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 and ETFs on more than 135 electronic exchanges and market centers in 33 countries and in 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 emerging complexity of multiple market centers has provided us with the opportunity 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 over the last three decades has allowed us to integrate our software with an increasing number of trading venues into one automatically functioning, computerized platform that requires minimal human intervention. Our customer base is diverse with respect to geography and segments. Currently, approximately 76% of our customers reside outside theU.S. in over 200 countries and territories, and over 50% of new customers come from outside theU.S. Approximately 64% 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 are successfully attracting 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.
COVID-19 Pandemic
InMarch 2020 , theWorld Health Organization recognized the outbreak of the COVID-19 caused by a novel strain of the coronavirus as a pandemic. The pandemic affects all countries in which we operate. The response of governments and societies to the COVID-19 pandemic, which includes temporary closures of certain businesses; social distancing; travel restrictions, "shelter in place" and other governmental regulations; and reduced consumer spending due to job losses, has significantly impacted market volatility in the financial, commodities and energy markets, and general economic conditions.
The COVID-19 pandemic has precipitated unprecedented market conditions with equally unprecedented social and community challenges. Amid these challenges:
?The Company is committed to ensuring the highest levels of service to its customers so they can effectively manage their assets, portfolios and risks. The Company's technical infrastructure has withstood the challenges presented by the extraordinary volatility and increased market volume.
?The Company can run its business from alternate office locations and/or remotely if a Company office must temporarily close due to the spread of the COVID-19 pandemic.
?As announced onApril 9, 2020 , during the second quarter of 2020 the Company donated$5 million to assist efforts to provide food and support for people affected by the COVID-19 pandemic inthe United States as well as to advance medical solutions. The effects of the COVID-19 pandemic on the Company's financial results for 2020 can be summarized as follows: (1) higher commission revenue due to increased trading activity and a higher rate of customer accounts opened during this period; and (2) lower net interest income resulting from lower benchmark interest rates. 30
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The impact of the COVID-19 pandemic on the Company's future financial results could be significant but currently cannot be quantified, as it will depend on numerous evolving factors that currently cannot be accurately predicted, including, but not limited to, the duration and spread of the pandemic; its impact on our customers, employees and vendors; governmental actions in response to the pandemic; and the overall impact of the pandemic in the economy and society; among other factors. Any of these events could have a materially adverse effect on the Company's financial results.
Business Environment
2020 was a unique year, as the onset of the COVID-19 pandemic, together with unpredictable geopolitical events, created great uncertainty and volatility in the world's financial markets. U.S. market volatility rose in 2020 over the prior year, with particularly high volatility in the first half of the year as the pandemic took hold. Fears about economic collapse were especially strong in the first quarter of 2020, as global markets fell and the S&P 500 declined 20%. Central banks turned to monetary easing to buffer their national economies from a pandemic-induced downturn. In March, theU.S. Federal Reserve adopted a near-zero interest rate policy and other countries maintained or reduced rates to zero and below. Following on the heels of the initial panic was a worldwide surge of interest in financial markets, particularly equity markets, as people following stay-at-home guidelines opened brokerage accounts for investing and trading. Equity market indices, which had fallen in the first quarter as the scope of the pandemic became known, responded to this surge in new participants and most indices rose over the remainder of the year. North American and Asian markets recovered more strongly than those inEurope , which may have been negatively affected by the final negotiations around Brexit. A more active trading environment worldwide coincided with higher volatility, with the averageChicago Board Options Exchange Volatility Index ("VIX®") up 89% in the fourth quarter of 2020, compared to the year-ago quarter. Among our customer base, volatility is highly correlated with customer trading activity across product types. In 2020, higher volatility, in combination with strong customer account growth, led to significant increases in trading volume. The resulting boost to commission revenues was tempered by a decline in net interest income. Lower benchmark interest rates, though they reduced the rate of interest paid on customer cash to zero in most currencies, also reduced the rates we earned on margin lending and gave us fewer opportunities to earn net interest income on fully interest-sensitive balances. In this environment, with near-zero interest rates and rising asset values in actively-trading markets, customer account growth was robust. Total customer accounts increased 56% in 2020 to over 1.07 million. Inflows from new and existing customers, combined with rising securities prices that generally lifted customers' investment values, led to customer equity growth of 66% to$288.6 billion . Institutional customers, such as hedge funds, mutual funds, introducing brokers, proprietary trading groups and financial advisors, comprised approximately 43% of total accounts and approximately 64% of total customer equity at the end of 2020. Customers seek out our superior technology and execution capabilities, global market access, and low costs, as well as our securities finance services, including margin lending and short sale support.
The following is a summary of the key profit drivers that affect our business and how they compared to 2019:
Global trading volumes. According to data received from exchanges, volumes in exchange-listed equity-based options rose by approximately 93% in theU.S. for the year endedDecember 31, 2020 , compared to 2019, whileU.S. equities volumes increased by 103% and exchange-listed futures increased by 31%. See the "Trading Volumes and Brokerage Statistics" section below in this Item 7 for additional details regarding our trade volumes, contract and share volumes, and brokerage statistics. Volatility. Based on the VIX®, average U.S. market volatility rose to 29.2 in 2020, up 89% from the average of 15.4 in 2019. Higher volatility tends to improve our electronic brokerage performance because it generally corresponds to stronger trading volumes. In 2020, as the VIX maintained elevated levels for most of the year, we saw the impact on both customer trading activity, which more than doubled, and our commissions revenue, which rose 58%. Interest Rates. TheU.S. Federal Reserve reduced the target federal funds rate to near-zero in March of 2020, mirroring rates in most other currencies, which generally ranged from near-zero to negative. Decreases in benchmark rates can lead to lower net interest income and a narrower net interest margin. As our margin balances are tied to benchmark rates, decliningU.S. interest rates reduce the interest we receive on ourU.S. dollar customer margin balances. Falling rates also reduce the interest we earn on our segregated cash, the majority of which is invested inU.S. government securities and related instruments. Partially offsetting these factors in 2020 were higher average customer credit balances, up 28%, higher average margin lending, up 9%, reduced interest expense due to lower rates, and strong securities lending activity and other financing activities. In total, our net interest income fell 19% compared to 2019. ? 31
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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 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 inU.S. dollars, the change in the value of the GLOBAL versus theU.S. dollar affects our earnings. During 2020 the value of the GLOBAL, as measured inU.S. dollars, increased 1.45% compared to its value as ofDecember 31, 2019 . A discussion of our approach for 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." Financial Overview In the fourth quarter of 2019, we introduced the reporting of non-GAAP financial measures, which excludes 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 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. Pursuant to the requirements ofFinancial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") Topic 280, "Segment Reporting," we performed a quantitative and a qualitative assessment of our business and determined that our remaining market making activities no longer support our reporting of separate business segments. Accordingly, effective the first quarter of 2020, we discontinued the reporting of separate business segments. Since our decision to wind down our market making activities, management has continued to shift its focus to growing and strengthening our electronic brokerage business. We believe the elimination of segment reporting aligns our financial reporting with our business strategy and management's focus on the electronic brokerage business. The remaining market making activity is now reported as a component of "principal transactions," which is included in other income in the consolidated statements of comprehensive income. Effective the first quarter of 2020, we also changed the presentation of our consolidated statements of comprehensive income to better align with our business strategy. Previously reported amounts have been adjusted to conform with the new presentation. See "Consolidated Statements of Comprehensive Income and Operating Business Segment Presentation Changes" in Note 2 - "Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of this annual report on Form 10-K. Diluted earnings per share were$2.42 for the year endedDecember 31, 2020 ("current year"), compared to diluted earnings per share of$2.10 for the year endedDecember 31, 2019 ("prior year"). Adjusted diluted earnings per share were$2.49 for the current year, compared to adjusted diluted earnings per share of$2.27 for the prior year. The calculation of diluted earnings per share is detailed in Note 4 - "Equity and Earnings Per Share" to the audited consolidated financial statements, in Part II, Item 8 of this Annual Report on Form 10-K. For the current year, our net revenues were$2,218 million and income before income taxes was$1,256 million , compared to net revenues of$1,937 million and income before income taxes of$1,157 million in the prior year. Adjusted net revenues were$2,204 million and adjusted income before income taxes was$1,346 million , compared to adjusted net revenues of$1,984 million and adjusted income before income taxes of$1,246 million in the prior year.
The financial highlights for the current year were:
?Commission revenue showed strong growth, increasing
?Net interest income decreased$211 million , or 19%, from the prior year as the average federal funds effective rate, which, in part, drives the rates we earn on our interest-earning assets, decreased to an average of 0.38% from 2.16% in the prior year. ?Other income increased$52 million from the prior year. This increase was mainly comprised of (1)$41 million related to our currency diversification strategy, which lost$19 million in the current year compared to a loss of$60 million in the prior year; (2)$35 million related to our strategic investment inUp Fintech Holding Limited ("Tiger Brokers"), which increased to a$44 million mark-to-market gain in the current year from a$9 million mark-to-market gain in the prior year; partially offset by (3)$16 million related to our principal trading activities which gained$40 million in the current year compared to$56 million in the prior year; and (4) a$13 million impairment loss on our investment in OneChicago Exchange, as it ceased operations, during the current year. ?Pretax profit margin was 57% for the current year, down from 60% in the prior year. Adjusted pretax profit margin for the current year was 61%, down from 63% in the prior year. ? 32
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In connection with our currency diversification strategy as ofDecember 31, 2020 , approximately 27% of our equity was denominated in currencies other than theU.S. dollar. In the current year, our currency diversification strategy increased our comprehensive earnings by$105 million (compared to a decrease of$36 million in the prior year), as theU.S. dollar value of the GLOBAL increased by approximately 1.45%, compared to its value as ofDecember 31, 2019 . The effects of our currency diversification strategy are reported as (1) a component of other income (loss of$19 million ) in the consolidated statements of comprehensive income and (2) other comprehensive income ("OCI") (gain of$124 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.
West Texas Intermediate Crude Oil Event
OnApril 20, 2020 the energy markets exhibited extraordinary price activity in theNew York Mercantile Exchange ("NYMEX") West Texas Intermediate Crude Oil futures contract. The price of theMay 2020 physically-settled futures contract dropped to an unprecedented negative price. This price was the basis for determining the settlement price for cash-settled futures contracts traded on the CME Globex and also for a separate, expiring cash-settled futures contract listed on the Intercontinental Exchange Europe ("ICE Europe"). Several of the Company's customers held long positions in these CME and ICE Europe contracts, and as a result they incurred losses, including losses in excess of the equity in their accounts. The Company fulfilled the required variation margin settlements with the respective clearinghouses on behalf of its customers. The Company subsequently compensated certain affected customers in connection with their losses resulting from the contracts settling at a price below zero. As a result, the Company recognized an aggregate loss of approximately$104 million , of which$103 million is included in general and administrative expenses and$1 million in customer bad debt expense in the consolidated statements of 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 on the Company's future financial results could be significant but currently cannot be quantified, as it will depend on numerous evolving factors that currently cannot be accurately predicted, including, but not limited to the duration and spread of the pandemic; its impact on our customers, employees and vendors; governmental regulations in response to the pandemic; and the overall impact of the pandemic on the economy and society; among other factors.
?Retail participation in the equity markets has fluctuated over the past few years due to investor sentiment, market conditions and a variety of other factors. Retail transaction volumes may not be sustainable and are not predictable.
?Additional consolidation among market centers may adversely affect the value of our IB SmartRoutingSM software.
?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.
?Price competition among broker-dealers may continue to intensify.
?Scrutiny of equity and options market makers, hedge funds, and soft dollar and
payment for order flow practices by regulatory and legislative authorities has
increased. New legislation or modifications to existing regulations and rules
could occur in the future.
?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 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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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,
2020 2019 2018
(in millions, except share and per share amounts)
Revenues
Commissions $ 1,112 $ 706 $ 777
Other fees and services 175 141 148
Other income 59 7 49
Total non-interest income 1,346 854 974
Interest income 1,133 1,726 1,392
Interest expense (261) (643) (463)
Total net interest income 872 1,083 929
Total net revenues 2,218 1,937 1,903
Non-interest expenses
Execution, clearing and distribution fees 293 251 269
Employee compensation and benefits 325 288 264
Occupancy, depreciation and amortization 69 60 49
Communications 26 25 25
General and administrative 236 112 96
Customer bad debt 13 44 4
Total non-interest expenses 962 780 707
Income before income taxes 1,256 1,157 1,196
Income tax expense 77 68 71
Net income 1,179 1,089 1,125
Less net income attributable to
noncontrolling interests 984 928 956
Net income available for common
stockholders $ 195 $ 161 $ 169
Earnings per share
Basic $ 2.44 $ 2.11 $ 2.30
Diluted $ 2.42 $ 2.10 $ 2.28
Weighted average common shares
outstanding
Basic 79,939,289 76,121,570 73,438,209
Diluted 80,638,908 76,825,863 74,266,370
Comprehensive income
Net income available for common
stockholders $ 195 $ 161 $ 169
Other comprehensive income
Cumulative translation adjustment, before
income taxes 26 4 (14)
Income taxes related to items of other
comprehensive income - - (1)
Other comprehensive income (loss), net of
tax 26 4 (13)
Comprehensive income available for common
stockholders $ 221 $ 165 $ 156
Comprehensive income attributable to
noncontrolling interests
Net income attributable to noncontrolling
interests $ 984 $ 928 $ 956
Other comprehensive income - cumulative
translation adjustment 98 20 (66)
Comprehensive income attributable to
noncontrolling interests $ 1,082 $ 948 $ 890
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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,
2020 2019 2018
Revenues
Commissions 50% 36% 41%
Other fees and services 8% 7% 8%
Other income 3% 0% 3%
Total non-interest income 61% 44% 51%
Interest income 51% 89% 73%
Interest expense -12% -33% -24%
Total net interest income 39% 56% 49%
Total net revenues 100% 100% 100%
Non-interest expenses
Execution, clearing and distribution fees 13% 13% 14%
Employee compensation and benefits 15% 15%
14%
Occupancy, depreciation and amortization 3% 3% 3% Communications 1% 1% 1% General and administrative 11% 6% 5% Customer bad debt 1% 2% 0% Total non-interest expenses 43% 40% 37% Income before income taxes 57% 60% 63% Income tax expense 3% 4% 4% Net income 53% 56% 59% Less net income attributable to noncontrolling interests 44% 48%
50%
Net income available for common stockholders 9% 8%
9%
Year Ended
Net Revenues
Total net revenues, for the current year, increased$281 million , or 15%, compared to the prior year, to$2,218 million . The increase in net revenues was primarily due to higher commissions, other fees and services, and other income partially offset by lower net interest income.
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. We have a commission structure that allows customers to choose between an all-inclusive fixed, or "bundled", rate and a tiered, or "unbundled", rate that offers lower commissions for high volume customers. For "unbundled" commissions, we pass through regulatory and exchange fees separately from our commissions, adding transparency to our fee structure. Commissions also include payments for order flow income received from IBKR LiteSM liquidity providers. Our commissions are geographically diversified. In 2020, 2019, and 2018 we generated 29%, 33%, and 32%, respectively, of commissions from operations conducted internationally. Commissions, for the current year, increased$406 million , or 58%, compared to the prior year, to$1,112 million , driven by significantly higher customer trading volumes in options, futures and stocks. Total customer options and futures contract and stock share volumes increased 67%, 30%, and 97%, respectively, compared to the prior year. The increase in customer trading volumes across all product types was in line with the active trading environment worldwide in the current year as compared to the prior year. Total DARTs for cleared and execution-only customers, for the current year, increased 115% to 1.79 million compared to 833 thousand for the prior year. DARTs for cleared customers, i.e., customers for whom we execute trades, as well as, clear and carry positions, for the current year, increased 113% to 1.59 million, compared to 748 thousand for the prior year. Average commission per commissionable order for cleared customers, for the current year, decreased 24% to$2.78 , compared to$3.67 for the prior year, reflecting smaller average order sizes in stocks, options, futures and foreign exchange as well as some effect from higher exchange rebates passed through to our customers. Smaller trade sizes are often seen in high volatility periods, as traders choose to risk less per trade in fast-moving markets. 35
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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$34 million , or 24%, compared to the prior year, to$175 million , driven by a$21 million increase in IPO-related fee income, a$16 million increase in market data fee income, and a$6 million increase in payments for order flow income from options exchange-mandated programs, partially offset by a$4 million decrease inFDIC Insured Bank Deposit Sweep Program fee income, and a$4 million decrease in risk exposure fee income. 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 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, increased$52 million , compared to the prior year, to$59 million . This increase was mainly comprised of (1)$41 million related to our currency diversification strategy, which lost$19 million in the current year compared to a loss of$60 million in the prior year; and (2)$35 million related to our strategic investment in Tiger Brokers, which increased to a$44 million mark-to-market gain in the current year from a$9 million mark-to-market gain in the prior year; partially offset by (3)$16 million related to our principal trading activities which gained$40 million in the current year compared to$56 million in the prior year; and (4) a$13 million impairment loss on our investment in OneChicago Exchange, as it ceased operations, during the current year.
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; and on deposits (in positive interest rate currencies) with banks. We pay interest on cash balances (in sufficiently positive interest rate currencies) customers hold with us; for borrowing and lending securities; and on our borrowings.
Net interest income (interest income less interest expense), for the current
year, decreased
Net interest income on customer balances, for the current year, decreased$239 million , compared to the prior year, driven by a decrease in the average federal funds effective rate to 0.38% from 2.16% in the prior year, partially offset by a$14.9 billion increase in average customer credit balances, a portion of which were invested in interest-bearingU.S. government securities and a$2.5 billion increase in average customer margin loans. See the "Business Environment" section above in this Item 7 for a further discussion about the change in interest rates in the current year. 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 collateral securing the loans in the customer's account. In the current year, average securities borrowed increased 8%, to$4.2 billion and average securities loaned increased 39%, to$5.7 billion , compared to the prior year. Net interest earned from securities lending is affected by the level of demand for securities positions held by our customers. During the current year, net interest earned from securities lending transactions increased$86 million , or 33%, compared to the prior year. 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 substantial 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 is paid only on eligible cash credit balances (i.e., balances over$10 thousand 36
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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 yields on segregated cash and customer credit balances as effective interest rates in those currencies fluctuate. 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 theU.S. customer protection rules, increases. ? 37
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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.
Year-Ended December 31,
2020 2019 2018
(in millions)
Average interest-earning assets
Segregated cash and securities
28,960 26,483 29,253
Securities borrowed 4,235 3,930 3,310
Other interest-earning assets 5,593 5,407 4,362
FDIC sweeps 1 2,882 2,046 1,259
$ 83,568 $ 65,678 $ 59,095
Average interest-bearing liabilities
Customer credit balances $ 67,540 $ 52,625 $ 48,179
Securities loaned 5,702 4,088 3,982
Other interest-bearing liabilities 215 196 241
$ 73,457 $ 56,909 $ 52,402
Net Interest income
Segregated cash and securities, net
380 694 677
Securities borrowed and loaned, net 343 257 216 Customer credit balances, net 2
(46) (515) (362)
Other net interest income 1,3 55 121 90
Net interest income 3 $ 898 $ 1,117 $ 958
Net interest margin ("NIM") 1.07% 1.70% 1.62%
Annualized Yields
Segregated cash and securities 0.40% 2.01% 1.61%
Customer margin loans 1.31% 2.62% 2.31%
Customer credit balances 0.07% 0.98% 0.75%
___________________________
(1)Represents the average amount of customer cash swept into FDIC -insured banks
as part of our Insured Bank Deposit Sweep Program. This item is not recorded in
the Company's 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 which 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 ended
December 31, 2020 , 2019, and 2018 $21 million , $15 million and $8 million were
reported in other fees and services, respectively. For the years ended December
31, 2020 , 2019, and 2018, $5 million , $19 million and $21 million were reported
in other income, respectively.
Non-Interest Expenses
Non-interest expenses, for the current year, increased$182 million , or 23%, compared to the prior year, to$962 million , mainly due to a$124 million increase in general and administrative expenses; a$42 million increase in execution, clearing and distribution fees; and a$37 million increase in employee compensation and benefits expenses partially offset by; a$31 million decrease in customer bad debt expense. As a percentage of total net revenues, non-interest expenses were 43% for the current year and 40% for the prior year.
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, increased$42 million , or 17%, compared to the prior year, to$293 million , driven by higher trade volumes as customer options and futures contract and stock share volumes increased 67%, 30%, and 97%, respectively, compared to the prior year. Execution and clearings fees did not increase in line with trading volumes for several 38
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reasons including, product mix and greater rebates received from exchanges on orders that add liquidity, though these rebates partially offset commission revenues.
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$37 million , or 13%, compared to the prior year, to$325 million , associated with a 20% increase in the average number of employees to 1,823, for the current year, compared to 1,523 for the prior year. We continued to add staff 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 15% for both the current year and the prior year.
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$9 million , or 15%, compared to the prior year, to$69 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 3% for both the current year and the prior year. 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$1 million , compared to the prior year. As a percentage of total net revenues, communications expenses were 1% for both the current year and the prior year. 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, increased$124 million , or 111%, compared to the prior year, to$236 million , primarily due to$103 million in expenses incurred to compensate certain affected customers in connection with their losses resulting from the West Texas Intermediate Crude Oil futures contracts settling at a price below zero onApril 20, 2020 as described above; a$5 million donation to assist efforts to provide food and support for people affected by the COVID-19 pandemic inthe United States as well as to advance medical solutions; and higher compliance and advertising related expenses. As a percentage of total net revenues, general and administrative expenses were 11% for the current year and 6% for the prior year.
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$31 million , compared to the prior year, to$13 million , due to the non-recurrence of$42 million in bad debt expense related to margin lending on a particular security listed on a majorU.S. exchange that lost a substantial amount of its value in a very short timeframe in the prior year; partially offset by higher bad debt expense resulting from the unusually volatile markets in the current year. See Note 14 - "Commitments, Contingencies, and Guarantees" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
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 year, increased$9 million , or 13%, compared to the prior year, to$77 million , due to (a)$15 million higher tax expense attributable to our operating companies driven by higher taxable income; (b)$5 million higher tax expense 39
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attributable toIBG, Inc. driven by higher taxable income; partially offset by (c) $11 million income tax benefit in the current year due to the remeasurement of deferred tax assets related to the step-up in basis arising from the acquisition of interests inIBG LLC primarily due to changes in the Company's effective tax rates. The table below presents information about our income tax expense for the periods indicated. Year-Ended December 31, 2020 2019 2018 (in millions, except %) Consolidated Consolidated income before income taxes$ 1,256 $ 1,157 $ 1,196 IBG, Inc. stand-alone income before income taxes (4) (1)
2
Operating companies income before income taxes
$ 1,194 Operating Companies Income before income taxes$ 1,260 $ 1,158 $ 1,194 Income tax expense 38 23 32 Net income available to members$ 1,222 $ 1,135
IBG, Inc. Average ownership percentage in IBG LLC 19.2% 18.4%
17.8%
Net income available toIBG, Inc. from operating companies$ 238 $ 207 $ 206 IBG, Inc. stand-alone income before income taxes (4) (1) 2 Income before income taxes 234 206 208 Income tax expense 39 45 39
Net income available to common stockholders
Consolidated income tax expense Income tax expense attributable to operating companies$ 38 $ 23 $ 32 Income tax expense attributable IBG, Inc. 39 45
39
Consolidated income tax expense$ 77 $ 68 $ 71 ? 40
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Operating Results
Income before income taxes, for the current year, increased$99 million , or 9%, compared to the prior year, to$1,256 million . Pretax profit margin was 57% for the current year and 60% for the prior year. Comparing our operating results for the current year to the prior year, excluding our non-GAAP financial measures: adjusted net revenues were$2,204 million , up 11%; adjusted income before income taxes was$1,346 million , up 8%; and adjusted pre-tax profit margin was 61% for the current year, down 2% from the prior year. See the "Non-GAAP Financial Measures" section below in this Item 7 for additional details. Noncontrolling Interest We are the sole managing member ofIBG LLC and, as such, operate and control all of the business and affairs ofIBG LLC and its subsidiaries and consolidateIBG LLC's financial results into our financial statements. As ofDecember 31, 2020 , we held approximately 21.8% ownership interest inIBG LLC . Holdings holds approximately 78.2% ownership interest inIBG LLC . We reflect Holdings' ownership as a noncontrolling interest in our consolidated statements of financial condition, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows. Our share ofIBG LLC's net income, excluding Holdings' noncontrolling interest, for the current year was approximately 19.2%, compared to approximately 18.4% for the prior year.
Year Ended
For a discussion of changes for the year endedDecember 31, 2019 compared to the Year EndedDecember 31, 2018 refer to the Annual Report on Form 10-K filed with theSEC onFebruary 28, 2020 , except for the line items below which have been re-written to conform with the new presentation of our consolidated statements of comprehensive income. See "Consolidated Statements of Comprehensive Income and Operating Business Segment Presentation Changes" in Note 2 - "Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of this annual report on Form 10-K.
Other Fees and Services
The Company earns fee income on services provided to customers, which includes market data fees, risk exposure fees, payments for order flow from exchange-mandated programs, minimum activity fees, and other fees and services charged to customers. Other fees and services, for 2019, decreased$7 million , or 5%, compared to 2018, to$141 million , driven by a$10 million decrease in risk exposure fee income and a$2 million decrease in consulting fee income, partially offset by a$5 million increase inFDIC sweep fee income.
Other Income
A component of other income is foreign currency gains and losses from our currency diversification strategy. 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 also consists of gains (losses) from principal transactions, gains (losses) from our equity method investments, and other revenue not directly attributable to our core business offerings. Other income, for 2019, decreased$42 million , compared to 2018, to$7 million . This decrease was mainly comprised of (1)$41 million related to our currency diversification strategy, which lost$60 million in 2019 compared to a loss of$19 million in 2018; (2)$7 million related to our principal trading activities which gained$58 million in 2019 compared to a gain of$65 million in 2018; and (3) non-recurrence in 2019 of a$2 million recovery of costs related to the sale of ourU.S. options market making operations toTwo Sigma Securities, LLC ; partially offset by (4) a$9 million mark-to-market gain on our strategic investment in Tiger Brokers consummated in 2019. ? 41
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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 %)
Brokerage
Brokerage Non Avg. Trades
Cleared % Cleared % Principal % Total % per U.S.
Period Trades Change Trades Change Trades Change Trades Change Trading Day
2016 259,932 16,515 64,038 340,485 1,354
2017 265,501 2% 14,835 (10%) 31,282 (51%) 311,618 (8%) 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
CONTRACT AND SHARE VOLUMES:
(in thousands, except %)
TOTAL
Options % Futures (1) % Stocks %
Period (contracts) Change (contracts) Change (shares) Change
2016 572,834 143,287 155,439,227
2017 395,885 (31%) 124,123 (13%) 220,247,921 42%
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%
ALL CUSTOMERS
Options % Futures (1) % Stocks %
Period (contracts) Change (contracts) Change (shares) Change
2016 265,457 129,082 142,356,340
2017 293,860 11% 118,427 (8%) 213,108,299 50%
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%
CLEARED CUSTOMERS
Options % Futures (1) % Stocks %
Period (contracts) Change (contracts) Change (shares) Change
2016 227,413 128,021 138,523,932
2017 253,304 11% 116,858 (9%) 209,435,662 51%
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%
___________________________
(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
2016 307,377 14,205 13,082,887
2017 102,025 (67%) 5,696 (60%) 7,139,622 (45%)
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%)
___________________________
(1)Futures contract volume includes options on futures.
CUSTOMER STATISTICS:
Year over Year 4Q2020 4Q2019 %
Change
Total Accounts (in thousands) 1,073 690
56%
Customer Equity (in billions) (1)$ 288.6 $ 174.1
66%
Cleared DARTs (in thousands) 1,871 719
160%
Total Customer DARTs (in thousands) 2,109 797
165%
Cleared Customers Commission per Cleared Commissionable Order (2)$ 2.46 $ 3.63 (32%) Cleared Avg. DART per Account (Annualized) 459 266
73%
Net Revenue per Avg. Account (Annualized)
___________________________ (1)Excludes non-customers.
(2)Commissionable order - a customer order that generates commissions
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, the 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, the net
mark-to-market gains (losses) on investments, the remeasurement of our TRA
liability, unusual customer compensation expense, 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 IBG, Inc. of our currency diversification strategy, the net
mark-to-market gains (losses) on investments, the remeasurement of our TRA
liability, unusual customer compensation expense, unusual bad debt expense, and
the remeasurement of certain deferred tax assets.
Mark-to-market gains (losses) on investments represents the net mark-to-market
gains (losses) on our U.S. government securities portfolio, which are typically
held to maturity, investments in equity securities that do not qualify for
equity method accounting which are measured at fair value, and equity securities
taken over by the Company from customers related to losses on margin loans
described below.
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Remeasurement of our TRA liability represents the change in the amount payable
to
Unusual customer compensation expense represents expenses incurred to compensate certain affected customers in connection with their losses resulting from the West Texas Intermediate Crude Oil futures contracts settling at a price below zero onApril 20, 2020 , as described above in this Item 7 in the "Financial Overview" section. Unusual bad debt expense includes material losses on margin loans resulting from unusual events that occur in the marketplace. For the twelve months endingDecember 31, 2019 , unusual bad debt expense reflects losses recognized on margin lending to a small number of our brokerage customers that had taken relatively large positions in a security listed on a majorU.S. exchange, which lost a substantial amount of its value in a very short timeframe. For the twelve months endedDecember 31, 2020 , unusual bad debt expense reflects losses incurred by futures customers in excess of the equity in their accounts related to the West Texas Intermediate Crude Oil event described above in this Item 7 in the "Financial Overview" section. 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 inIBG LLC primarily due to changes in the Company's effective tax rates. For further information refer to Note 4 - Equity and Earnings per Share under Part II, Item 8 - Financial Statements and Supplementary Data of this Annual Report on Form 10-K. The effect of our currency diversification strategy, the net mark-to-market gains (losses) on investments, the remeasurement of our TRA liability, customer compensation expense, unusual bad debt expense, and the remeasurement of certain deferred tax assets are excluded because management does not believe they are indicative of our underlying core business performance. 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,
2020 2019 2018
(in millions, except share and per share amounts)
Adjusted net revenues
Net revenues - GAAP $ 2,218 $ 1,937 $ 1,903
Non-GAAP adjustments
Currency diversification strategy, net 19 60 19
Mark-to-market on investments (36) (13) (9)
Remeasurement of TRA liability 3 - -
Total non-GAAP adjustments (14) 47 10
Adjusted net revenues $ 2,204 $ 1,984 $ 1,913
Year-Ended December 31,
2020 2019 2018
(in millions, except share and per share amounts)
Adjusted income before income taxes
Income before income taxes - GAAP $ 1,256 $ 1,157$ 1,196 Non-GAAP adjustments Currency diversification strategy, net 19 60 19 Mark-to-market on investments (36) (13) (9) Remeasurement of TRA liability 3 - - Customer compensation expense 103 - - Bad debt expense 1 42 - Total non-GAAP adjustments 90 89 10 Adjusted income before income taxes $ 1,346 $
1,246
Adjusted pre-tax profit margin 61% 63% 63%
Year-Ended December 31,
2020 2019 2018
(in millions, except share and per share amounts)
Adjusted net income available for
common stockholders
Net income available for common
stockholders - GAAP $ 195 $ 161 $ 169
Non-GAAP adjustments
Currency diversification strategy,
net 4 11 3
Mark-to-market on investments (7) (2) (2)
Remeasurement of TRA liability 3 - -
Customer compensation expense 20 - -
Bad debt expense 0 8 -
Income tax effect of above
adjustments1 (3) (3) (1)
Remeasurement of deferred income
taxes (11) - -
Total non-GAAP adjustments 6 13 1
Adjusted net income available for
common stockholders $ 201 $ 174 $ 170
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Year-Ended December 31,
2020 2019 2018
(in millions, except share and per share amounts)
Adjusted diluted EPS
Diluted EPS - GAAP $ 2.42 $ 2.10 $ 2.28
Non-GAAP adjustments
Currency diversification strategy,
net 0.05 0.14 0.05
Mark-to-market on investments (0.08) (0.03)
(0.02)
Remeasurement of TRA liability 0.04 - - Customer compensation expense 0.24 - - Bad debt expense 0.00 0.10 0.00 Income tax effect of above adjustments1 (0.04) (0.04) (0.02) Remeasurement of deferred income taxes (0.14) - - Total non-GAAP adjustments 0.08 0.17 0.01 Adjusted diluted EPS $ 2.49 $ 2.27 $ 2.28 Diluted weighted average common shares outstanding 80,638,908 76,825,863 74,266,370 _________________________
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 ofDecember 31, 2020 , total assets were$95.7 billion of which approximately$94.8 billion , or 99.1%, were considered liquid. 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. OurTreasury department, Market Risk Committee and other management control groups assist in evaluating, monitoring and controlling the impact that our business activities have on our financial condition, liquidity and capital structure. The objective of these policies is to support our business strategies while ensuring ongoing and sufficient liquidity. Our significant excess regulatory capital comprises an aggregate across our many regulated subsidiaries, and we believe this financial strength provides our customers with a source of comfort. 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 we 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 ofDecember 31, 2020 , liability balances in connection with securities loaned and payable to customers were higher than their respective average monthly balances during the current year and our short-term borrowings were lower than the average monthly balance during the current year. Cash and cash equivalents held by our non-U.S. operating subsidiaries as ofDecember 31, 2020 were$1,560 million ($1,121 million as ofDecember 31, 2019 ). These funds are primarily intended to finance each individual operating subsidiary's local operations, and thus would not be available to fundU.S. domestic operations unless repatriated through payment of dividends toIBG LLC . In 2020Timber Hill Canada Company paid a dividend of$76 million toIBG LLC as a result of its liquidation. In 2018 a dividend of$54 million was paid toIBG LLC from one of our non-U.S. subsidiaries. As ofDecember 31, 2020 , we had no intention to repatriate further amounts from non-U.S. operating subsidiaries. With the enactment of theU.S. Tax Cuts and Jobs Act onDecember 22, 2017 , we recognized a$62 million liability for the one-time transition tax on deemed repatriation of earnings of some of our foreign 46
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subsidiaries for the year endedDecember 31, 2017 . As a result, in the event dividends were to be paid to the Company in the future by a non-U.S. operating subsidiaries, the Company would not be required to accrue and pay income taxes on such dividends, except for foreign taxes in the form of dividend withholding tax, if any, imposed on the recipient of the distribution or dividend distribution tax imposed on the payor of the distribution. 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 13% to$9.0 billion as ofDecember 31, 2020 from$7.9 billion as ofDecember 31, 2019 . This increase is attributable to total comprehensive income, partially offset by distributions and dividends paid during 2020. 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,
2020 2019 2018
(in millions)
Net cash provided by operating activities
(50) (89) (57)
Net cash used in financing activities (229) (419) (399)
Effect of exchange rate changes on cash, cash
equivalents, and restricted cash 124 24 (79)
Increase in cash, cash equivalents, and
restricted cash $ 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 EndedDecember 31, 2020 : Our cash, cash equivalents, and restricted cash (i.e., cash and cash equivalents that are subject to withdrawal or usage restrictions) increased by$7,913 million to$20.2 billion for the year endedDecember 31, 2020 . We raised$8,068 million in net cash from operating activities. We used net cash of$279 million in our investing and financing activities, primarily for distributions to noncontrolling interests, dividends paid to our common stockholders and payments made under the Tax Receivable Agreement. Investing activities mainly consisted of purchases of other investments and property, equipment and intangible assets.
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
During 2020,IBG LLC initiated a program to offer senior notes in private placements to certain qualified customers ofIB LLC .IBG LLC intends to use the proceeds for general financing purposes when interest spread opportunities arise. The senior notes are offered at an issue price of$1 thousand dollars per note at an interest rate calculated by adding the benchmark rate to a rate (spread) thatIBG LLC announces from time-to-time. The benchmark rate is the effective federal funds rate as reported by theFederal Reserve Bank of New York on the morning of the date of the offering. The senior notes mature no later than the thirtieth day following the issuance date, andIBG LLC , at its option, may redeem the senior notes at any time, at a redemption price equal to 100% of the principal amount of the senior notes to be redeemed, plus accrued and unpaid interest. 47
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During the year endedDecember 31, 2020 IBG LLC issued senior notes of$116 million and redeemed senior notes of$20 million , respectively. The senior notes carried a weighted average interest rate of 0.913%. As ofDecember 31, 2020 ,IBG LLC had$96 million of senior notes outstanding, all of which carry a 1% per annum interest rate, and are included in short-term borrowings in the consolidated statements of financial condition.
Regulatory Capital Requirements
As ofDecember 31, 2020 , all of the operating subsidiaries were in compliance with their respective regulatory capital requirements. For additional information regarding our regulatory capital requirements see Note 16 - "Regulatory Requirements" to the audited consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
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$50 million ,$74 million , and$36 million for the three years endedDecember 31, 2020 , 2019, and 2018, respectively. The decrease in 2020 is mainly driven by the renovation of ourU.S. headquarters and the relocation of our primary data center that occurred in 2019. In the future, we plan to meet capital expenditure needs with cash from operations and cash on hand, as we continue our focus on technology infrastructure initiatives to further enhance our competitive position. In response to changing economic conditions, we believe we have the flexibility to modify our capital expenditures by adjusting them (either upward or downward) to match our actual performance. If we pursue any additional strategic acquisitions, we may incur additional capital expenditures. ? 48
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Contractual Obligations Summary
Our contractual obligations principally include obligations associated with our
outstanding indebtedness and interest payments as of
Payments Due by Year
Total 2021-2022 2023-2024 Thereafter
(in millions)
Payable to Holdings under Tax
Receivable Agreement (1) $ 199 $ 38 $ 48 $ 113
Operating leases 142 41 32 69
Transition tax liability (2) 51 10 14 27
Total contractual cash obligations
94 $ 209
___________________________
(1)As of December 31, 2020 , contractual amounts owed under the Tax Receivable
Agreement of $199 million have been recorded in payable to affiliate in the
consolidated financial statements representing management's best estimate of the
amounts currently expected to be owed under the Tax Receivable Agreement.
Through December 31, 2020 , approximately $205 million of cumulative cash
payments have been made.
(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.
Investments in
We invest inU.S. government securities for the purpose of satisfyingU.S. regulatory requirements. As a broker-dealer, unlike banks, we are required to mark these investments to market even though we intend to hold them to maturity. Sudden increases (decreases) in interest rates will cause mark-to-market losses (gains) on these securities, which are recovered (eliminated) if we hold them to maturity, as currently intended. The impact of changes in interest rates is further described in Part II, Item 7A of this Annual Report on Form 10-K entitled "Quantitative and Qualitative Disclosures about Market Risk."
Strategic Investments and Acquisitions
We regularly evaluate potential strategic investments and acquisitions. We hold strategic investments in certain electronic trading exchanges includingBOX Options Exchange, LLC . We also hold a strategic investment in Tiger Brokers, an online stock brokerage established for Chinese retail and institutional customers, in which we have a beneficial ownership interest of 7.6%. 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 announced onDecember 4, 2020 , we signed an agreement withFolio Investments Inc. to acquire its self-directed retail brokerage segment. The transaction closed inJanuary 2021 and resulted in the acquisition of approximately 57,000 customer accounts.
As of
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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 withU.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements and accompanying notes. These estimates and assumptions are based on judgment and the best available information at the time. Therefore, actual results could differ materially from those estimates. We believe that the critical policies listed below represent the most significant estimates used in the preparation of our consolidated financial statements. See Note 2 - "Significant Accounting Policies" to the audited consolidated financial statements for a summary of our significant accounting policies in Part II, Item 8 of this Annual Report on Form 10-K.
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 theU.S. and numerous foreign jurisdictions. Determining income tax expense requires significant judgment and estimates. 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 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 forU.S. tax liabilities or for additional foreign taxes on the unremitted earnings of foreign subsidiaries that have been indefinitely reinvested. 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 withFinancial Accounting Standards Board ("FASB") ASC Topic 740 and adjust these liabilities when management's judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in payments that are different from the current estimates of these tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information becomes available. 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, on the basis of 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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