VIRTU FINANCIAL, INC. The Company's Board of Directors and stockholders adopted the 2015 Management Incentive Plan, which became effective upon consummation of the IPO, and was subsequently amended and restated following receipt of approval from the Company's stockholders onJune 30, 2017 . The Amended and Restated 2015 Management Incentive Plan provides for the grant of stock options, restricted stock units, and other awards based on an aggregate of 21,000,000 shares of Class A Common Stock, subject to additional sublimits, including limits on the total option grant to any one participant in a single year and the total performance award to any one participant in a single year. 38 -------------------------------------------------------------------------------- Table of Contents OnNovember 13, 2020 , the Company amended its form award agreement for the issuance of RSUs to provide for the continued vesting of outstanding RSU awards upon the occurrence of a qualified retirement (the "RSU Amendment"). A qualified retirement generally means a voluntary resignation by the participant (i) after five years of service, (ii) the participant attaining the age of 50 and (iii) the sum of the participant's age and service at the time of termination equaling or exceeding 65. Continued vesting is subject to the participant entering into a 2 year non-compete. The RSU Amendment was authorized and approved by the Compensation Committee of the Company's Board of Directors. As a result of the RSU Amendment, currently issued and outstanding RSUs held by the Company's employees, including its executive officers, shall be deemed to be subject to the amended terms of the form award agreement, and any future RSU awards shall also be governed by such amended terms.
On the ITG Closing Date, the Company assumed the Amended and Restated ITG 2007 Equity Plan and the Assumed Awards. As of the ITG Closing Date, the aggregate number of shares of Class A Common Stock subject to such Assumed Awards was 2,497,028 and the aggregate number of shares of Class A Common Stock that remained issuable pursuant to the Amended and Restated ITG 2007 Equity Plan was 1,230,406. Share Repurchase Program OnMay 4, 2021 , the Company's Board of Directors authorized the expansion of the Company's share repurchase program, increasing the total authorized amount by$300 million to$470 million in Class A Common Stock and Virtu Financial Units and extending the duration of the program throughMay 4, 2022 . The share repurchase program authorizes the Company to repurchase shares from time to time in open market transactions, privately negotiated transactions or by other means. Repurchases are also permitted to be made under Rule 10b5-1 plans. The timing and amount of repurchase transactions are determined by the Company's management based on its evaluation of market conditions, share price, cash sources, legal requirements and other factors. From the inception of the program throughSeptember 30, 2021 , the Company repurchased approximately 12.5 million shares of Class A Common Stock and Virtu Financial Units for approximately$337.5 million . As ofSeptember 30, 2021 , the Company has approximately$132.5 million remaining capacity for future purchases of shares of Class A Common Stock and Virtu Financial Units under the program.
Employee Exchanges
During the nine months endedSeptember 30, 2021 and 2020, pursuant to the exchange agreement by and among the Company,Virtu Financial and holders of Virtu Financial Units, certain current and former employees elected to exchange 405,272 and 2,420,239 units, respectively inVirtu Financial held directly or on their behalf byVirtu Employee Holdco LLC ("Employee Holdco") on a one-for-one basis for shares of Class A Common Stock.
Warrant Issuance
OnMarch 20, 2020 , in connection with and in consideration of the Founder Member's commitments under the Founder Member Loan Facility (as described in Note 9 "Borrowings"), the Company delivered to the Founder Member a warrant (the "Warrant") to purchase shares of the Company's Class A Common Stock. Pursuant to the Warrant, the Founder Member may purchase up to 3,000,000 shares of Class A Common Stock. If at any time during the term of the Founder Member Loan Facility, the Founder Member Loans equal to or greater than$100 million had remained outstanding for a certain period of time specified in the Warrant, the number of shares would have increased to 10,000,000. The Founder Member Loan Facility Term expired onSeptember 20, 2020 without the Company having borrowed any Founder Member Loans thereunder (as described in Note 9 "Borrowings"), and as a result no such increase in the number of shares which may be purchased has occurred or will occur pursuant to the terms of the Warrant. The exercise price per share of the Class A Common Stock issuable pursuant to the Warrant is$22.98 , which in accordance with the terms of the Warrant, is equal to the average of the volume weighted average prices of the Class A Common Stock for the ten (10) trading days followingMay 7, 2020 , the date on which the Company publicly announced its earnings results for the first quarter of 2020. The Warrant may be exercised to purchase up to 3,000,000 shares of the Company's Class A Common Stock on any date afterMay 22, 2020 up to and includingJanuary 15, 2022 . The Warrant and Class A Common Stock issuable pursuant to the Warrant were offered, and will be issued and sold, in reliance on the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), set forth under Section 4(a)(2) of the Securities Act relating to sales by an issuer not involving any public offering. The fair value of the Warrant was determined using a Black-Scholes-Merton model, and was recorded as a debt issuance cost within Other Assets on the Condensed Consolidated Statements of Financial Condition and as an increase to Additional paid-in capital on the Condensed Consolidated Statements of Changes in Equity. The balance was amortized on a straight-line basis fromMarch 20, 2020 throughSeptember 20, 2020 , the date on which the Founder Member Loan Facility 39
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Table of Contents expired, and recorded as expense within Debt issue cost related to debt refinancing, prepayment and commitment fees in the Condensed Consolidated Statements of Comprehensive Income.
Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in Other Comprehensive Income (Loss)
for the three and nine months ended
Three Months Ended
Amounts recorded Amounts reclassified AOCI Ending (in thousands)
AOCI Beginning Balance in AOCI from AOCI to income Balance
Net change in unrealized cash flow
hedges gains (losses) (1) $ (24,952) $ (1,612) $ 3,803 $ (22,761)
Foreign exchange translation
adjustment 5,835 (4,912) - 923
Total $ (19,117) $ (6,524) $ 3,803 $ (21,838) (1) Amounts reclassified from AOCI to income are included within Financing interest expense on long-term borrowings on the Condensed
Consolidated Statements of Comprehensive Income. As of
Three Months Ended
Amounts recorded Amounts reclassified AOCI Ending (in thousands)
AOCI Beginning Balance in AOCI from AOCI to income Balance
Net change in unrealized cash flow
hedges gains (losses) $ (36,710) $ (1,797) $ 1,948 $ (36,559)
Foreign exchange translation
adjustment (2,857) 4,213 - 1,356
Total $ (39,567) $ 2,416 $ 1,948 $ (35,203)
Nine
Months Ended
Amounts Amounts
AOCI Beginning recorded reclassified from AOCI Ending
(in thousands) Balance in AOCI AOCI to income Balance
Net change in unrealized cash flow
hedges gains (losses) (1) $ (33,444) $
(83) $ 10,766
7,957 (7,034) - 923
Total $ (25,487) $ (7,117) $ 10,766 $ (21,838)
(1) Amounts reclassified from AOCI to income are included within Financing interest expense on long-term borrowings on the
Consolidated Statements of Comprehensive Income. As of September 30, 2021 , the Company expects approximately $15.0 million to be
reclassified from AOCI into earnings over the next 12 months. The timing of the reclassification is based on the interest
payment schedule of the long-term borrowings.
Nine
Months Ended
Amounts Amounts
AOCI Beginning recorded reclassified from AOCI Ending
(in thousands) Balance in AOCI AOCI to income Balance
Net change in unrealized cash flow
hedges gains (losses) $ - $
(42,405) $ 5,846
(647) 2,003 - 1,356
Total $ (647) $
(40,402) $ 5,846
19. Share-based Compensation
Pursuant to the Amended and Restated 2015 Management Incentive Plan as described
in Note 18 "Capital Structure", and in connection with the IPO, non-qualified
stock options to purchase shares of Class A Common Stock were granted, each of
which vests in equal annual installments over a period of four years from grant
date and expires not later than 10 years from the date of grant.
40
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The following table summarizes activity related to stock options for the nine
months ended September 30, 2021 and 2020:
Options Outstanding Options Exercisable
Weighted Average Weighted Average Weighted Average
Exercise Price Per Remaining Exercise Price
Number of Options Share Contractual Life Number of Options Per Share
At December 31, 2019 3,233,779 $ 18.74 5.24 3,233,779 $ 18.74
Granted - - - - -
Exercised (807,627) 17.96 - (807,627) 17.96
Forfeited or expired - - - - -
At September 30, 2020 2,426,152 $ 19.00 4.49 2,426,152 $ 19.00
At December 31, 2020 2,324,152 $ 19.00 4.24 2,324,152 $ 19.00
Granted - - - - -
Exercised (446,997) 19.00 - (446,997) 19.00
Forfeited or expired - - - - -
At September 30, 2021 1,877,155 $ 19.00 3.49 1,877,155 $ 19.00
The expected life was determined based on an average of vesting and contractual
period. The risk-free interest rate was determined based on the yields available
on U.S. Treasury zero-coupon issues. The expected stock price volatility was
determined based on historical volatilities of comparable companies. The
expected dividend yield was determined based on estimated future dividend
payments divided by the IPO stock price. The stock options to purchase shares of
Class A Common Stock were fully vested in 2019.
On the ITG Closing Date, the Company assumed the Amended and Restated ITG 2007 Equity Plan and the Assumed Awards. The Assumed Awards are subject to the same terms and conditions that were applicable to them under the Amended and Restated ITG 2007 Equity Plan, except that (i) the Assumed Awards relate to shares of the Company's Class A Common Stock, (ii) the number of shares of Class A Common Stock subject to the Assumed Awards was the result of an adjustment based upon an Exchange Ratio (as defined in the ITG Merger Agreement) and (iii) the performance share unit awards were converted into service-based vesting restricted stock unit awards that were no longer subject to any performance based vesting conditions. As of the ITG Closing Date, the aggregate number of shares of Class A Common Stock subject to such Assumed Awards was 2,497,028 and the aggregate number of shares of Class A Common Stock that remained issuable pursuant to the Amended and Restated ITG 2007 Equity Plan was 1,230,406. The Company filed a Registration Statement on Form S-8 on the ITG Closing Date to register such shares of Class A Common Stock.
Class A Common Stock, Restricted Stock Units and Restricted Stock Awards
Pursuant to the Amended and Restated 2015 Management Incentive Plan as described in Note 18 "Capital Structure", subsequent to the IPO, shares of immediately vested Class A Common Stock, RSUs and RSAs were granted, with RSUs and RSAs vesting over a period of up to 4 years. The fair value of the Class A Common Stock and RSUs was determined based on a volume weighted average price and the expense is recognized on a straight-line basis over the vesting period. The fair value of the RSAs was determined based on the closing price as of the date of grant and the expense is recognized from the date that achievement of the performance target becomes probable through the remainder of the vesting period. Performance targets are based on the Company's adjusted EBITDA for certain future periods. For the nine months endedSeptember 30, 2021 and 2020, respectively, there were 633,938 and 967,526 shares of immediately vested Class A Common Stock granted as part of year-end compensation. In addition, the Company accrued compensation expense of$6.3 million for the three months endedSeptember 30, 2021 and reduced accrued compensation expense by$11.4 million for the three months endedSeptember 30, 2020 , and accrued compensation expense of$17.7 million and$14.4 million for the nine months endedSeptember 30, 2021 and 2020, respectively, related to immediately vested Class A Common Stock expected to be awarded as part of year-end incentive compensation, which was included in Employee compensation and payroll taxes on the Condensed Consolidated Statements of Comprehensive Income and Accounts payable, accrued expenses and other liabilities on the Condensed Consolidated Statements of Financial Condition. 41 -------------------------------------------------------------------------------- Table of Contents The following table summarizes activity related to RSUs (including the Assumed Awards) and RSAs for the nine months endedSeptember 30, 2021 and 2020: Weighted Number of RSUs and Average Fair RSAs Value At December 31, 2019 2,993,489$ 24.10 Granted 3,300,894 17.15 Forfeited (391,223) 17.90 Vested (2,124,843) 20.40 At September 30, 2020 3,778,317$ 20.77 At December 31, 2020 3,393,084$ 21.35 Granted (1) 2,442,953 27.06 Forfeited (191,296) 22.97 Vested (2,032,477) 23.27 At September 30, 2021 3,612,264$ 24.05
(1) Excluded in the number of RSUs and RSAs are 350,000 participating RSAs where the grant date has not been achieved because the performance conditions have not been met.
The Company recognized$6.7 million and$9.0 million for the three months endedSeptember 30, 2021 and 2020 and$20.5 million and$25.8 million for the nine months endedSeptember 30, 2021 and 2020, respectively, of compensation expense in relation to RSUs. As ofSeptember 30, 2021 andDecember 31, 2020 , total unrecognized share-based compensation expense related to unvested RSUs was$51.4 million and$37.1 million , respectively, and this amount is to be recognized over a weighted average period of 1.1 years and 1.0 year, respectively. Awards in which the specific performance conditions have not been met are not included in unrecognized share-based compensation expense. OnNovember 13, 2020 , the Company adopted theVirtu Financial, Inc. Deferred Compensation Plan (the "DCP"). The DCP permits eligible executive officers and other employees to defer cash or equity based compensation beginning in the calendar year endingDecember 31, 2021 , subject to certain limitations and restrictions. Deferrals may also be directed to notional investments in certain of the employee investment opportunities. No amounts have been recognized as compensation cost under the DCP as ofSeptember 30, 2021 .
20. Regulatory Requirement
The Company'sU.S. broker-dealer subsidiary, VAL, is subject to the SEC Uniform Net Capital Rule 15c3-1, which requires the maintenance of minimum net capital as detailed in the table below. Pursuant toNew York Stock Exchange ("NYSE") rules, VAL was also required to maintain$1.0 million of capital in connection with the operation of its designated market maker ("DMM") business as ofSeptember 30, 2021 . The required amount is determined under the exchange rules as the greater of (i)$1 million or (ii)$75,000 for every 0.1% of NYSE transaction dollar volume in each of the securities for which the Company is registered as the DMM. VAL's regulatory capital and regulatory capital requirements as ofSeptember 30, 2021 was as follows: Excess Regulatory Regulatory Capital Regulatory (in thousands) Capital Requirement Capital Virtu Americas LLC$ 484,482 $ 1,725$ 482,757 As ofSeptember 30, 2021 , VAL had$60.9 million of cash in special reserve bank accounts for the benefit of customers pursuant to SEC Rule 15c3-3, Computation for Determination of Reserve Requirements, and$8.8 million of cash in reserve bank accounts for the benefit of proprietary accounts of brokers. The balances are included within Cash restricted or segregated under regulations and other on the Condensed Consolidated Statements of Financial Condition. VAL's regulatory capital and regulatory capital requirements as ofDecember 31, 2020 was as follows: Excess Regulatory Regulatory Capital Regulatory (in thousands) Capital Requirement Capital Virtu Americas LLC$ 621,253 $ 2,917$ 618,336 42
-------------------------------------------------------------------------------- Table of Contents As ofDecember 31, 2020 , VAL had$96.2 million of cash in special reserve bank accounts for the benefit of customers pursuant to SEC Rule 15c3-3, Computation for Determination of Reserve Requirements, and$20.4 million of cash in reserve bank accounts for the benefit of proprietary accounts of brokers.
Foreign Subsidiaries
The Company's foreign subsidiaries are subject to regulatory capital requirements set by local regulatory bodies, including theInvestment Industry Regulatory Organization of Canada ("IIROC"), theCentral Bank of Ireland ("CBI"), theFinancial Conduct Authority ("FCA") in theUnited Kingdom , theAustralian Securities and Investments Commission ("ASIC"), theSecurities and Futures Commission inHong Kong ("SFC"), and theMonetary Authority of Singapore ("MAS"). The regulatory net capital balances and regulatory capital requirements applicable to the Company's foreign subsidiaries as ofSeptember 30, 2021 were as follows: Regulatory Regulatory Capital Excess Regulatory (in thousands) Capital Requirement CapitalCanada Virtu ITG Canada Corp$ 16,911 $ 197$ 16,714 Virtu Financial Canada ULC 200 197 3 Ireland Virtu ITG Europe Limited (1) 78,066 32,636 45,430 Virtu Financial Ireland Limited (1) 109,229 58,083 51,146 United Kingdom Virtu ITG UK Limited 1,057 846 211 Asia Pacific Virtu ITG Australia Limited 30,717 8,776 21,941 Virtu ITG Hong Kong Limited 2,902 513 2,389 Virtu ITG Singapore Pte Limited 845 74 771
(1) Preliminary
As ofSeptember 30, 2021 ,Virtu ITG Europe Limited andVirtu ITG Canada Corp had$0.2 million and$0.4 million , respectively, of segregated funds on deposit for trade clearing and settlement activity, andVirtu ITG Hong Kong Ltd. had$30 thousand of segregated balances under a collateral account control agreement for the benefit of certain customers. The regulatory net capital balances and regulatory capital requirements applicable to the Company's foreign subsidiaries as ofDecember 31, 2020 were as follows: Regulatory Regulatory Capital Excess Regulatory (in thousands) Capital Requirement CapitalCanada Virtu ITG Canada Corp$ 12,944 $ 196$ 12,748 Virtu Financial Canada ULC 2,486 196 2,290 Ireland Virtu ITG Europe Limited 57,459 32,106 25,353 Virtu Financial Ireland Limited 94,528 41,038 53,490 United Kingdom Virtu ITG UK Limited 1,290 910 380 Asia Pacific Virtu ITG Australia Limited 30,606 12,729 17,877 Virtu ITG Hong Kong Limited 4,290 625 3,665 Virtu ITG Singapore Pte Limited 796 76 720 As ofDecember 31, 2020 ,Virtu ITG Europe Limited andVirtu ITG Canada Corp had$0.2 million and$0.4 million , respectively, of funds on deposit for trade clearing and settlement activity, andVirtu ITG Hong Kong Ltd had$30 thousand of segregated balances under a collateral account control agreement for the benefit of certain customers. 43 -------------------------------------------------------------------------------- Table of Contents 21. Geographic Information and Business Segments The Company operates its business in theU.S. and internationally, primarily inEurope ,Asia andCanada . Significant transactions and balances between geographic regions occur primarily as a result of certain of the Company's subsidiaries incurring operating expenses such as employee compensation, communications and data processing and other overhead costs, for the purpose of providing execution, clearing and other support services to affiliates. Charges for transactions between regions are designed to approximate full costs. Intra-region income and expenses and related balances have been eliminated in the geographic information presented below to accurately reflect the external business conducted in each geographical region. The revenues are attributed to countries based on the locations of the subsidiaries. The following table presents total revenues by geographic area for the three and nine months endedSeptember 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2021 2020 2021 2020 Revenues: United States$ 433,013 $ 484,594 $ 1,678,650 $ 2,045,330 Ireland 55,137 61,320 242,614 233,783 Singapore 30,696 26,630 102,965 140,492 Canada 13,955 71,268 43,924 103,331 Australia 9,982 10,107 31,868 32,186 United Kingdom - 964 1,745 3,944 Others 1,561 1,229 4,115 3,569 Total revenues$ 544,344 $ 656,112 $ 2,105,881 $ 2,562,635
The Company has two operating segments: (i) Market Making and (ii) Execution Services; and one non-operating segment: Corporate.
The Market Making segment principally consists of market making in the cash,
futures and options markets across global equities, fixed income, currencies and
commodities. As a market maker, the Company commits capital on a principal basis
by offering to buy securities from, or sell securities to, broker-dealers, banks
and institutions. The Company engages in principal trading in the Market Making
segment direct to clients as well as in a supplemental capacity on exchanges,
Electronic Communications Networks ("ECNs") and ATSs. The Company is an active
participant on all major global equity and futures exchanges and also trades on
substantially all domestic electronic options exchanges. As a complement to
electronic market making, the cash trading business handles specialized orders
and also transacts on the OTC Link ATS operated by OTC Markets Group Inc.
The Execution Services segment comprises client-based trading and trading
venues, offering execution services in global equities, options, futures and
fixed income on behalf of institutions, banks and broker-dealers. The Company
earns commissions and commission equivalents as an agent on behalf of clients as
well as between principals to transactions; in addition, the Company will commit
capital on behalf of clients as needed. Client-based, execution-only trading in
the segment is done primarily through a variety of access points including: (i)
algorithmic trading and order routing in global equities and options; (ii)
institutional sales traders who offer portfolio trading and single stock sales
trading which provides execution expertise for program, block and riskless
principal trades in global equities and ETFs; and (iii) matching of client
conditional orders in POSIT Alert and client orders in the Company's ATSs,
including Virtu MatchIt, and POSIT. The Execution Services segment also includes
revenues derived from providing (a) proprietary risk management and trading
infrastructure technology to select third parties for a service fee, (b)
workflow technology, the Company's integrated, broker-neutral trading tools
delivered across the globe including trade order and execution management and
order management software applications and network connectivity and (c) trading
analytics, including (1) tools enabling portfolio managers and traders to
improve pre-trade, real-time and post-trade execution performance, (2) portfolio
construction and optimization decisions and (3) securities valuation. The
segment also includes the results of the Company's capital markets business, in
which the Company act as an agent for issuers in connection with at-the-market
offerings and buyback programs.
The Corporate segment contains the Company's investments, principally in strategic trading-related opportunities and maintains corporate overhead expenses and all other income and expenses that are not attributable to the Company's other segments.
Management evaluates the performance of its segments on a pre-tax basis. Segment
assets and liabilities are not used for evaluating segment performance or in
deciding how to allocate resources to segments. The Company's total revenues and
income before income taxes and noncontrolling interest ("Pre-tax earnings") by
segment for the three months ended September 30, 2021 and 2020 and are
summarized in the following table:
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