of income from the operations of BGC's businesses 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 other 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 and/or cost
savings plans.
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Calculation of Non-Compensation Adjustments for Adjusted Earnings
Adjusted Earnings calculations may also exclude items such as:
* Non-cash GAAP charges related to the amortization of intangibles with
respect to acquisitions;
* Acquisition related costs;
* Certain rent charges;
* Non-cash GAAP asset impairment charges; and
* Various other GAAP items that management views as not reflective of
the Company's underlying performance in a given period,including
non-compensation-related charges incurred as part of broad
restructuring and/or cost savings plans. Such 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 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.
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 under GAAP. To calculate the quarterly tax provision under GAAP, BGC estimates its full fiscal year 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 quarterly 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 under 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 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. 91
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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
limited partnership units, 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 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 Earnings in part to help it evaluate, among other things, the overall performance of the Company's business, to make decisions with respect to the Company's operations, and to determine the amount of dividends payable to common stockholders and distributions payable to holders of limited partnership units. Dividends payable to common stockholders and distributions payable to holders of limited partnership units are included within "Dividends to stockholders" and "Earnings distributions to limited partnership interests and noncontrolling interests," respectively, in our unaudited, condensed, consolidated statements of cash flows. The term "Adjusted Earnings" should not be considered in isolation or as an alternative to GAAP net income (loss). The Company views Adjusted Earnings as a metric that is not indicative of liquidity, or the cash available to fund its operations, but rather as a performance measure. Pre- and post-tax Adjusted Earnings, as well as related measures, are not intended to replace the Company's presentation of its GAAP financial results. However, management believes that these measures help provide investors with a clearer understanding of BGC's financial performance and offer useful information to both management and investors regarding certain financial and business trends related to the Company's financial condition and results of operations. Management believes that the GAAP and Adjusted Earnings measures of financial performance should be considered together. For more information regarding Adjusted Earnings, see the section in the Company's most recent financial results press release titled "Reconciliation of GAAP Income (Loss) from Operations before Income Taxes to Adjusted Earnings and GAAP Fully Diluted EPS to Post-Tax Adjusted EPS", including the related footnotes, for details about how BGC's non-GAAP results are reconciled to those under GAAP. Adjusted EBITDA Defined
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.
92
-------------------------------------------------------------------------------- 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, 2021 , there were 334.4 million shares of BGC Class A common stock outstanding. OnJune 21, 2017 , Cantor pledged 10.0 million 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 10.0 million shares of BGC Class B common stock and remain pledged in connection with the partner loan program. OnNovember 23, 2018 ,BGC Partners issued 10.3 million shares of BGC Class B common stock to Cantor and 0.7 million 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 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, 2021 , 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, 2021 , Cantor and CFGM held 45.9 million shares of BGC Class B common stock (which represents all of the outstanding shares of BGC Class B common stock), representing approximately 57.8% 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, 2021 , Cantor has distributed to its current and former partners an aggregate of 20.9 million shares of BGC Class A common stock, consisting of (i) 19.4 millionApril 2008 distribution rights shares, and (ii) 1.5 millionFebruary 2012 distribution rights shares. As ofMarch 31, 2021 , Cantor is still obligated to distribute to its current and former partners an aggregate of 15.8 million shares of BGC Class A common stock, consisting of 14.0 millionApril 2008 distribution rights shares and 1.8 millionFebruary 2012 distribution rights shares.
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, 2021 , we held directly and indirectly, through wholly-owned subsidiaries, 380.2 million BGCU.S. OpCo limited partnership units and 380.2 million BGC Global OpCo limited partnership units, representing approximately 69.5% of the outstanding limited partnership units in both BGCU.S. OpCo and BGC Global OpCo. As of that date,BGC Holdings held 166.8 million BGCU.S. OpCo limited 93 -------------------------------------------------------------------------------- partnership units and 166.8 million BGC Global OpCo limited partnership units, representing approximately 30.5% 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 respect to outstanding non-exchangeable LPUs and FPUs, and to repurchaseBGC 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 inBGC Holdings are generally exchangeable under the Exchange Agreement for up to 23.6 million 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 ofMarch 31, 2021 , there were 0.5 million FPUs remaining whichBGC Holdings had the right to redeem or exchange and with respect to which Cantor will have the right to purchase an equivalent number of Cantor units following such redemption or exchange. In order to facilitate partner compensation and for other corporate purposes, theBGC 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 ofBGC 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 ofMarch 31, 2021 , there were 31.4 million such units granted and outstanding inBGC Holdings . OnJune 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 34.6 million shares of BGC Class A common stock now owned or subsequently acquired by such Cantor entities for up to an aggregate of 34.6 million 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 ofMarch 31, 2021 , 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 23.6 million 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 inBGC 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 94 -------------------------------------------------------------------------------- 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 ofBGC 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. 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 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
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,
2021 . 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, 2021
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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 common stock, Cantor would hold 11.9% of the voting power, CFGM
would hold 0.2% of the voting power, and the public stockholders would hold
87.9% of the voting power (and Cantor and CFGM's indirect economic interests in
BGC U.S. and BGC Global would remain
96
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unchanged). The diagram does not reflect certain BGC Class A common stock and
BGC 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)
31.4 million Preferred Units granted and outstanding to BGC Holdings partners
(see "BGC Partners, Inc. Partnership Structure" herein); and (c) 48.3 million N
Units granted and outstanding to BGC Holdings partners.
The diagram reflects BGC Class A common stock and BGC Holdings partnership unit
activity from January 1, 2021 through March 31, 2021 as follows: (a) 2.2 million
LPUs for vested N Units; (b) 2.2 million LPUs forfeited; (c) 1.4 million shares
of BGC Class A common stock issued for vested restricted stock units; (d) 1.2
million LPUs related to prior period adjustments; (e) 1.0 million shares of BGC
Class A common stock repurchased by us; (f) an aggregate of 0.5 million LPUs
granted by BGC Holdings ; (g) 0.3 million 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 5.5 million of such shares remaining
available for issuance by us under such Registration Statement; and (h) 5
thousand 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 9.3 million of such shares remaining available for issuance by us under
shelf Registration Statement on Form S-3 (Registration No. 333-196999). No
shares of BGC Class A common stock were sold by us during the three months ended
March 31, 2021 under the March 2018 Sales Agreement pursuant to our Registration
Statement on Form S-3 (Registration No. 333-223550) ($89.2 million of stock
remains for sale by us under such sales agreement). As March 31, 2021 , 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 Corporate Conversion
The Company continues to explore a possible conversion into a simpler corporate structure, weighing any significant change in taxation policy. In particular, the Company is awaiting insight into futureU.S. Federal tax policies, which remain uncertain under the newU.S. administration. Should the Company decide to move forward with a corporate conversion, it will continue to work with regulators, lenders, and rating agencies, and BGC's board and committees will review potential transaction arrangements.
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