INTERACTIVE BROKERS GROUP, INC. The following discussion should be read in conjunction with the audited consolidated financial statements and the related notes in Part II, Item 8, of this Annual Report on Form 10-K. In addition to historical information, the following discussion also contains forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K.
Business Overview
We are an automated global electronic broker. We custody and service accounts for hedge and mutual funds, ETFs, registered investment advisers, proprietary trading groups, introducing brokers and individual investors. We specialize in routing orders and executing and processing trades in stocks, options, futures, forex, bonds, mutual funds, ETFs, metals and cryptocurrencies on more than 150 electronic exchanges and market centers in 33 countries and 25 currencies seamlessly around the world.
As an electronic broker, we execute, clear and settle trades globally for both institutional and individual customers. Capitalizing on our proprietary technology, our systems provide our customers with the capability to monitor multiple markets around the world simultaneously and to execute trades electronically in these markets at a low cost, in multiple products and currencies from a single trading account. The ever-growing complexity of multiple market centers across diverse geographies provides us with ongoing opportunities to build and continuously adapt our order routing software to secure excellent execution prices.
Since our inception in 1977, we have focused on developing proprietary software to automate broker-dealer functions. The proliferation of electronic exchanges and market centers since the early 1990s has allowed us to integrate our software with an increasing number of trading venues, creating one automatically functioning, computerized platform that requires minimal human intervention.
Our customer base is diverse with respect to geography and segments. Currently,
approximately 77% of our customers reside outside the
Business Environment
In 2021, world equities markets ended the year mixed. While the
The following is a summary of the key economic drivers that affect our business and how they compared to the prior year:
Global trading volumes. According to industry data, average daily volume in
Volumes were impacted positively by large numbers of investors, particularly individuals, participating in securities markets throughout the year. Market volatility decreased moderately over the course of 2021, while average volatility for the year was down substantially from a highly volatile, pandemic-impacted 2020. Despite lower volatility, higher equities, futures and options volumes demonstrated the continuing impact of more participants in the financial markets and their increasing comfort with taking part in the investment arena.
Note that while
Volatility. U.S. market volatility, as measured by the average
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In general, higher volatility improves our performance because it correlates with customer trading activity across product types. Various market cross-currents led to mixed results across our major product types: customer options and stock volumes were up 46% and 131%, respectively, while futures and foreign exchange volumes declined 7% and 30%, respectively, compared to 2020. Trading was active as investors continued to capitalize on the opportunities to participate in the markets, seeking higher yields on their investments in the zero or negative interest rate environments that existed globally in 2021. These trends led to an influx of new accounts and increases in trading volume, particularly in equities.
Interest Rates. The
Low benchmark rates also reduce the interest we earn on our segregated cash, the
majority of which is invested in
As an offset, lower rates also reduce our interest expense. For example, in
Net interest income increased compared to 2020 while the average federal funds effective rate decreased to 0.08% in 2021 from 0.38% in 2020. The interest we pay on customer cash balances and earn on customer margin loans and investment of customer segregated funds results in spreads that are compressed at low benchmark rates. Rising balances and a minimum margin loan interest rate have partially compensated for this reduction in net interest income. Despite flat benchmark rates in 2021, a 58% increase in our average margin loan balances contributed to a 41% rise in margin loan interest over 2020. Further, a strong inflow of new accounts drove average customer credit balances up 17% for the year.
Fueled by higher average balances and strong securities lending results, our net interest income grew 32% over 2020, and our overall net interest margin increased from 1.07% to 1.17%.
Currency fluctuations. As a global electronic broker trading on exchanges around
the world in multiple currencies, we are exposed to foreign currency risk. We
actively manage this exposure by keeping our net worth in proportion to a
defined basket of 10 currencies we call the "GLOBAL" to diversify our risk and
to align our hedging strategy with the currencies that we use in our business.
Because we report our financial results in
Financial Overview
We report non-GAAP financial measures, which exclude certain items that may not be indicative of our core operating results and business outlook and may be useful in evaluating the operating performance of our business and provide a better comparison of our results in the current period to those in prior and future periods. See the "Non-GAAP Financial Measures" section below in this Item 7 for additional details.
Diluted earnings per share were
For the current year, our net revenues were
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The financial highlights for the current year were:
?Commission revenue increased
?Pretax profit margin was 66%, up from 57% in the prior year. Adjusted pretax profit margin was 67%, up from 61% in the prior year.
In connection with our currency diversification strategy as of
West Texas Intermediate Crude Oil Event
On
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Certain Trends and Uncertainties
We believe that our current operations may be favorably or unfavorably impacted by the following trends that may affect our financial condition and results of operations:
?The COVID-19 pandemic has precipitated unprecedented market conditions with equally unprecedented social and community challenges. The impact of the COVID-19 pandemic going forward will depend on numerous evolving factors that cannot be accurately predicted, including the duration and spread of the pandemic, governmental regulations in response to the pandemic, and the effectiveness of vaccinations and other medical advancements. ?Retail participation in the equity markets has fluctuated in the past due to investor sentiment, market conditions and a variety of other factors. Retail transaction volumes may not be sustainable and are not predictable. ?Consolidation among market centers may adversely affect the value of our IB SmartRoutingSM software.
?Price competition among broker-dealers may continue to intensify. ?Benchmark interest rates have fluctuated over the past years due to economic conditions. Changes in interest rates may not be predictable. ?Fiscal and/or monetary policy may change and impact the financial services business and securities markets. ?New legislation or modifications to existing regulations and rules could occur in the future. Scrutiny of payment for order flow and order routing practices by regulatory and legislative authorities has increased.
?We continue to be exposed to the risks and uncertainties of doing business in
international markets, particularly in the heavily regulated brokerage
industry. Such risks and uncertainties include political, economic and financial
instability, and foreign policy changes. For example, tensions between the
See "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K for a discussion of other risks that may affect our financial condition and results of operations.
?
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Trading Volumes and Customer Statistics
The tables below present historical trading volumes and customer statistics for our business. Trading volumes are the primary driver in our business. Information on our net interest income can be found elsewhere in this report.
TRADE VOLUMES:
(in thousands, except %)
Cleared Non-Cleared Avg. Trades
Customer % Customer % Principal % Total % per U.S.
Period Trades Change Trades Change Trades Change Trades Change Trading Day
2017 265,501 14,835 31,282 311,618 1,246
2018 328,099 24% 21,880 47% 18,663 (40%) 368,642 18% 1,478
2019 302,289 (8%) 26,346 20% 17,136 (8%) 345,771 (6%) 1,380
2020 620,405 105% 56,834 116% 27,039 58% 704,278 104% 2,795
2021 871,319 40% 78,276 38% 32,621 21% 982,216 39% 3,905
CONTRACT AND SHARE VOLUMES:
(in thousands, except %)
TOTAL
Options % Futures (1) % Stocks %
Period (contracts) Change (contracts) Change (shares) Change
2017 395,885 124,123 220,247,921
2018 408,406 3% 151,762 22% 210,257,186 (5%)
2019 390,739 (4%) 128,770 (15%) 176,752,967 (16%)
2020 624,035 60% 167,078 30% 338,513,068 92%
2021 887,849 42% 154,866 (7%) 771,273,709 128%
ALL CUSTOMERS
Options % Futures (1) % Stocks %
Period (contracts) Change (contracts) Change (shares) Change
2017 293,860 118,427 213,108,299
2018 358,852 22% 148,485 25% 198,909,375 (7%)
2019 349,287 (3%) 126,363 (15%) 167,826,490 (16%)
2020 584,195 67% 164,555 30% 331,263,604 97%
2021 852,169 46% 152,787 (7%) 766,211,726 131%
CLEARED CUSTOMERS
Options % Futures (1) % Stocks %
Period (contracts) Change (contracts) Change (shares) Change
2017 253,304 116,858 209,435,662
2018 313,795 24% 146,806 26% 194,012,882 (7%)
2019 302,068 (4%) 125,225 (15%) 163,030,500 (16%)
2020 518,965 72% 163,101 30% 320,376,365 97%
2021 773,284 49% 151,715 (7%) 752,720,070 135%
___________________________
(1)Futures contract volume includes options on futures.
?
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PRINCIPAL TRANSACTIONS
Options % Futures (1) % Stocks %
Period (contracts) Change (contracts) Change (shares) Change
2017 102,025 5,696 7,139,622
2018 49,554 (51%) 3,277 (42%) 11,347,811 59%
2019 41,452 (16%) 2,407 (27%) 8,926,477 (21%)
2020 39,840 (4%) 2,523 5% 7,249,464 (19%)
2021 35,680 (10%) 2,079 (18%) 5,061,983 (30%)
___________________________
(1)Futures contract volume includes options on futures.
CUSTOMER STATISTICS:
2021 2020 % Change
Total Accounts (in thousands) 1,676 1,073 56%
Customer Equity (in billions) (1) $ 373.8 $ 288.6 30%
Cleared DARTs (in thousands) (2) 2,300 1,591 45%
Total Customer DARTs (in thousands) (2) 2,570 1,787 44%
___________________________ (1)Excludes non-customers.
(2)Daily average revenue trades ("DARTs") are based on customer orders.
(3)Commissionable order - a customer order that generates commissions.
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Results of Operations
The table below presents our consolidated results of operations for the periods indicated. The period-to-period comparisons below of financial results are not necessarily indicative of future results.
Year-Ended December 31,
2021 2020 2019
(in millions, except share and per share amounts)
Revenues
Commissions $ 1,350 $ 1,112 $ 706
Other fees and services 218 175 141
Other income (loss) (2) 59 7
Total non-interest income 1,566 1,346 854
Interest income 1,372 1,133 1,726
Interest expense (224) (261) (643)
Total net interest income 1,148 872 1,083
Total net revenues 2,714 2,218 1,937
Non-interest expenses
Execution, clearing and distribution fees 236 293 251
Employee compensation and benefits 399 325 288
Occupancy, depreciation and amortization 80 69 60
Communications 33 26 25
General and administrative 176 236 112
Customer bad debt 3 13 44
Total non-interest expenses 927 962 780
Income before income taxes 1,787 1,256 1,157
Income tax expense 151 77 68
Net income 1,636 1,179 1,089
Less net income attributable to
noncontrolling interests 1,328 984 928
Net income available for common
stockholders $ 308 $ 195 $ 161
Earnings per share
Basic $ 3.27 $ 2.44 $ 2.11
Diluted $ 3.24 $ 2.42 $ 2.10
Weighted average common shares
outstanding
Basic 94,167,572 79,939,289 76,121,570
Diluted 95,009,880 80,638,908 76,825,863
Comprehensive income
Net income available for common
stockholders $ 308 $ 195 $ 161
Other comprehensive income
Cumulative translation adjustment, before
income taxes (22) 26 4
Income taxes related to items of other
comprehensive income - - -
Other comprehensive income (loss), net of
tax (22) 26 4
Comprehensive income available for common
stockholders $ 286 $ 221 $ 165
Comprehensive income attributable to
noncontrolling interests
Net income attributable to noncontrolling
interests $ 1,328 $ 984 $ 928
Other comprehensive income - cumulative
translation adjustment (75) 98 20
Comprehensive income attributable to
noncontrolling interests $ 1,253 $ 1,082 $ 948
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The table below presents our consolidated results of operations as a percent of our total net revenues for the periods indicated.
Year Ended December 31,
2021 2020 2019
Revenues
Commissions 50% 50% 36%
Other fees and services 8% 8% 7%
Other income (loss) 0% 3% 0%
Total non-interest income 58% 61% 44%
Interest income 51% 51% 89%
Interest expense (8%) (12%) (33%)
Total net interest income 42% 39% 56%
Total net revenues 100% 100% 100%
Non-interest expenses
Execution, clearing and distribution fees 9% 13% 13%
Employee compensation and benefits 15% 15% 15%
Occupancy, depreciation and amortization 3% 3% 3%
Communications 1% 1% 1%
General and administrative 6% 11% 6%
Customer bad debt 0% 1% 2%
Total non-interest expenses 34% 43% 40%
Income before income taxes 66% 57% 60%
Income tax expense 6% 3% 4%
Net income 60% 53% 56%
Less net income attributable to noncontrolling
interests 49% 44% 48%
Net income available for common stockholders 11% 9% 8%
Year Ended
Net Revenues
Total net revenues, for the current year, increased
Commissions
We earn commissions from our cleared customers for whom we act as an executing
and clearing broker and from our non-cleared customers for whom we act as an
execution-only broker. Our commission structure allows customers to choose
between (1) an all-inclusive fixed, or "bundled", rate; (2) a tiered, or
"unbundled", rate that offers lower commissions for high volume customers where
we pass through regulatory and exchange fees; and (3) our IBKR LiteSM offering,
which provides commission-free trades on
Commissions, for the current year, increased
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Other Fees and Services
The Company earns fee income on services provided to customers, which includes market data fees, risk exposure fees, minimum activity fees, payments for order flow from exchange-mandated programs, and other fees and services charged to customers.
Other fees and services, for the current year, increased
Other Income (Loss)
Other income consists of foreign exchange gains (losses) from our currency diversification strategy, gains (losses) from principal transactions, gains (losses) from our equity method investments, and other revenue not directly attributable to our core business offerings. A discussion of our approach to managing foreign currency exposure is contained in Part II, Item 7A of this Annual Report on Form 10-K entitled "Quantitative and Qualitative Disclosures about Market Risk."
Other income, for the current year, decreased
Interest Income and Interest Expense
We earn interest on margin lending to customers secured by marketable securities
these customers hold with us; from our investments in
Net interest income (interest income less interest expense), for the current
year, increased
Net interest income on customer balances, for the current year, increased
We earn income on securities loaned and borrowed to support customer long and
short stock holdings in margin accounts. In addition, our Stock Yield
Enhancement Program provides an opportunity for customers with fully-paid stock
to allow us to lend it out. We pay customers a rebate on the cash collateral
generally equal to 50% of the income we earn from lending the shares. We place
cash and/or
In the current year, average securities borrowed balances decreased 13%, to
The Company measures return on interest-earning assets using net interest margin
("NIM"). NIM is computed by dividing the annualized net interest income by the
average interest-earning assets for the period. Interest-earning assets consist
of cash and securities segregated for regulatory purposes (including
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resell), customer margin loans, securities borrowed, other interest-earning
assets (solely firm assets) and customer cash balances swept into
Yields are generally a reflection of benchmark interest rates in each currency
in which the Company and its customers hold cash balances. Because a substantial
portion of customer cash and margin loans are denominated in currencies other
than the
Generally, as benchmark interest rates rise, a larger portion of the interest
earned on securities lending transactions is reported as net interest income on
"Segregated cash and securities, net" instead of "Securities borrowed and
loaned, net" because interest earned on cash collateral held in specially
designated bank accounts for the benefit of customers, in accordance with the
The table below presents net interest income information corresponding to
interest-earning assets and interest-bearing liabilities for the periods
indicated.
Year-Ended December 31,
2021 2020 2019
(in millions)
Average interest-earning assets
Segregated cash and securities
45,681 28,960 26,483
Securities borrowed 3,677 4,235 3,930
Other interest-earning assets 7,029 5,593 5,407
FDIC sweeps 1 2,663 2,882 2,046
$ 99,376 $ 83,568 $ 65,678
Average interest-bearing liabilities
Customer credit balances $ 79,297 $ 67,540 $ 52,625
Securities loaned 10,871 5,702 4,088
Other interest-bearing liabilities 109 215 196
$ 90,277 $ 73,457 $ 56,909 Net Interest income
Segregated cash and securities, net
535 380 694
Securities borrowed and loaned, net 568 343 257 Customer credit balances, net 2
33 (46) (515)
Other net interest income 1,3 36 55 121
Net interest income 3 $ 1,163 $ 898 $ 1,117
Net interest margin ("NIM") 1.17% 1.07% 1.70%
Annualized Yields
Segregated cash and securities -0.02% 0.40% 2.01%
Customer margin loans 1.17% 1.31% 2.62%
Customer credit balances -0.04% 0.07% 0.98%
___________________________
(1)Represents the average amount of customer cash swept into
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(2)Interest income and interest expense on customer margin loans and customer credit balances, respectively, are calculated on daily cash balances within each customer's account on a net basis, which may result in an offset of balances across multiple account segments (e.g., between securities and commodities segments). ? (3)Includes income from financial instruments that has the same characteristics as interest, but is reported in other fees and services and other income in the Company's consolidated statements of comprehensive income. For the years endedDecember 31, 2021 , 2020, and 2019,$15 million ,$21 million and$15 million were reported in other fees and services, respectively. For the years endedDecember 31, 2021 , 2020, and 2019,$0 million ,$5 million and$19 million were reported in other income, respectively.
Non-Interest Expenses
Non-interest expenses, for the current year, decreased
Execution, Clearing and Distribution Fees
Execution, clearing and distribution fees include the costs of executing and clearing trades, net of liquidity rebates received from various exchanges and market centers, as well as regulatory fees and market data fees. Execution fees are paid primarily to electronic exchanges and market centers on which we trade. Clearing fees are paid to clearing houses and clearing agents. Market data fees are paid to third parties to receive streaming price quotes and related information.
Execution, clearing and distribution fees, for the current year, decreased
Employee Compensation and Benefits
Employee compensation and benefits include salaries, bonuses and other incentive compensation plans, group insurance, contributions to benefit programs and other related employee costs.
Employee compensation and benefits expenses, for the current year, increased
Occupancy, Depreciation and Amortization
Occupancy expenses consist primarily of rental payments on office and data center leases and related occupancy costs, such as utilities. Depreciation and amortization expenses result from the depreciation of fixed assets, such as computing and communications hardware, as well as amortization of leasehold improvements and capitalized in-house software development.
Occupancy, depreciation and amortization expenses, for the current year,
increased
Communications
Communications expenses consist primarily of the cost of voice and data telecommunications lines supporting our business, including connectivity to exchanges and market centers around the world.
Communications expenses, for the current year, increased
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General and Administrative
General and administrative expenses consist primarily of advertising; professional services expenses, such as legal and audit work; legal and regulatory matters; and other operating expenses.
General and administrative expenses, for the current year, decreased
Customer Bad Debt
Customer bad debt expense consists primarily of losses incurred by customers in
excess of their assets with us, net of amounts recovered by us. Customer bad
debt expense, for the current year, decreased
Income Tax Expense
We pay
Income tax expense, for the current year, increased
The table below presents information about our income tax expense for the
periods indicated.
Year-Ended December 31,
2021 2020 2019
(in millions, except %)
Consolidated
Consolidated income before income taxes
(4) (1)
Operating subsidiaries income before income
taxes $ 1,787 $ 1,260 $ 1,158
Operating subsidiaries
Income before income taxes $ 1,787 $ 1,260 $ 1,158
Income tax expense 76 38 23
Net income available to members $ 1,711 $ 1,222 $ 1,135
IBG, Inc.
Average ownership percentage in IBG LLC 22.6% 19.2% 18.4%
Net income available to IBG, Inc. from operating
subsidiaries $ 383 $ 238 $ 207
IBG, Inc. stand-alone income before income taxes - (4) (1)
Income before income taxes 383 234 206
Income tax expense 75 39 45
Net income available to common stockholders
Consolidated income tax expense Income tax expense attributable to operating subsidiaries$ 76 $ 38 $ 23 Income tax expense attributable IBG, Inc. 75 39 45 Consolidated income tax expense$ 151 $ 77 $ 68 43
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Operating Results
Income before income taxes, for the current year, increased
Comparing our operating results for the current year to the prior year using
non-GAAP financial measures, adjusted net revenues were
Noncontrolling Interest
We are the sole managing member of
Year Ended
For a discussion of changes for the year ended
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Non-GAAP Financial Measures
We use certain non-GAAP financial measures as additional measures to enhance the understanding of our financial results. These non-GAAP financial measures include adjusted net revenues, adjusted income before income taxes, adjusted net income available for common stockholders, and adjusted diluted earnings per share ("EPS"). We believe that these non-GAAP financial measures are important measures of our financial performance because they exclude certain items that may not be indicative of our core operating results and business outlook. We believe these non-GAAP financial measures may be useful to investors and analysts in evaluating the operating performance of the business and facilitating a meaningful comparison of our results in the current period to those in prior and future periods.
Adjusted net revenues, adjusted income before income taxes, adjusted net income available for common stockholders, and adjusted EPS are non-GAAP financial measures as defined by SEC Regulation G.
?We define adjusted net revenues as net revenues adjusted to remove the effect of our currency diversification strategy, our net mark-to-market gains (losses) on investments, and the remeasurement of our Tax Receivable Agreement ("TRA") liability.
?We define adjusted income before income taxes as income before income taxes adjusted to remove the effect of our currency diversification strategy, our net mark-to-market gains (losses) on investments, the remeasurement of our TRA liability, customer compensation expenses, and unusual bad debt expense.
?We define adjusted net income available to common stockholders as net income
available for common stockholders adjusted to remove the after-tax effects
attributable to
Mark-to-market on investments represents the net mark-to-market gains (losses)
on investments in equity securities that do not qualify for equity method
accounting which are measured at fair value, on our
Remeasurement of our TRA liability represents the change in the amount payable
to
Customer compensation expenses were incurred to compensate certain affected
customers in connection with their losses on West Texas Intermediate Crude Oil
contracts on
Unusual bad debt expense includes material losses on margin loans resulting from
unusual events that occur in the marketplace. For the year-ended
Remeasurement of certain deferred tax assets represents the change in the
unamortized balance of deferred tax assets related to the step-up in basis
arising from the acquisition of interests in
We also report compensation and benefits expenses as a percent of adjusted net revenues, as we believe this measure is useful to investors and analysts in evaluating the growth of our work force in relation to the growth of our core revenues.
These non-GAAP financial measures should be considered in addition to, rather than as a substitute for, measures of financial performance prepared in accordance with GAAP1. ?___________________________
1 Refers to generally accepted accounting principles in
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The tables below present a reconciliation of consolidated GAAP to non-GAAP financial measures for the periods indicated.
Year-Ended December 31,
2021 2020 2019
(in millions)
Adjusted net revenues
Net revenues - GAAP $ 2,714 $ 2,218 $ 1,937
Non-GAAP adjustments
Currency diversification strategy, net 37 19 60
Mark-to-market on investments 30 (36) (13)
Remeasurement of TRA liability (1) 3 -
Total non-GAAP adjustments 66 (14) 47
Adjusted net revenues $ 2,780 $ 2,204 $ 1,984
Year-Ended December 31,
2021 2020 2019
(in millions)
Adjusted income before income taxes
Income before income taxes - GAAP
19 60
Mark-to-market on investments 30 (36) (13)
Remeasurement of TRA liability (1) 3 -
Customer compensation expense - 103 -
Bad debt expense - 1 42
Total non-GAAP adjustments 66 90 89
Adjusted income before income taxes
Adjusted pre-tax profit margin 67% 61% 63%
Year-Ended December 31,
2021 2020 2019
(in millions)
Adjusted net income available for
common stockholders
Net income available for common
stockholders - GAAP $ 308 $ 195 $ 161
Non-GAAP adjustments
Currency diversification strategy,
net 8 4 11
Mark-to-market on investments 7 (7) (2)
Remeasurement of TRA liability (1) 3 -
Customer compensation expense - 20 -
Bad debt expense - - 8
Income tax effect of above
adjustments1 (3) (3) (3)
Remeasurement of deferred income
taxes 1 (11) -
Total non-GAAP adjustments 12 6 13
Adjusted net income available for
common stockholders $ 320 $ 201 $ 174
Note: Amounts may not add due to rounding.
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Year-Ended December 31,
2021 2020 2019
(in dollars, except share amounts)
Adjusted diluted EPS
Diluted EPS - GAAP $ 3.24 $ 2.42 $ 2.10
Non-GAAP adjustments
Currency diversification strategy,
net 0.09 0.05 0.14
Mark-to-market on investments 0.07 (0.08) (0.03)
Remeasurement of TRA liability (0.01) 0.04 -
Customer compensation expense - 0.24 -
Bad debt expense - 0.00 0.10
Income tax effect of above
adjustments1 (0.03) (0.04) (0.04)
Remeasurement of deferred income
taxes 0.01 (0.14) -
Total non-GAAP adjustments 0.13 0.08 0.17
Adjusted diluted EPS $ 3.37 $ 2.49 $ 2.27
Diluted weighted average common
shares outstanding 95,009,880 80,638,908 76,825,863
Note: Amounts may not add due to rounding.
_________________________
1 The income tax effect is estimated using the corporate income tax rates applicable to the Company.
Liquidity and Capital Resources
We maintain a highly liquid balance sheet. The majority of our assets consist of
investments of customer funds, collateralized receivables arising from
customer-related and proprietary securities transactions, and exchange-listed
marketable securities, which are marked-to-market daily. Collateralized
receivables consist primarily of customer margin loans, securities borrowed, and
securities purchased under agreements to resell. As of
Decisions on the allocation of capital are based upon, among other things,
prudent risk management guidelines, potential liquidity and cash flow needs for
current and future business activities, regulatory capital requirements, and
projected profitability. Our
Daily monitoring of liquidity needs and available collateral levels is undertaken to help ensure that an appropriate liquidity cushion, in the form of cash and unpledged collateral, is maintained at all times. We actively manage our excess liquidity and maintain significant borrowing facilities through the securities lending markets and with banks. As a general practice, we maintain sufficient levels of cash on hand to provide us with a buffer should we need immediately available funds for any reason. In addition, pursuant to our liquidity management plan we perform periodic liquidity stress tests, which are designed to identify and reserve liquid assets that would be available under market or idiosyncratic stress events. Based on our current level of operations, we believe our cash flows from operations, available cash and available borrowings will be adequate to meet our future liquidity needs for more than the next twelve months.
As of
Cash and cash equivalents held by our non-
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Act on
Historically, our consolidated equity has consisted primarily of accumulated
retained earnings, which to date have been sufficient to fund our operations and
growth. Our consolidated equity increased 14% to
Cash Flows
The table below presents our cash flows from operating activities, investing activities and financing activities for the periods indicated.
Year-Ended December 31,
2021 2020 2019
(in millions)
Net cash provided by operating activities
(188) (50) (89)
Net cash used in financing activities (523) (229) (419)
Effect of exchange rate changes on cash, cash
equivalents, and restricted cash (97) 124 24
Increase in cash, cash equivalents, and
restricted cash $ 5,088 $ 7,913 $ 2,182 Our cash flows from operating activities are largely a reflection of the changes in customer credit and margin loan balances. Our cash flows from investing activities are primarily related to other investments, capitalized internal software development, purchases and sales of memberships, trading rights and shares at exchanges where we trade, and strategic investments where such investments may enable us to offer better execution alternatives to our current and prospective customers, allow us to influence exchanges to provide competing products at better prices using sophisticated technology, or enable us to acquire either technology or customers faster than we could develop them on our own. Our cash flows from financing activities are comprised of short-term borrowings, capital transactions and payments made to Holdings under the Tax Receivable Agreement. Short-term borrowings from banks, and through our senior notes program are part of our daily cash management in support of operating activities. Capital transactions consist primarily of quarterly dividends paid to common stockholders and related distributions paid to Holdings.
Year Ended
Year Ended
For a discussion of changes in cash flows for the year ended
Year Ended
For a discussion of changes in cash flows for the year ended
Senior Notes
In 2020,
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senior notes to be redeemed, plus accrued and unpaid interest.
During the year ended
Regulatory Capital Requirements
As of
Capital Expenditures
Our capital expenditures are comprised of compensation costs of our software
engineering staff for development of software for internal use and expenditures
for computer, networking and communications hardware, and leasehold
improvements. These expenditure items are reported as property, equipment, and
intangible assets. Capital expenditures for property, equipment, and intangible
assets were approximately
Contractual Obligations Summary
Our contractual obligations principally include obligations associated with our
outstanding indebtedness and interest payments as of
Payments Due by Year
Total 2022-2023 2024-2025 Thereafter
(in millions)
Payable to Holdings under Tax
Receivable Agreement (1) $ 222 $ 44 $ 39 $ 139
Operating leases 142 49 35 58
Transition tax liability (2) 53 20 33 -
Total contractual cash obligations
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(1)As of
(2)The Tax Act implemented a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries to be paid over an eight-year period starting in 2018. We believe this tax will not have a material impact on our liquidity.
Seasonality
Our businesses are subject to seasonal fluctuations, reflecting varying numbers of market participants at times during the year, varying numbers of trading days from quarter-to-quarter, and declines in trading activity due to holidays. Typical seasonal trends may be superseded by market or world events, which can have a significant impact on prices and trading volume.
Inflation
Although we cannot accurately anticipate the effects of inflation on our operations, we believe that, for the three most recent years, inflation has not had a material impact on our results of operations and will not likely have a material impact in the foreseeable future despite current inflationary pressures. Statements about future inflation are subject to the risk that actual inflation and its effects may differ, possibly materially, due to, among other things, changes in economic growth, impact of supply chain disruptions, unemployment and consumer demand.
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Investments in
We invest in
Strategic Investments and Acquisitions
We regularly evaluate potential strategic investments and acquisitions. We hold
strategic investments in certain electronic trading exchanges, including
We intend to continue making acquisitions on an opportunistic basis, generally only when the acquisition candidate will, in our opinion, enable us to offer better execution alternatives to our current and prospective customers, allow us to influence exchanges to provide competing products at better prices using sophisticated technology, or enable us to acquire either technology or customers faster than we could develop them on our own.
As of
Certain Information Concerning Off-Balance-Sheet Arrangements
We may be exposed to a risk of loss not reflected in our consolidated financial statements for futures products, which represent our obligations to settle at contracted prices, and which may require us to repurchase or sell in the market at prevailing prices. Accordingly, these transactions result in off-balance sheet risk, as our cost to liquidate such futures contracts may exceed the amounts reported in our consolidated statements of financial condition.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with
Contingencies
Our policy is to estimate and accrue for potential losses that may arise out of litigation and regulatory proceedings, to the extent that such losses are probable and can be estimated. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different. Our total liability accrued with respect to litigation and regulatory proceedings is determined on a case by case basis and represents an estimate of probable losses based on, among other factors, the progress of each case, our experience with and industry experience with similar cases and the opinions and views of internal and external legal counsel.
Given the inherent difficulty of predicting the outcome of our litigation and regulatory matters, particularly in cases or proceedings in which substantial or indeterminate damages or fines are sought, or where cases or proceedings are in the early stages, we cannot estimate losses or ranges of losses for cases or proceedings where there is only a reasonable possibility that a loss may be incurred.
Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for
unrecognized tax benefits are based on enacted tax laws and reflect management's
best assessment of estimated future taxes to be paid. We are subject to income
taxes in both the
Deferred income tax assets and liabilities arise from temporary differences between the tax and financial statement recognition of the underlying assets and liabilities. In evaluating our ability to recover our deferred tax assets within the jurisdictions from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, historical results are adjusted for changes in accounting policies and incorporate assumptions including the amount of future state, federal and foreign
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pre-tax operating income, the reversal of temporary differences, and the
implementation of feasible and prudent tax-planning strategies. These
assumptions require significant judgment about the forecasts of future taxable
income and are consistent with the plans and estimates we are using to manage
the underlying businesses. In evaluating the objective evidence that historical
results provide, three years of cumulative operating income (loss) are
considered. Deferred income taxes have not been provided for
The calculation of our tax liabilities involves dealing with uncertainties in
the application of complex tax laws and regulations in a multitude of
jurisdictions across our global operations. Changes in tax laws and rates could
also affect recorded deferred tax assets and liabilities in the future. We
record tax liabilities in accordance with
We recognize that a tax benefit from an uncertain tax position may be recognized only when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. A tax position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement.
Accounting Pronouncements Issued but Not Yet Adopted
For additional information regarding FASB Accounting Standards Updates ("ASU"s) that have been issued but not yet adopted and that may impact the Company, refer to Note 2 - "Significant Accounting Policies" to the audited consolidated financial statements in Part II, Item 8 of this annual Report on form 10-K.
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