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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2014
Commission File Number: 001-33440
INTERACTIVE BROKERS GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization) |
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30-0390693
(I.R.S. Employer
Identification No.) |
One Pickwick Plaza
Greenwich, Connecticut 06830
(Address of principal executive office)
(203) 618-5800
(Registrant's telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of the each exchange on which registered |
Common Stock, par value $.01 per share |
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The NASDAQ Stock Market LLC
(NASDAQ Global Select Market) |
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the securities
act. Yes ý No o.
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
act. Yes o No ý.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý No o.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ý |
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Accelerated filer o |
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Non-accelerated filer o (Do not check if a
smaller reporting company) |
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Smaller reporting company o |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o No ý.
The aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the registrant was approximately $1,329,833,125 computed by
reference to the $23.29 closing sale price of the common stock on the NASDAQ Global Select Market, on June 30, 2014, the last business day of the registrant's most recently completed second
fiscal quarter.
As
of March 2, 2015, there were 58,473,186 shares of the issuer's Class A common stock, par value $0.01 per share, outstanding and 100 shares of the issuer's Class B
common stock, par value $0.01 per share, outstanding.
Documents Incorporated by Reference: Portions of Registrant's definitive proxy statement for its 2015 annual meeting of shareholders are
incorporated by reference in Part III of this Form 10-K.
Table of Contents
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2013
Table of Contents
i
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have included or incorporated by reference in this Annual Report on Form 10-K, and from time to time our management may make
statements that may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not
historical facts, but instead represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These statements include statements
other than historical information or statements of current condition and may relate to our future plans and objectives and results, among other things, and may also include our belief regarding the
effect of various legal proceedings, as set forth under "Legal Proceedings" in Part I, Item 3 of this Annual Report on Form 10-K, as well as statements about the objectives and
effectiveness of our liquidity policies, statements about trends in or growth opportunities for our businesses, in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II, Item 7 of this Annual Report on Form 10-K. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual
results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the
forward-looking statements include, among others, those discussed below and under "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this Annual Report on Form 10-K.
Factors
that could cause actual results to differ materially from any future results, expressed or implied, in these forward-looking statements include, but are not limited to, the
following:
-
- general economic conditions in the markets where we operate;
-
- increased industry competition and downward pressures on bid/offer spreads and electronic brokerage commissions;
-
- risks inherent to the electronic market making and brokerage businesses;
-
- implied versus actual price volatility levels of the products in which we make markets;
-
- the general level of interest rates;
-
- failure to protect or enforce our intellectual property rights in our proprietary technology;
-
- our ability to keep up with rapid technological change;
-
- system failures and disruptions;
-
- non-performance of third-party vendors;
-
- conflicts of interest and other risks due to our ownership and holding company structure;
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- the loss of key executives and failure to recruit and retain qualified personnel;
-
- the risks associated with the expansion of our business;
-
- our possible inability to integrate any businesses we acquire;
-
- compliance with laws and regulations, including those relating to the securities industry; and
-
- other factors discussed under "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K or elsewhere
in this Annual Report on Form 10-K.
We
undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this Annual Report on
Form 10-K.
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Table of Contents
PART I
ITEM 1. BUSINESS
Overview
Interactive Brokers Group, Inc. ("IBG, Inc." or the "Company") is an automated global electronic broker and market maker.
We custody and service accounts for hedge and mutual funds, RIAs, proprietary trading groups, introducing brokers and individual investors. We specialize in routing orders while striving to achieve
best executions and processing trades in securities, futures, foreign exchange instruments, bonds and mutual funds on more than 100 electronic exchanges and trading venues around the world. In the
U.S., our business is conducted from our headquarters in Greenwich, Connecticut and in Chicago, Illinois and Jersey City, New Jersey. Abroad, we conduct business through offices located in Canada,
England, Switzerland, Hong Kong, India, Australia and Japan. At December 31, 2014 we had 960 employees worldwide.
IBG, Inc.
is a holding company and our primary assets are our ownership of approximately 14.5% of the membership interests of IBG LLC (the "Group"), the current holding
company for our businesses. We are the sole managing member of IBG LLC. On May 3, 2007, IBG, Inc. priced its initial public offering (the "IPO") of shares of common stock. In
connection with the IPO, IBG, Inc. purchased 10.0% of the membership interests in IBG LLC and began to consolidate IBG LLC's financial results into its financial statements. When
we use the terms "we," "us," and "our," we mean IBG LLC and its subsidiaries for periods prior to the IPO, and IBG, Inc. and its subsidiaries (including IBG LLC) for periods from
and after the IPO. Unless otherwise indicated, the term "common stock" refers to the Class A common stock of IBG, Inc.
We
are a successor to the market making business founded by our Chairman and Chief Executive Officer, Thomas Peterffy, on the floor of the American Stock Exchange in 1977. Since our
inception, we have focused on developing proprietary software to automate broker-dealer functions. During that time, we have been a pioneer in developing and applying technology as a financial
intermediary to increase liquidity and transparency in the capital markets in which we operate. The advent of electronic exchanges in the last 24 years has provided us with the opportunity to
integrate our software with an increasing number of exchanges and trading venues into one automatically functioning, computerized platform that requires minimal human intervention. Over three decades
of developing our automated trading platforms and our automation of many middle and back office functions have allowed us to become one of the lowest cost providers of broker- dealer services and
significantly increase the volume of trades we handle.
Our
activities are divided into two principal business segments: (1) electronic brokerage and (2) market making:
-
- As a direct market access broker, we serve the customers of both traditional brokers and prime brokers. We provide our customers with
an advanced order management, trade execution and portfolio management platform at a very low cost. Our customers can simultaneously access many financial markets worldwide and trade across multiple
asset classes (stocks, options, futures, foreign exchange ("forex"), bonds and mutual funds) denominated in 21 different currencies, on one screen, from a single account based in any major currency.
Our large bank and broker-dealer customers may "white label" our trading interface (i.e., make our trading interface available to their customers without referencing our name), or they can
select from among our modular functionalities, such as order routing, trade reporting or clearing on specific products or exchanges where they may not have up-to-date technology, to offer their
customers a comprehensive, global range of services and products. The emerging complexity of multiple trading venues provided us with the opportunity of building and continuously adapting our order
routing software to secure excellent execution prices. This has become our major focus.
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Table of Contents
-
- As a market maker, we provide continuous bid and offer quotations on over one million securities and futures products listed on
electronic exchanges around the world. Our quotes are driven by proprietary mathematical models that assimilate market data and reevaluate our outstanding quotes each second. Unlike firms that trade
over-the-counter ("OTC") derivative products, our business creates liquidity and transparency on electronic exchanges. In the past several years our market making business has suffered from
competitive pressures and along with the rapid increase of our brokerage business, its significance has diminished.
Our
electronic brokerage and market making businesses are complementary. Both benefit from our combined scale and volume, as well as from our proprietary technology. Our brokerage
customers benefit from the technology and market structure expertise developed in our market making business. The expense of developing and maintaining our unique technology, clearing, settlement,
banking and regulatory structure required by any specific exchange or market center is shared by both of our businesses. These economies, in turn, enable us to provide lower transaction costs to our
customers than our competitors. In addition, we believe we gain a competitive advantage by applying the software features we have developed for a specific product or market to newly-introduced
products and markets over others who may have less automated facilities in one or both of our businesses or who operate only in a subset of the exchanges and market centers on which we operate. Our
trading system contains unique architectural aspects that, together with our massive trading volume in markets worldwide, may impose a significant barrier to entry for firms wishing to compete in our
specific businesses and permit us to compete favorably against our competitors.
Our
internet address is www.interactivebrokers.com and the investor relations section of our web site is located at www.interactivebrokers.com/ir. We make available free of charge, on or
through the investor relations section of our web site, this Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, related Interactive Data exhibits, Current Reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as proxy statements, as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission ("SEC"). Also posted on our web site are our Bylaws, our Amended and Restated
Certificate of Incorporation, charters for the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee of our board of directors, our Accounting Matters Complaint
Policy, our Whistle Blower Hotline, our Corporate Governance Guidelines and our Code of Business Conduct and Ethics governing our directors, officers and employees. Within the time periods required by
SEC and the NASDAQ Stock Market ("NASDAQ"), we will post on our web site any amendment to the Code of Business Conduct and Ethics and any waiver applicable to any executive officer, director or senior
financial officer. In addition, our web site includes information concerning purchases and sales of our equity securities by our executive officers and directors, as well as disclosure relating to
certain non-GAAP financial measures (as defined in Regulation G) promulgated under the Securities Act of 1933, as amended (the "Securities Act") and the Securities Exchange Act of 1934, as
amended (the "Exchange Act") that we may make public orally, telephonically, by webcast, by broadcast or by similar means from time to time.
Our
Investor Relations Department can be contacted at Interactive Brokers Group, Inc., Eight Greenwich Office Park, Greenwich, Connecticut 06831, Attn: Investor Relations,
telephone: 203-618-4070, e-mail: investor- relations@interactivebrokers.com.
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Table of Contents
Our Organizational Structure and Overview of Recapitalization Transactions
The graphic below illustrates our current ownership structure and reflects current ownership percentages. The graphic below does not
display the subsidiaries of IBG LLC.
Prior
to the IPO, we had historically conducted our business through a limited liability company structure. Our primary assets are our ownership of approximately 14.5% of the membership
interests of IBG LLC, the current holding company for our businesses, and our controlling interest and related contractual rights as the sole managing member of IBG LLC. The remaining
approximately 85.5% of IBG LLC membership interests are held by IBG Holdings LLC ("Holdings"), a holding company that is owned by our founder, Chairman and Chief Executive Officer,
Thomas Peterffy, and his affiliates, management and other employees of IBG LLC, and certain other members. The IBG LLC membership interests held by Holdings will be subject to purchase
by us over time in connection with offerings by us of shares of our common stock. The below table shows the amount of IBG LLC membership interests held by IBG, Inc. and Holdings as of
December 31, 2014.
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Public |
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Holdings |
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Total |
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Ownership % |
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14.5 |
% |
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85.5 |
% |
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100.0 |
% |
Membership interests |
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58,473,186 |
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346,062,282 |
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404,535,468 |
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4
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Purchases
of IBG LLC membership interests, held by Holdings, by the Company are governed by the exchange agreement among us, IBG LLC, Holdings and the historical members of
IBG LLC, (the "Exchange Agreement"), a copy of which was filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 and filed with the SEC
on November 9, 2009. The Exchange Agreement, as amended June 6, 2012, provides that the Company may facilitate the redemption by Holdings of interests held by its members through the
issuance of shares of common stock through a public offering in exchange for the interests in IBG LLC being redeemed by Holdings. The June 6, 2012 amendment (the "Amendment"), which was
filed as an exhibit to our Form 8-K filed with the SEC on June 6, 2012, eliminated from the Exchange Agreement an alternative funding method, which provided that upon approval by the
board of directors and by agreement of the Company, IBG LLC and Holdings, redemptions could be made in cash.
At
the time of the Company's IPO in 2007, three hundred sixty (360) million shares of authorized common stock were reserved for future sales and redemptions. From 2008 through
2010, Holdings redeemed 5,013,259 IBG LLC shares for a total of $114 million, which redemptions were funded using cash on hand at IBG LLC. Upon cash redemption these
IBG LLC shares were retired.
In
June 2011, with the consent of Holdings and the Company (on its own behalf and acting as the sole managing member of IBG LLC), IBG LLC agreed to redeem certain
membership interests from Holdings through the sale of common stock and to distribute the proceeds of such sale to the beneficial owners of such membership interests. On August 4, 2011, the
Company filed a "shelf" Registration
Statement on Form S-3 (File Number 333-176053) with the SEC for the issuance of additional shares in connection with Holdings requesting redemption of a portion of its member interests
in IBG LLC. On August 4, 2011, a Prospectus Supplement was filed by the Company with the SEC to issue 1,983,624 shares of common stock (with a fair value of $29 million) in
exchange for an equivalent number of shares of member interests in IBG LLC.
In
November 2013, with the consent of Holdings and the Company (on its own behalf and acting as the sole managing member of IBG LLC), IBG LLC agreed to redeem certain
membership interests from Holdings through the sale of common stock and to distribute the proceeds of such sale to the beneficial owners of such membership interests. On November 12, 2013, the
Company filed a "shelf" Registration Statement on Form S-3 (File Number 333-192275) with the SEC for the issuance of additional shares in connection with Holdings requesting redemption
of a portion of its member interests in IBG LLC. On November 12, 2013, a Prospectus Supplement was filed by the Company with the SEC to issue 4,683,415 shares of common stock (with a
fair value of $109.7 million) in exchange for an equivalent number of shares of member interests in IBG LLC.
On
October 24, 2014 the Company filed a Prospectus Supplement with the SEC to issue 1,358,478 shares of common stock (with a fair value of $35.2 million) in exchange for an
equivalent number of shares of member interests in IBG LLC.
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Table of Contents
Segment Operating Results
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Year Ended December 31, |
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2014 |
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2013 |
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2012 |
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(in millions)
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Electronic Brokerage |
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Net revenues(1) |
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$ |
952.3 |
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$ |
818.5 |
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$ |
672.2 |
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Non-interest expenses(2) |
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363.8 |
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422.7 |
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328.7 |
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Income before income taxes |
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$ |
588.5 |
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$ |
395.8 |
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$ |
343.5 |
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Pre-tax profit margin |
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62 |
% |
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48 |
% |
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51 |
% |
Market Making |
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Net revenues(1) |
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$ |
284.4 |
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$ |
361.1 |
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$ |
490.5 |
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Non-interest expenses |
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170.3 |
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202.6 |
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271.0 |
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Income before income taxes |
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$ |
114.1 |
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$ |
158.5 |
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$ |
219.5 |
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Pre-tax profit margin |
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40 |
% |
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44 |
% |
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45 |
% |
Corporate(3) |
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Net revenues(1) |
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$ |
(193.4 |
) |
$ |
(103.4 |
) |
$ |
(32.2 |
) |
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Non-interest expenses |
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3.1 |
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(0.4 |
) |
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3.8 |
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Loss before income taxes |
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$ |
(196.5 |
) |
$ |
(103.0 |
) |
$ |
(36.0 |
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Total |
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Net revenues |
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$ |
1,043.3 |
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$ |
1,076.2 |
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$ |
1,130.5 |
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Non-interest expenses |
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537.2 |
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624.9 |
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603.5 |
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Income before income taxes |
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$ |
506.1 |
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$ |
451.3 |
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$ |
527.0 |
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Pre-tax profit margin |
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49 |
% |
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42 |
% |
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47 |
% |
- (1)
- Certain
reclassifications have been made to previously reported amounts to conform with the current presentation of currency translation gains and losses
related to our currency diversification strategy. See "Management's Discussion and Analysis of Financial Condition and Results of OperationsPresentation of Foreign Currency Effects" in
Part II Item 7 of this Annual Report on Form 10-K.
- (2)
- Electronic
brokerage non-interest expenses in 2013 included an unusual loss of $64 million. See "Management's Discussion and Analysis of Financial
Condition and Results of OperationsFinancial Overview" in Part II Item 7 of this Annual Report on Form 10-K.
- (3)
- The
Corporate segment includes corporate related activities, inter-segment eliminations and net gains and losses on foreign currency contracts held as part
of our overall currency diversification strategy.
Financial
information concerning our business segments for each of 2014, 2013 and 2012 is set forth in "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the consolidated financial statements and the notes thereto, which are in Part II, Items 7 and 8 of this Annual Report on Form 10-K.
Electronic BrokerageInteractive Brokers
Electronic brokerage represented 77% of 2014 net revenues and 84% of 2014 income before income taxes from electronic brokerage and
market making combined. We conduct our electronic brokerage business through our Interactive Brokers ("IB") subsidiaries. As an electronic broker, we execute, clear and settle trades globally for both
institutional and individual customers. Capitalizing on the technology originally developed for our market making business, IB's systems
provide our customers with the capability to monitor multiple markets around the world simultaneously and to
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Table of Contents
execute
trades electronically in these markets at a low cost in multiple products and currencies from a single trading account.
Since
launching this business in 1993, we have grown to approximately 281,000 institutional and individual brokerage customers. We provide our customers with what we believe to be one of
the most effective and efficient electronic brokerage platforms in the industry. The following are key highlights of our electronic brokerage
business:
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- Low CostsWe provide our customers with among the industry's lowest
overall transaction costs in two ways. First, we offer among the lowest execution, commission and financing costs in the industry. Second, our customers benefit from our advanced routing of orders
designed to achieve the best available trade price. In order to illustrate this advantage, in 2014 we expanded our published monthly brokerage metrics to include our customers' average net trade cost
for Reg.-NMS stocks. In 2014, customers' total all-in cost of executing and clearing U.S. Reg.-NMS stocks through IB, including brokerage commissions, regulatory and exchange fees and market impact,
was 1 basis point of trade money, as measured against a daily VWAP benchmark.
-
- Automated Risk ControlsThroughout the trading day, we calculate margin
requirements for each of our customers on a real-time basis across all product classes (stocks, options, futures, bonds, forex, and mutual funds) and across all currencies. Our customers are alerted
to approaching margin violations and if a customer's equity falls below what is required to support that customer's margin, we attempt to automatically liquidate positions on a real-time basis to
bring the customer's account into margin compliance. This is done to protect IB, as well as the customer, from excessive losses.
-
- IB Universal AccountSMFrom a single point of entry in one
IB Universal AccountSM our customers are able to trade products denominated in 21 currencies, across multiple classes of tradable, exchange-listed products, including stocks, options,
futures, bonds, forex and mutual funds traded on more than 100 exchanges and market centers and in 24 countries around the world seamlessly.
-
- IB SmartRoutingSMOur customers benefit from our advanced
order routing technology. IB SmartRoutingSM retains control of the customer's order, continuously searches for the best available price and, unlike most other routers, dynamically
routes and re-routes all or parts of a customer's order to achieve optimal execution and among the lowest execution and commission costs in the industry. To highlight the quality of our price
executions, we publish on our website independent measurements performed by a third party provider of transaction analysis to illustrate IB's net price improvement versus the industry. In 2014, we
also launched Transaction Cost Analysis reporting to allow customers to track execution performance by criteria including trade date, trade price, underlying and exchange.
-
- Flexible and Customizable SystemOur platform is designed to provide an
efficient customer experience, beginning with a highly automated account opening process and ending with a fast trade execution, with real-time position monitoring. Our sophisticated interface
provides interactive real-time views of account balances, positions, profits or losses, buying power and "what-if" scenarios to enable our customers to more easily make informed investment decisions
and trade efficiently. Our system is configured to remember the user's preferences and is specifically designed for multi-screen systems. When away from their main workstations, customers are able to
access their accounts through our IB WebTraderSM or MobileTraderSM interfaces.
-
- Interactive AnalyticsSM and IB Options
AnalyticsSMWe offer our customers state-of-the-art tools, which include a customizable trading platform, advanced analytic tools and over 60
sophisticated order types and algorithms. IB also provides a real-time option analytics window which displays
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IB
is able to provide its customers with high-speed trade execution at low commission rates, in large part because it utilizes the backbone technology developed for Timber Hill's market
making operations. As a result of our advanced electronic brokerage platform, IB attracts sophisticated and active investors. No single customer represented more than 1% of our commissions and
execution fees in 2014.
Market MakingTimber Hill
Market making represented 23% of 2014 net revenues from electronic brokerage and market making combined. We conduct our market making
business through our Timber Hill ("TH") subsidiaries. As one of the largest market makers on many of the world's leading electronic exchanges,
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we
provide liquidity by offering competitively tight bid/offer spreads over a broad base of over one million tradable, exchange-listed products, including equity derivative products, equity index
derivative products, equity securities and futures. As principal, we commit our own capital and derive revenues or incur losses from the difference between the price paid when securities are bought
and the price received when those securities are sold. Historically, our profits have been principally a function of transaction volume and price volatility of electronic exchange- traded products
rather than the direction of price movements. Other factors, including the ratio of actual to implied volatility and shifts in foreign currency exchange rates, can also have a meaningful impact on our
results, as described further in "Business Environment" in Part II, Item 7 of this Annual Report on Form 10-K.
Our
strategy is to calculate quotes at which supply and demand for a particular security are likely to be in balance a few seconds ahead of the market and execute small trades at tiny
but favorable differentials. Because we provide continuous bid and offer quotations and we are continuously both buying and selling quoted securities, we may have either a long or a short position in
a particular product at a given point in time. As a matter of practice, we will generally not take portfolio positions in either the broad market or the financial instruments of specific issuers in
anticipation that prices will either rise or fall. Our entire portfolio is evaluated each second and continuously rebalanced throughout the trading day, thus minimizing the risk of our portfolio at
all times. This real-time rebalancing of our portfolio, together with our real-time proprietary risk management system, enables us to curtail risk and to be profitable in both up-market and
down-market scenarios. Our quotes are based on our proprietary model rather than customer order flow, and we believe that this approach provides us with a competitive advantage.
We
are a market leader in exchange-traded equity options and equity-index options and futures. Together with our electronic brokerage customers, in 2014 we accounted for approximately
8.5% of exchange-listed equity options traded worldwide according to data received from exchanges worldwide. Our ability to make markets in such a large number of exchanges and market centers
simultaneously around the world is one of our core strengths and has contributed to the large volumes in our market making business. We engage in market making operations in North and South America,
Europe and in the Asia/Pacific regions as described below.
North and South American Market Making Activities. Our U.S. market making activities are conducted through Timber Hill LLC
("TH LLC"),
a SEC-registered securities broker-dealer that conducts market making in equity derivative products, equity index derivative products and equity securities. Since its inception in 1982, TH LLC
has grown to become one of the largest listed options market makers in the United States. As of December 31, 2014, TH LLC held specialist, primary market maker or lead market maker
designations in options on approximately 1,080 underlying securities listed in the United States. TH LLC is a member of the Boston Options Exchange, BATS exchange, Chicago Board Options
Exchange, Chicago Mercantile Exchange, Chicago Board of Trade, International Securities Exchange, NYSE AMEX Options Exchange, NYSE Arca, OneChicago, NASDAQ OMX's PHLX and NOM option markets and the
New York Mercantile Exchange. TH LLC also conducts market making
activities in Mexico at the MEXDER and the Mexican Stock Exchange and in Brazil at BM&F BOVESPA S.A. We conduct market making activities in Canada through our Canadian subsidiary, Timber Hill
Canada Company ("THC") at the Toronto Stock Exchange and Montreal Exchange. In addition, we participate in stock trading at various notable Electronic Communications Networks ("ECNs") in both the U.S.
and Canada.
European, Asian, and Australian Market Making Activities. Our European, Asian, and Australian market making subsidiaries, primarily
Timber Hill
Europe AG ("THE"), conduct operations in 22 countries, comprising the major securities markets in these regions.
We
began our market making operations in Europe in 1990. In Germany and Switzerland, we have been among the largest equity options market makers in terms of volume on Eurex, one of the
world's
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largest
futures and options exchanges, which is jointly operated by Deutsche Börse AG and SIX Swiss Exchange. We have also been active in trading German stocks and warrants as a member
of XETRA, the German electronic stock trading system, and the Frankfurt and Stuttgart stock exchanges; and in Switzerland as a member of the SIX Swiss Exchange. Our other European operations are
conducted on the London Stock Exchange; the Weiner Börse AG; the Copenhagen Stock Exchange; the Helsinki Stock Exchange; the NYSE Euronext exchanges in Amsterdam, Paris, Brussels and
London; NASDAQ OMX Nordic exchanges in Sweden, Finland and Denmark; the MEFF and Bolsa de Valores Madrid in Spain; the IDEM and Borsa Valori de Milano in Milan; and the ÖTOB in Vienna.
Since
1995, we have conducted market making operations in Hong Kong. Our Hong Kong subsidiary, Timber Hill Securities Hong Kong Ltd ("THSHK"), is a member of the cash and
derivatives markets of the Hong Kong Exchanges. Since 1997, we have conducted operations in Australia. Our Australian subsidiary, Timber Hill Australia Pty Ltd ("THA"), is a member of the
Australian Stock Exchange, and routes orders for its trading on ASX 24 through its affiliate, Interactive Brokers LLC. We commenced trading in Japan during 2002, Korea and Singapore during 2004
and Taiwan in 2007. In 2008, we began our market making operation in India through our subsidiary, Interactive Brokers (India) Private Limited ("IBI"), which is a member of the National Stock Exchange
of India and the Bombay Stock Exchange.
Most
of the above trading activities take place on exchanges and all securities and commodities that we trade are cleared by exchange owned or authorized clearing houses. Recently, the
emergence of High Frequency Traders and others who compete with us but do not regularly provide liquidity have put our market making operations under pressure and its relative significance has
diminished
Technology
Our proprietary technology is the key to our success. We built our business on the belief that a fully computerized market making
system that could integrate pricing and risk exposure information quickly and continuously would enable us to make markets profitably in many different financial instruments simultaneously. We believe
that integrating our system with electronic exchanges and market centers results in transparency, liquidity and efficiencies of scale. Together with the IB SmartRoutingSM system
and our low commissions, these features reduce overall transaction costs to our customers and, in turn, increases our transaction volume and profits. Over the past 37 years, we have developed
an integrated trading system and communications network and have positioned our company as an efficient conduit for the global flow of risk capital across asset and product classes on electronic
exchanges around the world, permitting us to have one of the lowest cost structures in the industry. We believe that developing, maintaining and continuing to enhance our proprietary technology
provides us and our customers with the competitive advantage of being able to adapt quickly to the changing environment of our industry and to take advantage of opportunities presented by new
exchanges, products or regulatory changes before our competitors.
The
quotes that we provide as market makers are driven by proprietary mathematical models that assimilate market data and re-evaluate our outstanding quotes each second. Because our
technology infrastructure enables us to process large volumes of pricing and risk exposure information rapidly, we are able to make markets profitably in securities with relatively low spreads between
bid and offer prices. As market makers, we must ensure that our interfaces connect effectively and efficiently with each exchange and market center where we make markets and that they are in complete
conformity with all the applicable rules of each local venue. Utilizing up-to-date computer and telecommunications systems, we transmit continually updated pricing information directly to exchange
computer devices and receive trade and quote information for immediate processing by our systems. As a result, we are able to maintain more effective control over our exposure to price and volatility
movements on a real-time basis than many of our competitors. This control is important, not only because our system must process, clear and settle several hundred thousand market maker trades per day
with a minimal number
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of
errors, but also because the system monitors and manages the risk on the entire portfolio, which generally consists of more than ten million open contracts distributed among many hundred thousand
different products. Using our system, which we believe affords an optimal interplay of decentralized trading activity and centralized risk management, we quote markets in over one million securities
and futures products traded around the world.
In
our electronic brokerage business, our proprietary technology infrastructure enables us to provide our customers with the ability to execute trades at among the lowest commission
costs in the industry. Additionally, our customers benefit from real-time systems optimization for our market making business. Customer trades are both automatically captured and reported in real time
in our system. Our customers trade on more than 100 exchanges and market centers in 24 countries around the world. All of these exchanges are partially or fully electronic, meaning that a customer can
buy or sell a product traded on that exchange via an electronic link from his or her computer terminal through our system to the exchange. We offer our products and services through a global
communications network that is designed to provide secure, reliable and timely access to the most current market information. We provide our customers with a variety of means to connect to our
brokerage systems, including dedicated point-to-point data lines, virtual private networks and the Internet.
Specifically,
our customers receive worldwide electronic access connectivity through our Trader Workstation (our real-time Java-based trading platform), our proprietary Application
Programming Interface ("API"), and/or industry standard Financial Information Exchange ("FIX") connectivity. Customers who want a professional quality trading application with a sophisticated user
interface utilize our Trader Workstation which can be accessed through a desktop or variety of mobile devices. Customers interested in developing program trading applications in MS-Excel, Java, Visual
Basic or C++ utilize our API. Large institutions with FIX infrastructure prefer to use our FIX solution for seamless integration of their existing order gathering and reporting applications.
While
many brokerages, including some online brokerages, rely on manual procedures to execute many day-to-day functions, IB employs proprietary technology to automate, or otherwise
facilitate, many of the following functions:
-
- account opening process;
-
- order routing and best execution;
-
- seamless trading across all types of securities and currencies around the world from one account;
-
- order types and analytical tools offered to customers;
-
- delivery of customer information, such as confirmations, customizable real-time account statements and audit trails;
-
- customer service; and
-
- risk management through automated real-time credit management of all new orders and margin monitoring.
Research and Development
One of our core strengths is our expertise in the rapid development and deployment of automated technology for the financial markets.
Our core software technology is developed internally, and we do not generally rely on outside vendors for software development or maintenance. To achieve optimal performance from our systems, we are
continuously rewriting and upgrading our software. Use of the best available technology not only improves our performance but also helps us attract and retain talented developers. Our software
development costs are low because the employees who oversee the
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development
of the software are the same employees who design the application and evaluate its performance. This also enables us to add features and further refine our software rapidly.
Our
internally-developed, fully integrated trading and risk management systems are unique and transact across all product classes on more than 100 markets and in 21 currencies around the
world. These systems have the flexibility to assimilate new exchanges and new product classes without compromising transaction speed or fault tolerance. Fault tolerance, or the ability to maintain
system performance despite exchange malfunctions or hardware failures, is crucial to successful market making and ensuring best executions for brokerage customers. Our systems are designed to detect
exchange malfunctions and quickly take corrective actions by re-routing pending orders.
Our
company is technology-focused, and our management team is hands-on and technology-savvy. Most members of the management team write detailed program specifications for new
applications. The development queue is prioritized and highly disciplined. Progress on programming initiatives is generally tracked on a weekly basis by a steering committee consisting of senior
executives. This enables us to prioritize key initiatives and achieve rapid results. All new business starts as a software development project. We generally do not engage in any business that we
cannot automate and incorporate into our platform prior to entering into the business.
The
rapid software development and deployment cycle is achieved by our ability to leverage a highly integrated, object oriented development environment. The software code is modular,
with each object providing a specific function and being reusable in multiple applications. New software releases are tracked and tested with proprietary automated testing tools. We are not hindered
by disparate and often limiting legacy systems assembled through acquisitions. Virtually all of our software has been developed and maintained with a unified purpose.
For
over 36 years, we have built and continuously refined our automated and integrated, real-time systems for world-wide trading, risk management, clearing and cash management,
among others. We have also assembled a proprietary connectivity network between us and exchanges around the world. Efficiency and speed in performing prescribed functions are always crucial
requirements for our systems. As a result, our trading systems are able to assimilate market data, recalculate and distribute streaming quotes for tradable products in all product classes each second.
Risk Management Activities
The core of our risk management philosophy is the utilization of our fully integrated computer systems to perform critical,
risk-management activities on a real-time basis. In our market making business, our real-time integrated risk management system seeks to ensure that overall IBG positions are continuously hedged at
all times, curtailing risk. In our electronic brokerage business, integrated risk management seeks to ensure that each customer's positions are continuously credit checked and brought into compliance
if equity falls short of margin requirements, curtailing bad debt losses.
We
actively manage our global currency exposure on a continuous basis by maintaining our equity in a basket of currencies we call the GLOBAL. In 2011, we expanded the composition of the
GLOBAL from six to 16 currencies to better reflect the expanding breadth of our businesses around the world. We define the GLOBAL as consisting of fractions of a U.S. dollar, Euro, Japanese yen,
British pound, Canadian dollar, Australian dollar, Swiss franc, Hong Kong dollar, Swedish krona, Mexican peso, Danish krone, Norwegian krone, South Korean won, Brazilian real, Indian rupee and
Singapore dollar. The Company currently transacts business and is required to manage balances in each of these 16 currencies. The currencies comprising the GLOBAL and their relative proportions
can change over time. Additional information regarding our currency diversification strategy is set forth in "Quantitative and Qualitative Disclosures About Market Risk" in Part II,
Item 7A of this Annual Report on Form 10-K.
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Electronic Brokerage
IB calculates margin requirements for each of its customers on a real-time basis across all product classes (stocks, options, futures,
forex, bonds and mutual funds) and across all currencies. Recognizing that IB's customers are experienced investors, we expect our customers to manage their positions proactively and we provide tools
to facilitate our customers' position management. However, if a customer's equity falls below what is required to support that customer's margin, IB will automatically liquidate positions on a
real-time basis to bring the customer's account into margin compliance. We do this to protect IB, as well as the customer, from excessive losses. These systems further contribute to our low-cost
structure. The entire credit management process is completely automated.
As
a safeguard, all liquidations are displayed on custom built liquidation monitoring screens that are part of the toolset our technical staff uses to monitor performance of our systems
at all times the markets around the world are open. In the event our systems absorb erroneous market data from exchanges, which prompts liquidations, risk specialists on our technical staff have the
capability to halt liquidations that meet specific criteria. The liquidation halt function is highly restricted.
IB's
customer interface includes color coding on the account screen and pop-up warning messages to notify customers that they are approaching their margin limits. This feature allows
customers to take action, such as entering margin reducing trades, to avoid having IB liquidate their positions. These tools and real-time margining allow IB's customers to understand their trading
risk at any moment of the day and help IB maintain low commissions.
Market Making
We employ certain hedging and risk management techniques to protect us from a severe market dislocation. Our risk management policies
are developed and implemented by our Chairman and our steering committee, which is comprised of senior executives of our various companies. Our strategy is to calculate quotes a few seconds ahead of
the market and execute small trades at a tiny but favorable differential as a result. This strategy is made possible by our proprietary pricing model, which evaluates and monitors the risks inherent
in our portfolio, assimilates market data and reevaluates the outstanding quotes in our portfolio each second. Our model automatically rebalances our positions throughout each trading day to manage
risk exposures both on our options and futures positions and the underlying securities, and it will price the increased risk that a position would add to the overall portfolio into the bid and offer
prices we post. Under risk management policies implemented and monitored primarily through our computer systems, reports to management, including risk profiles, profit and loss analysis and trading
performance, are prepared on a real-time basis as well as daily and periodical bases. Although our market making is completely automated, the trading process and our risk are monitored by a team of
individuals who, in real-time, observe various risk parameters of our consolidated positions. Our assets and liabilities are marked-to-market daily for financial reporting purposes and re-valued
continuously throughout the trading day for risk management and asset/liability management purposes.
Over
the years, we have expanded our market presence and the number of financial instruments in which we make markets. This diversification acts as a passive form of portfolio risk
management.
We
trade primarily the options on stocks (and individual stocks) whose underlying equity market capitalization is greater than $500 million. Throughout the trading day we produce
online, real-time profit and loss, risk evaluation, activity and other management reports. Our software assembles from external sources a balance sheet and income statements for our accounting
department and to reconcile to the trading system results.
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The
adaptability of our portfolio risk management system and our trading methods have allowed us to expand the number of financial instruments traded and the number of markets on which
we trade.
Operational Controls
We have automated the full cycle of controls surrounding the market making and brokerage businesses. Key automated controls include the
following:
-
- Our technical operations section continuously monitors our network and the proper functioning of each of our nodes (exchanges,
internet service providers ("ISPs"), leased customer lines and our own data centers) around the world.
-
- Our real-time credit manager software provides pre- and post-execution controls by:
-
- testing every customer order to ensure that the customer's account holds enough equity to support the execution of the
order, rejecting the order if equity is insufficient or directing the order to an execution destination without delay if equity is sufficient; and
-
- continuously updating a customer account's equity and margin requirements and, if the account's equity falls below its
minimum margin requirements, automatically issuing liquidating orders in a smart sequence designed to minimize the impact on account equity.
-
- Our market making system continuously evaluates over one million securities and futures products in which we provide bid and offer
quotes and changes its bids and offers in such a way as to maintain an overall hedge and a low-risk profile. The speed of communicating with exchanges and market centers is maximized through
continuous software and network engineering innovation, thereby allowing the firm to achieve real-time controls over market exposure.
-
- Our clearing system captures trades in real-time and performs automated reconciliation of trades and positions, corporate action
processing, customer account transfer, options exercise, securities lending and inventory management, allowing the firm to effectively manage operational risk.
-
- Our accounting system operates with automated data feeds from clearing and banking systems, allowing the firm to produce financial
statements for all parts of our business every day by mid-day on the day following trade date.
-
- Software developed to interface with the accounting and market making systems performs daily profit and loss reconciliations, which
provide tight financial controls over market making functions.
Transaction Processing
Our transaction processing is automated over the full life cycle of a trade. Our market making software generates and disseminates to
exchanges and market centers continuous bid and offer quotes on over one million tradable, exchange-listed products. Our fully automated smart router system searches for the best possible combination
of prices available at the time a customer order is placed and immediately seeks to execute that order electronically or send it where the order has the highest possibility of execution at the best
price.
At
the moment a trade is executed, our systems capture and deliver this information back to the source, either the market making system or via the brokerage system to the customer, in
most cases within a fraction of a second. Simultaneously, the trade record is written into our clearing system,
where it flows through a chain of control accounts that allow us to reconcile trades, positions and money until the final settlement occurs. Our integrated software tracks other important activities,
such
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as
dividends, corporate actions, options exercises, securities lending, margining, risk management and funds receipt and disbursement.
IB SmartRoutingSM
IB SmartRoutingSM searches for the best destination price in view of the displayed prices, sizes and accumulated
statistical information about the behavior of market centers at the time an order is placed, and IB SmartRoutingSM immediately seeks to execute that order electronically. Unlike other
smart routers, IB SmartRoutingSM never relinquishes control of the order, and constantly searches for the best price. It continuously evaluates fast-changing market conditions and
dynamically re-routes all or parts of the order seeking to achieve optimal execution. IB SmartRoutingSM represents each leg of a spread order independently and enters each leg at the
best possible venue. IB SmartRouting AutorecoverySM re-routes a customer's U.S. options order in the case of an exchange malfunction, with IB undertaking the risk of double executions.
In addition, IB SmartRoutingSM checks each new order to see if it could be executed against any of its pending orders. As the system gains more users, this feature becomes more important
for customers in a world of multiple exchanges, trading venues and penny priced orders because it increases the possibility of best executions for our customers ahead of customers of other brokers. As
a result of this feature, our customers have a greater chance of executing limit orders and can do so sooner than those who use other routers.
Clearing and Margining
Our activities in the United States are entirely self-cleared. We are a full clearing member of The OCC (Options Clearing Corporation),
the Chicago Mercantile Exchange Clearing House ("CMECH"), The Depository Trust Clearing Corporation and ICE Clear U.S.
Due
to our large positions in broad based index products, we benefit from the cross-margin system maintained by OCC and CMECH. For example, if we hold a position in an OCC-cleared
product and have an offsetting position in a CMECH cleared product, the cross-margin computation takes both positions into account, thereby reducing the overall margin requirement. The reduced margin
benefit proves especially useful during times of market stress, such as on days with large price movements when intra-day margin calls may be reduced or eliminated by the cross-margin calculation.
In
addition, we are fully or partially self-cleared in Canada, Great Britain, Switzerland, France, Germany, Belgium, Austria, the Netherlands, Norway, Sweden, Denmark, Finland, Hong Kong
and India.
Customers
We established our electronic brokerage subsidiary, IB, in 1993 to enhance the use of our global network of trading interfaces,
exchange and clearinghouse memberships and regulatory registrations assembled over the prior 16 years to serve our market making business. We realized that electronic access to market centers
worldwide through our network could easily be utilized by the very same floor traders and trading desk professionals who, in the coming years, would be displaced by the conversion of exchanges from
open outcry to electronic systems.
We
currently service approximately 281,000 cleared customer accounts. Our customers reside in over 190 countries around the world.
The
target IB customer is one that requires the latest in trading technology, worldwide access and expects low overall transaction costs. IB's customers are mainly comprised of
"self-service" individuals, former floor traders, trading desk professionals, electronic retail brokers, financial advisors who are comfortable with technology, banks that require global access, and
hedge funds.
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Our
customers fall into three groups based on services provided: cleared customers, trade execution customers and wholesale customers. By offering portfolio margining, we have been able
to persuade more of our trade execution hedge fund customers to utilize our cleared business solution, which benefits the hedge funds in terms of cost savings. Many prime brokers once offered
increased leverage over Regulation T credit limitations and NYSE margin requirements through offshore entities and joint
back office arrangements. Following the market turmoil of late 2008 and the resulting tightening of credit, we observed competition in this area diminish. Through portfolio margining, IB is able to
offer similar leverage with lower margin requirements that reflect the reduced risk of a hedged portfolio.
-
- Cleared Customers: We provide trade execution and clearing services to our cleared customers who are generally attracted to our low
commissions, low financing rates, high interest paid and best price execution. From small market making groups and individual market makers, our cleared customer base has expanded over the years to
include institutional and individual traders and investors, financial advisors and introducing brokers.
-
- Trade Execution Customers: We offer trade execution for customers who choose to clear with another prime broker or a custodian bank;
these customers are able to take advantage of our low commissions for trade execution as well as our best price execution.
-
- Wholesale Customers: Our wholesale customers, which include some of the largest banks and retail electronic brokers, are generally
self-clearing. These customers count on us for our superior options and option/stock combination trade routing and execution and our ability to assist them in satisfying their regulatory requirements
to provide best execution to their customers.
Our
non-cleared customers include large online brokers and increasing numbers of the proprietary and customer trading units of U.S., Canadian and European commercial banks. These
customers are attracted by the IB SmartRouting SM technology as well as our direct access to stock, options, futures, forex and bond markets worldwide.
Our
customers receive worldwide electronic access connectivity in one of three ways: the Trader Workstation via desktop or mobile device, our proprietary API, and/or industry standard
FIX connectivity.
Employees and Culture
We take pride in our technology-focused company culture and embrace it as one of our fundamental strengths. We remain committed to
improving our technology, and we try to minimize corporate hierarchy to facilitate efficient communication among employees. We have assembled what we believe is a highly talented group of employees.
As we grow, we expect to continue to provide significant rewards for our employees who provide substantial value to us and the world's financial markets.
As
of December 31, 2014, we had 960 employees, all of whom were employed on a full-time basis. None of our employees are covered by collective bargaining agreements. We believe
that our relations with our employees are good.
Competition
Electronic Brokerage
The market for electronic brokerage services is rapidly evolving and highly competitive. IB believes that it fits neither within the
definition of a traditional broker nor that of a prime broker. IB's primary competitors include offerings targeted to professional traders by large retail online brokers (such as TD
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Ameritrade's
thinkorswim, E*TRADE Pro business, and The Charles Schwab Corporation's StreetSmart Edge and optionsXpress businesses) and the prime brokerage and electronic brokerage arms of major
investment banks and brokers (such as Goldman Sachs' Electronic Trading (GSET),
REDIPlus, and Morgan Stanley's Passport business). We also encounter competition to a lesser extent from full commission brokerage firms including Bank of America Merrill Lynch and Morgan Stanley
Smith Barney, as well as other financial institutions, most of which provide online brokerage services. The electronic brokerage businesses of many of our competitors are relatively insignificant in
the totality of their firms' business and many impose significant account equity minimums, which IB does not. IB provides access to a global range of products from a single IB Universal
AccountSM and professional level executions and pricing, which positions it in competition with niche direct-access providers and prime brokers. In addition to offering low commissions
and financing rates, IB provides sophisticated order types and analytical tools that give a competitive edge to its customers.
Market Making
Historically, competition has come from registered market making firms which range from sole proprietors with very limited resources to
large, integrated broker-dealers. Today, Timber Hill's major competitors continue to be large broker-dealers, such as Goldman Sachs, Morgan Stanley, UBS, Citigroup, Bank of America Merrill Lynch, and
niche players such as Citadel, Susquehanna, Virtu, Wolverine Trading, Group One Trading, Peak6 and Knight Capital Group. Some of our competitors in market making are larger than we are and have more
captive order flow, although this is less true with respect to our narrow focus on options, futures and ETFs listed on electronic exchanges.
The
competitive environment for market makers has evolved considerably in the past several years, most notably with the rise in high frequency trading firms ("HFTs"), which transact
significant trading volume on electronic exchanges by using complex algorithms and high speed execution software that analyzes market conditions. HFTs that are not registered market makers operate
with fewer regulatory restrictions and are able to move more quickly and trade more cheaply. This issue is currently an area of focus amongst regulators who are examining the practices of HFTs and
their impact on market structure.
To
compete successfully, we believe that we must have more sophisticated, versatile and robust software than our competitors. This is our primary focus, as contrasted with many of our
competitors. With respect to these competitors, Timber Hill maintains the advantage of having had much longer experience with the development and usage of its proprietary electronic brokerage and
market making systems. Market conditions that are difficult for other market participants often present Timber Hill with the opportunities inherent in diminished competition. Our advantage is our
expertise and decades of single-minded focus on developing our technology. This enables us to have a unique platform specializing strictly in electronic market making and brokerage.
Regulation
Our securities and derivatives businesses are extensively regulated by U.S. federal and state regulators, foreign regulatory agencies,
numerous exchanges and self-regulatory organizations ("SROs") of which our subsidiaries are members. In the current era of heightened regulation of financial institutions, we expect to incur
increasing compliance costs, along with the industry as a whole.
Overview
As registered U.S. broker-dealers, Interactive Brokers LLC ("IB LLC") and TH LLC are subject to the rules and
regulations of the Exchange Act, and as members of various exchanges, we are also subject to such exchanges' rules and requirements. Additionally, as registered futures commission merchants,
IB LLC and TH LLC are subject to the Commodity Exchange Act and rules promulgated
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by
the Commodity Futures Trading Commission ("CFTC") and the various commodity exchanges of which they are members. Finally, we are subject to the requirements of various self-regulatory organizations
such as the Financial Industry Regulatory Authority ("FINRA") and the National Futures Association ("NFA"). Our foreign affiliates are similarly regulated under the laws and institutional framework of
the countries in which they operate.
U.S.
broker-dealers and futures commission merchants are subject to laws, rules and regulations that cover all aspects of the securities and derivatives business,
including:
-
- sales methods;
-
- trade practices;
-
- use and safekeeping of customers' funds and securities;
-
- capital structure;
-
- record-keeping;
-
- financing of customers' purchases; and
-
- conduct of directors, officers and employees.
In
addition, the businesses that we may conduct are limited by our agreements with and our oversight by regulators. Participation in new business lines, including trading of new products
or participation on new exchanges or in new countries often requires governmental and/or exchange approvals, which may take significant time and resources. As a result, we may be prevented from
entering new businesses that may be profitable in a timely manner, or at all.
As
certain of our subsidiaries are members of FINRA, we are subject to certain regulations regarding changes in control of our ownership. FINRA Rule 1017 generally provides that
FINRA approval must be obtained in connection with any transaction resulting in a change in control of a member firm. The FINRA defines control as ownership of 25% or more of the firm's equity by a
single entity or person and would include a change in control of a parent company. As a result of these regulations, our future efforts to sell shares or raise additional capital may be delayed or
prohibited by FINRA.
Net Capital Rule
The SEC, FINRA, CFTC and various other regulatory agencies within the United States have stringent rules and regulations with respect
to the maintenance of specific levels of net capital by regulated entities. Generally, a broker-dealer's capital is net worth plus qualified subordinated debt less deductions for certain types of
assets. The Net Capital Rule requires that at least a minimum part of a broker-dealer's assets be maintained in a relatively liquid form.
If
these net capital rules are changed or expanded, or if there is an unusually large charge against our net capital, our operations that require the intensive use of capital would be
limited. A large operating loss or charge against our net capital could adversely affect our ability to expand or even maintain these current levels of business, which could have a material adverse
effect on our business and financial condition.
The
U.S. regulators impose rules that require notification when net capital falls below certain predefined criteria. These rules also dictate the ratio of debt-to-equity in the
regulatory capital composition of a broker-dealer, and constrain the ability of a broker-dealer to expand its business under certain circumstances. If a firm fails to maintain the required net
capital, it may be subject to suspension or revocation of registration by the applicable regulatory agency, and suspension or expulsion by these regulators could ultimately lead to the firm's
liquidation. Additionally, the Net
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Capital
Rule and certain FINRA rules impose requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to U.S. regulators
and approval from FINRA for certain capital withdrawals.
At
December 31, 2014, aggregate excess regulatory capital for all of the operating companies was $3.27 billion.
TH LLC
and IB LLC are subject to the Uniform Net Capital Rule (Rule 15c3-1) under the Exchange Act and the CFTC's minimum financial requirements
(Regulation 1.17) under the Commodities Exchange Act, and THE is subject to the Swiss Financial Market Supervisory Authority eligible equity requirement. Additionally, THSHK is subject to the
Hong Kong Securities and Futures Commission financial resource requirement, THA is subject to the Australian Stock Exchange liquid capital
requirement, Timber Hill (Lichtenstein) AG is subject to the Financial Market Authority Liechtenstein eligible capital requirements, THC and Interactive Brokers Canada Inc. ("IBC") are subject
to the Investment Industry Regulatory Organization of Canada risk adjusted capital requirement, Interactive Brokers (U.K.) Limited ("IBUK") is subject to the U.K. Financial Conduct Authority ("FCA")
financial resources requirement, IBI is subject to the National Stock Exchange of India net capital requirements and Interactive Brokers Securities Japan, Inc. ("IBSJ") is subject to the
Japanese Financial Supervisory Agency capital requirements. The following table summarizes capital, capital requirements and excess regulatory capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Capital/
Eligible Equity |
|
Requirement |
|
Excess |
|
|
|
(in millions)
|
|
IB LLC |
|
$ |
2,333.9 |
|
$ |
279.0 |
|
$ |
2,054.9 |
|
TH LLC |
|
|
374.2 |
|
|
63.6 |
|
|
310.6 |
|
THE |
|
|
661.7 |
|
|
205.3 |
|
|
456.4 |
|
Other regulated Operating Companies |
|
|
486.0 |
|
|
36.1 |
|
|
449.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,855.8 |
|
$ |
584.0 |
|
$ |
3,271.8 |
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At
December 31, 2014, all of the operating companies were in compliance with their respective regulatory capital requirements. For additional information regarding our net capital
requirements see Note 17 to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
Protection of Customer Assets
To conduct customer activities, IB LLC is obligated under rules mandated by its primary regulators, the SEC and the CFTC, to
segregate cash or qualified securities belonging to customers. In accordance with the Securities Exchange Act of 1934, IB LLC is required to maintain separate bank accounts for the exclusive
benefit of customers. In accordance with the Commodity Exchange Act, IB LLC is required to segregate all monies, securities and property received from commodities customers in specially
designated accounts. IBC, IBUK and IBSJ are subject to similar requirements within their respective jurisdictions.
To
further enhance the protection of our customers' assets, in 2011, IB LLC sought and received approval from FINRA to perform the customer reserve computation on a daily basis,
instead of once per week. IB LLC has been performing daily computations since December 2011, along with daily adjustments of the money set aside in safekeeping for our customers.
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Supervision and Compliance
Our Compliance Department supports and seeks to ensure proper operations of our market making and electronic brokerage businesses. The
philosophy of the Compliance Department, and our company as a whole, is to build automated systems to try to eliminate manual steps in the compliance process and then to augment these systems with
experienced staff members who apply their judgment where needed. We have built automated systems to handle wide-ranging compliance issues such as trade and audit trail reporting, financial operations
reporting, enforcement of short sale rules, enforcement of margin rules and pattern day trading restrictions, review of employee correspondence, archival of required records, execution quality and
order routing reports, approval and documentation of new customer accounts, and anti-money laundering and anti-fraud surveillance. In light of our automated operations and our automated compliance
systems, we have a smaller and more efficient Compliance Department than many traditional securities firms. Nonetheless, we have increased the staffing in our Compliance Department over the past
several years to meet the increased regulatory burdens faced by all industry participants.
Our
electronic brokerage and market making companies have Chief Compliance Officers who report to the Company's CEO, General Counsel and its Audit and Compliance Committee. These Chief
Compliance Officers, plus certain other senior staff members, are FINRA and NFA registered principals with supervisory responsibility over the various aspects of our businesses. Similar roles are
undertaken by staff in certain non-U.S. locations as well. Staff members in the Compliance Department and in other departments of the firm are also registered with FINRA, NFA or other regulatory
organizations.
Patriot Act and Increased Anti-Money Laundering ("AML") and "Know Your
Customer" Obligations
Registered broker-dealers traditionally have been subject to a variety of rules that require that they "know their customers" and
monitor their customers' transactions for potential suspicious activities. With the passage of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (the "Patriot Act"), broker-dealers are subject to even more stringent requirements. Likewise, the SEC, CFTC, foreign regulators, and the various exchanges and SROs, of which IB
companies are members, have passed numerous AML and customer due diligence rules. Significant criminal and civil penalties can be imposed for violations of the Patriot Act, and significant fines and
regulatory penalties for violations of other governmental and SRO AML rules.
As
required by the Patriot Act and other rules, we have established comprehensive anti-money laundering and customer identification procedures, designated AML compliance officers,
trained our employees and conducted independent audits of our programs. Our anti-money laundering screening is conducted using a mix of automated and manual reviews and has been structured to comply
with regulations in various jurisdictions. We collect required information through our new account opening process and screen accounts against databases for the purposes of identity verification and
for review of negative information and appearance on government lists, including the Office of Foreign Assets and Control, Specially Designated Nationals and Blocked Persons lists. Additionally, we
have developed methods for risk control and continue to add upon specialized processes, queries and automated reports designed to identify money laundering, fraud and other suspicious activities.
Dodd-Frank Reform Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act imposes strict reporting and disclosure requirements on the financial
services industry. Management is monitoring this and other accounting and regulatory rulemaking developments for their potential effect on the Company's financial statements and internal controls over
financial reporting.
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Business Continuity Planning
Federal regulators and industry self-regulatory organizations have passed a series of rules in the past several years requiring
regulated firms to maintain business continuity plans that describe what actions firms would take in the event of a disaster (such as a fire, natural disaster or terrorist incident) that might
significantly disrupt operations. IB has developed business continuity plans that describe steps that the firm and its employees would take in the event of various scenarios. The firm has built a
backup site for certain key operations at its Chicago facilities that would be utilized in the event of a significant outage at the firm's Greenwich headquarters. In addition, the firm has
strengthened the infrastructure at its Greenwich headquarters and has built redundancy of systems so that certain operations can be handled from multiple offices. The firm continually evaluates
opportunities to further its business continuity planning efforts.
Foreign Regulation
Our international subsidiaries are subject to extensive regulation in the various jurisdictions where they have operations. The most
significant of our international subsidiaries are: THE, registered to do business in Switzerland as a securities dealer; THSHK, registered to do business in Hong Kong as a securities dealer; THA,
registered to do business in Australia as a securities dealer and futures broker; IBUK, registered to do business in the U.K. as a broker; IBC and THC, registered to do business in Canada as an
investment dealer and securities dealer, respectively; IBI, registered to do business in India as a stock broker and IBSJ, registered in Japan as a financial instruments firm with the Kanto Regional
Finance Bureau and the Financial Supervisory Agency.
In
Hong Kong, the Securities and Futures Commission ("SFC") regulates our subsidiary, THSHK, as a securities dealer. The compliance requirements of the SFC include, among other things,
net capital requirements and stockholders' equity requirements. The SFC regulates the activities of the officers, directors, employees and other persons affiliated with THSHK and requires the
registration of such persons.
In
Canada, both THC and IBC are subject to the Investment Industry Regulatory Organization of Canada ("IIROC") risk adjusted capital requirement. In Switzerland, THE is subject to the
Swiss Financial Market Supervisory Authority eligible equity requirement. In Australia, THA is subject to the Australian Stock Exchange liquid capital requirement. In the United Kingdom, IBUK is
subject to the U.K Financial Conduct Authority financial resources requirement.
In
India, IBI is subject to the National Stock Exchange and Bombay Stock Exchange capital requirements. In Japan, IBSJ is subject to the Financial Supervisory Agency, the Osaka
Securities Exchange and the Tokyo Stock Exchange capital requirements.
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Executive Officers and Directors of Interactive Brokers Group, Inc.
The following table sets forth the names, ages and positions of our current directors and executive officers.
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Name
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Age |
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Position |
Thomas Peterffy |
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70 |
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Chairman of the Board of Directors and Chief Executive Officer |
Earl H. Nemser |
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67 |
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Vice Chairman and Director |
Milan Galik |
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48 |
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President and Director |
Paul J. Brody |
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54 |
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Chief Financial Officer, Treasurer, Secretary and Director |
Thomas A. Frank |
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59 |
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Executive Vice President and Chief Information Officer |
Lawrence E. Harris |
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58 |
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Director |
Hans R. Stoll |
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75 |
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Director |
Wayne Wagner |
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76 |
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Director |
Richard Gates |
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43 |
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Director |
Thomas Peterffy. Thomas Peterffy has been at the forefront of applying computer technology to automate trading and brokerage functions
since he
emigrated from Hungary to the United States in 1965. In 1977, after purchasing a seat on the American Stock Exchange and trading as an individual marker maker in equity options, Mr. Peterffy
was among the first to apply a computerized mathematical
model to continuously value equity option prices. By 1986, Mr. Peterffy developed and employed a fully integrated, automated market making system for stocks, options and futures. As this
pioneering system extended around the globe, online brokerage functions were added and, in 1993, Interactive Brokers was formed.
Earl H. Nemser. Mr. Nemser has been our Vice Chairman since 1988 and also serves as a director and/or officer for various
subsidiaries of
IBG LLC. Mr. Nemser has served as Special Counsel to the law firm Dechert LLP since January 2005. Prior to such time Mr. Nemser served as Partner at the law firms of
Swidler Berlin Shereff Friedman, LLP from 1995 to December 2004 and Cadwalader, Wickersham & Taft LLP prior to 1995. Mr. Nemser received a Bachelor of Arts degree in
economics from New York University in 1967 and a Juris Doctor, magna cum laude, from Boston University School of Law in 1970.
Milan Galik. Mr. Galik joined us in 1990 as a software developer and has served as President of the Company and IBG LLC since
October
2014. Mr. Galik served as Senior Vice President, Software Development of IBG LLC from October 2003 to October 2014. In addition, Mr. Galik has served as Vice President of Timber
Hill LLC since April 1998 and serves as a member of the board of directors of the Boston Options Exchange. Mr. Galik received a Master of Science degree in electrical engineering from
the Technical University of Budapest in 1990.
Paul J. Brody. Mr. Brody joined us in 1987 and has served as Chief Financial Officer since December 2003. Mr. Brody serves as
a
director and/or officer for various subsidiaries of IBG LLC. From 2005 to 2012 Mr. Brody served as a director, and for a portion of that time as member Vice Chairman, of The Options
Clearing Corporation, of which Timber Hill LLC and Interactive Brokers LLC are members. He also serves as a director of Quadriserv Inc., an electronic securities lending platform
provider. Mr. Brody received a Bachelor of Arts degree in economics from Cornell University in 1982.
Thomas A. Frank. Dr. Frank joined us in 1985 and has served since July 1999 as Executive Vice President and Chief Information
Officer of
Interactive Brokers LLC. In addition, Dr. Frank has served as Vice President of Timber Hill LLC since December 1990. Dr. Frank received a Ph.D. in physics from the
Massachusetts Institute of Technology in 1985.
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Lawrence E. Harris. Dr. Harris has been a director since July 2007. He is a professor of Finance and Business Economics at the
University of
Southern California, where he holds the Fred V. Keenan Chair in Finance at the Marshall School of Business. Dr. Harris also serves as trustee of the Clipper Fund, director of the Selected
Funds, and as the research coordinator of the Institute for Quantitative Research in Finance. Dr. Harris formerly served as Chief Economist of the U.S. Securities and Exchange Commission.
Dr. Harris earned his Ph.D. in Economics from the University of Chicago, and is a CFA charterholder. He is an expert in the economics of securities market microstructure and the uses of
transactions data in financial research. He has written extensively about trading rules, transaction costs, index markets, and market regulation. Dr. Harris is also the author of the widely
respected textbook "Trading and Exchanges: Market Microstructure for Practitioners."
Hans R. Stoll. Dr. Stoll has been a director since April 2008. He is The Anne Marie and Thomas B. Walker, Jr., Professor of
Finance, Emeritus
at the Owen Graduate School of Management, Vanderbilt University and founder of the Financial Markets Research Center. Dr. Stoll has published several books and more than 60 articles on
numerous securities and finance related subjects. He is known for developing the put call parity relation and for his work in market microstructure. Dr. Stoll was on the faculty of the Wharton
School from 1966 to 1980 at which time he joined the faculty at Vanderbilt. Dr. Stoll served as a member of the board of directors of the Options Clearing Corporation from 2005 to 2008. He has
been President of the American Finance Association. Dr. Stoll received his A.B. degree from Swarthmore College in 1961 and his M.B.A. and Ph.D. degrees from the Graduate School of Business of
the University of Chicago in 1963 and 1966, respectively.
Wayne Wagner. Mr. Wagner has been a director since April 2014. He is a consultant on issues related to investment management and
securities
trading. He co-founded Plexus Group, now part of ITG, Inc., in 1986. Plexus provided trading evaluation and advisory services to money managers, brokerage firms and pension plan sponsors. He
was also a founding partner of Wilshire Associates and served as the Chief Investment Officer of Wilshire Asset Management. He participated in the design of the operating, balancing and evaluation
algorithms for the world's first operational index fund at Wells Fargo Bank. He is recognized as instrumental in pioneering processes to reduce the costs of trading. Mr. Wagner has authored
several books on the topic of trading and investment management and is currently the Research Committee Chairman of the CFA-Institute Research Foundation.
Richard Gates. Mr. Gates co-founded TFS Capital in 1997. TFS is an independent advisory firm that has been dedicated to the
construction of
quantitative models that are designed to identify market inefficiencies. As a portfolio manager at this firm, he oversees several hedge funds and mutual funds that take both long and short positions
in equities and futures. At TFS, his focus is on trade execution, factor research and business development. Mr. Gates graduated from the University of Virginia in 1994 with a bachelor's degree
in Chemical Engineering.
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ITEM 1A. RISK FACTORS
We face a variety of risks that are substantial and inherent in our businesses, including market, liquidity, credit, operational, legal
and regulatory. In addition to the risks identified elsewhere in this Annual Report on Form 10-K, the following risk factors apply to our business results of operations and financial condition:
Risks Related to Our Company Structure
Control by Thomas Peterffy of a majority of the combined voting power of our common stock may give
rise to conflicts of interests and could discourage a change of control that other stockholders may favor, which could negatively affect our stock price, and adversely affect stockholders in other
ways.
Thomas Peterffy, our founder, Chairman and Chief Executive Officer, and his affiliates beneficially own approximately 88.0% of the
economic interests and all of the voting interests in Holdings, which owns all of our Class B common stock, representing approximately 85.5% of the combined voting power of all classes of our
voting stock. As a result, Mr. Peterffy has the ability to elect all of the members of our board of directors and thereby to control our management and affairs, including determinations with
respect to acquisitions, dispositions, material expansions or contractions
of our business, entry into new lines of business, borrowings, issuances of common stock or other securities, and the declaration and payment of dividends on our common stock. In addition,
Mr. Peterffy is able to determine the outcome of all matters requiring stockholder approval and will be able to cause or prevent a change of control of our company or a change in the
composition of our board of directors and could preclude any unsolicited acquisition of our company. The concentration of ownership could discourage potential takeover attempts that other stockholders
may favor and could deprive stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and this may adversely affect the market price of our common
stock.
Moreover,
because of Mr. Peterffy's substantial ownership, we are eligible to be and are, treated as a "controlled company" for purposes of the NASDAQ Marketplace Rules. As a
result, we are not required by NASDAQ to have a majority of independent directors or to maintain Compensation and Nominating and Corporate Governance Committees composed entirely of independent
directors to continue to list the shares of our common stock on The NASDAQ Global Select Market ("NASDAQ GS"). Our Compensation Committee is comprised of Messrs. Thomas Peterffy (Chairman of
the Compensation Committee) and Earl H. Nemser (our Vice Chairman). Mr. Peterffy's membership on the Compensation Committee may give rise to conflicts of interests in that Mr. Peterffy
is able to influence all matters relating to executive compensation, including his own compensation.
We are dependent on IBG LLC to distribute cash to us in amounts sufficient to pay our tax
liabilities and other expenses.
We are a holding company and our primary assets are our approximately 14.5% equity interest in IBG LLC and our controlling
interest and related rights as the sole managing member of IBG LLC and, as such, we operate and control all of the business and affairs of IBG LLC and are able to consolidate
IBG LLC's financial results into our financial statements. We have no independent means of generating revenues. IBG LLC is treated as a partnership for U.S. federal income tax purposes
and, as such, is not subject to U.S. federal income tax. Instead, its taxable income is allocated on a pro rata basis to Holdings and us. Accordingly, we incur income taxes on our proportionate share
of the net taxable income of IBG LLC, and also incur expenses related to our operations. We intend to cause IBG LLC to distribute cash to its members in amounts at least equal to that
necessary to cover their tax liabilities, if any, with respect to the earnings of IBG LLC. To the extent we need funds to pay such taxes, or for any other purpose, and IBG LLC is unable
to provide such funds, it could have a material adverse effect on our business, financial condition or results of operations.
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We are required to pay Holdings for the benefit relating to additional tax depreciation or
amortization deductions we claim as a result of the tax basis step-up our subsidiaries received in connection with our IPO and certain subsequent redemptions of Holdings membership interests.
In connection with our IPO, we purchased interests in IBG LLC from Holdings for cash. In August 2011, November 2013 and October
2014, in connection with redemptions of Holdings membership interests, we acquired additional interests in IBG LLC by issuing shares of Class A common stock in exchange for an equivalent
number of shares of member interests in IBG LLC (the "Redemptions"). In addition, IBG LLC membership interests held by Holdings may be sold in the future to us and financed by our
issuances of shares of our common stock. The initial purchase and the Redemptions did, and the subsequent purchases may, result in increases in the tax basis of the tangible and intangible assets of
IBG LLC and its subsidiaries that otherwise would not have been available. Such increase will be approximately equal to the amount by which our stock price at the time of the purchase exceeds
the income tax basis of the assets of IBG LLC underlying the IBG LLC interests acquired by us. These increases in tax basis will result in increased deductions in computing our taxable
income and resulting tax savings for us generally over the 15 year period which commenced with the initial purchase. We have agreed to pay 85% of these tax savings, if any, to Holdings as they
are realized as additional consideration for the IBG LLC interests that we acquire.
As
a result of the IPO and the redemptions by Holdings, the increase in the tax basis attributable to our interest in IBG LLC is $1.09 billion. The tax savings that we
would actually realize as a result of this increase in tax basis likely would be significantly less than this amount multiplied by our effective tax rate due to a number of factors, including the
allocation of a portion of the increase in tax basis to foreign or non-depreciable fixed assets, the impact of the increase in the tax basis on our ability to use foreign tax credits and the rules
relating to the amortization of intangible assets, for example. Based on current facts and assumptions, including that subsequent purchases of IBG LLC interests will occur in fully taxable
transactions, the potential tax basis increase resulting from the historical and future purchases of the IBG LLC interests held by Holdings could be as much as $6.76 billion. The tax
receivable agreement requires 85% of such tax savings, if any, to be paid to Holdings, with the balance to be retained by us. The actual increase in tax basis depends, among other factors, upon the
price of shares of our common stock at the time of the purchase and the extent to which such purchases are taxable and, as a result, could differ materially from this amount. Our ability to achieve
benefits from any such increase, and the amount of the payments to be made under the tax receivable agreement, depends upon a number of factors, as discussed above, including the timing and amount of
our future income.
The
tax basis of $6.76 billion assumes that (a) all remaining IBG LLC membership interests held by Holdings are purchased by the Company and (b) such
purchases in the future are made at prices that reflect the closing share price at December 31, 2014. In order to have a $6.76 billion tax basis, the offering price per share of
Class A common stock in such future public offering will need to exceed the then current cost basis per share of Class A common stock by approximately $16.39.
If
either immediately before or immediately after any purchase or the related issuance of our stock, the Holdings members own or are deemed to own, in the aggregate, more than 20% of our
outstanding
stock, then all or part of any increase in the tax basis of goodwill may not be amortizable and, thus, our ability to realize the annual tax savings that otherwise would have resulted if such tax
basis were amortizable may be significantly reduced. Although the Holdings members are prohibited under the Exchange Agreement from purchasing shares of Class A common stock, grants of our
stock to employees and directors who are also members or related to members of Holdings and the application of certain tax attribution rules, such as among family members and partners in a
partnership, could result in Holdings members being deemed for tax purposes to own shares of Class A common stock.
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If
the IRS successfully challenges the tax basis increase, under certain circumstances, we could be required to make payments to Holdings under the tax receivable agreement in excess of
our cash tax savings.
Future sales of our common stock in the public market could lower our stock price, and any
additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us.
The members of Holdings have the right to cause the redemption of their Holdings membership interests over time in connection with
offerings of shares of our common stock. We intend to sell additional shares of common stock in public offerings in the future, which may include offerings of our common stock to finance future
purchases of IBG LLC membership interests which, in turn, will finance corresponding redemptions of Holdings membership interests. These offerings and related transactions were anticipated to
occur on or about each of the first eight years following the IPO. Given the absence of any public offering subsequent to our IPO in 2007 through 2010 (and the relatively minor amounts associated with
the 2011, 2013 and 2014 redemptions) and depending on the timing of redemptions, this offering schedule will be extended into the future in accordance with the Exchange Agreement. The size and
occurrence of these offerings may be affected by market conditions. We may also issue additional shares of common stock or convertible debt securities to finance future acquisitions or business
combinations. We currently have approximately 58.5 million outstanding shares of common stock. Assuming no anti-dilution adjustments based on combinations or divisions of our common stock, the
offerings referred to above could result in the issuance by us of up to an additional approximately 346.1 million shares of common stock. It is possible, however, that such shares could be
issued in one or a few large transactions.
We
cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock may have on the market price of
our common stock. Sales of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may cause the market
price of our common stock to decline.
Certain provisions in our amended and restated certificate of incorporation may prevent efforts by
our stockholders to change our direction or management.
Provisions contained in our amended and restated certificate of incorporation could make it more difficult for a third party to acquire
us, even if doing so might be beneficial to our stockholders. For example, our amended and restated certificate of incorporation authorizes our board of directors to determine the rights, preferences,
privileges and restrictions of unissued series of preferred stock, without any vote or action by our stockholders. We could issue a series of preferred stock that could impede the completion of a
merger, tender offer or other takeover attempt. These provisions may discourage potential acquisition proposals and may delay, deter or prevent a change of control of us, including through
transactions, and, in particular, unsolicited transactions, that some or all of our stockholders might consider to be desirable. As a result, efforts by our stockholders to change our direction or
management may be unsuccessful.
Risks Related to Our Business
Our business may be harmed by global events beyond our control, including overall slowdowns in
securities trading.
Like other brokerage and financial services firms, our business and profitability are directly affected by elements that are beyond our
control, such as economic and political conditions, broad trends in business and finance, changes in volume of securities and futures transactions, changes in the markets in which such transactions
occur and changes in how such transactions are processed. A weakness in equity markets, such as a slowdown causing reduction in trading volume in U.S. or foreign
26
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securities
and derivatives, has historically resulted in reduced transaction revenues and would have a material adverse effect on our business, financial condition and results of operations.
Because our revenues and profitability depend on trading volume, they are prone to significant
fluctuations and are difficult to predict.
Our revenues are dependent on the level of trading activity on securities and derivatives exchanges in the United States and abroad. In
the past, our revenues and operating results have varied significantly from period to period due primarily to the willingness of competitors to trade more aggressively by decreasing their bid/offer
spreads and thereby assuming more risk in order to acquire market share, to movements and trends in the underlying markets, and to fluctuations in trading levels. As a result, period to period
comparisons of our revenues and operating results may not be meaningful, and future revenues and profitability may be subject to significant fluctuations or declines.
Our reliance on our computer software could cause us great financial harm in the event of any
disruption or corruption of our computer software. We may experience technology failures while developing our software.
We rely on our computer software to receive and properly process internal and external data. Any disruption for any reason in the
proper functioning or any corruption of our software or erroneous or corrupted data may cause us to make erroneous trades or suspend our services and could cause us great financial harm. To maintain
our competitive advantage, our software is under continuous development. As we identify and enhance our software, there is risk that software failures may occur and result in service interruptions and
have other unintended consequences.
Our business could be harmed by a systemic market event.
Some market participants could be overleveraged. In case of sudden, large price movements, such market participants may not be able to
meet their obligations to brokers who, in turn, may not be able to meet their obligations to their counterparties. As a result, the financial system
or a portion thereof could collapse, and the impact of such an event could be catastrophic to our business.
We may incur material trading losses from our market making activities.
A substantial portion of our revenues and operating profits is derived from our trading as principal in our role as a market maker and
specialist. We may incur trading losses relating to these activities since each primarily involves the purchase or sale of securities for our own account. In any period, we may incur trading losses in
a significant number of securities for a variety of reasons including:
-
- price changes in securities;
-
- lack of liquidity in securities in which we have positions; and
-
- the required performance of our market making and specialist obligations.
These
risks may limit or restrict our ability to either resell securities we purchased or to repurchase securities we sold. In addition, we may experience difficulty borrowing securities
to make delivery to purchasers to whom we sold short, or lenders from whom we have borrowed. From time to time, we have large position concentrations in securities of a single issuer or issuers
engaged in a specific industry or traded in a particular market. Such a concentration could result in higher trading losses than would occur if our positions and activities were less concentrated.
In
our role as a market maker, we attempt to derive a profit from the difference between the prices at which we buy and sell, or sell and buy, securities. However, competitive forces
often require us to match the quotes other market makers display and to hold varying amounts of securities in inventory. By having to maintain inventory positions, we are subjected to a high degree of
risk. We cannot assure you that we will be able to manage such risk successfully or that we will not experience
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significant
losses from such activities, which could have a material adverse effect on our business, financial condition and operating results.
Reduced spreads in securities pricing, levels of trading activity and trading through market makers
and/or specialists could harm our business.
Computer-generated buy/sell programs and other technological advances and regulatory changes in the marketplace may continue to tighten
spreads on securities transactions. Tighter spreads and increased competition could make the execution of trades and market making activities less profitable. In addition, new and enhanced alternative
trading systems such as ECNs have emerged as an alternative for individual and institutional investors, as well as broker-dealers, to avoid directing their trades through market makers, and could
result in reduced revenues derived from our market making business.
We may incur losses in our market making activities in the event of failures of our proprietary
pricing model.
The success of our market making business is substantially dependent on the accuracy of our proprietary pricing mathematical model,
which continuously evaluates and monitors the risks inherent in our portfolio, assimilates market data and reevaluates our outstanding quotes each second. Our model is designed to automatically
rebalance our positions throughout the trading day to manage risk exposures on our positions in options, futures and the underlying securities. In the event of a flaw in our pricing model and/or a
failure in the related software, our pricing model may lead to unexpected and/or unprofitable trades, which may result in material trading losses.
The valuation of the financial instruments we hold may result in large and occasionally anomalous
swings in the value of our positions and in our earnings in any period.
The market prices of our long and short positions are reflected on our books at closing prices which are typically the last trade price
before the official close of the primary exchange on which each such security trades. Given that we manage a globally integrated portfolio, we may have large and substantially offsetting positions in
securities that trade on different exchanges that close at different times of the trading day. As a result, there may be large and occasionally anomalous swings in the value of our positions daily
and, accordingly, in our earnings in any period. This is especially true on the last business day of each calendar quarter.
We are exposed to losses due to lack of perfect information.
As market makers, we provide liquidity by buying from sellers and selling to buyers. Quite often, we trade with others who have
different information than we do, and as a result, we may accumulate unfavorable positions preceding large price movements in companies. Should the frequency or magnitude of these events increase, our
losses will likely increase correspondingly.
Rules governing specialists and designated market makers may require us to make unprofitable trades
or prevent us from making profitable trades.
Specialists and designated market makers are granted certain rights and have certain obligations to "make a market" in a particular
security. They agree to specific obligations to maintain a fair and orderly market. In acting as a specialist or designated market maker, we are subjected to a high degree of risk by having to support
an orderly market. In this role, we may at times be required to make trades that adversely affect our profitability. In addition, we may at times be unable to trade for our own account in
circumstances in which it may be to our advantage to trade, and we may be obligated to act as a principal when buyers or sellers outnumber each other. In those instances, we may take a position
counter to the market, buying or selling securities to support an orderly market. Additionally, the rules of the markets which govern our activities as a specialist or designated market maker are
subject to change. If these rules are made more stringent, our trading revenues and profits as specialist or designated market maker could be adversely affected.
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We are subject to potential losses as a result of our clearing and execution activities.
As a clearing member firm providing financing services to certain of our brokerage customers, we are ultimately responsible for their
financial performance in connection with various stock, options and futures transactions. Our clearing operations require a commitment of our capital and, despite safeguards implemented by our
software, involve risks of losses due to the potential failure of our customers to perform their obligations under these transactions. If our customers default on their obligations, we remain
financially liable for such obligations, and although these obligations are collateralized, we are subject to market risk in the liquidation of customer collateral to satisfy those obligations. There
can be no assurance that our risk management procedures will be adequate. Any liability arising from clearing operations could have a material adverse effect on our business, financial condition
and/or operating results.
As
a clearing member firm of securities and commodities clearing houses in the United States and abroad, we are also exposed to clearing member credit risk. Securities and commodities
clearing houses require member firms to deposit cash and/or government securities to a clearing fund. If a clearing member defaults in its obligations to the clearing house in an amount larger than
its own margin and clearing fund deposits, the shortfall is absorbed pro rata from the deposits of the other clearing members. Many clearing houses of which we are members also have the authority to
assess their
members for additional funds if the clearing fund is depleted. A large clearing member default could result in a substantial cost to us if we are required to pay such assessments.
We may not pay dividends on our common stock at any time in the foreseeable future.
As a holding company for our interest in IBG LLC, we will be dependent upon the ability of IBG LLC to generate earnings
and cash flows and distribute them to us so that we may pay any dividends to our stockholders. To the extent (if any) that we have excess cash, any decision to declare and pay dividends in the future
will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial conditions, cash requirement, contractual restrictions and other
factors that our board of directors may deem relevant. In December 2010 and December 2012, special cash dividends were paid to holders of our common stock. Since the second quarter of 2011, the
Company has declared and paid a quarterly cash dividend of $0.10 per share. Although not required, we currently intend to pay quarterly dividends of $0.10 per share to our common stockholders for the
foreseeable future.
Regulatory and legal uncertainties could harm our business.
The securities and derivatives businesses are heavily regulated. Firms in financial service industries have been subject to an
increasingly regulated environment over recent years, and penalties and fines sought by regulatory authorities have increased accordingly. This regulatory and enforcement environment has created
uncertainty with respect to various types of transactions that historically had been entered into by financial services firms and that were generally believed to be permissible and appropriate. Our
broker-dealer subsidiaries are subject to regulations in the United States and abroad covering all aspects of their business. Regulatory bodies include, in the United States, the SEC, FINRA, the Board
of Governors of the Federal Reserve System, the Chicago Board Options Exchange, the Chicago Mercantile Exchange, the Commodity Futures Trading Commission, and the National Futures Association; in
Switzerland, the Swiss Financial Market Supervisory Authority; in the United Kingdom, the Financial Conduct Authority; in Hong Kong, the Securities and Futures Commission; in Australia, the Australian
Securities and Investment Commission; in India, the Securities and Exchange Board of India; in Canada, the Investment Industry Regulatory Organization of Canada and various Canadian securities
commissions; and in Japan, the Financial Supervisory Agency and the Japan Securities Dealers Association. Our mode of operation and profitability may be directly affected by additional legislation
changes in rules promulgated by various domestic and foreign government
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agencies
and self-regulatory organizations that oversee our businesses, and changes in the interpretation or enforcement of existing laws and rules, including the potential imposition of transaction
taxes. Noncompliance with applicable laws or regulations could result in sanctions being levied against us, including fines and censures, suspension or expulsion from a certain jurisdiction or market
or the revocation or limitation of licenses. Noncompliance with applicable laws or regulations could adversely affect our reputation, prospects, revenues and earnings. In addition, changes in current
laws or regulations or in governmental policies could adversely affect our operations, revenues and earnings.
Domestic
and foreign stock exchanges, other self-regulatory organizations and state and foreign securities commissions can censure, fine, issue cease- and-desist orders, suspend or expel
a broker-dealer or any of its officers or employees. Our ability to comply with all applicable laws and rules is largely dependent on our internal system to ensure compliance, as well as our ability
to attract and retain qualified compliance personnel. We could be subject to disciplinary or other actions in the future due to claimed noncompliance, which could have a material adverse effect on our
business, financial condition and results of operations. To continue to operate and to expand our services internationally, we may have to comply with the regulatory controls of each country in which
we conduct, or intend to conduct business, the requirements of which may not be clearly defined. The varying compliance requirements of these different regulatory jurisdictions, which are often
unclear, may limit our ability to continue existing international operations and further expand internationally.
Our future efforts to sell shares or raise additional capital may be delayed or prohibited by
regulations.
As certain of our subsidiaries are members of FINRA, we are subject to certain regulations regarding changes in control of our
ownership. FINRA Rule 1017 generally provides that FINRA approval must be obtained in connection with any transaction resulting in a change in control of a member firm. FINRA defines control as
ownership of 25% or more of the firm's equity by a single entity or person and would include a change in control of a parent company. Interactive Brokers (U.K.) Limited is subject to similar change in
control regulations promulgated by the FCA in the United Kingdom. As a result of these regulations, our future efforts to sell shares or raise additional capital may be delayed or prohibited. We may
be subject to similar restrictions in other jurisdictions in which we operate.
We depend on our proprietary technology, and our future results may be impacted if we cannot
maintain technological superiority in our industry.
Our success in the past has largely been attributable to our sophisticated proprietary technology that has taken many years to develop.
We have benefited from the fact that the type of proprietary technology equivalent to that which we employ has not been widely available to our competitors. If our technology becomes more widely
available to our current or future competitors for any reason, our operating results may be adversely affected. Additionally, adoption or development of similar or more advanced technologies by our
competitors may require that we devote substantial resources to the development of more advanced technology to remain competitive. The markets in which we compete are characterized by rapidly changing
technology, evolving industry standards and changing trading systems, practices and techniques. Although we have been at the forefront of many of these developments in the past, we may not be able to
keep up with these rapid changes in the future, develop new technology, realize a return on amounts invested in developing new technologies or remain competitive in the future.
The loss of our key employees would materially adversely affect our business.
Our key executives have substantial experience and have made significant contributions to our business, and our continued success is
dependent upon the retention of our key management executives, as well as the services provided by our staff of trading system, technology and programming
30
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specialists
and a number of other key managerial, marketing, planning, financial, technical and operations personnel. The loss of such key personnel could have a material adverse effect on our
business. Growth in our business is dependent, to a large degree, on our ability to retain and attract such employees.
We are exposed to risks associated with our international operations.
During 2014, approximately 27% of our net revenues were generated by our operating companies outside the United States. We are exposed
to risks and uncertainties inherent in doing business in international markets, particularly in the heavily regulated brokerage industry. Such risks and uncertainties include political, economic and
financial instability; unexpected changes in regulatory requirements, tariffs and other trade barriers; exchange rate fluctuations; applicable currency controls; and difficulties in staffing,
including reliance on newly hired local experts, and managing foreign operations. These risks could cause a material adverse effect on our business, financial condition or results of operations.
We do not have fully redundant systems. System failures could harm our business.
If our systems fail to perform, we could experience unanticipated disruptions in operations, slower response times or decreased
customer service and customer satisfaction. Our ability to facilitate transactions successfully and provide high quality customer service also depends on the efficient and uninterrupted operation of
our computer and communications hardware and software systems. Our service has experienced periodic system interruptions, which we believe will continue to occur from time to time. Our systems and
operations also are vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of
vandalism and similar events. While we currently maintain redundant servers to provide limited service during system disruptions, we do not have fully redundant systems, and our formal disaster
recovery plan does not include restoration of all services. For example, we have backup facilities at our disaster recovery site that enable us, in the case of complete failure of our main North
America data center, to recover and complete all pending transactions, provide customers with access to their accounts to deposit or withdraw money, transfer positions to other brokers and manage
their risk by continuing trading through the use of marketable orders. These backup services are currently limited to U.S. markets. We do not currently have separate backup facilities dedicated to our
non-U.S. operations. It is our intention to provide for and progressively deploy backup facilities for our global facilities over time. In addition, we do not carry business interruption insurance to
compensate for losses that could occur to the extent not required. Any system failure that causes an interruption in our service or decreases the responsiveness of our service could impair our
reputation, damage our brand name and materially adversely affect our business, financial condition and results of operations.
Failure of third-party systems on which we rely could adversely affect our business.
We rely on certain third-party computer systems or third-party service providers, including clearing systems, exchange systems,
Internet service, communications facilities and other facilities. Any interruption in these third-party services, or deterioration in their performance, could be disruptive to our business. If our
arrangement with any third party is terminated, we may not be able to find an alternative source of systems support on a timely basis or on commercially reasonable terms. This could have a material
adverse effect on our business, financial condition and results of operations.
We face competition in our market making activities.
In our market making activities, we compete with other firms based on our ability to provide liquidity at competitive prices and to
attract order flow. These firms include registered market makers as well as high frequency trading firms ("HFTs") that act as market makers. Both types of competitors
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range
from sole proprietors with very limited resources to a few highly sophisticated groups which have substantially greater financial and other resources, including research and development
personnel, than we do. These larger and better capitalized competitors may be better able to respond to changes in the market making industry, to compete for skilled professionals, to finance
acquisitions, to fund internal growth and to compete for market share generally. HFTs that are not registered market makers have certain advantages over registered market making firms that may allow
them to bypass regulatory restrictions and trade more quickly and cheaply than registered market makers at some exchanges. We may not be able to compete effectively against HFTs or market makers with
greater financial resources, and our failure to do so could materially and adversely affect our business, financial condition and results of operations. As in the past, we may in the future face
enhanced competition, resulting in narrowing bid/offer spreads in the marketplace that may adversely impact our financial performance. This is especially likely if HFTs continue to receive advantages
in capturing order flow or if others can acquire systems that enable them to predict markets or process trades more efficiently than we can.
Our direct market access clearing and non-clearing brokerage operations face intense competition.
With respect to our direct market access brokerage business, the market for electronic and interactive bidding, offering and trading
services in connection with equities, options and futures is relatively new, rapidly evolving and intensely competitive. We expect competition to continue and intensify in the future. Our current and
potential future competition principally comes from five categories of competitors:
-
- prime brokers who, in an effort to satisfy the demands of their customers for hands-on electronic trading facilities, universal access
to markets, smart routing, better trading tools, lower commissions and financing rates, have embarked upon building such facilities and product enhancements;
-
- direct market access and online options and futures firms;
-
- direct market access and online equity brokers;
-
- software development firms and vendors who create global trading networks and analytical tools and make them available to brokers; and
-
- traditional brokers.
In
addition, we compete with financial institutions, mutual fund sponsors and other organizations, many of which provide online, direct market access or other investing services. A
number of brokers provide
our technology and execution services to their customers, and these brokers will become our competitors if they develop their own technology. Some of our competitors in this area have greater name
recognition, longer operating histories and significantly greater financial, technical, marketing and other resources than we have and offer a wider range of services and financial products than we
do. Some of our competitors may also have an ability to charge lower commissions. We cannot assure you that we will be able to compete effectively or efficiently with current or future competitors.
These increasing levels of competition in the online trading industry could significantly harm this aspect of our business.
We are subject to risks relating to litigation and potential securities laws liability.
We are exposed to substantial risks of liability under federal and state securities laws, other federal and state laws and court
decisions, as well as rules and regulations promulgated by the SEC, the CFTC, the Federal Reserve, state securities regulators, the self-regulatory organizations and foreign regulatory agencies. We
are also subject to the risk of litigation and claims that may be without merit. We could incur significant legal expenses in defending ourselves against and resolving lawsuits or claims. An adverse
resolution of any future lawsuits or claims against us could result in a negative perception of
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our
company and cause the market price of our common stock to decline or otherwise have an adverse effect on our business, financial condition and/or operating results. See Part I,
Item 3, "Legal Proceedings and Regulatory Matters."
Any future acquisitions may result in significant transaction expenses, integration and
consolidation risks and risks associated with entering new markets, and we may be unable to profitably operate our consolidated company.
Although our growth strategy has not focused historically on acquisitions, we may in the future engage in evaluations of potential
acquisitions and new businesses. We may not have the financial resources necessary to consummate any acquisitions in the future or the ability to obtain the necessary funds on satisfactory terms. Any
future acquisitions may result in significant transaction expenses and risks associated with entering new markets in addition to integration and consolidation risks. Because acquisitions historically
have not been a core part of our growth strategy, we have no material experience in successfully utilizing acquisitions. We may not have sufficient
management, financial and other resources to integrate any such future acquisitions or to successfully operate new businesses and we may be unable to profitably operate our expanded company.
Internet-related issues may reduce or slow the growth in the use of our services in the future.
Critical issues concerning the commercial use of the Internet, such as ease of access, security, privacy, reliability, cost, and
quality of service, remain unresolved and may adversely impact the growth of Internet use. If Internet usage continues to increase rapidly, the Internet infrastructure may not be able to support the
demands placed on it by this growth, and its performance and reliability may decline. Although our larger institutional customers use leased data lines to communicate with us, our ability to increase
the speed with which we provide services to consumers and to increase the scope and quality of such services is limited by and dependent upon the speed and reliability of our customers' access to the
Internet, which is beyond our control. If periods of decreased performance, outages or delays on the Internet occur frequently or other critical issues concerning the Internet are not resolved,
overall Internet usage or usage of our web based products could increase more slowly or decline, which would cause our business, results of operations and financial condition to be materially and
adversely affected.
Our computer infrastructure may be vulnerable to security breaches. Any such problems could
jeopardize confidential information transmitted over the Internet, cause interruptions in our operations or cause us to have liability to third persons.
Our computer infrastructure is potentially vulnerable to physical or electronic computer break-ins, viruses and similar disruptive
problems and security breaches. Any such problems or security breaches could cause us to have liability to one or more third parties, including our customers, and disrupt our operations. A party able
to circumvent our security measures could misappropriate proprietary information or customer information, jeopardize the confidential nature of information transmitted over the Internet or cause
interruptions in our operations. Concerns over the security of Internet transactions and the privacy of users could also inhibit the growth of the Internet or the electronic brokerage industry in
general, particularly as a means of conducting commercial transactions. To the extent that our activities involve the storage and transmission of proprietary information such as personal financial
information, security breaches could expose us to a risk of financial loss, litigation and other liabilities. Our estimated annual losses from reimbursements to customers whose accounts have been
negatively affected by unauthorized access have historically been less than $500,000 annually, but instances of unauthorized access of customer accounts have been increasing recently on an
industry-wide basis. Our current insurance program may protect us against some, but not all, of such losses. Any of these events, particularly if they (individually or in the aggregate) result in a
loss of
33
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confidence
in our company or electronic brokerage firms in general, could have a material adverse effect on our business, results of operations and financial condition.
We may not be able to protect our intellectual property rights or may be prevented from using
intellectual property necessary for our business.
We rely primarily on trade secret, contract, copyright, patent and trademark laws to protect our proprietary technology. It is possible
that third parties may copy or otherwise obtain and use our proprietary technology without authorization or otherwise infringe on our rights. We may also face claims of infringement that could
interfere with our ability to use technology that is material to our business operations.
In
the future, we may have to rely on litigation to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of
others or defend against claims of infringement or invalidity. Any such litigation, whether successful or unsuccessful, could result in substantial costs and the diversion of resources and the
attention of management, any of which could negatively affect our business.
Our future success will depend on our response to the demand for new services, products and
technologies.
The demand for market making services, particularly services that rely on electronic communications gateways, is characterized
by:
-
- rapid technological change;
-
- changing customer demands;
-
- the need to enhance existing services and products or introduce new services and products; and
-
- evolving industry standards.
New
services, products and technologies may render our existing services, products and technologies less competitive. Our future success will depend, in part, on our ability to respond
to the demand for new services, products and technologies on a timely and cost-effective basis and to adapt to technological advancements and changing standards to address the increasingly
sophisticated requirements and varied needs of our customers and prospective customers. We cannot assure you that we will be successful in developing, introducing or marketing new services, products
and technologies. In addition, we may experience difficulties that could delay or prevent the successful development, introduction or marketing of these services and products, and our new service and
product enhancements may not achieve market acceptance. Any failure on our part to anticipate or respond adequately to technological advancements, customer requirements or changing industry standards,
or any significant delays in the development, introduction or availability of new services, products or enhancements could have a material adverse effect on our business, financial condition and
operating results.
Market making in forex-based products entails significant risk, and unforeseen events in such
business could have an adverse effect on our business, financial condition and results of operation.
Our activities in market making for forex-based products include the trading of cash in foreign currencies with banks and
exchange-listed futures, options on futures, options on cash deposits and currency-based ETFs. All of the risks that pertain to our market making activities in equity-based products also apply to our
forex-based market making. In addition, we have comparatively less experience in the forex markets and even though we have expanded this activity slowly, any kind of unexpected event can occur that
can result in great financial loss.
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We are subject to counterparty risk whereby defaults by parties with whom we do business can have an
adverse effect on our business, financial condition and/or operating results.
In our electronic brokerage business, our customer margin credit exposure is to a great extent mitigated by our policy of automatically
evaluating each account throughout the trading day and closing out positions automatically for accounts that are found to be under-margined. While this methodology is effective in most situations, it
may not be effective in situations in which no liquid market exists for the relevant securities or commodities or in which, for any reason, automatic liquidation for certain accounts has been
disabled. If no liquid market exists or automatic liquidation has been disabled, we are subject to risks inherent in extending credit, especially during periods of rapidly declining markets. Any loss
or expense incurred due to defaults by our customers in failing to repay margin loans or to maintain adequate collateral for these loans would cause harm to our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
Our headquarters are located in Greenwich, Connecticut. We also lease facilities in 14 other locations throughout parts of the world
where we conduct our operations as set forth below. Unless otherwise indicated, all properties are used by both our market making and electronic brokerage segments. We believe our present facilities,
together with our current options to extend lease terms, are adequate for our current needs.
The
following table sets forth certain information with respect to our leased facilities:
|
|
|
|
|
|
|
|
|
Location
|
|
Space (sq. feet) |
|
Expiration |
|
Principal Usage |
Greenwich, CT |
|
|
81,266 |
|
|
2019 |
|
Headquarters and data center |
Greenwich, CT |
|
|
37,404 |
|
|
2019 |
|
Office space |
Jersey City, NJ |
|
|
5,869 |
|
|
2018 |
|
Office space |
Chicago, IL |
|
|
61,492 |
|
|
2017 |
|
Office space and data center |
Washington, D.C. |
|
|
1,035 |
|
|
2015 |
|
Office space |
Montreal, Canada |
|
|
4,566 |
|
|
2019 |
|
Office space |
London, United Kingdom |
|
|
2,283 |
|
|
2015 |
|
Office space |
Zug, Switzerland |
|
|
23,672 |
|
|
2017 |
|
Office space and data center |
Vaduz, Liechtenstein |
|
|
2,370 |
|
|
2017 |
|
Office space |
Sydney, Australia |
|
|
2,649 |
|
|
2016 |
|
Office space |
Hong Kong |
|
|
9,336 |
|
|
2018 |
|
Office space and data center |
Budapest, Hungary |
|
|
4,297 |
|
|
2018 |
|
Office space |
St. Petersburg, Russia |
|
|
2,742 |
|
|
2015 |
|
Office space |
Tallinn, Estonia |
|
|
4,844 |
|
|
2016 |
|
Office space |
Mumbai, India |
|
|
5,700 |
|
|
2017 |
|
Office space |
Tokyo, Japan |
|
|
2,161 |
|
|
2016 |
|
Office space |
Shanghai, China |
|
|
3,635 |
|
|
2018 |
|
Office space |
ITEM 3. LEGAL PROCEEDINGS AND REGULATORY MATTERS
The securities and commodities industry is highly regulated and many aspects of our business involve substantial risk of liability. In
recent years, there has been an increasing incidence of litigation involving the brokerage industry, including class action suits that generally seek substantial damages, including in some cases
punitive damages. Compliance and trading problems that are reported to federal, state and provincial regulators, exchanges or other self-regulatory organizations by dissatisfied customers are
investigated by such regulatory bodies, and, if pursued by such regulatory body or such customers, may rise to the level of arbitration or disciplinary action. We are also subject to periodic
regulatory audits and inspections.
Like
other brokerage firms, we have been named as a defendant in lawsuits and from time to time we have been threatened with, or named as a defendant in, arbitrations and administrative
proceedings. The following contains information regarding potentially material pending litigation and pending regulatory inquiries. We may in the future become involved in additional litigation or
regulatory proceedings in the ordinary course of our business, including litigation or regulatory proceedings that could be material to our business.
Trading Technologies Matter
On February 3, 2010, Trading Technologies International, Inc. ("Trading Technologies") filed a complaint in the United
States District Court for the Northern District of Illinois, Eastern Division, against Interactive Brokers Group, Inc., IBG LLC, Holdings, and Interactive Brokers LLC. Thereafter,
Trading Technologies dismissed Interactive Brokers Group, Inc. and Holdings from the case, leaving
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only
IBG LLC and Interactive Brokers LLC as defendants ("Defendants"). The operative complaint, as amended, alleges that the Defendants have infringed and continue to infringe twelve
U.S. patents held by Trading Technologies. Trading Technologies is seeking, among other things, unspecified damages and injunctive relief ("the Litigation").
The
Defendants filed an answer to Trading Technologies' amended complaint, as well as related counterclaims. The defendants deny Trading Technologies' claims, assert that the asserted
patents are not infringed and are invalid, and assert several other defenses as well.
Trading
Technologies also filed patent infringement lawsuits against approximately a dozen other companies in the same court, many of which are still pending. The Litigation was
consolidated with the other lawsuits filed by Trading Technologies.
On
June 2, 2014, the Defendants filed a motion to stay the Litigation pursuant to Section 18(b) of the America Invents Act in light of petitions for Covered Business Method
("CBM") Review on five asserted patents filed with the United States Patent and Trademark Office ("USPTO") by other defendants in the consolidated cases. Some of the other defendants have similarly
requested a stay in light of such petitions. On December 2, 2014, the USPTO issued decisions instituting CBM Review on four of the asserted patents for which CBM petitions were filed, declining
to institute CBM Review on one of the asserted patents. The District Court has not yet ruled on the motions to stay.
The
case is in the early stages and discovery has yet to begin. While it is too early to predict the outcome of the matter, we believe we have meritorious defenses to the allegations
made in the complaint and intend to defend ourselves vigorously against them. However, litigation is inherently uncertain and there can be no guarantee that the Company will prevail or that the
litigation can be settled on favorable terms.
Pending Regulatory Inquiries
IB's businesses are heavily regulated by state, federal and foreign regulatory agencies as well as numerous exchanges and
self-regulatory organizations ("SRO"). IB's various companies are regulated under state securities laws, U.S. and foreign securities, commodities and financial services laws and under the rules of
more than 25 exchanges and SROs. In the current era of dramatically heightened regulatory scrutiny of financial institutions, IB has incurred sharply
increased compliance costs, along with the industry as a whole. Increased regulation also creates increased barriers to entry, however, and IB has built human and automated infrastructure to handle
increased regulatory scrutiny, which provides IB an advantage over potential newcomers to the business.
IB
receives hundreds of regulatory inquiries each year in addition to being subject to frequent regulatory examinations. The great majority of these inquiries do not lead to fines or any
further action against IB. Most often, regulators do not inform IB as to when and if an inquiry has been concluded. IB is currently the subject of regulatory inquiries regarding topics such as order
audit trail reporting, trade reporting, short sales, margin lending, anti-money laundering, technology development practices, business continuity planning and other topics of recent regulatory
interest. IB is unaware of any specific regulatory matter that, itself, or together with similar regulatory matters, would have a material impact on IB's financial condition. Nonetheless, in the
current climate, we expect to pay significant regulatory fines on various topics on an ongoing basis, as other regulated financial services businesses do. The amount of any fines, and when and if they
will be incurred, is impossible to predict given the nature of the regulatory process.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY; RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock Information
The following table shows the high and low sale prices for the periods indicated for the Company's common stock, as reported by NASDAQ.
|
|
|
|
|
|
|
|
|
|
Sales Price |
|
|
|
High |
|
Low |
|
|
|
(in dollars)
|
|
2013 |
|
|
|
|
|
|
|
First Quarter |
|
$ |
15.14 |
|
$ |
13.61 |
|
Second Quarter |
|
$ |
16.60 |
|
$ |
14.07 |
|
Third Quarter |
|
$ |
18.89 |
|
$ |
16.16 |
|
Fourth Quarter |
|
$ |
24.98 |
|
$ |
18.91 |
|
2014 |
|
|
|
|
|
|
|
First Quarter |
|
$ |
20.73 |
|
$ |
21.67 |
|
Second Quarter |
|
$ |
24.33 |
|
$ |
21.15 |
|
Third Quarter |
|
$ |
26.21 |
|
$ |
22.12 |
|
Fourth Quarter |
|
$ |
29.57 |
|
$ |
23.59 |
|
2015 |
|
|
|
|
|
|
|
Year-to-date February 24, 2015 |
|
$ |
32.63 |
|
$ |
28.09 |
|
The
closing price of our common stock on February 24, 2015, as reported by NASDAQ, was $32.13 per share.
Holders
On February 20, 2015, there were four holders of record, which does not reflect those shares held beneficially or those shares
held in "street" name. Accordingly, the number of beneficial owners of our common stock exceeds this number.
Dividends and Other Restrictions
In December 2010, the Company effected a series of dividend payments, including a dividend of $1.79 per share, which was paid to the
Company's common shareholders. In December 2012, the Company paid a special dividend of $1.00 per share to the Company's common shareholders. During the second quarter of 2011, the Company declared
and paid a cash dividend of
$0.10 per share and has continued this quarterly dividend policy through the current fiscal year end and into the first quarter of 2015. We currently intend to pay quarterly dividends of $0.10 per
share to our common stockholders for the foreseeable future.
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Stockholder Return Performance Graph
The following graph compares cumulative total stockholder return on our common stock, the S&P 500 Index and the NASDAQ
Financial-100 Index from December 31, 2009 to December 31, 2014. The comparison assumes $100 was invested on December 31, 2009 in our common stock and each of the foregoing
indices and assumes reinvestment of dividends before consideration of income taxes.
- (1)
- The
NASDAQ Financial-100 Index includes 100 of the largest domestic and international financial securities listed on The NASDAQ Stock Market based on market
capitalization. They include companies classified according to the Industry Classification Benchmark as Financials, which are included within the NASDAQ Bank, NASDAQ Insurance, and NASDAQ Other
Finance Indexes.
- (2)
- The
S&P 500 Index includes 500 large cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of
large publicly held companies that trade on either of the two largest American stock markets, the New York Stock Exchange and NASDAQ.
The
stock performance depicted in the graph above is not to be relied upon as indicative of future performance. The stock performance graph shall not be deemed to be incorporated by
reference into any of our filings under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate the same by reference, nor shall it be deemed to be "soliciting
material" or to be "filed" with the SEC or subject to Regulations 14A or 14C or to the liabilities of Section 18 of the Exchange Act.
Use of Proceeds from Member Redemption
Purchases of IBG LLC membership interests, held by Holdings, by the Company are governed by the Exchange Agreement, a copy of
which was filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 and filed with the SEC on November 9, 2009. The Exchange Agreement, as
amended June 6, 2012, provides that the Company may facilitate the redemption by Holdings of interests held by its members through the issuance of shares of common stock through a public
offering in exchange for the interests in IBG LLC being redeemed by Holdings. The June 6, 2012 amendment (the "Amendment"), which was filed as an exhibit to our Form 8-K filed
with the SEC on June 6, 2012, eliminated from the Exchange Agreement an alternative funding method, which provided that upon approval by the board of directors and by agreement of the Company,
IBG LLC and Holdings, redemptions could be made in cash.
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Table of Contents
At
the time of the Company's IPO in 2007, three hundred sixty (360) million shares of authorized common stock were reserved for future sales and redemptions.
On
an annual basis, each holder of a membership interest may request that the liquefiable portion of that holder's interest be redeemed by Holdings. We expect Holdings to use the net
proceeds it receives from such sales to redeem an identical number of Holdings membership interests from the requesting holders.
With
the consent of Holdings and the Company (on its own behalf and acting as the sole managing member of IBG LLC), IBG LLC agreed in October 2014 to redeem certain
membership interests from Holdings through the sale of common stock and the distribution of the proceeds of such sale to the beneficial owners of such membership interests.
On
October 24, 2014, the Company issued 1,358,478 shares of Class A common stock (with a fair value of $35.2 million) to Holdings, for sale for the benefit of,
certain of its members in exchange for membership interests in IBG LLC equal in number to such number of shares of common stock issued by the Company. It is intended that the acquired shares
will be sold for the benefit of certain of the members of Holdings who have elected to redeem a portion of their Holdings membership interests. The shares to be sold are sold in open market
transactions pursuant to a Rule 10b5-1 trading plan (the "Plan").
Certain
officers and directors are among the members of Holdings who have elected to redeem a portion of their Holdings membership interests and therefore have an interest in the
proceeds of sale of 225,095 shares of the Class A common stock to be sold pursuant to the Plan. In addition, certain current and former employees of the Company and its subsidiaries also
elected the redemption of a portion of their membership interests in Holdings and therefore have an interest in the balance of the shares to be sold under the Plan and/or distributed by Holdings.
Neither Mr. Thomas Peterffy nor his affiliates have elected to redeem any of their Holdings membership interests and therefore have no interest in the proceeds of sale or distribution of the
shares of Class A common stock acquired by Holdings on November October 24, 2014.
As
a consequence of this transaction, IBG, Inc.'s interest in IBG LLC increased to approximately 14.5%, with Holdings owning the remaining 85.5%. The redemptions also
resulted in an increase in the Holdings interest held by Thomas Peterffy and his affiliates from approximately 87.6% to approximately 88.0%. The redemptions were completed during October, 2014.
40
Table of Contents
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information about shares of common stock available for future awards under all of the Company's equity
compensation plans as of December 31, 2014. The Company has not made grants of common stock outside of its equity compensation plans:
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Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights |
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Weighted-average exercise
price of outstanding options
warrants and rights |
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Number of securities
remaining available for
future issuance under
equity compensation plans(1) |
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Equity compensation plans approved by security holders |
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N/A |
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|
N/A |
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|
10,286,472 |
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Equity compensation plans not approved by security holders |
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N/A |
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N/A |
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Total |
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10,286,472 |
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- (1)
- Amount
represents shares available for future issuance of grants under the Company's 2007 Stock Incentive Plan ("SIP"). The amount excludes shares purchased
from employees to satisfy their tax withholding obligations for vested shares, which are held as treasury stock. On April 24, 2014, the Company's stockholders approved an additional 10,000,000
shares to be distributed under the SIP. This increased the total number of shares available to be distributed under this plan to 30,000,000 shares, from 20,000,000 shares. There are no shares
available for future issuance of grants under the 2007 ROI Unit Stock Plan; all shares under this plan have been granted.
41
Table of Contents
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected historical consolidated financial and other data of IBG, Inc. They are presented for the
years ended, and as of, December 31, 2010, 2011, 2012, 2013 and 2014.
The
following selected historical consolidated financial and other data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
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Year Ended December 31, |
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2014 |
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2013 |
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2012 |
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2011 |
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2010 |
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(in millions except share and per share data)
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Consolidated Statement of Comprehensive Income Data |
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Revenues |
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Trading gains(1) |
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$ |
261.2 |
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$ |
331.2 |
|
$ |
466.0 |
|
$ |
633.7 |
|
$ |
554.6 |
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Commissions and execution fees |
|
|
548.8 |
|
|
502.1 |
|
|
412.6 |
|
|
456.2 |
|
|
386.8 |
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Interest income(1) |
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|
416.2 |
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|
303.4 |
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|
270.3 |
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|
280.1 |
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|
172.5 |
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Other (loss) income(1) |
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|
(110.7 |
) |
|
(8.8 |
) |
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43.6 |
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74.6 |
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(125.6 |
) |
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Total revenues |
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1,115.5 |
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|
1,127.9 |
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|
1,192.5 |
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1,444.6 |
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|
988.3 |
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Interest expense |
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72.2 |
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51.7 |
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62.0 |
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86.3 |
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66.2 |
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Total net revenues |
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1,043.3 |
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1,076.2 |
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1,130.5 |
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1,358.3 |
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922.1 |
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Non-interest expenses |
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Execution and clearing |
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211.5 |
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242.5 |
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251.0 |
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281.3 |
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272.6 |
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Employee compensation and benefits |
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204.8 |
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205.3 |
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244.5 |
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216.3 |
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203.6 |
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Occupancy, depreciation and amortization |
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39.4 |
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38.9 |
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38.8 |
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37.1 |
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37.3 |
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Communications |
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24.2 |
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23.1 |
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23.3 |
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23.6 |
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23.5 |
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General and administrative(2) |
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57.3 |
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115.1 |
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45.9 |
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58.9 |
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47.7 |
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Total non-interest expenses |
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537.2 |
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624.9 |
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603.5 |
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617.2 |
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584.7 |
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Income before income taxes |
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506.1 |
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451.3 |
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527.0 |
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741.1 |
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337.4 |
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Income tax expense |
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47.3 |
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33.7 |
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30.0 |
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53.9 |
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60.3 |
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Net income |
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458.8 |
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|
417.6 |
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497.0 |
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687.2 |
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277.1 |
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Less net income attributable to noncontrolling interests |
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414.3 |
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380.6 |
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456.3 |
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625.3 |
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286.7 |
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Net income attributible to common stockholders(3) |
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$ |
44.5 |
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$ |
37.0 |
|
$ |
40.7 |
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$ |
61.9 |
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$ |
(9.6 |
) |
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Earnings per share(3) |
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Basic |
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$ |
0.79 |
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$ |
0.74 |
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$ |
0.89 |
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$ |
1.39 |
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$ |
(0.23 |
) |
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Diluted |
|
$ |
0.77 |
|
$ |
0.73 |
|
$ |
0.89 |
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$ |
1.37 |
|
$ |
(0.23 |
) |
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Comprehensive income attributable to common stockholders |
|
$ |
41.8 |
|
$ |
34.3 |
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$ |
52.0 |
|
$ |
59.2 |
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$ |
0.7 |
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Comprehensive income attributable to noncontrolling interests |
|
$ |
322.3 |
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$ |
355.9 |
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$ |
473.3 |
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$ |
597.5 |
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$ |
418.9 |
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Comprehensive earnings per share |
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Basic |
|
$ |
0.52 |
|
$ |
0.39 |
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$ |
1.13 |
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$ |
1.33 |
|
$ |
0.01 |
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Diluted |
|
$ |
0.51 |
|
$ |
0.38 |
|
$ |
1.13 |
|
$ |
1.31 |
|
$ |
0.01 |
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Weighted average common shares outstanding |
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Basic |
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56,492,381 |
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49,742,428 |
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46,814,676 |
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43,924,554 |
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41,870,926 |
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Diluted |
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57,709,668 |
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50,924,736 |
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47,070,522 |
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44,364,902 |
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42,498,705 |
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- (1)
- Certain
reclassifications have been made to previously reported amounts to conform with the current presentation of currency translation gains and losses
related to our currency diversification strategy. See "Management's Discussion and Analysis of Financial Condition and Results of OperationsPresentation of Foreign Currency Effects" in
Part II Item 7 of this Annual Report on Form 10-K.
42
Table of Contents
- (2)
- In
2013, general and administrative expenses include an unusual loss of $64 million. See "Management's Discussion and Analysis of Financial Condition
and Results of OperationsFinancial Overview" in Part II Item 7 of this Annual Report on Form 10-K.
- (3)
- In
2011, earnings per share were impacted by a tax benefit that the Company recognized during preparation of its 2010 income tax returns. In connection with
the special dividend paid by our Swiss operating company in December 2010, we were able to capture additional foreign tax credits, which resulted in an estimated $0.12 increase in diluted earnings per
share.
In
December 2010, we effected a series of dividend payments, culminating in a cash dividend of $1.79 per share, which was paid to holders of IBKR common stock. Funding for this dividend originated
with our Swiss company and was made from earnings that were not previously taxed in the U.S. As a result, this triggered a U.S. federal income tax liability for the Company, which was reported as
income tax expense in the consolidated statement of comprehensive income. This income tax liability was funded by reserving a portion of the dividend that the Company received. The remaining after-tax
amount was paid to the Company's common stockholders. The result was cash-flow neutral for the public company.
During
2010, the Company also paid a dividend equivalent to employees holding unvested shares in our Stock Incentive Plan which was recorded as compensation expense.
In
summary, the 2010 transactions reduced diluted EPS by approximately $0.71 for the year ended December 31, 2010.
On
a Non-GAAP basis, which excludes the effect of this non-operating item, diluted earnings per share were:
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Year ended
December 31,
2010 |
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(in dollars)
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Diluted earnings per share as reported |
|
$ |
(0.23 |
) |
Effect of special dividend on earnings per share |
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0.71 |
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Adjusted diluted earnings per share |
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$ |
0.48 |
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This
Non-GAAP measure is discussed in further detail in "Non-GAAP Financial Measures" and for a full GAAP to Non-GAAP reconciliation see "GAAP to Non-GAAP Reconciliation and Footnotes" in
"Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 76 in this Annual Report on Form 10-K.
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December 31, |
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2014 |
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2013 |
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2012 |
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2011 |
|
2010 |
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(in millions)
|
|
Cash, cash equivalents and short-term investments(1) |
|
$ |
17,059.1 |
|
$ |
15,591.3 |
|
$ |
14,525.9 |
|
$ |
12,140.8 |
|
$ |
9,578.6 |
|
Total assets(2)(3) |
|
$ |
43,385.0 |
|
$ |
37,870.7 |
|
$ |
33,199.6 |
|
$ |
30,404.4 |
|
$ |
28,500.0 |
|
Total liabilities(3) |
|
$ |
38,200.3 |
|
$ |
32,778.5 |
|
$ |
28,386.5 |
|
$ |
25,592.4 |
|
$ |
24,207.0 |
|
Redeemable noncontrolling interests(4) |
|
$ |
0.0 |
|
$ |
0.0 |
|
$ |
0.0 |
|
$ |
5,269.6 |
|
$ |
6,320.8 |
|
Stockholders' equity (deficit)(4)(5) |
|
$ |
4,418.3 |
|
$ |
4,384.9 |
|
$ |
598.5 |
|
$ |
(459.5 |
) |
$ |
(2,029.2 |
) |
Noncontrolling interests |
|
$ |
766.3 |
|
$ |
707.3 |
|
$ |
4,214.6 |
|
$ |
1.8 |
|
$ |
1.5 |
|
- (1)
- Cash,
cash equivalents and short-term investments represent cash and cash equivalents, cash and securities segregated under federal and other regulations,
short-term investments and securities purchased under agreements to resell.
- (2)
- At
December 31, 2014, approximately $42.95 billion, or 99.0%, of total assets were considered to be liquid and consisted primarily of cash,
marketable securities and collateralized receivables.
- (3)
- As
a result of our acquisition from Holdings of IBG LLC membership interests, we received not only an interest in IBG LLC but also, for
federal income tax purposes, a step-up to the federal income tax basis of the assets of IBG LLC underlying such additional interest. This increased tax basis is expected to result in tax
benefits as a result of increased amortization deductions. We will retain 15% of the tax benefits actually realized. As set forth in the tax receivable agreement we entered into with Holdings, we will
pay the remaining 85% of the realized tax benefits relating to any applicable tax year to Holdings. The deferred tax asset was $278.8 million, $294.7 million, $281.6 million,
$297.9 million and $313.6 million and the corresponding payable to Holdings was
43
Table of Contents
$277.4 million,
$287.2 million, $258.6 million, $271.6 million and $284.9 million at December 31, 2014, 2013, 2012, 2011 and 2010, respectively.
- (4)
- As
discussed in Note 4 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, prior to June 6,
2012, the Company reported Holdings' interests in IBG LLC as redeemable noncontrolling interests, at redemption value and separate from equity. Redemption value for these redeemable
noncontrolling interests was measured as the number of equivalent shares of IBG LLC member interests owned by Holdings multiplied by the then current market price per share of the Company's
common stock. The excess of the redemption value over the book value of these interests, which did not affect net income attributable to common stockholders or cash flows, was required to be accounted
for as a reduction of the Company's stockholders' equity in the consolidated statements of financial condition. These fair value adjustments had the effect of decreasing reported stockholders' equity
by $1.0 billion, $2.5 billion and $1.9 billion as of December 31, 2011, 2010 and 2009, respectively. Accordingly, the above condensed consolidated statement of financial
condition information is presented as if ASC 810-10 and ASC 480-10-S99 had been applied historically. Subsequent to June 6, 2012, the Company has reported noncontrolling interests attributable
to Holdings as a component of the Company's total equity, valued based on Holding's proportionate ownership in IBG LLC.
- (5)
- In
December of 2010 and 2012, the Company paid special cash dividends of $1.79 and $1.00 per share, respectively, to holders of the Company's common stock.
The payment of these dividends resulted in a decrease in the Company's stockholders' equity (deficit) balances from prior years.
44
Table of Contents
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the audited consolidated financial statements and the related notes in
Item 8, included elsewhere in this report. In addition to historical information, the following discussion also contains forward-looking statements that include risks and uncertainties. Our
actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading "Risk Factors" in
Part I, Item 1A of this Annual Report on Form 10-K.
Business Overview
We are an automated global electronic market maker and broker. We custody and service accounts for hedge and mutual funds, RIAs,
proprietary trading group, introducing brokers and individual investors. We specialize in routing orders and executing and processing trades in securities, futures and foreign exchange instruments on
more than 100 electronic exchanges and trading venues around the world. Since our inception in 1977, we have focused on developing proprietary software to automate broker-dealer functions. The advent
of electronic exchanges in the last 24 years has provided us with the opportunity to integrate our software with an increasing number of exchanges and trading venues into one automatically
functioning, computerized platform that requires minimal human intervention.
In
connection with our IPO priced on May 3, 2007, IBG, Inc. purchased 10.0% of the membership interests in IBG LLC, became the sole managing member of IBG LLC
and began to consolidate IBG LLC's financial results into its financial statements. Our primary assets are our ownership of approximately 14.5% of the membership interests of IBG LLC,
the current holding company for our businesses, and our controlling interest and related contractual rights as the sole managing member of IBG LLC. The remaining approximately 85.5% of
IBG LLC membership interests are held by Holdings, a holding company that is owned by our founder, Chairman and Chief Executive Officer, Thomas Peterffy, and his affiliates, management and
other employees of IBG LLC, and certain other members. The IBG LLC membership interests held by Holdings will be subject to purchase by us over time in connection with offerings by us of
shares of our common stock.
Business Segments
The Company reports its results in two operating business segments, electronic brokerage and market making. These segments are analyzed
separately as these are the two principal business activities from which we derive our revenues and to which we allocate resources.
-
- Electronic Brokerage. We conduct our electronic brokerage
business through our IB subsidiaries. As an electronic broker, we execute, clear and settle trades globally for both institutional and individual customers. Capitalizing on the technology originally
developed for our market making business, IB's 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. We offer our customers access to all classes of tradable, primarily exchange-listed products, including
stocks, bonds, options, futures, forex and mutual funds traded on more than 100 exchanges and market centers and in 24 countries around the world seamlessly. The emerging complexity of multiple
trading venues provided us with the opportunity of building and continuously adapting our order routing software to secure excellent execution prices. This has become our major focus.
-
- Market Making. We conduct our market making business
through our TH subsidiaries. As one of the largest market makers on many of the world's leading exchanges, we provide liquidity by offering competitively tight bid/offer spreads over a broad base of
over one million tradable, exchange-listed products. As principal, we commit our own capital and derive revenues or incur
45
Table of Contents
losses
from the difference between the price paid when securities are bought and the price received when those securities are sold. Because we provide continuous bid and offer quotations and we are
continuously both buying and selling quoted securities, we may have either a long or a short position in a particular product at a given point in time. Our entire portfolio is evaluated each second
and continuously rebalanced throughout the trading day, thus minimizing the risk of our portfolio at all times. This real-time rebalancing of our portfolio, together with our real-time proprietary
risk management system, enables us to curtail risk and to be profitable in both up-market and down-market scenarios. In the past several years our market making business has suffered from competitive
pressures and along with the rapid increase of our brokerage business, its significance has diminished.
The
operating business segments are supported by our corporate segment which provides centralized services and executes Company's currency diversification strategy.
Business Environment
The operating environment for our brokerage business continued to exhibit positive trends in 2014. Rising investor optimism, strong
valuation gains in the equity markets and brief periods of increased volatility contributed to the favorable operating environment.
We
maintained our position as the largest U.S. electronic broker as measured by number of customer revenue trades. Customer trading volumes increased 17% over the prior year, outpacing
the industry and driving a 9% increase in commission revenue. This growth was most pronounced in stock trading, followed by options and futures. Market values continued to rise as U.S. indexes added
to their gains from 2013, with the S&P 500 Index climbing 11% over its year-ago level, contributing to our 24% increase in customer equity.
New
customer account growth continued to gain momentum as total customer accounts increased 18% in 2014. Institutional customers, such as hedge funds, mutual funds, introducing brokers,
proprietary trading groups and financial advisors, comprised approximately 29% of total accounts at the end of 2014. Average equity per account increased by 6%, to $202,000, at year-end. Our customer
base is geographically diversified. Our customers reside in over 190 countries and over 60% of new customers came from outside the U.S.
Customers
continued to take advantage of our low margin lending rates, which are tied to benchmark rates, such as the Federal Funds rate in the U.S. In 2014, our customers paid 0.5% to
1.6% for their margin loans with us. This drove growth of our margin balances to a record high of $16.9 billion, an increase of 25% over the prior year. Brokerage net interest income grew 39%
in 2014.
Market
making segment results declined in 2014 due to the continuation of a difficult operating environment for market makers with strong competition from high frequency traders (HFT's)
and historically low volatility levels, which depressed our trading gains.
The
following is a summary of the key profit drivers that affect our business and how they compared to the prior year:
Global trading volumes. According to data received from exchanges worldwide, volumes in exchange-listed equity-based options increased
by
approximately 3% globally and 4% in the U.S. for the year ended December 31, 2014, as compared to 2013. During 2014 (2013) we accounted for
approximately 8.5% (9.1%) of the exchange-listed equity-based options (including options on ETFs and stock index products) volume traded worldwide and approximately 11.2% (11.8%) of exchange-listed
equity-based options volume traded in the U.S. It is important to note that this metric is not directly correlated with our profits. 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."
46
Table of Contents
See
the tables on pages 60-61 of this Annual Report on Form 10-K for additional details regarding our trade volumes, contract and share volumes and brokerage statistics.
Volatility. Our market making profits are generally correlated with market volatility since we typically maintain an overall long
volatility
position, which protects us against a severe market dislocation in either direction. Based on the Chicago Board Options Exchange Volatility Index ("VIX®"), the average volatility remained
at historically low levels, averaging 14.2 in 2014, unchanged from the average in 2013.
The
ratio of actual to implied volatility is also meaningful to our results. Because the cost of hedging our positions is based on implied volatility, while our trading profits are, in
part, based on actual market volatility, a higher ratio is generally favorable and a lower ratio generally has a negative effect on our trading gains. This ratio averaged approximately 79% during
2014, slightly higher than the average of 77% in 2013.
Currency fluctuations. As a global electronic broker and market maker 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 16 currencies we call the "GLOBAL" in order to diversify our risk
and to align our hedging strategy with the currencies that we use in our business. Because we report our financial results in U.S. dollars, the change in the value of the GLOBAL to the U.S. dollar
affects our earnings. The value of the GLOBAL, as measured in U.S. dollars, at December 31, 2014 declined 6% compared to its value at December 31, 2013. This had a negative impact on our
comprehensive earnings in 2014.
Presentation of Foreign Currency Effects
In this reporting period, we have taken several steps to improve the transparency of our currency diversification strategy.
- 1.
- We
transferred nearly all of the currency spot positions held as part of our GLOBAL basket of currencies from the primary market making company to the parent
holding company, IBG LLC.
- 2.
- We
reclassified all currency translation gains and losses related to the GLOBAL as other income instead of trading gains.
- 3.
- We
elected to report gains and losses from currency hedging in the corporate segment instead of the market making segment.
These
actions place the income statement effects of our currency diversification in the corporate segment, thereby providing a clearer picture of the core operating results in the market
making segment.
For
comparative purposes, certain reclassifications have been made to previously reported amounts to conform with the current presentation. These changes had no effect on total
consolidated net revenues or on net income.
Financial Overview
Diluted earnings per share were $0.77 for the year ended December 31, 2014. The calculation of diluted earnings per share is
detailed in Note 4 to the audited consolidated
financial statements, in Part II, Item 8 of this Annual Report on Form 10-K. Diluted earnings per share were $0.73 for the year ended December 31, 2013.
47
Table of Contents
On
a comprehensive basis, which includes the effect of changes in the U.S. dollar value of the Company's non-U.S. subsidiaries, diluted earnings per share were $0.51 for the year ended
December 31, 2014, compared to diluted earnings per share of $0.67 for the same period in 2013.
For
the year ended December 31, 2014, our net revenues were $1,043.3 million and income before income taxes was $506.1 million, compared to net revenues of
$1,076.2 million and income before income taxes of $451.3 million for 2013. Compared to 2013, trading gains decreased 21% in 2014, commissions and execution fees increased 9% and net
interest income increased 37%. Our pretax margin for the year ended December 31, 2014 was 49%, compared to 42% for 2013.
Our
net revenues were negatively impacted by currency translation effects from the strengthening of the U.S. dollar against other currencies. Currency translation effects are largely a
result of our currency diversification strategy. We have determined to base our net worth in GLOBALs, a self-defined basket of currencies in which we maintain our equity. As a result, approximately
59% of our equity is denominated in currencies other than U.S. dollar. The effects of our currency diversification strategy appear in two places in the financial statements: (1) as a component
of other income in the consolidated statement of comprehensive income and (2) as other comprehensive income ("OCI") in the consolidated statement of financial condition and the consolidated
statement of comprehensive income. The full effect of the GLOBAL is captured in comprehensive income. For the year ended December 31, 2014 the value of the GLOBAL as measured in U.S. Dollars
decreased approximately 6% as compared to the same period last year.
During
the year ended December 31, 2014, income before income taxes in our electronic brokerage segment increased by 49% compared to 2013. Commissions and execution fees increased
by 9% on higher customer trade volumes and net interest income grew by 39% from the prior year, driven by higher customer balances and higher customer borrowings. Pretax margin increased to 62% from
48% in the same time periods. Customer accounts grew 18% from the prior year and customer equity increased 24% during 2014. Total Daily Average Revenue Trades ("DARTs") for cleared and execution-only
customers increased 16% to 566 thousand during the year ended December 31, 2014, compared to 486 thousand during the year ended December 31, 2013.
In
October 2013, a small number of the Company's brokerage customers had taken relatively large positions in four securities listed on the Singapore Exchange. In early October, within a
very short timeframe, these securities lost over 90% of their value. The customer accounts were margined and fell
into deficits totaling $64 million prior to the time the Company took possession of their securities positions. At December 31, 2014, the Company has recognized an aggregate loss of
approximately $82 million. The maximum aggregate loss, which would occur if the securities' prices all fell to zero and none of the debts were collected, would be approximately
$84 million. The Company is currently pursuing the collection of the debts. The ultimate effect of this incident on the Company's results will depend upon market conditions and the outcome of
the Company's debt collection efforts.
During
the year ended December 31, 2014, income before income taxes in our market making segment decreased 28%, compared with 2013. Trading gains were negatively impacted by low
volatility levels, as measured by the VIX®; and low ratio of actual to implied volatility. Pretax margin decreased to 40% in 2014, as compared to 44% in 2013.
Market
making, by its nature, does not produce predictable earnings. Our results in any given period may be materially affected by volumes in the global financial markets, the level of
competition and other factors. Electronic brokerage is more predictable, but it is dependent on customer activity, growth in customer accounts and assets, interest rates and other factors. For a
further discussion of the factors, that may affect our future operating results, please see the description of risk factors in Part I, Item 1A of this Annual Report on Form 10-K.
48
Table of Contents
The
following two tables present net revenues and income before income taxes for each of our business segments for the periods indicated.
Net
revenues of each of our segments and our total net revenues are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2014 |
|
2013 |
|
2012 |
|
|
|
(in millions)
|
|
Electronic brokerage(1) |
|
$ |
952.3 |
|
$ |
818.5 |
|
$ |
672.2 |
|
Market making(1) |
|
|
284.4 |
|
|
361.1 |
|
|
490.5 |
|
Corporate(1)(2) |
|
|
(193.4 |
) |
|
(103.4 |
) |
|
(32.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,043.3 |
|
$ |
1,076.2 |
|
$ |
1,130.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Certain
reclassifications have been made to previously reported amounts to conform with the current presentation of the impact our currency diversification
strategy.
- (2)
- The
corporate segment includes corporate related activities, inter-segment eliminations gains and losses on positions held as part of our overall currency
diversification strategy.
Income
before income taxes of each of our segments and our total income before income taxes are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2014 |
|
2013 |
|
2012 |
|
|
|
(in millions)
|
|
Electronic brokerage(1) |
|
$ |
588.5 |
|
$ |
395.8 |
|
$ |
343.5 |
|
Market making(1) |
|
|
114.1 |
|
|
158.5 |
|
|
219.5 |
|
Corporate(1)(2) |
|
|
(196.5 |
) |
|
(103.0 |
) |
|
(36.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
506.1 |
|
$ |
451.3 |
|
$ |
527.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Certain
reclassifications have been made to previously reported amounts to conform with the current presentation of the impact our currency diversification
strategy.
- (2)
- The
corporate segment includes corporate related activities, inter-segment eliminations and gains and losses on positions held as part of our overall
currency diversification strategy.
Revenue
Trading Gains
Trading gains are generated in the normal course of market making. Trading revenues are, in general, proportional to the trading
activity in the markets. Our revenue base is highly diversified and comprised of millions of relatively small individual trades of various financial products traded on electronic exchanges, primarily
in stocks, options and futures. Trading gains accounted for approximately 23%, 29% and 39% of our total revenues for the years ended December 31, 2014, 2013 and 2012, respectively.
Trading
gains also include revenues from net dividends. Market making activities require us to hold a substantial inventory of equity securities. We derive significant revenues in the
form of dividend income from these equity securities. This dividend income is largely offset by dividend expense incurred when we make significant payments in lieu of dividends on short positions in
securities in our portfolio. Dividend income and expense arise from holding market making positions over dates on which
49
Table of Contents
dividends
are paid to shareholders of record. When a stock pays a dividend, its market price is generally adjusted downward to reflect the value paid to the shareholders of record, which will not be
received by those who purchase the stock after the dividend date. Hence, the apparent gains and losses due to these price changes must be taken together with the dividends paid and received,
respectively, to accurately reflect the results of our market making operations.
As
a result of the way we have integrated our market making and securities lending systems, our trading gains and our net interest income from the market making segment are
interchangeable and depend on the mix of market making positions in our portfolio. When implied interest rates in the equity and equity options and futures markets exceed the actual interest rates
available to us, our market making systems tend to buy stock and sell it forward, which produces higher trading gains and lower net interest income. When these rates are inverted, our market making
systems tend to sell stock and buy it forward, which produces lower trading gains and higher net interest income.
Our
trading gains are geographically diversified. In 2014, 2013 and 2012, we generated 37%, 41% and 36%, respectively, of our trading gains from operations conducted internationally.
Commissions and Execution Fees
We earn commissions and execution fees 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 "bundled" rate or an "unbundled" rate that
offers lower commissions for high volume customers. For "unbundled" commissions, we charge regulatory and exchange fees, at our cost, separately from our commissions, adding transparency to our fee
structure. Commissions and execution fees accounted for 49%, 45% and 35% of our total revenues for the years ended December 31, 2014, 2013 and 2012, respectively.
Our
commissions and execution fees are geographically diversified. In 2014, 2013 and 2012 we generated 25%, 26% and 28%, respectively, of commissions and execution fees from operations
conducted internationally.
Interest Income and Interest Expense
We earn interest on customer funds segregated in safekeeping accounts; on customer borrowings on margin, secured by marketable
securities these customers hold with us; from our investment in government treasury securities; from borrowing securities in the general course of our market making and brokerage activities, and on
bank balances. Interest income accounted for 37%, 27% and 23% of total revenues for the years ended December 31, 2014, 2013 and 2012, respectively. Interest income is partially offset by
interest expense.
We
pay interest on cash balances customers hold with us; for cash received from lending securities in the general course of our market making and brokerage activities; and on our
borrowings. Interest expense was 7%, 5% and 5% of total revenues for the years ended December 31, 2014, 2013 and 2012, respectively.
We
have automated and integrated our securities lending system with our trading system. As a result, we have been able to tailor our securities lending activity to produce more optimal
results when taken together with trading gains (see description under "Trading Gains" above).
Our
net interest income accounted for approximately 33%, 23% and 18% of our total net revenues for the years ended December 31, 2014, 2013 and 2012, respectively.
50
Table of Contents
Other Income
The largest component of other income is foreign exchange currency translation 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 market data fee income, payment for order flow income, minimum activity fee income from customers and mark-to-market gains or losses on non-market making
securities (generally, strategic investments and U.S. government securities). Our other income accounted for approximately 10%, 1% and 4% of our total revenues for
each of the years ended December 31, 2014, 2013 and 2012, respectively.
Costs and Expenses
Execution and Clearing Expenses
Our largest single expense category is execution and clearing expenses, which includes the costs of executing and clearing our market
making and electronic brokerage trades, as well as other direct expenses, including payment for order flow, 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. Payments for order flow are made as part of exchange-mandated programs and to otherwise
attract order volume to our system. Market data fees are fees paid to third parties to receive streaming price quotes and related information.
Employee Compensation and Benefits
Employee compensation and benefits includes salaries, bonuses and other incentive compensation plans, group insurance, contributions to
benefit programs and other related employee costs.
Occupancy, Depreciation and Amortization
Occupancy expense consists primarily of rental payments on office and data center leases and related occupancy costs, such as
utilities. Depreciation and amortization expense results 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.
Communications
Communications expense consists primarily of the cost of voice and data telecommunications lines supporting our business, including
connectivity to exchanges around the world.
General and Administrative
Expenses in this category are primarily incurred for professional services, such as legal and audit work, bad debts, and other
operating expenses such as advertising and exchange membership lease expenses.
Income Tax Expense
We pay U.S. federal, state and local income taxes on our taxable income, which is proportional to the percentage of IBG LLC
owned by IBG, Inc. Our subsidiaries are subject to income tax in the respective jurisdictions in which they operate.
51
Table of Contents
Subsequent Event
On January 15, 2015, due to the sudden move in the value of the Swiss Franc that followed an unprecedented action by the Swiss
National Bank, several of the Company's customers who held currency futures and spot positions suffered losses in excess of their deposits with the Company. The Company took immediate action to hedge
its exposure to the foreign currency receivables from these customers. The Company estimates unsecured receivables, net of hedging activity, to be approximately $129 million. The Company is
actively pursuing collection of the debts. The ultimate effect of this incident on the Company's results will depend upon the outcome of the Company's debt collection efforts.
Noncontrolling Interest
We are the sole managing member of IBG LLC and, as such, operate and control all of the business and affairs of IBG LLC
and its subsidiaries and consolidate IBG LLC's financial results into our financial statements. We hold approximately 14.5% ownership interest in IBG LLC. Holdings is owned by the
original members of IBG LLC and holds approximately 85.5% ownership interest in IBG LLC. We reflect Holdings' ownership as a noncontrolling interest in our consolidated statement of
financial condition, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows. Our share of IBG LLC's net income,
excluding Holdings' noncontrolling interest, for 2014 was approximately 14.0% and similarly, outstanding shares of our common stock represent approximately 14.5% of the outstanding membership
interests of IBG LLC.
Certain Trends and Uncertainties
We believe that our continuing operations may be favorably or unfavorably impacted by the following trends that may affect our
financial condition and results of operations.
-
- Over the past several years, the effects of market structure changes, competition (in particular, from HFTs) and market conditions
have, during certain periods, exerted downward pressure on bid/offer spreads realized by market makers.
-
- Retail broker-dealer 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.
-
- In recent years, in an effort to improve the quality of their executions as well as increase efficiencies, market makers have
increased the level of automation within their operations, which may allow them to compete more effectively with us.
-
- Scrutiny of equity and option market makers, hedge funds and soft dollar practices by regulatory and legislative authorities has
increased. New legislation or modifications to existing regulations and rules could occur in the future.
-
- Additional consolidation among market centers may adversely affect the value of our smart routing software.
-
- A driver of our market making profits is the relationship between actual and implied volatility in the equities markets. The cost of
maintaining our conservative risk profile is based on implied volatility, while our profitability, in part, is based on actual volatility. Hence, our profitability is increased when actual volatility
runs above implied volatility and it is decreased when actual volatility falls below implied volatility. Implied volatility tends to lag actual volatility.
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.
52
Table of Contents
Results of Operations
The tables in the period comparisons below provide summaries of our consolidated results of operations. The period-to-period
comparisons below of financial results are not necessarily indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2014 |
|
2013 |
|
2012 |
|
|
|
(in millions except share and per share data)
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
Trading gains(1) |
|
$ |
261.2 |
|
$ |
331.2 |
|
$ |
466.0 |
|
Commissions and execution fees |
|
|
548.8 |
|
|
502.1 |
|
|
412.6 |
|
Interest income(1) |
|
|
416.2 |
|
|
303.4 |
|
|
270.3 |
|
Other income(1) |
|
|
(110.7 |
) |
|
(8.8 |
) |
|
43.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,115.5 |
|
|
1,127.9 |
|
|
1,192.5 |
|
Interest expense |
|
|
72.2 |
|
|
51.7 |
|
|
62.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
1,043.3 |
|
|
1,076.2 |
|
|
1,130.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
Execution and clearing |
|
|
211.5 |
|
|
242.5 |
|
|
251.0 |
|
Employee compensation and benefits |
|
|
204.8 |
|
|
205.3 |
|
|
244.5 |
|
Occupancy, depreciation and amortization |
|
|
39.4 |
|
|
38.9 |
|
|
38.8 |
|
Communications |
|
|
24.2 |
|
|
23.1 |
|
|
23.3 |
|
General and administrative |
|
|
57.3 |
|
|
115.1 |
|
|
45.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
|
537.2 |
|
|
624.9 |
|
|
603.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
506.1 |
|
|
451.3 |
|
|
527.0 |
|
Income tax expense |
|
|
47.3 |
|
|
33.7 |
|
|
30.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
458.8 |
|
|
417.6 |
|
|
497.0 |
|
Less net income attributable to noncontrolling interests |
|
|
414.3 |
|
|
380.6 |
|
|
456.3 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
44.5 |
|
$ |
37.0 |
|
$ |
40.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.79 |
|
$ |
0.74 |
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.77 |
|
$ |
0.73 |
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
56,492,381 |
|
|
49,742,428 |
|
|
46,814,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
57,709,668 |
|
|
50,924,736 |
|
|
47,070,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
44.5 |
|
$ |
37.0 |
|
$ |
40.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment, before income taxes |
|
|
(15.3 |
) |
|
(3.2 |
) |
|
2.2 |
|
Income taxes related to items of other comprehensive income |
|
|
(0.3 |
) |
|
(0.5 |
) |
|
(9.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax |
|
|
(15.0 |
) |
|
(2.7 |
) |
|
11.3 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to common stockholders |
|
$ |
29.5 |
|
$ |
34.3 |
|
$ |
52.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interests: |
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interests |
|
$ |
414.3 |
|
$ |
380.6 |
|
$ |
456.3 |
|
Other comprehensive income (loss)cumulative translation adjustment |
|
|
(92.0 |
) |
|
(24.7 |
) |
|
17.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interests |
|
$ |
322.3 |
|
$ |
355.9 |
|
$ |
473.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Certain
reclassifications have been made to previously reported amounts to conform with the current presentation of currency translation gains and losses
related to our currency diversification strategy.
53
Table of Contents
The
following table sets forth our consolidated results of operations as a percent of our total revenues for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2014 |
|
2013 |
|
2012 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
Trading gains |
|
|
25.0 |
% |
|
30.8 |
% |
|
41.2 |
% |
Commissions and execution fees |
|
|
52.6 |
% |
|
46.7 |
% |
|
36.5 |
% |
Interest income |
|
|
39.9 |
% |
|
28.2 |
% |
|
23.9 |
% |
Other (loss) income |
|
|
10.6 |
% |
|
0.8 |
% |
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
106.9 |
% |
|
104.9 |
% |
|
105.6 |
% |
Interest expense |
|
|
6.9 |
% |
|
4.9 |
% |
|
5.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses |
|
|
|
|
|
|
|
|
|
|
Execution and clearing |
|
|
20.3 |
% |
|
22.5 |
% |
|
22.2 |
% |
Employee compensation and benefits |
|
|
19.6 |
% |
|
19.1 |
% |
|
21.6 |
% |
Occupancy, depreciation and amortization |
|
|
3.8 |
% |
|
3.6 |
% |
|
3.4 |
% |
Communications |
|
|
2.3 |
% |
|
2.1 |
% |
|
2.1 |
% |
General and administrative |
|
|
5.6 |
% |
|
10.7 |
% |
|
4.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
|
51.6 |
% |
|
58.0 |
% |
|
53.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
48.4 |
% |
|
42.0 |
% |
|
46.6 |
% |
Income tax expense |
|
|
4.5 |
% |
|
3.1 |
% |
|
2.7 |
% |
Net Income |
|
|
43.9 |
% |
|
38.9 |
% |
|
43.9 |
% |
Less net income attributable to noncontrolling interests |
|
|
39.7 |
% |
|
35.4 |
% |
|
40.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders |
|
|
4.2 |
% |
|
3.5 |
% |
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013
Net Revenues
Total net revenues for the year ended December 31, 2014 decreased $32.9 million or 3%, to $1,043.3 million from
$1,076.2 million during the year ended December 31, 2013. The decrease in net revenues was primarily due to lower trading gains and currency translation losses, partially offset by
increased net interest income and commissions and execution fees. Trading volume is an important driver of revenues and costs for both our electronic brokerage and market making segments. During the
year ended December 31, 2014 our volumes in options decreased 4%, while futures contracts and stock shares volume increased 1% and 61%, respectively, as compared to the year-ago period.
Trading Gains. Trading gains for the year ended December 31, 2014 decreased $70.0 million, or 21%, to $261.2 million
from
$331.2 million for the year ended December 31, 2013. As market makers, we provide liquidity by buying from sellers and selling to buyers. During the year ended December 31, 2014,
our market making operations executed 64.5 million trades, a decrease of 1% as compared to the number of trades executed in the year ended December 31, 2013. Market making options and
futures contract and stock share volumes decreased 15%, 14% and 6%, respectively, as compared to the year-ago period.
Trading
gains were negatively impacted by a market making environment with intense competition and low volatility. The VIX®, which measures perceived U.S. equity market
volatility, was unchanged at 14.2 average for the year ended December 31, 2014 as compared to the year-ago period. The ratio of actual to implied volatility was up slightly at 79% for 2014 as
compared to 77% for 2013. An
54
Table of Contents
approximate
$16 million loss due to a trading error in the third quarter also negatively impacted trading gains.
Included
in trading gains are net dividends. Dividend income and expense arise from holding market making positions over dates on which dividends are paid to shareholders of record. When
a stock pays a dividend, its market price is generally adjusted downward to reflect the value paid, which will not be received by those who purchase stock after the ex-dividend date. Hence, the
apparent gains and losses due to these price changes, reflecting the value of dividends paid to shareholders, must be taken together with the dividends paid and received, respectively, to accurately
reflect the results of our market making operations.
Commissions and Execution Fees. Commissions and execution fees for the year ended December 31, 2014 increased $46.7 million,
or 9%, to
$548.8 million, as compared to the year ended December 31, 2013, driven by continued customer account growth and increased customer activity, but moderated by lower commissions per
customer order. Cleared customer options and futures contract volumes and stock share volumes increased 25%, 4% and 74%, respectively, from the same period last year. Total DARTs for cleared and
execution-only customers for the year ended December 31, 2014 increased 16% to 566, as compared to 486 thousand during the year ended December 31, 2013. DARTs for cleared
customers, i.e., customers for whom we execute trades as well as clear and carry positions, increased 17% to 515 thousand, for the year ended December 31, 2014, as compared to
441 thousand for the year-ago period. Average commission per DART for cleared customers, for the year ended December 31, 2014, decreased by 6% to $4.16, as compared to $4.41 for the same
period last year.
Interest Income and Interest Expense. Net interest income (interest income less interest expense) for the year ended December 31,
2014
increased $92.3 million, or 37%, to $344.0 million, as compared to the year ended December 31, 2013. The increase in net interest income was driven by higher customer cash and
margin balances and higher net fees earned from securities lending transactions.
Net
interest income on customer balances increased $43.4 million compared to the year-ago period. Average customer cash balances increased by 20%, to $28.22 billion and
average customer fully secured margin borrowings increased 36% to $16.18 billion, for the year ended December 31, 2014, as compared to $23.59 billion and $11.88 billion,
respectively, for the year ended December 31, 2013. The average Fed Funds effective rate decreased by approximately two basis points to 0.09% for the year ended December 31, 2014, as
compared to the prior year.
We
earn fees 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 IB to lend it out. In exchange for lending out their stock, our customers receive generally 50% of the stock loan fees. IB places cash
collateral securing the loans in the customer's account.
In
the market making segment, as a result of the way we have integrated our market making and securities lending systems, our trading income and our net interest income are
interchangeable and depend on the mix of market making positions in our portfolio. When implied interest rates in the equity and equity options and futures markets exceed the actual interest rates
available to us, our market making systems tend to buy stock and sell it forward, which produces higher trading gains and lower net interest income. When these rates are inverted, our market making
systems tend to sell stock and buy it forward, which produces lower trading gains and higher net interest income.
Average
securities borrowed decreased by 8%, to $3.18 billion and average securities loaned increased by 34%, to $2.93 billion, for the year ended December 31, 2014
from the same period last year. Net interest earned from securities lending is also affected by the level of demand for securities positions held by our market making companies and our customers.
During the year ended December 31, 2014, net fees earned by our brokerage and market making segments from securities
55
Table of Contents
lending
transactions increased by 49%, or $46.5 million, as compared to the year ended December 31, 2013. The bulk of the increase in securities lending transactions came from the
brokerage segment.
Other Income. Other income, for the year ended December 31, 2014, decreased $101.9 million, to a loss of $110.7 million,
as
compared to the year ended December 31, 2013. To improve the transparency of the financial impact of our currency diversification strategy, we report currency translation gains and losses
related to the GLOBAL as other income instead of trading gains, as previously presented. The decrease in other income was driven by a $93.6 million increase in currency translation losses to a
$185.2 loss million during the year ended December 31, 2014, compared to a $91.6 million loss in 2013. 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 was also impacted by lower market date fee
income, losses on other investments and lower dividend income paid on an investment, partially offset by exposure fees collected from customers.
Non-Interest Expenses
Non-interest expenses, for the year ended December 31, 2014, decreased by $87.7 million, or 14%, to $537.2 million
from $624.9 million, during the year ended December 31, 2013. The decrease was primarily due to lower execution and clearing fees and general and administrative expenses. As a percentage
of total net revenues, non-interest expenses decreased to 51% for the year ended December 31, 2014 from 58% in the year ago period.
Execution and Clearing. Execution and clearing expenses for the year ended December 31, 2014, decreased $31.0 million, or 13%,
to
$211.5 million, as compared to the year ended December 31, 2013. The decrease reflects lower overall trading volumes in options and an increase in our executions on exchanges and ECN's
with make-or-take revenue models. Under the make-or take fee model, we are paid for providing liquidity.
Employee Compensation and Benefits. Employee compensation and benefits expenses, for the year ended December 31, 2014, decreased
by
$0.5 million to $204.8 million, as compared to the year ended December 31, 2013, largely a result of lower insurance related expenses, partially offset by increased salaries. The
number of employees increased 9% to 960 for the year ended December 31, 2014, as compared to 880 for the corresponding period in 2013. Within the operating segments, we continued to add staff
in electronic brokerage and reduce staff in market making. 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 20% and 19% for the year ended December 31, 2014 and 2013, respectively.
Occupancy, Depreciation and Amortization. Occupancy, depreciation and amortization expenses increased $0.5 million to
$39.4 million for
the year ended December 31, 2014 as compared to the year ended December 31, 2013. As a percentage of total net revenues, occupancy, depreciation and amortization expense was 4% for both
2014 and 2013.
Communications. Communications expenses increased $1.1 million, or 5%, to $24.2 million for the year ended December 31,
2014, as
compared to the year ended December 31, 2013. As a percentage of total net revenues, communications expenses were 2% for both 2014 and 2013.
General and Administrative. General and administrative expenses, for the year ended December 31, 2014, decreased $57.8 million,
or 50%,
to $57.3 million, as compared to the year ended December 31, 2013. The decrease in general and administrative expenses was primarily due to the non-recurrence of customer bad debt
recognized in 2013 related to the Singapore stock issue, as
56
Table of Contents
described
above in the "Financial Overview", partially offset by increases in advertising and professional services expenses.
Income Tax Expense
Income tax expense for the year ended December 31, 2014 increased $13.6 million, or 40%, compared to income tax expense
for the year ended December 31, 2013, while income before taxes increased by $54.8 million, or 12%, during the same period. The increase in income taxes is due to additional amortization
of the deferred tax asset arising from the step-up in tax basis of our interests in IBG LLC, as a result of the 2013 and 2014 membership interest redemptions from Holdings. In addition, in
2013, we recognized greater tax benefits related to prior years, than in 2014.
Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012
To provide meaningful comparisons, prior period amounts have been revised for changes in the presentation of currency translation
classifications.
Net Revenues
Total net revenues for the year ended December 31, 2013 decreased $54.3 million or 5%, to $1,076.2 million from
$1,130.5 million during the year ended December 31, 2012. The decrease in net revenues was primarily due to lower trading gains compared to the prior year, partially offset by increases
in commissions and execution fees and net interest income. Trading volume is an important driver of revenues and costs for both our electronic brokerage and market making segments. During the year
ended December 31, 2013 our volumes in options decreased 6% from prior year levels while futures contracts and stock shares volumes increased 23% and 45%, respectively.
Trading Gains. Trading gains for the year ended December 31, 2013 decreased $134.8 million, or 29%, to $331.2 million
from
$466.0 million for the year ended December 31, 2012. As market makers, we provide liquidity by buying from sellers and selling to buyers. During the year ended December 31, 2013,
our market making operations executed 65.3 million trades, an increase of 8% as compared to the number of trades executed in the year ended December 31, 2012. Market making options
contract volume decreased 12% while futures contracts and stock shares volumes increased 44% and 38%, respectively, as compared to the year-ago period.
Trading
gains were negatively impacted by a market making environment with persistent low volatility and low actual-to-implied volatility. The VIX®, which measures perceived
U.S. equity market volatility, decreased by 15% in the year ended December 31, 2013 as compared to the year-ago period.
Included
in trading gains are net dividends. Dividend income and expense arise from holding market making positions over dates on which dividends are paid to shareholders of record. When
a stock pays a dividend, its market price is generally adjusted downward to reflect the value paid, which will not be received by those who purchase stock after the ex-dividend date. Hence, the
apparent gains and losses due to these price changes, reflecting the value of dividends paid to shareholders, must be taken together with the dividends paid and received, respectively, to accurately
reflect the results of our market making operations.
Commissions and Execution Fees. Commissions and execution fees for the year ended December 31, 2013 increased $89.5 million,
or 22%, to
$502.1 million, as compared to the year ended December 31, 2012, driven by continued customer account growth and increased customer activity. Cleared customer options, futures and stock
volumes increased 25%, 20% and 45%, respectively. Total DARTs for cleared and execution-only customers for the year ended December 31, 2013 increased 18% to 486 thousand, as
compared to 413 thousand during the year ended December 31, 2012. Average commission per DART for cleared customers, for the year ended December 31, 2013, increased by 6%
57
Table of Contents
to
$4.41, as compared to $4.17 for the year ended December 31, 2012. DARTs for cleared customers, i.e., customers for whom we execute trades as well as clear and carry positions,
increased 15% to 441 thousand, for the year ended December 31, 2013, as compared to 384 thousand for the year ended December 31, 2012.
Interest Income and Interest Expense. Net interest income (interest income less interest expense) for the year ended December 31,
2013
increased $43.4 million, or 21%, to $251.7 million, as compared to the year ended December 31, 2012. The increase in net interest income was driven by higher customer cash and
margin balances and higher net fees earned from securities borrowed and loaned transactions.
Net
interest income on customer balances increased $18.4 million compared to the year-ago quarter. Average customer cash balances increased by 21%, to $23.59 billion, while
average customer fully secured margin borrowings increased 37% to $11.88 billion, for the year ended December 31, 2013, as compared to $19.54 billion and $8.67 billion,
respectively, for the year ended December 31, 2012. The average Fed Funds effective rate decreased by approximately three basis points to 0.11% for the year ended December 31, 2013.
We
earn fees 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 IB to lend it out. In exchange for lending out their stock, our customers receive generally 50% of the stock loan fees. IB places cash
collateral securing the loans in the customer's account.
In
the market making segment, as a result of the way we have integrated our market making and securities lending systems, our trading income and our net interest income are
interchangeable and depend on the mix of market making positions in our portfolio. When implied interest rates in the equity and equity options and futures markets exceed the actual interest rates
available to us, our market making systems tend to buy stock and sell it forward, which produces higher trading gains and lower net interest income. When these rates are inverted, our market making
systems tend to sell stock and buy it forward, which produces lower trading gains and higher net interest income.
Average
securities borrowed increased by 19%, to $3.47 billion and average securities loaned increased by 24%, to $2.19 billion, for the year ended December 31,
2013. Net interest earned from securities borrowed and loaned is also affected by the level of demand for securities positions held by our market making companies and by our customers. During the year
ended December 31, 2013, net fees earned by our brokerage and market making segments from securities borrowed and loaned transactions increased $26.4 million as compared to the year
ended December 31, 2012.
Other Income. Other income, for the year ended December 31, 2013, decreased $52.4 million, or 120%, to a loss of
$8.8 million,
as compared to the year ended December 31, 2012. To improve the transparency of the financial impact from our currency diversification strategy, we report currency translation gains and losses
related to the GLOBAL as other income instead of trading gains, as previously presented. The decrease in other income was driven by a $61.7 million increase in currency to a
$91.6 million loss during the year ended December 31, 2013, compared to a $29.9 million loss in 2012. 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."
Non-Interest Expenses
Non-interest expenses, for the year ended December 31, 2013, increased by $21.4 million, or 4%, to $624.9 million
from $603.5 million, during the year ended December 31, 2012. The increase was primarily due to higher customer bad debt expenses (contained in general and administrative expenses),
58
Table of Contents
partially
offset by lower employee compensation and benefits expenses and lower execution and clearing fees in the market making segment. As a percentage of total net revenues, non-interest expenses
increased to 58% for the year ended December 31, 2013 from 53% in 2012.
Execution and Clearing. Execution and clearing expenses for the year ended December 31, 2013, decreased $8.5 million, or 3%,
to
$242.5 million, as compared to the year ended December 31, 2012. The decrease reflects lower options volume in the market making segment, partially offset by higher volume across product
types and market data fees in the electronic brokerage segment.
Employee Compensation and Benefits. Employee compensation and benefits expenses, for the year ended December 31, 2013, decreased
by
$39.2 million, or 16%, to $205.3 million, as compared to the year ended December 31, 2012, reflecting the non-recurrence of a special employee Stock Incentive Plan grant made in
2012, a payment made on unvested shares in our Stock Incentive plan in lieu of the December 2012 special dividend and lower incentive compensation related expenses. The number of employees decreased
1% to 880 for the year ended December 31, 2013, as compared to 891 for the corresponding period in 2012. Within the operating segments, we continued to add staff in electronic brokerage and
reduce staff in market making. 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 19% and 22% for the year ended December 31, 2013 and 2012, respectively.
Occupancy, Depreciation and Amortization. Occupancy, depreciation and amortization expenses increased $0.1 million to
$38.9 million for
the year ended December 31, 2013 as compared to the year ended December 31, 2012. As a percentage of total net revenues, occupancy, depreciation and amortization expense was 4% and 3%
for the years ended December 31, 2013 and 2012, respectively.
Communications. Communications expenses decreased $0.2 million, or 1%, to $23.1 million for the year ended December 31,
2013, as
compared to the year ended December 31, 2012. As a percentage of total net revenues, communications expenses were 2% for both 2013 and 2012.
General and Administrative. General and administrative expenses, for the year ended December 31, 2013, increased
$69.2 million to
$115.1 million, as compared to the year ended December 31, 2012. The increase in general and administrative expenses was primarily due to increases in customer bad debt related to the
Singapore stock issue, as described above in the "Financial Overview" section.
Income Tax Expense
Income tax expense for the year ended December 31, 2013 increased $3.7 million, or 12%, compared to income tax expense
for the year ended December 31, 2012, while income before taxes decreased by $75.5 million, or 14%, during the same period. In 2012, we recognized greater tax benefits related to prior
years, than in 2013.
59
Table of Contents
Supplemental Information
The following tables present historical trading volumes for our business. However, volumes are not the only drivers in our business.
TRADE VOLUMES:
(in 000's, except %)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Market
Making
Trades |
|
%
Change |
|
Brokerage
Cleared
Trades |
|
%
Change |
|
Brokerage
Non
Cleared
Trades |
|
%
Change |
|
Total
Trades |
|
%
Change |
|
Avg. Trades
per U.S.
Trading Day |
|
2010 |
|
|
75,169 |
|
|
|
|
|
133,658 |
|
|
|
|
|
18,732 |
|
|
|
|
|
227,559 |
|
|
|
|
|
905 |
|
2011 |
|
|
63,602 |
|
|
15 |
% |
|
160,567 |
|
|
20 |
% |
|
19,187 |
|
|
2 |
% |
|
243,356 |
|
|
7 |
% |
|
968 |
|
2012 |
|
|
60,421 |
|
|
5 |
% |
|
150,000 |
|
|
7 |
% |
|
16,118 |
|
|
16 |
% |
|
226,540 |
|
|
7 |
% |
|
904 |
|
2013 |
|
|
65,320 |
|
|
8 |
% |
|
173,849 |
|
|
16 |
% |
|
18,489 |
|
|
15 |
% |
|
257,658 |
|
|
14 |
% |
|
1,029 |
|
2014 |
|
|
64,530 |
|
|
1 |
% |
|
206,759 |
|
|
19 |
% |
|
18,055 |
|
|
2 |
% |
|
289,344 |
|
|
12 |
% |
|
1,155 |
|
CONTRACT AND SHARE VOLUMES:
(in 000's, except %)
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Options
(contracts) |
|
%
Change |
|
Futures
(contracts) |
|
%
Change |
|
Stocks
(shares) |
|
%
Change |
|
2010 |
|
|
678,856 |
|
|
|
|
|
96,193 |
|
|
|
|
|
84,469,874 |
|
|
|
|
2011 |
|
|
789,370 |
|
|
16 |
% |
|
106,640 |
|
|
11 |
% |
|
77,730,974 |
|
|
8 |
% |
2012 |
|
|
698,140 |
|
|
12 |
% |
|
98,801 |
|
|
7 |
% |
|
65,872,960 |
|
|
15 |
% |
2013 |
|
|
659,673 |
|
|
6 |
% |
|
121,776 |
|
|
23 |
% |
|
95,479,739 |
|
|
45 |
% |
2014 |
|
|
631,265 |
|
|
4 |
% |
|
123,048 |
|
|
1 |
% |
|
153,613,174 |
|
|
61 |
% |
MARKET MAKING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Options
(contracts) |
|
%
Change |
|
Futures
(contracts) |
|
%
Change |
|
Stocks
(shares) |
|
%
Change |
|
2010 |
|
|
435,184 |
|
|
|
|
|
15,371 |
|
|
|
|
|
19,165,000 |
|
|
|
|
2011 |
|
|
503,053 |
|
|
16 |
% |
|
15,519 |
|
|
1 |
% |
|
11,788,769 |
|
|
38 |
% |
2012 |
|
|
457,384 |
|
|
9 |
% |
|
12,660 |
|
|
18 |
% |
|
9,339,465 |
|
|
21 |
% |
2013 |
|
|
404,490 |
|
|
12 |
% |
|
18,184 |
|
|
44 |
% |
|
12,849,729 |
|
|
38 |
% |
2014 |
|
|
344,741 |
|
|
15 |
% |
|
15,668 |
|
|
14 |
% |
|
12,025,822 |
|
|
6 |
% |
Notes:
- (1)
- Futures
contract volume includes options on futures
BROKERAGE TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Options
(contracts) |
|
%
Change |
|
Futures
(contracts) |
|
%
Change |
|
Stocks
(shares) |
|
%
Change |
|
2010 |
|
|
243,672 |
|
|
|
|
|
80,822 |
|
|
|
|
|
65,304,874 |
|
|
|
|
2011 |
|
|
286,317 |
|
|
18 |
% |
|
91,121 |
|
|
13 |
% |
|
65,942,205 |
|
|
1 |
% |
2012 |
|
|
240,756 |
|
|
16 |
% |
|
86,141 |
|
|
5 |
% |
|
56,533,495 |
|
|
14 |
% |
2013 |
|
|
255,183 |
|
|
6 |
% |
|
103,592 |
|
|
20 |
% |
|
82,630,010 |
|
|
46 |
% |
2014 |
|
|
286,524 |
|
|
12 |
% |
|
107,380 |
|
|
4 |
% |
|
141,587,352 |
|
|
71 |
% |
60
Table of Contents
BROKERAGE CLEARED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Options
(contracts) |
|
%
Change |
|
Futures
(contracts) |
|
%
Change |
|
Stocks
(shares) |
|
%
Change |
|
2010 |
|
|
103,054 |
|
|
|
|
|
79,144 |
|
|
|
|
|
62,077,741 |
|
|
|
|
2011 |
|
|
145,993 |
|
|
42 |
% |
|
89,610 |
|
|
13 |
% |
|
63,098,072 |
|
|
2 |
% |
2012 |
|
|
144,539 |
|
|
1 |
% |
|
84,794 |
|
|
5 |
% |
|
54,371,351 |
|
|
14 |
% |
2013 |
|
|
180,660 |
|
|
25 |
% |
|
101,732 |
|
|
20 |
% |
|
78,829,785 |
|
|
45 |
% |
2014 |
|
|
225,662 |
|
|
25 |
% |
|
106,074 |
|
|
4 |
% |
|
137,153,132 |
|
|
74 |
% |
Notes:
- (1)
- Futures
contract volume includes options on futures
BROKERAGE STATISTICS:
(in 000's, except % and where noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
4Q2014 |
|
4Q2013 |
|
% Change |
|
Total Accounts |
|
|
281 |
|
|
239 |
|
|
18 |
% |
Customer Equity (in billions)* |
|
$ |
56.7 |
|
$ |
45.7 |
|
|
24 |
% |
Cleared DARTs |
|
|
564 |
|
|
453 |
|
|
25 |
% |
Total Customer DARTs |
|
|
619 |
|
|
499 |
|
|
24 |
% |
Cleared Customers (in $'s, except DART per account) |
|
|
|
|
|
|
|
|
|
|
Commission per DART |
|
$ |
4.28 |
|
$ |
4.23 |
|
|
1 |
% |
DART per Avg. Account (Annualized) |
|
|
511 |
|
|
483 |
|
|
6 |
% |
Net Revenue per Avg. Account (Annualized) |
|
$ |
3,700 |
|
$ |
3,375 |
|
|
10 |
% |
Business Segments
The following sections discuss results of our operations by business segment, excluding a discussion of corporate income and expense.
In the following tables, revenues and expenses directly associated with each segment are included in determining income before income taxes. Due to the integrated nature of the business segments,
estimates and judgments have been made in allocating certain revenue and expense items. Transactions between segments generally result from one subsidiary facilitating the business of another
subsidiary through the use of its existing trading memberships and clearing arrangements. In such cases, certain revenue and expense items are eliminated to accurately reflect the external business
conducted in each segment. Rates on transactions between segments are designed to approximate full costs. In addition to execution and clearing expenses, which are the main cost driver for both the
market making segment and the electronic brokerage segment, each segment's operating expenses include (i) employee compensation and benefits expenses that are incurred directly in support of
the businesses, (ii) general and administrative expenses, which include directly incurred expenses for property leases, professional fees, travel and entertainment, communications and
information services, equipment, and (iii) indirect support costs (including compensation and other related operating expenses) for administrative services provided by IBG LLC. Such
administrative services include, but are not limited to, computer software development and support, accounting, tax, legal and facilities management.
61
Table of Contents
Electronic Brokerage
The following table sets forth the results of our electronic brokerage operations for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2014 |
|
2013 |
|
2012 |
|
|
|
(in millions)
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
Commissions and execution fees |
|
$ |
549.0 |
|
$ |
502.1 |
|
$ |
412.6 |
|
Interest income(1) |
|
|
352.0 |
|
|
254.2 |
|
|
213.1 |
|
Other income(1) |
|
|
81.4 |
|
|
85.0 |
|
|
74.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
982.4 |
|
|
841.3 |
|
|
700.2 |
|
Interest expense |
|
|
30.1 |
|
|
22.8 |
|
|
28.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
952.3 |
|
|
818.5 |
|
|
672.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses |
|
|
|
|
|
|
|
|
|
|
Execution and clearing |
|
|
147.7 |
|
|
159.1 |
|
|
135.8 |
|
Employee compensation and benefits |
|
|
79.9 |
|
|
74.5 |
|
|
81.6 |
|
Occupancy, depreciation and amortization |
|
|
11.2 |
|
|
12.5 |
|
|
12.1 |
|
Communications |
|
|
11.5 |
|
|
9.7 |
|
|
8.9 |
|
General and administrative |
|
|
113.5 |
|
|
166.9 |
|
|
90.3 |
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
|
363.8 |
|
|
422.7 |
|
|
328.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
588.5 |
|
$ |
395.8 |
|
$ |
343.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Certain
reclassifications have been made to previously reported amounts to conform with the current presentation of currency translation gains and losses
related to our currency diversification strategy.
Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013
Electronic brokerage total net revenues for the year ended December 31, 2014 increased $133.8 million, or 16%, to
$952.3 million, from $818.5 million during the year ended December 31, 2014, primarily due to higher net interest income and commission revenue. Commissions and execution fees
increased $46.9 million, or 9%, as a result of higher cleared customer volume in options and stock, partially offset by a lower average commission per customer order. Cleared customer volume
rose in options and futures contracts and stock shares by 25%, 4% and 74%, respectively for the year ended December 31, 2014 from the prior year. Total DARTs from cleared and execution-only
customers for the year ended December 31, 2014 increased 16% to 566 thousand, as compared to 486 thousand during the year ended December 31, 2013. DARTs from cleared
customers for the year ended December 31, 2014 increased 17% to 515 thousand, as compared to 441 thousand during the year ended December 31, 2013.
Net
interest income increased $90.5 million, or 39% in the year ended December 31, 2014 as compared to the corresponding period in 2013. The increase in net interest income
was attributable to higher net customer interest of $43.4 million, driven by a $4.65 billion increase in average customer credit balances and a $4.31 billion increase in average
margin borrowings; as well as higher net fees from securities
lending transactions of $46.1 million. The average Fed Funds effective rate decreased by approximately two basis points to 0.09% for the year ended December 31, 2014 from the prior year
period. In 2014, the company purchased U.S. government securities for the purpose of satisfying regulatory requirements, which improved the yield on the investment of customer funds.
62
Table of Contents
Electronic
brokerage non-interest expenses for the year ended December 31, 2014 decreased $58.9 million, or 14%, as compared to the year ended December 31, 2013.
Within non-interest expenses, execution and clearing expenses decreased by $11.4 million due to continued price competition between U.S. stock and options exchanges. Employee compensation and
benefits expenses increased by $5.4 million, or 7% during the year ended December 31, 2014 as compared to the prior year. The increase in employee compensation and benefits expense
reflects an 11% increase in the average number of brokerage employees from the same period last year. General and administrative expenses decreased $53.4 million during the year ended
December 31, 2014 as compared to the year ago period, primarily due to the non-recurrence of a $64 million bad debt expense recorded in 2013, offset by minor increases across other
general and administrative expenses. As a percentage of total net revenues, non-interest expenses decreased to 38% from 52% for the year ended December 31, 2014 as compared to 2013.
Electronic
brokerage income before income taxes increased $192.7 million, or 49%, to $588.5 million for the year ended December 31, 2014 from $395.8 million
for the year ended December 31, 2013. As a percentage of total net revenues for the electronic brokerage segment, income before income taxes was 62% and 48% for the years ended
December 31, 2014 and 2013, respectively.
Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012
Electronic brokerage total net revenues for the year ended December 31, 2013 increased $146.3 million, or 22%, to
$818.5 million, from $672.2 million during the year ended December 31, 2012, primarily due to higher commissions and execution fees and higher net interest income. Commissions and
execution fees increased $89.5 million, or 22%, directly attributable to higher cleared customer volume, which rose in options and futures contracts and stock shares by 25%, 20% and 45%,
respectively, for the year ended December 31, 2013 from the corresponding period in 2012. Total DARTs from cleared and execution-only customers for the year ended December 31, 2013
increased 18% to 486 thousand, as compared to 413 thousand during the year ended December 31, 2012. DARTs from cleared customers for the year ended December 31, 2013
increased 15% to 441 thousand, as compared to 384 thousand during the year ended December 31, 2012.
Net
interest income increased $ 46.3 million, or 25% in the year ended December 31, 2013 as compared to 2012. The increase in net interest income was attributable to an
increase of $26.4 million in net fees from securities borrowed and loaned transactions as well as a $4.05 billion increase in average customer credit balances and an increase of
$3.21 billion in average margin borrowings. The average Fed Funds effective rate decreased by approximately three basis points to 0.11% for the year ended December 31, 2013 from the
prior year.
Electronic
brokerage non-interest expenses for the year ended December 31, 2013 increased $94.0 million, or 29%, as compared to the year ended December 31, 2012.
Within non-interest expenses, execution and clearing expenses increased by $23.3 million, driven primarily by an increase in customer trading volume. Employee compensation and benefits expenses
decreased by $7.1 million, or 9% during the year ended December 31, 2013 as compared to 2012. The decrease in employee compensation and benefits expense reflects the non-recurrence of
the special discretionary grant of restricted stock units awarded in January 2012, a payment made on unvested shares in our Stock Incentive plan in lieu of the December 2012 special dividend and lower
incentive compensation related expenses. General and administrative expenses increased $76.6 million, during the year ended December 31, 2013 as compared to 2012, primarily due to bad
debt expense related to the Singapore stock issue, explained in further detail in the "Financial Overview" section. As a percentage of total net revenues, non-interest expenses increased to 52% from
49% for the year ended December 31, 2013 as compared to the corresponding period in 2012.
63
Table of Contents
Electronic brokerage income before income taxes increased $52.3 million, or 15%, to $395.8 million for the year ended December 31, 2012 from
$343.5 million for the year ended December 31, 2012. As a percentage of total net revenues for the electronic brokerage segment, income before income taxes was 48% and 51% for the years
ended December 31, 2013 and 2012, respectively.
Market Making
The following table sets forth the results of our market making operations for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2014 |
|
2013 |
|
2012 |
|
|
|
(in millions)
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
Trading gains(1) |
|
$ |
261.5 |
|
$ |
331.8 |
|
$ |
466.0 |
|
Interest income |
|
|
64.9 |
|
|
50.8 |
|
|
57.9 |
|
Other income(1) |
|
|
1.9 |
|
|
7.7 |
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
328.3 |
|
|
390.3 |
|
|
526.5 |
|
Interest expense |
|
|
43.9 |
|
|
29.2 |
|
|
36.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
284.4 |
|
|
361.1 |
|
|
490.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses |
|
|
|
|
|
|
|
|
|
|
Execution and clearing |
|
|
63.8 |
|
|
84.0 |
|
|
117.8 |
|
Employee compensation and benefits |
|
|
40.8 |
|
|
45.9 |
|
|
66.8 |
|
Occupancy, depreciation and amortization |
|
|
6.3 |
|
|
6.1 |
|
|
7.1 |
|
Communications |
|
|
9.6 |
|
|
8.8 |
|
|
10.2 |
|
General and administrative |
|
|
49.8 |
|
|
57.8 |
|
|
69.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
|
170.3 |
|
|
202.6 |
|
|
271.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
114.1 |
|
$ |
158.5 |
|
$ |
219.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Certain
reclassifications have been made to previously reported amounts to conform with the current presentation of currency translation gains and losses
related to our currency diversification strategy.
Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013
Market making total net revenues for the year ended December 31, 2014 decreased $76.7 million, or 21%, to
$284.4 million, from $361.1 million during the year ended December 31, 2013. Trading gains for the year ended December 31, 2014 decreased $70.3 million, or 21% from
the year-ago period. Trading gains were negatively impacted by a market making environment with intense competition and low average volatility. The VIX® was unchanged at 14.2 average for
2014 as compared to the prior year. The ratio of actual to implied volatility was up slightly at 79% for 2014 as compared to 77% for 2013. An approximate $16 million loss due to a trading error
in the third quarter also negatively impacted trading gains.
Market
making options and futures contract volume and stock share volumes decreased 15%, 14%, and 6%, respectively, in the year ended December 31, 2014 as compared the prior year.
Net
interest income for the year ended December 31, 2014 decreased by $0.6 million, or 3%, to $21.0 million. As described above, our trading gains and our net
interest income are interchangeable and depend on the mix of market making positions in our portfolio and on relative interest rates in the
64
Table of Contents
stock
and options markets. In the year ended December 31, 2014, these factors, together with securities lending activity, produced less net interest income than in 2013.
Market
making non-interest expenses for the year ended December 31, 2014 decreased $32.3 million, or 16%, as compared to the year ended December 31, 2013. The
decrease was primarily from a $20.2 million decrease in execution and clearing fees and an $8.0 million decrease in general and administrative expenses during the year ended
December 31, 2014 as compared to the same period last year. The decrease in execution and clearing fees was driven by lower volume across all product classes. General and administrative
expenses reflect a reduction in administrative and consulting fees, primarily for software development from the year-ago period. As a percentage of total net revenues, market making non-interest
expenses were 60% and 56% for the years ended December 31, 2014 and 2013, respectively.
Market
making income before income taxes decreased $44.4 million, or 28%, to $114.1 million for the year ended December 31, 2014 from $158.5 million for the
year ended December 31, 2013. As a percentage of total net revenues for the market making segment, income before income taxes was 40% and 44% for the years ended December 31, 2014 and
2013, respectively.
Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012
Market making total net revenues for the year ended December 31, 2013 decreased $129.4 million, or 26%, to
$361.1 million, from $490.5 million during the year ended December 31, 2012. Trading gains for the year ended December 31, 2013 decreased $134.2 million, or 29% from
the prior year.
Trading
gains were negatively impacted by a 15% decrease in volatility, as measured by the VIX®, which decreased to 14.2, for the year ended December 31, 2013 as
compared to
the year-ago period. As a result, our trading gains, after removing the effects of currency translation, were 30% lower than those of the prior year.
Market
making options contract volume decreased 12%, while futures contracts and stock shares volumes increased 44% and 38%, respectively, in the year ended December 31, 2013 as
compared to 2012.
Net
interest income for the year ended December 31, 2013 decreased by $0.3 million, or 1%, to $21.6 million. The decrease was driven by lower interest earned on firm
cash balances, partially offset by an increase in net fees earned from securities borrowed and loaned transactions. As described above, our trading gains and our net interest income are
interchangeable and depend on the mix of market making positions in our portfolio and on relative interest rates in the stock and options markets. In the year ended December 31, 2013, these
factors, together with securities lending activity, produced less net interest income than in 2012.
Market
making non-interest expenses for the year ended December 31, 2013 decreased $68.4 million, or 25%, as compared to the year ended December 31, 2012. The
decrease primarily resulted from a $33.8 million decrease in execution and clearing fees and a $20.9 million decrease in employee compensation and benefits during the year ended
December 31, 2013 as compared to 2012. The decrease in execution and clearing fees was driven by lower options volume. The decrease in employee compensation and benefits expense reflects staff
reductions as well as the non-recurrence of the special discretionary grant of restricted stock units awarded in January 2012, a payment made on unvested shares in our Stock Incentive plan in lieu of
the December 2012 special dividend and lower incentive compensation related expenses. As a percentage of total net revenues, market making non-interest expenses increased to 74% from 59% for the year
ended December 31, 2013 and 2012, respectively.
Market
making income before income taxes decreased $61.0 million, or 28%, to $158.5 million for the year ended December 31, 2013 from $219.5 million for the
year ended December 31, 2012. As a
65
Table of Contents
percentage
of total net revenues for the market making segment, income before income taxes was 44% and 45% for the years ended December 31, 2013 and 2012, respectively.
Liquidity and Capital Resources
We maintain a highly liquid balance sheet. The majority of our assets consist of exchange-listed marketable securities inventories,
which are marked-to-market daily, investment of customer funds and collateralized receivables arising from customer-related and proprietary securities transactions. Collateralized receivables consist
primarily of customer margin loans, securities borrowed, and, to a lesser extent receivables from clearing houses for settlement of securities transactions, and securities purchased under agreements
to resell. At December 31, 2014, total assets were $43.39 billion of which approximately $42.95 billion, or 99.0% were considered liquid.
Daily
monitoring of liquidity needs and available collateral levels is undertaken to help ensure that an appropriate liquidity cushion, in the form of unpledged collateral, is maintained
at all times. Our ability to quickly reduce funding needs by balance sheet contraction without adversely affecting our core businesses and to pledge additional collateral in support of secured
borrowings is continuously evaluated to ascertain the adequacy of our capital base.
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.
Liability
balances in connection with our securities loaned and payables to customers were greater than their respective average monthly balances during the year ended
December 31, 2014. Liability balances in connection with our short term borrowings were lower than their respective average monthly balances during the year ended December 31, 2014.
Based on our current level of operations, we believe our cash flows from operations, available cash and available borrowings under our senior secured revolving credit facility will be adequate to meet
our future liquidity needs for more than the next twelve months.
Cash
and cash equivalents held by the Company's non-U.S. operating companies at December 31, 2014 were $439.5 million ($421.2 million at December 31, 2013).
These funds are primarily intended to finance each individual operating company's local operations, and thus would not be available to fund U.S. domestic operations unless repatriated through payment
of dividends to IBG LLC. In December 2012, a dividend of $131.6 million was paid to IBG LLC from a non-U.S. subsidiary as part of the $400 million funding for the special
cash dividend. The majority of the underlying earnings of this subsidiary had previously been subject to U.S. income taxes. Therefore, additional U.S. income taxes were required to be provided on a
minority portion of this dividend. It is not currently the Company's intention to repatriate further amounts from non-U.S. operating companies. In the event dividends were to be paid to the Company in
the future by a non-U.S. operating company, as occurred in connection with the special dividend in December 2010, the Company would be required to accrue and pay income taxes on such dividends to the
extent that U.S. income taxes had not been paid previously on the income of the paying company.
Historically,
IBG, Inc.'s consolidated equity has consisted primarily of accumulated retained earnings, which to date have been sufficient to fund our operations and growth.
IBG, Inc.'s consolidated equity increased 2% to $5.18 billion at December 2014 from $5.09 billion at December 31, 2013. This is attributable to total comprehensive income
for 2014, offset by dividends paid during 2014.
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Table of Contents
Cash Flows
The following table sets forth our cash flows from operating activities, investing activities and financing activities for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2014 |
|
2013 |
|
2012 |
|
|
|
(in millions)
|
|
Net cash provided by operating activities |
|
$ |
417.0 |
|
$ |
140.9 |
|
$ |
725.4 |
|
Net cash provided by (used in) investing activities |
|
|
54.1 |
|
|
(32.4 |
) |
|
(52.4 |
) |
Net cash used in financing activities |
|
|
(308.0 |
) |
|
(248.5 |
) |
|
(605.2 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
(107.0 |
) |
|
(27.4 |
) |
|
28.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
$ |
56.1 |
|
$ |
(167.4 |
) |
$ |
96.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
cash flows from operating activities are largely a reflection of the size and composition of trading positions held by our market making subsidiaries, and of the changes in customer
cash and margin debit balances in our electronic brokerage business. Our cash flows from investing activities are primarily related to our currency diversification strategy, other investments,
capitalized internal software development, purchases and sales of memberships 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, or create new opportunities for ourselves as market makers or where we can influence exchanges to provide competing products at better prices
using sophisticated technology. Our cash flows from financing activities are comprised of short-term borrowings, long-term borrowings and capital transactions. Short-term borrowings from banks are
part of our daily cash management in support of operating activities. Other borrowings provide us with flexible sources of excess liquidity and regulatory capital. Capital transactions consist
primarily of the approximately $400 million special dividend paid in December 2012 as well as the quarterly dividends beginning in June 2011 and continuing through December 2014 paid to common
stockholders, and related cash distributions paid to Holdings.
Year Ended December 31, 2014: Our cash and cash equivalents increased by $56.1 million to $1,269.3 million at the end of
2014.
We raised $417.0 million in net cash from operating activities. We used net cash of $253.9 million in our investing and financing activities for dividends paid to our common stockholders
and noncontrolling interests and payments made to Holdings under the Tax Receivable Agreement, partially offset by cash generated by other investments and an increase in short term borrowings. Under
investing activities, purchases and sales of other investments mainly consisted transactions in marketable securities held for investment purposes.
Year Ended December 31, 2013: Our cash and cash equivalents decreased by $167.4 million to $1,213.2 million at the end of
2013.
We raised $140.9 million in net cash from operating activities. We used net cash of $32.4 million in our investing activities to purchase other investments and for capital expenditures.
We used $248.5 million in financing activities, primarily dividends paid and to reduce short-term borrowings.
Year Ended December 31, 2012: Our cash and cash equivalents increased by $96.0 million to $1,380.6 million at the end of
2012.
We raised $725.4 million in net cash from operating activities. We used net cash of $52.4 million in our investing activities to purchase other investments and for capital expenditures.
We used $605.2 million in financing activities, primarily in dividends paid, the repayment of senior notes outstanding and payments made to Holdings under the Tax receivable Agreement.
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Table of Contents
Regulatory Capital Requirements
Our principal operating subsidiaries are subject to separate regulation and capital requirements in the United States and other
jurisdictions. TH LLC and IB LLC are registered U.S. broker-dealers and futures commission merchants, and their primary regulators include the SEC, the Commodity Futures Trading
Commission, the Chicago Board Options Exchange, the Chicago Mercantile Exchange, the Financial Industry Regulatory Authority and the National Futures Association. THE is registered to do business in
Switzerland as a securities dealer and is regulated by the Swiss Financial Market Supervisory Authority. IBUK is subject to regulation by the U.K. Financial Conduct Authority. Our various other
operating subsidiaries are similarly regulated. See the notes to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further
information regarding our regulated subsidiaries.
At
December 31, 2014, aggregate excess regulatory capital for all of the operating companies was $3.27 billion, and all of the operating companies were in compliance with
their respective regulatory capital requirements.
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Capital/
Eligible Equity |
|
Requirement |
|
Excess |
|
|
|
(in millions)
|
|
IB LLC |
|
$ |
2,333.9 |
|
$ |
279.0 |
|
$ |
2,054.9 |
|
TH LLC |
|
|
374.2 |
|
|
63.6 |
|
|
310.6 |
|
THE |
|
|
661.7 |
|
|
205.3 |
|
|
456.4 |
|
Other regulated Operating Companies |
|
|
486.0 |
|
|
36.1 |
|
|
449.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,855.8 |
|
$ |
584.0 |
|
$ |
3,271.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Indebtedness
Senior Secured Revolving Credit Facility
On May 17, 2012, IBG LLC entered into a $100 million three-year senior secured revolving credit facility with a
syndicate of banks. This credit facility replaced a similar two-year facility that expired on May 18, 2012. On August 8, 2014 IBG LLC elected to terminate this credit facility.
Senior Notes
Prior to January 2012, IBG LLC periodically issued senior notes in private placements to certain qualified customers of
IB LLC. IBG LLC used the proceeds from sales of the senior notes to provide capital to IBG LLC's broker-dealer subsidiaries in the form of subordinated loans and for other general
purposes. Based on a review of its available liquidity resources, which resulted in a determination of a strong liquidity position, in January 2012 the Company decided to discontinue the Senior Notes
Program. It is the Company's current intention that no new Senior Notes will be issued.
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. These expenditure items are reported as property and equipment. Capital expenditures for property and equipment were
approximately $19.4, $16.8 and $18.0 million for the three years ended December 31, 2014, 2013 and 2012, respectively. In the future, we plan meet capital expenditure needs as we
continue our focus on technology infrastructure initiatives to further enhance our competitive position. We anticipate that we will fund capital expenditures with cash from operations and cash on
hand. 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 strategic acquisitions, we may incur additional capital expenditures.
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Table of Contents
Contractual Obligations Summary
Our contractual obligations principally include obligations associated with our outstanding indebtedness and interest payments as of
December 31, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year |
|
|
|
Total |
|
2015 - 2016 |
|
2017 - 2018 |
|
Thereafter |
|
|
|
(in Millions)
|
|
Payable to Holdings under Tax Receivable Agreement(1) |
|
$ |
277.4 |
|
$ |
41.1 |
|
$ |
45.9 |
|
$ |
190.4 |
|
Operating leases |
|
|
41.9 |
|
|
22.9 |
|
|
18.4 |
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
319.3 |
|
$ |
64.0 |
|
$ |
64.3 |
|
$ |
191.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- As
of December 31, 2014, contractual amounts owed under the tax receivable agreement of $277.4 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,
2014, approximately $86.2 million of cumulative cash payments have been made.
Seasonality
Our businesses are subject to seasonal fluctuations, reflecting varying numbers of market participants at times during the year and
varying numbers of trading days from quarter-to-quarter, including 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 effect of inflation on our operations, we believe that inflation has not had for the three
most recent years, and is not likely in the foreseeable future to have, a material impact on our results of operations.
The
company purchased U.S. government securities for the purpose of satisfying U.S. regulatory requirements. Sudden increases in interest rates will cause mark-to-market losses on these
securities. The impact of changes in interest rates is further described in ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Strategic Investments and Acquisitions
We periodically engage in evaluations of potential strategic investments and acquisitions. The Company holds strategic investments in
electronic trading exchanges including: Boston Options Exchange, LLC; OneChicago LLC and CBOE Stock Exchange, LLC. The Company has also made an investment in
Quadriserv Inc., an electronic securities lending platform provider.
We
intend to continue making acquisitions on an opportunistic basis, generally only when the acquisition candidate will, in our opinion, enable us to acquire either technology or
customers faster than we could develop them on our own. At December 31, 2014, there were no definitive agreements with respect to any material acquisition.
Certain Information Concerning Off-Balance-Sheet Arrangements
IBG, Inc. may be exposed to a risk of loss not reflected in the consolidated financial statements for futures products, which
represent obligations of the Company to settle at contracted prices, which may require repurchase or sale in the market at prevailing prices. Accordingly, these transactions result
69
Table of Contents
in
off-balance sheet risk as IBG, Inc.'s cost to liquidate such futures contracts may exceed the amounts reported in our consolidated statements of financial condition.
Critical Accounting Policies
Valuation of Financial Instruments
Due to the nature of our operations, substantially all of our financial instrument assets, comprised of financial instruments owned,
securities purchased under agreements to resell, securities borrowed and receivables from brokers, dealers and clearing organizations are carried at fair value based on published market prices and are
marked to market daily, or are assets which are short-term in nature and are reported at amounts approximating fair value. Similarly, all of our financial instrument liabilities that arise from
financial instruments sold but not yet purchased, securities sold under agreements to repurchase, securities loaned and payables to brokers, dealers and clearing organizations are short-term in nature
and are reported at quoted market prices or at amounts approximating fair value. Our long and short positions are valued at either the last consolidated trade price at the close of regular trading
hours, in their respective markets. Given that we manage a globally integrated market making portfolio, we have large and substantially offsetting positions in securities and commodities that trade on
different exchanges that close at different times of the trading day. As a
result, there may be large and anomalous swings in the value of our positions daily and, accordingly, in our earnings in any period. This is especially true on the last business day of each calendar
quarter, although such swings tend to come back into equilibrium on the first business day of the succeeding calendar quarter.
Principles of Consolidation, including Noncontrolling Interests
The consolidated financial statements include the accounts of IBG, Inc. and its majority and wholly owned subsidiaries. As sole
managing member of IBG LLC, IBG, Inc. exerts control over the Group's operations. In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification
("ASC") ASC Topic 810, "Consolidation", the Company consolidates the Group's consolidated financial statements and records as noncontrolling interest the interests in the Group that
IBG, Inc. does not own.
We
are the sole managing member of IBG LLC and, as such, operate and control all of the business and affairs of IBG LLC and its subsidiaries and consolidate
IBG LLC's financial results into our financial statements. We hold approximately 14.5% ownership interest in IBG LLC. Holdings is owned by the original members of IBG LLC and
holds approximately 85.5% ownership interest in IBG LLC. Our share of IBG LLC's net income is approximately 14.5% and similarly, outstanding shares of our common stock represent
approximately 14.5% of the outstanding membership interests of IBG LLC.
Prior
to the June 6, 2012 amendment to the Exchange Agreement (see Note 4 to the consolidated financial statements), the Company was required to report Holdings' ownership
as redeemable noncontrolling interests (i.e., temporary equity), outside of total equity in the consolidated financial statements. Redemption value of these redeemable noncontrolling interests
was measured as the number of equivalent shares of member interests in IBG LLC owned by Holdings multiplied by the then current market price per share of the Company's common stock. The excess
of the redemption value over the book value of these interests, which did not affect net income attributable to common stockholders or cash flows, was required to be accounted for as a reduction of
the Company's stockholders' equity in the consolidated statement of financial condition.
The
Company elected to recognize changes in redemption value in each reporting period immediately as they occurred as if the end of each reporting period was also the redemption date for
the entire redeemable noncontrolling interest, notwithstanding that the redeemable noncontrolling
70
Table of Contents
interests
are redeemable over a period of time pursuant to a redemption schedule (see Note 4 to the consolidated financial statements).
For
periods after the Amendment, the noncontrolling interests in IBG LLC attributable to Holdings will be reported as a component of total equity.
The
Company's policy is to consolidate all other entities in which it owns more than 50% unless it does not have control. All inter-company balances and transactions have been
eliminated.
Earnings per Share
Earnings per share ("EPS") are computed in accordance with FASB ASC Topic 260, "Earnings per Share." Shares of Class A and
Class B common stock share proportionately in the earnings of IBG, Inc. Basic earnings per share are calculated utilizing net income available for common stockholders divided by the
weighted average number of shares of Class A and Class B common stock outstanding for that period. Diluted earnings per share are calculated utilizing the Company's basic net income
available for common stockholders divided by diluted weighted average shares outstanding with no adjustments to net income available to common stockholders for dilutive potential common shares.
For
periods prior to June 6, 2012, the Company has determined to reflect Topic D-98 measurement adjustments for non-fair value redemption rights through application of the
two-class method of calculating earnings per share in lieu of recognizing the impact through the determination of net income attributable to common shareholders. Furthermore, the Company has elected
to treat only the portion of the periodic measurement adjustments that reflect a redemption in excess of fair value as being akin to a dividend, reducing net income attributable to common stockholders
for purposes of applying the two-class method. Decreases in the carrying amount of redeemable noncontrolling interests through Topic D-98 measurement adjustments are reflected in the application of
the two-class method only to the extent they represent recoveries of amounts previously accounted for by applying the two-class method.
Stock-Based Compensation
IBG, Inc. follows FASB ASC Topic 718, "CompensationStock Compensation" ("ASC Topic 718"), to account for its
stock-based compensation plans. ASC Topic 718 requires all share-based payments to employees to be recognized in the consolidated financial statements using a fair value-based method. Grants, which
are denominated in U.S. dollars, are communicated to employees in the year of grant, thereby establishing the fair value of each grant. The fair value of awards granted to employees are generally
expensed as follows50% in the year of grant in recognition of plan forfeiture provisions (described below) and the remaining 50% over the related vesting period utilizing the "graded
vesting" method permitted under ASC Topic 718. In the case of "retirement eligible" employees (those employees older than 59), 100% of awards are expensed when granted.
Awards
granted under the stock-based compensation plans are subject to forfeiture in the event an employee ceases employment with the Company. The plans provide that employees who
discontinue employment with the Company without cause and continue to meet the terms of the plans' post-employment provisions will forfeit 50% of unvested previously granted awards unless the employee
is over the age of 59, in which case the employee would be eligible to receive 100% of unvested awards previously granted.
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, in accordance with FASB ASC Topic 450, "Contingencies." Significant judgment is required in making these estimates
71
Table of Contents
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.
We
have been from time to time subject to certain pending and legal actions which arise out of the normal course of business. Litigation is inherently unpredictable, particularly in
proceedings where claimants seek substantial or indeterminate damages, or which are in their early stages. We cannot predict with certainty the actual loss or range of loss related to such legal
proceedings, the manner in which they will be resolved, the timing of final resolution or the ultimate settlement. Consequently, we cannot estimate losses or ranges of losses related to such legal
matters, even in instances where it is reasonably possible that a future loss will be incurred. As of December 31, 2014, we, along with certain of our subsidiaries, have been named parties to
legal actions, which we and/or such subsidiaries intend to defend vigorously. Although the results of legal actions cannot be predicted with certainty, it is the opinion of management that the
resolution of these actions is not expected to have a material adverse effect, if any, on our business or financial condition, but may have a material impact on the results of operations for a given
period. As of December 31, 2014 and December 31, 2013, reserves provided for potential losses related to litigation matters were not material.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP 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. Such estimates include the allowance for doubtful accounts, valuation of certain investments, compensation accruals,
current and deferred income taxes and estimated contingency reserves.
Income Taxes
IBG, Inc. accounts for income taxes in accordance with FASB ASC Topic 740, "Income Taxes" ("ASC Topic 740"). The Company's
income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits are based on enacted tax laws and reflect management's best assessment of estimated future taxes to
be paid. We are subject to income taxes in both the United States and numerous foreign jurisdictions. Determining income tax expense requires significant judgments 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 pretax 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)
72
Table of Contents
are
considered. Deferred income taxes have not been provided for U.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. Management is not aware of any such changes that would have a material effect on
the Company's results of operations, cash flows, or financial position.
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.
The
Company records tax liabilities in accordance with ASC Topic 740 and adjusts 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.
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Table of Contents
Recently Issued Accounting Pronouncements
Following is a summary of recently issued FASB Accounting Standards Updates ("ASUs") that have affected or may affect the Company's
consolidated financial statements:
|
|
|
|
|
|
|
Affects |
|
Status |
ASU 2013-05 |
|
Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of
an Investment in a Foreign Entity. |
|
Effective for fiscal years and interim periods within those years beginning after December 15, 2013. |
ASU 2014-06 |
|
Technical Corrections and Improvements Related to Glossary Terms. |
|
Effective on issuance in March 2014. |
ASU 2014-08 |
|
Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an
Entity. |
|
Effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. |
ASU 2014-09 |
|
Revenue from Contracts with Customers (Topic 606) |
|
Effective for annual periods beginning on or after December 15, 2016. |
ASU 2014-11 |
|
Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. |
|
Effective for the first interim or annual period beginning after December 15, 2014. |
ASU 2014-15 |
|
Presentation of Financial StatementsGoing Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. |
|
Effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. |
Adoption
of those ASUs that became effective during 2014 and 2015 prior to the issuance of the Company's consolidated financial statements, did not have a material effect on these
financial statements.
Non-GAAP Financial Measures
Non-GAAP measures are used to isolate items that the Company's management views as non-operating in nature, which is intended to give a
clearer presentation of operating results. Given its material impact on our reported financial results, the following non-GAAP measure is presented for 2010:
In
December 2010, we effected a series of dividend payments, culminating in a cash dividend of $1.79 per share, which was paid to holders of IBKR common stock. In total, IBG LLC
paid out about $1 billion. Funding for this dividend originated with our Swiss company, which paid a dividend to IBG LLC, its parent company. IBG LLC, in turn, paid a dividend to
its members, including Interactive Brokers Group, Inc., the public company. On a consolidated reporting basis, these dividends had no
74
Table of Contents
effect
on the Company's reported income. However, the original dividend from the Swiss company was made from earnings that were not previously taxed in the U.S. As a result, this triggered a U.S.
federal income tax liability for the Company, which is reported as income tax expense in the consolidated statement of comprehensive income. This income tax liability was funded by reserving a portion
of the dividend that the Company received. The remaining after-tax amount was paid to the Company's common stockholders. The result was cash-flow neutral for the public company.
The
Company also paid a dividend equivalent to employees holding unvested shares in our Stock Incentive Plan at that time. This amounted to approximately $10 million and was
recorded as compensation expense.
In
summary, this item reduced diluted EPS by approximately $0.71 for the 2010 year.
The
Company believes that it is appropriate to adjust this non-operating item in the consolidated statement of comprehensive income in order to achieve a proper representation of the
Company's financial performance. For a reconciliation of our accounting principles generally accepted in the United States of America ("U.S. GAAP") to non-GAAP results for 2010 see the 'GAAP to
Non-GAAP Reconciliation and Footnotes' later in this section this Annual Report on Form 10-K.
75
Table of Contents
GAAP to NON-GAAP Reconciliation and Footnotes
IBG, Inc. Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
(In thousands, except shares or per share
amounts) |
|
|
|
As Reported |
|
Non-GAAP
Adjustments |
|
Non-GAAP
Financial
Performance
Measures |
|
Income Before Income Taxes: |
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
337,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Adjustments for non-operating activities |
|
|
|
|
|
|
|
|
|
|
Payments in lieu of dividends on unvested shares of the Company's Class A Common Stock(a) |
|
|
|
|
$ |
9,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
337,415 |
|
$ |
9,456 |
|
$ |
346,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax profit margin |
|
|
37 |
% |
|
|
|
|
38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense: |
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
60,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Adjustments for non-operating activities |
|
|
|
|
|
|
|
|
|
|
Income taxes on payments in lieu of dividends(a) |
|
|
|
|
$ |
678 |
|
|
|
|
The Company's share of taxes payable arising from the payment of dividends by THE AG to IBG LLC(b) |
|
|
|
|
|
(46,112 |
) |
|
|
|
U.S. foreign tax credits for Swiss taxes paid(c) |
|
|
|
|
|
16,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
60,281 |
|
$ |
(28,826 |
) |
$ |
31,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(9,550 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Adjustments for non-operating activities |
|
|
|
|
|
|
|
|
|
|
Payments in lieu of dividends on unvested shares of the Company's Class A Common Stock(a) |
|
|
|
|
$ |
1,010 |
|
|
|
|
Income taxes on payments in lieu of dividends(a) |
|
|
|
|
|
(368 |
) |
|
|
|
The Company's share of taxes payable arising from the payment of dividends by THE AG to IBG LLC(b) |
|
|
|
|
|
46,112 |
|
|
|
|
U.S. foreign tax credits for Swiss taxes paid(c) |
|
|
|
|
|
(16,608 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(9,550 |
) |
$ |
30,146 |
|
$ |
20,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share(d): |
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.23 |
) |
$ |
0.72 |
|
$ |
0.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.23 |
) |
$ |
0.71 |
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares: |
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
41,870,926 |
|
|
|
|
|
41,870,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
42,498,705 |
|
|
|
|
|
42,498,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (a)
- Holders
of unvested Class A shares of the Company's common stock were paid $1.79 per share in lieu of the cash dividend paid on outstanding shares on
December 23, 2010. The Company's share of these payments was $1.0 million, on which it realized a tax benefit of $0.4 million.
76
Table of Contents
- (b)
- On
December 21, 2010, Timber Hill Europe AG ("THE AG") paid its sole shareholder, IBG LLC, a dividend of $990.3 million. THE AG's
pretax earnings had not previously been subject to taxation in the United States. U.S. federal income taxes on the Company's share of this dividend were $40.8 million. In addition, the Company
incurred $5.3 million in non- refundable taxes withheld by the Swiss government.
- (c)
- The
provision for income taxes is reported net of available foreign tax credits of $16.6 million.
- (d)
- The
non-GAAP diluted EPS for 2010 of $0.48 differs from the $0.72 by $0.24, which represented the impact of currency translation now included in the GAAP
Comprehensive Income. See Note 5 to the consolidated financial statements in this section for further information regarding comprehensive income.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks. Our exposures to market risks arise from assumptions built into our pricing models, equity
price risk, foreign currency exchange rate fluctuations related to our international operations, changes in interest rates which impact our variable-rate debt obligations, and risks relating to the
extension of margin credit to our customers.
Market
risk refers to the risk that a change in the level of one or more market prices, rates, indices, implied volatilities (the price volatility of the underlying instrument imputed
from option prices), correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio. Generally, the Company incurs trading-related market risk as a
result of activities in the market making segment, where the substantial majority of the Company's Value-at-Risk ("VaR") for market risk exposures is generated. In addition, the Company incurs
non-trading-related market risk primarily from investment activities and from foreign currency exposure held in the equity of the Company's non-market making foreign affiliates, i.e., its
non-U.S. brokerage affiliates and information technology affiliates, and held to meet target balances in its currency diversification strategy.
The
Company uses various risk management tools in managing its market risk, which are embedded in its real-time market making systems. We employ certain hedging and risk management
techniques to protect us from a severe market dislocation. Our risk management policies are developed and implemented by our Chairman and our steering committee, which is comprised of senior
executives of our various companies. Our strategy is to calculate quotes a few seconds ahead of the market and execute small trades at a tiny but favorable differential as a result. This is made
possible by our proprietary pricing model, which evaluates and monitors the risks inherent in our portfolio, assimilates market data and reevaluates the outstanding quotes in our portfolio each
second. Our model automatically rebalances our positions throughout each trading day to manage risk exposures on our options and futures positions and the underlying securities, and will price the
increased risk that a position would add to the overall portfolio into the bid and offer prices we post. Under risk management policies implemented and monitored primarily through our computer
systems, reports to management, including risk profiles, profit and loss analysis and trading performance, are prepared on a real-time basis as well as daily and periodical bases. Although our market
making is completely automated, the trading process and our risk are monitored by a team of individuals who, in real time, observe various risk parameters of our consolidated positions. Our assets and
liabilities are
marked-to-market daily for financial reporting purposes and re-valued continuously throughout the trading day for risk management and asset/liability management purposes.
The
Company uses a covariant VaR methodology to measure, monitor and review the market risk of its market making portfolios, with the exception of fixed income products, and its currency
exposures. The risk of fixed income products, which comprise U.S. corporate bonds and U.S. Treasury securities, is measured using a stress test.
77
Table of Contents
Pricing Model Exposure
As described above, our proprietary pricing model, which continuously evaluates and monitors the risks inherent in our portfolio,
assimilates market data and reevaluates the outstanding quotes in our entire portfolio each second. Certain aspects of the model rely on historical prices of securities. If the behavior of price
movements of individual securities diverges substantially from what their historical behavior would predict, we might incur trading losses. We attempt to limit such risks by diversifying our portfolio
across many different options, futures and underlying securities and avoiding concentrations of positions based on the same underlying security. Historically, our losses from these events have been
immaterial in comparison to our annual trading profits.
Foreign Currency Exposure
As a result of our international market making activities and accumulated earnings in our foreign subsidiaries, our income and net
worth is exposed to fluctuations in foreign exchange rates. Our European operations and some of our Asian operations are conducted by our Swiss subsidiary, THE. THE is regulated by the Swiss Financial
Market Supervisory Authority as a securities dealer and its financial statements are presented in Swiss francs. Accordingly, THE is exposed to certain foreign exchange risks as described
below:
-
- THE buys and sells futures contracts and securities denominated in various currencies and carries bank balances and borrows and lends
such currencies in its regular course of business. At the end of each accounting period THE's assets and liabilities are translated into Swiss francs for presentation in its financial statements. The
resulting gains or losses are reported as translation gain or loss in THE's income statement. When we prepare our consolidated financial statements, THE's Swiss franc balances are translated into U.S.
dollars for U.S. GAAP purposes. THE's translation gains or losses appear as such on IBG, Inc.'s consolidated statement, of comprehensive income, included in other income.
-
- THE's net worth is carried on THE's books in Swiss francs in accordance with Swiss accounting standards. At the end of each accounting
period, THE's net worth is translated at the then prevailing exchange rate into U.S. dollars and the resulting gain or loss is reported as OCI in our consolidated statement of financial condition and
consolidated statement of comprehensive income. To a smaller extent, OCI is also produced by our other non-U.S. subsidiaries.
Historically,
we have taken the approach of not hedging the above exposures, based on the notion that the cost of constantly hedging over the years would amount to more than the random
impact of rate changes on our non-U.S. dollar balances. For instance, an increase in the value of the Swiss franc would be unfavorable to the earnings of THE but would be counterbalanced to some
extent by the fact that the yearly translation gain or loss into U.S. dollars is likely to move in the opposite direction.
Since
2005, we have expanded our market making systems to incorporate cash forex and forex options to hedge our currency exposure at little or no cost and to hedge our currency exposure
throughout each day on a continuous basis. The majority of currency spot positions held as part of our currency diversification strategy are regularly transferred from the market making unit to the
parent holding company, IBG LLC, where they are held and reported in the corporate segment. In connection with the development of our currency diversification strategy, we determined to base
our net worth in GLOBALs, a basket of currencies. Periodically, we re-evaluate the composition of the GLOBAL; in
78
Table of Contents
2011
we expanded the composition of the GLOBAL from six to 16 currencies. The table below shows a comparison of the U.S. dollar equivalent of the GLOBAL as December 31, 2014 and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of 12/31/2013 |
|
As of 12/31/2014 |
|
|
|
Currency
|
|
Composition |
|
FX Rate |
|
GLOBAL in
USD Equiv. |
|
% of
Comp. |
|
Net Equity
(in USD
millions) |
|
FX Rate |
|
GLOBAL in
USD Equiv. |
|
% of
Comp. |
|
Net Equity
(in USD
millions) |
|
CHANGE in
% of Comp. |
|
USD |
|
|
0.41 |
|
|
1.0000 |
|
|
0.410 |
|
|
38.2 |
% |
|
1,944.9 |
|
|
1.0000 |
|
|
0.410 |
|
|
40.6 |
% |
|
2,107.4 |
|
|
1.0 |
% |
EUR |
|
|
0.17 |
|
|
1.3745 |
|
|
0.234 |
|
|
21.8 |
% |
|
1,108.4 |
|
|
1.2098 |
|
|
0.206 |
|
|
20.4 |
% |
|
1,057.1 |
|
|
1.6 |
% |
JPY |
|
|
10.00 |
|
|
0.0095 |
|
|
0.095 |
|
|
8.8 |
% |
|
450.5 |
|
|
0.0084 |
|
|
0.084 |
|
|
8.3 |
% |
|
429.4 |
|
|
2.2 |
% |
GBP |
|
|
0.03 |
|
|
1.6559 |
|
|
0.050 |
|
|
4.6 |
% |
|
235.7 |
|
|
1.5577 |
|
|
0.047 |
|
|
4.6 |
% |
|
240.2 |
|
|
0.1 |
% |
CAD |
|
|
0.04 |
|
|
0.9415 |
|
|
0.038 |
|
|
3.5 |
% |
|
178.6 |
|
|
0.8608 |
|
|
0.034 |
|
|
3.4 |
% |
|
177.0 |
|
|
0.1 |
% |
BRL |
|
|
0.08 |
|
|
0.4234 |
|
|
0.034 |
|
|
3.2 |
% |
|
160.7 |
|
|
0.3763 |
|
|
0.030 |
|
|
3.0 |
% |
|
154.7 |
|
|
0.2 |
% |
INR |
|
|
2.00 |
|
|
1.1199 |
|
|
0.034 |
|
|
3.1 |
% |
|
159.4 |
|
|
0.0159 |
|
|
0.032 |
|
|
3.1 |
% |
|
163.1 |
|
|
0.5 |
% |
CHF |
|
|
0.03 |
|
|
0.0162 |
|
|
0.032 |
|
|
3.0 |
% |
|
153.5 |
|
|
1.0058 |
|
|
0.030 |
|
|
3.0 |
% |
|
155.1 |
|
|
0.2 |
% |
HKD |
|
|
0.25 |
|
|
0.1290 |
|
|
0.032 |
|
|
3.0 |
% |
|
152.9 |
|
|
0.1290 |
|
|
0.032 |
|
|
3.2 |
% |
|
165.7 |
|
|
0.1 |
% |
AUD |
|
|
0.03 |
|
|
0.8915 |
|
|
0.027 |
|
|
2.5 |
% |
|
126.9 |
|
|
0.8169 |
|
|
0.025 |
|
|
2.4 |
% |
|
126.0 |
|
|
0.2 |
% |
KRW |
|
|
28.00 |
|
|
0.0009 |
|
|
0.027 |
|
|
2.5 |
% |
|
125.8 |
|
|
0.0009 |
|
|
0.026 |
|
|
2.5 |
% |
|
131.5 |
|
|
0.1 |
% |
MXN |
|
|
0.30 |
|
|
0.0767 |
|
|
0.023 |
|
|
2.1 |
% |
|
109.2 |
|
|
0.0678 |
|
|
0.020 |
|
|
2.0 |
% |
|
104.6 |
|
|
0.0 |
% |
SEK |
|
|
0.09 |
|
|
0.1553 |
|
|
0.014 |
|
|
1.3 |
% |
|
66.3 |
|
|
0.1282 |
|
|
0.012 |
|
|
1.1 |
% |
|
59.3 |
|
|
0.1 |
% |
NOK |
|
|
0.06 |
|
|
0.1648 |
|
|
0.010 |
|
|
0.9 |
% |
|
46.9 |
|
|
0.1338 |
|
|
0.008 |
|
|
0.8 |
% |
|
41.3 |
|
|
0.0 |
% |
SGD |
|
|
0.01 |
|
|
0.7916 |
|
|
0.008 |
|
|
0.7 |
% |
|
37.6 |
|
|
0.7544 |
|
|
0.008 |
|
|
0.7 |
% |
|
38.8 |
|
|
0.0 |
% |
DKK |
|
|
0.04 |
|
|
0.1842 |
|
|
0.007 |
|
|
0.7 |
% |
|
35.0 |
|
|
0.1625 |
|
|
0.006 |
|
|
0.6 |
% |
|
33.4 |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.073 |
|
|
100.0 |
% |
|
5,092.1 |
|
|
|
|
|
1.009 |
|
|
100.0 |
% |
|
5,184.6 |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Because
we conduct business in many countries and many currencies and we actively manage our global currency exposure by maintaining our equity in GLOBALs, we consider ourselves a global
enterprise based in a diversified basket of currencies rather than a U.S. dollar based company. The U.S. dollar value of the GLOBAL decreased from $1.07 to $ 1.01, or 6%, in 2014. At
December 31, 2014, approximately 59% of our equity was denominated in currencies other than U.S. dollars.
The
effects of our currency diversification strategy appear in two places in the financial statements: (1) as a component of other income in the condensed consolidated statement
of comprehensive income and (2) as OCI in the condensed consolidated statement of financial condition. The full effect of the GLOBAL is captured in comprehensive income and the consolidated
statement of comprehensive income.
Reported
results on a comprehensive basis reflect the U.S. GAAP convention adopted in 2011 that requires the reporting of currency translation results contained in OCI as part of
reportable earnings. Previously, currency translation results were reported only as a component of changes in Total Equity in the condensed consolidated statement of financial condition.
Interest Rate Risk
We had no variable-rate debt outstanding at December 31, 2014.
We
pay our electronic brokerage customers interest based on benchmark overnight interest rates in various currencies. In a normal rate environment, we typically invest a portion of these
funds in U.S. government treasury securities with maturities of up to two years. If interest rates were to increase rapidly and substantially, our net interest income will not increase proportionally
with the interest rates, for the portion of the funds invested in the treasury securities with fixed yields. In addition, the mark-to-market changes in the value of the fixed rate securities will be
reflected in other income. However, we do not pay interest on individual customer balances below $10 thousand. Based on customer balances and investments outstanding at December 31,
2014, an increase of 0.5% in the U.S. benchmark interest rates would result in a net increase in our net interest income of approximately $79 million on an annualized basis. If the benchmark
rates were to increase by 1.0% from current
79
Table of Contents
levels,
our net interest income would increase by approximately $71 million on an annualized basis. The company did not approximate mark to market impact from interest rate changes; if treasury
securities whose prices were to fall under these scenarios were held to maturity, then the reduction in net interest income would be temporary, as the securities would mature at par value.
We
also face the potential for reduced net interest income from customer deposits due to interest rate spread compression in a low rate environment. Due to a currently low rate
environment, a decrease of benchmark interest rates by 0.05%, would reduce our net interest income by approximately $11.7 million on an annualized basis.
We
also face substantial interest rate risk due to positions carried in our market making business to the extent that long or short stock positions may have been established for future
or forward dates on options or futures contracts and the value of such positions are impacted by interest rates. We hedge such risks by entering into interest rate futures contracts. To the extent
that these futures positions do not perfectly hedge this interest rate risk, our trading gains may be adversely affected. The amount of such risk cannot be quantified.
Dividend Risk
We face dividend risk in our market making business as we derive significant revenues and incur significant expenses in the form of
dividend income and expense, respectively, from our substantial inventory of equity securities, and must make significant payments in lieu of dividends on short positions in securities in our
portfolio. Projected future dividends are an important component of pricing equity options and other derivatives, and incorrect projections may lead to trading losses. The amount of these risks cannot
be quantified.
Margin Credit
We extend margin credit to our customers, which is subject to various regulatory requirements. Margin credit is collateralized by cash
and securities in the customers' accounts. The risks associated with margin credit increase during periods of fast market movements or in cases where collateral is concentrated and market movements
occur. During such times, customers who utilize margin credit and who have collateralized their obligations with securities may find that the securities have a rapidly depreciating value and may not
be sufficient to cover their obligations in the event of a liquidation. We are also exposed to credit risk when our customers execute transactions, such as short sales of options and equities that can
expose them to risk beyond their invested capital.
We
expect this kind of exposure to increase with growth in our overall business. Because we indemnify and hold harmless our clearing firms from certain liabilities or claims, the use of
margin credit and short sales may expose us to significant off-balance-sheet risk in the event that collateral requirements are not sufficient to fully cover losses that customers may incur and those
customers fail to satisfy their obligations. As of December 31, 2014, we had $16.9 billion in margin credit extended to our customers. The amount of risk to which we are exposed from the
margin credit we extend to our customers and from short sale transactions by our customers is unlimited and not quantifiable as the risk is dependent upon analysis of a potential significant and
undeterminable rise or fall in stock prices. Our account level margin credit requirements meet or exceed those required by Regulation T of the Board of Governors of the Federal Reserve. As a
matter of practice, we enforce real-time margin compliance monitoring and liquidate customers' positions if their equity falls below required margin requirements.
We
have a comprehensive policy implemented in accordance with regulatory standards to assess and monitor the suitability of investors to engage in various trading activities. To mitigate
our risk, we also continuously monitor customer accounts to detect excessive concentration, large orders or positions, patterns of day trading and other activities that indicate increased risk to us.
80
Table of Contents
Our
credit exposure is to a great extent mitigated by our policy of automatically evaluating each account throughout the trading day and closing out positions automatically for accounts
that are found to be under-margined. While this methodology is effective in most situations, it may not be effective in situations where no liquid market exists for the relevant securities or
commodities or where, for any reason, automatic liquidation for certain accounts has been disabled.
Value-at-Risk
The Company estimates VaR using an historical approach, which uses the historical daily price returns of underlying assets as well as
estimates of the end of day implied volatility for options. The Company's one-day VaR is defined as the unrealized loss in portfolio value that, based on historically observed market risk factors,
would have been exceeded with a frequency of one percent, based on a calculation with a confidence interval of 99%.
The
Company's VaR model generally takes into account exposures to equity and commodity price risk and foreign exchange rates.
The
Company uses VaR as one of a range of risk management tools. Among their benefits, VaR models permit estimation of a portfolio's aggregate market risk exposure, incorporating a range
of varied market risks and portfolio assets. One key element of the VaR model is that it reflects risk reduction due to portfolio diversification or hedging activities. However, VaR has various
strengths and limitations, which include, but are not limited to: use of historical changes in market risk factors, which may not be accurate predictors of future market conditions, and may not fully
incorporate the risk of extreme market events that are outsized relative to observed historical market behavior or reflect the historical distribution of results beyond the confidence interval; and
reporting of losses in a single day, which does not reflect the risk of positions that cannot be liquidated or hedged in one day. A small proportion of market risk generated by trading positions is
not included in VaR. The modeling of the risk characteristics of some positions relies on approximations that, under certain circumstances, could produce significantly different results from those
produced using more precise measures. VaR is most appropriate as a risk measure for trading positions in liquid financial markets and will understate the risk associated with severe events, such as
periods of extreme illiquidity.
The
VaR calculation simulates the performance of the portfolio based on several years of the daily price changes of the underlying assets and determines the VaR as the calculated loss
that occurs at the 99th percentile.
Since
the reported VaR statistics are estimates based on historical data, VaR should not be viewed as predictive of the Company's future revenues or financial performance or of its
ability to monitor and manage risk. There can be no assurance that the Company's actual losses on a particular day will not exceed the indicated VaR or that such losses will not occur more than one
time in 100 trading days. VaR does not predict the magnitude of losses which, should they occur, may be significantly greater than the VaR amount.
Stress Test
The Company estimates the market risk to its fixed income portfolio using a risk analysis model provided by a leading external vendor.
This stress test is configured to calculate the change in value of each bond in the portfolio over one day in eight scenarios each of which represents a parallel shift of the U.S. Treasury yield
curve. The scenarios are shifts of +/100, +/200 and +/300 basis points.
81
Table of Contents
VaR and Stress Test Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Risk Category
|
|
At December 31,
2014 |
|
At December 31,
2013 |
|
Average
2014 |
|
High
2014 |
|
|
|
(USD in millions)
|
|
Trading(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities and Currencies(2) |
|
|
4.5 |
|
|
19.6 |
|
|
18.6 |
|
|
24.3 |
|
Fixed Income(3) |
|
|
0.5 |
|
|
2.0 |
|
|
1.5 |
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Total |
|
|
5.0 |
|
|
21.6 |
|
|
20.1 |
|
|
26.5 |
|
Non-Trading(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities and Currencies |
|
|
18.8 |
|
|
1.4 |
|
|
6.5 |
|
|
18.8 |
|
Fixed Income, Other |
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Trading Total |
|
|
18.8 |
|
|
1.5 |
|
|
6.5 |
|
|
18.8 |
|
- (1)
- The
product categories displayed in the table as "Trading" reflect activities undertaken in the Company's market making segment. VaR amounts reported for
December 31, 2014 reflect certain foreign currency transactions and the Company's reclassification related to its currency diversification strategy, as disclosed in ITEM 7 herein. For periods
prior to the quarter ending December 31, 2014, the effects of this currency diversification are reported in the market making segment and the corresponding VaR measures are reported in the
Trading category. For periods ending at or after December 31, 2014, the currency effects are reported in the corporate segment and the corresponding VaR measures are reported in the Non-Trading
category.
The
"Non-trading" category reflects investment activities and foreign currency exposures held in the equity of the Company's non-market making affiliates, i.e., its non-U.S. brokerage
affiliates and information technology affiliates. As stated above, as of December 31, 2014 this category also includes corporate segment activities in foreign exchange designed to achieve the
Company's currency diversification strategy.
The
average and high VaR amounts are based on the four quarter ending VaR calculations performed in 2014.
- (2)
- Equities
and currencies held for market making purposes are combined because these products are part of an integrated, hedged market making portfolio, on
which the risk is measured using VaR.
- (3)
- For
the TradingFixed Income category, which contains corporate bonds and U.S. Treasury securities, the risks on these products were managed
separately and measured using the stress test analysis. Corporate bond positions held in the market maker segment were substantially eliminated at December 31, 2014.
82
Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
83
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
Interactive Brokers Group, Inc.
Greenwich, CT
We
have audited the accompanying consolidated statements of financial condition of Interactive Brokers Group, Inc. and subsidiaries as of December 31, 2014 and 2013, and
the related consolidated statements of comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are
the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Interactive Brokers Group, Inc. and subsidiaries at
December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting
principles generally accepted in the United States of America.
We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of
December 31, 2014, based on the criteria established in Internal ControlIntegrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March 2, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.
|
|
|
/s/ Deloitte & Touche LLP
New York, New York
March 2, 2015 |
|
|
84
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in thousands, except share amounts)
|
|
2014 |
|
2013 |
|
Assets |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,269,317 |
|
$ |
1,213,241 |
|
Cash and securitiessegregated for regulatory purposes |
|
|
15,403,512 |
|
|
13,991,711 |
|
Securities borrowed |
|
|
3,659,766 |
|
|
2,751,501 |
|
Securities purchased under agreements to resell |
|
|
386,221 |
|
|
386,316 |
|
Financial instruments owned, at fair value: |
|
|
|
|
|
|
|
Financial instruments owned |
|
|
1,998,427 |
|
|
3,285,313 |
|
Financial instruments owned and pledged as collateral |
|
|
1,935,722 |
|
|
1,163,531 |
|
|
|
|
|
|
|
|
|
Total financial instruments owned, at fair value |
|
|
3,934,149 |
|
|
4,448,844 |
|
|
|
|
|
|
|
|
|
Receivables: |
|
|
|
|
|
|
|
Customers, less allowance for doubtful accounts of $6,613 and $67,999 at December 31, 2014 and 2013 |
|
|
17,051,452 |
|
|
13,596,650 |
|
Brokers, dealers and clearing organizations |
|
|
1,131,177 |
|
|
858,189 |
|
Interest |
|
|
36,785 |
|
|
26,489 |
|
|
|
|
|
|
|
|
|
Total receivables |
|
|
18,219,414 |
|
|
14,481,328 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
512,647 |
|
|
597,759 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
43,385,026 |
|
$ |
37,870,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity |
|
|
|
|
|
|
|
Short-term borrowings |
|
$ |
33,791 |
|
$ |
24,635 |
|
Financial instruments sold, but not yet purchased, at fair value |
|
|
2,560,787 |
|
|
3,153,673 |
|
Securities loaned |
|
|
3,199,106 |
|
|
2,563,653 |
|
Payables |
|
|
|
|
|
|
|
Customers |
|
|
31,795,853 |
|
|
26,319,420 |
|
Brokers, dealers and clearing organizations |
|
|
234,098 |
|
|
330,956 |
|
Payable to affiliate |
|
|
277,400 |
|
|
287,242 |
|
Accounts payable, accrued expenses and other liabilities |
|
|
95,401 |
|
|
96,026 |
|
Interest |
|
|
3,962 |
|
|
2,969 |
|
|
|
|
|
|
|
|
|
Total payables |
|
|
32,406,714 |
|
|
27,036,613 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
38,200,398 |
|
|
32,778,574 |
|
|
|
|
|
|
|
|
|
Commitments, contingencies and guarantees (see Note 15) |
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
Stockholders' equity |
|
|
|
|
|
|
|
Common stock, $0.01 par value per share: |
|
|
|
|
|
|
|
Class AAuthorized1,000,000,000, Issued58,612,245 and 54,788,049 shares, Outstanding58,473,186 and 54,664,095 shares at
December 31, 2014 and 2013 |
|
|
586 |
|
|
548 |
|
Class BAuthorized, Issued and Outstanding100 shares at December 31, 2014 and 2013 |
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
636,150 |
|
|
583,312 |
|
Retained earnings |
|
|
120,670 |
|
|
98,868 |
|
Accumulated other comprehensive income, net of income taxes of $651 and $936 at December 31, 2014 and 2013 |
|
|
11,982 |
|
|
27,028 |
|
Treasury stock, at cost, 139,059 and 123,954 shares at December 31, 2014 and 2013 |
|
|
(3,064 |
) |
|
(2,492 |
) |
|
|
|
|
|
|
|
|
Total stockholders' equity |
|
|
766,324 |
|
|
707,264 |
|
Noncontrolling interests |
|
|
4,418,304 |
|
|
4,384,862 |
|
|
|
|
|
|
|
|
|
Total equity |
|
|
5,184,628 |
|
|
5,092,126 |
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
43,385,026 |
|
$ |
37,870,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
85
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Three Years Ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except for shares or per share amounts)
|
|
2014 |
|
2013 |
|
2012 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
Trading gains |
|
$ |
261,147 |
|
$ |
331,233 |
|
$ |
465,973 |
|
Commissions and execution fees |
|
|
548,830 |
|
|
502,116 |
|
|
412,614 |
|
Interest income |
|
|
416,152 |
|
|
303,356 |
|
|
270,319 |
|
Other (loss) income |
|
|
(110,581 |
) |
|
(8,845 |
) |
|
43,564 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,115,548 |
|
|
1,127,860 |
|
|
1,192,470 |
|
Interest expense |
|
|
72,272 |
|
|
51,720 |
|
|
61,950 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
1,043,276 |
|
|
1,076,140 |
|
|
1,130,520 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses |
|
|
|
|
|
|
|
|
|
|
Execution and clearing |
|
|
211,498 |
|
|
242,426 |
|
|
250,990 |
|
Employee compensation and benefits |
|
|
204,805 |
|
|
205,329 |
|
|
244,504 |
|
Occupancy, depreciation and amortization |
|
|
39,369 |
|
|
38,923 |
|
|
38,875 |
|
Communications |
|
|
24,196 |
|
|
23,130 |
|
|
23,258 |
|
General and administrative |
|
|
57,285 |
|
|
115,054 |
|
|
45,893 |
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
|
537,153 |
|
|
624,862 |
|
|
603,520 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
506,123 |
|
|
451,278 |
|
|
527,000 |
|
Income tax expense |
|
|
47,254 |
|
|
33,685 |
|
|
30,014 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
458,869 |
|
|
417,593 |
|
|
496,986 |
|
Less net income attributable to noncontrolling interests |
|
|
414,336 |
|
|
380,590 |
|
|
456,318 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
44,533 |
|
$ |
37,003 |
|
$ |
40,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.79 |
|
$ |
0.74 |
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.77 |
|
$ |
0.73 |
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
56,492,381 |
|
|
49,742,428 |
|
|
46,814,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
57,709,668 |
|
|
50,924,736 |
|
|
47,070,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
44,533 |
|
$ |
37,003 |
|
$ |
40,668 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment, before income taxes |
|
|
(15,331 |
) |
|
(3,207 |
) |
|
2,231 |
|
Income taxes related to items of other comprehensive income |
|
|
(285 |
) |
|
(481 |
) |
|
(9,036 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax |
|
|
(15,046 |
) |
|
(2,726 |
) |
|
11,267 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to common stockholders |
|
$ |
29,487 |
|
$ |
34,277 |
|
$ |
51,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interests |
|
$ |
414,336 |
|
$ |
380,590 |
|
$ |
456,318 |
|
Other comprehensive income (loss)cumulative translation adjustment |
|
|
(91,992 |
) |
|
(24,643 |
) |
|
16,955 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interests |
|
$ |
322,344 |
|
$ |
355,947 |
|
$ |
473,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
86
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-Ended December 31, |
|
(in thousands)
|
|
2014 |
|
2013 |
|
2012 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
458,869 |
|
$ |
417,593 |
|
$ |
496,986 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities |
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
18,168 |
|
|
11,730 |
|
|
17,784 |
|
Depreciation and amortization |
|
|
19,679 |
|
|
19,244 |
|
|
19,269 |
|
Employee stock plan compensation |
|
|
40,621 |
|
|
40,272 |
|
|
67,092 |
|
Unrealized losses on other investments, net |
|
|
9,664 |
|
|
5,561 |
|
|
2,164 |
|
Bad debt expense |
|
|
3,174 |
|
|
67,166 |
|
|
758 |
|
Change in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
|
Cash and securitiessegregated for regulatory purposes |
|
|
(1,409,364 |
) |
|
(1,275,330 |
) |
|
(2,235,490 |
) |
Securities borrowed |
|
|
(908,265 |
) |
|
81,644 |
|
|
(171,474 |
) |
Securities purchased under agreements to resell |
|
|
95 |
|
|
42,588 |
|
|
(53,538 |
) |
Financial instruments owned, at fair value |
|
|
512,058 |
|
|
95,892 |
|
|
2,070,342 |
|
Receivables from customers |
|
|
(3,457,976 |
) |
|
(3,745,632 |
) |
|
(2,826,226 |
) |
Other receivables |
|
|
(283,284 |
) |
|
(16,700 |
) |
|
550,874 |
|
Other assets |
|
|
(7,745 |
) |
|
(75,489 |
) |
|
(2,886 |
) |
Financial instruments sold, but not yet purchased, at fair value |
|
|
(592,886 |
) |
|
(1,132,587 |
) |
|
(1,869,888 |
) |
Securities loaned |
|
|
635,453 |
|
|
724,379 |
|
|
453,215 |
|
Payable to customers |
|
|
5,476,433 |
|
|
4,897,442 |
|
|
4,121,873 |
|
Other payables |
|
|
(97,728 |
) |
|
(16,873 |
) |
|
84,609 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
416,966 |
|
|
140,900 |
|
|
725,464 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
Purchases of other investments |
|
|
(443,154 |
) |
|
(263,499 |
) |
|
(453,161 |
) |
Proceeds from sales of other investments |
|
|
515,223 |
|
|
236,818 |
|
|
417,158 |
|
Distributions received from and redemptions of equity investments |
|
|
1,484 |
|
|
11,054 |
|
|
1,567 |
|
Purchase of property and equipment |
|
|
(19,428 |
) |
|
(16,812 |
) |
|
(17,997 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
54,125 |
|
|
(32,439 |
) |
|
(52,433 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
Dividends paid to stockholders |
|
|
(22,731 |
) |
|
(20,207 |
) |
|
(66,298 |
) |
Distributions to noncontrolling interests |
|
|
(278,650 |
) |
|
(142,458 |
) |
|
(525,253 |
) |
Redemptions of senior notes |
|
|
|
|
|
|
|
|
(101,411 |
) |
Short-term borrowings, net |
|
|
9,156 |
|
|
(85,785 |
) |
|
103,882 |
|
Payments made under the Tax Receivable Agreement |
|
|
(15,752 |
) |
|
|
|
|
(16,115 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(307,977 |
) |
|
(248,450 |
) |
|
(605,195 |
) |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(107,038 |
) |
|
(27,369 |
) |
|
28,221 |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
56,076 |
|
|
(167,358 |
) |
|
96,057 |
|
Cash and cash equivalents at beginning of period |
|
|
1,213,241 |
|
|
1,380,599 |
|
|
1,284,542 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
1,269,317 |
|
$ |
1,213,241 |
|
$ |
1,380,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
72,856 |
|
$ |
53,258 |
|
$ |
63,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes |
|
$ |
36,787 |
|
$ |
52,086 |
|
$ |
23,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities |
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock in exchange of member interests in IBG LLC |
|
$ |
35,185 |
|
$ |
109,684 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of member interests from IBG Holdings LLC |
|
$ |
(35,185 |
) |
$ |
(109,684 |
) |
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to additional paid-in capital for changes in proportionate ownership in IBG LLC |
|
$ |
10,476 |
|
$ |
(30,350 |
) |
$ |
13,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to noncontrolling interests for changes in proportionate ownership in IBG LLC |
|
$ |
(10,476 |
) |
$ |
30,350 |
|
$ |
(13,800 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in redemption value of redeemable noncontrolling interests |
|
$ |
|
|
$ |
|
|
$ |
(5,269,619 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes to total equity for the change in redemptions value of redeemable noncontrolling interests |
|
$ |
|
|
$ |
|
|
$ |
5,269,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
87
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
Three Years Ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other
Comprehensive
Income |
|
|
|
|
|
|
|
|
|
(in thousands, except for share amounts)
|
|
Issued
Shares |
|
Par
Value |
|
Additional
Paid-In
Capital |
|
Treasury
Stock |
|
Retained
Earnings |
|
Total
Stockholders'
Equity |
|
Non-
controlling
Interests |
|
Total
Equity |
|
Redeemable
Noncontrolling
Interests |
|
Balance, December 31, 2011 |
|
|
46,061,256 |
|
$ |
460 |
|
$ |
|
|
$ |
(13,310 |
) |
$ |
(465,138 |
) |
$ |
18,487 |
|
$ |
(459,501 |
) |
$ |
1,837 |
|
$ |
(457,664 |
) |
$ |
5,269,619 |
|
Adjustment of redeemable noncontrolling interests from temporary to permanent equity (Note 4) |
|
|
|
|
|
|
|
|
472,409 |
|
|
|
|
|
572,840 |
|
|
|
|
|
1,045,249 |
|
|
4,322,304 |
|
|
5,367,553 |
|
|
(5,269,619 |
) |
Common stock distributed pursuant to stock plans |
|
|
1,736,588 |
|
|
18 |
|
|
(18 |
) |
|
5,592 |
|
|
|
|
|
|
|
|
5,592 |
|
|
|
|
|
5,592 |
|
|
|
|
Compensation for stock grants vesting in the future |
|
|
|
|
|
|
|
|
7,226 |
|
|
|
|
|
|
|
|
|
|
|
7,226 |
|
|
29,096 |
|
|
36,322 |
|
|
|
|
Deferred tax benefit retained |
|
|
|
|
|
|
|
|
495 |
|
|
|
|
|
|
|
|
|
|
|
495 |
|
|
|
|
|
495 |
|
|
|
|
Dividends paid to stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66,298 |
) |
|
|
|
|
(66,298 |
) |
|
|
|
|
(66,298 |
) |
|
|
|
Distributions from IBG LLC to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(490,261 |
) |
|
(490,261 |
) |
|
|
|
Adjustments for changes in proportionate ownership in IBG LLC |
|
|
|
|
|
|
|
|
13,800 |
|
|
|
|
|
|
|
|
|
|
|
13,800 |
|
|
(59 |
) |
|
13,741 |
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,668 |
|
|
11,267 |
|
|
51,935 |
|
|
351,732 |
|
|
403,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012 |
|
|
47,797,844 |
|
|
478 |
|
|
493,912 |
|
|
(7,718 |
) |
|
82,072 |
|
|
29,754 |
|
|
598,498 |
|
|
4,214,649 |
|
|
4,813,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock in follow-on offering |
|
|
4,683,415 |
|
|
47 |
|
|
109,639 |
|
|
|
|
|
|
|
|
|
|
|
109,686 |
|
|
(109,686 |
) |
|
|
|
|
|
|
Common stock distributed pursuant to stock plans |
|
|
2,306,790 |
|
|
23 |
|
|
(23 |
) |
|
5,226 |
|
|
|
|
|
|
|
|
5,226 |
|
|
|
|
|
5,226 |
|
|
|
|
Compensation for stock grants vesting in the future |
|
|
|
|
|
|
|
|
5,128 |
|
|
|
|
|
|
|
|
|
|
|
5,128 |
|
|
36,060 |
|
|
41,188 |
|
|
|
|
Deferred tax benefit retainedfollow-on offering |
|
|
|
|
|
|
|
|
5,006 |
|
|
|
|
|
|
|
|
|
|
|
5,006 |
|
|
|
|
|
5,006 |
|
|
|
|
Dividends paid to stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,207 |
) |
|
|
|
|
(20,207 |
) |
|
|
|
|
(20,207 |
) |
|
|
|
Distributions from IBG LLC to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(142,458 |
) |
|
(142,458 |
) |
|
|
|
Adjustments for changes in proportionate ownership in IBG LLC |
|
|
|
|
|
|
|
|
(30,350 |
) |
|
|
|
|
|
|
|
|
|
|
(30,350 |
) |
|
30,350 |
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,003 |
|
|
(2,726 |
) |
|
34,277 |
|
|
355,947 |
|
|
390,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013 |
|
|
54,788,049 |
|
|
548 |
|
|
583,312 |
|
|
(2,492 |
) |
|
98,868 |
|
|
27,028 |
|
|
707,264 |
|
|
4,384,862 |
|
|
5,092,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock in follow-on offering |
|
|
1,358,478 |
|
|
14 |
|
|
35,171 |
|
|
|
|
|
|
|
|
|
|
|
35,185 |
|
|
(35,185 |
) |
|
|
|
|
|
|
Common stock distributed pursuant to stock plans |
|
|
2,445,200 |
|
|
24 |
|
|
(24 |
) |
|
178 |
|
|
|
|
|
|
|
|
178 |
|
|
|
|
|
178 |
|
|
|
|
Compensation for stock grants vesting in the future |
|
|
|
|
|
|
|
|
5,671 |
|
|
|
|
|
|
|
|
|
|
|
5,671 |
|
|
34,951 |
|
|
40,622 |
|
|
|
|
Stock incentive plan adjustment |
|
|
20,518 |
|
|
|
|
|
75 |
|
|
(750 |
) |
|
|
|
|
|
|
|
(675 |
) |
|
458 |
|
|
(217 |
) |
|
|
|
Deferred tax benefit retainedfollow-on offering |
|
|
|
|
|
|
|
|
998 |
|
|
|
|
|
|
|
|
|
|
|
998 |
|
|
|
|
|
998 |
|
|
|
|
Deferred tax benefit on stock incentive plans |
|
|
|
|
|
|
|
|
471 |
|
|
|
|
|
|
|
|
|
|
|
471 |
|
|
|
|
|
471 |
|
|
|
|
Dividends paid to stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,731 |
) |
|
|
|
|
(22,731 |
) |
|
|
|
|
(22,731 |
) |
|
|
|
Distributions from IBG LLC to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(278,650 |
) |
|
(278,650 |
) |
|
|
|
Adjustments for changes in proportionate ownership in IBG LLC |
|
|
|
|
|
|
|
|
10,476 |
|
|
|
|
|
|
|
|
|
|
|
10,476 |
|
|
(10,476 |
) |
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,533 |
|
|
(15,046 |
) |
|
29,487 |
|
|
322,344 |
|
|
351,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014 |
|
|
58,612,245 |
|
$ |
586 |
|
$ |
636,150 |
|
$ |
(3,064 |
) |
$ |
120,670 |
|
$ |
11,982 |
|
$ |
766,324 |
|
$ |
4,418,304 |
|
$ |
5,184,628 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the consolidated financial statements.
88
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization and Nature of Business
Interactive Brokers Group, Inc. ("IBG, Inc.") is a Delaware holding company whose primary asset is its ownership of approximately 14.5% of the membership interests of
IBG LLC, which, in turn, owns operating subsidiaries (collectively, "IBG LLC"). IBG, Inc. together with IBG LLC and its consolidated subsidiaries (collectively, "the
Company"), is an automated global electronic broker and market maker specializing in executing and clearing trades in securities, futures, foreign exchange instruments, bonds
and mutual funds on more than 100 electronic exchanges and trading venues around the world and offering custody, prime brokerage, securities and margin lending services to customers. In the United
States of America ("U.S."), the Company's business is conducted from its headquarters in Greenwich, Connecticut, from Chicago, Illinois and from Jersey City, New Jersey. Abroad, business is conducted
through offices located in Canada, England, Switzerland, Liechtenstein, China (Hong Kong and Shanghai), Japan, India, and Australia. At December 31, 2014, the Company had 960 employees
worldwide.
IBG LLC
is a Connecticut limited liability company that conducts its business through its operating subsidiaries (collectively, the "Operating Companies"): Interactive
Brokers LLC ("IB LLC") and its subsidiary, Interactive Brokers Corp. ("IB Corp"); Interactive Brokers Canada Inc. ("IBC"); Interactive Brokers (U.K.) Limited and its subsidiary,
Interactive Brokers (U.K.) Nominee Limited (collectively, "IBUK"); Interactive Brokers Securities Japan, Inc. ("IBSJ"); Interactive Brokers (India) Private Limited ("IBI"); Timber
Hill LLC ("TH LLC"); Timber Hill Europe AG and its subsidiary, Timber Hill (Liechtenstein) AG (collectively, "THE"); Timber Hill Securities Hong Kong Limited ("THSHK"); Timber Hill
Australia Pty Limited ("THA"); Timber Hill Canada Company ("THC"); Interactive Brokers Financial Products S.A. ("IBFP"); Interactive Brokers Hungary KFT ("IBH"); IB Exchange Corp. ("IBEC");
Interactive Brokers Software Services Estonia OU ("IBEST") and Interactive Brokers Software Services Russia ("IBRUS").
The
Company operates in two business segments: electronic brokerage and market making, both supported by corporate. The Company conducts its electronic brokerage business through certain
Interactive Brokers subsidiaries, which provide electronic execution and clearing services to customers worldwide. The Company conducts its market making business principally through its Timber Hill
subsidiaries on the world's leading exchanges and market centers, primarily in exchange-traded equities, equity options and equity-index options and futures. Corporate enables the Company to operate
cohesively and effectively by providing support via control functions to the business segments and also by executing the Company's currency diversification strategy.
Certain
of the Operating Companies are members of various securities and commodities exchanges in North America, Europe and the Asia/Pacific region and are subject to regulatory capital
and other requirements (see Note 17). IB LLC, IBUK, IBC, IBI and IBSJ carry securities accounts for customers or perform custodial functions relating to customer securities.
2. Significant Accounting Policies
Basis of Presentation
These consolidated financial statements are presented in U.S. dollars and have been prepared in accordance with accounting principles
generally accepted in the U.S. ("U.S. GAAP") and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") regarding financial reporting with respect to
Form 10-K.
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Notes to Consolidated Financial Statements (Continued)
2. Significant Accounting Policies (Continued)
These
consolidated financial statements include the accounts of the Company and its consolidated subsidiaries and reflect all adjustments of a normal and recurring nature that are, in
the opinion of management, necessary for the fair presentation of the results for the periods presented.
In
connection with the Company's currency diversification strategy, the Company's net worth is held in a basket of 16 currencies (referred to by management as the
"GLOBAL"). For the year ended December 31, 2014, the Company has improved the transparency of its currency diversification strategy results by (1) reporting nearly all
translation gains and losses from this strategy as other income (previously reported as a component of trading gains) in the consolidated statements of comprehensive income, and (2) reporting
these gains and losses in the corporate segment instead of the market making
segment. These changes in presentation resulted in certain reclassifications to previously reported amounts.
Principles of Consolidation, including Noncontrolling Interests
The consolidated financial statements include the accounts of IBG, Inc. and its majority and wholly owned subsidiaries. As sole
managing member of IBG LLC, IBG, Inc. exerts control over IBG LLC's operations. In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification
("ASC") Topic 810, "Consolidation", the Company consolidates IBG LLC's financial statements and records the interests in IBG LLC that it does not own as noncontrolling interests.
Prior
to the June 6, 2012 amendment (the "Amendment") to the Exchange Agreement (see Note 4), the Company was required to report IBG Holdings LLC's ("Holdings")
ownership as redeemable noncontrolling interests (i.e., temporary equity), outside of total equity. Redemption value of these redeemable noncontrolling interests was measured as the number of
equivalent shares of member interests in IBG LLC owned by Holdings multiplied by the then current market price per share of the Company's common stock. The excess of the redemption value over
the book value of these interests, which did not affect net income attributable to common stockholders or cash flows, was required to be accounted for as a reduction of the Company's stockholders'
equity.
The
Company elected to recognize changes in redemption value in each reporting period immediately as they occurred as if the end of each reporting period was also the redemption date for
the entire redeemable noncontrolling interest, notwithstanding that the redeemable noncontrolling interests are redeemable over a period of time pursuant to a redemption schedule (see Note 4).
For
periods after the Amendment, the noncontrolling interests in IBG LLC attributable to Holdings are reported as a component of equity.
The
Company's policy is to consolidate all other entities in which it owns more than 50% unless it does not have control. All inter-company balances and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts and disclosures in these 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. Such estimates include the allowance for doubtful accounts, valuation of certain
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2. Significant Accounting Policies (Continued)
investments,
compensation accruals, current and deferred income taxes, and estimated contingency reserves.
Fair Value
Substantially all of the Company's assets and liabilities, including financial instruments are carried at fair value based on published
market prices and are marked to market, or are assets and liabilities which are short-term in nature and are carried at amounts that approximate fair value.
The
Company applies the fair value hierarchy in accordance with FASB ASC Topic 820, "Fair Value Measurement" ("ASC Topic 820"), to prioritize the inputs to valuation techniques used to
measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The
three levels of the fair value hierarchy are:
|
|
|
Level 1 |
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
Level 2 |
|
Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly. |
Level 3 |
|
Prices or valuations that require inputs that are both significant to fair value measurement and unobservable. |
Financial
instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value are generally classified as Level 1 of the fair value hierarchy.
The Company's Level 1 financial instruments, which are valued using quoted market prices as published by exchanges and clearing houses or otherwise broadly distributed in active markets,
include active listed stocks, options, warrants and discount certificates, U.S. and foreign government securities and corporate and municipal bonds. The Company does not adjust quoted prices for
financial instruments classified as Level 1 of the fair value hierarchy, even in the event that the Company may hold a large position whereby a purchase or sale could reasonably impact quoted
prices.
Currency
forward contracts are valued using broadly distributed bank and broker prices, and are classified as Level 2 of the fair value hierarchy as such instruments are not
exchange-traded. Other securities that are not traded in active markets are also classified in Level 2 of the fair value hierarchy. Level 3 financial instruments are comprised of
securities that have been delisted or otherwise are no longer tradable and have been valued by the Company based on internal estimates.
Other
fair value investments and other fair value liabilities, included in other assets and other liabilities and accrued expenses, respectively, in the consolidated statements of
financial condition, are comprised of listed stocks, options, foreign currency contracts and corporate and municipal bonds that the Company does not carry in its market making business. These
investments are generally reported as Level 2 of the fair value hierarchy, except for unrestricted listed securities, which are classified as Level 1 of the fair value hierarchy, and
delisted securities which are classified as Level 3 of the fair value hierarchy.
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2. Significant Accounting Policies (Continued)
Earnings Per Share
Earnings per share ("EPS") are computed in accordance with FASB ASC Topic 260, "Earnings per Share." Basic EPS is computed by dividing
the net income available for common stockholders by the weighted average number of shares outstanding for that period. Diluted EPS is calculated by dividing the net income available for common
stockholders by the diluted weighted average shares outstanding for that period. Diluted EPS includes the determinants of the basic EPS and, in addition, reflects the dilutive effect of shares of
common stock estimated to be distributed in the future under the Company's stock-based compensation plans, with no adjustments to net income available for common stockholders for dilutive potential
common shares.
For
periods prior to June 6, 2012 (see Note 4), the Company has determined to reflect measurement adjustments for non-fair value redemption rights through application of
the two-class method of calculating earnings per share in lieu of recognizing the impact through the determination of net income attributable to common shareholders. Furthermore, the Company has
elected to treat only the portion of the periodic measurement adjustments that reflect a redemption in excess of fair value as being akin to a dividend, reducing net income attributable to common
stockholders for purposes of applying the two-class method. Decreases in the carrying amount of redeemable noncontrolling interests through measurement adjustments are reflected in the application of
the two-class method only to the extent they represent recoveries of amounts previously accounted for by applying the two-class method.
Stock-Based Compensation
The Company follows FASB ASC Topic 718, "CompensationStock Compensation" ("ASC Topic 718"), to account for its
stock-based compensation plans. ASC Topic 718 requires all share-based payments to employees to be recognized in the consolidated financial statements using a fair value-based method. Grants, which
are denominated in U.S. dollars, are communicated to employees in the year of grant, thereby establishing the fair value of each grant. The fair value of awards granted to employees are generally
expensed as follows: 50% in the year of grant in recognition of plan forfeiture provisions (as described below) and the remaining 50% over the related vesting period utilizing the "graded vesting"
method permitted under ASC Topic 718. In the case of "retirement eligible" employees (those employees older than 59), 100% of awards are expensed when granted.
Awards
granted under stock-based compensation plans are subject to forfeiture in the event an employee ceases employment with the Company. The plans provide that employees who
discontinue employment with the Company without cause and continue to meet the terms of the plans'
post-employment provisions will forfeit 50% of unvested previously granted awards unless the employee is over the age of 59, in which case the employee would be eligible to receive 100% of unvested
awards previously granted.
Cash and Cash Equivalents
The Company considers all highly liquid investments, with maturities of three months or less, that are not segregated and deposited for
regulatory purposes or to meet margin requirements at clearing houses to be cash equivalents.
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2. Significant Accounting Policies (Continued)
Cash and SecuritiesSegregated for Regulatory Purposes
As a result of customer activities, certain Operating Companies are obligated by rules mandated by their primary regulators to
segregate or set aside cash or qualified securities to satisfy such regulations, which regulations have been promulgated to protect customer assets. Securities segregated for regulatory purposes
consisted of U.S. Treasury securities of $6.68 billion and $1.30 billion at December 31, 2014 and December 31, 2013, respectively, and securities purchased under agreements
to resell in the amount of $3.87 billion and $6.73 billion as of December 31, 2014 and December 31, 2013, respectively, which amounts approximate fair value.
Securities Borrowed and Securities Loaned
Securities borrowed and securities loaned are recorded at the amount of the cash collateral advanced or received. Securities borrowed
transactions require the Company to provide counterparties with collateral, which may be in the form of cash, letters of credit or other securities. With respect to securities loaned, the Company
receives collateral, which may be in the form
of cash or other securities in an amount generally in excess of the fair value of the securities loaned. The Company monitors the market value of securities borrowed and loaned on a daily basis, with
additional collateral obtained or refunded as permitted contractually. The Company does not net, in the consolidated statements of financial condition, securities borrowed and securities loaned
entered into with the same counterparty.
Securities
lending fees received and paid by the Company are included in interest income and interest expense, respectively, in the consolidated statements of comprehensive income.
Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to
Repurchase
Securities purchased under agreements to resell, which are reported as collateralized financing transactions, are recorded at contract
value, which approximates fair value. To ensure that the fair value of the underlying collateral remains sufficient, the collateral is valued daily with additional collateral obtained or excess
collateral returned, as permitted under contractual provisions. The Company does not net, in the consolidated statements of financial condition, securities purchased under agreements to resell
transactions and securities sold under agreements to repurchase transactions entered into with the same counterparty.
Financial Instruments Owned and Financial Instruments Sold, But Not Yet Purchased, at Fair
Value
Financial instrument transactions are accounted for on a trade date basis. Financial instruments owned and financial instruments sold,
but not yet purchased are stated at fair value based upon quoted market prices. All firm-owned financial instruments pledged to counterparties where the counterparty has the right, by contract or
custom, to sell or repledge the financial instruments are reported as financial instruments owned and pledged as collateral in the consolidated statements of financial condition.
The
Company also enters into currency forward contracts. These transactions, which are also accounted for on a trade date basis, are agreements to exchange a fixed amount of one currency
for a specified amount of a second currency at completion of the currency forward contract term. Unrealized mark-to-market gains and losses on currency forward contracts are included in financial
instruments
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2. Significant Accounting Policies (Continued)
owned,
at fair value or financial instruments sold, but not yet purchased, at fair value in the consolidated statements of financial condition.
Customer Receivables and Payables
Customer securities transactions are recorded on a settlement date basis and customer commodities transactions are recorded on a trade
date basis. Receivables from and payables to customers include amounts due on cash and margin transactions, including futures contracts transacted on behalf of customers. Securities owned by
customers, including those that collateralize margin loans or other similar transactions, are not reported in the consolidated statements of financial condition. Amounts receivable from customers that
are determined by management to be uncollectible are expensed and included in general and administrative expense in the consolidated statements of comprehensive income.
Receivables from and Payables to Brokers, Dealers and Clearing Organizations
Receivables from and payables to brokers, dealers and clearing organizations include net receivables and payables from unsettled
trades, including amounts related to futures and options on futures contracts executed on behalf of customers, amounts receivable for securities not delivered by the Company to the purchaser by the
settlement date ("fails to deliver") and cash margin deposits. Payables to brokers, dealers and clearing organizations also include amounts payable for securities not received by the Company from a
seller by the settlement date ("fails to receive").
Investments
The Company makes certain strategic investments related to its business and accounts for these investments under the cost method of
accounting or under the equity method of accounting as required under FASB ASC Topic 323, "InvestmentsEquity Method and
Joint Ventures." Investments accounted for under the equity method, including where the investee is a limited partnership or limited liability company, are recorded at the fair value amount of the
Company's initial investment and are adjusted each period for the Company's share of the investee's income or loss. The Company's share of the income or losses from equity method investments is
included in other income in the consolidated statements of comprehensive income. The recorded amounts of the Company's equity method investments, $37.3 million at December 31, 2014
($27.5 million at December 31, 2013), which are included in other assets in the consolidated statements of financial condition, increase or decrease accordingly. Contributions paid to
and distributions received from equity method investees are recorded as additions or reductions, respectively, to the respective investment balance.
The
Company also holds exchange memberships and investments in equity securities of certain exchanges as required to qualify as a clearing member, and strategic investments in corporate
stock that do not qualify for equity method accounting. Such investments, $30.7 million at December 31, 2014 ($27.6 million at December 31, 2013), are recorded at cost or,
if an other-than-temporary impairment in value has occurred, at a value that reflects management's estimate of the impairment, and are also included in other assets in the consolidated statements of
financial condition. Dividends received from cost basis investments are included in other income in the consolidated statements of comprehensive income when such dividends are received.
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2. Significant Accounting Policies (Continued)
A
judgmental aspect of accounting for investments is evaluating whether an other-than-temporary decline in the value of an investment has occurred. The evaluation of an
other-than-temporary impairment is dependent on specific quantitative and qualitative factors and circumstances surrounding an investment, including recurring operating losses, credit defaults and
subsequent rounds of financing. The Company's equity investments do not have readily determinable market values. All investments are reviewed for changes in circumstances or occurrence of events that
suggest the Company's investment may not be recoverable. If an unrealized loss on any investment is considered to be other-than-temporary, the loss is recognized in the period the determination is
made.
The
Company also has certain investments (which are not considered core business activities) that are accounted for at fair value (see Note 6) and included in other assets in the
consolidated statements of financial condition. Gains and losses related to these investments are included in other income in the consolidated statements of comprehensive income.
Property and Equipment
Property and equipment, which is included in other assets in the consolidated statements of financial condition, consists of purchased
technology hardware and software, internally developed software, leasehold improvements and office furniture and equipment.
Property
and equipment are recorded at historical cost, less accumulated depreciation and amortization. Additions and improvements that extend the lives of assets are capitalized, while
expenditures for repairs and maintenance are expensed as incurred. Depreciation and amortization are computed using the straight-line method. Equipment is depreciated over the estimated useful lives
of the assets, while leasehold improvements are amortized over the lesser of the estimated economic useful life of the asset or the term of the lease. Computer equipment is depreciated over three to
five years and office furniture and equipment are depreciated over five to seven years. Qualifying costs for internally developed software are capitalized and amortized over the expected useful life
of the developed software, not to exceed three years.
Comprehensive Income and Foreign Currency Translation
The Company's operating results are reported in the consolidated statements of comprehensive income pursuant to FASB Accounting
Standards Update 2011-05, "Comprehensive Income."
Comprehensive
income consists of two components: net income and other comprehensive income ("OCI"). OCI is comprised of revenues, expenses, gains and losses that are reported in the
comprehensive income section of the statements of comprehensive income, but are excluded from reported net income. The Company's OCI is comprised of gains and losses resulting from translating foreign
currency financial statements of non-U.S. subsidiaries, net of related income taxes, where applicable. In general, the practice and intention of the Company is to reinvest the earnings of its non-U.S.
subsidiaries in those operations, therefore no tax is accrued.
The
Company's non-U.S. domiciled subsidiaries have a functional currency that is other than the U.S. dollar. Such subsidiaries' assets and liabilities are translated into U.S. dollars at
period-end exchange rates, and revenues and expenses are translated at average exchange rates prevailing during the period. Adjustments that result from translating amounts from a subsidiary's
functional currency to the U.S. dollar (as described above) are reported net of tax, where applicable, in accumulated OCI in
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Notes to Consolidated Financial Statements (Continued)
2. Significant Accounting Policies (Continued)
the
consolidated statements of financial condition. During 2013, the Company derecognized accumulated OCI of a $5.2 million loss attributable to its Brazilian subsidiary, IB Brasil
Participações Ltda, which was liquidated during the year, and recognized a foreign currency translation loss, before taxes, which is included in other income in
the consolidated statements of comprehensive income.
Revenue Recognition
Trading Gains
Trading gains and losses are recorded on trade date and are reported on a net basis. Trading gains and losses are comprised of changes
in the fair value of financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value (i.e., unrealized gains and losses) and realized gains and
losses. Included in trading gains are net gains and losses on stocks, U.S. and foreign government securities, corporate and municipal bonds, options, futures, foreign exchange and other derivative
instruments. Dividends are integral to the valuation of stocks and interest is integral to the valuation of fixed income instruments. Accordingly, both dividends and interest income and expense
attributable to financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value are reported on a net basis in trading gains in the consolidated
statements of comprehensive income.
Commissions and Execution Fees
Commissions earned for executing and clearing transactions are accrued on a trade date basis and are reported as commissions and
execution fees in the statements of comprehensive income.
Interest Income and Expense
The Company earns interest income and incurs interest expense primarily in connection with its electronic brokerage customer business
and its securities lending activities, which are recorded on the accrual basis and are included in interest income and interest expense, respectively, in the consolidated statements of comprehensive
income.
Foreign Currency Gains and Losses
Currency translation refers to the gains and losses resulting from foreign currency transactions. Foreign currency translation gains
and losses related to the Company's currency diversification strategy are included in other income in the consolidated statements of comprehensive income. Foreign currency translation gains and losses
related to the market making core-business activities are included in trading gains in the consolidated statements of comprehensive income. Electronic brokerage foreign currency translation gains and
losses, arising from currency swap transactions, are included in interest income in the consolidated statements of comprehensive income.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC Topic 740, "Income Taxes" ("ASC Topic 740"). The Company's income tax
expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits are based on enacted tax laws (see Note 13) and reflect management's
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Notes to Consolidated Financial Statements (Continued)
2. Significant Accounting Policies (Continued)
best
assessment of estimated future taxes to be paid. The Company is subject to income taxes in both the U.S. and numerous foreign jurisdictions. Determining income tax expense requires significant
judgments and estimates.
The
Company recognizes interest related to income tax matters as interest income or interest expense and penalties related to income tax matters as income tax expense.
Deferred
income tax assets and liabilities arise from temporary differences between the tax and financial statements recognition of the underlying assets and liabilities. In evaluating
the ability to recover deferred tax assets within the jurisdictions from which they arise, the Company considers 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 pretax 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 the Company is
using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, three years of cumulative operating income (loss) are considered. Deferred income taxes
have not been provided for U.S. tax liabilities or for additional foreign taxes on the unremitted earnings of foreign subsidiaries that have been indefinitely reinvested.
The
calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across the
Company's global operations. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. The Company is not aware of any such changes that would have a
material effect on the Company's results of operations, cash flows, or financial position.
The
Company recognizes that a tax benefit from an uncertain tax position 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.
The
Company records tax liabilities in accordance with ASC Topic 740 and adjusts 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.
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2. Significant Accounting Policies (Continued)
Recently Issued Accounting Pronouncements
Following is a summary of recently issued FASB Accounting Standards Updates ("ASUs") that have affected or may affect the Company's
consolidated financial statements:
|
|
|
|
|
|
|
Affects |
|
Status |
ASU 2013-05 |
|
Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of
an Investment in a Foreign Entity. |
|
Effective for fiscal years and interim periods within those years beginning after December 15, 2013. |
ASU 2014-06 |
|
Technical Corrections and Improvements Related to Glossary Terms. |
|
Effective on issuance in March 2014. |
ASU 2014-08 |
|
Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an
Entity. |
|
Effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. |
ASU 2014-09 |
|
Revenue from Contracts with Customers (Topic 606) |
|
Effective for annual periods beginning on or after December 15, 2016. |
ASU 2014-11 |
|
Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. |
|
Effective for the first interim or annual period beginning after December 15, 2014. |
ASU 2014-15 |
|
Presentation of Financial StatementsGoing Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. |
|
Effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. |
Adoption
of those ASUs that became effective during 2014 and 2015, prior to the issuance of the Company's consolidated financial statements, did not have a material effect on these
financial statements.
3. Trading Activities and Related Risks
The Company's trading activities include providing securities market making and brokerage services. Trading activities expose the Company to market and credit risks. These risks are
managed in accordance with established risk management policies and procedures. To accomplish this, management has established a risk management process that
includes:
-
- a regular review of the risk management process by executive management as part of its oversight role;
-
- defined risk management policies and procedures supported by a rigorous analytic framework; and
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3. Trading Activities and Related Risks (Continued)
-
- articulated risk tolerance levels as defined by executive management that are regularly reviewed to ensure that the Company's
risk-taking is consistent with its business strategy, capital structure, and current and anticipated market conditions.
Market Risk
The Company is exposed to various market risks. Exposures to market risks arise from equity price risk, foreign currency exchange rate
fluctuations and changes in interest rates. The Company seeks to mitigate market risk associated with trading inventories by employing hedging strategies that correlate rate, price and spread
movements of trading inventories and related financing and hedging activities. The Company uses a combination of cash instruments and exchange traded derivatives to hedge its market exposures. The
Company does not apply hedge accounting. The following discussion describes the types of market risk faced:
Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the value of equity securities and
other instruments that derive their value from a particular stock, a defined basket of stocks, or a stock index. The Company is subject to equity price risk primarily in financial instruments held.
The Company attempts to limit such risks by continuously reevaluating prices and by diversifying its portfolio across many different options, futures and underlying securities and avoiding
concentrations of positions based on the same underlying security.
Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact the value of financial instruments.
The Company manages this risk using spot (i.e., cash) currency transactions, currency futures contracts and currency forward contracts. As a global market maker trading on exchanges around the
world in multiple currencies, the Company is exposed to foreign currency risk. The Company actively manages its currency exposure using hedging strategies that are based on a defined basket of 16
currencies internally referred to as the "GLOBAL." These strategies minimize the fluctuation of the Company's net worth as expressed in GLOBALs, thereby diversifying its risk in alignment with these
global currencies, weighted by the Company's view of their importance. As the Company's financial results are reported in U.S. dollars, the change in the value of the GLOBAL as expressed in U.S.
dollars affects the Company's earnings. The impact of this currency diversification strategy in the Company's earnings is included in other income in the consolidated statements of comprehensive
income.
Interest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments. The
Company is exposed to interest rate risk on cash and margin balances, positions carried in equity securities, options, and futures and on its debt obligations. These risks are managed through
investment policies and by entering into interest rate futures contracts.
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3. Trading Activities and Related Risks (Continued)
Credit Risk
The Company is exposed to risk of loss if an individual, counterparty or issuer fails to perform its obligations under contractual
terms ("default risk"). Both cash instruments and derivatives expose the Company to default risk. The Company has established policies and procedures for mitigating credit risk on principal
transactions, including reviewing and establishing limits for credit exposure, maintaining collateral, and continually assessing the creditworthiness of counterparties.
The
Company's credit risk is limited in that substantially all of the contracts entered into are settled directly at securities and commodities clearing houses and a small portion is
settled through member firms and banks with substantial financial and operational resources. The Company seeks to control the risks associated with its customer margin activities by requiring
customers to maintain collateral in compliance with regulatory and internal guidelines.
In
the normal course of business, the Company executes, settles, and finances various customer securities transactions. Execution of these transactions includes the purchase and sale of
securities which exposes the Company to default risk arising from the potential that customers or counterparties may fail to satisfy their obligations. In these situations, the Company may be required
to purchase or sell financial instruments at unfavorable market prices to satisfy obligations to customers or counterparties. Liabilities to other brokers and dealers related to unsettled transactions
(i.e., securities
fails to receive) are recorded at the amount for which the securities were purchased, and are paid upon receipt of the securities from other brokers or dealers. In the case of aged securities fails to
receive, the Company may purchase the underlying security in the market and seek reimbursement for any losses from the counterparty.
For
cash management purposes, the Company enters into short-term securities purchased under agreements to resell and securities sold under agreements to repurchase transactions ("repos")
in addition to securities borrowing and lending arrangements, all of which may result in credit exposure in the event the counterparty to a transaction is unable to fulfill its contractual
obligations. Repos are collateralized by securities with a market value in excess of the obligation under the contract. Similarly, securities lending agreements are collateralized by deposits of cash
or securities. The Company attempts to minimize credit risk associated with these activities by monitoring collateral values on a daily basis and requiring additional collateral to be deposited with
or returned to the Company as permitted under contractual provisions.
Concentrations of Credit Risk
The Company's exposure to credit risk associated with its trading and other activities is measured on an individual counterparty basis,
as well as by groups of counterparties that share similar attributes. Concentrations of credit risk can be affected by changes in political, industry, or economic factors. To reduce the potential for
risk concentration, credit limits are established and exposure is monitored in light of changing counterparty and market conditions. As of December 31, 2014, the Company did not have any
material concentrations of credit risk outside the ordinary course of business.
Off-Balance Sheet Risks
The Company may be exposed to a risk of loss not reflected in the consolidated financial statements to settle futures and certain
over-the-counter contracts at contracted prices, which may
100
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
3. Trading Activities and Related Risks (Continued)
require
repurchase or sale of the underlying products in the market at prevailing prices. Accordingly, these transactions result in off-balance sheet risk as the Company's cost to liquidate such
contracts may exceed the amounts reported in the Company's consolidated statements of financial condition.
4. Equity and Earnings Per Share
In connection with IBG, Inc.'s initial public offering of Class A common stock ("IPO") in May 2007, it purchased 10.0% of the membership interests in IBG LLC from
Holdings, became the sole managing member of IBG LLC and began to consolidate IBG LLC's financial results into its financial statements. Holdings owns all of IBG, Inc.'s
Class B common stock, which has voting rights in proportion to its ownership interests in IBG LLC, approximately 85.5% as of December 31, 2014. The consolidated financial
statements reflect the results of operations and financial position of IBG, Inc., including consolidation of its investment in IBG LLC and its subsidiaries. Prior to the June 6,
2012 amendment to the Exchange Agreement (described below), Holdings' ownership interests in IBG LLC were accounted for and reported in these consolidated financial statements as "redeemable
noncontrolling interests" (temporary equity). For periods after the Amendment, beginning with the quarter ended June 30, 2012, the noncontrolling interests in IBG LLC attributable to
Holdings are reported as a component of total equity in the consolidated statements of financial condition, as described below.
Recapitalization and Post-IPO Capital Structure
Immediately prior to and immediately following the consummation of the IPO, IBG, Inc., Holdings, IBG LLC and the members
of IBG LLC consummated a series of transactions
collectively referred to herein as the "Recapitalization." In connection with the Recapitalization, IBG, Inc., Holdings and the historical members of IBG LLC entered into an exchange
agreement, dated as of May 3, 2007 (the "Exchange Agreement"), pursuant to which the historical members of IBG LLC received membership interests in Holdings in exchange for their
membership interests in IBG LLC. Additionally, IBG, Inc. became the sole managing member of IBG LLC.
In
connection with the consummation of the IPO, Holdings used the net proceeds to redeem 10.0% of members' interests in Holdings in proportion to their interests. Immediately following
the Recapitalization and IPO, Holdings owned approximately 90% of IBG LLC and 100% of IBG, Inc.'s Class B common stock, which has voting power in IBG, Inc. in proportion to
Holdings' ownership of IBG LLC.
Since
consummation of the IPO and Recapitalization, IBG, Inc.'s equity capital structure has been comprised of Class A and Class B common stock. All shares of common
stock have a par value of $0.01 per share and have identical rights to earnings and dividends and in liquidation. As described previously in this Note 4, Class B common stock has voting
power in IBG, Inc. proportionate to the extent of Holdings' and IBG, Inc.'s respective ownership of IBG LLC. At December 31, 2014 and December 31, 2013,
1,000,000,000 shares of Class A common stock were authorized, of which 58,612,245 and 54,788,049 shares have been issued; and 58,473,186 and 54,664,095 shares were outstanding, respectively.
Class B common stock is comprised of 100 authorized shares, of which 100 shares were issued and outstanding as of December 31, 2014 and December 31, 2013, respectively. In
addition, 10,000 shares of preferred stock have been authorized, of which no shares are issued or outstanding as of December 31, 2014 and December 31, 2013, respectively.
101
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Equity and Earnings Per Share (Continued)
As
a result of a federal income tax election made by IBG LLC applicable to the acquisition of IBG LLC member interests by IBG, Inc., the income tax basis of the
assets of IBG LLC acquired by IBG, Inc. have been adjusted based on the amount paid for such interests. Deferred tax assets were recorded as of the IPO date and in connection with
subsequent redemptions of Holdings member interests in exchange for common stock. These deferred tax assets are included in other assets in the Company's consolidated statements of financial condition
and are being amortized as additional deferred income tax expense over 15 years from the IPO date and from the additional redemption dates, respectively, as allowable under current tax law. As
of December 31, 2014 and December 31, 2013, the unamortized balance of these deferred tax assets was $278.8 million and $294.7 million, respectively.
IBG, Inc.
also entered into an agreement (the "Tax Receivable Agreement") with Holdings to pay Holdings (for the benefit of the former members of IBG LLC) 85% of the tax
savings that IBG, Inc. actually realizes as the result of tax basis increases. These payables, net of payments made to Holdings, are reported as payable to affiliate in the Company's
consolidated statements of financial condition.
The remaining 15% is accounted for as a permanent increase to additional paid-in capital in the Company's consolidated statements of financial condition.
The
cumulative amounts of deferred tax assets, payables to Holdings and additional paid-in capital arising from stock offerings from the date of the IPO through December 31, 2014
were $427.1 million, $363.0 million and $64.1 million, respectively. Amounts payable under the Tax Receivable Agreement are payable to Holdings annually following the filing of
IBG, Inc.'s federal income tax return. The Company has paid Holdings a cumulative total of $86.2 million through December 31, 2014 pursuant to the terms of the Tax Receivable
Agreement.
The
Exchange Agreement, as amended June 6, 2012, provides for future redemptions of member interests and for the purchase of member interests in IBG LLC by IBG, Inc.
from Holdings, which could result in IBG, Inc. acquiring the remaining member interests in IBG LLC that it does not own. On an annual basis, holders of Holdings member interests are able
to request redemption of such member interests over a minimum eight (8) year period following the IPO; 12.5% annually for seven (7) years and 2.5% in the eighth year.
At
the time of IBG, Inc.'s IPO in 2007, three hundred sixty (360) million shares of authorized common stock were reserved for future sales and redemptions. From 2008
through 2010, Holdings redeemed 5,013,259 IBG LLC shares with a total value of $114.0 million, which redemptions were funded using cash on hand at IBG LLC. Upon cash redemption
these IBG LLC shares were retired. In 2011 and 2013, respectively, IBG, Inc. issued 1,983,624 shares and 4,683,415 shares of common stock directly to Holdings in exchange for an
equivalent number of shares of member interests in IBG LLC. On October 24, 2014, the Company issued 1,358,478 shares of Class A Common stock (with a fair value of
$35.2 million) to Holdings in exchange for membership interests in IBG LLC equal in number to such number of shares of Class A common stock issued by IBG, Inc.
As
a consequence of these redemption transactions, and distribution of shares to employees (see Note 12), IBG, Inc.'s interest in IBG LLC has increased to
approximately 14.5%, with Holdings owning the remaining 85.5% as of December 31, 2014. The redemptions also resulted in an increase in the Holdings interest held by Thomas Peterffy and his
affiliates from approximately 84.6% at the IPO to approximately 88.0% at December 31, 2014.
102
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Equity and Earnings Per Share (Continued)
The
Exchange Agreement, as amended June 6, 2012, provides that the Company may facilitate the redemption by Holdings of interests held by its members through the issuance of
shares of common stock through a public offering in exchange for the interests in IBG LLC being redeemed by Holdings. The Amendment eliminated from the Exchange Agreement an alternative funding
method, which
provided that upon approval by the board of directors and by agreement of IBG, Inc., IBG LLC and Holdings, redemptions could be made in cash.
Subsequent
to the amendment to the Exchange Agreement on June 6, 2012, the Company recorded adjustments to report Holdings' noncontrolling interests in IBG LLC as component
of total equity, reducing redeemable noncontrolling interests to zero and reversing the cumulative effect of adjustments through June 6, 2012 to redemption value previously recorded to
additional paid-in capital. The effect of these adjustments was:
|
|
|
|
|
|
|
Adjustments
as of June 6,
2012 |
|
|
|
(in thousands)
|
|
Redeemable noncontrolling interests |
|
$ |
(5,367,553 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid in Capital |
|
$ |
472,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
$ |
572,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests |
|
$ |
4,322,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share
For periods prior to June 6, 2012, the Company reflected measurement adjustments for non-fair value redemption rights through
application of the two-class method of calculating earnings per share in lieu of recognizing the impact through the determination of net income attributable to common stockholders.
Basic
earnings per share are calculated utilizing net income available for common stockholders divided by the weighted average number of shares of Class A and Class B
common stock outstanding for that period.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-Ended December 31, |
|
|
|
2014 |
|
2013 |
|
2012 |
|
|
|
(in thousands, except for shares
or per share amounts)
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
44,533 |
|
$ |
37,003 |
|
$ |
40,668 |
|
Add net income attributable to non-fair value redemption rights |
|
|
|
|
|
|
|
|
1,108 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income available for common stockholers |
|
$ |
44,533 |
|
$ |
37,003 |
|
$ |
41,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding |
|
|
|
|
|
|
|
|
|
|
Class A |
|
|
56,492,281 |
|
|
49,742,328 |
|
|
46,814,576 |
|
Class B |
|
|
100 |
|
|
100 |
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,492,381 |
|
|
49,742,428 |
|
|
46,814,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.79 |
|
$ |
0.74 |
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Equity and Earnings Per Share (Continued)
Diluted earnings per share are calculated utilizing the Company's basic net income available for common stockholders divided by diluted weighted average shares outstanding with no
adjustments to net income available to common stockholders for potentially dilutive common shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-Ended December 31, |
|
|
|
2014 |
|
2013 |
|
2012 |
|
|
|
(in thousands, except for shares
or per share amounts)
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
Net income available for common stockholders |
|
$ |
44,533 |
|
$ |
37,003 |
|
$ |
41,776 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding |
|
|
|
|
|
|
|
|
|
|
Class A |
|
|
|
|
|
|
|
|
|
|
Issued and outstanding |
|
|
56,492,281 |
|
|
49,742,328 |
|
|
46,814,576 |
|
Potentially dilutive common shares |
|
|
|
|
|
|
|
|
|
|
Issuable pursuant to employee incentive plans |
|
|
1,217,287 |
|
|
1,182,308 |
|
|
255,846 |
|
Class B |
|
|
100 |
|
|
100 |
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,709,668 |
|
|
50,924,736 |
|
|
47,070,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.77 |
|
$ |
0.73 |
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member Distributions and Stockholder Dividends
During the three years ended December 31, 2014, 2013 and 2012, IBG LLC made distributions totaling $323.6 million,
$162.9 million and $595.8 million, respectively, to its members, of which IBG, Inc.'s proportionate share was $45.0 million, $20.5 million and $70.6 million,
respectively. The Company paid quarterly cash dividends of $0.10 per share of common stock, totaling $22.7 million, $20.2 million and $18.8 million during 2014, 2013 and 2012,
respectively. In addition, in December 2012, a special dividend of $1.00 per share of common stock was also paid, totaling $47.5 million.
On
January 20, 2015, the Company declared a cash dividend of $0.10 per common share, payable on March 13, 2015 to stockholders of record as of February 27, 2015.
104
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
5. Comprehensive Income
The following table presents comprehensive income and earnings per share on comprehensive income (calculated using the two-class method for periods prior to June 6, 2012).
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-Ended December 31, |
|
|
|
2014 |
|
2013 |
|
2012 |
|
Comprehensive income attributable to common stockholders |
|
$ |
29,487 |
|
$ |
34,277 |
|
$ |
51,935 |
|
Add net income attributable to non-fair value redemption rights |
|
|
|
|
|
|
|
|
1,108 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income available for common stockholders |
|
$ |
29,487 |
|
$ |
34,277 |
|
$ |
53,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share on comprehensive income |
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.52 |
|
$ |
0.69 |
|
$ |
1.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.51 |
|
$ |
0.67 |
|
$ |
1.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
56,492,381 |
|
|
49,742,428 |
|
|
46,814,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
57,709,668 |
|
|
50,924,736 |
|
|
47,070,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Financial Assets and Financial Liabilities
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables set forth, by level within the fair value hierarchy (see Note 2), financial assets and liabilities,
primarily financial instruments owned, at fair value, financial instruments sold, but not yet purchased, at fair value, and other assets and liabilities measured at fair value on a recurring basis as
of December 31, 2014 and December 31, 2013. As required by ASC Topic 820, financial assets and
105
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Financial Assets and Financial Liabilities (Continued)
financial
liabilities are classified in their entirety based on the lowest level of input that is significant to the respective fair value measurement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets At Fair Value as of
December 31, 2014 |
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
|
|
(in thousands)
|
|
Securities segregated for regulatory purposes |
|
$ |
6,680,951 |
|
$ |
|
|
$ |
|
|
$ |
6,680,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stocks |
|
|
2,552,641 |
|
|
|
|
|
74 |
|
|
2,552,715 |
|
Options |
|
|
1,208,899 |
|
|
|
|
|
|
|
|
1,208,899 |
|
Warrants and discount certificates |
|
|
72,307 |
|
|
|
|
|
|
|
|
72,307 |
|
U.S. and foreign government securities |
|
|
97,942 |
|
|
|
|
|
|
|
|
97,942 |
|
Currency forward contracts |
|
|
|
|
|
2,286 |
|
|
|
|
|
2,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments owned, at fair value |
|
|
3,931,789 |
|
|
2,286 |
|
|
74 |
|
|
3,934,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other fair value investments, included in other assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stocks and options |
|
|
39,305 |
|
|
|
|
|
98 |
|
|
39,403 |
|
Currency forward contracts |
|
|
|
|
|
1,269 |
|
|
|
|
|
1,269 |
|
Corporate and municipal bonds |
|
|
|
|
|
3,233 |
|
|
|
|
|
3,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other fair value investments, included in other assets |
|
|
39,305 |
|
|
4,502 |
|
|
98 |
|
|
43,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets at fair value |
|
$ |
10,652,045 |
|
$ |
6,788 |
|
$ |
172 |
|
$ |
10,659,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities At Fair Value as of
December 31, 2014 |
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
|
|
(in thousands)
|
|
Financial instruments sold, but not yet purchased, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stocks |
|
$ |
1,355,634 |
|
$ |
|
|
$ |
930 |
|
$ |
1,356,564 |
|
Options |
|
|
1,193,125 |
|
|
|
|
|
|
|
|
1,193,125 |
|
Warrants and discount certificates |
|
|
690 |
|
|
|
|
|
|
|
|
690 |
|
Currency forward contracts |
|
|
|
|
|
10,408 |
|
|
|
|
|
10,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments sold, but not yet purchased, at fair value |
|
|
2,549,449 |
|
|
10,408 |
|
|
930 |
|
|
2,560,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other fair value liabilities, included in accounts payable, accrued expenses and other liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stocks and options |
|
|
7,827 |
|
|
|
|
|
|
|
|
7,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other fair value liabilities, included in accounts payable, accrued expenses and other liabilities |
|
|
7,827 |
|
|
|
|
|
|
|
|
7,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities at fair value |
|
$ |
2,557,276 |
|
$ |
10,408 |
|
$ |
930 |
|
$ |
2,568,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Financial Assets and Financial Liabilities (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets At Fair Value as of
December 31, 2013 |
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
|
|
(in thousands)
|
|
Securities segregated for regulatory purposes |
|
$ |
1,300,016 |
|
$ |
|
|
$ |
|
|
$ |
1,300,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stocks |
|
|
2,341,648 |
|
|
|
|
|
57 |
|
|
2,341,705 |
|
Options |
|
|
1,880,481 |
|
|
|
|
|
|
|
|
1,880,481 |
|
Warrants and discount certificates |
|
|
57,377 |
|
|
|
|
|
|
|
|
57,377 |
|
U.S. and foreign government securities |
|
|
69,080 |
|
|
2,102 |
|
|
|
|
|
71,182 |
|
Corporate and municipal bonds |
|
|
73,875 |
|
|
18,476 |
|
|
|
|
|
92,351 |
|
Currency forward contracts |
|
|
|
|
|
5,748 |
|
|
|
|
|
5,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments owned, at fair value |
|
|
4,422,461 |
|
|
26,326 |
|
|
57 |
|
|
4,448,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other fair value investments, included in other assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stocks |
|
|
25,604 |
|
|
419 |
|
|
101 |
|
|
26,124 |
|
Corporate and municipal bonds |
|
|
1,776 |
|
|
47,896 |
|
|
|
|
|
49,672 |
|
Mortgage backed securities |
|
|
|
|
|
26,892 |
|
|
|
|
|
26,892 |
|
Other asset backed securities |
|
|
|
|
|
22,734 |
|
|
|
|
|
22,734 |
|
Other |
|
|
|
|
|
5,328 |
|
|
|
|
|
5,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other fair value assets |
|
|
27,380 |
|
|
103,269 |
|
|
101 |
|
|
130,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets at fair value |
|
$ |
5,749,857 |
|
$ |
129,595 |
|
$ |
158 |
|
$ |
5,879,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities At Fair Value as of
December 31, 2013 |
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
|
|
(in thousands)
|
|
Financial instruments sold, but not yet purchased, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stocks |
|
$ |
1,266,429 |
|
$ |
|
|
$ |
3 |
|
$ |
1,266,432 |
|
Options |
|
|
1,793,248 |
|
|
|
|
|
|
|
|
1,793,248 |
|
Warrants and discount certificates |
|
|
1,215 |
|
|
|
|
|
|
|
|
1,215 |
|
U.S. and foreign government securities |
|
|
|
|
|
4,412 |
|
|
|
|
|
4,412 |
|
Corporate bonds |
|
|
77,936 |
|
|
9,628 |
|
|
|
|
|
87,564 |
|
Currency forward contracts |
|
|
|
|
|
802 |
|
|
|
|
|
802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments sold, but not yet purchased, at fair value |
|
$ |
3,138,828 |
|
$ |
14,842 |
|
$ |
3 |
|
$ |
3,153,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers between Level 1 and Level 2
Transfers of financial assets and financial liabilities at fair value to or from Levels 1 and 2 arise where the market for a
specific financial instrument has become active or inactive during the period. The fair values transferred are ascribed as if the financial assets or financial liabilities had been transferred as of
the end of the period.
107
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Financial Assets and Financial Liabilities (Continued)
During
the quarter ended December 31, 2014, the Company stopped trading fixed-income securities and liquidated all its fixed-income positions. As a result, there were no transfers
between levels for financial instruments owned and sold, but not yet purchased, at fair value. The Company reclassified approximately $1.2 million of other fair value investments, included in
other assets, from Level 1 to Level 2.
During
the year ended December 31, 2013, the Company reclassified approximately $1.8 million of financial instruments owned, at fair value from Level 1 to
Level 2 and reclassified approximately $1.1 million from Level 2 to Level 1. Financial instruments sold, but not yet purchased, at fair value of approximately
$0.6 million were reclassified from Level 1 to Level 2 and approximately $1.8 million were reclassified from Level 2 to Level 1.
Level 3 Financial Assets and Financial Liabilities
The Company's Level 3 financial assets and financial liabilities are comprised of delisted securities reported within financial
instruments owned, at fair value, financial instruments sold, but not yet purchased, at fair value and other assets in the consolidated statements of financial condition. The following tables report
Level 3 activities for the years ended December 31, 2014 and December 2013:
|
|
|
|
|
|
|
|
|
|
Financial Assets |
|
Financial Liabilities |
|
|
|
(in thousands)
|
|
Balance, January 1, 2014 |
|
$ |
158 |
|
$ |
3 |
|
Total gains or losses (realized/unrealized)included in earnings |
|
|
77 |
|
|
|
|
Purchases, issuances and settlements |
|
|
(63 |
) |
|
927 |
|
Transfers in and/or out of Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014 |
|
$ |
172 |
|
$ |
930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets |
|
Financial Liabilities |
|
|
|
(in thousands)
|
|
Balance, January 1, 2013 |
|
$ |
|
|
$ |
|
|
Total gains or losses (realized/unrealized)included in earnings |
|
|
(526 |
) |
|
|
|
Purchases, issuances and settlements |
|
|
|
|
|
|
|
Transfers in and/or out of Level 3 |
|
|
684 |
|
|
3 |
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013 |
|
$ |
158 |
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Gains from Market Making Transactions
As described in Note 2, in 2014, nearly all of the currency translation gains and losses related to the Company's currency
diversification strategy were reclassified from trading gains to other income. Prior period amounts have been reclassified to conform to the current presentation. Trading gains and
108
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Financial Assets and Financial Liabilities (Continued)
losses
from market making transactions reported in the statements of comprehensive income, by major product type, are comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
|
|
(in thousands)
|
|
Equities |
|
$ |
247,227 |
|
$ |
285,364 |
|
$ |
422,026 |
|
Fixed income |
|
|
20,615 |
|
|
24,485 |
|
|
37,567 |
|
Foreign exchange |
|
|
(6,695 |
) |
|
21,269 |
|
|
6,496 |
|
Commodities |
|
|
|
|
|
115 |
|
|
(116 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total trading gains, net |
|
$ |
261,147 |
|
$ |
331,233 |
|
$ |
465,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These
transactions are related to the Company's financial instruments owned and financial instruments sold, but not yet purchased, at fair value and include both derivative and
non-derivative financial instruments, including exchange traded options and futures. These gains and losses also include market making related dividend and fixed income trading related interest income
and expense.
The
gains (losses) in the above table are not representative of the integrated trading strategies applied by the Company, which utilizes financial instruments across various product
types. Gains and losses in one product type frequently offset gains and losses in other product types.
Financial Assets and Liabilities Not Measured at Fair Value
The following table represents the carrying value, fair value, and fair value hierarchy category of certain financial assets and
liabilities that are not recorded at fair value in the Company's statement of
109
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Financial Assets and Financial Liabilities (Continued)
financial
condition. The following table excludes certain financial instruments such as equity investments and all non-financial assets and liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
|
|
Carrying Value |
|
Fair Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Financial assets, not measured at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,269,317 |
|
$ |
1,269,317 |
|
$ |
1,269,317 |
|
$ |
|
|
$ |
|
|
Cash and securities segregated for regulatory purposes |
|
|
8,722,560 |
|
|
8,722,560 |
|
|
4,849,257 |
|
|
3,873,303 |
|
|
|
|
Securities borrowed |
|
|
3,659,766 |
|
|
3,659,766 |
|
|
|
|
|
3,659,766 |
|
|
|
|
Securities purchased under agreements to resell |
|
|
386,221 |
|
|
386,221 |
|
|
|
|
|
386,221 |
|
|
|
|
Customer receivables |
|
|
17,051,452 |
|
|
17,051,452 |
|
|
|
|
|
17,051,452 |
|
|
|
|
Receivables from broker, dealers, and clearing organizations |
|
|
1,131,177 |
|
|
1,131,177 |
|
|
|
|
|
1,131,177 |
|
|
|
|
Interest receivable |
|
|
36,785 |
|
|
36,785 |
|
|
|
|
|
36,785 |
|
|
|
|
Other assets |
|
|
29,547 |
|
|
55,078 |
|
|
|
|
|
55,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets, not measured at fair value |
|
$ |
32,286,825 |
|
$ |
32,312,356 |
|
$ |
6,118,574 |
|
$ |
26,193,782 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities, not measured at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities loaned |
|
$ |
3,199,106 |
|
$ |
3,199,106 |
|
$ |
|
|
$ |
3,199,106 |
|
$ |
|
|
Short-term borrowings |
|
|
33,791 |
|
|
33,791 |
|
|
|
|
|
33,791 |
|
|
|
|
Customer payables |
|
|
31,795,853 |
|
|
31,795,853 |
|
|
|
|
|
31,795,853 |
|
|
|
|
Payables to brokers, dealers and clearing organizations |
|
|
234,098 |
|
|
234,098 |
|
|
|
|
|
234,098 |
|
|
|
|
Interest payable |
|
|
3,962 |
|
|
3,962 |
|
|
|
|
|
3,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities, not measured at fair value |
|
$ |
35,266,810 |
|
$ |
35,266,810 |
|
$ |
|
|
$ |
35,266,810 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Financial Assets and Financial Liabilities (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013 |
|
|
|
Carrying Value |
|
Fair Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Financial assets, not measured at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,213,241 |
|
$ |
1,213,241 |
|
$ |
1,213,241 |
|
$ |
|
|
$ |
|
|
Cash and securities segregated for regulatory purposes |
|
|
12,691,695 |
|
|
12,691,695 |
|
$ |
5,957,517 |
|
|
6,734,178 |
|
|
|
|
Securities borrowed |
|
|
2,751,501 |
|
|
2,751,501 |
|
|
|
|
|
2,751,501 |
|
|
|
|
Securities purchased under agreements to resell |
|
|
386,316 |
|
|
386,316 |
|
|
|
|
|
386,316 |
|
|
|
|
Customer receivables |
|
|
13,596,650 |
|
|
13,596,650 |
|
|
|
|
|
13,596,650 |
|
|
|
|
Receivables from broker, dealers, and clearing organizations |
|
|
858,189 |
|
|
858,189 |
|
|
|
|
|
858,189 |
|
|
|
|
Interest receivable |
|
|
26,489 |
|
|
26,489 |
|
|
|
|
|
26,489 |
|
|
|
|
Other assets |
|
|
26,942 |
|
|
49,610 |
|
|
|
|
|
49,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets, not measured at fair value |
|
$ |
31,551,023 |
|
$ |
31,573,691 |
|
$ |
7,170,758 |
|
$ |
24,402,933 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities, not measured at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities loaned |
|
$ |
2,563,653 |
|
$ |
2,563,653 |
|
$ |
|
|
$ |
2,563,653 |
|
$ |
|
|
Short-term borrowings |
|
|
24,635 |
|
|
24,635 |
|
|
|
|
|
24,635 |
|
|
|
|
Customer payables |
|
|
26,319,420 |
|
|
26,319,420 |
|
|
|
|
|
26,319,420 |
|
|
|
|
Payables to brokers, dealers and clearing organizations |
|
|
330,956 |
|
|
330,956 |
|
|
|
|
|
330,956 |
|
|
|
|
Interest payable |
|
|
2,969 |
|
|
2,969 |
|
|
|
|
|
2,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities, not measured at fair value |
|
$ |
29,241,633 |
|
$ |
29,241,633 |
|
$ |
|
|
$ |
29,241,633 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netting of Financial Assets and Financial Liabilities
The Company does not net securities borrowed and securities loaned, and securities purchased under agreements to resell and securities
sold under agreements to repurchase, which are presented on a gross basis in the consolidated statements of financial condition. In the tables below, the amounts of derivative financial instruments
owned that are not offset in the consolidated statements of financial condition, but could be netted against financial liabilities with specific counterparties under master netting agreements,
according to the terms of the agreements, including clearing houses (exchange traded options, warrants and discount certificates) or over the counter currency forward contract counterparties, are
presented to provide financial statement readers with the Company's estimate of its net exposure to counterparties for these derivative financial instruments.
111
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Financial Assets and Financial Liabilities (Continued)
The
following tables sets forth the netting of financial assets and of financial liabilities as of December 31, 2014 and December 31, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
|
|
|
|
|
|
Amounts Not Offset
in the Consolidated
Statement of
Financial Condition |
|
|
|
|
|
|
|
Amounts
Offset in the
Consolidated
Statement of
|
|
Net Amounts
Presented in
the Consolidated
Statement of
|
|
|
|
|
|
Gross Amounts
of Recognized |
|
Financial
Condition |
|
Financial
Condition |
|
Cash or Financial
Instruments |
|
Net Exposure |
|
|
|
(in millions)
|
|
Offsetting of Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities segregated for regulatory purposespurchased under agreements to resell |
|
$ |
3,873.3 |
(1) |
$ |
|
|
$ |
3,873.3 |
|
$ |
(3,873.3 |
) |
$ |
|
|
Securities borrowed |
|
|
3,659.8 |
|
|
|
|
|
3,659.8 |
|
|
(3,564.4 |
) |
|
95.4 |
|
Securities purchased under agreements to resell |
|
|
386.2 |
|
|
|
|
|
386.2 |
|
|
(386.2 |
) |
|
|
|
Financial Instruments owned, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
1,208.9 |
|
|
|
|
|
1,208.9 |
|
|
(1,146.6 |
) |
|
62.3 |
|
Warrants and discount certificates |
|
|
72.3 |
|
|
|
|
|
72.3 |
|
|
(0.7 |
) |
|
71.6 |
|
Currency forward contracts |
|
|
2.3 |
|
|
|
|
|
2.3 |
|
|
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,202.8 |
|
$ |
|
|
$ |
9,202.8 |
|
$ |
(8,971.2 |
) |
$ |
231.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Financial Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities loaned |
|
$ |
3,199.1 |
|
$ |
|
|
$ |
3,199.1 |
|
$ |
(3,183.5 |
) |
$ |
15.6 |
|
Financial instruments sold, but not yet purchased, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
1,193.1 |
|
|
|
|
|
1,193.1 |
|
|
(1,146.6 |
) |
|
46.5 |
|
Warrants and discount certificates |
|
|
0.7 |
|
|
|
|
|
0.7 |
|
|
(0.7 |
) |
|
|
|
Currency forward contracts |
|
|
10.4 |
|
|
|
|
|
10.4 |
|
|
|
|
|
10.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,403.3 |
|
$ |
|
|
$ |
4,403.3 |
|
$ |
(4,330.8 |
) |
$ |
72.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Financial Assets and Financial Liabilities (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013 |
|
|
|
|
|
|
|
Amounts Not Offset
in the Consolidated
Statement of
Financial Condition |
|
|
|
|
|
|
|
Amounts
Offset in the
Consolidated
Statement of
|
|
Net Amounts
Presented in
the Consolidated
Statement of
|
|
|
|
|
|
Gross Amounts
of Recognized |
|
Financial
Condition |
|
Financial
Condition |
|
Cash or Financial
Instruments |
|
Net Exposure |
|
|
|
(in millions)
|
|
Offsetting of Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities segregated for regulatory purposespurchased under agreements to resell |
|
$ |
6,734.2 |
(1) |
$ |
|
|
$ |
6,734.2 |
|
$ |
(6,734.2 |
) |
$ |
|
|
Securities borrowed |
|
|
2,751.5 |
|
|
|
|
|
2,751.5 |
|
|
(2,694.6 |
) |
|
56.9 |
|
Securities purchased under agreements to resell |
|
|
386.3 |
|
|
|
|
|
386.3 |
|
|
(386.3 |
) |
|
|
|
Financial Instruments owned, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
1,880.5 |
|
|
|
|
|
1,880.5 |
|
|
(1,652.8 |
) |
|
227.7 |
|
Warrants and discount certificates |
|
|
57.4 |
|
|
|
|
|
57.4 |
|
|
(1.2 |
) |
|
56.2 |
|
Currency forward contracts |
|
|
5.7 |
|
|
|
|
|
5.7 |
|
|
|
|
|
5.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,815.6 |
|
$ |
|
|
$ |
11,815.6 |
|
$ |
(11,469.1 |
) |
$ |
346.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Financial Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities loaned |
|
$ |
2,563.7 |
|
$ |
|
|
$ |
2,563.7 |
|
$ |
(2,544.6 |
) |
$ |
19.1 |
|
Financial instruments sold, but not yet purchased, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
1,793.2 |
|
|
|
|
|
1,793.2 |
|
|
(1,652.8 |
) |
|
140.4 |
|
Warrants and discount certificates |
|
|
1.2 |
|
|
|
|
|
1.2 |
|
|
(1.2 |
) |
|
|
|
Currency forward contracts |
|
|
0.8 |
|
|
|
|
|
0.8 |
|
|
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,358.9 |
|
$ |
|
|
$ |
4,358.9 |
|
$ |
(4,198.6 |
) |
$ |
160.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- As
of December 31, 2014 and December 31, 2013, the Company had $3.87 billion and $6.73 billion, respectively, of securities
purchased under agreements to resell that were segregated to satisfy regulatory requirements. These securities are included in "Cash and securitiessegregated for regulatory purposes" in
the consolidated statements of financial condition.
7. Collateralized Transactions
The Company enters into securities borrowing and lending transactions and agreements to repurchase and resell securities to finance trading inventory, to obtain securities for settlement
and to earn residual interest rate spreads. In addition, the Company's customers pledge their securities owned to collateralize margin loans. Under these transactions, the Company either receives or
provides collateral, including equity, corporate debt and U.S. government securities. Under many agreements, the Company is permitted to sell or repledge securities received as collateral and use
these securities to secure securities purchased under agreements to resell, enter into securities lending transactions or deliver these securities to counterparties to cover short positions.
113
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
7. Collateralized Transactions (Continued)
The
Company also engages in securities financing transactions with and for customers through margin lending. Customer receivables generated from margin lending activity are
collateralized by customer-owned securities held by the Company. Customers' required margin levels and established credit limits are monitored continuously by risk management staff using automated
systems. Pursuant to the Company's policy and as enforced by such systems, customers are required to deposit additional collateral or reduce positions, when necessary to avoid automatic liquidation of
their positions.
Margin
loans are extended to customers on a demand basis and are not committed facilities. Factors considered in the acceptance or rejection of margin loans are the amount of the loan,
the degree of leverage being employed in the customer account and an overall evaluation of the customer's portfolio to ensure proper diversification or, in the case of concentrated positions,
appropriate liquidity of the underlying collateral. Additionally, transactions relating to concentrated or restricted positions are limited or prohibited by raising the level of required margin
collateral (to 100% in the extreme case). Underlying collateral for margin loans is evaluated with respect to the liquidity of the collateral positions, valuation of securities, volatility analysis
and an evaluation of industry concentrations.
Adherence to the Company's collateral policies significantly limits the Company's credit exposure to margin loans in the event of a customer's default. Under margin lending agreements, the Company may
request additional margin collateral from customers and may sell securities that have not been paid for or purchase securities sold but not delivered from customers, if necessary. At
December 31, 2014 and December 31, 2013, approximately $17.05 billion and $13.60 billion, respectively, of customer margin loans were outstanding.
The
following table summarizes the amounts related to collateralized transactions at December 31, 2014 and December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
December 31, 2013 |
|
|
|
Permitted
to Repledge |
|
Sold or
Repledged |
|
Permitted
to Repledge |
|
Sold or
Repledged |
|
|
|
(in millions)
|
|
Securities lending transactions |
|
$ |
10,907.2 |
|
$ |
2,366.0 |
|
$ |
9,331.9 |
|
$ |
2,504.3 |
|
Agreements to resell(1) |
|
|
4,259.8 |
|
|
4,259.8 |
|
|
7,116.1 |
|
|
7,099.6 |
|
Customer margin assets |
|
|
14,933.0 |
|
|
5,739.8 |
|
|
11,753.3 |
|
|
4,602.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,100.0 |
|
$ |
12,365.6 |
|
$ |
28,201.3 |
|
$ |
14,206.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- At
December 31, 2014, $3.87 billion or 91% (at December 31, 2013, $6.73 billion, or 95%), of securities acquired through
agreements to resell that are shown as repledged have been deposited in a separate bank account for the exclusive benefit of customers in accordance with SEC Rule 15c3-3.
In
the normal course of business, the Company pledges qualified securities with clearing organizations to satisfy daily margin and clearing fund requirements. At December 31, 2014
and December 31, 2013, the majority of the Company's U.S. and foreign government securities owned were pledged to clearing organizations.
114
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
7. Collateralized Transactions (Continued)
Financial
instruments owned and pledged as collateral, including amounts pledged to affiliates, where the counterparty has the right to repledge, at December 31, 2014 and
December 31, 2013 are presented in the following table:
|
|
|
|
|
|
|
|
|
|
December 31,
2014 |
|
December 31,
2013 |
|
|
|
(in millions)
|
|
Stocks |
|
$ |
1,859.5 |
|
$ |
1,097.8 |
|
Warrants |
|
|
0.3 |
|
|
0.2 |
|
U.S. and foreign government obligations |
|
|
75.9 |
|
|
64.4 |
|
Corporate and municipal bonds |
|
|
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
$ |
1,935.7 |
|
$ |
1,163.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Short-Term Borrowings
Short-term borrowings consist primarily of collateralized borrowing facilities with clearing banks in multiple currencies that bear interest at variable overnight rates based on
interbank funds rates prevailing in the respective currencies. In addition, the Company has available secured and unsecured overnight bank loan facilities. All short-term borrowings outstanding at
December 31, 2014 and 2013 were either repaid on the next business day or rolled forward and, accordingly, their carrying values approximated fair values.
As
of December 31, 2014 and 2013, short-term borrowings consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
|
|
Principal |
|
Weighted
Average
Rates |
|
Principal |
|
Weighted
Average
Rates |
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
Overnight borrowing facilities |
|
$ |
33,791 |
|
|
0.50 |
% |
$ |
24,635 |
|
|
0.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
33,791 |
|
|
|
|
$ |
24,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense on short term borrowings for each of the three years ended December 31, 2014, 2013 and 2012 was $0.9 million, $0.7 million and $0.6 million,
respectively.
9. Senior Notes Payable
In January 2012, the Company discontinued its Senior Notes Program. All previously issued Senior Notes, $101.4 million outstanding as of December 31, 2011, were redeemed
prior to June 30, 2012.
10. Senior Secured Revolving Credit Facility
On May 17, 2012, IBG LLC entered into a $100 million three-year senior secured revolving credit facility with Bank of America, N.A. as administrative agent and
Citibank, N.A., as syndication agent. This credit facility replaced a similar two-year facility that expired on May 18, 2012. On August 8, 2014 IBG LLC elected to terminate this
credit facility.
115
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
11. Other Income
As described in Note 2, in 2014, nearly all of the currency translation gains and losses related to the Company's currency diversification strategy were reclassified from trading
gains to other income. Prior
period amounts have been reclassified to conform to the current presentation. The components of other income for the three years ended December 31, 2014, 2013 and 2012 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
|
|
(in thousands)
|
|
Payments for order flow |
|
$ |
25,433 |
|
$ |
25,701 |
|
$ |
21,167 |
|
Market data fees |
|
|
23,933 |
|
|
34,853 |
|
|
27,175 |
|
Account activity fees |
|
|
14,287 |
|
|
15,498 |
|
|
13,404 |
|
Exchange fee income |
|
|
1,197 |
|
|
1,930 |
|
|
4,393 |
|
Market maker incentives |
|
|
732 |
|
|
540 |
|
|
988 |
|
Losses on other investments, net |
|
|
(5,286 |
) |
|
(1,651 |
) |
|
(3,373 |
) |
Losses from currency diversification strategy, net |
|
|
(185,239 |
) |
|
(91,577 |
) |
|
(29,854 |
) |
Other, net |
|
|
14,362 |
|
|
5,861 |
|
|
9,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(110,581 |
) |
$ |
(8,845 |
) |
$ |
43,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
for order flow are earned from various options exchanges based upon options trading volume originated by the Operating Companies. Market data fees are charged to customers based
upon market data services provided. This income is largely offset by the related cost to obtain the underlying market data from third party vendors. Various exchanges pay the Company market maker
incentives for its market making efforts on those exchanges. Gains and losses on other investments are generated from investments in securities that are not held for the Group's market making
operations or from securities that are subject to restrictions, and include the Company's interests in the earnings of equity method investees and dividends received on cost-basis investments.
12. Employee Incentive Plans
Return on Investment Dollar Units ("ROI Dollar Units")
From 1998 through January 1, 2006, IBG LLC granted all non-member employees ROI Dollar Units, which are redeemable under
the amended provisions of the plan, and in accordance with regulations issued by the Internal Revenue Service (Section 409A of the Internal Revenue Code). Upon redemption, the grantee is
entitled to accumulated earnings on the face value of the certificate, but not the actual face value. For grants made in 1998 and 1999, grantees may redeem the ROI Dollar Units after vesting on the
fifth anniversary of the date of their grant and prior to the
tenth anniversary of the date of their grant. For grants made between January 1, 2000 and January 1, 2005, grantees must elect to redeem the ROI Dollar Units upon the fifth, seventh or
tenth anniversary date. These ROI Dollar Units have vested at the fifth anniversary of the date of their grant and will continue to accumulate earnings until the elected redemption date. For grants
made on or after January 1, 2006, all ROI Dollar Units vested on the fifth anniversary date of their grant and were or will be automatically redeemed. Subsequent to the IPO, no additional ROI
Dollar Units have been or will be granted, and non-cash compensation to employees will consist primarily of grants of shares of restricted common stock as described below under "2007 Stock Incentive
Plan."
116
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
12. Employee Incentive Plans (Continued)
As
of December 31, 2014 and December 31, 2013, payables to employees for ROI Dollar Units were $3.1 million and $5.6 million, respectively, all of which were
vested. These amounts are included in other liabilities and accrued expenses in the consolidated statements of financial condition. Compensation expense for the ROI Dollar Unit plan, included in the
consolidated statements of comprehensive income was $0.3 million, $0.5 million and $0.8 million for the three years ended December 31, 2014, 2013 and 2012, respectively.
2007 ROI Unit Stock Plan
In connection with the IPO, the Company adopted the IBG, Inc. 2007 ROI Unit Stock Plan ("ROI Unit Stock Plan"). Under this plan,
certain employees of IBG LLC who held ROI Dollar Units, at the employee's option, elected to invest their ROI Dollar Unit accumulated earnings as of December 31, 2006 in shares of
restricted common stock. An aggregate of 1,271,009 shares of restricted common stock (consisting of 1,250,000 shares issued under the ROI Unit Stock Plan and 21,009 shares under the 2007 Stock
Incentive Plan, as described below), with a fair value at the date of grant of $38.1 million were issued to IBG LLC and held as treasury stock, to be distributed to employees in
accordance with the following schedule and subject to the conditions below:
-
- 10% on the date of the IPO (or on the first anniversary of the IPO, in the case of U.S. ROI Unit holders who made the above-referenced
elections after December 31, 2006); and
-
- an additional 15% on each of the first six anniversaries of the date of the IPO, assuming continued employment with the Company and
compliance with other applicable covenants.
Of
the fair value at the date of grant, $17.8 million represented the accumulated ROI Dollar Unit value elected to be invested by employees in restricted common stock and such
amount was accrued for as of December 31, 2006. The remainder was being ratably accrued as compensation expense by the Company from the date of the IPO over the requisite service period
represented by the aforementioned distribution schedule.
As
of December 31, 2012, compensation costs for the ROI Unit Stock Plan had been fully accrued. Compensation expense for the ROI Unit Stock Plan, net of the effect of forfeitures,
included in the consolidated statements of comprehensive income was $3.6 million for the year ended December 31, 2012. As of December 31, 2014, the Company has 9,614 shares of
common stock remaining to be distributed to former employees under the ROI Unit Stock Plan.
2007 Stock Incentive Plan
Under the Company's 2007 Stock Incentive Plan (the "Stock Incentive Plan"), up to 30 million shares (20 million shares at
December 31, 2013) of the Company's common stock may be granted and issued to directors, officers, employees, contractors and consultants of the Company. The 10 million increase in
shares allocated to the Stock Incentive Plan was approved by the Company's Compensation Committee and Board of Directors in February 2014. The Board of Directors' approval was ratified by a vote of
the stockholders at the Company's 2014 Annual Meeting held on April 24, 2014. The purpose of the Stock Incentive Plan is to promote the Company's long-term financial success by attracting,
retaining and rewarding eligible participants.
As
a result of the Company's organizational structure, a description of which can be found in "BusinessOur Organizational Structure" in Part I Item 1 of this
annual Report Form 10-K, there is
117
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
12. Employee Incentive Plans (Continued)
no
dilutive effect upon ownership of minority stockholders of issuing shares under the Stock Incentive Plan. The issuances do not dilute the book value of the ownership of minority stockholders since
the restricted stock units are granted at market value, and upon their vesting and the related issuance of shares of common stock, the ownership of the IBG, Inc. in IBG LLC, increases
proportionately to the shares issued. As a result of such proportionate increase in share ownership, the dilution upon issuance of common stock is borne by IBG LLC's majority member
(i.e., noncontrolling interest), Holdings, and not by IBG, Inc. or its minority shareholders. Additionally, dilution of earnings that may take place after issuance of common stock is
reflected in EPS reported in the Company's financial statements. The EPS dilution can be neither estimated nor projected, but historically it has not been material.
The
Stock Incentive Plan is administered by the Compensation Committee of the Company's Board of Directors. The Compensation Committee has discretionary authority to determine the
eligibility to participate in the Stock Incentive Plan and establishes the terms and conditions of the stock awards, including the number of awards granted to each participant and all other terms and
conditions applicable to such awards in individual grant agreements. Awards are expected to be made primarily through grants of restricted common stock. Stock Incentive Plan awards are subject to
issuance over time and may be forfeited upon the participant's termination of employment or violation of certain applicable covenants prior to issuance, unless determined otherwise by the Compensation
Committee.
The
Stock Incentive Plan provides that, upon a change in control, the Compensation Committee may, at its discretion, fully vest any granted but not yet earned awards under the Stock
Incentive Plan, or provide that any such granted but not yet earned awards will be honored or assumed, or new rights substituted by the new employer on a substantially similar basis and on terms and
conditions substantially comparable to those of the Stock Incentive Plan.
The
Company expects to continue to grant awards on or about December 31 of each year to eligible participants as part of an overall plan of equity compensation. Shares of common
stock vest, and become distributable to participants in accordance with the following schedule:
-
- 10% on the first vesting date, which is on or about May 9 of each year; and
-
- an additional 15% on each of the following six anniversaries of the first vesting, assuming continued employment with the Company and
compliance with non-competition and other applicable covenants.
Awards
granted to external directors vest, and are distributed, over a five-year period (20% per year) commencing one year after the date of grant. A total of 22,996 shares have been
granted to the external directors cumulatively since the plan inception.
118
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
12. Employee Incentive Plans (Continued)
Stock Incentive Plan share grants (excluding 21,009 shares issued pursuant to the ROI Unit Stock Plan described above) and the related fair values since the plan inception are presented
in the table below:
|
|
|
|
|
|
|
|
|
|
Shares |
|
Fair Value
at Date of Grant
($ millions) |
|
Prior periods (since inception) |
|
|
13,654,494 |
|
$ |
251.9 |
|
December 31, 2012 |
|
|
3,629,960 |
|
|
50.5 |
|
December 31, 2013 |
|
|
1,894,046 |
|
|
46.2 |
|
December 31, 2014 |
|
|
1,709,968 |
|
|
48.6 |
|
|
|
|
|
|
|
|
|
|
|
|
20,888,468 |
|
$ |
397.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
future grants under the Stock Incentive Plan are accrued for ratably during each year (see Note 2). In accordance with the vesting schedule, outstanding awards vest and
are distributed to participants yearly on or about May 9 of each year. At the end of each year, there are no vested awards that remain undistributed.
Compensation
expense related to the Stock Incentive Plan recognized in the consolidated statements of comprehensive income was $40.6 million, $40.3 million and
$63.3 million for the three years ended December 31, 2014, 2013 and 2012, respectively. Estimated future compensation costs for unvested awards, net of forfeiture credits, at
December 31, 2014 are $38.6 million.
119
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
12. Employee Incentive Plans (Continued)
The
following summarizes the Stock Incentive Plan and ROI Unit Stock Plan activities for the three year period from January 1, 2012 through December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Incentive Plan
("SIP")
Shares |
|
Intrinsic Value
of SIP Shares
which Vested
and were
Distributed
($ millions)(2) |
|
ROI Unit
Stock Plan
(Shares) |
|
Balance, December 31, 2011 |
|
|
9,408,994 |
|
|
|
|
|
356,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
4,845,826 |
|
|
|
|
|
|
|
Forfeited |
|
|
(115,750 |
) |
|
|
|
|
(500 |
) |
Distributed |
|
|
(1,736,588 |
) |
$ |
25.1 |
|
|
(186,360 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012 |
|
|
12,402,482 |
|
|
|
|
|
169,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,894,046 |
|
|
|
|
|
|
|
Forfeited |
|
|
(334,111 |
) |
|
|
|
|
(6,423 |
) |
Distributed |
|
|
(2,315,300 |
) |
$ |
36.3 |
|
|
(162,866 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013 |
|
|
11,647,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,709,968 |
|
|
|
|
|
|
|
Forfeited(1) |
|
|
(535,085 |
) |
|
|
|
|
15,518 |
|
Distributed |
|
|
(2,445,200 |
) |
$ |
55.7 |
|
|
(5,904 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014 |
|
|
10,376,800 |
|
|
|
|
|
9,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- ROI
Unit Stock Plan number of forfeited shares related to prior years was adjusted by 15,518 shares during the period.
- (2)
- Intrinsic
value of SIP shares distributed represents the compensation value reported to the participants.
Awards
granted under the stock plans are subject to forfeiture in the event a participant ceases employment with the Company. The stock plans provide that participants who discontinue
employment with the Company without cause and continue to meet the terms of the plans' post-employment provisions will forfeit 50% of unvested previously granted awards unless the participant is over
the age of 59, in which case the participant would be eligible to receive 100% of unvested awards previously granted. Distributions of remaining awards granted on or before January 1, 2009 to
former participants will occur within 90 days of the anniversary of the termination of employment date over a five (5) year vesting schedule, 12.5% in each of the first four years and
50% in the fifth year. Distributions of remaining awards granted on or after January 1, 2010 to former participants will occur over the remaining vesting schedule applicable to each grant.
Through December 31, 2014, a total of 188,203 shares have been distributed under these post-employment provisions. These distributions are included in the table above.
120
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
13. Income Taxes
Income tax expense for the three years ended December 31, 2014, 2013 and 2012 differs from the U.S. federal statutory rate primarily due to the taxation treatment of income
attributable to noncontrolling interests in IBG LLC. These noncontrolling interests are subject to U.S. taxation as partnerships. Accordingly, the income attributable to these noncontrolling
interests is reported in the consolidated statements of comprehensive income, but the related U.S. income tax expense attributable to these noncontrolling interests is not reported by the Company as
it is the obligation of the individual partners. Income tax expense is also affected by the differing effective tax rates in foreign, state and local jurisdictions where certain of the Company's
subsidiaries are subject to corporate taxation.
Deferred
income taxes arise primarily due to the amortization of the deferred tax assets recognized in connection with the common stock offerings (see Note 4), differences in the
valuation of financial assets and liabilities, and for other temporary differences arising from the deductibility of compensation and depreciation expenses in different time periods for book and
income tax return purposes.
For
the three years ended December 31, 2014, 2013 and 2012, the provision for income taxes consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
|
|
(in thousands)
|
|
Current |
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
720 |
|
$ |
(1,096 |
) |
$ |
1,379 |
|
State and local |
|
|
81 |
|
|
10 |
|
|
167 |
|
Foreign |
|
|
28,285 |
|
|
23,041 |
|
|
10,684 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
29,086 |
|
|
21,955 |
|
|
12,230 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
21,323 |
|
|
17,691 |
|
|
16,765 |
|
State and local |
|
|
14 |
|
|
(1 |
) |
|
27 |
|
Foreign |
|
|
(3,169 |
) |
|
(5,960 |
) |
|
992 |
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
18,168 |
|
|
11,730 |
|
|
17,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
47,254 |
|
$ |
33,685 |
|
$ |
30,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
reconciliation of the statutory U.S. Federal income tax rate of 35% to the Company's effective tax rate for the three years ending December 31, 2014, 2013 and 2012 is set forth
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
U.S. Statutory Tax Rate |
|
|
35.0 |
% |
|
35.0 |
% |
|
35.0 |
% |
Less: rate attributable to noncontrolling interests |
|
|
28.6 |
% |
|
29.5 |
% |
|
30.3 |
% |
State, local and foreign taxes, net of federal benefit |
|
|
2.9 |
% |
|
2.0 |
% |
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.3 |
% |
|
7.5 |
% |
|
5.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
121
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
13. Income Taxes (Continued)
Significant
components of the Company's deferred tax assets (liabilities), which are respectively reported in other assets and in other liabilities and accrued expenses in the
consolidated statements of financial condition, as of December 31, 2014, 2013 and 2012 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
|
|
(in thousands)
|
|
Deferred tax assets |
|
|
|
|
|
|
|
|
|
|
Arising from the acquisition of interests in IBG LLC |
|
$ |
278,842 |
|
$ |
294,666 |
|
$ |
281,615 |
|
Deferred compensation |
|
|
6,236 |
|
|
8,724 |
|
|
7,309 |
|
Other |
|
|
7,533 |
|
|
3,028 |
|
|
1,135 |
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
292,611 |
|
|
305,968 |
|
|
290,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
|
|
Foreign, primarily THE |
|
|
2,964 |
|
|
7,942 |
|
|
14,022 |
|
Other comprehensive income |
|
|
(484 |
) |
|
(199 |
) |
|
282 |
|
Other |
|
|
432 |
|
|
335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
2,912 |
|
|
8,078 |
|
|
14,304 |
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
289,699 |
|
$ |
297,890 |
|
$ |
275,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of and for the years ended December 31, 2014 and 2013, the Company had no unrecognized tax and no valuation allowances on deferred tax assets were required. The Company is
subject to taxation in the U.S. and various states and foreign jurisdictions. As of December 31, 2014, the Company is no longer subject to U.S. Federal and State income tax examinations for tax
years prior to 2010, and to non-U.S. income tax examinations for tax years prior to 2006.
At
December 31, 2014, accumulated earnings held by non-U.S. subsidiaries totaled $1,004.5 million (at December 31, 2013 $1,072.9 million). Of this amount,
approximately $393.7 million (at December 31, 2013 $422.3 million) is attributable to earnings of the Company's foreign subsidiaries that are considered "pass-through" entities
for U.S. income tax purposes. Since the Company accounts for U.S. income taxes on these earnings on a current basis, no additional U.S. tax consequences would result from the repatriation of these
earnings other than that which would be due arising from currency fluctuations between the time the earnings are reported for U.S. tax purposes and when they are remitted. With respect to certain of
these subsidiaries' accumulated earnings (approximately $293.0 million and $318.7 million as of December 31, 2014 and December 31, 2013, respectively), repatriation would
result in additional foreign taxes in the form of dividend withholding tax imposed on the recipient of the distribution or dividend distribution tax imposed on the payor of the distribution. The
Company has not provided for its proportionate share of these additional foreign taxes as it does not intend to repatriate these earnings in the foreseeable future. For the same reason, the Company
has not provided deferred U.S. tax on cumulative translation adjustments associated with these earnings.
The
remainder of the accumulated earnings are attributable to non-U.S. subsidiaries that are not considered "pass-through" entities for U.S. tax purposes. The Company's U.S. tax basis in
the stock of most of these entities exceeds its book basis. Establishing a deferred tax asset pursuant to ASC Topic 740 is not permitted as this difference will not reverse in the foreseeable
future. In the instances in which the Company's book basis were to exceed its U.S. tax basis, no deferred tax liability would be established as the Company would consider the earnings of those
entities to be indefinitely reinvested.
122
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
14. Property and Equipment
Property and equipment, which is included in other assets in the consolidated statements of financial
condition, is comprised of leasehold improvements, computer equipment, software developed for the Company's internal use and office furniture and equipment. At December 31, 2014 and 2013,
property and equipment consisted of:
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
|
|
(in thousands)
|
|
Leasehold improvements |
|
$ |
17,341 |
|
$ |
21,177 |
|
Computer equipment |
|
|
8,515 |
|
|
8,157 |
|
Internally developed software |
|
|
44,172 |
|
|
39,127 |
|
Office furniture and equipment |
|
|
3,270 |
|
|
3,727 |
|
|
|
|
|
|
|
|
|
|
|
|
73,298 |
|
|
72,188 |
|
Lessaccumulated depreciation and amortization |
|
|
(41,475 |
) |
|
(39,951 |
) |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
31,823 |
|
$ |
32,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of $19.7 million, $19.2 million and $19.3 million for the three years ended December 31, 2014, 2013 and 2012, respectively, is
included in occupancy, depreciation and amortization expenses in the consolidated statements of comprehensive income.
15. Commitments, Contingencies and Guarantees
In October 2013, a small number of the Company's brokerage customers had taken relatively large positions in four stocks listed on the Singapore Exchange. In early October 2013, within a
very short timeframe, these securities lost over 90% of their value. The customer accounts were margined and fell into deficits totaling $64 million prior to the time the Company took
possession of their securities positions. The Company has recognized a cumulative loss of approximately $83.4 million from October 2013 through December 31, 2014. The maximum aggregate
loss, which would occur if the securities' prices all fell to zero and none of the debts were collected, would be approximately $84 million. The Company is currently pursuing the collection of
the debts. The ultimate effect of this incident on the Company's results will depend upon market conditions and the outcome of the Company's debt collection efforts.
Litigation
The Company is subject to certain pending and threatened legal actions which arise out of the normal course of business. Litigation is
inherently unpredictable, particularly in proceedings where claimants seek substantial or indeterminate damages, or which are in their early stages. The Company has not been able to quantify the
actual loss or range of loss related to such legal proceedings, the manner in which they will be resolved, the timing of final resolution or the ultimate settlement. Management believes that the
resolution of these actions will not have a material effect, if any, on the Company's business or financial condition, but may have a material impact on the results of operations for a given period.
The
Company accounts for potential losses related to litigation in accordance with FASB ASC Topic 450, "Contingencies." As of December 31, 2014 and 2013, reserves provided for
potential losses related to litigation matters were not material.
123
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
15. Commitments, Contingencies and Guarantees (Continued)
Trading Technologies Matter
On February 3, 2010, Trading Technologies International, Inc. ("Trading Technologies") filed a complaint in the United
States District Court for the Northern District of Illinois, Eastern Division, against Interactive Brokers Group, Inc., IBG LLC, Holdings, and Interactive Brokers LLC. Thereafter,
Trading Technologies dismissed Interactive Brokers Group, Inc. and Holdings from the case, leaving only IBG LLC and Interactive Brokers LLC as defendants (the "Defendants"). The
operative complaint, as amended, alleges that the Defendants have infringed and continue to infringe twelve U.S. patents held by Trading Technologies. Trading Technologies is seeking, among other
things, unspecified damages and injunctive relief ("the Litigation").
The
Defendants filed an answer to Trading Technologies' amended complaint, as well as related counterclaims. The defendants deny Trading Technologies' claims, assert that the asserted
patents are not infringed and are invalid, and assert several other defenses as well.
Trading
Technologies also filed patent infringement lawsuits against approximately a dozen other companies in the same court, many of which are still pending. The Litigation was
consolidated with the other lawsuits filed by Trading Technologies.
On
June 2, 2014, the Defendants filed a motion to stay the Litigation pursuant to Section 18(b) of the America Invents Act in light of petitions for Covered Business Method
("CBM") Review on five asserted patents filed with the United States Patent and Trademark Office ("USPTO") by other defendants in the consolidated cases. Some of the other defendants have similarly
requested a stay in light of such petitions. On December 2, 2014, the USPTO issued decisions instituting CBM Review on four of the asserted patents for which CBM petitions were filed, declining
to institute CBM Review on one of the asserted patents. The District Court has not yet ruled on the motions to stay.
The
case is in the early stages and discovery has yet to begin. While it is too early to predict the outcome of the matter, the Company believes it has meritorious defenses to the
allegations made in the complaint and intends to defend itself vigorously against them. However, litigation is inherently uncertain and there can be no guarantee that the Company will prevail or that
the litigation can be settled on favorable terms.
Leases
Operating Companies have non-cancelable operating leases covering office space. All but one of the office space leases are subject to
escalation clauses based on specified costs incurred by the respective landlords and contain renewal elections. Rent expense calculated on a straight-line basis for the Company was
$12.9 million, $13.3 million and $13.3 million for the three years ended December 31, 2014, 2013 and 2012, respectively, and is reported in occupancy, depreciation and
124
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
15. Commitments, Contingencies and Guarantees (Continued)
amortization
expenses in the consolidated statements of comprehensive income. As of December 31, 2014, the Company's minimum annual lease commitments totaled $41.8 million, as follows:
|
|
|
|
|
Year
|
|
(in thousands) |
|
2015 |
|
$ |
11,495 |
|
2016 |
|
|
11,367 |
|
2017 |
|
|
9,259 |
|
2018 |
|
|
9,115 |
|
Thereafter |
|
|
632 |
|
|
|
|
|
|
|
|
$ |
41,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
Certain of the Operating Companies provide guarantees to securities clearing houses and exchanges which meet the accounting definition
of a guarantee under FASB ASC Topic 460, "Guarantees." Under standard membership agreements, clearing house and exchange members are required to guarantee collectively the performance of other
members. Under the agreements, if a member becomes unable to satisfy its obligations, other members would be required to meet shortfalls. In the opinion of management, the Operating Companies'
liability under these arrangements is not quantifiable and could exceed the cash and securities they have posted as
collateral. However, the potential for these Operating Companies to be required to make payments under these arrangements is remote. Accordingly, no contingent liability is carried in the consolidated
statements of financial condition for these arrangements.
In
connection with its retail brokerage business, IB LLC or other electronic brokerage Operating Companies perform securities and commodities execution, clearance and settlement
on behalf of their customers for whom they commit to settle trades submitted by such customers with the respective clearing houses. If a customer fails to fulfill its settlement obligations, the
respective Operating Company must fulfill those settlement obligations. No contingent liability is carried on the consolidated statements of financial condition for such customer obligations.
Other Commitments
Certain clearing houses and clearing banks and firms used by certain Operating Companies are given a security interest in certain
assets of those Operating Companies held by those clearing organizations. These assets may be applied to satisfy the obligations of those Operating Companies to the respective clearing organizations.
16. Segment and Geographic Information
The Company has two operating business segments: electronic brokerage and market making. These segments are supported by our corporate segment which provides centralized services and
executes Company's currency diversification strategy.
The
Company conducts its electronic brokerage business through its Interactive Brokers subsidiaries, which provide electronic execution and clearing services to customers worldwide. The
Company conducts its market making business principally through its Timber Hill subsidiaries on the
125
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
16. Segment and Geographic Information (Continued)
world's
leading exchanges and market centers, primarily in exchange-traded equities, equity options and equity-index options and futures.
Significant
transactions and balances between the Operating Companies occur, primarily as a result of certain Operating Companies holding exchange or clearing organization memberships,
which are utilized to provide execution and clearing services to affiliates. Charges for transactions between segments are designed to approximate full costs. Intra-segment and intra-region income and
expenses and related balances have been eliminated in this segment and geographic information to reflect the external business conducted in each segment or geographical region. As described in
Note 2, during the fourth quarter of 2014, the Company had taken several steps to improve the transparency of its currency diversification strategy. The Company reclassified gains and losses
from its currency diversification strategy in the corporate segment instead of the market making segment. To provide meaningful comparisons, prior period amounts have been reclassified for changes in
the presentation of currency translation effects. Corporate items include non-allocated corporate income and expenses that are not attributed to segments for performance measurement, net gains and
losses on positions held as part of our overall currency diversification strategy, corporate assets and eliminations.
Management
believes that the following information by business segment provides a reasonable representation of each segment's contribution to total net revenues and income before income
taxes for the three years ended December 31, 2014, 2013 and 2012, and to total assets as of December 31, 2014, 2013 and 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2014 |
|
2013 |
|
2012 |
|
|
|
(in millions)
|
|
Net revenues |
|
|
|
|
|
|
|
|
|
|
Electronic brokerage |
|
$ |
952.3 |
|
$ |
818.5 |
|
$ |
672.2 |
|
Market making |
|
|
284.4 |
|
|
361.1 |
|
|
490.5 |
|
Corporate and eliminations |
|
|
(193.4 |
) |
|
(103.4 |
) |
|
(32.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
1,043.3 |
|
$ |
1,076.2 |
|
$ |
1,130.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
|
|
|
|
|
|
|
|
Electronic brokerage |
|
$ |
588.5 |
|
$ |
395.8 |
|
$ |
343.5 |
|
Market making |
|
|
114.1 |
|
|
158.5 |
|
|
219.5 |
|
Corporate and eliminations |
|
|
(196.5 |
) |
|
(103.0 |
) |
|
(36.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total income before income taxes |
|
$ |
506.1 |
|
$ |
451.3 |
|
$ |
527.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2014 |
|
December 31,
2013 |
|
December 31,
2012 |
|
|
|
(in millions)
|
|
Segment Assets |
|
|
|
|
|
|
|
|
|
|
Electronic brokerage |
|
$ |
38,280.1 |
|
$ |
31,333.5 |
|
$ |
25,741.5 |
|
Market making |
|
|
12,172.4 |
|
|
12,139.5 |
|
|
12,730.8 |
|
Corporate and eliminations |
|
|
(7,067.5 |
) |
|
(5,602.3 |
) |
|
(5,272.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
43,385.0 |
|
$ |
37,870.7 |
|
$ |
33,199.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
16. Segment and Geographic Information (Continued)
The
Company operates its automated global business in the U.S. and international markets on more than 100 exchanges and market centers. A significant portion of the Company's net
revenues are generated by subsidiaries operating outside the U.S. International operations are comprised of electronic brokerage and market making activities in 25 countries in Europe, Asia and the
Americas (outside the U.S.). The following table presents total net revenues and income before income taxes by geographic area for the three years ended December 31, 2014, 2013 and 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2014 |
|
2013 |
|
2012 |
|
|
|
(in millions)
|
|
Net revenues |
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
964.6 |
|
$ |
889.0 |
|
$ |
862.7 |
|
International |
|
|
279.6 |
|
|
295.6 |
|
|
301.5 |
|
Corporate and eliminations |
|
|
(200.9 |
) |
|
(108.4 |
) |
|
(33.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
1,043.3 |
|
$ |
1,076.2 |
|
$ |
1,130.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
619.7 |
|
$ |
456.2 |
|
$ |
468.9 |
|
International |
|
|
90.3 |
|
|
98.2 |
|
|
95.4 |
|
Corporate and eliminations |
|
|
(203.9 |
) |
|
(103.1 |
) |
|
(37.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total income before income taxes |
|
$ |
506.1 |
|
$ |
451.3 |
|
$ |
527.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17. Regulatory Requirements
At December 31, 2014, aggregate excess regulatory capital for all of the Operating Companies was $3.27 billion.
TH LLC
and IB LLC are subject to the Uniform Net Capital Rule (Rule 15c3-1) under the Exchange Act and the Commodity and Futures Trading Commission's minimum
financial requirements (Regulation 1.17), and THE is subject to the Swiss Financial Market Supervisory Authority eligible equity requirement. Additionally, THSHK is subject to the Hong Kong
Securities Futures Commission liquid capital requirement, THA is subject to the Australian Stock Exchange liquid capital requirement, THLI is subject to the Financial Market Authority Liechtenstein
eligible capital requirements, THC and IBC are subject to the Investment Industry Regulatory Organization of Canada risk adjusted capital requirement, IBUK is subject to the U.K. Financial Conduct
Authority Capital Requirements Directive, IBI is subject to the National Stock Exchange of India net capital requirements and IBSJ is subject to the Japanese Financial Supervisory Agency capital
requirements. The following table summarizes capital, capital requirements and excess regulatory capital.
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Capital/
Eligible Equity |
|
Requirement |
|
Excess |
|
|
|
(in millions)
|
|
IB LLC |
|
$ |
2,333.9 |
|
$ |
279.0 |
|
$ |
2,054.9 |
|
TH LLC |
|
|
374.2 |
|
|
63.6 |
|
|
310.6 |
|
THE |
|
|
661.7 |
|
|
205.3 |
|
|
456.4 |
|
Other regulated Operating Companies |
|
|
486.0 |
|
|
36.1 |
|
|
449.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,855.8 |
|
$ |
584.0 |
|
$ |
3,271.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127
Table of Contents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
17. Regulatory Requirements (Continued)
Regulatory
capital requirements could restrict the Operating Companies from expanding their business and declaring dividends if their net capital does not meet regulatory requirements.
Also, certain entities within the Company are subject to other regulatory restrictions and requirements.
At
December 31, 2014, all of the regulated Operating Companies were in compliance with their respective regulatory capital requirements.
18. Related Party Transactions
Receivable from affiliate, reported in other assets in the consolidated statement of financial condition represents amounts advanced to Holdings and payable to affiliate represents
amounts payable to Holdings under the Tax Receivable Agreement (see Note 4).
Included
in receivables from and payables to customers in the accompanying consolidated statements of financial condition as of December 31, 2014 and December 31, 2013 were
accounts receivable from directors, officers and their affiliates of $151.9 million and $0.4 million and payables of $273.7 million and $815.5 million, respectively.
19. Subsequent Events
As required by FASB ASC Topic 855, "Subsequent Events", the Company has evaluated subsequent events for adjustment to or disclosure in its consolidated financial statements through the
date the consolidated financial statements were issued.
On
January 15, 2015, due to a sudden move in the value of the Swiss Franc that followed an unprecedented action by the Swiss National Bank, several of the Company's customers who
held currency futures and spot positions suffered losses in excess of their deposits with the Company. The Company took immediate action to hedge its exposure to the foreign currency receivables from
these customers. The Company estimates unsecured receivables, net of hedging activity, to be approximately $129 million. The Company is actively pursuing collection of the debts. The ultimate
effect of this incident on the Company's results will depend upon the outcome of the Company's debt collection efforts.
No
other recordable or disclosable events occurred.
*****
128
Table of Contents
SUPPLEMENTARY DATA
Unaudited Quarterly results
The Company's unaudited quarterly results for 2014 and 2013 reflect the condensed consolidated operating results of IBG, Inc.
and its subsidiaries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 Quarterly Data |
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
|
(in millions)
|
|
Revenues |
|
$ |
369.2 |
|
$ |
321.2 |
|
$ |
195.2 |
|
$ |
229.9 |
|
Interest expense |
|
|
14.3 |
|
|
11.9 |
|
|
24.2 |
|
|
21.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
|
354.9 |
|
|
309.3 |
|
|
171.0 |
|
|
208.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Execution and clearing |
|
|
54.2 |
|
|
51.6 |
|
|
52.2 |
|
|
53.5 |
|
Employee compensation and benefits |
|
|
53.5 |
|
|
53.6 |
|
|
49.4 |
|
|
48.3 |
|
Other |
|
|
29.1 |
|
|
29.9 |
|
|
29.9 |
|
|
32.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
|
136.8 |
|
|
135.1 |
|
|
131.5 |
|
|
133.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
218.1 |
|
|
174.2 |
|
|
39.5 |
|
|
74.3 |
|
Income tax expense |
|
|
16.9 |
|
|
13.5 |
|
|
7.8 |
|
|
9.1 |
|
Noncontrolling interests |
|
|
182.1 |
|
|
145.6 |
|
|
28.5 |
|
|
58.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
19.1 |
|
$ |
15.1 |
|
$ |
3.2 |
|
$ |
7.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.35 |
|
$ |
0.27 |
|
$ |
0.06 |
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.34 |
|
$ |
0.26 |
|
$ |
0.05 |
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
19.1 |
|
$ |
15.1 |
|
$ |
3.2 |
|
$ |
7.1 |
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment, before income taxes |
|
|
0.5 |
|
|
1.6 |
|
|
(11.1 |
) |
|
(6.3 |
) |
Income taxes related to items of other comprehensive income |
|
|
0.1 |
|
|
0.1 |
|
|
(0.3 |
) |
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax |
|
|
0.4 |
|
|
1.5 |
|
|
(10.8 |
) |
|
(6.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to common stockholders |
|
$ |
19.5 |
|
$ |
16.6 |
|
$ |
(7.6 |
) |
$ |
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interests |
|
$ |
182.1 |
|
$ |
145.6 |
|
$ |
28.5 |
|
$ |
58.1 |
|
Other comprehensive income (loss)cumulative translation adjustment |
|
|
3.1 |
|
|
9.6 |
|
|
(67.2 |
) |
|
(37.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interests |
|
$ |
185.2 |
|
$ |
155.2 |
|
$ |
(38.7 |
) |
$ |
20.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Quarterly Data |
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
|
(in millions)
|
|
Revenues |
|
$ |
229.0 |
|
$ |
297.5 |
|
$ |
338.5 |
|
$ |
262.9 |
|
Interest expense |
|
|
12.9 |
|
|
13.6 |
|
|
12.2 |
|
|
13.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
|
216.1 |
|
|
283.9 |
|
|
326.3 |
|
|
249.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Execution and clearing |
|
|
59.5 |
|
|
64.8 |
|
|
56.0 |
|
|
62.2 |
|
Employee compensation and benefits |
|
|
46.3 |
|
|
58.0 |
|
|
44.3 |
|
|
56.7 |
|
Other |
|
|
28.1 |
|
|
27.2 |
|
|
29.6 |
|
|
92.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
|
133.9 |
|
|
150.0 |
|
|
129.9 |
|
|
211.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
82.2 |
|
|
133.9 |
|
|
196.4 |
|
|
38.8 |
|
Income tax expense |
|
|
6.9 |
|
|
13.9 |
|
|
10.4 |
|
|
2.5 |
|
Noncontrolling interests |
|
|
68.7 |
|
|
109.7 |
|
|
169.5 |
|
|
32.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
6.6 |
|
$ |
10.3 |
|
$ |
16.5 |
|
$ |
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.14 |
|
$ |
0.21 |
|
$ |
0.33 |
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.14 |
|
$ |
0.21 |
|
$ |
0.32 |
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
6.6 |
|
$ |
10.3 |
|
$ |
16.5 |
|
$ |
3.6 |
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment, before income taxes |
|
|
(3.8 |
) |
|
(3.9 |
) |
|
3.7 |
|
|
0.8 |
|
Income taxes related to items of other comprehensive income(1) |
|
|
|
|
|
(0.4 |
) |
|
0.1 |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax |
|
|
(3.8 |
) |
|
(3.5 |
) |
|
3.6 |
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to common stockholders |
|
$ |
2.8 |
|
$ |
6.8 |
|
$ |
20.1 |
|
$ |
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interests |
|
$ |
68.7 |
|
$ |
109.7 |
|
$ |
169.5 |
|
$ |
32.7 |
|
Other comprehensive income (loss)cumulative translation adjustment |
|
|
(27.6 |
) |
|
(28.0 |
) |
|
26.0 |
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interests |
|
$ |
41.1 |
|
$ |
81.7 |
|
$ |
195.5 |
|
$ |
37.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to
be disclosed in the reports it files or submits under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported accurately and within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"),
as appropriate, to allow timely decisions regarding required disclosure.
Under
the supervision and with the participation of our management, including our CEO and our CFO, we conducted an evaluation of our disclosure controls and procedures; as such term is
defined under Exchange Act Rule 13a-15(e). Based on this evaluation, our CEO and our CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered
by this annual report.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. IBG, Inc.'s
internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with U.S. generally accepted accounting principles.
Our
internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of IBG, Inc.; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of IBG, Inc.'s management and
directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial
statements.
In
2012, the Company's management created the Accounting Policy Committee (the "APC") to provide a robust framework for the design and implementation of all relevant controls. The APC is
comprised of nine (9) experienced subject matter experts from within the Company's accounting, tax and regulatory disciplines, and includes the CFO and Chief Accounting Officer. The APC is
responsible for assessing the effects of complex transactions and related accounting guidance on the Company's financial statements and to report the results of its assessments to management and to
the Audit Committee. The APC's mandate includes review and approval of the adoption and implementation of accounting guidance (new or newly applicable) by the Company.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
131
Table of Contents
Management,
including our CEO and our CFO, assessed the effectiveness of IBG, Inc.'s internal control over financial reporting as of December 31, 2014. In making this
assessment, management used the criteria set forth in Internal ControlIntegrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
Based on management's assessment and those criteria, management concluded that IBG, Inc. maintained effective internal control over financial reporting as of December 31, 2014.
The
effectiveness of the Company's internal control over financial reporting as of December 31, 2014, has been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report, which appears herein.
Changes to Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting for the year ended December 31, 2014 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
132
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
Interactive Brokers Group, Inc.
Greenwich, CT
We
have audited the internal control over financial reporting of Interactive Brokers Group, Inc. and subsidiaries (the "Company") as of December 31, 2014, based on criteria
established in Internal ControlIntegrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management's Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because
of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to
future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal ControlIntegrated Framework
(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
133
Table of Contents
We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition as of
December 31, 2014 and 2013, and the related consolidated statements of comprehensive income, cash flows and changes in equity for each of the three years in the period ended December 31,
2014, of the Company and our report dated March 2, 2015 expressed an unqualified opinion on those financial statements.
|
|
|
/s/ Deloitte & Touche LLP |
|
|
New York, New York |
|
|
March 2, 2015 |
|
|
134
Table of Contents
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information related to the Company's directors and nominees under the following captions in the Company's Proxy Statement is
incorporated by reference herein.
-
- "Item 1Election of Directors"
-
- "Item 1Election of DirectorsBoard Meetings and Committees"
Code of Ethics
IBG, Inc.'s Code of Ethics and Business Conduct applies to all directors, officers and employees, including its Chief Executive
Officer, its Chief Financial Officer and its Controller. Information relating to our Code of Business Conduct and Ethics is included in Part I, Item 1 of this Annual Report on
Form 10-K. We will post any amendments to the Code of Ethics and Business Conduct, and any waivers that are required to be disclosed by the rules of either the SEC or NASDAQ on the investor
relations section of our website located at www.interactivebrokers.com/ir.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to director and executive officer compensation under the following captions in the Company's Proxy Statement is
incorporated by reference herein.
-
- "Compensation of Directors"
-
- "Executive Compensation"
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Other information relating to security ownership of certain beneficial owners and management is set forth under the caption "Beneficial
Ownership of Directors, Executive Officers and Owners of More than Five Percent" in the Company's Proxy Statement and such information is incorporated by reference herein.
ITEM 13. TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS
Information regarding certain relationships and related transactions under the following caption in the Company's Proxy Statement and
such information is incorporated by reference herein.
-
- "Certain Relationships and Related Transactions"
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accounting fees and under the following caption in the Company's Proxy Statement is incorporated by
reference herein.
-
- "Item 2Ratification of Appointment of Independent Registered Public Accounting Firm"
135
Table of Contents
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Documents filed as part of this report
1. Consolidated Financial Statements
The consolidated financial statements required to be filed in the Annual Report on Form 10-K are listed on page F-1 hereof and in Part II,
Item 8 hereof.
2. Financial Statement Schedule
The financial statement schedule required in the Annual Report on Form 10-K is listed on page F-1 hereof. The required schedule appears on
pages F-1 through F-5 hereof.
3. Exhibits
|
|
|
|
Exhibit
Number |
|
Description |
|
3.1 |
|
Amended and Restated Certificate of Incorporation of Interactive Brokers Group, Inc. (filed as Exhibit 3.1 to Amendment No. 2 to the Registration Statement on Form S-1 filed by the Company on
April 4, 2007).** |
|
3.2 |
|
Amended bylaws of Interactive Brokers Group, Inc. (filed as Exhibit 3.1 to the Form 8-K filed by the Company on December 22, 2014).** |
|
10.1 |
|
Amended and Restated Operating Agreement of IBG LLC (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the Quarterly Period Ended March 31, 2007 filed by the Company on June 15,
2007).** |
|
10.2 |
|
Form of Limited Liability Company Operating Agreement of IBG Holdings LLC (filed as Exhibit 10.5 to Amendment No. 1 to the Registration Statement on Form S-1 filed by the Company on
February 12, 2007).** |
|
10.3 |
|
Exchange Agreement by and among Interactive Brokers Group, Inc., IBG Holdings LLC, IBG LLC and the Members of IBG LLC (filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q for the
Quarterly Period Ended September 30, 2009 filed by the Company on November 11, 2009).** |
|
10.4 |
|
Tax Receivable Agreement by and between Interactive Brokers Group, Inc. and IBG Holdings LLC (filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q for the Quarterly Period Ended March 31,
2007 filed by theCompany on June 15, 2007).** |
|
10.5 |
|
Amended Interactive Brokers Group, Inc. 2007 Stock Incentive Plan.+ |
|
10.6 |
|
Interactive Brokers Group, Inc. 2007 ROI Unit Stock Plan. (filed as Exhibit 10.9 to Amendment No. 2 to the Registration Statement on Form S-1 filed by the Company on April 4,
2007).**+ |
|
10.7 |
|
Interactive Brokers Group, Inc. Amendment to the Exchange Agreement (filed as Exhibit 10.1 to the Form 8-K filed by the Company on June 6, 2012).**+ |
|
11.1 |
|
Statement Re; Computation of Earnings per Common Share (the calculation of per share earnings is disclosed in Part II, Item 8, Note 4 to the Consolidated Financial Statements "Equity and Earnings per
Share" and is omitted in accordance with Item 601 Section (b)(11) of Regulation S-K). |
|
21.1 |
|
Subsidiaries of the registrant. |
136
Table of Contents
|
|
|
|
Exhibit
Number |
|
Description |
|
23.1 |
|
Consent of Independent Registered Public Accounting Firm. |
|
31.1 |
|
Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2 |
|
Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1 |
|
Certification of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2 |
|
Certification of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
101.INS |
|
XBRL Instance Document* |
|
101.SCH |
|
XBRL Extension Schema* |
|
101.CAL |
|
XBRL Extension Calculation Linkbase* |
|
101.DEF |
|
XBRL Extension Definition Linkbase* |
|
101.LAB |
|
XBRL Extension Label Linkbase* |
|
101.PRE |
|
XBRL Extension Presentation Linkbase* |
- **
- Previously
filed; incorporated herein by reference.
- +
- These
exhibits relate to management contracts or compensatory plans or arrangements.
- *
- Attached
as Exhibit 101 to this Annual Report on Form 10-K for the annual period ended December 31, 2014, are the following materials
formatted in XBRL (Extensible Business Reporting Language) (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Comprehensive Income,
(iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statement of Changes in Stockholders' Equity and (v) Notes to the Consolidated Financial Statements tagged
in detail levels 1-4.
137
Table of Contents
ITEMS. 15 (a)(1) and 15 (a)(2) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Financial Statement Schedule
138
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
Interactive Brokers Group, Inc.
Greenwich, CT
We
have audited the consolidated financial statements of Interactive Brokers Group, Inc. and subsidiaries (the "Company") as of December 31, 2014 and 2013, and for each of
the three years in the period ended December 31, 2014, and the Company's internal control over financial reporting as of December 31, 2014, and have issued our reports thereon dated
March 2, 2015; such reports are included elsewhere in this Form 10-K. Our audits also included the financial statement schedule of the Company listed in the accompanying index at
Item 15. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/
Deloitte & Touche LLP
New York, New York
March 2, 2015
F-1
Table of Contents
INTERACTIVE BROKERS GROUP, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
|
|
|
|
|
|
|
|
As of December 31,
(in thousands, except share and per share amounts)
|
|
2014 |
|
2013 |
|
Assets |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,154 |
|
$ |
1,164 |
|
Investments in subsidiaries, equity basis |
|
|
748,449 |
|
|
691,499 |
|
Other assets |
|
|
294,136 |
|
|
302,919 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,043,739 |
|
$ |
995,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity |
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
Payable to affiliates |
|
$ |
277,395 |
|
$ |
287,216 |
|
Accrued expenses and other liabilities |
|
|
20 |
|
|
1,102 |
|
|
|
|
|
|
|
|
|
|
|
|
277,415 |
|
|
288,318 |
|
|
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
Common stock, $0.01 par value per share: |
|
|
|
|
|
|
|
Class AAuthorized1,000,000,000, Issued58,612,245 and 54,788,049 shares, Outstanding58,473,186 and 54,664,095 shares at
December 31, 2014 and 2013 |
|
|
586 |
|
|
548 |
|
Class BAuthorized, Issued and Outstanding100 shares at December 31, 2014 and 2013 |
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
636,150 |
|
|
583,312 |
|
Retained earnings |
|
|
120,670 |
|
|
98,868 |
|
Accumulated other comprehensive income, net of income taxes of $651 and $936 at December 31, 2014 and 2013 |
|
|
11,982 |
|
|
27,028 |
|
Treasury stock, at cost, 139,059 and 123,954 shares at December 31, 2014 and 2013 |
|
|
(3,064 |
) |
|
(2,492 |
) |
|
|
|
|
|
|
|
|
Total stockholders' equity |
|
|
766,324 |
|
|
707,264 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
1,043,739 |
|
$ |
995,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the condensed financial statements.
F-2
Table of Contents
INTERACTIVE BROKERS GROUP, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
(in thousands)
|
|
2014 |
|
2013 |
|
2012 |
|
Revenuesdividends, interest and other |
|
$ |
3 |
|
$ |
4 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
51 |
|
|
|
|
Delaware franchise taxes |
|
|
180 |
|
|
180 |
|
|
180 |
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
180 |
|
|
231 |
|
|
180 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss before equity in income of subsidiary |
|
|
(177 |
) |
|
(227 |
) |
|
(180 |
) |
Equity in income of subsidiary, net of tax |
|
|
44,710 |
|
|
37,230 |
|
|
40,848 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
44,533 |
|
$ |
37,003 |
|
$ |
40,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
44,533 |
|
$ |
37,003 |
|
$ |
40,668 |
|
Cumulative translation adjustment, net of tax |
|
|
(15,046 |
) |
|
(2,726 |
) |
|
11,267 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to common stockholders |
|
$ |
29,487 |
|
$ |
34,277 |
|
$ |
51,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the condensed financial statements.
F-3
Table of Contents
INTERACTIVE BROKERS GROUP, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
(in thousands)
|
|
2014 |
|
2013 |
|
2012 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
44,533 |
|
$ |
37,003 |
|
$ |
40,668 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
Equity in income of subsidiary |
|
|
(44,710 |
) |
|
(37,230 |
) |
|
(40,848 |
) |
Deferred income taxes |
|
|
21,517 |
|
|
17,565 |
|
|
17,283 |
|
Changes in operating assets and liabilities |
|
|
(43,589 |
) |
|
(16,557 |
) |
|
(21,337 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(22,249 |
) |
|
781 |
|
|
(4,234 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
44,970 |
|
|
20,496 |
|
|
70,608 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities |
|
|
(22,731 |
) |
|
(20,207 |
) |
|
(66,298 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(10 |
) |
|
1,070 |
|
|
76 |
|
Cash and cash equivalents at beginning of year |
|
|
1,164 |
|
|
94 |
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
1,154 |
|
$ |
1,164 |
|
$ |
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes paid |
|
$ |
5,954 |
|
$ |
29 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the condensed financial statements.
F-4
Table of Contents
INTERACTIVE BROKERS GROUP, INC.
(Parent Company Only)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(In U.S. dollars (thousands), unless otherwise noted)
1. Basis of Presentation
The accompanying condensed financial statements (the "Parent Company Financial Statements") of Interactive Brokers Group, Inc. ("IBG, Inc."), a Delaware holding company,
including the notes thereto, should be read in conjunction with the consolidated financial statements of Interactive Brokers Group, Inc. and subsidiaries (the "Company") and the notes thereto.
IBG, Inc.'s primary operating asset is its ownership interest in IBG LLC, an automated global market maker and electronic broker specializing in routing orders and processing trades in
securities, futures and foreign exchange instruments.
The
preparation of the Parent Company Financial Statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the condensed financial statements and accompanying notes. Actual results could differ materially from those estimates.
Income Taxes
Refer to Note 2 to the consolidated financial statements.
2. Transactions with Affiliates
As of December 31, 2014, there were no receivables from affiliates. Dividends received from IBG LLC for the three years ended December 31, 2014, 2013 and 2012 were
$45.0 million, $20.5 million and $70.6 million, respectively.
As
of December 31, 2014 and 2013, respectively, payable to affiliates of $277.4 million and $287.2 million consisted primarily of amounts payable to Holdings under
the Tax Receivable Agreement.
3. Stockholders' Equity
Refer to Note 4 to the consolidated financial statements.
4. Employee Stock Plans
Refer to Note 12 to the consolidated financial statements.
5. Commitments, Contingencies and Guarantees
Refer to Note 15 to the consolidated financial statements.
6. Subsequent Events
As required by FASB Topic 855, "Subsequent Events" the Company has evaluated subsequent events for adjustment to or disclosure in its condensed financial statements through the date the
financial statements were issued. No recordable or disclosable events, not otherwise reported in these condensed financial statements or the notes thereto, occurred.
****
F-5
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
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INTERACTIVE BROKERS GROUP, INC. |
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/s/ PAUL J. BRODY
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Name: |
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Paul J. Brody |
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Title: |
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Chief Financial Officer, Treasurer and Secretary |
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(Signing both in his capacity as a duly authorized officer and as principal financial officer of the registrant) |
Date:
March 2, 2015
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
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Signature
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Title
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Date
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/s/ THOMAS PETERFFY
Thomas Peterffy |
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Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) |
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March 2, 2015 |
/s/ PAUL J. BRODY
Paul J. Brody |
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Chief Financial Officer, Treasurer, Secretary and Director (Principal Financial Officer) |
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March 2, 2015 |
/s/ DENIS MENDONCA
Denis Mendonca |
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Controller |
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March 2, 2015 |
/s/ LAWRENCE E. HARRIS
Lawrence E. Harris |
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Director |
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March 2, 2015 |
/s/ HANS R. STOLL
Hans R. Stoll |
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Director |
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March 2, 2015 |
/s/ RICHARD GATES
Richard Gates |
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Director |
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March 2, 2015 |
Exhibit 10.5
INTERACTIVE BROKERS GROUP, INC.
2007 STOCK INCENTIVE PLAN
(as of December 16, 2014)
PURPOSES OF THE PLAN. The purposes of the Interactive Brokers Group, Inc. 2007 Stock Incentive Plan (the Plan) are to further the long-term growth of Interactive Brokers Group, Inc. (the Company), to the benefit of its stockholders, by providing incentives to the directors, officers, employees, contractors and consultants of the Company and its subsidiaries who will be largely responsible for such growth, and to assist the Company in attracting and retaining executives of experience and ability on a basis competitive with industry practices. The Plan permits the Company to provide incentive compensation in the form of, or based upon the value of, the Companys Class A common stock, $0.01 par value (Common Stock), of the types commonly known as restricted stock, stock appreciation rights and performance shares, as well as other types of equity-based incentive compensation (collectively, the Awards).
ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Compensation Committee of the Board of Directors or such other committee of two or more directors as the Board of Directors of the Company may from time to time designate (the Committee). Subject to the provisions of the Plan, the Committee shall have exclusive power to select the officers or other key employees to participate in the Plan, to determine the type, size and terms and conditions of Awards (including, but not limited to, restrictions as to transferability or forfeiture, exercisability or settlement of an Award and waivers or accelerations thereof, based in each case on such considerations as the Committee shall determine) and all other matters to be determined in connection with any Award to be made to each Participant selected, and to determine the time or times when Awards will be granted; provided, however, that if the Committee is not the Compensation Committee of the Board of Directors, then an Award granted hereunder by the Committee to any Participant will be revoked if such Award is not thereafter ratified by the Compensation Committee of the Board of Directors. The Committees interpretation of the Plan or of any Awards granted thereunder shall be final and binding on all parties concerned, including the Company and any Participant. The Committee shall have the authority, subject to the provisions of the Plan, to correct any defect or supply any omission or reconcile any inconsistency in the Plan, and to adopt, revise and rescind such rules, regulations, guidelines, forms of agreements and instruments relating to the Plan as it may deem necessary or advisable for the administration of the Plan.
PARTICIPATION. The Committee shall select from the officers and other key employees of the Company and its subsidiaries (the Participants) the persons who will receive Awards pursuant to the Plan. The term subsidiary shall mean any entity a majority of the total combined voting power of whose equity securities is beneficially owned, directly or indirectly, by the Company and any entity otherwise controlled by the Company, including, without limitation, IBG LLC, a Connecticut limited liability company. Participants may receive multiple Awards under the Plan.
SHARES OF STOCK SUBJECT TO THE PLAN. Subject to adjustment as provided in Section 6(a) hereof, 9,200,000 shares of Common Stock may be issued pursuant to Awards under the Plan. Shares to be issued under the Plan may be either authorized but unissued shares
of Common Stock or shares of Common Stock held by the Company as treasury shares, including shares acquired by purchase.
No Award may be granted if the number of shares of Common Stock to which such Award relates, when added to the number of shares of Common Stock previously issued under the Plan and the number of shares of Common Stock which may then be acquired pursuant to other outstanding, unexercised Awards, exceeds the number of shares of Common Stock available for issuance pursuant to the Plan. If any shares of Common Stock subject to an Award are forfeited or such Award is settled in cash or otherwise terminates or is settled for any reason whatsoever without an actual issuance of shares of Common Stock to the Participant, any shares of Common Stock counted against the number of shares of Common Stock available for issuance pursuant to the Plan with respect to such Award shall, to the extent of any such forfeiture, settlement, or termination, again be available for Awards under the Plan; provided, however, that the Committee may adopt procedures for the counting of shares of Common Stock relating to any Award to ensure appropriate counting, avoid double counting, and provide for adjustments in any case in which the number of shares of Common Stock actually distributed differs from the number of shares of Common Stock previously counted in connection with such Award. Notwithstanding anything to the contrary herein, any shares of Common Stock retained by the Company in satisfaction of the Participants obligation for withholding taxes shall not again be available for issuance as Awards under the Plan.
AWARDS.
(a) General. Awards under the Plan may include, but need not be limited to, shares of Common Stock that may be subject to certain restrictions and to a risk of forfeiture (Restricted Stock), rights to receive the appreciation of Common Stock from the date of grant to the date of exercise (SARs) and a book-entry unit with an initial value equal to Common Stock on the date of grant (Performance Shares). The Committee may also make any other type of Award payable in, or valued in whole or in part by reference to, shares of Common Stock (Stock-Based Awards) deemed by the Committee to be consistent with the purposes of the Plan. Awards may be granted on the terms and conditions set forth in this Section 5.
(b) Vesting, Other Performance Requirements and Forfeiture. In making Awards under the Plan, the Committee may, on the date of grant or thereafter, (i) specify that the right to exercise, receive, retain and/or transfer such Award shall be conditional upon the fulfillment of specified conditions, including, without limitation, completion of specified periods of service in the employ of the Company or its subsidiaries, and/or the achievement of specified business and/or personal performance goals, and (ii) provide for the forfeiture of all or any portion of any such Awards in specified circumstances. The Committee may also specify by whom and/or in what manner the accomplishment of any such performance goals shall be determined. Notwithstanding the foregoing, the Committee shall retain full power to accelerate or waive any such condition as it may have previously imposed. All Awards shall be evidenced by an Award agreement.
(c) Term of Awards. The term of each Award shall, except as otherwise provided herein, be for such period as may be determined by the Committee; provided,
2
however, that in no event shall the term of any Award exceed a period of ten years from the date of grant.
(d) Restricted Stock. The Committee may grant Restricted Stock to Participants on the following terms and conditions:
(i) Restricted Stock shall be subject to such restrictions on transferability and other restrictions, if any, as the Committee may impose at the date of grant or thereafter, which restrictions, if any, may lapse separately or in combination at such times, under such circumstances (including, without limitation, upon achievement of performance criteria if deemed appropriate by the Committee), in such installments, or otherwise, as the Committee may determine. Except to the extent restricted under the Award agreement relating to the Restricted Stock, a Participant granted Restricted Stock shall have all of the rights of a shareholder including, without limitation, the right to vote Restricted Stock and the right to receive dividends (whether in cash or in shares of Common Stock) thereon.
(ii) Except as otherwise determined by the Committee, at the date of grant or thereafter, upon termination of employment prior to specific vesting dates, shares of Restricted Stock and any accrued but unpaid dividends that are at that time subject to restrictions shall be forfeited.
(iii) Restricted Stock granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Stock are registered in the name of the Participant, such certificates shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, and, if the Committee so determines, the Company shall retain physical possession of the certificate representing such Restricted Stock (whether or not vested).
(e) Stock Appreciation Rights. The Committee is authorized to grant SARs to Participants on the following terms and conditions:
(i) A SAR shall confer on the Participant to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one share of Common Stock on the date of exercise over (B) the Fair Market Value of one share of Common Stock on the date of grant of the SAR (the Grant Value). For purposes of the Plan, the term Fair Market Value is the mean of the high and low sales prices of the Common Stock on the relevant date as reported on the stock exchange or market on which the Common Stock is primarily traded, or, if no sale is made on such date, then Fair Market Value is the weighted average of the mean of the high and low sales prices of the Common Stock on the next preceding day and the next succeeding day on which such sales were made as reported on the stock exchange or market on which the Common Stock is primarily traded.
3
(ii) The Committee shall determine the time or times at which a SAR may be exercised in whole or in part, the method of exercise, method of settlement, form of consideration payable in settlement, the method by which shares of Common Stock will be delivered or deemed to be delivered to Participants, and any other terms and conditions of any SAR.
(f) Performance Shares. The Committee is authorized to grant Awards of Performance Shares to Participants with a value equal to the Fair Market Value of one share of Common Stock on the date of grant. An Award of Performance Shares shall vest and become payable to a Participant after a specified period of continued employment with the Company or a subsidiary or upon the achievement of specified performance goals, as determined by the Committee. Settlement of Performance Shares shall be made in cash or shares of Common Stock or any combination thereof, as determined by the Committee.
(g) Other Stock-Based Awards. The Committee is authorized, subject to limitations under applicable law, to grant to Participants Stock-Based Awards, in addition to those provided in Sections 5(d), (e) and (f) hereof, as deemed by the Committee to be consistent with the purposes of the Plan, including Stock-Based Awards granted in substitution for any other right of a Participant to receive payment of compensation from the Company or a subsidiary. The Committee shall determine the terms and conditions of such Awards.
(h) Cash Payments. The Committee is authorized, subject to limitations under applicable law, to grant to Participants cash payments, including cash payments of dividend equivalents with respect to a specified number of shares of Common Stock, whether awarded separately or as a supplement to any other Award. The Committee shall determine the terms and conditions of such cash payment Awards.
(i) Certain Qualifying Awards. The Committee, in its sole discretion, may grant an Award to any Participant with the intent that such award qualifies as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (Code) (a Qualifying Award). The right to receive or retain any award granted as a Qualifying Award (other than a SAR) shall be conditional upon the achievement of specified performance goals during a calendar year or such other period (a Performance Period) as may be established by the Committee. Performance goals shall be established in writing by the Committee prior to the beginning of each Performance Period, or at such other time no later than such time as is permitted by the applicable provisions of the Code. Such performance goals, which may vary from Participant to Participant and Award to Award, shall be based upon the attainment of specific amounts of, or increases in, one or more of the following: the Fair Market Value of Common Stock, revenues, operating income, cash flow, earnings before income taxes, net income, earnings per share, stockholders equity, return on equity, underwriting profits, compound growth in net loss and loss adjustment expense reserves, loss ratio or combined ratio of the Companys insurance businesses, operating efficiency or strategic business objectives consisting of one or more objectives based on meeting specified cost targets, business expansion goals and goals relating to acquisitions or divestitures, all
4
whether applicable to the Company or any relevant subsidiary or business unit or entity in which the Company has a significant investment, or any combination thereof as the Committee may deem appropriate. Each performance goal may be expressed on an absolute and/or relative basis, may be based on, or otherwise employ, comparisons based on internal targets, the past performance of the Company and/or the past or current performance of other companies, may provide for the inclusion, exclusion or averaging of specified items in whole or in part, such as catastrophe losses, realized gains or losses on strategic investments, discontinued operations, extraordinary items, accounting changes, and unusual or nonrecurring items, and, in the case of earnings-based measures, may use or employ comparisons relating to capital, shareholders equity and/or shares outstanding, assets or net assets. Prior to the payment of any Award granted as a Qualifying Award, the Committee shall certify in writing that the performance goals were satisfied. The maximum number of shares of Common Stock with respect to which Qualifying Awards may be granted to any Participant in any calendar year shall be 1,000,000 shares of Common Stock, subject to adjustment as provided in Section 6(a) hereof.
(j) Form of Payment. Subject to the terms of the Plan and any applicable Award agreement, payments or transfers to be made under the Plan upon the grant or exercise of an Award may be made in such forms as the Committee shall determine, including, without limitation, cash, shares of Common Stock, other Awards, or other property, and may be made in a single payment or transfer, or on a deferred basis. The Committee may, whether at the time of grant or at any time thereafter prior to payment or settlement, permit (subject to the requirements of applicable law and any conditions as the Committee may from time to time establish) a Participant to elect to defer receipt of all or any portion of any payment of cash or shares of Common Stock that would otherwise be due to such Participant in payment or settlement of an Award under the Plan. (Such payments may include, without limitation, provisions for the payment or crediting of reasonable interest in respect of deferred payments credited in cash, and the payment or crediting of dividends in respect of deferred amounts credited in Common Stock equivalents.)
(k) Exchange and Buy Out Provisions; Limitation on Repricing. The Committee may at any time offer to exchange or buy out any previously granted Award for a payment in cash, shares of Common Stock, other Awards, or other property based on such terms and conditions as the Committee shall determine and communicate to a Participant at the time that such offer is made. Notwithstanding the foregoing, unless such action is approved by the Companys stockholders, the Grant Value of a SAR may not be reduced (except pursuant to Section 6), nor may a SAR be cancelled and a new SAR granted in consideration therefore (whether for the same or a different number of shares) issued at a Grant Value less than the Grant Value of the SAR cancelled.
DILUTION AND OTHER ADJUSTMENTS.
(a) Changes in Capital Structure. In the event of any corporate transaction involving the Company (including, without limitation, any subdivision or combination or exchange of the outstanding shares of Common Stock, stock dividend, stock split, spin-off, split-off, recapitalization, capital reorganization, liquidation, reclassification of shares
5
of Common Stock, merger, consolidation, extraordinary cash distribution, or sale, lease or transfer of substantially all of the assets of the Company), the Board of Directors of the Company shall make such equitable adjustments as it may deem appropriate in the Plan and the Awards thereunder, including, without limitation, an adjustment in (i) the total number of shares of Common Stock which may thereafter be issued pursuant to Awards under the Plan, (ii) the number of shares of Common Stock with respect to which Qualifying Awards may be granted to any Participant in any calendar year under Section 5(i) hereof, and (iii) the Grant Price or other price or value at the time of grant relating to any Award. Moreover, in the event of any such transaction, the Board of Directors of the Company may provide in substitution for any or all outstanding Awards under the Plan such alternative consideration as it may in good faith determine to be equitable under the circumstances and may require in connection therewith the surrender of all Awards so replaced. Agreements evidencing Awards may include such provisions as the Committee may deem appropriate with respect to the adjustments to be made to the terms of such Awards upon the occurrence of any of the foregoing events.
(b) Tender Offers and Exchange Offers. In the event of any tender offer or exchange offer, by any person other than the Company, for shares of Common Stock, the Committee may (i) make such adjustments in outstanding Awards and authorize such further action as it may deem appropriate to enable the recipients of outstanding Awards to avail themselves of the benefits of such offer, including, without limitation, acceleration of the payment of outstanding Awards payable, in whole or in part, in shares of Common Stock and/or (ii) cancel any outstanding Award and cause the holder thereof to be paid, in cash or shares of Common Stock, or any combination thereof, the value of such Award based upon the price per share of Common Stock received or to be received by other shareholders of the Company in the tender offer or exchange offer.
(c) Limits on Discretion to Make Adjustments. Notwithstanding any provision of this Section 6 to the contrary, no adjustment shall be made in any outstanding Qualifying Awards to the extent that such adjustment would adversely affect the status of that Qualifying Award as performance-based compensation under Section 162(m) of the Code.
MISCELLANEOUS PROVISIONS.
(a) Right to Awards. No employee or other person shall have any claim or right to be granted any Award under the Plan.
(b) Rights as Stockholders. A Participant shall have no rights as a holder of Common Stock by reason of Awards under the Plan, unless and until shares of Common Stock are actually issued to the Participant.
(c) No Assurance of Employment. Neither the Plan nor any action taken thereunder shall be construed as giving any employee any right to be retained in the employ of the Company or any subsidiary.
6
(d) Costs and Expenses. All costs and expenses incurred in administering the Plan shall be borne by IBG LLC.
(e) Unfunded Plan. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund nor to make any other segregation of assets to assure the payment of any Award under the Plan.
(f) Withholding Taxes. The Company is authorized to withhold from any Award granted and any payment relating to an Award under the Plan, including from a distribution of Common Stock or any payroll or other payment to a Participant amounts of withholding and other taxes due in connection with any transaction involving an Award, and to take such other action as the Committee may deem advisable to enable the Company and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive shares of Common Stock or other property, to make payment of an Award net of a Participants withholding taxes and other tax obligations and to make cash payments in respect thereof in satisfaction of a Participants tax obligations. Withholding of taxes in the form of shares of Common Stock issued pursuant to an Award (including any net payments) shall not occur at a rate that exceeds the minimum required statutory federal and state withholding rates.
(g) Limits on Transferability. No Awards under the Plan nor any rights or interests therein shall be pledged, encumbered, or hypothecated to, or in favor of, or subject to any lien, obligation, or liability of a Participant to, any party, other than the Company or any subsidiary, nor shall such Awards or any rights or interests therein be assignable or transferable by the recipient thereof except, in the event of the recipients death, to his designated beneficiary as hereinafter provided, or by will or the laws of descent and distribution. During the lifetime of the recipient, Awards under the Plan requiring exercise shall be exercisable only by such recipient or by the guardian or legal representative of such recipient. Notwithstanding the foregoing, the Committee may, in its discretion, provide that Awards granted pursuant to the Plan be transferable, without consideration, to a Participants immediate family members (i.e., children, grandchildren or spouse), to trusts for the benefit of such immediate family members and to partnerships in which such family members are the only partners. The Committee may impose such terms and conditions on such transferability as it may deem appropriate.
(h) Beneficiary. Any payments on account of Awards under the Plan to a deceased Participant shall be paid to such beneficiary as has been designated by the Participant in writing to the Secretary of the Company or, in the absence of such designation, according to the Participants will or the laws of descent and distribution.
(i) Nature of Benefits. Awards under the Plan, and payments made pursuant thereto, are not a part of salary or base compensation.
(j) No Fractional Shares. No fractional shares of Common Stock shall be issued or delivered pursuant to the Plan or any Award. In the case of Awards to Participants, the Committee shall determine whether cash or other property shall be
7
issued or paid in lieu of such fractional shares, or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.
(k) Compliance with Legal Requirements.
(i) The obligation of the Company to issue shares of Common Stock hereunder shall be subject to the satisfaction of all applicable legal and securities exchange requirements, including, without limitation, the provisions of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. The Company shall endeavor to satisfy all such requirements in such a manner to permit the issuance and delivery of shares of Common Stock under the Plan.
(ii) The Committee may require, as a condition to the right to receive shares of Common Stock pursuant to any Award, that the Company receive from the Participant, at the time any such Award is exercised, vests or any applicable restrictions lapse, representations, warranties and agreements to the effect that the shares are being purchased or acquired by the Participant for investment only and without any present intention to sell or otherwise distribute such shares and that the Participant will not dispose of such shares in transactions which, in the opinion of counsel to the Company, would violate the registration provisions of the Securities Act of 1933, as then amended, and the rules and regulations thereunder. The certificates issued to evidence such shares shall bear appropriate legends summarizing such restrictions on the disposition thereof.
(l) Discretion. In exercising, or declining to exercise, any grant of authority or discretion hereunder, the Committee may consider or ignore such factors or circumstances and may accord such weight to such factors and circumstances as the Committee alone and in its sole judgment deems appropriate and without regard to the effect such exercise, or declining to exercise such grant of authority or discretion, would have upon the affected Participant, any other Participant, any employee, the Company, any Subsidiary, any stockholder or any other person.
(m) Repricing of Awards. Notwithstanding anything to the contrary herein, the repricing of outstanding Awards shall be prohibited unless approved by the Companys shareholders.
AMENDMENT OR TERMINATION OF THE PLAN. The Board of Directors of the Company, without the consent of any Participant, may at any time terminate or from time to time amend the Plan in whole or in part; provided, however, that, subject to Section 6 hereof, no such action shall materially and adversely affect any rights or obligations with respect to any Awards theretofore made under the Plan; and provided, further, that no amendment, without approval of the holders of Common Stock by an affirmative vote of a majority of the shares of Common Stock voted thereon in person or by proxy, shall (i) increase the aggregate number of shares
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subject to the Plan (other than increases pursuant to Section 6 hereof), (ii) extend the maximum term of Awards under the Plan or the Plan itself, (iii) decrease the price at which SARs may be granted under the Plan (other than decreases pursuant to Section 6 hereof) to less than Fair Market Value at the time of grant, or (iv) make any other change that would require stockholder approval pursuant to the terms of the Plan or under any regulatory requirement applicable to the Plan (including as necessary to comply with any applicable stock exchange listing requirement). Subject to Section 6 hereof, with the consent of the Participants affected, the Committee may amend outstanding agreements evidencing Awards under the Plan in any manner not inconsistent with the terms of the Plan.
EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become effective when adopted by the Board of Directors, provided that the Plan is approved by the stockholders of the Company at the annual meeting of stockholders next following the adoption of the Plan by the Board of Directors, and no Award shall become exercisable, realizable or vested prior to such annual meeting. If the Plan is not so approved by the stockholders at the next annual meeting, all Awards theretofore granted shall be null and void. The Plan shall terminate at the close of business on the tenth anniversary of the date the Plan was adopted by the Board of Directors, unless sooner terminated by action of the Board of Directors of the Company. No Award may be granted hereunder after termination of the Plan, but such termination shall not affect the validity of any Award then outstanding.
LAW GOVERNING. The validity and construction of the Plan and any agreements entered into thereunder shall be governed by the laws of the State of Delaware without giving effect to principles of conflict of laws.
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EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
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Name
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Jurisdiction of Organization |
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IBG LLC |
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Connecticut, U.S.A. |
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The following is a list of subsidiaries of IBG LLC:
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Name
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Jurisdiction of Organization |
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Timber Hill LLC(1) |
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Connecticut, U.S.A. |
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Interactive Brokers LLC(2) |
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Connecticut, U.S.A. |
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Interactive Brokers Canada Inc. |
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Canada |
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Interactive Brokers (U.K.) Limited |
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United Kingdom |
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Timber Hill Europe AG |
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Switzerland |
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Timber Hill Securities Hong Kong Limited |
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Hong Kong |
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Timber Hill Australia Pty Limited |
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Australia |
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Timber Hill Canada Company |
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Canada |
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Interactive Brokers Hungary Kft |
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Hungary |
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IB Exchange Corp. |
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Delaware, U.S.A. |
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Interactive Brokers (India) Private Limited(3) |
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India |
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Interactive Brokers Financial Products S.A. |
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Luxembourg |
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Interactive Brokers Securities Japan, Inc. |
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Japan |
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Interactive Brokers Software Services Estonia |
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Estonia |
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Interactive Brokers Software Services Russia |
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Russia |
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- (1)
- IBG LLC
owns 99.99% and Thomas Peterffy owns 0.01%.
- (2)
- IBG LLC
owns 99.9% and Thomas Peterffy owns 0.1%.
- (3)
- IB
Exchange Corp. owns 0.01%
The following is a list of subsidiaries of Interactive Brokers LLC:
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Name
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Jurisdiction of Organization |
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Interactive Brokers Corp |
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Connecticut, U.S.A. |
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The following is a list of subsidiaries of Timber Hill Europe AG Brokers LLC:
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Name
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Jurisdiction of Organization |
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Timber Hill (Liechtenstein) AG |
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Germany |
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The following is a list of subsidiaries of Interactive Brokers (U.K.) Limited
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Name
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Jurisdiction of Organization |
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Interactive Brokers (U.K.) Nominee Limited |
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United Kingdom |
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SUBSIDIARIES OF THE COMPANY
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EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-192275 on Form S-3 of our reports dated
March 2, 2015 relating to the consolidated financial statements and financial statement schedule of Interactive Brokers Group, Inc. and subsidiaries, and the effectiveness of Interactive
Brokers Group, Inc. and subsidiaries internal control over financial reporting appearing in this Annual Report on Form 10-K of Interactive Brokers Group, Inc. and subsidiaries for
the year ended December 31, 2014.
/s/
Deloitte & Touche LLP
New York, New York
March 2, 2015
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EXHIBIT 31.1
CERTIFICATION
I,
Thomas Peterffy, certify that:
- 1.
- I
have reviewed this Annual Report on Form 10-K for the year ended December 31, 2014 of Interactive Brokers Group, Inc.;
- 2.
- Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
- 3.
- Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
- 4.
- The
registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) and have:
- (a)
- Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
- (b)
- Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
- (c)
- Evaluated
the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
- (d)
- Disclosed
in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
- 5.
- The
registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the Audit Committee of the registrant's board of directors (or persons performing the equivalent functions):
- (a)
- All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
- (b)
- Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
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By: |
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/s/ THOMAS PETERFFY
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Name: |
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Thomas Peterffy |
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Title: |
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Chairman and Chief Executive Officer |
Date:
March 2, 2015
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CERTIFICATION
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EXHIBIT 31.2
CERTIFICATION
I,
Paul J. Brody, certify that:
- 1.
- I
have reviewed this Annual Report on Form 10-K for the year ended December 31, 2014 of Interactive Brokers Group, Inc.;
- 2.
- Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
- 3.
- Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
- 4.
- The
registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) and have:
- (a)
- Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
- (b)
- Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
- (c)
- Evaluated
the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
- (d)
- Disclosed
in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
- 5.
- The
registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the Audit Committee of the registrant's board of directors (or persons performing the equivalent functions):
- (a)
- All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
- (b)
- Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
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By: |
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/s/ PAUL J. BRODY
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Name: |
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Paul J. Brody |
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Title: |
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Chief Financial Officer, Treasurer and Secretary |
Date:
March 2, 2015
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CERTIFICATION
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EXHIBIT 32.1
CERTIFICATION
Pursuant to 18 U.S.C. § 1350, the undersigned officer of Interactive Brokers Group, Inc. (the "Company")
hereby certifies that the Company's Annual Report on Form 10-K for the year ended December 31, 2014 (the "Report") fully complies with the requirements of Section 13(a) or 15(d),
as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
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By: |
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/s/ THOMAS PETERFFY
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Name: |
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Thomas Peterffy |
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Title: |
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Chairman and Chief Executive Officer |
Date:
March 2, 2015
The
foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.
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CERTIFICATION
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EXHIBIT 32.2
CERTIFICATION
Pursuant to 18 U.S.C. § 1350, the undersigned officer of Interactive Brokers Group, Inc. (the "Company")
hereby certifies that the Company's Annual Report on Form 10-K for the year ended December 31, 2014 (the "Report") fully complies with the requirements of Section 13(a) or 15(d),
as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
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By: |
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/s/ PAUL J. BRODY
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Name: |
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Paul J. Brody |
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Title: |
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Chief Financial Officer, Treasurer and Secretary |
Date:
March 2, 2015
The
foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.
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CERTIFICATION
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