INTERACTIVE BROKERS GROUP, INC. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes in Item 1, included elsewhere in this report. 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 our Annual Report on Form 10-K filed with theSecurities Exchange Commission ("SEC") onFebruary 25, 2022 and elsewhere in this report.
When we use the terms "we," "us," and "our," we mean
Introduction
Interactive Brokers Group, Inc. (the "Company" or "IBG, Inc. ") is a holding company whose primary asset is its ownership of approximately 23.7% of the membership interests ofIBG LLC . The remaining approximately 76.3% ofIBG LLC membership interests are held byIBG Holdings LLC ("Holdings"), a holding company that is owned by our founder and Chairman, Mr.Thomas Peterffy and his affiliates, management and other employees ofIBG LLC , and certain other members. The table below shows the amount ofIBG LLC membership interests held byIBG, Inc. and Holdings as ofJune 30, 2022 . IBG, Inc. Holdings Total Ownership % 23.7% 76.3% 100.0%
Membership interests 99,601,921 319,880,492 419,482,413
We are an automated global electronic broker. We custody and service accounts
for hedge and mutual funds, exchange traded 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
and precious metals on more than 150 electronic exchanges and market centers in
34 countries and 27 currencies seamlessly around the world. In addition, our
customers can use our trading platform to trade certain cryptocurrencies through
a third-party cryptocurrency service provider which executes, clears and
custodies the cryptocurrencies.
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 79% of our customers reside outside the U.S. in over 200 countries
and territories, and over 50% of new customers come from outside the U.S.
Approximately 59% of our customers' equity is in institutional accounts such as
hedge funds, financial advisors, proprietary trading desks and introducing
brokers. Specialized products and services that we have developed successfully
attract these accounts. For example, we offer prime brokerage services,
including financing and securities lending, to hedge funds; our model portfolio
technology and automated share allocation and rebalancing tools are particularly
attractive to financial advisors; and our trading platform, global access and
low pricing attract introducing brokers.
Business Environment
The quarter endedJune 30, 2022 ("current quarter") saw world equities markets generally lower, as compared to the prior year quarter and the sequential quarter, with declines in theU.S. ,Europe andAsia . Despite this down market backdrop, there continues to be worldwide interest in the financial markets. Growing numbers of individuals, especially those newly attracted to investing, turned to the markets with increased awareness, due to the interconnectedness of investors to each other and to the markets, as they sought to earn higher yields on their assets. ? 39
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The following is a summary of the key economic drivers that affect our business and how they compared to the prior-year quarter:
Global trading volumes. According to industry data, average daily volume inU.S. exchange-listed equity-based options increased 8%, and inU.S. futures 25%, over the prior year.U.S. listed cash equities volume rose 19%. Various market cross-currents led to mixed results across our major product types: customer options, futures and foreign exchange volumes were up 11%, 46% and 14%, respectively, while stock volumes declined 53% compared to the prior-year quarter. High volatility in commodity futures, particularly in energy and agriculture, led to volume increases, while options volumes were impacted positively by increasing numbers of investors looking to take on a specific and limited risk-reward profile, at low cost, in order to invest. For stocks, while trading volumes were significantly higher than pre-pandemic levels, they are below the unusually high levels of stock trading seen in early 2021, a period dominated by trading in "meme" stocks and low-priced stocks generally. Trading was active as investors continued to capitalize on the opportunities to participate in the markets, seeking higher yields on their investments in the low interest rate environments that existed globally for most of the current quarter. Note that whileU.S. options, futures and cash equities volumes are readily comparable measures, they reflect most but not all of the global volumes that generate our commission revenue. See "Trading Volumes and Customer Statistics" below in this Item 2 for additional details regarding our trade volumes, contract and share volumes, and customer statistics. Volatility. Volatility has risen steadily over the past four quarters as inflationary pressures, the potential for higher interest rates and geopolitical uncertainty have impacted markets worldwide. U.S. market volatility, as measured by theChicago Board Options Exchange Volatility Index ("VIX®"), rose from an average of 18.0 in the prior-year quarter to 27.4 in the current quarter. In general, higher volatility improves our performance because it often correlates positively with customer trading activity across product types. Higher options and futures volumes during a period of elevated volatility demonstrate the continuing impact of more participants in the financial markets and their increasing comfort with these exchange-listed derivative products, amid heightened geopolitical and interest rate uncertainty. Interest Rates. TheU.S. Federal Reserve increased the target federal funds range this quarter to 1.50%-1.75% inJune 2022 , raising rates in a series of increases from the zero to 0.25% range that had been targeted fromMarch 2020 toMarch 2022 . While theU.S. Treasury short-term yield curve steepened further in the current quarter, rates in other countries remained low, and in some cases negative. WhileU.S. rates have risen, these historically low benchmark rates reduce the interest we earn on our segregated cash, the majority of which is invested inU.S. government securities and related instruments. The environment of uncertainty over futureFederal Reserve policy led us to maintain a short duration investment profile, though further rate increases would present more opportunities for interest-sensitive assets. Further, our margin balances are tied to benchmark rates, so low interest rates limit the interest we receive on margin lending to our customers. We continue to offer among the lowest rates in the industry on margin lending, and we believe our low rates are an important factor that attracts customers to our platform. As an offset, low rates also reduce our interest expense. For example, inU.S. dollars we pay interest to customers only when the federal funds effective rate is above 0.50%, and in currencies with negative rates we collect interest on a portion of customer cash balances. As an indirect positive effect, we believe low and negative benchmark world interest rates have been a factor leading to the active trading we have experienced, as investors enter securities markets to achieve higher yields on their investments. Net interest income on customer cash and margin loan balances increased compared to the prior-year quarter as the average federal funds effective rate increased to 0.77% in the current quarter from 0.07% in the prior-year quarter. 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 benchmark interest rates counteract this spread compression and lead to higher net interest income. Higher interest rates contributed to a 54% rise in margin loan interest over the prior-year quarter, despite only slightly higher average balances. Further, a steady inflow of new accounts drove average customer credit balances up 16% from the prior-year quarter. Securities lending interest income declined in the current quarter as opportunities to lend securities in particularly high demand decreased. Together, these factors led to an increase in overall net interest income of 27% versus the prior-year quarter, and our net interest margin rose from 1.15% to 1.27%. 40
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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 equity 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 inU.S. dollars, the change in the value of the GLOBAL versus theU.S. dollar affects our earnings. During the current quarter the value of the GLOBAL, as measured inU.S. dollars, decreased 1.46% compared to its value atMarch 31, 2022 , which had a negative impact on our comprehensive earnings for the current quarter. A discussion of our approach for managing foreign currency exposure is contained in Part I, Item 3 of this Quarterly Report on Form 10-Q entitled "Quantitative and Qualitative Disclosures about Market Risk. Overall, several factors - active securities markets, engaged investors and a search for higher yields in low rate environments, now combined with inflation, a forecasted series of rate increases and geopolitical uncertainty - have led to higher volatility and to investor usage of options and futures to manage risk. Customers continue to seek our superior technology, execution capabilities, and our ability to offer a broad range of products and global market access.
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 2 for additional details. Diluted earnings per share were$0.72 for the current quarter, compared to diluted earnings per share of$1.00 for the prior-year quarter. Adjusted diluted earnings per share were$0.84 for the current quarter and$0.82 for the prior-year quarter. The calculation of diluted earnings per share is detailed in Note 4 - "Equity and Earnings per Share" to the unaudited condensed consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q. For the current quarter, our net revenues were$656 million and income before income taxes was$392 million , compared to net revenues of$754 million and income before income taxes of$541 million in the prior-year quarter. Adjusted net revenues were$717 million and adjusted income before income taxes was$453 million , compared to adjusted net revenues of$650 million and adjusted income before income taxes of$437 million in the prior-year quarter. Diluted earnings per share were$1.46 for the six months endedJune 30, 2022 ("current six-month period"), compared to diluted earnings per share of$2.17 for the six months endedJune 30, 2021 ("prior year six-month period"). Adjusted diluted earnings per share were$1.66 for the current six-month period and$1.80 for the prior year six-month period. For the current six-month period, our net revenues were$1,301 million and income before income taxes was$786 million , compared to net revenues of$1,647million and income before income taxes of$1,180 million in the prior year six-month period. Adjusted net revenues were$1,409 million and adjusted income before income taxes was$894 million , compared to adjusted net revenues of$1,446 million and adjusted income before income taxes of$979 million in the prior year six-month period.
Financial highlights for the current quarter:
?Commission revenue increased 5% to$322 million on higher customer options and futures trading volume tempered by lower stock volume. ?Net interest income increased 27% to$348 million on higher benchmark interest rates and customer balances, partially offset by a decline in securities lending activity. ?Other income decreased$175 million to a loss of$57 million . This decrease was mainly comprised of the non-recurrence of a$113 million gain related to our strategic investment inUp Fintech Holding Limited ("Tiger Brokers"),$44 million related to our currency diversification strategy, and$7 million related to ourU.S. government securities portfolio. ?Pretax profit margin was 60% for the current quarter, down from 72% in the prior-year quarter. Adjusted pretax profit margin for the current quarter was 63%, down from 67% in the prior-year quarter. ?Total equity as ofJune 30, 2022 was$10.6 billion . ? 41
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In connection with our currency diversification strategy, as ofJune 30, 2022 approximately 24% of our equity was denominated in currencies other than theU.S. dollar. In the current quarter, our currency diversification strategy decreased our comprehensive earnings by$158 million (compared to an increase of$12 million in the prior-year quarter), as theU.S. dollar value of the GLOBAL decreased by approximately 1.46%, compared to its value as ofMarch 31, 2022 . The effects of our currency diversification strategy are reported as (1) a component of other income (loss of$53 million ) in the consolidated statements of comprehensive income and (2) other comprehensive income ("OCI") (loss of$105 million ) in the consolidated statements of financial condition and the consolidated statements of comprehensive income. The full effect of the GLOBAL is captured in comprehensive income.
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 could 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 theU.S. andChina have escalated recently, and changes in Chinese governmental oversight ofHong Kong and in the Chinese andHong Kong capital markets could result in adverse effects on our business and loss of assets we hold in the region. Additionally, although our direct and indirect exposures toRussia andUkraine are not material, the war inUkraine and related sanctions have created substantial uncertainty in the global economy and financial markets. We continue to monitor the war and assess any potential impact to our business, including effects relating to currency control restrictions imposed by theCentral Bank of Russia and restrictions by theMoscow Stock Exchange regarding the sale of assets by non-Russian residents. •Our remaining market making activities will continue to be impacted by market structure changes, market conditions, the level of automation of competitors, and the relationship between actual and implied volatility in the equities markets. See "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K, filed with theSEC onFebruary 25, 2022 , and elsewhere in this report for a discussion of other risks that may affect our financial condition and results of operations. ? 42
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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
2019 302,289 26,346 17,136 345,771 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
2Q2021 196,659 16,130 7,975 220,764 3,504
2Q2022 186,791 (5%) 18,274 13% 8,327 4% 213,392 (3%) 3,442
1Q2022 212,818 20,671 9,225 242,714 3,915
2Q2022 186,791 (12%) 18,274 (12%) 8,327 (10%) 213,392 (12%) 3,442
CONTRACT AND SHARE VOLUMES:
(in thousands, except %)
TOTAL
Options % Futures (1) % Stocks %
Period (contracts) Change (contracts) Change (shares) Change
2019 390,739 128,770 176,752,967
2020 624,035 60% 167,078 30% 338,513,068 92%
2021 887,849 42% 154,866 (7%) 771,273,709 128%
2Q2021 196,715 35,061 172,099,915
2Q2022 217,642 11% 51,562 47% 81,137,875 (53%)
1Q2022 245,343 53,570 97,406,991
2Q2022 217,642 (11%) 51,562 (4%) 81,137,875 (17%)
ALL CUSTOMERS
Options % Futures (1) % Stocks %
Period (contracts) Change (contracts) Change (shares) Change
2019 349,287 126,363 167,826,490
2020 584,195 67% 164,555 30% 331,263,604 97%
2021 852,169 46% 152,787 (7%) 766,211,726 131%
2Q2021 189,073 34,635 171,417,373
2Q2022 209,124 11% 50,707 46% 80,079,410 (53%)
1Q2022 234,790 52,728 95,990,985
2Q2022 209,124 (11%) 50,707 (4%) 80,079,410 (17%)
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(1)Futures contract volume includes options on futures.
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CLEARED CUSTOMERS
Options % Futures (1) % Stocks %
Period (contracts) Change (contracts) Change (shares) Change
2019 302,068 125,225 163,030,500
2020 518,965 72% 163,101 30% 320,376,365 97%
2021 773,284 49% 151,715 (7%) 752,720,070 135%
2Q2021 170,902 34,355 168,601,027
2Q2022 188,617 10% 50,313 46% 77,283,249 (54%)
1Q2022 212,628 52,264 92,860,481
2Q2022 188,617 (11%) 50,313 (4%) 77,283,249 (17%)
PRINCIPAL TRANSACTIONS
Options % Futures (1) % Stocks %
Period (contracts) Change (contracts) Change (shares) Change
2019 41,452 2,407 8,926,477
2020 39,840 (4%) 2,523 5% 7,249,464 (19%)
2021 35,680 (10%) 2,079 (18%) 5,061,983 (30%)
2Q2021 7,642 426 682,542
2Q2022 8,518 11% 855 101% 1,058,465 55%
1Q2022 10,553 842 1,416,006
2Q2022 8,518 (19%) 855 2% 1,058,465 (25%)
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(1)Futures contract volume includes options on futures.
CUSTOMER STATISTICS:
Year over Year 2Q2022 2Q2021 %
Change
Total Accounts (in thousands) 1,923 1,414
36%
Customer Equity (in billions) (1)$ 294.8 $ 363.5
(19%)
Cleared DARTs (in thousands) (2) 1,927 2,082
(7%)
Total Customer DARTs (in thousands) (2) 2,173 2,304
(6%)
Cleared Customers Commission per Cleared Commissionable Order (3)$ 2.74 $ 2.38 15% Cleared Avg. DARTs per Account (Annualized) 259 382 (32%) Consecutive Quarters 2Q2022 1Q2022 % Change Total Accounts (in thousands) 1,923 1,809
6%
Customer Equity (in billions) (1)$ 294.8 $ 355.9
(17%)
Cleared DARTs (in thousands) (2) 1,927 2,234
(14%)
Total Customer DARTs (in thousands) (2) 2,173 2,522
(14%)
Cleared Customers Commission per Cleared Commissionable Order (3)$ 2.74 $ 2.57 7% Cleared Avg. DARTs per Account (Annualized) 259 321 (19%) ________________________ (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.
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(in millions, except share and per share amounts)
Revenues
Commissions $ 322 $ 307 $ 671 $ 719
Other fees and services 43 55 96 111
Other income (loss) (57) 118 (96) 238
Total non-interest income 308 480 671 1,068
Interest income 460 307 792 697
Interest expense (112) (33) (162) (118)
Total net interest income 348 274 630 579
Total net revenues 656 754 1,301 1,647
Non-interest expenses
Execution, clearing and
distribution fees 77 54 148 122
Employee compensation and benefits 112 96 223 193
Occupancy, depreciation and
amortization 23 19 45 39
Communications 9 8 17 16
General and administrative 42 35 80 94
Customer bad debt 1 1 2 3
Total non-interest expenses 264 213 515 467
Income before income taxes 392 541 786 1,180
Income tax expense 32 35 60 88
Net income 360 506 726 1,092
Less net income attributable to
noncontrolling interests 288 414 581 893
Net income available for common
stockholders $ 72 $ 92 $ 145 $ 199
Earnings per share
Basic $ 0.73 $ 1.01 $ 1.47 $ 2.19
Diluted $ 0.72 $ 1.00 $ 1.46 $ 2.17
Weighted average common shares
outstanding
Basic 98,853,981 91,365,234 98,541,798 91,078,868
Diluted 99,695,489 92,199,169 99,461,867 91,984,246
Comprehensive income
Net income available for common
stockholders $ 72 $ 92 $ 145 $ 199
Other comprehensive income
Cumulative translation adjustment,
before income taxes (24) 5 (34) (12)
Income taxes related to items of
other comprehensive income - - - -
Other comprehensive income (loss),
net of tax (24) 5 (34) (12)
Comprehensive income available for
common stockholders $ 48 $ 97 $ 111 $ 187
Comprehensive income attributable
to noncontrolling interests
Net income attributable to
noncontrolling interests $ 288 $ 414 $ 581 $ 893
Other comprehensive income -
cumulative translation adjustment (81) 16 (112) (43)
Comprehensive income attributable
to noncontrolling interests $ 207 $ 430 $ 469 $ 850
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Three Months Ended
Net Revenues
Total net revenues, for the current quarter, decreased
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 onU.S. exchange-listed stocks and ETFs. Instead of commission revenue, IBKR LiteSM trades generate payments from market makers and others to whom we route these orders, which are reported in commissions. Our commissions are geographically diversified. Commissions, for the current quarter, increased$15 million , or 5%, compared to the prior-year quarter, to$322 million , driven by higher customer volumes in options and futures, partially offset by lower customer trading volumes in stocks. Total customer options and futures contracts volumes increased 11% and 46%, respectively, while stock share volume decreased 53% from the prior-year quarter, largely attributable to pink sheet and other low-priced stocks. Total DARTs for cleared and execution-only customers, for the current quarter, decreased 6% to 2.2 million, compared to 2.3 million for the prior-year quarter. DARTs for cleared customers, i.e., customers for whom we execute trades, as well as clear and carry positions, for the current quarter, decreased 7% to 1.9 million, compared to 2.1 million for the prior-year quarter. Average commission per commissionable order for cleared customers, for the current quarter, increased 15% to$2.74 , compared to$2.38 for the prior-year quarter, as our customers' trading volume mix included higher per order commissions from stocks and options. Other Fees and Services We earn 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 quarter, decreased$12 million , or 22%, compared to the prior-year quarter, to$43 million , driven by an$8 million decrease in minimum activity fees, which were discontinued for most account types effectiveJuly 1, 2021 , a$4 million decrease in IPO-related fee income, and a$1 million decrease in both market data and exposure fees; partially offset by a$2 million increase inFDIC sweep fees.
Other Income
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 I, Item 3 of this Quarterly Report on Form 10-Q entitled "Quantitative and Qualitative Disclosures about Market Risk." Other income, for the current quarter, decreased$175 million , compared to the prior-year quarter, to a loss of$57 million . This decrease was mainly comprised of the non-recurrence of a$113 million gain related to our strategic investment in Tiger Brokers in the prior-year quarter;$44 million related to our currency diversification strategy; and a$7 million mark-to-market loss on ourU.S. government securities portfolio in the current quarter.
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 inU.S. and foreign government securities; from borrowing and lending securities; on deposits (in positive interest rate currencies) with banks; and on certain customers' cash balances in negative rate currencies. We pay interest on customer cash balances (in sufficiently positive interest rate currencies); for borrowing and lending securities; on deposits (in negative interest rate currencies) with banks; and on our borrowings. Net interest income (interest income less interest expense), for the current quarter, increased$74 million , or 27%, compared to the prior-year quarter, to$348 million . The increase in net interest income was driven by higher benchmark interest rates and customer cash balances, partially offset by a decline in securities lending activity. 46
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Net interest income on customer balances, for the current quarter, increased$79 million , compared to the prior-year quarter, driven by an increase in the average federal funds effective rate to 0.77% from 0.07% in the prior-year quarter and a$12.4 billion increase in average customer credit balances. See the "Business Environment" section above in this Item 2 for a further discussion about the change in interest rates in the current quarter. 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/orU.S. Treasury securities, as collateral securing the loans in the customer's account, in segregated accounts, or at an affiliate acting as collateral agent for the benefit of our customer. In the current quarter, average securities borrowed increased 33%, to$3.8 billion and average securities loaned decreased 4%, to$10.6 billion from the prior-year quarter. Net interest earned from securities lending is affected by the level of demand for securities positions held by our customers that investors are looking to sell short. During the current quarter, net interest earned from securities lending transactions decreased$20 million , or 14%, compared to the active prior-year quarter. While securities lending opportunities maintained a strong pace during the current quarter, despite fewer opportunities than the prior-year quarter, as benchmark interest rates rise a greater portion of the interest generated by lending securities is reflected as interest income on segregated cash, because cash collateral received is invested in segregated funds. It should be noted that securities lending transactions entered into to support customer activity may produce interest income (expense) that is offset by interest expense (income) related to customer balances. 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 (includingU.S. government securities and securities purchased under agreements to resell), customer margin loans, securities borrowed, other interest-earning assets (solely firm assets) and customer cash balances swept intoFDIC -insured banks as part of our Insured Bank Deposit Sweep Program. Interest-bearing liabilities consist of customer credit balances, securities loaned, and other interest-bearing liabilities. Yields are generally a reflection of benchmark interest rates in each currency in which the Company and its customers hold cash balances. Because a meaningful portion of customer cash and margin loans are denominated in currencies other than theU.S. dollar, changes inU.S. benchmark interest rates do not impact the total amount of segregated cash and securities, customer margin loans and customer credit balances. Furthermore, because interest, when benchmark rates are at sufficiently high levels, is paid only on eligible cash credit balances (i.e., balances over$10 thousand or equivalent, in securities accounts with over$100 thousand in equity, and in smaller accounts at reduced rates), changes in benchmark interest rates are not passed through to the total amount of customer credit balances. Finally, the Company's policies with respect to currencies with negative interest rates impact the overall yields on segregated cash and customer credit balances as effective interest rates in those currencies fluctuate. Securities lending generates (1) net interest earned on lending a security, which is based on supply and demand for that security and (2) interest earned on the cash collateral deposited for the loan of that security, which is based on benchmark interest rates. Generally, as benchmark interest rates rise, an increasing portion of the interest earned on securities lending transactions is classified as net interest income on "Segregated cash and securities, net" instead of net interest income on "Securities borrowed and loaned, net". Because cash collateral from securities lending is held in specially designated bank accounts for the benefit of customers, in accordance with theU.S. customer protection rules, interest on this collateral is reported as net interest on segregated cash. ? 47
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The table below presents net interest income information corresponding to
interest-earning assets and interest-bearing liabilities for the periods
indicated.
Three Months Ended June 30,
2022 2021
(in millions)
Average interest-earning assets
Segregated cash and securities $ 50,508 $ 39,671
Customer margin loans 44,764 44,234
Securities borrowed 3,775 2,833
Other interest-earning assets 9,482 7,411
FDIC sweeps 1 2,176 2,749
$ 110,705 $ 96,898
Average interest-bearing liabilities
Customer credit balances $ 90,048 $ 77,676
Securities loaned 10,599 11,068
Other interest-bearing liabilities 1 296
$ 100,648 $ 89,040
Net Interest income
Segregated cash and securities, net $ 53 $ (2)
Customer margin loans 2 197 128
Securities borrowed and loaned, net 116 136
Customer credit balances, net 2 (37) 8
Other net interest income 1,3 22 7
Net interest income 3 $ 351 $ 277
Net interest margin ("NIM") 1.27% 1.15%
Annualized Yields
Segregated cash and securities 0.42% -0.02%
Customer margin loans 1.77% 1.16%
Customer credit balances 0.17% -0.04%
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(1)Represents the average amount of customer cash swept intoFDIC -insured banks as part of our Insured Bank Deposit Sweep Program. This item is not recorded in the Company's condensed consolidated statements of financial condition. Income derived from program deposits is reported in other net interest income in the table above. ? (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 in the Company's condensed consolidated statements of comprehensive income. For the three months endedJune 30, 2022 and 2021,$3 million and$4 million were reported in other fees and services, respectively. ?
Non-Interest Expenses
Non-interest expenses, for the current quarter, increased$51 million , or 24%, compared to the prior-year quarter, to$264 million , mainly due to a$23 million increase in execution, clearing and distribution fees; a$16 million increase in employee compensation and benefits; a$7 million increase in general and administrative expenses; and a$4 million increase in occupancy, depreciation and amortization expenses. As a percentage of total net revenues, non-interest expenses were 40% for the current quarter and 28% for the prior-year quarter. ? 48
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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 quarter, increased$23 million , or 43%, compared to the prior-year quarter, to$77 million , mainly driven by a$17 million increase in exchange fees on higher customer trading volumes in options and futures, which carry higher fees, and lower liquidity rebates, which are primarily a factor of the order types we receive from customers; and a$7 million increase in regulatory transaction fees on higher fee rates; partially offset by a$2 million decrease in clearing and depository fees on lower fee rates.
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 quarter, increased$16 million , or 17%, compared to the prior-year quarter, to$112 million , associated with an 18% increase in the average number of employees to 2,732 for the current quarter, compared to 2,314 for the prior-year quarter. We continued to add staff worldwide in customer service, compliance and software development. As we continue to grow, our focus on automation has allowed us to maintain a relatively small staff. As a percentage of total net revenues, employee compensation and benefits expenses were 17% for the current quarter and 13% for the prior-year quarter. Employee compensation and benefits expenses as a percentage of adjusted net revenues were 16% for the current quarter and 15% for the prior-year quarter.
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 quarter, increased$4 million , or 21%, compared to the prior-year quarter, to$23 million , mainly due to higher costs related to the expansion of our physical space for both offices and data centers. As a percentage of total net revenues, occupancy, depreciation and amortization expenses were 4% for the current quarter and 3% for the prior-year quarter.
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 quarter, increased
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 quarter, increased$7 million , or 20%, compared to the prior-year quarter, to$42 million , primarily due to higher advertising, legal and other administrative expenses versus the prior-year quarter. As a percentage of total net revenues, general and administrative expenses were 6% for the current quarter and 5% for the prior-year quarter.
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 quarter, was unchanged from the
prior-year quarter at
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Income Tax Expense
We payU.S. federal, state and local income taxes on our taxable income, which is proportional to the percentage we own ofIBG LLC . Also, our operating subsidiaries are subject to income tax in the respective jurisdictions in which they operate. Income tax expense, for the current quarter, decreased$3 million , or 9%, compared to the prior-year quarter, to$32 million , primarily due to lowerU.S. income tax expense driven by lower income before income taxes, partially offset by higher income tax expense attributable to our foreign operating subsidiaries.
The table below presents information about our income tax expense for the periods indicated.
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