| | | | | Name |
| Age |
| Position | Name | Age | | Position | Edward T. Tilly | 53 |
56 | | Chairman of the Board, President and Chief Executive Officer | Edward L. ProvostChristopher A. Isaacson | 64 |
41 | | Executive Vice President and Chief Operating Officer | Alan J. DeanBrian N. Schell | 62 |
54 | | Executive Vice President, Chief Financial Officer and Treasurer | Joanne Moffic-SilverJohn F. Deters | 64 |
49 | | Executive Vice President, Chief Strategy Officer | Bryan Harkins | | 43 | | Executive Vice President, Head of Markets Division | David Howson | | 43 | | Executive Vice President, President Europe | Patrick Sexton | | 55 | | Executive Vice President, General Counsel and Corporate Secretary | Gerald T. O'ConnellJill M. Griebenow | 65 |
40 | | ExecutiveSenior Vice President, and Chief Information Officer | David S. Reynolds | 63 |
| | Vice President and Chief Accounting Officer |
Edward T. Tilly. Mr. Tilly is our Chairman, President and Chief Executive Officer. HeMr. Tilly has served in that capacityas our President since January 2019, Chairman since February 2017 and as CEO and director since May 2013. Prior to becoming CEO, Mr. Tilly served as President and Chief Operating Officer from November 2011, and Executive Vice Chairman from August 2006 until November 2011. He was a member of CBOE from 1989 until 2006, and served as Member Vice Chairman from 2004 through July 2006. He holds a B.A. degree in Economics from Northwestern University. Christopher A. Isaacson. Mr. TillyIsaacson is our Executive Vice President and Chief Operating Officer, a position he has held since January 2019. Previously he was our Executive Vice President and Chief Information Officer, a position he was appointed to upon the Company’s acquisition of Bats. Prior to that, he served as Bats' Executive Vice President and Global Chief Information Officer since February 2014, he served as Bats' Senior Vice President and Chief Operation Officer from 2007 to 2014 and he has held other various senior leadership positions since 2005. Prior to being one of the founders of Bats, Mr. Isaacson was a software developer at Tradebot Systems, Inc. from 2003 to 2005. Mr. Isaacson serves on the board of directors of the OCC. HeMr. Isaacson holds a B.A.B.S. degree in Economicsinformation systems with a minor in math from Northwestern University. Edward L. Provost. Mr. Provost became our President and Chief Operating Officer in May 2013. Prior to that, Mr. Provost served as Executive Vice President and Chief Business Development Officer. He served as the head of our Business Development Division since 2000 and has been employed at the Company since 1975. He holds a B.B.A. in Finance from LoyolaNebraska Wesleyan University of Chicago and an M.B.A. degree from the University of Chicago Graduate School of Business.
Alan J. Dean.Nebraska-Lincoln. Brian N. Schell. Mr. DeanSchell is our Executive Vice President, Chief Financial Officer and Treasurer. HeTreasurer, a position he has held since January 2018. Previously, he was Deputy Chief Financial Officer of the Company’s subsidiary Cboe Exchange, Inc., a position he was appointed to upon the Company’s acquisition of Bats. Prior to that, he served in that capacityas Chief Financial Officer of Bats since 1988 and has been employedMarch 2011. Prior to joining Bats, he held various senior leadership positions at H&R Block Inc., as well as various positions at the Company in the financial area since 1979. He is a certified public accountant,FDIC, KPMG and heJP Morgan. Mr. Schell holds a B.S.B.B.A. degree with an emphasis in Accountingfinance from Western Illinoisthe University of Notre Dame and an M.B.A. degree from NorthwesternThe George Washington University. John F. Deters. Mr. Deters is our Executive Vice President, Chief Strategy Officer, a position he has held since 2018. He has previously served as our Head of Multi-Asset Solutions from 2018 to 2019 and as Chief Strategy Officer from 2013 to 2018. Prior to joining Cboe in 2013, Mr. Deters was most recently a Vice President and Investment Banker of Financial Institutions Group, Investment Banking at Barclays from 2008 to 2013. Mr. Deters holds a B.A. degree from Wheaton College, an M.B.A. degree from the University of Chicago, and a J.D./M.S. dual degree from Georgetown University Law Center. Bryan Harkins. Mr. Harkins is our Executive Vice President, Head of Markets Division, a position he has held since June 2019. He has also previously served as our Co-Head of Markets Division from March 2018 to June 2019. Previously, he was Head of Equities and Global FX of the Company’s subsidiaries, a position he was appointed to upon the Company’s acquisition of Bats. Prior to that, he served as Executive Vice President, Head of U.S. Markets of Bats since January 2014. Prior to the Direct Edge acquisition by Bats in January 2014 when Mr. Harkins first joined Bats, Mr. Harkins served as Chief Operating Officer of Direct Edge, where he worked since 2007. Mr. Harkins holds a B.A. degree from the University of Notre Dame and an M.B.A. degree from New York University's Kellogg GraduateStern School of Management. Joanne Moffic-Silver. Ms. Moffic-SilverBusiness.David Howson. Mr. Howson is our Executive Vice President, President Europe, a position he has held since January 2020. Previously, he was Chief Operating Officer of Cboe Europe from 2013 to 2019. Prior to that, he served as Founder, Chief Technology Officer of Equiduct from April 2006 through June 2013. Mr. Howson holds a First Class Honours bachelor's degree from the University of Newcastle-upon-Tyne. Patrick Sexton. Mr. Sexton is our Executive Vice President, General Counsel and Corporate Secretary. SheSecretary, a position he has served in that capacityheld since 1997 and has been employed as an attorney at the Company since 1980. She is currently a memberMarch 2018. Previously, he was Deputy General Counsel of the executive committee of the board of advisors of Northwestern University School of Law, a member of the Anti-Defamation League's Chicago/Upper Midwest Region Board, a member of the board of a not-for-profit education organization and a member of the Chicago Network. Ms. Moffic-Silver received her B.A. degree from the University of Wisconsin-Madison (Phi Beta Kappa). Ms. Moffic-Silver received her J.D. degree with honors from Northwestern University Pritzker School of Law. Gerald T. O'Connell. Mr. O'Connell is our Executive Vice President and Chief Information Officer.Company’s subsidiary Cboe Exchange, Inc. He has served in that capacity since 1993July 2013 and has been employed atacted as legal, regulatory and compliance counsel with increasing responsibility and oversight since joining the Company since 1984. Hein 1997. Mr. Sexton holds a B.S.B.A. degree in Mathematics from Lewisthe University of Notre Dame and a J.D. degree with honors from John MarshallNotre Dame Law School.
David S. Reynolds. Mr. ReynoldsJill M. Griebenow. Ms. Griebenow is our Senior Vice President, and Chief Accounting Officer. HeOfficer, a position she has held since August 2018. Previously, she served as Chief Financial Officer, Europe of the Company's subsidiary Cboe Europe, a position she was appointed to upon the Company’s acquisition of Bats. She also previously served as Chief Financial Officer, Europe of Bats’ subsidiary Bats Europe Limited since February 2014 and was employed by Bats in that capacitythe financial area since May 2009.2011. Prior to that, Mr. Reynolds was with Hudson Highland Group, Inc., where he served inshe has also held various roles including vice president, controller and chief accounting officer. From February 2005 to February 2007, Mr. Reynolds was vice president, controller and chief accounting officer of Bally Total Fitness Corporation. Prior to that, he spent twenty-two years in various
financial roles at Comdisco, Inc., rising to senior vice president and controller. Mr. Reynolds began his careerpositions at Ernst & Young. Mr. ReynoldsYoung LLP. Ms. Griebenow is a certified public accountant and holds a certified cash manager. He is a graduatebachelor's degree in accounting from the University of Lehigh University where he obtained an M.B.A. and a B.S. in Finance.
Northern Iowa.Available Information Our website is www.cboe.com. The Company files annual, quarterly and current reports, proxy statements and other information with the SEC under the Exchange Act. The Company makes available, free of charge, on its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The Company's reports filed with, or furnished to, the SEC are also available on the SEC's website at www.sec.gov. In addition, we have posted on our website the charters for our (i) Audit Committee, (ii) Compensation Committee, and (iii) Nominating and Governance Committee, as well as our Code of Business Conduct and Ethics and Corporate Governance Guidelines. We will provide a copy of these documents without charge to stockholders upon written request to Investor Relations, CBOE HoldingsCboe Global Markets, Inc., 400 South LaSalle Street, Chicago, Illinois 60605. Our website and information included in or linked to our website are not part of this Form 10-K. Factors.The risks and uncertainties described below are those that we believe are material at this time relating to our business and relating to the Merger.business. These risks and uncertainties, however, are not the only risks and uncertainties that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also significantly impact us. Any of these risks and uncertainties may materially and adversely affect our business, financial condition or results of operations, liquidity, and cash flows and the Merger.
Risks Relating to Our Business
flows.Loss of our right to exclusively list and trade certain index options and futures could have a material adverse effect on our financial performance. We hold exclusive licenses to list securities index options on the S&P 500 Index, the S&P 100 Index, the Russell 2000 Index, as well as others, granted to us by the owners of such indexesindices and based on which we have developed our proprietary VIX methodology. In 2016,2019, approximately 88.2%64.8% of our net transaction fees (defined below) were generated by our futures and index options, the overwhelming majority of which were generated by our exclusively-licensed products (e.g., SPX options) and products based on the VIX methodology.methodology (e.g., VIX options and futures). The bulk of this revenue is attributable to our S&P 500 IndexSPX options and VIX Index options and futures. As a result, our operatingnet revenues are dependent in large part on the exclusive licenses we hold for these products and our ability to maintain our exclusive proprietary rights in the VIX methodology.methodology and related products and indices.There is a risk, with respect to each of our current exclusive licenses, that the owner of the index may not renew the license with us on an exclusive basis or at all. In the first event, we would be subject to multiple listing in the trading of what is now an exclusive index product traded by us on an exclusive basis, which could result in a loss of market share and negatively impact our profitability. In the second event, we could lose the right to list the index product entirely. The loss or limited use of any of our exclusive index licenses, especially for the S&P 500 Index, for any reason could have a material adverse effect on our business and profitability. See "Business—Products—Strategic Relationships" for a discussion of these licenses and their expiration dates. In addition to the risks related to our exclusive licenses, if we are unable to retain exclusive proprietary rights in the VIX methodology and related products and indices, our volatility products could be subject to multiple listing which could have a material adverse effect on us. In addition, the European ParliamentThe E.U. has adopted legislation that will require European exchangesaffecting providers and users of benchmark indices in the E.U. MiFIR requires benchmarks used to value a financial instrument in the E.U. to be made available on a non-discriminatory basis to all E.U. trading venues and central counterparty clearing houses for the purposes of trading and clearing. As a result, owners of such benchmarks must provide licenses on fair, reasonable and non-discriminatory access to benchmarks, like index options, and is considering other legislation that may impact the ability of European banks to trade our products.terms. While similar legislation to MiFIR has not been proposed in the U.S., if it were passed, it could cause us to lose exclusivity in our exclusive rights to list and trade internally developed and licensed index products. The adoptedFurther, in 2018, the E.U. implemented the E.U. Benchmark Regulation, which regulates users, data providers and proposed European legislationcalculators of benchmarks (“administrators”) in the E.U., and among other things, prohibits use of benchmarks in connection with a financial instrument unless the administrator is deemed to be subject to an equivalent regulatory regime and the benchmark is registered in an E.U. member state. These regulations and other emerging regulatory regimes around the world may impact international customers’ interest in or ability to trade index-based products listed on our U.S. exchanges, as well as impact our expansion activities in Europe,to establish foreign trading of our index-based products and may reduceour ability to license proprietary indices for use outside of the volume on our exchanges from international customers. U.S.Furthermore, our competitors may succeed in developing, offering and providing a market for the trading of index-based or volatility products that are economically similar to those that we offer.offer and they may become successful and take away volume from our products. It is also possible that a third party may offer trading in index-based products that are the same as those that are the subject of one of our exclusive licenses, but in a jurisdiction in which the index owner cannot require a license or in a manner otherwise not covered by our exclusive license.
The value of our exclusive licenses to exclusively list securities index options and futures also depends on the continued ability of index owners to require licenses for the trading of options and futures based on their indexes.indices. Although we and the index owners have prevailed in legal actions challenging our rights to exclusively license indexes,indices, we may be subject to changes in the law or other actions taken in the future that might impede our ability to exclusively offer trading in certain index options. options and futures.General economic conditions and other factors beyond our control could significantly reduce demand for our products and services and harm our business. The volume of options and futuresexchange transactions and the demand for our products and services are directly affected by economic, political and market conditions in the U.S., Europe and elsewhere in the world that are beyond our control, including: broad trends in business and finance;
| ● | economic, political and geopolitical market conditions; |
| ● | broad trends in business and finance; |
| ● | concerns over inflation and wavering institutional or retail confidence levels; |
| ● | government or central bank actions, such as changes in government fiscal and monetary policy and foreign currency exchange rates; |
| ● | other legislative and regulatory changes; |
| ● | the availability of short-term and long-term funding and capital; |
| ● | the perceived attractiveness of the U.S. or European capital markets; |
| ● | the availability of alternative investment opportunities; |
| ● | changes in the level of trading activity in underlying instruments; |
| ● | changes and volatility in the prices of securities; |
| ● | changes in the volume of foreign currency transactions; |
| ● | changes in supply and demand for currencies; |
| ● | movements in currency exchange rates; |
| ● | the level and volatility of interest rates; |
| ● | changes in the financial strength of market participants; |
| ● | consolidation among market participants and market data subscribers; |
| ● | unforeseen market closures or other disruptions in trading; and |
| ● | disruptions due to terrorism, war, extreme weather events or other catastrophes. |
Any of these factors, individually or retail confidence levels; changes in government fiscal and monetary policy and foreign currency exchange rates;
the availability of short-term and long-term funding and capital;
the availability of alternative investment opportunities;
changes in the level of trading activity in underlying instruments;
changes and volatility in the prices of securities;
the level and volatility of interest rates;
unforeseen market closures or other disruptions in trading; and
concerns about terrorism and war.
General economic conditions affect options and futures trading in a variety of ways, from the availability of capital to investor confidence. The economic climate in recent years has been characterized by challenging business, economic and political conditions throughout the world. Adverse changes in the economy may have a negative impact on our revenues by causing a decline in trading volume. Significant declines in trading volumes or demand for market data maycollectively, could have a material adverse effect on our business, financial condition and operating results.
results by causing a substantial decline in the financial services markets and reducing trading volumes and demand for market data.We operate in a highly regulated industry and may be subject to censures, fines and other legal proceedings if we fail to comply with legal and regulatory obligations. CBOECboe Options, C2, BZX, BYX, EDGX, and C2EDGA are registered national securities exchanges and SROs,self-regulatory organizations (“SROs”), and, as such, are subject to comprehensive regulation by the SEC. CFE is a DCM and Cboe SEF is a SEF, each registered with the CFTC and is subject to comprehensive regulation by the CFTC. In addition to its other SRO responsibilities, BZX, as a listing market, also is responsible for evaluating applications submitted by issuers interested in listing their securities on BZX and monitoring each issuer’s compliance with BZX’s continued listing standards. Failure to comply with these SRO responsibilities could result in potential sanctions or fines and a negative impact on Cboe’s reputation and/or branding. Our European business is subject to regulatory oversight in the U.K. by the FCA and in the Netherlands by the AFM, which, through the “passporting” regime, provides authorization to carry on business in other Member States of the E.U. and the European Economic Area in accordance with the applicable E.U. legislation and regulation to which our European business is subject. If a regulatory authority makes a finding of non-compliance, conditional fines could be imposed, and our licenses could be revoked. Any such fine or revocation of a license could have a material adverse effect on our business, financial condition and operating results. In addition to the requirements related to operating our U.S. markets imposed by the SEC and the CFTC, we also have certain responsibilities for regulating the TPHs and members that trade on our exchanges. While we have entered into agreements under which FINRA, with respect to our options and equities exchanges, and NFA, with respect to our futures exchange, provide certain regulatory services, we retain ultimate responsibility for the regulation of our TPHs. See "Business—Regulatory Responsibilities." TPHs and members. We have begun to perform internally more of the regulatory services that FINRA used to handle.Our ability to comply with applicable laws and rules is largely dependent on the establishment and maintenance of appropriate systems and procedures, our ability to attract and retain qualified personnel, the ability of FINRA and NFA to perform under the regulatory services agreementsRSAs, the ability of FINRA to transition to us any other potential responsibilities under its revised RSA, our ability to complete the new additional responsibilities for regulating our TPHs and members and our oversight of the work done by FINRA and NFA. The SEC and CFTC have broad powers to audit, investigate and enforce compliance and to punish noncompliance by, as applicable, SROs, DCMs and DCMs, respectively,SEFs pursuant to applicable laws, rules and regulations. If the SEC or CFTCa regulatory authority were to find one of our programs of enforcement or compliance to be deficient, CBOE, C2our SROs, DCM, or CFESEF could be the subject of SEC or CFTC investigations and enforcement proceedings that may result in substantial sanctions, including revocation of an exchange's registration as a national securities exchange, DCM, or DCM.SEF. Any such investigations or proceedings, whether successful or unsuccessful, could result in substantial costs, the diversion of resources, including management time, and potential harm to our reputation, which could have a material adverse effect on our business, results of operations or financial condition.condition and operating results. In addition, CBOE, C2our SROs, DCM, or CFESEF may be required to modify or restructure their regulatory functions in response to any changes in the regulatory environment, or they may be required to rely on third parties to perform regulatory and oversight functions, each of which may require us to incur substantial expenses and may harm our reputation if our regulatory services are deemed inadequate.
Although CBOE Holdings itselfIn addition, SROs are required by federal law to perform a variety of regulatory functions. In light of these responsibilities, some courts have held that SROs are immune to certain private causes of action relating to the performance of these regulatory functions. There is a risk that some courts may not apply this immunity doctrine to all claims. There is also a risk that legislative or regulatory developments may change the application of this immunity doctrine. Limitations on the application of the immunity doctrine could result in an SRO, CBOE Holdings isincreased exposure to litigation, and increase liability and/or other legal expenses. Further under the Commodity Exchange Act, CFE and Cboe SEF may be subject to regulation by the SEC of activitieslitigation alleging that involve the options exchanges. Specifically, the SEC will exercise oversight over the governance of CBOE Holdings and its relationship with CBOE and C2. See "Business—Regulatory Responsibilities." they have acted in bad faith. We also could be exposed to liability to regulators or other governmental authorities even in situations where immunity would bar a civil claim.Our business may be adversely affected by price competition. The business of operating options exchangessecurities industry is characterized by intense price competition, especially with respect to transaction fees. TheWe may be required to adjust pricing to respond to actions by new or existing competitors, which could adversely impact our business, financial condition and operating results. We also compete with respect to the pricing of market data and value-added market data, such as historical market data. In our options segment, the pricing model for trade execution for options has changed in response to competitive market conditions, and our competitors have adjusted transaction fees and fee structures accordingly, including by opening new exchanges, which allow them to offer multiple pricing models that can appeal to different segments of market participants. These changes have resulted in significant pricing pressures on us, especially on transaction fees and incentives for multiply-listedmulti-listed products. As a result of these pricing pressures, our average rate per multiply-listedmulti-listed options contract may decrease. It is likely that this pressure will continue and even intensify as our competitors continue to seek to increase their share of trading by further reducing their transaction fees or by offering other financial incentives to order providers and liquidity providers to induce them to direct orders to their markets. In addition, one or more competitors may engage in aggressive pricing strategies and significantly decrease or completely eliminate their profit margin for a period of time in order to capture a greater share of trading volume. Some order-providing firms on our exchanges have taken ownership positions in options exchanges that compete with us and such exchanges have given those firms added economic incentives to direct orders to them. With respect to our proprietary products, we compete with futures exchanges and swap execution facilities that offer similar products and other financial market participants that offer over-the-counter derivatives. We also compete on price against certain multiply-listedmulti-listed options products, including SPY, thatwhich offer some of the features of our proprietary products. To attract market share, we may offer “inverted” pricing specials or no-transaction fee trading from time to time. BZX also offers a “cross-asset add volume tier” that gives a bigger rebate for additional volume on both the BZX equities and options platforms. These forms of promotions may adversely affect our profitability. If we are unable to compete successfully with respect to the pricing of our services and products, our business, financial condition and operating results may be adversely affected. We could lose a substantial percentage of our share of trading if we are unable to price transactions in a competitive manner. Also, our profits could decline if competitive pressures or regulatory changes, such as the transaction fee pilot, force us to reduce fees. If any of these events occur, our operating results and profitability could be adversely affected. A significant portion of our operating revenues is generated by our transaction-based business. If the amount of trading volume on our exchanges decreases, or the product mix shifts to lower revenue products, our revenues from transaction fees will most likely decrease. In 2016, 2015 and 2014,2019, approximately 70.5%, 71.9% and 70.9%62.9% of our operatingnet revenues respectively, were generated by our transaction-based business. This business is dependent on our ability to attract and maintain order flow, both in absolute terms and relative to other market centers. If the amount of trading volume on our exchanges, CFE or notional value traded on Cboe FX, Cboe SEF and Cboe Europe Equities exchanges decreases, we are likely to see a decrease in transaction fees.Our total trading volumes could decline if our market participants reduce their trading activity for any reason, such as: | ● | heightened capital requirements; |
| ● | regulatory or legislative actions; |
| ● | reduced need to trade due to changes in volatility and/or passive investment trends; |
| ● | reduced access to capital required to fund trading activities; |
| ● | consolidation among market participants; or |
| ● | significant market disruptions. |
heightened capital requirements;
regulatory or legislative actions;
reduced access to capital required to fund trading activities; or
significant market disruptions.
Over the past few years, a number of legislative actions have been taken, both domestically and internationally, that may cause market participants to be subject to increased capital requirements and additional compliance burdens. These actions, including Basel III, Dodd-Frank and the Collins Amendment to Dodd-Frank, MiFID II and MiFIR, may cause market participants to reduce the number of trades they maketrading activity on our exchanges. In addition, the transaction fees generated are different based on type of product and other factors, including the type of customer and certain volume discounts. See "Management's Discussion and Analysis—Operating Revenues—Average revenue per contract." If the amount of our trading volume decreases, or the mix traded shifts to our lower revenue per contract products or the transaction fee pilot is implemented, our revenues from transaction fees will most likely decrease. We can offer no assurance that we would be able to reduce our costs to match the amount of any such decrease. Revenues from our market data fees and access and capacity fees may be reduced due to declines in our market share, trading volumes or regulatory changes. The occurrence of any event that reduces the amount of market data fees that we receive, whether as a result of fee reductions, fewer members subscribing to the U.S. tape plans, declines in market share or trading volumes (or notional volume in the case of Cboe Europe Equities) or regulatory changes, will have a direct negative impact on our business, financial condition and operating results. For example, if our market share of U.S. listed equities and options, or Cboe’s European equities trading, were to decline, our share of market data fees could also decline. Moreover, market data fees could decline as a result of a reduction in the numbers of market data users, for example because of consolidation among market data subscribers or due to a decline in professional subscriptions as a result of staff reductions in the financial services industry or otherwise. Regulatory and legal developments could also impact the fees we receive from market data and access and capacity, or our cost in providing such services. In the U.S., we are generally required to file with the SEC any changes to the fees that we charge for our securities market data products and access and capacity fees. In recent years, certain industry groups have objected to the ability of exchanges to charge for certain market data products. Specifically, the Securities Industry and Financial Markets Association (“SIFMA”) has filed a number of denial of access applications with the SEC to set aside proposed rule changes to establish or modify fees for our market data products, access and capacity fees and related services. Further, the SEC and some media have scrutinized market data and market access. An adverse ruling in these matters or additional scrutiny could cause the SEC to more closely examine exchange market data and access and capacity fees, which in turn could result in our having to reduce the fees we charge for market data and access and capacity and there could be a negative impact on our revenues. See “Legal Proceedings” for more information. In addition, as discussed above, in January 2020, the SEC issued for public comment the Proposed Order that would require U.S. equities exchanges and FINRA to develop and file a new consolidated data plan. If a final order were to be issued, it may have a negative impact on the market data fees we charge and there could be a negative impact on our revenues. We believe Cboe Europe Equities currently offers market data to customers on a non-discriminatory basis at a reasonable cost. As regulators determine how market data should be disaggregated and what is a reasonable commercial basis for providing market data, it could affect our ability to offer market data products in the same manner that we do today thereby causing an adverse effect on our European market data revenues. While MiFID II and MiFIR aim to encourage a commercial solution to a consolidated tape in Europe, should this fail to materialize, policy makers might be encouraged to implement a mandatory solution that could impact our ability to develop our own commercial offering. Legislative or regulatory changes affecting the listed options or futuresour markets could have a material adverse effect on our business. business, financial condition and operating results.Changes in regulation by the SEC, CFTC, FCA, AFM, foreign regulators or other government action, including SEC approval of rule filings by other SROs or entities, including OCC, could materially affect our markets. In recent years, the securities and futuresderivatives industries have been subject to significant regulatory changes as a result of increasing government and public scrutiny of the securities and futuresderivatives industries. We have also experienced an increase in rulemaking and legislation that could affect our
business. In 2010, Congress passed the Dodd-Frank Act and other legislation. While many of its requirements have been implemented or are in the process of being implemented, some of the provisions in Dodd-Frank that impact our markets require additional action by the SEC or the CFTC. Depending on how the SEC and CFTC interpret and implement these laws, exchanges like ours could be subject to increased competition and additional costs. We could also see reduced trading by our customers due to margin or other requirements placed on them.
Under the Collins Amendment to the Dodd-Frank Act, startingStarting in 2015, large U.S. banks were required to use a calculation methodology known as the current exposure method (“CEM”) to compute regulatory capital requirements associated with the clearing guarantee provided by bank-affiliated OCC clearing members. U.S. banks, as well as European banks that also apply CEM, are required to compute theirmaintain regulatory capital that is disproportionate to the risk weighted assets, which include exchange-tradedof clearing options contracts and futures. This, and other rulemaking, may leadhas led to further increases in capital requirements for U.S. bank holding companies and bank subsidiaries involved in the trading and clearing of derivatives. These increasedIn November 2019, the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency approved replacing CEM with a more risk-sensitive calculation method known as the standardized approach to counterparty credit risk (“SA-CCR”), which is expected to reduce capital requirements associated with the clearing of listed options. Banks are required to adopt SA-CCR by January 1, 2022, but may reducedo so as early as April 1, 2020. If the implementation of SA-CCR does not occur earlier than 2022, during that time we may experience a reduction in trading in options and futures due to bank-affiliated clearing members and broker-dealers reducing their own trading, charging their customers more to trade, reducing the type or number of customers or withdrawing from the business of market-maker clearing. Further, Congress, regulators and some media have been increasingly scrutinizing electronic trading and the structure of equity markets in recent years. The SEC continues to consider various potential market structure changes, which could result in reduced trading volumes, or which could negatively affect our business. To the extent the SEC adopts regulatory changes, our business, financial condition and operating results could be negatively impacted. In addition, high frequency trading has been the subject of private litigation and we are party to one such matter. See Note 24 (“Commitments, Contingencies, and Guarantees—Legal Proceedings”) for more information. To the extent the SEC adopts regulatory changes related to market data and access and capacity, such as the Proposed Order, our business, financial condition and operating results could be negatively impacted. In 2016,addition, as discussed above, in December 2018, the SEC approved the transaction fee pilot. The transaction fee pilot may cause Cboe’s equities exchanges, BZX, BYX, EDGX, and EDGA, to require additional resources to comply with or challenge the transaction fee pilot and it may have a planmaterial impact on our business, financial condition and operating results if, for example, shifts in order flow away from exchanges were to create, implement and maintain the CAT, which would serve as a comprehensive audit trail of orders that will allow regulators to efficiently and accurately track all activity in Regulation NMS securities in the U.S. market. In addition to increased regulatory obligations, implementation of the CAT could result in significant additional expenditures, including to implement any new technology to meet any plan's requirements. occur. See “Legal Proceedings” for more information.Under European Union ("EU")E.U. regulations, European banks and other European financial institutions become subject to punitive capital charges if they transact options or futures through a non-qualifying clearinghouse. OCC, our clearinghouse for options and futures, is not currently recognized as a qualified clearinghouse by the EU. The current deadline forE.U.; however, the EUOCC is working with the E.U. to qualify as a foreign clearinghouses as equivalent is June 15, 2017.clearinghouse equivalent. As a prerequisite to becoming qualified, OCC could be required by the E.U. to contribute significant capital to its default waterfall applicable in the event of clearing member default. This capital could be required to be drawn before the default fund contributions of non-defaulting clearing members in the event that a defaulting clearing member’s margin and other contributions were to be exhausted. OCC’s stockholders, including Cboe Options, could effectively be required to fund this capital. If the EUE.U. does not recognize OCC as a qualified clearinghouse by such dateJune 15, 2021 (or by a subsequent date in the event that the current deadline is extended), then European market participants that clear through OCC would become subject to punitive capital charges. As a result, we could experience the loss of a significant number of European market participants and a significant reduction in trading activity on our options and futures markets, which could have a material adverse effect on our business. On June 23, 2016,business, financial condition and operating results.The implementation of MiFID II and MiFIR in Europe at the U.K. heldbeginning of 2018 has encouraged competition among market centers in Europe. MiFID II and MiFIR have introduced a referendumnumber of new rules, including enhanced internal organizational and compliance monitoring requirements, which apply directly to European trading venues such as our MTF and RM. The impact of MiFID II and MiFIR is significant, and the increased competition among market centers could reduce trading volumes and trading fees, while increasing our costs of operating in which voters approved an exit from the EU, commonly referredEurope. Additionally, European authorities are planning to review MiFID in 2020 as “Brexit.” As a result of which new rules may come into effect that could have a material impact on our business. The legislative and regulatory environment in which the referendum, itspot FX market operates is expected thatevolving and has undergone significant changes in the British government will begin negotiatingrecent past, and there may be future regulatory changes in the termsspot FX industry. The FX Global Code was published in 2017 and sets forth standards of conduct agreed by market participants and central banks on a global basis to apply to the U.K.’swholesale FX market, and the effect of its publication on conduct and future relationship withregulation continues to evolve. Changes in the EU. The Brexit vote resulted ininterpretation or enforcement of existing laws and regulations by applicable governmental bodies and regulatory uncertainty throughoutorganizations, or the region and couldadoption of new legal or regulatory requirements, may also adversely affect our spot FX business. Further, our FX non-deliverable forwards business activity, political stability and economic conditions throughout Europe. may also be adversely affected by proposed regulatory changes to the rules governing swap execution facilities. It is also possible that there will be additional legislative and regulatory changes or efforts in the environment in which we operate our businesses, although we cannot predict the nature of these changes or their impact on our business at this time.businesses. Actions on any of the specific regulatory issues currently under review in the U.S. or Europe and other proposals could have a material impact on our business. For a discussion of the regulatory environment in which we operate and proposed regulatory changes, see "Business—Regulatory Environment and Compliance." In addition, Congress, the SEC,U.S. and foreign legislatures and regulators and other regulatory authorities could impose legislative or regulatory changes that could adversely impact the ability of our market participants to use our markets or participate in the options or futuressecurities industry at all. Any such changes could result in the loss of a significant number of market participants or a reduction in trading activity on our markets, either of which could have a material adverse effect on our business.business, financial condition and operating results. Changes or proposed changes in regulation may also result in additional costs of compliance and modification of market participants'participants’ trading activity on our exchanges.exchanges and markets. The technology upon which we rely, including those of our service providers, may be vulnerable to security risks, cybersecurity risks, insider threats, unauthorized disclosure of confidential information, operational disruptions, and other risks and events that could harm our business. The secure and reliable operation of our technology, including our computer systems and communications networks, and those of our service providers and market participants, is a critical element of our operations. These systems and networks may be subject to various cybersecurity incidents, improper or inadvertent access to or disclosure of confidential, commercially sensitive, or personally identifiable information, data theft, corruption or destruction, cyber-attack, malware and other security problems, as well as acts of terrorism, natural disasters, human error, criminal insider activity, power loss and other events that are beyond our control. For example, in 2018, we discovered and in 2018 and 2019 we investigated an incident involving a suspected theft of computer servers and networking devices. We currently maintain physical, technical, and administrative safeguards to protect the confidentiality, integrity, availability and reliability of our systems, networks and information more broadly, and to guard against cybersecurity incidents and unauthorized access. We also maintain and continue to enhance policies, procedures and controls for tracking and appropriately disposing of technology equipment hardware during technology updates and around the protection of our computer systems and communications networks. Collectively, these safeguards and measures may prove inadequate to prevent the attendant risk posed by cybersecurity incidents, subjecting us to contractual restrictions, liability and damages, loss of business, penalties, unfavorable publicity, and increased scrutiny by our regulators, and materially impacting our financial condition and operating results. We may be required to expend significant resources in the event of any real or threatened breaches in security or system failures, including to protect against threatened breaches, to alleviate harm caused by an actual breach, and to address any reputational harm or litigation or regulatory liability. Such harms also could cause us to lose market participants, experience lower trading volume, and negatively impact our competitive advantage and business, financial condition and operating results. Additionally, as threats continue to evolve and increase, and as the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, we may be required to devote significant additional resources to modify and enhance our security controls and to identify and remediate any security vulnerabilities, which could have an adverse effect on our business, financial condition and operating results. Intense competition could materially adversely affect our market share and financial performance. The market for trade execution services and products is intensely competitive in the asset classes and geographies in which we operate. Increased competition may result in a decline in our share of trading activity and a decline in our revenues from transaction fees and market data fees, thereby adversely affecting our operating results. We compete with a number of entities on several different fronts, including the cost, quality and speed of our trade execution, functionality and ease of use of our trading platform, range of our products and services, our technological innovation and adaptation and our reputation. We compete with futures exchanges and swap execution facilities that offer comparable products and with the over-the-counter market with respect to our proprietary products. With respect to our multiply-listed products, our principal competitors are the thirteen other U.S. options exchanges. See the risk factor entitled "Our business may be adversely affected by price competition." Most of the equity options and options on ETPs listed and traded on our exchanges are also listed and traded on other U.S. options exchanges. Changes we have implemented in response to competitive pressures may not be successful in maintaining or expanding our market share in those products in the future. Likewise, our future responses to these or other competitive developments may not be successful in maintaining or expanding our market share.
In addition, indexes underlying our products, including VIX and SPX, may be licensed for use in similar OTC options. Needs or preferences of investors could change leading to a migration to the market of some trades that today could be entered into on our exchanges. Options on ETFs and ETNs that have such licenses on these indexes are available for trading. As a result, trading in our products could decrease due to competitive pressures from these alternative products.
“Business – Competition.”Some of our competitors and potential competitors have greater financial, marketing, technological, personnel and other resources than we do. These factors may enable them to develop similar or more innovative products, to offer lower transaction fees or better execution to their customers or to execute their business strategies more quickly or efficiently than we can. In addition, our business, financial condition and operating results may be adversely affected if we cannot successfully develop, introduce and/or market new services and products or if we need to adopt costly and customized technology for our services and products.Furthermore, ournew or existing competitors may: | ● | respond more quickly to competitive pressures; |
| ● | develop products that compete with our products or are preferred by our customers; |
| ● | offer products and services at prices below ours to gain market share and to promote other businesses; |
| ● | develop and expand their technology and service offerings more efficiently; |
| ● | provide better, more user-friendly and more reliable technology; |
| ● | take greater advantage of acquisitions, alliances and other opportunities; |
respond more quickly to competitive pressures;31 develop products that compete with our products or are preferred by our customers;
develop and expand their technology and service offerings more efficiently;provide better, more user-friendly and more reliable technology; | ● | market, promote, bundle and sell their products and services more effectively; |
| ● | leverage existing relationships with customers and alliance partners more effectively or exploit brand names to market and sell their services; and |
| ● | exploit regulatory disparities between traditional, regulated exchanges and alternative markets, including over-the-counter markets, that benefit from a reduced regulatory burden and lower-cost business model. |
take greater advantage of acquisitions, alliances and other opportunities;
market, promote, bundle and sell their products and services more effectively;
leverage existing relationships with customers and alliance partners more effectively or exploit brand names to market and sell their services; and
exploit regulatory disparities between traditional, regulated exchanges and alternative markets, including over-the-counter markets, that benefit from a reduced regulatory burden and lower-cost business model.
The derivatives industry has witnessed both the consolidation of exchange holding companies and the growth in the number of exchanges, with a doubling of the number of options exchanges over the past decade. Consolidation or alliances among our competitors may achieve cost reductions or other increases in efficiency, which may allow them to offer better prices or services than we do. The increase to the number of competitors that we face may result in fragmentation of the market and a reduced market share for our exchanges.
If our products, markets, services and technology are not competitive or we fail to anticipate or respond adequately to changes in technology, customer preferences and regulatory requirements or any significant delays in product development efforts our business, financial condition and operating results wouldcould be materially harmed. A decline in our transaction fees or any loss of customers would lower our revenues, which would adversely affect our profitability. For a discussion of the competitive environment in which we operate, see "Business—Competition." We depend on third partythird-party service providers for certain services that are important to our business. An interruption, significant increase in fees or cessation or impairment of such service by any third party could have a material adverse effect on our business. business, financial condition and operating results.We depend on a number of service providers, including clearing organizations such as OCC, NSCC, LCH, EuroCCP and its member clearing firms;SIX x-clear; securities information processors such as the CTA, UTP Securities Information Processor and OPRA; regulatory and other service providers such as FINRA, NFA and NFA;OCC; the hosthosts of our data center;and disaster recovery centers; and various vendors of communications and networking products and services. More specifically: OCC is the sole provider ofIn addition, we also depend on third party routing and clearing on all of our exchanges. If it were unable to perform clearing services, or its clearing members were unable or unwilling to clear through OCC,firms who are involved in processing transactions would likely not occur on our markets or there may be delays.
behalf. More specifically: | ● | If OCC, NSCC, EuroCCP, LCH and SIX x-clear were unable to perform clearing services for existing or new products, or their clearing members were unable or unwilling to clear through them, transactions could likely not occur on our markets or there may be delays, including until clearing is moved to another clearing agency. In 2019, approximately 64.8% of our net transaction fees were generated by options and futures that were cleared through OCC. |
| ● | OPRA, UTP Securities Information Processor and the CTA consolidate options and equities market information such as last sale reports and quotations. If any of them were unable to provide this information for a sustained period of time, we may be unable to offer trading on our options and equities markets. |
| ● | We are heavily dependent on technology for our markets, including our data and disaster recovery centers, some of which are housed by third parties, and certain communications and networking products and services. If this technology is unavailable, and cannot be replaced in a sufficiently short time period, we may be unable to operate our markets. |
| ● | We plan to utilize Amazon Web Services (“AWS”) to maintain secondary offsite backups of our and our customers’ data and may utilize AWS in the future for additional services. We do not control the operations of AWS or their facilities and may be vulnerable to disruptions in our access to the platform as a result of a number of potential causes, including technical failure, natural disasters, fraud or security attacks that we cannot predict or prevent. Additionally, any vulnerability of AWS could expose our or our customers’ confidential data, which could result in harm to our business reputation. |
| ● | FINRA, OCC, and NFA provide certain regulatory services and functions for our options, equities and futures exchanges, while we retain regulatory responsibilities for such services. If FINRA, OCC, or NFA stopped providing services, or provided inadequate services, we may be subject to action by the SEC or CFTC, or may have limitations placed upon our markets. |
| ● | We rely on FINRA to provide services for the implementation of the CAT. If FINRA stops providing services or provides inadequate services, we and the other execution venues may incur regulatory liability including enforcement action by the SEC or limitations placed upon our markets. In addition, until the SEC approves a funding model that shares the cost of the CAT between the SROs and industry members, the SROs may continue to incur additional significant costs, including as a result of replacing the plan processor, or result in not being able to collect on the promissory notes related to the funding of the implementation and operation of the CAT. |
| ● | We rely on third party routing and clearing firms to clear trades in U.S. listed equity securities routed by us to other markets, and to execute trades in options that we route to other markets. |
With respect to options, all contracts traded on our exchanges must be cleared through clearing members of OCC. At December 31, 2019, there were 98 TPHs that are clearing members of OCC. Two clearing members accounted for approximately 48.9% of transaction and other fees collected through OCC in 2019. The next largest clearing member accounted for approximately 16.6% of transaction and other fees collected through OCC. Additionally, the two largest clearing members clear the majority of the market-maker sides of transactions at Cboe Options, C2, BZX, EDGX and at all of the options exchanges. Should one of these clearing members or liquidity providers exit the business or withdraw from our options exchanges, impose additional market-maker financial requirements or if market-makers were unable to transfer to another clearing member or other liquidity providers were unable to provide additional liquidity, this information forcould create a sustained period of time, we may be unablesignificant disruption to offer trading on ourthe options markets. We are heavily dependent on technology for our markets, including our data center, which is housed by a third party, and certain communications and networking products and services. If this technology is unavailable, and cannot be replaced in a short time period, we may be unable to operate our markets.
FINRA and NFA provide regulatory services for our options and futures exchanges, respectively, while we retain regulatory responsibilities for such services. If FINRA or NFA stopped providing services, or provided inadequate services, we may be subject to action by the SEC or CFTC, or may have limitations placed upon our markets.
ours.We cannot provide assurance that any of these providers will be able to continue to provide these services in an efficient manner or that they will be able to adequately expand their services to meet our needs. An interruption or malfunction in or the cessation or impairment of an important service by a third party or disruption of a third party’s operations could cause us to halt trading in some or all of our products or our services, or
make us unable to conduct other aspects of our business.business, cause us to experience the loss of a significant number of market participants or cause us to experience a significant reduction in trading activity on our options and futures markets, each of which could have a material adverse effect on our business, financial condition and operating results. In addition, our inability to make alternative arrangements, such as moving clearing to another clearing agency, in a timely manner, or at all, could have a material adverse impact on our business, financial condition and operating results. Our operations outside of the U.S. expose us to currency risk. In addition to our operations in the U.S., we have operations in the U.K., continental Europe, Ecuador, Hong Kong and Singapore. We, therefore, have exposure to exchange rate movements between the British pound, the Euro, the Hong Kong dollar, and the Singapore dollar against the U.S. dollar. Significant inflation or changes in foreign exchange rates with respect to one or more of these currencies could occur as a result of general economic or political conditions, acts of war or terrorism, changes in governmental monetary or tax policy, Brexit or changes in local interest rates. These exchange rate differences will affect the translation of our non-U.S. results of operations and financial condition into U.S. dollars as part of our consolidated financial statements. If one or more of the index providers from which we have licenses or service providers with respect to proprietary products fails to maintain the quality and integrity of their indexesindices or fails to perform under our agreements with them or if customer preferences change, or if we fail to maintain the quality and integrity of our proprietary indices, revenues we generate from trading in these proprietary products or the calculation and dissemination of index values may suffer. We are a party to an increasinga number of license agreements pursuant to which we may list for trading securities options on various indexesindices including license agreements that we have with S&P, for the S&P 500, IndexS&P 100 and S&P 100 Index, S&P Dow JonesSelect Sectors Indices, LLC, for the Dow Jones Industrial Average,DJIA, LSEG for more than two dozen FTSE Russell indexes, including the Russell 2000 Index, and MSCI Inc., for six MSCI indexes, including the MSCI EAFE Index and MSCI Emerging Markets Index.MSCI. These license agreements provide among other things, that we are authorized to list optionsproducts based on their indexes,indices, and some of the resulting index options and futures are among the most actively traded products at CBOE.on our exchanges. We also enter into licensing agreements pursuant to which we calculate and disseminate values of proprietary indices. The quality and integrity of each of these indexesindices are dependent on the ability of the index providers, including us, to maintain the index, including by means of the calculation and rebalancing of the index, and we are dependent on the index providers for a number of things, including the provision of index data to us.data. We also rely on index providers to enforce intellectual property rights against unlicensed uses of the indexesindices and uses of the indexesindices that infringe on our licenses, as further discussed in risk factor "We may not be able to protect our intellectual property rights."licenses. Furthermore, some of our agreements concerning our proprietary products provide for the parties to those agreements to provide important services to us. If any of our index providers, including us, are unable to maintain the quality and integrity of their indexes,indices, or if any of the index providers or service providers fail to perform their obligations under the agreements, trading in these products, and therefore transaction fees we receive, may be adversely affected or we may not receive the financial benefits of the agreements that we negotiated. If we are unable to fulfill our obligations under the Consent Order, it may have a significant adverse impact on our business.33 In addition to entering into the Consent Order and agreeing to complete certain undertakings, we may be subject to additional investigations or proceedings by the SEC if the SEC were to find that we did not fulfill our obligations under the Consent Order. See "Business—Regulatory Environment and Compliance—Compliance—Consent Order." Any investigations or proceedings, whether successful or unsuccessful, could result in substantial costs, the diversion
We and our licensors may not be able to protect our respective intellectual property rights. We rely on patent, trade secret, copyright and trademark laws, the law of the doctrine of misappropriation and contractual protections to protect our proprietary technology, proprietary index and futures products, index methodologies and other proprietary rights. In addition, we rely on the intellectual property rights of our licensors in connection with our listing of exclusively-licensed index options and futures products. We and our licensors may not be able to prevent third parties from copying, or otherwise obtaining and using, our intellectual property without authorization, listing our proprietary or exclusively-licensed index products without licenses or otherwise infringing on our rights. We and our licensors may have to rely on litigation to enforce our intellectual property rights, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. We and our licensors may not be successful in this regard. Such litigation, whether successful or unsuccessful, could result in substantial costs to us, diversion of our resources or a reduction in our revenues, any of which could materially adversely affect our business. Any infringement by us on patentintellectual property rights of others could result in litigation and could have a material adverse effect on our operations. Our competitors, as well as others, have obtained, or may obtain, patents or may otherwise hold intellectual property rights that are related to our technology or the types of products and services we offer or plan to offer. We may not be aware of all patents containing claimsintellectual property that may pose a risk of infringement by our products, services or technologies. In addition, some potential patent applications in the U.S. are confidential until a patent is issued, and therefore we cannot evaluate the extent to which our products, and services or technologies may be covered or asserted to be covered in pending patent applications. Thus, we cannot be sure that our products, and services or technologies do not infringe on the rights of others or that others will not make claims of infringement against us. Claims of infringement are not uncommon in our industry.industry, and even if we believe that such claims are without merit, they can be time-consuming and costly to defend and divert management resources and attention. If one or more of our products, services or technologies were determined to infringe a patent or other intellectual property right held by another party, we may be required to pay damages, stop using, developing or marketing those products, services or technologies, obtain a license from the intellectual property rights holders, of the patents or redesign those products, services or technologies to avoid infringing the patent.infringement. If we were required to stop using, developing or marketing certain products, services or technologies, our business, results of operationsfinancial condition and financial conditionoperating results could be materially harmed. Moreover, if we were unable to obtain required licenses, we may not be able to redesign our
products, services or technologies to avoid infringement, which could materially adversely affect our business, resultsfinancial condition and operating results.If we fail to attract or retain highly skilled management and other employees our business may be harmed. Our success largely depends on the skills, experience and continued efforts of operationsmanagement and other key personnel. As a result, to be successful, we must retain and motivate executives and other key employees. However, we have no assurances that these employees will remain with us. The roles and responsibilities of departing executive officers and employees will need to be filled either by existing or new officers and employees, which may require us to devote time and resources to identifying, hiring and integrating replacements for the departed executives and employees that could otherwise be used to pursue business opportunities, which could have a material adverse effect on our overall business, financial condition.condition and operating results. There is substantial competition for qualified and capable personnel in the technology space, which may make it difficult for us to retain and recruit qualified employees in sufficient numbers. If we fail to retain our current employees, it would be difficult and costly to identify, recruit and train replacements needed to continue to conduct and expand our business. In particular, failure to retain and attract qualified technology personnel could result in systems failures. Consequently, our reputation may be harmed, we may incur additional costs and our profitability could decline. There can be no assurance that we will be able to retain and motivate our employees in the same manner as wehave historically done. Additionally, effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving our management team and key employees could hinder our strategic planning and execution. Computer and communications systems failures and capacity constraints could harm our reputation and our business. We operate, monitorOur business depends on the integrity and maintainperformance of our computer and communications systems. If our systems cannot expand to cope with increased demand or otherwise fail to perform, we could experience unanticipated disruptions in service, slower response times and networks, includingdelays in the systems that comprise CBOE Command, the platform forintroduction of new products and services. These consequences could result in trading on our exchangesoutages, lower trading volumes, financial losses, decreased customer service and CBOE Vector, the platform that we are developing that is expected to replace CBOE Command. If we are unable to operate, monitor or maintain these systemssatisfaction and networks, program them so that they operate correctlyregulatory sanctions and maintain the integrity of their data, or successfully transition from the CBOE Command platform to the new CBOE Vector trading platform, it could have a material adverse effect on our ability to conduct our business. Although we have a back-up plan of significant trading and key corporate systems, the back-up systems or disaster recovery plans may prove to be inadequate in the event of a systems failure or cyber-security breach. ThereDespite having disaster recovery facilities, there can be no guarantees that we will be able to open an efficient, transparent and liquid marketplace, if we can open at all. Withall, following a systems failure. Moreover, with extended trading hours, we have to operate our systems longer and have fewer non-trading hours to address any potential concerns with the systems on which we rely.
Our markets have experienced occasional systems failures and delays in the past and in the future our systems may fail, in whole or in part, or may operate slowly, causing one or more of the following: | ● | unanticipated disruption in service to our participants; |
| ● | failures or delays during peak trading times or times of unusual market volatility; |
| ● | slower response times and delays in trade execution and processing; |
| ● | incomplete or inaccurate accounting, recording or processing of trades; and |
| ● | distribution of inaccurate or untimely market data to participants who rely on this data in their trading activity. |
unanticipated disruption in service to our participants;
failures or delays during peak trading times or times of unusual market volatility;
slower response times and delays in trade execution and processing;
incomplete or inaccurate accounting, recording or processing of trades; and
distribution of inaccurate or untimely market data to participants who rely on this data in their trading activity.
Any of these events may cause: | ● | a loss in transaction or other fees due to the inability to provide services for a time; |
| ● | requests by market participants or others that we reimburse them for financial loss, either within the constraints of the limited liability provisions of our exchanges’ rules or in excess of those amounts; |
| ● | trading volume to diminish on our exchanges due to dissatisfaction with the platform; and |
| ● | one or more of our regulators to investigate or take enforcement action against us. |
a loss in transaction or other fees due to the inability to provide services for a time;
requests by market participants or others that we reimburse them for financial loss, either within the constraints of the limited liability provisions of our exchanges' rules or in excess of those amounts;
trading to diminish on our exchanges due to dissatisfaction with the platform; and
one or more of our regulators to investigate or take enforcement action against us.
As a consequence of any of these events, our business, financial condition and results of operations could suffer materially. In addition to other measures, we test our systems to confirm whether they will be able to handle anticipated present and future peak trading activity or times of unusual market volatility. However, we cannot assure you that our estimates of future trading volume will be accurate or that our systems will always be able to accommodate actual trading volume without failure or degradation of performance. We anticipate that we will need to continue to make significant investments in hardware, software and telecommunications infrastructure to accommodate the increases in traffic. If we cannot increase the capacity and capabilities of our systems to accommodate increasing trading activity and to execute our business strategy, our ability to maintain or expand our businesses would be adversely affected. Misconduct by our TPHs, members, participants or others could harm us. We run the risk that our TPHs, members, participants or other persons who use our markets or our products or our employees may engage in fraud, market or product manipulation or other misconduct, which could result in regulatory sanctions and serious harm to our reputation, especially because we are the parent company of SROs. It is not always possible to deter misconduct, or market or product manipulation, and the precautions we take to prevent and detect this activity may not be effective in all cases. In addition, misconduct, or market or product manipulation by, or failures of, participants on our or other exchanges may discourage trading on our exchanges or of our products, which could reduce revenues. Our use of open source software code may subject our software to general release or require us to re-engineer our software, which could harm our business. Our technology platform uses open source software code. Companies that incorporate open source software into their products have, from time to time, faced claims challenging the ownership of open source software. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. In addition, some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code in their software and communication networks upon which we relymake any derivative works of the open source code available on unfavorable terms or at no cost. Open source license terms may be vulnerable to securityambiguous, and many of the risks associated with usage of open source software cannot be eliminated. We believe that our use of open source software is in compliance with the relevant open source software licenses and other disruptions. The secure and reliable operationdoes not require disclosure of any of our computer systems, our communications networks and the systems of our service providers and market participants, is a critical element of our operations. These systems and communications networks may be vulnerablesource code. However, if we were found to unauthorized access, including the improper access or disclosure of personally identifiable information, malware and other security problems, as well as to acts of terrorism, natural disasters and other events that are beyond our control. If our security measures are inadequate or if there are interruptions or malfunctions in our systems or communications networks, our business, financial condition and operating results could be materially impacted. Wehave inappropriately used open source software, we may be required to expend significant resources in the event of any realrelease our proprietary source code, re-engineer or threatened breaches in security or system failures, including to protect against threatened breaches and to alleviate harm caused by an actual breach, and may suffer harm to our reputation and litigation. Measures we implement for security and otherwise to provide for the confidentiality, integrity and reliabilitydiscontinue use of our systems may prove to be
inadequate in preventing system failuressoftware or delays in our systemstake other remedial action any or communications networks,all of which could lower trading volume and have an adverse effectcause disruptions in, or impose significant costs on, our business, financial condition and operating results.
We may not be able to maintain operating revenues generated by making trading permits available in exchange for a fee.
The right to trade on our exchanges is made available through trading permits for which the user pays a fee. These fees accounted for 8.0% of our operating revenues in 2016. CBOE charges the highest relative trading permit rates in the options industry. We may face pressure from our customers to lower these rates or may see larger firms electing to use fewer permits to access our exchanges. If the demand for trading permits to our exchanges is less than historic levels or if we are unable to maintain permit rates, our ability to generate operating revenues through the granting of permits for trading access would be negatively impacted, which could adversely affect our profitability.
business.Potential conflicts of interest between our for-profit status and our regulatory responsibilities may adversely affect our business. As a for-profit business with regulatory responsibilities, we are responsible for disciplining TPHs and members for violating our rules, including by imposing fines and sanctions. This may create a conflict of interest between our business interests and our regulatory responsibilities. Any failure by us to fulfill our regulatory obligations could significantly harm our reputation, increase regulatory scrutiny or cause the SEC or CFTC to take action against us, all of which could adversely affect our business, results of operations or financial condition. Brexit could have a negative impact on the U.K. and E.U. economies and lead to considerable uncertainty while new treaties are negotiated. In addition to the economic uncertainty the Brexit Vote, Brexit and Transition Period bring, there are a number of potential risks that investors should consider: | ● | Political uncertainty. Following the Brexit Vote, the U.K. entered into a period of acute political uncertainty both as to the nature and timing of the negotiations with the E.U. Such uncertainty led to a high degree of economic and market disruption and legal uncertainty. While some certainty has been established following the joint U.K./E.U. approval of the Withdrawal Agreement, including the agreement of a Transition Period up to the end of 2020, it is not possible to predict the outcome of trade negotiations and the impact they will have on the U.K. in general and markets more broadly. |
| ● | Legal uncertainty. A significant proportion of English law currently derives from or is designed to operate in concert with E.U. law. This is especially true of English law relating to financial markets, financial services, prudential and conduct regulation of financial institutions, bank recovery and resolution, payment services and systems, settlement finality, and market infrastructure. Depending on the terms of the U.K.’s exit from the E.U. entered into during the Transition Period, significant changes to English law are likely, and we cannot predict what these changes will be and how they may affect our business. |
| ● | Regulatory uncertainty. There is significant uncertainty about how the remaining E.U. countries (“EU27”) financial institutions with assets (including branches) in the U.K. and U.K. financial institutions with assets in the EU27 will be regulated. At present, E.U. single market regulation allows regulated financial institutions (including credit institutions, investment firms, alternative investment fund managers, insurance and reinsurance undertakings) to benefit from a passporting system for regulatory authorizations required to conduct their businesses, as well as facilitating mutual rights of access to important elements of market infrastructure |
| | such as payment and settlement systems. E.U. law is also the framework for mutual recognition of bank recovery and resolution regimes. |
Once the U.K. ceases to be a member state of the E.U., the current passporting arrangements are expected to cease to be effective, as will the current mutual rights of access to market infrastructure and current arrangements for mutual recognition of bank recovery and resolution regimes. The ability of regulated financial institutions to continue to do business between the U.K. and the EU27 after the U.K. ceases to be a member state of the E.U. would therefore be subject to separate arrangements between the U.K. and the EU27. There can be no assurance that there will be any such arrangements concluded and, if they are concluded, on what terms. | ● | Market uncertainty. Since the Brexit Vote and Brexit, there has been volatility and disruption of the capital, currency, exchange rates and credit markets. If this disruption continues, it may adversely impact our business, financial condition and operating results. |
In 2019, we derived 7.7% of our total net revenues from our U.K. operations. Depending on the outcome of the Brexit and Transition Period negotiations, companies with operations in the U.K. may face unfavorable business conditions to access the single market. In preparation for Brexit, Cboe Europe Equities established a regulated entity in the E.U. in addition to its existing entity in the U.K. so that it can continue offering its services to customers in both jurisdictions. Nevertheless, if the E.U. or the U.K. introduce new legislation that could restrict free competition or access to capital markets, the impact of such legislation could have a material adverse effect on our business, financial condition and operating results. Damage to our reputation could have a material adverse effect on our business, financial condition and operating results. We believe one of our competitive strengths is our strong industry reputation. Various issues may give rise to reputational risk, including issues relating to: | ● | the representation of our business in the media; |
| ● | the quality and benefits of using our proprietary products, including the reliability and functionality of our transaction-based business and the accuracy of our market data; |
| ��� | the ability to execute our business plan, key initiatives or new business ventures and the ability to keep up with changing customer demands and regulatory initiatives; |
| ● | our regulatory compliance and our enforcement of compliance on our customers; |
| ● | the accuracy of our financial statements and other financial and statistical information; |
| ● | the quality of our corporate governance structure; |
| ● | the quality of our disclosure controls and internal controls over financial reporting, including any failures in supervision; |
| ● | the integrity and performance of our computer and communications systems; |
| ● | security breaches, including any unauthorized delivery of proprietary data to third parties; |
| ● | management of our outsourcing relationships, including our relationship with FINRA and NFA; |
| ● | any misconduct or fraudulent activity by our employees, especially senior management, or other persons formerly or currently associated with us; |
| ● | our listings business and our enforcement of our listing rules; and |
| ● | any negative publicity surrounding the ETPs that we serve as the listing destination. |
Damage to our reputation could cause a reduction in the trading volume of our proprietary products or on our exchanges or cause us to lose customers. This, in turn, may have a material adverse effect on our business, financial condition and operating results. If our risk management and compliance methods mightare not effective, our business, financial condition and operating results may be adversely affected. Our ability to comply with all applicable laws and rules is largely dependent on our establishment and maintenance of compliance, risk, audit, and reporting systems and procedures, as well as our ability to attract and retain qualified compliance, risk and audit management personnel. These systems and procedures may not be effectivefully effective. We face the risk of intervention by regulatory authorities, including extensive examination and surveillance activity. In the case of actual or alleged non-compliance with applicable laws or regulations, we could be subject to investigations and judicial or administrative proceedings that may result in outcomes thatpenalties, settlements or civil lawsuits, including by customers, for damages, which may be substantial. In the past, the SEC has brought actions against exchange operators, including us, for failing to fulfill their obligations to have an effective regulatory system. Any failure to comply with applicable laws and rules could adversely affect our business, reputation, financial condition and operating results. results and, in extreme cases, our ability to conduct our business or portions thereof. As the parent company for SROs, we are responsible for maintaining exchanges that comply with securities and futures laws, SEC, FCA, AFM and CFTC regulations and the rules of the respective exchanges. Our ability to comply with applicable laws and rules is largely dependent on our policies and procedures designed to meet those compliance responsibilities, as well as our ability to attract and retain qualified personnel throughout the company. Our policies and proceduresWe have methods to identify, monitor and manage compliance risks may not be fully effective.our risks. Management of legal and regulatory risk requires policies and procedures to properly monitor record and verify a large number of transactions and events. We cannot provide assurance thatmanage risk. If our policies, procedures, and procedures will always be effective or that we will always be successful in monitoring or evaluating the compliance risks to which we are or may be exposed, or that our compliance and internal audit functions would be able to identify any such ineffectiveness. If these policies and procedures are not effective, we may be subject to monetary or other penalties by our regulators. If our risk management methods are not effective, our business, reputation and financial results may be adversely affected.
We have methods to identify, monitor and manage our risks. If our methodssystems are not effective or we are not successful in monitoring or evaluating the risks to which we are or may be exposed, our business, reputation, financial condition and operating results could be materially adversely affected. In addition,We cannot provide assurance that our policies and procedures will always be effective, or that our management, compliance department, risk department and related enterprise risk management program and internal audit department would be able to identify any such ineffectiveness. If these departments or the enterprise risk program, and related policies and procedures are not effective, we may be subject to monetary or other penalties by our regulators, and our insurance policies may not provide adequate coverage. Financial or other problems experienced by third parties could have an adverse effect on our business. We are exposed to credit risk from third parties, including customers, clearing agents and counterparties. For example, we are exposed to credit risk for transaction fees we bill to customers on a monthly basis in arrears. Our customers and other third parties may default on their obligations to us due to a lack of liquidity, operational failure, bankruptcy or other reasons. In addition, with respect to orders Cboe Trading routes to other markets for execution on behalf of our customers, Cboe Trading is exposed to counterparty credit risk in the case of failure to perform on the part of our routing and clearing firms who are involved in processing equities and options transactions on our behalf, as well as failure on the part of such brokers to pass back any transactional rebates. Wedbush Securities Inc. (“Wedbush”), and Morgan Stanley & Co. LLC (“Morgan Stanley”) guarantee equity trades until one day after the trade date, after which time NSCC provides a guarantee. Thus, Cboe Trading is potentially exposed to credit risk to the counterparty to an equity trade routed to another market center between the trade date and one day after the trade date in the event that Wedbush or Morgan Stanley fails to perform. With respect to U.S. listed equity options and futures, we deliver matched trades of our customers to the OCC, which acts as a central counterparty on all transactions occurring on Cboe Options, C2, BZX, EDGX, and CFE and, as such, guarantees clearance and settlement of all of our matched options and futures trades. With respect to U.S. equities, Cboe Trading has counterparty credit risk exposure to Wedbush and Morgan Stanley related to clearing until the day following the trade date. Cboe Trading uses Wedbush to clear trades routed through affiliates of Credit Suisse Securities (USA) LLC as well as for trades routed directly to other exchanges and optionally dark pools. Morgan Stanley clears trades routed through the Morgan Stanley routing brokers and also clears executions routed to most dark pools. Cboe Trading maintains counterparty credit risk exposure from routing brokers with respect to rebates earned until completion of the routing brokers next invoice cycle following the execution. With respect to U.S. listed equity and exchange traded product options, Cboe Trading is subject to counterparty credit risk exposure with respect to rebates earned from routing brokers until completion of the routing brokers’ next invoice cycle has completed for an execution. Our exposure to credit risk may be further impacted by volatile securities markets that may affect the ability of our TPHscustomers and other third parties to satisfy their contractual obligations to us. Moreover, we may not be successful in managing our credit risk through reporting and control procedures or othersby maintaining credit standards. Any losses arising from such defaults or other credit losses could harm us. We runadversely affect our financial condition and operating results.While neither Cboe FX nor Cboe SEF has direct counterparty risk, Cboe FX or Cboe SEF may suffer a decrease in transaction volume if a bank or prime broker experiences an event that causes other prime brokers to decrease or revoke the credit available to the prime broker experiencing the event. Therefore, Cboe FX and Cboe SEF may have risk that is related to the credit of the banks and prime brokers that trade spot FX on the Cboe FX platform, or non-deliverable forward FX transactions on Cboe SEF. We may be required to assume ownership of a position in securities in connection with our TPHs,order routing service, which could subject us to trading losses when our broker-dealer disposes of that position. We offer a smart-order routing service through our broker-dealer subsidiary, Cboe Trading, which provides its customers with access to other persons who usemarket centers when we route their orders to those market centers for execution. In connection with this service, we may assume ownership of a position in securities. This may occur, for example, when a market center to which we have routed a customer’s order experiences systems problems and is unable to determine the status of that order. When this happens, we may make a business decision to provide a cancellation notice to our markets orcustomer, relieving our employeescustomer of any liability with respect to the order. We may engagebe informed later, however, that the order was executed at the market center to which we routed it, in fraud, market manipulation or other misconduct,which case Cboe Trading would be required to take ownership of that securities position. Our third party clearing brokers maintain error accounts on behalf of Cboe Trading into which such positions settle, and we require the respective clearing broker to trade out of those positions as expeditiously as possible, which could result in regulatory sanctions and serious harm to our reputation, especially because we are the parent company of SROs. It is not always possible to deter misconduct or market manipulation, and the precautions we take to prevent and detect this activity may not be effective in all cases. In addition, misconduct or market manipulation by, or failures of, participants on our exchanges may discourageincurring trading on our exchanges, which could reduce revenues. If we fail to attract or retain highly skilled management and other employees, our business may be harmed.
Our future success depends in large part on our management team, which possesses extensive knowledge and managerial skill with respect to the critical aspects of our business. The failure to retain members of our management team could adversely affect our ability to manage our business effectively and execute our business strategy. Additionally, effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving our management team and key employees could hinder our strategic planning and execution.
Our business is also dependent on highly skilled employees, especially those who provide specialized services to our clients and oversee our technology functions. Many of these employees have extensive knowledge and experience in highly technical and complex areas of the options trading industry. Because of the complexity and risks associated with our business and the specialized knowledge required to conduct this business effectively, and because the growth in our industry has increased demand for qualified personnel, many of our employees could find employment at other firms if they chose to do so,
particularly if we fail to continue to provide competitive levels of compensation. If we fail to retain our current employees, it would be difficult and costly to identify, recruit and train replacements needed to continue to conduct and expand our business. In particular, failure to retain and attract qualified systems personnel could result in systems errors. Consequently, our reputation may be harmed, we may incur additional costs and our profitability could decline.
losses.We may not effectively manage our growth, which could materially harm our business. Over the past five years, we have experienced significantly increased volume on our futures exchange, extended trading hours on our futures exchangebusiness, financial condition and in SPX and VIX options and developed several proprietary products. operating results.We expect that our business will continue to grow, which may place a significant strain on our management, personnel, systems and resources. We must continually improve our operational, financial and regulatory systems and managerial controls and procedures, and may need to continue to expand, train and manage our workforce. We must also maintain close coordination among our technology, legal, accounting, finance, marketing, sales, regulatory and compliance functions. We cannot assure you that we will manage our growth effectively. If we fail to do so,manage our growth effectively, our business, financial condition and operating results could be materially harmed. Furthermore, failure to successfully expand into new asset classes or new geographies may adversely affect our growth strategy and our future profitability.Our continued growth will require increased investment by us in technology, facilities, personnel, and financial and management systems and controls. It also will require expansion of our procedures for monitoring and assuring our compliance with applicable regulations, and we will need to integrate, train and manage a growing employee base. The expansion of our existing businesses, any expansion into new businesses and the resulting growth of our employee base will increase our need for internal audit and monitoring processes, which may be more extensive and broader in scope than those we have historically required. We may not be successful in identifying or implementing all of the processes that are necessary. Further, unless our growth results in an increase in our revenues that is proportionally greater than or equal to the increase in our costs associated with this growth, our business, financial condition and operating marginsresults will be adversely affected. Our ability to implement or amend rules could be limited or delayed because of regulation, which could negatively affect our ability to implement needed changes. Our options exchanges registered with the SEC must submit proposed rule changes to the SEC for its review and, in many cases, its approval. Even where a proposed rule change may be effective upon filing with the SEC, the SEC retains the right to suspend and disapprove such a rule changes.change. Also, the CFTC may stay or disapprove rules that we file with it for CFE our futures exchange.or Cboe SEF. The rule review process can be lengthy and can significantly delay the implementation of proposed rule changes that we believe are necessary to the operation of our markets. If the SEC or CFTC delays, including because of a government shutdown, or does not allow one of our exchanges to implement a rule change, this could negatively affect our ability to make needed changes or implement business activities. Similarly, the SEC must approve amendments to our options exchange subsidiaries'subsidiaries’ certificates of incorporation and bylaws as well as certain amendments to the certificate of incorporation and bylaws of CBOE Holdings.Cboe Global Markets. The SEC may decide not to approve a proposed amendment or may delay such approval in a manner that could negatively affect our ability to make a desired change, which could prevent or delay us from improving the operations of our markets or recognize income from new products. As one of the largest options exchanges in the world and the largest options exchange in the U.S., we may be at a greater risk for a cyber attack and other cyber security risks.
The frequency of cyber attacks is increasing in general, and a variety of threat actors have specifically targeted the financial services industry. At the date of this filing, we have no evidence of any material cases of data theft, corruption or destruction of data or compromised customer data. Security breaches may, among other consequences, lead to increased scrutiny by our regulators and have significant costs in terms of cash outlays, business disruption, revenue losses, internal labor, overhead and other expenses. Measures we implement to monitor the environment and protect our infrastructure against security breaches and misappropriation of our intellectual property assets may prove insufficient, which could cause us to lose market participants, experience lower trading volume, incur significant liabilities or have a negative impact on our competitive advantage.
Changes in the tax laws and regulations affecting us, our products and our market participants could have a material adverse effect on our business. Legislation may be proposed, both domestically and internationally, that could add a transaction tax on our products or change the way that our market participants are taxed on the products they trade on our markets. If such proposals were to become law, they could have a negative impact on the options and futuressecurities industry and on us by making transactions more costly to market participants, which may reduce trading.
In 2015, the Internal Revenue Service issued finaltrading and temporary regulations under Section 871(m) that require dividend tax withholding for certain transactions completed by foreign persons that could result in a reduction in trading by such foreign persons, either by their choice or as a result of brokers refusing to execute certain option trades for such persons.
make our markets less competitive.In addition to proposed tax changes that could affect our market participants, like other corporations, we are subject to taxes at the federal, state and local levels, as well as in non-U.S. jurisdictions. Changes in tax laws, regulations or policies or successful claims by tax authorities could result in usour having to pay higher taxes, which would in turn reduce our net income. There has been a trend toward states changing income tax laws to increase the apportionment factors on which state income taxes are based and becoming more aggressive asserting nexus over corporations that are not domiciled in the state. If state income tax laws change, or if states are successful asserting nexus against us, we may become subject to income taxes in additional states or at a higher rate in the states where income tax filing requirements exists. If this occurs, we may experience a higher effective state tax rate. We selectively explore acquisition opportunities orand strategic alliances relating to other businesses, products or technologies. We may not be successful in integrating other businesses, products or technologies with our business. Any such transaction also may not produce the results we anticipate, which could adversely affect us. our business, financial condition and operating results.We selectively explore and pursue acquisition and other opportunities to strengthen our business and grow our company. We may enter into business combination transactions, make acquisitions or enter into strategic partnerships, joint ventures or alliances, any of which may be material. The market for acquisition targets and strategic alliances is highly competitive, which could make it more difficult to find appropriate merger or acquisition opportunities. If we are required to raise capital by incurring debt or issuing additional equity for any reason in connection with a strategic acquisition or investment, financing may not be available or the terms of such financing may not be favorable to us and our stockholders, whose interests may be diluted by the issuance of additional stock. See “Risk Factors — Risks Relating For example, in 2019, we entered into a definitive agreement to acquire all of the outstanding shares of stock of EuroCCP, other than the shares of EuroCCP already owned by us (the “Transaction”). The Transaction, which we plan to fund with cash on hand, is expected to close in the first half of 2020 and is subject to the Merger” for additional discussionsatisfaction or waiver of our risks relatedconditions precedent including (i) the receipt of required regulatory clearances and approvals and (ii) the successful implementation of a supporting Euro 1.5 billion committed syndicated credit liquidity facility at the EuroCCP clearing entity level. Additionally, in February 2020, we acquired Hanweck Associates, LLC (“Hanweck”), a real-time risk analytics company based in New York, and the business of FT Providers, LLC, a portfolio management platform provider based in Chicago, commonly referred to the Merger. In 2016, we made a majority investment in CBOE Vest, an investment manager focused on Target Outcome Investment strategies, a minority investment in CurveGlobal, a new interest rate derivatives venture of the LSEG and a number of major dealer banks, and made a minority equity investment in Eris, a U.S. - based futures exchange group offering swap futures as a capital-efficient alternative to over-the-counter swaps. See also “Business-Strategic Partnership” for additional information regarding our strategic partnerships.
FT Options (“FT”).The process of integration may produce unforeseen regulatory issues and operating difficulties and expenditures and may divert the attention of management from the ongoing operation of our business and harm the reputation of the companies.our reputation. We may not successfully achieve the integration objectives, and we may not realize the anticipated cost savings, revenue growth and synergies in full or at all, or it may take longer to realize them than expected, any of which could negatively impact our business, financial condition and operating results. We may be required to inject further capital into OCC or EuroCCP or return dividends received back to OCC. OCC is the sole provider of clearing on all of our options and futures exchanges. In addition, Cboe Europe currently owns 20% of EuroCCP, which is one of three interoperable central counterparties used to clear trades conducted on Cboe Europe. On January 24, 2020, upon receipt of SEC approval, OCC established a capital management policy providing that, if OCC’s equity capital falls below certain defined thresholds, OCC can access additional capital through an operational loss fee charged to clearing members. Although Cboe Options does not have a legal or contractual obligation to contribute capital to OCC under OCC’s capital management policy or otherwise, given OCC’s importance to Cboe Options’ business, if OCC were to experience financial difficulties, Cboe Options might nevertheless effectively (but not legally) be required to inject further capital into it in order for OCC to maintain sufficient working or regulatory capital. Likewise, notwithstanding the pending Transaction, if EuroCCP were to experience financial difficulties, Cboe Europe might effectively be required to inject further capital into EuroCCP in order to maintain sufficient working or regulatory capital. In a worst case scenario, OCC or EuroCCP, as applicable, might have their regulatory license suspended or withdrawn, or might have to wind down. This may result in a loss to Cboe Options and Cboe Europe of their respective investments in OCC and EuroCCP and withdrawals of OCC or EuroCCP as clearing houses, which could have a material adverse effect on our business, financial condition and operating results. In addition, while OCC’s new capital management policy is now effective, there remains some degree of uncertainty as to the terms and conditions of the wind-down of OCC’s prior capital plan, under which OCC’s shareholders (including Cboe Options) provided equity capital to OCC and received annual dividends in respect thereof, and which was disapproved by the SEC on February 13, 2019. Depending on the terms on which the prior OCC capital plan is ultimately required to be unwound, Cboe Options could potentially be required to return dividend payments received from OCC during the time the capital plan was in effect. We have outstanding indebtedness, which may decrease our business flexibility and adversely affect our business, financial condition and operating results. As of December 31, 2019, we had $225 million outstanding under our term loan facility, $650 million of senior unsecured notes and no funds outstanding under our revolving credit facility. The financial and other covenants to which we have agreed and our indebtedness may have the effect of reducing our flexibility to respond to changing business and economic conditions, thereby placing us at a competitive disadvantage compared to competitors that have less indebtedness and making us more vulnerable to general adverse economic and industry conditions. Our indebtedness will also increase future borrowing costs, and the covenants pertaining thereto may also limit our ability to repurchase shares of our common stock, increase dividends or obtain additional financing to fund working capital, capital expenditures, acquisitions or general corporate requirements. We are also required to dedicate a larger portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow for other purposes, including working capital, capital expenditures and general corporate purposes. Further, a portion of our borrowings are at variable rates of interest, which exposes us to the risk of increased interest rates unless we enter into offsetting hedging transactions. Our ability to make payments on and to refinance our debt obligations and to fund planned capital expenditures depend on our ability to generate cash from our operations. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may not be able to refinance any of our indebtedness on commercially reasonable terms, or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances, any of which could impede the implementation of our business strategy or prevent us from entering into transactions that would otherwise benefit our business. Additionally, we may not be able to effect such actions, if necessary, on commercially reasonable terms, or at all. Any of the foregoing consequences could adversely affect our business, financial condition and operating results. Deterioration in our credit profile may increase our costs of borrowing money. As of December 31, 2019, we have investment grade credit ratings from S&P Global Ratings (A-) and Moody’s Investor Service (A3). Ratings from credit agencies are not recommendations to buy, sell or hold our securities, and each rating should be evaluated independently of any other rating. There is no assurance that we will maintain such credit ratings, since credit ratings may be lowered or withdrawn entirely by a rating agency if, in its judgment, the circumstances warrant. If a rating agency were to downgrade our rating below investment grade, our borrowing costs could increase. If our goodwill, long-lived assets, investments in non-consolidated subsidiaries and intangible assets become impaired, the resulting charge to earnings may be significant. We are required to assess investments in non-consolidated subsidiaries and intangible assets for impairment at least annually. Goodwill impairment testing is performed annually in the fiscal fourth quarter or more frequently if conditions exist that indicate that the asset may be impaired. In the future, we may take charges against earnings resulting from impairment. Any determination requiring the write-off of a significant portion of our goodwill, long-lived assets, intangible assets or investments in non-consolidated subsidiaries could adversely affect our results of operations and financial condition or the market price of our common stock. condition.Any decision to pay dividends on our common stock is at the discretion of our board of directors and depends upon the earnings and cash flow of our operating subsidiaries. Accordingly, there can be no guarantee that we will pay dividends to our stockholders. We have paid quarterly dividends since the restructuring transaction and initial public offering and intend to continue paying regular quarterly dividends to our stockholders. However, anyAny decision to pay dividends on our common stock in the future will be at the discretion of theour board of directors, which may determine not to declare dividends at all or at a reduced amount. The board'sboard’s determination to declare dividends will depend upon our profitability and financial condition, contractual restrictions, restrictions imposed by applicable law and the SEC and other factors that the board deems relevant. As a holding company with no significant business operations of its own, CBOE HoldingsCboe Global Markets depends entirely on distributions, if any, it may receive from its subsidiaries to meet its obligations and pay dividends to its stockholders. If these subsidiaries are not profitable, or even if they are and they determine to retain their profits for use in their businesses, we will be unable to pay dividends to our stockholders. Certain provisions in our organizational documents and governing law could enable the board of directors to prevent or delay a change of control. Our organizational documents contain provisions that could block actions that stockholders might find favorable, including discouraging, delaying or preventing a change of control or andany unsolicited acquisition proposals for us. These include provisions: prohibiting stockholders from acting by written consent;
requiring advance notice of director nominations and of business to be brought before a meeting of stockholders; and
limiting the persons who may call special stockholders' meetings.
| ● | prohibiting stockholders from acting by written consent; |
| ● | requiring advance notice of director nominations and of business to be brought before a meeting of stockholders; and |
| ● | limiting the persons who may call special stockholders’ meetings. |
In addition, our organizational documents include provisions that: | ● | restrict any person from voting or causing the voting of shares of stock representing more than 20% of our outstanding voting capital stock; and |
| ● | restrict any person from beneficially owning shares of stock representing more than 20% of the outstanding shares of our capital stock. |
restrict any person from voting or causing the voting of shares of stock representing more than 20% of our outstanding voting capital stock; and
restrict any person from beneficially owning shares of stock representing more than 20% of the outstanding shares of our capital stock.
Furthermore, our board of directors has the authority to issue shares of preferred stock in one or more series and to fix the rights and preferences of these shares without stockholder approval. Any series of our preferred stock is likely to be senior to our common stock with respect to dividends, liquidation rights and, possibly, voting rights. The ability of the board of directors to issue preferred stock also could have the effect of discouraging unsolicited acquisition proposals, thus adversely affecting the market price of our common stock. Delaware law makes it difficult for stockholders that have recently acquired a large interest in a corporation to cause the merger or acquisition of the corporation against the directors'board’s wishes. Under Section 203 of the Delaware General Corporation Law, a Delaware corporation may not engage in any merger or other business combination with an interested stockholder for a period of three years following the date that the stockholder became an interested stockholder except in limited circumstances, including by approval of the corporation'scorporation’s board of directors. Failure to complete the proposed Merger within the expected timeframe or at all could have a material adverse impact on our business, financial condition and results of operations.
There can be no assurance that the Merger will occur. The closing of the Merger is subject to certain conditions, including, among others, (i) the adoption of the Merger Agreement by the holders of at least a majority of the outstanding shares of Bats common stock entitled to vote thereon, (ii) approval of the issuance of shares of our common stock in the Merger by the holders of at least a majority of the shares of our common stock entitled to vote thereon and present in person or represented by proxy at the meeting of our stockholders called for such purpose, (iii) the expiration or earlier termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and regulatory approval by the SEC, Financial Industry Regulatory Authority and the U.K. Financial Conduct Authority, (iv) no court order or other legal restraint or prohibition preventing the consummation of the Merger or the Subsequent Merger or imposing a “burdensome effect” (as defined in the Merger Agreement) upon the consummation thereof, (v) the absence of any pending action commenced by a governmental or regulatory body wherein a judgment would reasonably be expected to prevent the consummation of the Merger or the Subsequent Merger or impose a burdensome effect upon the consummation thereof, (vi) receipt of tax opinions from counsel to each of us and Bats with respect to the treatment of the Merger and Subsequent Merger from a tax perspective, (vii) in the case of our obligation to effect the Merger, no exercise of appraisal rights by Bats stockholders holding more than 20% of the outstanding shares of Bats common stock, (viii) in the case of each party’s obligation to effect the Merger, the absence of a material adverse effect with respect to the other party since the date of the Merger Agreement and (ix) subject to materiality exceptions, the accuracy of the representations and warranties made by us, Merger Sub and Merger LLC, on the one hand, and Bats, on the other hand, and compliance by us, Merger Sub, Merger LLC and Bats in all material respects with our and their respective obligations under the Merger Agreement. Although certain of these conditions have been satisfied, there can be no assurance that the remaining conditions to the closing of the Merger will be satisfied in a timely matter or at all.
In particular, before the proposed transactions contemplated by the Merger Agreement, including the Merger, may be completed, various clearances and approvals must be obtained from certain regulatory and governmental authorities. These regulatory and governmentalEuropean countries where we operate regulated entities, may impose conditions on the granting of such approvals. Such conditions and the process of obtaining regulatory approvals could have the effect of delaying completion of the Merger or of imposing additional costs or limitations on the combined company following the Merger. The regulatory approvals may not be received at all, may not be received in a timely fashion and may contain conditions on the completion of the Merger. However, if any such conditions impose a “burdensome effect” as defined in the Merger Agreement, the parties may not be obligated to complete the Merger, and either Bats or we may have the right to terminate the Merger Agreement. In addition, our and Bats’ obligations to complete the Merger are conditioned on the receipt of certain regulatory approvals or waiver by the other party of such condition.
Failure to complete the Merger could negatively impact our stock price and future businesses and financial results.
If the Merger is not completed, our ongoing business may be adversely affected, and we will be subject to several risks and consequences, including the following:
we may be required, under certain circumstances, to pay Bats a termination fee of $110 million or reimburse Bats’ expenses up to $10 million under the Merger Agreement;
we will be required to pay certain costs relating to the Merger, whether or not the Merger is completed, such as legal, accounting, financial advisory and printing fees;
under the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to completing the Merger that may adversely affect our ability to execute certain of our business strategies; and
matters relating to the Merger may require substantial commitments of time and resources by our management, which could otherwise have been devoted to other opportunities that may have been beneficial to us as an independent company and such commitments may impact future earnings of the combined company.
In addition, if the Merger is not completed, we may experience negative reactions from the financial markets and from our customers and employees. We also could be subject to litigation related to any failure to complete the Merger or to enforcement proceedings commenced against us to perform our obligations under the Merger Agreement. If the Merger is not completed, we cannot assure our stockholders that the risks described above will not materialize and will not materially adversely affect our business, financial results and stock prices.
The announcement and pendency of the Merger may adversely affect our business, financial condition and results of operations.
Uncertainty about the effect of the Merger on our employees, customers, and other parties may have an adverse effect on our business, financial condition and results of operation regardless of whether the Merger is completed. These risks to our business include the following, all of which could be exacerbated by a delay in the completion of the Merger:
the impairment of our ability to attract, retain and motivate our employees, including key personnel;
the diversion of significant management time and resources towards the completion of the Merger;
difficulties maintaining relationships with customers and other business partners;
delays or deferments of certain business decisions by our customers and other business partners;
the inability to pursue alternative business opportunities or make appropriate changes to our business because of requirements in the Merger Agreement that we conduct our business in the ordinary course of business consistent with past practice and not engage in certain kinds of transactions prior to the completion of the Merger;
litigation relating to the Merger and the costs related thereto; and
the incurrence of significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger.
Our debt arrangements in connection with financing the Merger may decrease our business flexibility and adversely affect our financial results.
On December 15, 2016, we entered into a $1.0 billion senior unsecured delayed draw term loan facility. On January 12, 2017, we issued $650 million aggregate principal amount of our 3.650% Senior Notes due 2027. The proceeds from this delayed draw term loan facility and issuance of our senior notes, in addition to using cash on hand at CBOE Holdings and Bats, are expected to be used to finance a portion of the cash component of the Merger consideration, to refinance existing indebtedness of Bats and its subsidiaries and to pay related fees and expenses. In addition, on December 15, 2016, we entered into a $150 million revolving credit facility to be used for working capital and other general corporate purposes.
Prior to entering into the Merger Agreement, we did not have any indebtedness and were not subject to any financial covenants. The financial and other covenants to which we have agreed to in connection with the incurrence of the indebtedness, and the combined company’s increased indebtedness, may have the effect, among other things, of reducing the combined company’s flexibility to respond to changing business and economic conditions, thereby placing the combined company at a competitive disadvantage compared to competitors that have less indebtedness and making the combined company more vulnerable to general adverse economic and industry conditions. The combined company’s increased indebtedness will also
increase borrowing costs, and the covenants pertaining thereto may also limit the combined company’s ability to repurchase shares of our common stock, increase dividends or obtain additional financing to fund working capital, capital expenditures, acquisitions or general corporate requirements. The combined company will also be required to dedicate a larger portion of its cash flow from operations to payments on its indebtedness, thereby reducing the availability of its cash flow for other purposes, including working capital, capital expenditures and general corporate purposes.
The combined company’s ability to make payments on and to refinance its debt obligations and to fund planned capital expenditures will depend on its ability to generate cash from the combined company’s operations. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond the combined company’s control.
The combined company may not be able to refinance any of its indebtedness on commercially reasonable terms, or at all. If the combined company cannot service its indebtedness, the combined company may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances, any of which could impede the implementation of the combined company’s business strategy or prevent the combined company from entering into transactions that would otherwise benefit its business. Additionally, the combined company may not be able to effect such actions, if necessary, on commercially reasonable terms, or at all.
Any of the foregoing consequences could adversely affect the combined company’s financial results.
Deterioration in our credit profile may increase our costs of borrowing money.
Our long-term indebtedness is rated by S&P Global Ratings and Moody’s Investors Service. There is no assurance that we will maintain such credit ratings, since credit ratings may be lowered or withdrawn entirely by a rating agency if, in its judgment, the circumstances warrant. If a rating agency were to downgrade our rating below investment grade, our borrowing costs and the costs of the proposed transactions contemplated by the Merger Agreement would increase.
The Merger Agreement contains provisions that may discourage other companies from trying to acquire us.
The Merger Agreement contains provisions that apply both during the pendency of the Merger transaction with Bats as well as afterward should the Merger with Bats not be consummated that may discourage a third party from submitting a business combination proposal to us that might result in greater value to our stockholders than the Merger. These Merger Agreement provisions include a general prohibition on us from soliciting, or, subject to certain exceptions, entering into discussions with any third party regarding any acquisition proposal or offers for competing transactions. In addition, we may be required to pay Bats a $110 million termination fee and reimburse Bats for its expenses incurred in connection with the Merger in an aggregate amount not to exceed $10 million in certain circumstances involving acquisition proposals for competing transactions.
The price of our common stock might increase or decline prior to the completion of the Merger, which would change the value of the Merger consideration to be received by Bats stockholders pursuant to the Merger Agreement.
The market price of ourcommon stock at the time the Merger is completed may vary significantly from the price on the date of the Merger Agreement. On September 22, 2016, the last full trading day prior to media publications regarding the proposed Merger, ourcommon stock closed at $69.41 per share as reported on NASDAQ, and on September 23, 2016, the last full day of trading prior to the announcement of the Merger Agreement, our common stock closed at $70.30 per share as reported on NASDAQ. If the market price of our common stock increases above $70.30, the market value of the Merger consideration will be greater than $32.50 per share of Bats common stock.
The issuance of shares of our common stock to Bats stockholders pursuant to the Merger Agreement will substantially reduce the percentage ownership interests of our pre-existing stockholders.
Based on the number of shares of our common stock and Bats common stock outstanding on December 9, 2016, the record date for the two companies' special meetings of stockholders held in connection with the Merger, we expect to issue or reserve for issuance approximately 31.9 million shares of our common stock pursuant to the Merger Agreement (including shares of our common stock issuable to Bats stockholders pursuant to outstanding and unexercised options to purchase Bats common stock granted under any Bats equity incentive plan, whether vested or unvested, and outstanding awards of restricted Bats common stock granted under any Bats equity incentive plan). Based on these numbers, immediately following the completion of the Merger, our pre-existing stockholders and former Bats stockholders would own approximately 72% and 28% of the outstanding shares of our common stock, respectively. The Merger will have no effect on the number of shares of our
common stock owned by our existing stockholders. The issuance of approximately 31.9 million shares of our common stock to Bats stockholders and holders of equity incentive awards will cause a significant reduction in the relative percentage interests of our current stockholders in earnings, voting, liquidation value and book and market value.
The Merger will result in changes to the board of directors and management of the combined company that may affect the strategy of the combined company as compared to our strategy as a standalone company.
If the parties complete the Merger, the composition of our board of directors and our management team will change from our current board and management team. The board of directors of the combined company will consist of 14 members, including three individuals designated by Bats who are serving as Bats directors immediately prior to the effective time of the Merger. We will also have executive officers from both us and Bats. This new composition of our board of directors and our management team may affect the business strategy and operating decisions of the combined company upon the completion of the Merger.
We will incur significant transaction and integration costs in connection with the Merger.
We and Bats expect to incur a number of costs associated with completing the Merger and integrating the operations of the two companies. The substantial majority of these costs will be non-recurring expenses resulting from the Merger and will consist of transaction costs related to the Merger, facilities and systems consolidation costs and employment‑related costs. Additional unanticipated costs may be incurred in the integration of our businesses with Bats’ businesses. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, will offset incremental transaction and Merger-related costs over time, this net benefit may not be achieved in the near term, or at all.
We may not realize all of the anticipated benefits of the transactions contemplated by the Merger Agreement or such benefits may take longer to realize than expected.
The success of the Merger will depend, in part, on our ability to realize the anticipated benefits from combining our businesses with Bats’ businesses. Our ability to realize the anticipated benefits of the Merger will depend, to a large extent, on our ability to integrate our businesses with Bats’ businesses. The combination of two independent companies is a complex, costly and time-consuming process. As a result, the combined company will be required to devote significant management attention and resources to integrating our business practices and operations with those of Bats. The integration process may disrupt the business of either or both of the companies and, if implemented ineffectively, could preclude realization of the full benefits expected by us. The failure of the combined company to meet the challenges involved in integrating successfully our operations with those of Bats or otherwise to realize the anticipated benefits of the proposed transactions could cause an interruption of, or a loss of momentum in, the activities of the combined company and could seriously harm its results of operations. In addition, the overall integration of the two companies may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of client relationships and diversion of management’s attention, and may cause the combined company’s stock price to decline. The difficulties of combining the operations of the companies include, among others:
unanticipated issues in integrating information technology, communications and other systems;
unforeseen expenses or delays associated with the integration or the Merger;
managing a significantly larger company;
the potential diversion of management focus and resources from other strategic opportunities and from operational matters, and potential disruption associated with the Merger;
maintaining employee morale and retaining key management and other key employees;
integrating two unique business cultures, which may prove to be incompatible;
the possibility of faulty assumptions underlying expectations regarding the integration process and expense synergies;
consolidating corporate and administrative infrastructures and eliminating duplicative operations;
coordinating geographically separate organizations;
changes in applicable laws and regulations;
managing costs or inefficiencies associated with integrating the operations of the combined company; and
making any necessary modifications to internal financial control standards to comply with the Sarbanes Oxley Act of 2002 and the rules and regulations promulgated thereunder.
Many of these factors will be outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy, which could materially impact our business, financial condition and results of operations. In addition, even if Bats’ and our operations are integrated successfully, we may not realize the full benefits of the proposed transactions, including the synergies, cost savings or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, or at all. As a result, we cannot assure you that the combination of Bats with uswill result in the realization of the full benefits anticipated from the transactions contemplated by the Merger Agreement.
A failure to integrate successfully or a material disruption in information technology systems could adversely affect the combined company’s business and results of operations.
The combined company will rely extensively on its information technology systems. The failure of information technology systems to operate effectively, difficulty in integrating our information technology systems with Bats’ information technology systems, inconsistencies in standards, controls, procedures and policies and problems with transitioning to upgraded or replacement systems could adversely impact the business of the combined company. In addition, a number of our TPHs are not connected to Bats’ information technology platforms and will be required to complete the process of connecting to these platforms as part of the integration.
The process of integrating information technology systems may take longer, cost more and provide fewer synergies than initially anticipated. There may also be new regulations adopted during the transition period that require systems changes, which could divert attention away from integration process and cause delays. To the extent this occurs, the benefits of the proposed transaction may be reduced, delayed or may never come to fruition. Although Bats has experience with transitioning other businesses to its information technology platform, there are certain portions of our business, such as open outcry trading and complex order trading, that have not yet been addressed by Bats’ information technology platform.
We currently expect to complete the integration of our information technology systems with those of Bats in phases over a four-year period following the Merger. However, we may not be able to successfully achieve the transition on the timetable currently contemplated, and the transition may not be successful or could encounter various difficulties and unexpected issues. Any delays or issues that we encounter in the transition could have a material adverse effect on the businesses of the combined company and could negatively affect our reputation, which in turn could have a material adverse effect on the combined company’s overall business, results of operations and financial condition, as well as impair customer confidence in the combined company’s product offerings and overall services.
If the combined company is unable to manage its growth, its business and financial results could suffer.
The combined company’s future financial results will depend in part on its ability to manage its core businesses, including any growth that the combined company may be able to achieve. Over the past several years, weand Bats have each engaged in the identification of, and competition for, growth and expansion opportunities. In order to achieve those initiatives, the combined company will need to, among other things, recruit, train, retain and effectively manage employees and expand its operations and financial control systems. If the combined company is unable to manage its businesses effectively and profitably, its business and financial results could suffer.
To be successful, the combined company must retain and motivate key employees, including those experienced with post-acquisition integration, and failure to do so could seriously harm the combined company.
The success of the combined company largely depends on the skills, experience and continued efforts of management and other key personnel. As a result, to be successful, the combined company must retain and motivate executives and other key employees. In particular, the combined company expects to benefit from the integration experience of certain Bats personnel. Certain key executives of Bats have executed offer letters with us to continue their employment following the Merger. However, these executives will continue to be at‑will employees, and the offer letters provide no assurance that these executives will remain with the combined company. Additionally, certain of our information technology employees will be
important to retain during the transition period to effectively manage our information technology platforms and to assist Bats in the process of integrating its information technology platform. If these personnel were to leave, the combined company may experience increased difficulty in the post-Merger integration process, maintenance of the current information technology platform and may not be able to adequately replace such personnel, which could have a material adverse effect on the combined company’s overall business, results of operations and financial condition.
Our and Bats’ employees may experience uncertainty about their future roles with the combined company until integration strategies for the combined company are announced or executed. These circumstances may adversely affect the combined company’s ability to retain key personnel. The combined company also must continue to motivate employees and maintain their focus on the strategies and goals of the combined company. Doing so may be difficult due to the uncertainties and challenges associated with post-Merger integration. If the combined company is unable to retain executives and other key employees, the roles and responsibilities of such executive officers and employees will need to be filled either by existing or new officers and employees, which may require the combined company to devote time and resources to identifying, hiring and integrating replacements for the departed executives and employees that could otherwise be used to integrate our and Bats’ businesses or otherwise pursue business opportunities. There can be no assurance that the combined company will be able to retain and motivate its employees in the same manner as weand Bats have historically done.
The combined company may need to hire additional personnel in order to assist with the transition of our businesses to the Bats information technology platform. It may be difficult for the combined company to retain and recruit qualified employees in sufficient numbers, and if the combined company is unable to satisfy its needs for qualified and capable employees, its business and operating results could be adversely affected.
There is substantial competition for qualified and capable personnel in the technology space, which may make it difficult for the combined company to retain and recruit qualified employees in sufficient numbers. Increased difficulty in retaining or recruiting sufficient and qualified personnel by the combined company may lead to increased employment compensation costs, which could adversely affect the combined company’s results of operations. In addition, the increased number of employees may impose a significant administrative burden on the combined company. If the combined company is unable to retain and recruit highly qualified employees by offering competitive compensation, stable work environment and leadership opportunities now and in the future, the combined company’s business and operating results could be negatively impacted.
Bats generates a significant percentage of its total revenues from, and is provided with significant liquidity in its markets and other services by, entities who are affiliates of its significant stockholders, and there is no assurance that such entities will continue to generate such revenue or provide such liquidity and other services after the completion of the Merger.
Bats earns a significant percentage of its revenue from customers who are affiliates of its significant stockholders. In addition, Bats relies on certain entities who are affiliates of significant Bats stockholders to route orders that are not routed directly by Bats and to clear certain trades routed to other markets. The significant stockholders of Bats may not receive shares of our common stock in the Merger, or even if they do, their proportionate stake in the combined company will be significantly less than their stake in Bats prior to the Merger, so there may be less incentive for the affiliates of Bats’ significant stockholders to maintain their current business relationships with the combined company following the Merger at current levels or at all. If the affiliates of Bats’ significant stockholders do not remain customers following the Merger at current levels or at all or if any of the affiliates of Bats’ significant stockholders do not continue to route and clear trades as they did prior to the Merger, the combined company may experience decreased revenues and business interruptions, which could have a material adverse effect on the business, results of operations and financial condition of the combined company.
The combined company will record goodwill and intangible assets that could become impaired and adversely affect its results of operations and financial condition.
Accounting standards in the United States require that one party to the Merger be identified as the acquirer. In accordance with these standards, the Merger will be accounted for as an acquisition of Bats by usand will follow the acquisition method of accounting for business combinations. The assets and liabilities of Bats will be consolidated with our assets and liabilities. The excess of the purchase price over the fair values of Bats’ assets and liabilities, if any, will be recorded as goodwill.
We will be required to assess goodwill and intangible assets for impairment at least annually. In the future we may take charges against earnings resulting from impairment. Any determination requiring the write off of a significant portion of our goodwill or other intangible assets could adversely affect our results of operations and financial condition.
The Merger may not be accretive and may cause dilution to our earnings per share, which may negatively affect the market price of our common stock.
We currently anticipate that the Merger will be accretive to adjusted earnings per share in the first year following the completion of the Merger. This expectation is based on preliminary estimates, which may materially change. We could also encounter additional transaction and integration‑related costs or other factors such as the failure to realize all of the benefits anticipated in the Merger. All of these factors could cause dilution to our earnings per share or decrease or delay the expected accretive effect of the MergerU.K. and cause a decrease in the price of our common stock.
The combined company will indirectly hold 100% of the issued share capital and voting rights in Bats Trading Limited (“BTL”) and its wholly owned subsidiary, Chi-X Europe Limited (“Chi-X Europe”). As a result, any person who holds, or has voting power with respect to,Netherlands, may require prior governmental approval before an investor acquires 10% or more of the outstanding shares of our common stock following the effective time of the Merger, will be subject to certain regulatory requirements under U.K. law.
A person that indirectly acquires control in a FCA entity is required to file a change in control notice with the FCA. Though both are FCA regulated entities, the statutorily prescribed change in control notification threshold for BTL is acquisition of voting power with respect to 20% or more of the issued share capital thereof. The change in control notification threshold for Chi-X Europe is acquisition of voting power with respect to 10% or more of the issued share capital thereof. Therefore, any person who holds, or has voting power with respect to, 10% or more of the outstanding shares of our common stock will be required to file a change in control notice in respect of Chi-X Europe and, if this holding is in excess of 20%, also for BTL. This obligation may discourage, delay or prevent accumulations of 10% or more of our common stock.
Item 1B. Unresolved Staff CommentsOur principal offices are located at 400 South LaSalle Street, Chicago, Illinois 60605. Through our wholly-owned subsidiary, Chicago Options ExchangeCboe Building Corporation, we own the building in which our principal offices are located and occupy approximately 300,000 square feet of this building. The building is currently classified as held for sale. See Note 9 (“Property and Equipment, Net”) of the consolidated financial statements included herein for further information. In addition to our principal offices, we have space located at 8050 Marshall Drive, Lenexa, Kansas, where we lease approximately 13,00061,900 square feet of space. The lease on this space expires in February 2027 and contains two five-year renewal options. We have an office located at 17 State Street, New York, New York, where we lease approximately 21,000 square feet of space, which includes office space, our data centerexpires in April 2024, and remote network operations. We believe the space we occupy is sufficient to meet our current and expected future needs.
Item 3. Legal Proceedings
As of December 31, 2016, the end of the period covered by this report, the Company was subject to the various legal proceedings and claims discussed below, as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business.
contains one five-year renewal option. The Company reviews its legal proceedings and claims, regulatory reviews and inspections and other legal proceedings on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. The Company does not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote. The Company's assessment of whether a loss is reasonably possible or probable is based on its assessment of the ultimate outcome of the matter following all appeals.
As of December 31, 2016, the Company does not believe that there is a reasonable possibility that any material loss exceeding the amounts already recognized for these reviews, inspections or other legal proceedings, if any, has been incurred. While the consequences of certain unresolved proceedings are not presently determinable, the outcome of any litigation is inherently uncertain and an adverse outcome from certain matters could have a material effect on our earnings in any given reporting period. However, in the opinion of management, the ultimate liability is not expected to have a material effect on our financial position, liquidity or capital resources.
Lanier Litigation
On May 23, 2014, Harold R. Lanier sued 14 securities exchanges, including CBOE,disaster recovery sites in the United States District Court for the Southern District ofare located in Chicago, Illinois, Kansas City, Missouri, and Secaucus, New York (the "Court") on behalf of himselfJersey. In addition, we have agreements with a primary data center in Secaucus, New Jersey and a putative class consistingsecondary data center in Chicago, Illinois. Our principal offices in the United Kingdom are at 11 Monument Street, London, where we lease approximately 10,300 square feet of all personsoffice space, which expires in March 2027. Our work area recovery space is available on invocation with a specialist provider. In Europe, our primary data center is in Slough, England. The secondary data center for Cboe Europe is in Park Royal, London. We operate a back-up location for our London operations in the
United States whoKingdom. We also maintain leased locations in California, Florida, Singapore, Amsterdam, and Hong Kong.In addition to the offices noted above, the Company has entered into contracts to receive market data through certain data planstwo leases that will commence in 2020 for a new principal office space and new trading floor. See Note 25 (“Leases”) of the consolidated financial statements included herein for further information. We believe that our properties are in good operating condition and adequately serve our current business operations. Generally, our properties are not earmarked for use by a particular segment. Instead, most of our properties are used by two or more segments. We also anticipate that suitable additional or alternative space will be available at any time since May 19, 2008commercially reasonable terms for future expansion to the present.extent necessary. Item 3.Legal Proceedings Cboe incorporates herein by reference the discussion set forth in Note 22 (“Income Taxes”) and Note 24 (“Commitments, Contingencies, and Guarantees”) of the consolidated financial statements included herein. Transaction Fee Pilot In December 2018, the SEC approved a transaction fee pilot in national market system (“NMS”) stocks (the “pilot”). The complaint alleged thatpilot will subject stock exchange transaction fee pricing, including maker-taker fee-and-rebate pricing models, to new temporary pricing restrictions across two test groups, and require the marketexchanges to prepare data provided under the CQ Plan and CTA Plans was inferiorto be submitted to the dataSEC. The pilot includes a test group that will prohibit rebates and linked pricing, as well as a test group that will impose a cap of $0.0010 for removing or providing displayed liquidity. Once commenced, the exchanges providedpilot will last for up to those that directly receive other data from the exchanges, which the plaintiffs alleged is a breach of their “subscriber contracts” and a violation of the exchanges’ obligations under the CQ and CTA Plans. The plaintiffs sought monetary and injunctive relief. On May 30, 2014, Mr. Lanier filed two additional suits in the same Court, alleging substantially the same claims and requesting the same types of relief against the exchanges who participate in the UTP and the OPRA data plans. CBOE was a defendant in each of these suits, while C2 was only a defendant in the suit regarding the OPRA Plan. On April 28, 2015, the Court dismissed Lanier’s complaintyears with prejudice because it was preemptedan automatic sunset at one year unless extended by the federal regulatory scheme and becauseSEC. On February 15, 2019, the claims were precluded by the terms of the applicable subscriber agreements. Mr. Lanier appealed the orders dismissing each of his three cases and, on September 2, 2015, heCompany filed his opening appellate briefsa Petition for Review in those cases. The defendants’ response briefs were filed November 24, 2015 and briefing on the appeals has concluded. The oral arguments on the appeals were heard on March 3, 2016. On September 23, 2016, the Court of Appeals ruledfor the D.C. Circuit (the “D.C. Circuit”) asserting the pilot is unlawful. The pilot was published in favorthe Federal Register on February 20, 2019 and was scheduled to become effective on April 22, 2019. On March 28, 2019, the SEC granted a partial stay of the defendantspilot, agreeing to delay implementing its fee-and-rebate and affirmeddata-publication requirements until after the Court’s dismissalD.C. Circuit decides the pending challenges. The data- Other
As a self-regulatory organization under the jurisdictiongathering requirement of the SEC, with respect to CBOE and C2, and as a designated contract market under the jurisdiction of the CFTC, with respect to CFE, we are subject to routine reviews and inspections bypilot’s pre-pilot period remains in effect. On May 21, 2019, the SEC issued its notice to announce the effective period for the pre-pilot, which was designated as July 1, 2019 through December 31, 2019. On June 3, 2019, the Company, along with other equities exchanges, filed an opening brief with the D.C. Circuit. The SEC filed its opening brief with the D.C. Circuit on July 25, 2019, the exchanges’ reply brief was filed on August 26, 2019 and final briefs were filed on September 10, 2019. Oral arguments were held on October 11, 2019. The pilot may cause the CFTC. We are also currently a partyCompany’s equities exchanges, BZX, BYX, EDGX, and EDGA, to various other legal proceedings in additionrequire additional resources to those already mentioned. Management does not believe thatcomply with or challenge the outcome of any of these other reviews, inspections or other legal proceedings willpilot and it may have a material impact on our consolidatedbusiness, financial position,condition and operating results of operations or cash flows.
if, for example, shifts in order flow away from exchanges were to occur. The Company intends to litigate the matter vigorously. Item 4. Mine Safety DisclosuresPART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Common Stock The Company'sCompany’s common stock is listed on the NASDAQ Global Select MarketCboe BZX under the trading symbol CBOE. As of January 31, 2017,2020, there were approximately 145143 holders of record of our common stock. The following table sets forth the high and low sales prices by quarter for shares of our common stock as reported on NASDAQ and cash dividends declared per quarter:
| | | | | | | | | | | | | | | Price Range | | Cash Dividends Declared per Share | | Calendar Period | High | | Low | | | 2015 | | | | | | | First Quarter | $ | 68.00 |
| | $ | 56.57 |
| | $ | 0.21 |
| | Second Quarter | 59.64 |
| | 55.04 |
| | 0.21 |
| | Third Quarter | 67.22 |
| | 57.41 |
| | 0.23 |
| | Fourth Quarter | 72.53 |
| | 63.65 |
| | 0.23 |
| | 2016 | | | | | | | First Quarter | 67.41 |
| | 58.43 |
| | 0.23 |
| | Second Quarter | 66.95 |
| | 61.22 |
| | 0.23 |
| | Third Quarter | 71.05 |
| | 64.62 |
| | 0.25 |
| | Fourth Quarter | 77.29 |
| | 61.58 |
| | 0.25 |
| | 2017 | | | | | | | Through February 16, 2017 (1) | 80.47 |
| | 72.54 |
| | 0.25 |
|
(1) On February 16, 2017, the Company's board of directors declared a quarterly cash dividend of $0.25 per share. The dividend is payable on March 24, 2017 to stockholders of record at the close of business on March 3, 2017.
Each share of common stock, including restricted stock awards and restricted stock units, is entitled to receive dividend and dividend equivalents, respectively, if, as and when declared by the board of directors of the Company. The Company’s expectation is to continue to pay dividends. The decision to pay a dividend, however, remains within the discretion of the Company's board of directors and may be affected by various factors, including our earnings, financial condition, capital requirements, level of indebtedness and other considerations our board of directors deems relevant. Future debt obligations and statutory provisions, among other things, may limit, or in some cases prohibit, our ability to pay dividends. As a holding company, the Company'sCompany’s ability to declare and continue to pay dividends in the future with respect to its common stock will also be dependent upon the ability of its subsidiaries to pay dividends to it under applicable corporate law. Recent Sales of Unregistered Securities Purchases of Equity Securities by the Issuer and Affiliated Purchasers Share Repurchase Program In 2011, the board of directors approved an initial authorization for the Company to repurchase shares of its outstanding common stock of $100 million and approved additional authorizations of $100 million in each of 2012, 2013, 2014, 2015 and 2016, $150 million in February 20162018, $100 million in August 2018, and $250 million in October 2019 for a total authorization of $600 million.$1.1 billion. The Company expects to fund repurchases primarily through the use of existing cash balances. The program permits the Company to purchase shares through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. It does not obligate the Company to make any repurchases at any specific time or situation.
Under the program, for the year ended December 31, 2016,2019, the Company purchased 947,786repurchased 1,420,654 shares of common stock at an average cost per share of $63.83$110.42, totaling $60.5$156.9 million. Since inception of the program through December 31, 2016,2019, the Company has purchased 10,947,401repurchased 13,716,009 shares of common stock at an average cost per share of $45.95$58.38, totaling $503.0$800.8 million. As of December 31, 2016,2019, the Company had $97$299.2 million of availability remaining under its existing share repurchase authorizations. As a result | | | | | | | | | | | | | | | | | | Total Number of | | Approximate Dollar | | | | | | | | Shares Purchased | | Value of Shares that May | | | | | | | | as Part of Publicly | | Yet Be Purchased Under | | | Total Number of | | Average Price | | Announced Plans | | the Plans or Programs | Period | | Shares Purchased | | Paid per Share | | or Programs | | (in millions) | October 1 to October 31, 2019 | | 480,442 | | $ | 115.62 | | 480,442 | | $ | 313.3 | November 1 to November 30, 2019 | | — | | | — | | — | | | 313.3 | December 1 to December 31, 2019 | | 120,000 | | | 117.26 | | 120,000 | | | 299.2 | Total | | 600,442 | | $ | 115.76 | | 600,442 | | | |
Purchase of common stock from employees During the fiscal quarter ended December 31, 2019, we purchased shares from employees in connection with the settlement of employee tax withholding obligations arising from the vesting of restricted stock units, restricted stock awards, and stock options. The table below represents repurchases made by or on behalf of us or any “affiliated purchaser” of our pending transaction with Bats, we were not active in our share repurchase programcommon stock during the third and fourth quarters of 2016. fiscal quarter ended December 31, 2019: | | | | | | | | Total number of shares | | Average price paid | Period | | purchased | | per share | October 1 to October 31, 2019 | | 321 | | $ | 115.58 | November 1 to November 30, 2019 | | 2,454 | | | 118.09 | December 1 to December 31, 2019 | | 13,651 | | | 117.20 | Total | | 16,426 | | | |
Stockholder Return Performance Graph The following graph compares the cumulative total return provided to stockholders on our common stock since our initial public offering against the return of the S&P Midcap 400500 Index and a customized peer group that includes CME Group Inc., Intercontinental Exchange Inc., NASDAQ,and Nasdaq, Inc. and CBOE Holdings. An investment of $100, with reinvestment of all dividends, is assumed to have been made in our common stock, the index and the peer groups on December 31, 2011,2014, and its performance is tracked on aan annual basis through December 31, 2016.
2019.Comparison of Cumulative Total Return of the Company, Peer Groups, Industry IndexesIndices and/or Broad Markets
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among CBOE Holdings,Cboe Global Markets, Inc., the S&P Midcap 400500 Index and a Peer Group 
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/14 | | 12/15 | | 12/16 | | 12/17 | | 12/18 | | 12/19 | Cboe Global Markets, Inc. | | 100.00 | | 103.76 | | 119.87 | | 204.33 | | 162.24 | | 201.44 | S&P 500 | | 100.00 | | 101.38 | | 113.51 | | 138.29 | | 132.23 | | 173.86 | Peer Group | | 100.00 | | 116.46 | | 140.37 | | 175.70 | | 205.28 | | 248.81 |
 47 * $100 invested on 12/31/11 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2017 Standard & Poor's, a division of S&P Global. All rights reserved.
| | | | | | | | | | | | | | | | 12/2011 | 12/2012 | 12/2013 | 12/2014 | 12/2015 | 12/2016 | | CBOE Holdings, Inc. | 100 |
| 119.10 |
| 215.30 |
| 266.60 |
| 276.63 |
| 319.56 |
| | S&P Midcap 400 | 100 |
| 117.88 |
| 157.37 |
| 172.74 |
| 168.98 |
| 204.03 |
| | Peer Group | 100 |
| 108.45 |
| 184.46 |
| 205.09 |
| 231.94 |
| 282.72 |
|
Item 6. Selected Financial DataThe following table shows selected financial and operating data of the Company that should be read togetherin conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the Consolidated Financial Statements and correspondingaccompanying notes included in Items 7 and 8, respectively of this Form 10-K: | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | | (in millions, except per share data) | Consolidated Statements of Operations Data: | | | | | | | | | | | | | | | | Revenues: | | | | | | | | | | | | | | | | Transaction fees | | $ | 1,716.2 | | $ | 1,986.9 | | $ | 1,564.9 | | $ | 509.3 | | $ | 485.3 | Access and capacity fees | | | 221.9 | | | 211.0 | | | 181.6 | | | 98.7 | | | 95.5 | Market data fees | | | 213.5 | | | 204.0 | | | 164.5 | | | 33.2 | | | 30.0 | Regulatory fees | | | 311.7 | | | 333.9 | | | 291.5 | | | 48.3 | | | 33.5 | Other revenue | | | 32.8 | | | 33.0 | | | 26.6 | | | 13.6 | | | 19.5 | Total revenues | | | 2,496.1 | | | 2,768.8 | | | 2,229.1 | | | 703.1 | | | 663.8 | Cost of revenues: | | | | | | | | | | | | | | | | Liquidity payments | | | 964.7 | | | 1,113.0 | | | 849.7 | | | 35.8 | | | 29.2 | Routing and clearing | | | 35.8 | | | 39.1 | | | 37.6 | | | 11.1 | | | 2.3 | Section 31 fees (1) | | | 271.4 | | | 302.4 | | | 260.0 | | | 11.8 | | | — | Royalty fees | | | 86.8 | | | 97.4 | | | 86.2 | | | 78.0 | | | 70.6 | Other | | | 0.5 | | | — | | | — | | | — | | | — | Total cost of revenues | | | 1,359.2 | | | 1,551.9 | | | 1,233.5 | | | 136.7 | | | 102.1 | Revenues less cost of revenues | | | 1,136.9 | | | 1,216.9 | | | 995.6 | | | 566.4 | | | 561.7 | Operating expenses: | | | | | | | | | | | | | | | | Compensation and benefits | | | 199.0 | | | 228.8 | | | 201.4 | | | 113.2 | | | 105.9 | Depreciation and amortization | | | 176.6 | | | 204.0 | | | 192.2 | | | 44.4 | | | 46.3 | Technology support services | | | 46.2 | | | 47.9 | | | 42.1 | | | 22.5 | | | 20.7 | Professional fees and outside services | | | 68.3 | | | 68.3 | | | 66.0 | | | 53.1 | | | 50.1 | Travel and promotional expenses | | | 11.9 | | | 13.0 | | | 17.2 | | | 11.0 | | | 9.0 | Facilities costs | | | 11.0 | | | 11.5 | | | 10.3 | | | 5.7 | | | 5.0 | Acquisition-related costs | | | 48.5 | | | 30.0 | | | 84.4 | | | 13.6 | | | — | Other expenses | | | 38.2 | | | 14.0 | | | 10.1 | | | 4.7 | | | 4.8 | Total operating expenses | | | 599.7 | | | 617.5 | | | 623.7 | | | 268.2 | | | 241.8 | Operating income | | | 537.2 | | | 599.4 | | | 371.9 | | | 298.2 | | | 319.9 | Non-operating (expenses) income: | | | | | | | | | | | | | | | | Interest expense, net | | | (35.9) | | | (38.2) | | | (41.3) | | | (5.7) | | | — | Other income, net | | | 0.1 | | | 10.0 | | | 3.8 | | | 14.1 | | | 4.1 | Income before income tax provision | | | 501.4 | | | 571.2 | | | 334.4 | | | 306.6 | | | 324.0 | Income tax provision | | | 130.6 | | | 146.0 | | | (66.2) | | | 120.9 | | | 119.0 | Net income | | $ | 370.8 | | $ | 425.2 | | $ | 400.6 | | $ | 185.7 | | $ | 205.0 | Net loss attributable to noncontrolling interest | | | 4.1 | | | 1.3 | | | 1.1 | | | 1.1 | | | — | Net income excluding noncontrolling interest | | | 374.9 | | | 426.5 | | | 401.7 | | | 186.8 | | | 205.0 | Change in redemption value of noncontrolling interest | | | (0.5) | | | (1.3) | | | (1.1) | | | (1.1) | | | — | Net income allocated to participating securities | | | (1.7) | | | (3.1) | | | (3.9) | | | (0.8) | | | (0.9) | Net income allocated to common stockholders | | $ | 372.7 | | $ | 422.1 | | $ | 396.7 | | $ | 184.9 | | $ | 204.1 | | | | | | | | | | | | | | | | | Basic earnings per share | | $ | 3.35 | | $ | 3.78 | | $ | 3.70 | | $ | 2.27 | | $ | 2.46 | Diluted earnings per share | | $ | 3.34 | | $ | 3.76 | | $ | 3.69 | | $ | 2.27 | | $ | 2.46 | | | | | | | | | | | | | | | | | Basic weighted average shares outstanding | | | 111.4 | | | 111.8 | | | 107.2 | | | 81.4 | | | 83.1 | Diluted weighted average shares outstanding | | | 111.8 | | | 112.2 | | | 107.5 | | | 81.4 | | | 83.1 | Distributions per share | | $ | 1.34 | | $ | 1.16 | | $ | 1.04 | | $ | 0.96 | | $ | 0.88 |
| | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | | | (In thousands, except per share amounts) | | Income Statement Data: | | | | | | | | | | | Total operating revenues | $ | 656,946 |
| | $ | 634,545 |
| | $ | 617,225 |
| | $ | 572,050 |
| | $ | 512,338 |
| | Total operating expenses | 358,746 |
| | 314,617 |
| | 303,424 |
| | 286,236 |
| | 268,241 |
| | Operating income | 298,200 |
| | 319,928 |
| | 313,801 |
| | 285,814 |
| | 244,097 |
| | Total other income/(expense) | 8,404 |
| | 4,096 |
| | (4,104 | ) | | (2,158 | ) | | (1,546 | ) | | Income before income taxes | 306,604 |
| | 324,024 |
| | 309,697 |
| | 283,656 |
| | 242,551 |
| | Income tax provision | 120,884 |
| | 119,001 |
| | 119,983 |
| | 107,657 |
| | 85,156 |
| | Net income | $ | 185,720 |
| | $ | 205,023 |
| | $ | 189,714 |
| | $ | 175,999 |
| | $ | 157,395 |
| | Net income allocated to common stockholders | $ | 184,945 |
| | $ | 204,125 |
| | $ | 188,392 |
| | $ | 173,863 |
| | $ | 155,254 |
| | Net income per share allocated to common stockholders | | | | | | | | | | | Basic | $ | 2.27 |
| | $ | 2.46 |
| | $ | 2.21 |
| | $ | 1.99 |
| | $ | 1.78 |
| | Diluted | 2.27 |
| | 2.46 |
| | 2.21 |
| | 1.99 |
| | 1.78 |
| | Cash dividends declared per share (1) (2) | 0.96 |
| | 0.88 |
| | 0.78 |
| | 1.16 |
| | 1.29 |
| | Balance Sheet Data: | | | | | | | | | | | Total assets | $ | 476,615 |
| | $ | 384,788 |
| | $ | 383,901 |
| | $ | 441,589 |
| | $ | 338,858 |
| | Total liabilities | 146,069 |
| | 125,143 |
| | 133,834 |
| | 157,072 |
| | 99,736 |
| | Redeemable noncontroling interests | 12,600 |
| | — |
| | — |
| | — |
| | — |
| | Total stockholders' equity | 317,946 |
| | 259,645 |
| | 250,067 |
| | 284,517 |
| | 239,122 |
| | Average daily volume by product (3) | | | | | | | | | | | Equities | 1,446 |
| | 1,559 |
| | 1,939 |
| | 1,721 |
| | 1,977 |
| | Indexes | 1,719 |
| | 1,620 |
| | 1,613 |
| | 1,479 |
| | 1,217 |
| | Exchange-traded products | 1,297 |
| | 1,274 |
| | 1,507 |
| | 1,353 |
| | 1,247 |
| | Total options average daily volume | 4,462 |
| | 4,453 |
| | 5,059 |
|
| 4,553 |
|
| 4,441 |
| | Futures | 239 |
| | 205 |
| | 201 |
| | 159 |
| | 96 |
| | Total average daily volume | 4,701 |
| | 4,658 |
| | 5,260 |
|
| 4,712 |
|
| 4,537 |
|
| | | (1) | On December 11, 2012,As national securities exchanges, Cboe Options, C2, BZX, BYX, EDGX, and EDGA are assessed fees pursuant to Section 31 of the Company's board of directors declared a special cash dividend of $0.75 per share. This was in additionExchange Act. Section 31 fees are assessed on the notional value traded and are designed to recover the costs to the quarterly cash dividends which aggregated $0.54 per share for the year ended Decembergovernment of supervision and regulation of securities markets and securities professionals. Section 31 2012. |
| | (2) | On December 10, 2013, the Company's board of directors declared a special cash dividend of $0.50 per share. This was in additionfees are paid directly to the quarterly cash dividends which aggregated $0.66 per share for the year ended December 31, 2013. |
| | (3) | Average daily volume equals the total contracts traded during the period divided by the numberSEC, and our national securities exchanges then pass these costs along to our members as regulatory transaction fees, recognizing these amounts as incurred in cost of trading days in the period.revenues and revenues, respectively. |
| | | | | | | | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | | | (in millions) | Balance Sheet Data: | | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 229.3 | | $ | 275.1 | | $ | 143.5 | | $ | 97.3 | | $ | 102.3 | Financial investments | | | 71.0 | | | 35.7 | | | 47.3 | | | — | | | — | Accounts receivables, net | | | 234.7 | | | 287.3 | | | 217.3 | | | 76.7 | | | 68.4 | Goodwill and intangible assets, net | | | 4,272.0 | | | 4,411.6 | | | 4,610.0 | | | 35.2 | | | 10.1 | Total assets | | $ | 5,113.9 | | $ | 5,321.0 | | $ | 5,265.7 | | $ | 476.7 | | $ | 384.8 | Liabilities and stockholders' equity: | | | | | | | | | | | | | | | | Short-term and long-term debt | | $ | 867.6 | | $ | 1,215.4 | | $ | 1,237.9 | | $ | — | | $ | — | Total liabilities | | | 1,758.3 | | | 2,070.6 | | | 2,145.7 | | | 146.2 | | | 125.2 | Total redeemable noncontrolling interest | | | — | | | 9.4 | | | 9.4 | | | 12.6 | | | — | Total stockholders' equity | | | 3,355.6 | | | 3,241.0 | | | 3,110.6 | | | 317.9 | | | 259.6 | Total liabilities, redeemable noncontrolling interest, and stockholders' equity | | $ | 5,113.9 | | $ | 5,321.0 | | $ | 5,265.7 | | $ | 476.7 | | $ | 384.8 |
Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations General
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations ("(“MD&A"&A”) should be read in conjunction with the consolidated financial statements of the Company and the notes thereto included in Item 8 of this Annual Report on Form 10-K. The following discussion contains forward-looking statements. Actual results could differ materially from the results discussed in the forward-looking statements. See "Risk Factors"“Risk Factors” and "Forward-Looking Statements"“Forward-Looking Statements” above. A detailed comparison of the Company’s 2018 operating results to its 2017 operating results can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in the Company’s 2018 Annual Report on Form 10-K filed February 22, 2019 at www.sec.gov. Overview CBOE Holdings,Cboe Global Markets, Inc. is one of the world’s largest exchange holding companycompanies, offering cutting-edge trading and investment solutions to investors around the world. The Company is committed to defining markets to benefit its participants and drive the global marketplace forward through product innovation, leading edge technology and seamless trading solutions. Cboe offers trading across a diverse range of products in multiple asset classes and geographies, including options, futures, U.S. and European equities, exchange-traded products (“ETPs”), global foreign exchange (“FX”) and multi-asset volatility products based on the VIX Index, recognized as the world’s premier gauge of U.S. equity market volatility. Cboe’s subsidiaries include the largest options exchange and the third largest stock exchange operator in the U.S. In addition, the Company operates one of the largest equities stock exchanges by value traded in Europe and is a leading market globally for ETP listings and trading. The Company is headquartered in Chicago Boardwith offices in Kansas City, New York, London, San Francisco, Amsterdam, Singapore, Hong Kong, and Ecuador. Business Segments The Company reports five business segments: Options, Exchange, Incorporated, CBOEU.S. Equities, Futures, Exchange, LLC, C2 Options Exchange, IncorporatedEuropean Equities, and Global FX. Segment performance is primarily based on operating income (loss). The Company has aggregated all of its corporate costs and eliminations, as well as other subsidiaries, includingbusiness ventures, within Corporate Items and Eliminations; however, operating expenses that relate to activities of a specific segment have been allocated to that segment. Our management allocates resources, assesses performance and manages our majority ownership in CBOE Vest Financial Group, Inc. The Company's principal business is operating markets that offer for tradingaccording to these segments:Options. Our options segment includes listed options on various market indexes (index options)indices (“index options”), mostly on an exclusive basis, and futures contracts, as well as on non-exclusive "multiply-listed"“multi-listed” options, such as options on the stocks of individual corporations (equity options)(“equity options”) and options on other exchange-traded products (ETP options),ETPs, such as exchange-traded funds (ETF options)(“ETFs”) and exchange-traded notes (ETN options)(“ETNs”). The Company operates CBOE, CFEThese options trade on Cboe Options, C2, BZX, and C2 as stand-alone exchanges, but reports the results of its operations in a single reporting segment. CBOEEDGX. Cboe Options is our primary options market and offers trading in listed options through a single system, thatknown as our Hybrid trading model, which integrates electronic trading and traditional open outcry trading on our trading floor in Chicago. This integration of electronic tradingC2, BZX, and traditional open outcry trading into a single exchange is known as our Hybrid trading model. CFE,EDGX are our all-electronic options exchanges, and typically operate with different market models and fee structures than Cboe Options. The Options segment also includes applicable market data revenue generated from the U.S. tape plan, the sale of proprietary market data, index licensing, and access and capacity services.U.S. Equities. The U.S. Equities segment includes listed equities and ETP transaction services that occur on BZX, BYX, EDGX, and EDGA. This segment also includes ETP listings on BZX, the Cboe Global Markets, Inc. common stock listing, applicable market data revenue generated from the U.S. tape plans, the sale of proprietary market data, routing services, access and capacity services and advertising activity from ETF.com. Futures. Our Futures segment includes the business of our futures exchange, offersCFE, which includes offerings for trading ofVIX futures on the VIX Index and other products. C2 is our all-electronic exchange that also offers trading of listed options, and may operate with a different market model and fee structure than CBOE. All of our exchanges operate on our proprietary technology platform known as CBOE Command. Business Highlights
On September 25, 2016, CBOE Holdings and Bats entered into the Merger Agreement. The completion of the Merger is subject to certain conditions, including, among others, receipt of certain regulatory approvals. The Merger is expected to close on February 28, 2017. For more information, see "Business—Pending Merger" above.
In connection with entering into the Merger Agreement, we entered into a commitment letter relating to a $1.65 billion senior unsecured 364-day bridge loan facility. In lieu of entering into the bridge loan facility, CBOE Holdings entered into a term loan agreement and completed a notes offering, securing $1.65 billion to finance the cash portion of its pending acquisition of Batsfutures products, as well as revenue generated from the repaymentsale of Bats' existing indebtedness.
On December 15, 2016, we entered intoproprietary market data and from access and capacity services.European Equities. The European Equities segment includes the pan-European listed equities transaction services, ETPs, exchange traded commodities, and international depository receipts that occur on MTFs operated by Cboe Europe Equities. It also includes the listings business where ETPs can be listed on RMs. Cboe Europe Equities operates lit and dark books, a $1.0 billion senior unsecured delayed draw term loan facilityperiodic auctions book, and a Large-in-Scale (“LIS”) trading negotiation facility. Cboe NL, launched in October 2019, operates similar business functionality that is offered by Cboe Europe, other than LIS, and provides for trading only in European Economic Area symbols. Cboe Europe Equities also includes revenue generated from the sale of proprietary market data and from access and capacity services. Global FX. Our Global FX segment includes institutional FX trading services that occur on January 12, 2017, we issued $650 million aggregate principal amountthe Cboe FX platform, as well as non-deliverable forward FX transactions offered for execution on Cboe SEF, as well as revenue generated from the sale of proprietary market data and from access and capacity services. General Factors Affecting Results of Operations In broad terms, our 3.650% Senior Notes due 2027. On December 15, 2016, we entered intobusiness performance is impacted by a $150 million revolving credit facilitynumber of drivers, including macroeconomic events affecting the risk and return of financial assets, investor sentiment, the regulatory environment for capital markets, geopolitical events, central bank policies and changing technology, particularly in the financial services industry. Our future revenues and net income will continue to be used for working capital and other general corporate purposes.
Transaction fees accounted for 70.5%, 71.9% and 70.9% of total operating revenues for the years ended December 31, 2016, 2015 and 2014, respectively.
Index options and futures contracts accounted for 88.2%, 82.9% and 81.8% of our transaction fees for the years ended December 31, 2016, 2015 and 2014, respectively.
Our share of total U.S. exchange-traded options contracts for the year ended December 31, 2016 was 27.7%, up from 27.1% in 2015 and down from 29.9% in 2014.
Operating expenses were 54.7%, 49.6% and 49.2%, of total operating revenues for the years ended December 31, 2016, 2015 and 2014, respectively.
Compensation and benefits, representing our largest expense category, were 17.2%, 16.7% and 19.7%, of total operating revenues for the years ended December 31, 2016, 2015 and 2014, respectively.
Professional fees and outside services for the year ended December 31, 2016 includes $13.7 million of acquisition-related costs, consisting mainly of legal and professional fees.
Business Strategy
We believe that the derivatives industry, especially the listed options and futures industry, has significant growth potential, including through new participants and products. We expect to further expand our business and increase our revenues and profitability by pursuing the following growth strategies:
We intend to continue our efforts to expand the use of our products domestically and internationally through extended trading hours in our exclusive index options and futures products and investor education.
We intend to continue developing innovative proprietary products that meet the needs of the derivatives industry and complement our core products, both through strategic relationships and internal development.
We have designed our fee schedule to provide economic benefits to market participants that concentrate their overall trading activity at our exchanges.
We intend to continue to enhance our trading platform by continuing to invest in enhancing and augmenting the functionality and capacity of our trading systems and by developing the next generation of trading technology, CBOE Vector. However, the launch of CBOE Vector on CFE is suspended due to the pending Merger.
We evaluate strategic opportunities that leverage and complement our core business and that we believe will enhance stockholder value.
In addition, we believe the recently announced Merger squarely fits into our growth strategy outlined above to develop unique products, expand our customer base and leverage alliances that complement our core business. Specifically, we believe that the Merger has the potential to significantly expand and diversify our product line across new asset classes, such as U.S. and European equities, ETF trading and global FX products, broaden our reach with Bats’ market-leading European presence and increase our non-transactional revenue stream, while enabling us to streamline the combined company’s technology and enhance our strong growth and margin profile.
Components of Operating Revenues
Transaction Fees
The primary and largest source of operating revenues is transaction fees. Transaction fees are a function of many variables with the main three being: (1) exchange fee rates; (2) trading volume mix (products traded); and (3) transaction mix between origin type. Because transaction fees are assessed on a per contract basis, transaction fee revenue is correlated to the volume of contracts traded on the Company's exchanges. While exchange fee rates are established by the Company, trading volume and transaction mix are influenced by a number of factors, including price competition, price volatility in the underlying securities and nationaldomestic and international economic trends, including: | ● | trading volumes on our proprietary products such as VIX options and futures and SPX options; |
| ● | trading volumes in listed equity securities and ETPs in both the U.S. and Europe, volumes in listed equity options, and volumes in institutional FX trading; |
| ● | the demand for the U.S. tape plan market data distributed by the Securities Information Processors (SIPs), which determines the pool size of the industry market data revenue we receive based on our market share; |
| ● | consolidation and expansion of our customers and competitors in the industry; |
| ● | the demand for information about, or access to, our markets, which is dependent on the products we trade, our importance as a liquidity center and the quality and pricing of our data and access and capacity services; |
| ● | continuing pressure in transaction fee pricing due to intense competition in the United States and Europe; |
| ● | significant fluctuations in foreign currency translation rates or weakened value of currencies resulting from Brexit; and |
| ● | regulatory changes relating to market structure and increased capital requirements, and those which affect certain types of instruments, transactions, pricing structures, capital market participants or reporting or compliance requirements, including any changes resulting from Brexit. |
A number of significant structural, political and political conditions. Revenue is recordedmonetary issues continue to confront the global economy, and instability could return at any time, resulting in an increased level of market volatility, increased trading volumes and greater uncertainty. In contrast, many of the largest customers of our transactional businesses continue to adapt their business models as transactions occur on a trade-date basis. The main products that trade on our exchanges are equity, index and ETP options and futures contracts.
Equity options reflect trading in options contracts onthey address the stocksimplementation of individual companies.
Index options reflect trading in index options contracts on market indexes.
ETP options include ETF options that are options on basketsregulatory changes initiated following the global financial crisis.Components of stocks designed to generally track an index, but which trade like individual stocks, and ETN options that are options on senior, unsecured, unsubordinated debt securities issued by an underwriting bank. Futures contracts are standardized, transferable, exchange-traded contracts that require delivery of a commodity, bond, currency, stock index or other benchmark interests at a specified price and on a specified future date, which are settled in cash.
AccessRevenuesTransaction Fees AccessTransaction fees represent fees assessedcharged by the Company for the performance obligation of executing a trade on its markets. These fees can be variable based on trade volume tiered discounts, however as all tiered discounts are calculated monthly, the actual discount is recorded on a monthly basis. Transaction fees, as well as any tiered volume discounts, are calculated and billed monthly in accordance with the Company’s published fee schedules. Transaction fees are recognized across all segments. The Company also pays liquidity payments to Trading Permitcustomers based on its published fee schedules. The Company uses these payments to improve the liquidity on its markets and Privilege Holderstherefore recognizes those payments as a cost of revenue. Access and Capacity Fees Access and capacity fees represent fees assessed for the opportunity to trade, including fees for trading-related functionality on CBOE, C2 and CFE. The CBOE program contains a tier-based market-maker appointment system with different trading permits based on trading function and, in the case of market-makers, the assessment of a surcharge for certain CBOE proprietary products and sliding scales foracross all Market-Maker and Floor Broker Trading Permits held by affiliated Trading Permit Holders and TPH Organizations that are used in any options classes other than certain proprietary indexes. The number of trading permits made available is limited.
Exchange Services and Other Fees
To facilitate trading, the Company offers technology services,segments, terminal and other equipment rentals,rights, maintenance services, trading floor space and telecommunications services. Trading floorThese fees are billed monthly in accordance with the Company’s published fee schedules and equipment rentals are generallyrecognized on a month-to-month basis.monthly basis when the performance obligation is met. Facilities, systems services and other fees are generally monthly fee-based, although certain services are influenced by trading volume or other defined metrics, while others are based solely on demand. The revenues generated by Livevol for market data services andAll fees associated with the trading analytics platformsfloor are also includedrecognized in this line item.
the Options segment. There is no remaining performance obligation after revenue is recognized.Market Data Fees Market data fees represent income derivedthe fees from the saleU.S. tape plans and fees from customers for proprietary market data. Fees from the U.S. tape plans are collected monthly based on published fee schedules and distributed quarterly to the U.S. Exchanges based on a known formula using trading and/or quoting activity. A contract for proprietary market data is entered into and charged on a monthly basis in accordance with the Company’s published fee schedules as the service is provided. Both types of ourmarket data are satisfied over time, and revenue is recognized on a monthly basis as the customer receives and consumes the benefit as the Company provides the data. U.S. tape plan market data is recognized in the U.S. Equities and Options segments. Proprietary market data fees are recognized across all segments. Regulatory Fees Regulatory fees primarily represent fees collected by the Company to cover the Section 31 fees charged to the Exchanges under the authority of the SEC (Cboe Options, C2, BZX, BYX, EDGX, and EDGA) and are charged by the SEC. Consistent with industry practice, the fees charged to customers are based on the fee set by the SEC per notional value of the transaction information throughexecuted on the Company’s markets. These fees are calculated and billed monthly and are recognized in the U.S. Equities and Options segments. As the Exchanges are responsible for the ultimate payment to the SEC, the Exchanges are considered the principals in these transactions. Regulatory fees also include the options regulatory fee (“ORF”) charged to customers which supports the Company’s regulatory oversight function in the Options Price Reporting Authority ("OPRA") and primarily through our subsidiary, Market Data Express, LLC ("MDX"). Through MDX, we sell historical options data,segment, as well as real-time dataother miscellaneous regulatory fees and fines, and cannot be used for certainnon-regulatory purposes. Other Revenue Other revenue primarily includes among other items, revenue from various licensing agreements, all fees related to the trade reporting facility operated in the European Equities segment, and revenue associated with advertisements through the Company’s website. Components of Cost of Revenues Liquidity Payments Liquidity payments are directly correlated to the volume of securities traded on our markets. As stated above, we record the liquidity rebates paid to market participants providing liquidity, in the case of C2, BZX, EDGX, and Cboe Europe Limited, as cost of revenue. BYX and EDGA offer a pricing model pursuant to which we rebate liquidity takers for executing against an order resting on our book, which is also recorded as a cost of revenue. Routing and Clearing Various rules require that U.S. options and equities trade executions occur at the National Best Bid/Offer (“NBBO”) displayed by any exchange. Linkage order routing consists of the cost incurred to provide a service whereby Cboe equities and options exchanges deliver orders to other execution venues when there is a potential for obtaining a better execution price or when instructed to directly route an order to another venue by the order provider. The service affords exchange order flow providers an opportunity to obtain the best available execution price and may also result in cost benefits to those clients. Such an offering improves our competitive position and provides an opportunity to attract orders which would otherwise bypass our exchanges. We utilize third-party brokers or our broker-dealer, Cboe Trading, to facilitate such delivery. Section 31 Fees Exchanges under the authority of the SEC (Cboe Options, C2, BZX, BYX, EDGX, and EDGA) are assessed fees pursuant to the Exchange Act designed to recover the costs to the U.S. government of supervision and regulation of securities markets and securities professionals. We treat these fees as a pass-through charge to customers executing eligible listed equities and listed equity options trades. Accordingly, we recognize the amount that we are charged under Section 31 as a cost of revenues and the corresponding amount that we charge our customers as regulatory transaction fees revenue. Since the regulatory transaction fees recorded in revenues are equal to the Section 31 fees recorded in cost of revenues, there is no impact on our operating income. CFE, Cboe Europe Limited and Cboe FX are not U.S. national securities exchanges, and accordingly are not charged Section 31 fees. Royalty Fees Royalty fees primarily consist of license fees paid by us for the use of underlying indices in our proprietary products and indexes. It also provides market data through CBOE Streaming Markets, a high-availability, low latency streaming data feed. OPRA is a limited liability company consisting of representativesusually based on contracts traded. The Company has licenses with the owners of the member exchanges, including CBOES&P 500 Index, S&P 100 Index and C2, authorized bycertain other S&P indices, FTSE Russell indices, the SECDJIA, MSCI, and certain other index products. This category also includes fees related to provide consolidated options information. OPRA gathers market data from various options exchanges, including CBOE and C2, and, in turn, disseminates this data to third parties who pay fees to OPRA to access the data. Revenue generated by OPRA from the dissemination of market data is shared among OPRA members according to the number of total cleared options transactions by each of the member exchanges as calculated each quarter. OPRA is not consolidated with the Company. Regulatory Fees
Regulatory fees are charged to Trading Permit Holders in support of our regulatory responsibilities as self-regulatory organizations under the Exchange Act. Regulatory fees include an Options Regulatory Fee under which fees are based on industry-wide customer volume of Trading Permit Holders and designated examining authority fees for certain Trading Permit Holders. This source of revenue could decline in the future if the number of customer contracts executed by Trading Permit Holders declines and rates are not increased or are decreased or if our costs to perform our regulatory responsibilities stabilize or decrease.
The SEC requires that the revenues derived from certain of the fees from our regulatory functions, some of which are included in this revenue category, and regulatory fines, must be used for regulatory purposes. Expenses related to our regulatory functions are included in our operating expenses, mainly in compensationS&P indices and benefits in 2014 and professional fees and outside services starting in 2015 as a result of the transition of certain regulatory systems to FINRA.
Other Revenue
The following sub-categories are the sources of revenue within this category:
Revenue generated through various licensing agreements;
Revenue derived from fines assessed for rule violations;
Revenue associated with advertisements through our corporate web site, www.cboe.com;
Revenue generated from courses and seminars offered through CBOE's Options Institute;
Revenue generated through regulatory service agreements with other options exchanges (as of 2015, we no longer generated revenue from these regulatory service agreements);
Revenue generated through our order routing cancel fee (as of 2015, we waived order routing cancel fees) and position transfer fee;
Rental of commercial space in the lobby of our building; and
Other sources of revenue.
PULse system terminal fees.Components of Operating Expenses Most of our expenses do not vary directly with changes in our trading volume except royalty fees and order routing.
Compensation and Benefits Compensation and benefits are our most significant expenses and include salaries and benefits, stock-based compensation, incentive compensation, severance and employer taxes. Salaries and benefits represent our largest expense category and tend to be driven by both our staffing requirements, financial performance, and the general dynamics of the employment market. Stock-based compensation is a non-cash expense related to equity awards. Stock-based compensation can vary depending on the quantity and fair value of the award on the date of grant and the related service period. Depreciation and Amortization Depreciation and amortization expense results from the depreciation of long-lived assets purchased and the amortization of purchased and internally developed software. software, and the amortization of intangible assets.Technology Support Services Technology support services expense consists primarily of costs related to the maintenance of computer equipment supporting our system architecture, circuits supporting our wide area network, support for production software, fees paid to information vendors for displaying data and off-site system hosting fees. Professional Fees and Outside Services Professional fees and outside services consist primarily of consulting services, which include: the supplementation ofsupplemental staff for activities primarily related to systems development and maintenance, legal, regulatory and audit, and tax advisory services and acquisition-related costs, consisting mainly of legal and professional fees. Royalty Fees
Royalty fees primarily consist of license fees paid for the use of underlying indexes in our proprietary products usually based on contracts traded. The Company has licenses with the owners of the S&P 500 Index, S&P 100 Index and certain other S&P indexes, the DJIA, MSCI, FTSE Russell indexes and certain other index products. This category also includes fees related to the dissemination of market data related to S&P indexes and in prior years, certain fees paid to market participants for order flow that they directed or caused to be directed to our exchanges.
Order Routing
Order routing consists of market linkage expenses incurred to send certain orders to other exchanges. If a competing exchange quotes a better price, we route the customer's order to that exchange and pay certain of the associated costs. Regardless of whether the transaction is traded at our options exchanges, the order flow potential enhances our overall market position and participation and provides cost savings to customers.
services.Travel and Promotional Expenses Travel and promotional expenses primarily consist of advertising, costs for special events, sponsorship of industry conferences, options education seminars and travel relatedtravel-related expenses. Facilities costs primarily consist of expenses related to owned and leased properties including rent, maintenance, utilities, real estate taxes and telecommunications costs. Acquisition-Related Costs Acquisition-related costs relate to acquisitions and other strategic opportunities, including the Merger. The acquisition-related costs include fees for investment banking advisors, lawyers, accountants, tax advisors, public relations firms, severance and retention costs, impairment of goodwill, capitalized software and facilities, and other external costs directly related to the mergers and acquisitions, as well as compensation-related expenses. Other Expenses Other expenses represent costs necessary to support our operations butthat are not already included in the above categories. Other Income/Non-Operating Income (Expense) Income and expenses incurred through activities outside of our core operations are considered non-operating and are classified as other income/income (expense). These activities primarily include interest earned on the investing of excess cash, interest expense related to outstanding debt facilities, dividend income, income and unrealized gains and losses related to investments held in a rabbi trust for the Company’s non-qualified retirement and benefit plans, and equity earnings or losses from our investments in other business ventures. Results of Operations The following are summaries of changes in financial performance and include certain non-GAAP financial measures. These non-GAAP financials measures assist management in comparing our performance on a consistent basis for purposes of business decision making by removing the impact of certain items management believes do not reflect our underlying operations. Please see the footnotes below for additional information and reconciliations from our consolidated financial statements. Critical Accounting Policies
Comparison of Years Ended December 31, 2019 and Estimates2018 Overview The following summarizes changes in financial performance for the year ended December 31, 2019, compared to the year ended December 31, 2018: 
| (1) | These are Non-GAAP figures for which reconciliations are provided below. |
| | | | | | | | | | | | | | | Year Ended | | | | | | | | | December 31, | | Increase/ | | Percent | | | | 2019 | | 2018 | | (Decrease) | | Change | | | | (in millions, except percentages, earnings per share, and as noted below) | | Total revenues | | $ | 2,496.1 | | $ | 2,768.8 | | $ | (272.7) | | (9.8) | % | Total cost of revenues | | | 1,359.2 | | | 1,551.9 | | | (192.7) | | (12.4) | % | Revenues less cost of revenues | | | 1,136.9 | | | 1,216.9 | | | (80.0) | | (6.6) | % | Total operating expenses | | | 599.7 | | | 617.5 | | | (17.8) | | (2.9) | % | Operating income | | | 537.2 | | | 599.4 | | | (62.2) | | (10.4) | % | Income before income tax provision | | | 501.4 | | | 571.2 | | | (69.8) | | (12.2) | % | Income tax provision | | | 130.6 | | | 146.0 | | | (15.4) | | (10.5) | % | Net income | | $ | 370.8 | | $ | 425.2 | | $ | (54.4) | | (12.8) | % | Basic earnings per share | | $ | 3.35 | | $ | 3.78 | | $ | (0.43) | | (11.4) | % | Diluted earnings per share | | | 3.34 | | | 3.76 | | | (0.42) | | (11.1) | % | EBITDA(1) | | $ | 715.8 | | $ | 810.3 | | $ | (94.5) | | (11.7) | % | EBITDA margin(2) | | | 63.0 | % | | 66.6 | % | | (3.6) | % | | * | Adjusted EBITDA(1) | | $ | 784.1 | | $ | 840.4 | | $ | (56.3) | | (6.7) | % | Adjusted EBITDA margin(3) | | | 69.0 | % | | 69.1 | % | | (0.1) | % | | * | Adjusted earnings(4) | | $ | 528.6 | | $ | 563.4 | | $ | (34.8) | | (6.2) | % | Diluted weighted average shares outstanding | | | 111.8 | | | 112.2 | | | (0.4) | | (0.4) | % | Adjusted Diluted earnings per share(5) | | $ | 4.73 | | $ | 5.02 | | $ | (0.29) | | (5.8) | % |
* Not meaningful | (1) | EBITDA is defined as income before interest, income taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA before acquisition-related costs, provision for notes receivable, loss on disposal of data processing software, change in fair value of contingent consideration, and impairment charges attributed to noncontrolling interest. EBITDA and adjusted EBITDA do not represent, and should not be considered as, alternatives to net income as determined in accordance with GAAP. We have presented EBITDA and adjusted EBITDA because we consider them important supplemental measures of our performance and believe that they are frequently used by analysts, investors and other interested parties in the evaluation of companies. In addition, we use adjusted EBITDA as a measure of operating performance for preparation of our forecasts and evaluating our leverage ratio for the debt to earnings covenant included in our outstanding credit facility. Other companies may calculate EBITDA and adjusted EBITDA differently than we do. EBITDA and adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. |
| (2) | EBITDA margin represents EBITDA divided by revenues less cost of revenues. |
| (3) | Adjusted EBITDA margin represents adjusted EBITDA divided by revenues less cost of revenues. |
| (4) | Adjusted earnings is defined as net income adjusted for amortization of purchased intangibles, acquisition-related costs, provision for notes receivable, change in fair value of contingent consideration, change in redemption value of noncontrolling interest, tax provision re-measurements, impairment charges attributed to noncontrolling interest, and net income allocated to participating securities, net of the income tax effects of these adjustments. Adjusted earnings does not represent, and should not be considered as, an alternative to net income, as determined in accordance with GAAP. We have presented adjusted earnings because we consider it an important supplemental measure of our performance and we use it as the basis for monitoring our own core operating financial performance relative to other operators of exchanges. We also believe that it is frequently used by analysts, investors and other interested parties in the evaluation of companies. We believe that investors may find this non-GAAP measure useful in evaluating our performance compared to that of peer companies in our industry. Other companies may calculate adjusted earnings differently than we do. Adjusted earnings has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. |
| (5) | Adjusted diluted earnings per share represents adjusted earnings divided by diluted weighted average shares outstanding. |
The preparationfollowing is a reconciliation of net income (loss) allocated to common stockholders to EBITDA and adjusted EBITDA: | | | | | | | | | | | | | | | | Year Ended December 31, | | 2019 | | Options | U.S. Equities | Futures | European Equities | Global FX | Corporate | Total | | (in millions) | Net income (loss) allocated to common stockholders | $ | 202.7 | $ | 111.8 | $ | 45.5 | $ | 18.3 | $ | (5.0) | $ | (0.6) | $ | 372.7 | Interest | | — | | — | | — | | (0.4) | | — | | 36.3 | | 35.9 | Income tax provision (benefit) | | 124.8 | | 20.2 | | 37.4 | | 3.2 | | 0.1 | | (55.1) | | 130.6 | Depreciation and amortization | | 38.5 | | 76.0 | | 2.5 | | 28.7 | | 29.9 | | 1.0 | | 176.6 | EBITDA | | 366.0 | | 208.0 | | 85.4 | | 49.8 | | 25.0 | | (18.4) | | 715.8 | Acquisition-related costs | | 20.5 | | — | | — | | 1.7 | | 0.3 | | 26.0 | | 48.5 | Provision for notes receivable | | 6.1 | | 17.3 | | — | | — | | — | | — | | 23.4 | Impairment charges attributable to noncontrolling interest | | — | | — | | — | | — | | — | | (3.6) | | (3.6) | Adjusted EBITDA | $ | 392.6 | $ | 225.3 | $ | 85.4 | $ | 51.5 | $ | 25.3 | $ | 4.0 | $ | 784.1 | | | | | | | | | | | | | | | | | Year Ended December 31, | | 2018 | | Options | U.S. Equities | Futures | European Equities | Global FX | Corporate | Total | | (in millions) | Net income (loss) allocated to common stockholders | $ | 267.5 | $ | 120.5 | $ | 42.7 | $ | 19.2 | $ | (11.8) | $ | (16.0) | $ | 422.1 | Interest | | (0.5) | | — | | — | | (0.2) | | — | | 38.9 | | 38.2 | Income tax provision (benefit) | | 132.7 | | 19.5 | | 42.8 | | 4.8 | | 0.1 | | (53.9) | | 146.0 | Depreciation and amortization | | 46.4 | | 87.1 | | 2.2 | | 31.3 | | 34.6 | | 2.4 | | 204.0 | EBITDA | | 446.1 | | 227.1 | | 87.7 | | 55.1 | | 22.9 | | (28.6) | | 810.3 | Acquisition-related costs | | 15.4 | | — | | — | | 1.5 | | 0.1 | | 13.0 | | 30.0 | Change in fair value of contingent consideration | | — | | — | | — | | — | | 0.1 | | — | | 0.1 | Adjusted EBITDA | $ | 461.5 | $ | 227.1 | $ | 87.7 | $ | 56.6 | $ | 23.1 | $ | (15.6) | $ | 840.4 |
The following is a reconciliation of net income allocated to common stockholders to adjusted earnings: | | | | | | | | | Year Ended December 31, | | | 2019 | | 2018 | | | (in millions) | Net income allocated to common stockholders | | $ | 372.7 | | $ | 422.1 | Amortization of acquired intangible assets | | | 138.5 | | | 160.6 | Acquisition-related costs | | | 48.5 | | | 30.0 | Provision for notes receivable | | | 23.4 | | | — | Change in fair value of contingent consideration | | | — | | | 0.1 | Change in redemption value of noncontrolling interest | | | 0.5 | | | 1.3 | Tax effect of adjustments | | | (50.7) | | | (49.4) | Tax provision re-measurements | | | — | | | (0.4) | Impairment charges attributed to noncontrolling interest | | | (3.6) | | | — | Net income allocated to participating securities | | | (0.7) | | | (0.9) | Adjusted earnings | | $ | 528.6 | | $ | 563.4 |
The following summarizes changes in certain operational and financial metrics for the year ended December 31, 2019, compared to the year ended December 31, 2018: 
| | | | | | | | | | | | | | | Year Ended | | | | | | | | | December 31, | | Increase/ | | Percent | | | | 2019 | | 2018 | | (Decrease) | | Change | | | | (in millions, except percentages, trading days, and as noted below) | | Options: | | | | | | | | | | | | | Average daily volume (ADV) (in millions of contracts): | | | | | | | | | | | | | Total contracts | | | 7.3 | | | 7.9 | | | (0.6) | | (7.6) | % | Market ADV | | | 19.4 | | | 20.5 | | | (1.1) | | (5.4) | % | Index contract ADV | | | 1.9 | | | 2.2 | | | (0.3) | | (13.6) | % | Multi-Listed contract ADV | | | 5.4 | | | 5.7 | | | (0.3) | | (5.3) | % | Number of trading days | | | 252 | | | 251 | | | 1 | | 0.4 | % | Total Options revenue per contract (RPC) (1) | | $ | 0.235 | | $ | 0.258 | | $ | (0.023) | | (8.9) | % | Multi-Listed Options RPC (1) | | | 0.059 | | | 0.069 | | | (0.010) | | (14.5) | % | Index Options RPC (1) | | | 0.746 | | | 0.736 | | | 0.010 | | 1.4 | % | Market share | | | 37.7 | % | | 38.5 | % | | (0.8) | % | | * | U.S. Equities: | | | | | | | | | | | | | ADV: | | | | | | | | | | | | | Total touched shares (in billions) | | | 1.2 | | | 1.4 | | | (0.2) | | (14.3) | % | Market ADV (in billions) | | | 7.0 | | | 7.3 | | | (0.3) | | (4.1) | % | Trading days | | | 252 | | | 251 | | | 1.0 | | 0.4 | % | Market share | | | 16.3 | % | | 18.4 | % | | (2.1) | % | | * | U.S. Equities (net capture per one hundred touched shares)(2) | | $ | 0.025 | | $ | 0.025 | | $ | — | | — | % | U.S. ETPs: launches (number of launches) | | | 57 | | | 61 | | | (4.0) | | (6.6) | % | U.S. ETPs: listings (number of listings) | | | 353 | | | 290 | | | 63 | | 21.7 | % | Futures: | | | | | | | | | | | | | ADV (in thousands) | | | 249.0 | | | 300.0 | | | (51.0) | | (17.0) | % | Trading days | | | 252 | | | 252 | | | — | | — | % | Revenue per contract | | $ | 1.756 | | $ | 1.694 | | $ | 0.062 | | 3.7 | % | European Equities: | | | | | | | | | | | | | ADNV: | | | | | | | | | | | | | Matched and touched ADNV (in billions) | | € | 7.7 | | € | 10.4 | | € | (2.7) | | (26.0) | % | Market ADNV (in billions) | | | 37.9 | | | 46.5 | | | (8.6) | | (18.5) | % | Trading days | | | 256 | | | 256 | | | — | | — | % | Market share | | | 20.2 | % | | 22.3 | % | | (2.1) | % | | * | European Equities (net capture per matched notional value in basis points)(3) | | | 0.227 | | | 0.192 | | | 0.035 | | 18.2 | % | Average Euro/British pound exchange rate | | £ | 0.877 | | £ | 0.884 | | £ | (0.007) | | (0.8) | % | Global FX: | | | | | | | | | | | | | ADNV (in billions) | | $ | 32.3 | | $ | 37.4 | | $ | (5.1) | | (13.6) | % | Trading days | | | 259 | | | 259 | | | — | | — | % | Global FX (net capture per one million dollars traded)(4) | | | 2.71 | | | 2.56 | | | 0.15 | | 5.9 | % | Average British pound/U.S. dollar exchange rate | | $ | 1.277 | | $ | 1.335 | | $ | (0.058) | | (4.3) | % |
* Not meaningful | (1) | Revenue per contract represents transaction fees less liquidity payments and routing and clearing costs divided by total contracts traded during the period. |
| (2) | Net capture per one hundred touched shares refers to transaction fees less liquidity payments and routing and clearing costs divided by the product of one-hundredth ADV of touched shares on BZX, BYX, EDGX and EDGA and the number of trading days for the period. |
| (3) | Net capture per matched notional value in basis points refers to transaction fees less liquidity payments in British pounds divided by the product of ADNV in British pounds of shares matched on Cboe Europe Limited and the number of trading days for the period. |
| (4) | Net capture per one million dollars traded refers to net transaction fees, divided by the product of one-millionth of ADNV traded on the Cboe FX market, the number of trading days, and two, which represents the buyer and seller that are both charged on the transaction for the period. |
Revenues Total revenues for the year ended December 31, 2019 decreased $272.7 million, or 9.8%, compared to the prior period primarily due to a $270.7 million, or 13.6% decrease in transaction fees as a result of a decline in overall market volumes across all segments. The following summarizes changes in revenues for the year ended December 31, 2019 compared to the year ended December 31, 2018: | | | | | | | | | | | | | | | Year Ended | | | | | | | | | December 31, | | Increase/ | | Percent | | | | 2019 | | 2018 | | (Decrease) | | Change | | | | (in millions, except percentages) | | Transaction fees | | $ | 1,716.2 | | $ | 1,986.9 | | $ | (270.7) | | (13.6) | % | Access and capacity fees | | | 221.9 | | | 211.0 | | | 10.9 | | 5.2 | % | Market data fees | | | 213.5 | | | 204.0 | | | 9.5 | | 4.7 | % | Regulatory fees | | | 311.7 | | | 333.9 | | | (22.2) | | (6.6) | % | Other revenue | | | 32.8 | | | 33.0 | | | (0.2) | | (0.6) | % | Total revenues | | $ | 2,496.1 | | $ | 2,768.8 | | $ | (272.7) | | (9.8) | % |
Transaction Fees Transaction fees decreased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to a 2.1% point decline in market share and a 4.1% decline in market ADV within the U.S. Equities segment, and a 5.4% decline in overall options market ADV, including a 13.6% decrease in index options ADV. Also contributing to the decline was an 18.5% decrease in European Equities ADNV, coupled with a 2.1% point decline in market share, partially offset by an 18.2% increase in net capture, as well as a 17.0% decline in Futures ADV. Access and Capacity Fees Access and capacity fees increased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to an increase in subscribers on Cboe Options and the U.S. Equities exchanges. Market Data Fees Market data fees increased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to an increase of $12.9 million within the Options segment as the result of an increase in subscribers, partially offset by a $3.3 million decline in tape plan market data revenue within the U.S. Equities segment as the result of a decline in market share. Regulatory Fees Regulatory transaction fees decreased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to a decline in volumes in the U.S. Equities segment, partially offset by an increase in the average Section 31 fee rate for 2019 and increased fines and assessments. Other Revenue Other revenue was relatively flat for the year ended December 31, 2019 compared to the same period in 2018. Cost of Revenues Cost of revenues decreased in the year ended December 31, 2019 compared to the same period in 2018 primarily due to lower liquidity payments driven by a decrease in volumes traded on the U.S. Equities, Options, and European Equities exchanges, as well as a decrease in Section 31 fees within the U.S. Equities segment of $30.6 million. The following summarizes changes in cost of revenues for the year ended December 31, 2019 compared to the prior year: | | | | | | | | | | | | | | | Year Ended | | | | | | | | | December 31, | | Increase/ | | Percent | | | | 2019 | | 2018 | | (Decrease) | | Change | | | | (in millions, except percentages) | | Liquidity payments | | $ | 964.7 | | $ | 1,113.0 | | $ | (148.3) | | (13.3) | % | Routing and clearing | | | 35.8 | | | 39.1 | | | (3.3) | | (8.4) | % | Section 31 fees | | | 271.4 | | | 302.4 | | | (31.0) | | (10.3) | % | Royalty fees | | | 86.8 | | | 97.4 | | | (10.6) | | (10.9) | % | Other | | | 0.5 | | | — | | | 0.5 | | 100.0 | % | Total | | $ | 1,359.2 | | $ | 1,551.9 | | $ | (192.7) | | (12.4) | % |
Liquidity Payments Liquidity payments decreased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to a decrease in volumes traded on the U.S. Equities, Options, and European Equities exchanges. Routing and Clearing The decrease in routing and clearing fees for the year ended December 31, 2019 compared to the same period in 2018 was primarily due to a decrease in routed shares in the U.S. Equities segment and a decrease in fees per routed contract in the Options segment. Section 31 Fees Section 31 fees decreased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to a decline in volumes in the U.S. Equities segment, partially offset by an increase in the average Section 31 fee rate for 2019. Royalty Fees Royalty fees decreased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to lower trading volumes in licensed products in 2019. Revenues Less Cost of Revenues Revenues less cost of revenues decreased $80.0 million, or 6.6%, in the year ended December 31, 2019 compared to the same period in 2018, primarily due to a $119.1 million, or 14.3%, decrease in transaction fees less liquidity payments and routing and clearing costs, partially offset by an increase in access and capacity fees and an increase in market data fees. The following summarizes the components of revenues less cost of revenues for the year ended December 31, 2019, presented as a percentage of revenues less cost of revenues and compared to the prior year: | | | | | | | | | | | | | | | | | | | | | | | | Percentage of | | | | | | | | | | | | Revenues Less | | | | | | | | | | | | Cost of | | | | | | | | | | | | Revenues | | | | Year Ended | | | | Year Ended | | | | December 31, | | Percent | | December 31, | | | | 2019 | | 2018 | | Change | | 2019 | | 2018 | | | | (in millions, except percentages) | | Transaction fees less liquidity payments and routing and clearing costs | | $ | 715.7 | | $ | 834.8 | | (14.3) | % | 63.0 | % | 68.6 | % | Access and capacity fees | | | 221.9 | | | 211.0 | | 5.2 | % | 19.5 | % | 17.3 | % | Market data fees | | | 213.5 | | | 204.0 | | 4.7 | % | 18.8 | % | 16.8 | % | Regulatory fees, less Section 31 fees | | | 40.3 | | | 31.5 | | 27.9 | % | 3.5 | % | 2.6 | % | Royalty fees | | | (86.8) | | | (97.4) | | (10.9) | % | (7.6) | % | (8.0) | % | Other | | | 32.3 | | | 33.0 | | (2.1) | % | 2.8 | % | 2.7 | % | Revenues less cost of revenues | | $ | 1,136.9 | | $ | 1,216.9 | | (6.6) | % | 100.0 | % | 100.0 | % |
Transaction Fees Less Liquidity Payments and Routing and Clearing Costs Transaction fees less liquidity payments and routing and clearing costs (“Net Transaction Fees”) decreased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to a 5.4% decline in overall options market ADV, including a 13.6% decrease in index options ADV, a 17.0% decrease in Futures ADV, a 2.1% point decline in market share and a 4.1% decline in market ADV within the U.S. Equities segment, and an 18.5% decrease in ADNV coupled with a 2.1% point decline in market share, partially offset by a 18.2% increase in net capture within the European Equities segment. Access and Capacity Fees Access and fees increased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to an increase in subscribers on Cboe Options and the U.S. Equities exchanges. Market Data Fees Market data fees increased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to an increase of $12.9 million within the Options segment as the result of an increase in subscribers, partially offset by a $3.3 million decline in tape plan market data revenue within the U.S. Equities segment as the result of a decline in market share. Regulatory Fees, less Section 31 Fees Regulatory fees, less Section 31 Fees, increased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to an increase in fines and assessment fees. Royalty Fees Royalty fees decreased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to lower trading volumes in licensed products in 2019. Other Other revenue was relatively flat for the year ended December 31, 2019 compared to the same period in 2018. Operating Expenses For the year ended December 31, 2019 compared to the year ended December 31, 2018, total operating expenses decreased primarily due to a decline in compensation and benefits and depreciation and amortization, offset by an increase in other expenses and acquisition-related costs. The following summarizes changes in operating expenses for the year ended December 31, 2019 compared to the prior year: | | | | | | | | | | | | | | | Year Ended | | | | | | | | | December 31, | | Increase/ | | Percent | | | | 2019 | | 2018 | | (Decrease) | | Change | | | | (in millions, except percentages) | Operating Expenses: | | | | | | | | | | | | | Compensation and benefits | | $ | 199.0 | | $ | 228.8 | | $ | (29.8) | | (13.0) | % | Depreciation and amortization | | | 176.6 | | | 204.0 | | | (27.4) | | (13.4) | % | Technology support services | | | 46.2 | | | 47.9 | | | (1.7) | | (3.5) | % | Professional fees and outside services | | | 68.3 | | | 68.3 | | | — | | — | % | Travel and promotional expenses | | | 11.9 | | | 13.0 | | | (1.1) | | (8.5) | % | Facilities costs | | | 11.0 | | | 11.5 | | | (0.5) | | (4.3) | % | Acquisition-related costs | | | 48.5 | | | 30.0 | | | 18.5 | | 61.7 | % | Change in contingent consideration | | | — | | | 0.1 | | | (0.1) | | (100.0) | % | Other expenses | | | 38.2 | | | 13.9 | | | 24.3 | | 174.8 | % | Total operating expenses | | $ | 599.7 | | $ | 617.5 | | $ | (17.8) | | (2.9) | % |
Compensation and Benefits Compensation and benefits decreased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to a $24.5 million decline in bonus expense, a $8.1 million decrease in stock-based compensation primarily driven by forfeitures of unvested equity awards in the first quarter of 2019, and a $1.6 million decrease in salaries and wages expense, partially offset by an increase in compensation expense for the deferred compensation plans of $3.1 million. Depreciation and Amortization Depreciation and amortization decreased for the year ended December 31, 2019 compared to the same period in 2018, due to a decline in amortization under the discounted cash flow method for the intangibles acquired in the Bats acquisition, as well as a change in the accounting classification for the Chicago headquarters building to held for sale, which resulted in depreciation ceasing on the building. Technology Support Services Technology support services costs decreased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to a decline in expenses related to data center hosting. Professional Fees and Outside Services Professional and outside services fees were flat for the year ended December 31, 2019 compared to the same period in 2018. Travel and Promotional Expenses Travel and promotional expenses decreased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to a $0.7 million reduction in travel expenses and a reduction in marketing expenses of $0.2 million. Facilities Costs Facilities costs decreased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to a $1.2 million decline in rent expense and a $0.5 million decline in repairs and maintenance expense, partially offset by a $0.5 million increase in real estate taxes and a $0.3 million increase in utilities expenses. Acquisition-Related Costs Acquisition-related costs increased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to an increase in severance costs, impairment charges recorded, which included the write down of goodwill attributed to a 2016 acquisition, a loss on disposal of data processing software recorded in the fourth quarter of 2019, and the write down of the Chicago headquarters location attributed to the reduction in employee workspace needed in Chicago as a result of the Bats acquisition. Acquisition-related costs include fees for investment banking advisors, lawyers, accountants, tax advisors, public relations firms, severance and retention costs, impairment of goodwill, capitalized software and facilities, and other external costs directly related to the mergers and acquisitions, as well as compensation-related expenses. Other Expenses Other expenses increased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to a $23.4 million provision for the notes receivable recorded in the fourth quarter of 2019 as a result of circumstances associated with the development of the consolidated audit trail. Operating Income As a result of the items above, operating income for the year ended December 31, 2019 was $537.2 million, compared to $599.4 million for the year ended December 31, 2018, a decrease of $62.2 million, or 10.4%. Interest Expense, Net Net interest expense decreased in the year ended December 31, 2019 as the outstanding debt balance decreased from $1,215.4 million at December 31, 2018 to $867.6 million at December 31, 2019. Other Income, Net Net other income decreased in the year ended December 31, 2019 compared to the same period in 2018 due to the reversal of the $8.8 million OCC dividend declared in 2018, which was to be paid in 2019, as a result of the SEC’s disapproval of the prior OCC capital plan during the first quarter of 2019. Income Before Income Tax Provision As a result of the above, income before income tax provision for the year ended December 31, 2019 was $501.4 million compared to $571.2 million for the year ended December 31, 2018, a decrease of $69.8 million, or 12.2%. Income Tax Provision For the year ended December 31, 2019, the income tax provision was $130.6 million compared with $146.0 million for the year ended December 31, 2018, a decrease of $15.4 million, primarily due to the decrease in income before income tax provision. The effective tax rate for the year ended December 31, 2019 was 26.0%, compared to a rate of 25.6% for the year ended December 31, 2018. Net Income As a result of the items above, net income for the year ended December 31, 2019 was $370.8 million, or 32.6% of revenues less cost of revenues, compared to $425.2 million, or 34.9% of revenues less cost of revenues, for the year ended December 31, 2018, a decrease of $54.4 million, or 12.8%. Segment Operating Results We report results from our five segments: Options, U.S. Equities, Futures, European Equities, and Global FX. Segment performance is primarily based on operating income (loss). We have aggregated all corporate costs, as well as other business ventures, within the Corporate Items and Eliminations as those activities should not be used to evaluate a segment's operating performance. All operating expenses that relate to activities of a specific segment have been allocated to that segment. The following summarizes our total revenues by segment: 
| | | | | | | | | | | | | | | | | | | | | | | | Percentage of | | | | | | | | | | | | Total | | | | | | | | | | | | Revenues | | | | Year Ended | | | | Year Ended | | | | December 31, | | Percent | | December 31, | | | | 2019 | | 2018 | | Change | | 2019 | | 2018 | | | | (in millions, except percentages) | | Options | | $ | 983.1 | | $ | 1,057.5 | | (7.0) | % | 39.4 | % | 38.2 | % | U.S. Equities | | | 1,213.1 | | | 1,373.1 | | (11.7) | % | 48.6 | % | 49.6 | % | Futures | | | 135.9 | | | 149.8 | | (9.3) | % | 5.4 | % | 5.4 | % | European Equities | | | 110.8 | | | 131.6 | | (15.8) | % | 4.4 | % | 4.8 | % | Global FX | | | 53.0 | | | 56.4 | | (6.0) | % | 2.1 | % | 2.0 | % | Corporate | | | 0.2 | | | 0.4 | | (50.0) | % | — | % | — | % | Total revenues | | $ | 2,496.1 | | $ | 2,768.8 | | (9.8) | % | 100.0 | % | 100.0 | % |
The following summarizes our revenues less cost of revenues by segment: 
| | | | | | | | | | | | | | | | | | | | | | | | Percentage of | | | | | | | | | | | | Total Revenues | | | | | | | | | | | | less Cost of Revenues | | | | Year Ended | | | | Year Ended | | | | December 31, | | Percent | | December 31, | | | | 2019 | | 2018 | | Change | | 2019 | | 2018 | | | | (in millions, except percentages) | | Options | | $ | 564.1 | | $ | 611.2 | | (7.7) | % | 49.6 | % | 50.2 | % | U.S. Equities | | | 300.8 | | | 310.2 | | (3.0) | % | 26.5 | % | 25.6 | % | Futures | | | 131.3 | | | 144.1 | | (8.9) | % | 11.5 | % | 11.8 | % | European Equities | | | 87.5 | | | 94.6 | | (7.5) | % | 7.7 | % | 7.8 | % | Global FX | | | 53.0 | | | 56.4 | | (6.0) | % | 4.7 | % | 4.6 | % | Corporate | | | 0.2 | | | 0.4 | | (50.0) | % | — | % | — | % | Total revenues less cost of revenues | | $ | 1,136.9 | | $ | 1,216.9 | | (6.6) | % | 100.0 | % | 100.0 | % |
Options The following summarizes revenues less cost of revenues, operating expenses, operating income, EBITDA and EBITDA margin for our Options segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage | | | | | | | | | | | | | | | of Total | | | | | | | | | | | | | | | Revenues | | | | Year Ended | | | | | | Year Ended | | | | December 31, | | | Percent | | | December 31, | | | | 2019 | | | 2018 | | | Change | | | 2019 | | | 2018 | | | | (in millions, except percentages) | | Revenues less cost of revenues | | $ | 564.1 | | | $ | 611.2 | | | (7.7) | % | | 57.4 | % | | 57.8 | % | Operating expenses | | | 229.8 | | | | 220.3 | | | 4.3 | % | | 23.4 | % | | 20.8 | % | Operating income | | $ | 334.3 | | | $ | 390.9 | | | (14.5) | % | | 34.0 | % | | 37.0 | % | EBITDA(1) | | $ | 366.0 | | | $ | 446.1 | | | (18.0) | % | | 37.2 | % | | 42.2 | % | EBITDA margin(2) | | | 64.9 | % | | | 73.0 | % | | * | | | * | | | * | |
* Not meaningful | (1) | See footnote (1) to the table under “Overview” above for a reconciliation of net income to EBITDA, and management’s reasons for using such non-GAAP measures. |
| (2) | EBITDA margin represents EBITDA divided by revenues less cost of revenues. |
Revenue less cost of revenues decreased $47.1 million for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to a 5.4% decrease in overall options market ADV, including a 13.6% decrease in index options ADV. For the year ended December 31, 2019, the operating income decreased $56.6 million compared to the year ended December 31, 2018 due to lower revenues less cost of revenues. Operating expenses increased $9.5 million for the year ended December 31, 2019, compared to the prior period, primarily due to the provision for notes receivable related to circumstances associated with the development of the consolidated audit trail recorded in the fourth quarter of 2019, coupled with increases in acquisition-related costs and higher compensation and benefits as a result of higher cost allocations and the loss on disposal of data processing software due to the migration of Cboe Options to the Bats technology platform in 2019, partially offset by a decrease in depreciation and amortization. U.S. Equities The following summarizes revenues less cost of revenues, operating expenses, operating income, EBITDA and EBITDA margin for our U.S. Equities segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage | | | | | | | | | | | | | | | of Total | | | | | | | | | | | | | | | Revenues | | | | Year Ended | | | | | | Year Ended | | | | December 31, | | | Percent | | | December 31, | | | | 2019 | | | 2018 | | | Change | | | 2019 | | | 2018 | | | | (in millions, except percentages) | | Revenues less cost of revenues | | $ | 300.8 | | | $ | 310.2 | | | (3.0) | % | | 24.8 | % | | 22.6 | % | Operating expenses | | | 168.3 | | | | 169.7 | | | (0.8) | % | | 13.9 | % | | 12.4 | % | Operating income | | $ | 132.5 | | | $ | 140.5 | | | (5.7) | % | | 10.9 | % | | 10.2 | % | EBITDA(1) | | $ | 208.0 | | | $ | 227.1 | | | (8.4) | % | | 17.1 | % | | 16.5 | % | EBITDA margin(2) | | | 69.1 | % | | | 73.2 | % | | * | | | * | | | * | |
* Not meaningful | (1) | See footnote (1) to the table under “Overview” above for a reconciliation of net income to EBITDA, and management’s reasons for using such non-GAAP measures. |
| (2) | EBITDA margin represents EBITDA divided by revenues less cost of revenues. |
Revenue less cost of revenues decreased $9.4 million for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to a 2.1% point decline in market share and 4.1% decrease in volumes. For the year ended December 31, 2019, the U.S. Equities segment's operating income decreased $8.0 million compared to the year ended December 31, 2018 as a result of lower revenues less cost of revenues. Operating expenses remained flat for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to the provision for notes receivable related to circumstances associated with the development of the consolidated audit trail recorded in the fourth quarter of 2019, offset by decreases in depreciation and amortization, professional fees and outside services, and technology support services. Futures The following summarizes revenues less cost of revenues, operating expenses, operating income, EBITDA, and EBITDA margin for our Futures segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage | | | | | | | | | | | | | | | of Total | | | | | | | | | | | | | | | Revenues | | | | Year Ended | | | | | | Year Ended | | | | December 31, | | | Percent | | | December 31, | | | | 2019 | | | 2018 | | | Change | | | 2019 | | | 2018 | | | | (in millions, except percentages) | | Revenues less cost of revenues | | $ | 131.3 | | | $ | 144.1 | | | (8.9) | % | | 96.6 | % | | 96.2 | % | Operating expenses | | | 48.2 | | | | 58.4 | | | (17.5) | % | | 35.5 | % | | 39.0 | % | Operating income | | $ | 83.1 | | | $ | 85.7 | | | (3.0) | % | | 61.1 | % | | 57.2 | % | EBITDA(1) | | $ | 85.4 | | | $ | 87.7 | | | (2.6) | % | | 62.8 | % | | 58.5 | % | EBITDA margin(2) | | | 65.0 | % | | | 60.9 | % | | * | | | * | | | * | |
* Not meaningful | (1) | See footnote (1) to the table under “Overview” above for a reconciliation of net income to EBITDA, and management’s reasons for using such non-GAAP measures. |
| (2) | EBITDA margin represents EBITDA divided by revenues less cost of revenues. |
Revenue less cost of revenues decreased $12.8 million for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to a 17.0% decline in Futures ADV, partially offset by a 3.7% increase in revenue per contract. For the year ended December 31, 2019, the Futures segment's operating income decreased $2.6 million compared to the year ended December 31, 2018 due to lower revenues less cost of revenues. Operating expenses decreased $10.2 for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to a decline in compensation and benefits. European Equities The following summarizes revenues less cost of revenues, operating expenses, operating income, EBITDA and EBITDA margin for our European Equities segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage | | | | | | | | | | | | | | | of Total | | | | | | | | | | | | | | | Revenues | | | | Year Ended | | | | | | Year Ended | | | | December 31, | | | Percent | | | December 31, | | | | 2019 | | | 2018 | | | Change | | | 2019 | | | 2018 | | | | (in millions, except percentages) | | Revenues less cost of revenues | | $ | 87.5 | | | $ | 94.6 | | | (7.5) | % | | 79.0 | % | | 71.9 | % | Operating expenses | | | 67.2 | | | | 70.5 | | | (4.7) | % | | 60.6 | % | | 53.6 | % | Operating income | | $ | 20.3 | | | $ | 24.1 | | | (15.8) | % | | 18.3 | % | | 18.3 | % | EBITDA(1) | | $ | 49.8 | | | $ | 55.1 | | | (9.6) | % | | 44.9 | % | | 41.9 | % | EBITDA margin(2) | | | 56.9 | % | | | 58.2 | % | | * | | | * | | | * | |
* Not meaningful | (1) | See footnote (1) to the table under “Overview” above for a reconciliation of net income to EBITDA, and management’s reasons for using such non-GAAP measures. |
| (2) | EBITDA margin represents EBITDA divided by revenues less cost of revenues. |
Revenue less cost of revenues decreased $7.1 million for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to a 18.5% decline in European Equities ADNV, as well as a 2.1% point decline in market share and the exchange rate impact from British Pounds to U.S. Dollars, partially offset by a 18.2% increase in net capture. For the year ended December 31, 2019, the operating income decreased $3.8 million compared to the year ended December 31, 2018 as a result of lower revenues less cost of revenues. Operating expenses decreased $3.3 million for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to decreases in compensation and benefits and depreciation and amortization. Global FX The following summarizes revenues less cost of revenues, operating expenses, operating income, EBITDA and EBITDA margin for our Global FX segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage | | | | | | | | | | | | | | | of Total | | | | | | | | | | | | | | | Revenues | | | | Year Ended | | | | | | Year Ended | | | | December 31, | | | Percent | | | December 31, | | | | 2019 | | | 2018 | | | Change | | | 2019 | | | 2018 | | | | (in millions, except percentages) | | Revenues less cost of revenues | | $ | 53.0 | | | $ | 56.4 | | | (6.0) | % | | 100.0 | % | | 100.0 | % | Operating expenses | | | 57.9 | | | | 68.1 | | | (15.0) | % | | 109.2 | % | | 120.7 | % | Operating loss | | $ | (4.9) | | | $ | (11.7) | | | (58.1) | % | | (9.2) | % | | (20.7) | % | EBITDA(1) | | $ | 25.0 | | | $ | 22.9 | | | 9.2 | % | | 47.2 | % | | 40.6 | % | EBITDA margin(2) | | | 47.2 | % | | | 40.6 | % | | * | | | * | | | * | |
* Not meaningful | (1) | See footnote (1) to the table under “Overview” above for a reconciliation of net income to EBITDA, and management’s reasons for using such non-GAAP measures. |
| (2) | EBITDA margin represents EBITDA divided by revenues less cost of revenues. |
Revenue less cost of revenues decreased $3.4 million for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to a 13.6% decline in Global FX ADNV during 2019. For the year ended December 31, 2019, the Global FX segment's operating loss decreased $6.8 million compared to the year ended December 31, 2018, as a result of lower operating expenses. Operating expenses decreased $10.2 million for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to decreases in compensation and benefits and depreciation and amortization. Liquidity and Capital Resources Below are charts that reflect our capital allocation: 
We expect our cash on hand at December 31, 2019 and other available resources, including cash generated from operations, to be sufficient to continue to meet our cash requirements for the foreseeable future. In the near term, we expect that our cash from operations and availability under our revolving credit facility will meet our cash needs to fund our operations, capital expenditures, interest payments on debt, debt repayments, any dividends, potential strategic acquisitions, and opportunities for common stock repurchases under the previously announced program. We may also utilize excess cash on hand to pay down amounts outstanding under the Term Loan Agreement. See Note 13 (“Debt”) of the consolidated financial statements for further information. Our long-term cash needs will depend on many factors, including an introduction of new products, enhancements of current products, the geographic mix of our business and any potential acquisitions. We believe our cash from operations and the availability under our revolving credit facility will meet any long-term needs unless a significant acquisition is identified, in which case we expect that we would be able to borrow the necessary funds to complete such an acquisition. In February 2020, we acquired Hanweck Associates, LLC (“Hanweck”), a real-time risk analytics company based in New York, and the business of FT Providers, LLC, a portfolio management platform provider based in Chicago, commonly referred to as FT Options (“FT”) with cash on hand. Cash and cash equivalents include cash in banks and all non-restricted, highly liquid investments with original maturities of three months or less at the time of purchase. Cash and cash equivalents as of December 31, 2019 decreased $45.8 million from December 31, 2018 primarily due to share repurchases of $156.9 million and dividends of $150.0 million, offset by net income and other operating activities. See “Cash Flow” below for further discussion. Our cash and cash equivalents held outside of the United States in various foreign subsidiaries totaled $85.1 million and $72.9 million as of December 31, 2019 and December 31, 2018, respectively. The remaining balance was held in the United States and totaled $144.1 million and $202.2 million as of December 31, 2019 and December 31, 2018, respectively. The majority of cash held outside the United States is available for repatriation, but under current law, could subject us to additional United States income taxes, less applicable foreign tax credits. Our financial investments include deferred compensation plan assets, as well as investments with original or acquired maturities longer than three months but that mature in less than one year from the balance sheet date and are recorded at fair value. As of December 31, 2019 financial investments consisted of U.S. Treasury securities and deferred compensation plan assets. Cash Flow The following table summarizes our cash flow data for the years ended December 31, 2019, 2018 and 2017: | | | | | | | | | | | | | For the Year Ended | | | | December 31, | | | | 2019 | | 2018 | | 2017 | | | | (in millions) | | Net cash provided by operating activities | | $ | 632.8 | | $ | 534.7 | | $ | 374.4 | | Net cash used in investing activities | | | (15.9) | | | (25.6) | | | (1,436.5) | | Net cash (used in) provided by financing activities | | | (662.9) | | | (371.6) | | | 1,099.7 | | Effect of foreign currency exchange rate changes on cash and cash equivalents | | | 0.2 | | | (5.9) | | | 8.6 | | (Decrease) increase in cash and cash equivalents | | $ | (45.8) | | $ | 131.6 | | $ | 46.2 | |
Net Cash Flows Provided by Operating Activities During the year ended December 31, 2019, net cash provided by operating activities was $262.0 million higher than net income. The variance is primarily attributed to the adjustment for depreciation expense of $176.6 million, the change in accounts receivable of $50.3 million, partially offset by the adjustment for provision of unpaid taxes of $37.2 million, the changes in accounts payable and accrued liabilities of $25.7 million, and other prepaid expenses of $16.9 million. Net cash provided by operating activities was $632.8 million and $534.7 million for the years ended December 31, 2019 and 2018, respectively. The increase in net cash flows provided by operating activities was primarily due to decreases in accounts receivable and increases in income tax liability, and Section 31 fees payable, partially offset by the decline in net income. Net cash provided by operating activities was $109.5 million higher than net income for the fiscal year ended December 31, 2018. The primary adjustments were related to accounts receivable of $70.3 million, income tax receivable of $53.2 million, provision for deferred income taxes of $47.7 million, and Section 31 fees payable of $24.5 million, partially offset by $204.0 million in depreciation and amortization, accounts payable and accrued liabilities of $46.8 million, income tax liability of $36.1 million, and the recognition of stock-based compensation totaling $35.1 million,. Net cash provided by operating activities was $534.7 million and $374.4 million for the years ended December 31, 2018 and 2017, respectively. The increase in net cash flows provided by operating activities was primarily due to higher net income. Net Cash Flows Used in Investing Activities Net cash flows used in investing activities were $15.9 million and $25.6 million for the years ended December 31, 2019 and 2018, respectively. The variance is primarily due to the return of capital from investments, coupled with a higher net cash impact of purchases and sales of available-for-sale investments, offset by purchases of property and equipment. Net cash flows used in investing activities totaled $25.6 million and $1,436.5 million for the years ended December 31, 2018 and 2017, respectively. Expenditures for capital and other assets totaled $36.3 million and $37.5 million for the years ended December 31, 2018 and 2017, respectively, primarily representing purchases of systems hardware and development of software to develop and enhance our trading platform and operations. In 2018, investing activities primarily represented purchases of property and equipment. In 2017, investing activities primarily represented our acquisition of Bats. We expect to spend $65 million to $70 million in capital expenditures in 2020 for the headquarters office and trading floor relocations, software development, and general maintenance and ongoing enhancement of our data and telecommunications infrastructure. Net Cash Flows (Used in) Provided by Financing Activities For the year ended December 31, 2019, the Company paid down $350.0 million of long-term debt, repurchased $156.9 million of common stock, and paid dividends totaling $150.0 million. Net cash flows used in financing activities totaled $371.6 million for the year ended December 31, 2018. For the year ended December 31, 2018, $300.0 million was received in proceeds from long-term debt, offset by $325.0 million in payments of long-term debt. Purchase of common stock totaled $140.9 million, and dividends paid totaled $130.3 million. Net cash flows provided by financing activities totaled $1.1 billion for the year ended December 31, 2017. The $1.4 billion decrease in net cash flows provided by financing activities resulted primarily from proceeds from long-term debt not recurring in 2018. Financial Assets The following summarizes our financial assets as of December 31, 2019, 2018 and 2017: | | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | 2017 | | | (in millions) | Cash and cash equivalents | | $ | 229.3 | | $ | 275.1 | | $ | 143.5 | Financial investments | | | 71.0 | | | 35.7 | | | 47.3 | Less deferred compensation plan assets | | | (23.4) | | | — | | | — | Less cash collected for Section 31 Fees | | | (69.0) | | | (53.1) | | | (70.5) | Adjusted Cash(1) | | $ | 207.9 | | $ | 257.7 | | $ | 120.3 |
| (1) | Adjusted Cash is a non-GAAP measure and represents cash and cash equivalents plus financial investments minus deferred compensation plan assets and cash collected for Section 31 fees. We have presented Adjusted Cash because we consider it an important supplemental measure of our liquidity and believe that it is frequently used by analysts, investors and other interested parties in the evaluation of companies. |
Debt The following summarizes our debt obligations as of December 31, 2019, 2018 and 2017: | | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | 2017 | | | (in millions) | Debt: | | | | | | | | | | Term Loan Agreement | | $ | 225.0 | | $ | 275.0 | | $ | 300.0 | 3.650% Senior Notes | | | 650.0 | | | 650.0 | | | 650.0 | 1.950% Senior Notes | | | — | | | 300.0 | | | 300.0 | Revolving Credit Agreement | | | — | | | — | | | — | Less unamortized discount and debt issuance costs | | | (7.4) | | | (9.6) | | | (12.1) | Total debt | | $ | 867.6 | | $ | 1,215.4 | | $ | 1,237.9 |
At December 31, 2019, we were in compliance with the covenants of our debt agreements. In addition to the debt outstanding, as of December 31, 2019 we had an additional $150.0 million available through our revolving credit facility, with the ability to borrow another $100.0 million by increasing the commitments under the facility. Together with Adjusted Cash, we had $357.9 million available to fund our operations, capital expenditures, potential acquisitions, debt repayments and any dividends as of December 31, 2019. Dividends The Company’s expectation is to continue to pay dividends. The decision to pay a dividend, however, remains within the discretion of the Company's consolidatedboard of directors and may be affected by various factors, including our earnings, financial statements requirescondition, capital requirements, level of indebtedness and other considerations our board of directors deems relevant. Future debt obligations and statutory provisions, among other things, may limit, or in some cases prohibit, our ability to pay dividends. Share Repurchase Program In 2011, the board of directors approved an initial authorization for the Company to repurchase shares of its outstanding common stock of $100 million and approved additional authorizations of $100 million in each of 2012, 2013, 2014, 2015 and 2016, $150 million in February 2018, $100 million in August 2018, and $250 million in October 2019, for a total authorization of $1.1 billion. The Company expects to fund repurchases primarily through the use of existing cash balances. The program permits the Company to purchase shares through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. It does not obligate the Company to make any repurchases at any specific time or situation. Under the program, for the year ended December 31, 2019, the Company repurchased 1,420,654 shares of common stock at an average cost per share of $110.42, totaling $156.9 million. Since inception of the program through December 31, 2019, the Company has repurchased 13,716,009 shares of common stock at an average cost per share of $58.38, totaling $800.8 million. As of December 31, 2019, the Company had $299.2 million of availability remaining under its existing share repurchase authorizations. OCC Capital Plan In December 2014, OCC announced a newly-formed capital plan, under which each of OCC's existing exchange stockholders agreed to contribute its pro-rata share, based on ownership percentage, of $150 million in equity capital, which would increase OCC's shareholders' equity, and to provide its pro rata share in replenishment capital, up to a maximum of $40 million per exchange stockholder, if certain capital thresholds were breached. OCC also adopted policies under the plan with respect to fees, customer refunds, and stockholder dividends, which envisioned an annual dividend payment to the exchange stockholders. On March 3, 2015, in accordance with the plan, Cboe Options contributed $30 million to OCC. That contribution has been recorded under investments in the consolidated balance sheets as of December 31, 2019 and 2018. The SEC initially issued a notice of no objection to OCC’s advance notice filing regarding the capital plan and subsequently approved OCC’s proposed rule filing for the capital plan, but certain petitioners appealed the SEC approval order to the U.S. Court of Appeals for the D.C. Circuit. The court ultimately remanded the matter to the SEC, and on February 13, 2019, the SEC issued an order disapproving the proposed rule change implementing OCC’s capital plan. In an effort to achieve compliance with its target capital requirements in the absence of an approved capital plan, OCC (i) retained funds that otherwise would have been paid to stockholders as dividends and to clearing members as refunds with respect to 2018, and (ii) raised its clearing fees. In connection with the disapproval of the capital plan, OCC returned the capital that had been contributed by its shareholders under the disapproved plan (equal to $30.0 million for Cboe Options) to the respective shareholders in 2019, of which $22.0 million was returned to Cboe Options in the first quarter of 2019 and $8.0 million in the fourth quarter of 2019. With each return of capital described in this paragraph, the Company also incurred a tax expense. OCC agreed to reimburse the Company for part of that tax liability and paid the Company $1.1 million in the third quarter and $0.4 million in the fourth quarter of 2019. OCC did not pay its shareholders any dividend or other return on the retained portion of their capital contributions. As such, the Company reversed the $8.8 million OCC dividend declared in 2018, which was to be paid in 2019, in other income in the consolidated statement of income for the year ended December 31, 2019. The remaining contributed capital has been recorded under investments in the consolidated balance sheet as of December 31, 2019. On January 24, 2020, upon receipt of SEC approval, OCC established a new capital management policy intended to replace the disapproved capital plan. The new capital management policy provides that, if OCC’s equity capital falls below certain defined thresholds, OCC can access additional capital through an operational loss fee charged to clearing members. None of OCC’s shareholders (including Cboe Options) has any obligation to contribute capital to OCC under the new capital management policy, nor does any shareholder have the right to receive dividends from OCC under such policy. Lease and Obligations The Company currently leases additional office space, data centers and remote network operations center, with lease terms remaining from 4 months to 180 months as of December 31, 2019. In September 2019, we entered into two leases that will commence in 2020 for a new principal office space and trading floor space, both located in Chicago, Illinois. Total rent expense related to current and former lease obligations for the years ended December 31, 2019, 2018 and 2017 totaled $12.4 million, $10.1 million and $7.6 million, respectively. In addition to our lease obligations, we have contractual obligations related to certain operating leases, data and telecommunications agreements, and our long-term debt outstanding. Future minimum payments under these leases and agreements were as follows as of December 31, 2019: | | | | | | | | | | | | | | | | | | | Payments Due by Period | | | | | | | Less than | | | | | | | | | More than | | | Total | | | 1 year | | | 1-3 years | | | 4-5 years | | | 5 years | Contractual Obligations | | (in millions) | Operating leases | | $ | 164.3 | | $ | 11.3 | | $ | 30.5 | | $ | 25.9 | | $ | 96.6 | Principal payments of debt | | | 875.0 | | | — | | | 225.0 | | | — | | | 650.0 | Interest payments on debt | | | 187.0 | | | 32.1 | | | 80.9 | | | 48.8 | | | 25.2 | Total | | $ | 1,226.3 | | $ | 43.4 | | $ | 336.4 | | $ | 74.7 | | $ | 771.8 |
Off-Balance Sheet Arrangements As of December 31, 2019 and 2018, we did not have any off-balance sheet arrangements. Guarantees We use Wedbush and Morgan Stanley to clear our routed equities transactions in our U.S. Equities segment. Wedbush and Morgan Stanley guarantee the trade until one day after the trade date, after which time the NSCC provides a guarantee. In the case of failure to perform on the part of one of our clearing firms, Wedbush or Morgan Stanley, we provide the guarantee to the counterparty to the trade. OCC acts as a central counterparty on all transactions in listed equity options in our Options segment, and as such, guarantees clearance and settlement of all of our options transactions. We believe that any potential requirement for us to make payments under these guarantees is remote and accordingly, have not recorded any liability in the consolidated financial statements for these guarantees. Similarly, with respect to U.S. listed equity options and futures, we deliver matched trades of our customers to the OCC, which acts as a central counterparty on all transactions occurring on Cboe Options, C2, BZX, EDGX, and CFE and, as such, guarantees clearance and settlement of all of our matched options and futures trades. Critical Accounting Policies The preparation of consolidated financial statements in conformity with U.S. GAAP requires our management to make estimates and judgmentsassumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosure of the amounts of contingent assets and liabilities.liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. On an ongoing basis, the Company evaluates its estimates, including those related to areas that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. The Company bases its estimates on historical experience, observance of trends in particular areas, information available from outside sources and various other assumptions that are believed to be reasonable under the circumstances. Information from these sources form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. Actual amounts may differ from these estimates under different assumptions or conditions. We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact of, and any associated risks related to, these policies on our business operations is discussed throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations." For a detailed discussion on the application of these and other accounting policies, see Note 12 (“Summary of Significant Accounting Policies”) to our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.TransactionFor further discussion related to revenue recognition of fees, revenuesuch as transaction fees and liquidity payments, access and capacity fees, market data fees, and regulation transaction and Section 31 fees, see Note 4 (“Revenue Recognition”). Goodwill and Other Intangible Assets Our acquisitions of Bats, Cboe Vest Financial Group Inc. (“Vest”), Silexx Financial Systems, LLC (“Silexx”), and LiveVol resulted in the recording of goodwill and other intangible assets. In accordance with ASC 350—Intangibles—Goodwill and Other, we test the carrying values of goodwill and indefinite-lived intangible assets for impairment at least annually, or more frequently when events or changes in circumstances signal indicators of impairment are present. We perform our annual impairment test of goodwill and other indefinite-lived intangible assets during the fourth quarter of our fiscal year, using the October 1 carrying values. Goodwill is considered earned upontested for impairment at the executionreporting unit level in accordance with ASC 350-20. If the carrying value of the tradereporting unit exceeds its fair value, an impairment loss will be recognized on a trade-date basisin an amount equal to the excess. If the fair value of indefinite-lived intangible assets is less than their carrying value, an impairment loss will be recognized in an amount equal to the difference. We performed our annual goodwill impairment test as of October 1, 2019 and presented netdetermined that no impairment existed. The estimated fair values of our reporting units are based on the attainmentmarket approach and the income approach (using discounted estimated future cash flows). The estimated fair values of volume thresholds resultingindefinite-lived intangibles used the income approach. The discounted cash flow analysis requires significant judgment, including judgments about the discount rate, anticipated revenue growth rate, and operating expenses, that are inherent in these fair value estimates over the estimated remaining operating period. As such, actual results may differ from these estimates and lead to a revaluation of our goodwill and indefinite-lived intangible assets. If updated estimates indicate that the fair value of goodwill or any indefinite-lived intangibles is less than the carrying value of the asset, an impairment charge is expected to be recorded in the amortizationconsolidated statements of the prepayment over the calendar year. Access fee revenue is recognized during the period access is granted and assurance of collectability is provided.
Exchange services and other fees revenue is recognized during the period the service is provided.
Market data fees from OPRA are allocated based upon the share of total options transactions cleared for each of the OPRA members and is received quarterly. Revenue from our market data services is recognizedincome in the period of the data is provided.
Regulatory feeschange in estimate.Purchase Accounting Tangible and intangible assets acquired and liabilities assumed in an acquired business are recognized primarilyrecorded at their estimated fair values on a trade-date basis. Income Taxes
Deferred income taxes arise from temporary differencesthe date of acquisition. The difference between the tax basispurchase price amount and book basisthe net fair value of assets acquired and liabilities.liabilities assumed is recognized as goodwill on the balance sheet if the purchase price exceeds the estimated net fair value or as a bargain purchase gain on the income statement if the purchase price is less than the estimated net fair value. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment, often utilizes independent valuation experts and involves the use of significant estimates and assumptions with respect to the timing and amounts of future cash inflows and outflows, discount rates, market prices and asset lives, among other items. The Company accounts for income taxes underjudgments made in the determination of the estimated fair value assigned to the assets acquired and liabilities assumed, as well as the estimated useful life of each asset and the duration of each liability, method, which requirescould significantly impact the recognitionfinancial statements in periods after acquisition, such as through depreciation and amortization expense. When available, the estimated fair values of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the consolidated financial statements. Under this method, deferred taxthese assets and liabilities are determined based on observable inputs, such as quoted market prices, information from comparable transactions, offers made by other prospective acquirers, in such cases where we may have certain rights to acquire additional interests in existing investments, and the replacement cost of assets in the same condition or stage of usefulness (Level 1 and 2). Unobservable inputs, such as expected future cash flows or internally developed estimates of value (Level 3), are used if observable inputs are not available. As noted in ASC 805—Business Combinations, the allocation of the purchase price may be modified up to twelve months after the acquisition date as more information is obtained about the fair value of assets acquired and liabilities assumed. See Note 5 (“Acquisitions”) for additional information.Stock-Based Compensation We have historically granted stock-based compensation to our employees in the form of restricted stock units. With the acquisition of Bats, we also assumed Bats’ grants of restricted stock and stock options to certain employees. We record the related stock-based compensation expense based on the grant date fair value calculated in accordance with the authoritative guidance issued by FASB. The Company used the Monte Carlo valuation model method to estimate the fair value of the total shareholder return performance share units, which incorporated the following assumptions: risk-free interest rate, three-year volatility, and three year correlation with S&P 500 Index. We recognize these stock-based compensation costs on a straight-line basis over the requisite service period of the award. We recognized stock-based compensation expense of approximately $21.8 million, $35.1 million, and $50.1 million for the years ended December 31, 2019, 2018 and 2017, respectively. This expense is included in the compensation and benefits expense and acquisition related costs in the consolidated statements of income. Income Taxes Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the book and tax basisreported amounts of assets and liabilities using enactedand their tax ratesbases. Deferred tax assets are reduced by a valuation allowance when, in effect forour opinion, it is more likely than not that all or some portion of the year in which the differences are expected todeferred tax assets will not be reversed. The effect of a change in tax rates on deferredrealized. Deferred tax assets and liabilities is recognizedare adjusted for the effects of changes in tax laws and rates on the period that includes the enactment date. date of enactment. The Company filesrecognizes the tax returns for federal, state and local incomebenefit from an uncertain tax purposes. A valuation allowance is recognizedposition only if it is anticipatedmore likely than not that some or all of a deferred tax asset may not be realized. If the Company considers that a tax position is "more-likely-than-not" towill be sustained upon audit,on examination by the taxing authorities, based solely onupon the technical merits of the position, it recognizes the tax benefit.position. The Company measures the
tax benefit by determiningrecognized in the consolidated financial statements from such a position is measured based on the largest amountbenefit that ishas a greater than 50% likelylikelihood of being realized upon settlement, presuming thatultimate settlement. Also, interest and penalties expense is recognized on the full amount of deferred benefits for uncertain tax positionpositions. The Company’s policy is examined by the appropriate taxing authority that has full knowledge of all relevant information. These assessments can be complexto include interest and require specific analysis to determine the impact of the position, as such the Company often obtains assistance from external advisors. The Company considers the information and arrives at the percentage to apply as a possible uncertain portionpenalties related to the position. To the extent that the Company's estimates change or the finalunrecognized tax outcome of these matters is different than the amounts recorded, such differences will impactbenefits in the income tax provision in the period in which such determinations are made. Uncertain tax positions are classified as current only when the Company expects to pay cash within the next twelve months. Interest and penalties, if any, are recorded within the provision for income taxes in the Company's consolidated statements of incomeincome. Recent Accounting Pronouncements See Note 3 (“Recent Accounting Pronouncements”) to the consolidated financial statements for further discussion of recently adopted and recently issued accounting pronouncements that are classifiedapplicable to the Company. Item 7A. Quantitative and Qualitative Disclosures about Market Risk As a result of our operating activities, we are exposed to market risks such as foreign currency exchange rate risk, equity risk, credit risk, and interest rate risk. We have implemented policies and procedures to measure, manage and monitor and report risk exposures, which are reviewed regularly by management and our board of directors. Foreign Currency Exchange Rate Risk Our operations in Europe and Asia are subject to increased currency translation risk as revenues and expenses are denominated in foreign currencies, primarily the British pound, Singapore dollar, Hong Kong dollar, and the Euro. We also have de minimis exposure to other foreign currencies, including the Swiss Franc, Norwegian Kroner, Swedish Krona and Danish Kroner. For the year ended December 31, 2019, our exposure to foreign-denominated revenues and expenses is presented by primary foreign currency in the following table: | | | | | | | | | Year Ended | | | | December 31, 2019 | | | | | | | British | | | | Euro (1) | | | Pound (1) | | | | (in millions, except | | | | percentages) | | Foreign denominated % of: | | | | | | | Revenues | | 0.3 | % | | 4.0 | % | Cost of revenues | | 0.1 | % | | 1.4 | % | Operating expenses | | 0.2 | % | | 5.5 | % | Impact of 10% adverse currency fluctuation on: | | | | | | | Revenues | $ | 0.3 | | $ | 4.3 | | Cost of revenues | | 0.1 | | | 0.6 | | Operating expenses | | 0.1 | | | 1.0 | |
| (1) | An average foreign exchange rate to the U.S. dollar for the period was used. |
Equity Risk Our investment in European operations is exposed to volatility in currency exchange rates through translation of our net assets or equity to U.S. dollars. The assets and liabilities of our European business are denominated in British pounds or Euros. Fluctuations in currency exchange rates may create volatility in our reported results as we are required to translate foreign currency reported statements of financial condition and operational results into U.S. dollars for consolidated reporting. The translation of these non-U.S. dollar statements of financial condition into U.S. dollars for consolidated reporting results in a cumulative translation adjustment, which is recorded in accumulated other comprehensive loss (income) within stockholders' equity on our consolidated balance sheet. Our primary exposure to this equity risk as of December 31, 2019 is presented by foreign currency in the following table: | | | | | | British | | | Pound (1) | | | (in millions) | Net equity investment in Cboe Europe | | $ | 727.9 | Impact on consolidated equity of a 10% adverse currency fluctuation | | | 72.8 |
| (1) | Converted to U.S. dollars using the foreign exchange rate of British pounds per U.S. dollar as of December 31, 2019. |
Credit Risk We are exposed to credit risk from third parties, including customers, counterparties and clearing agents. These parties may default on their obligations due to bankruptcy, lack of liquidity, operational failure or other reasons. We limit our exposure to credit risk by considering such risk when selecting the counterparties with which we make investments and execute agreements. We do not have counterparty credit risk with respect to trades matched on our exchanges in the U.S. and Europe. With respect to listed equities, we deliver matched trades of our customers to the NSCC without taking on counterparty risk for those trades. NSCC acts as a central counterparty on all equity transactions occurring on BZX, BYX, EDGX and EDGA and, as such, guarantees clearance and settlement of all of our matched equity trades. Similarly, with respect to U.S. listed equity options and futures, we deliver matched trades of our customers to the OCC, which acts as a central counterparty on all transactions occurring on Cboe Options, C2, BZX, EDGX and CFE and, as such, guarantees clearance and settlement of all of our matched options and futures trades. With respect to orders Cboe Trading routes to other markets for execution on behalf of our customers, Cboe Trading is exposed to some counterparty credit risk in the case of failure to perform on the consolidated balance sheets with the related liability for unrecognized tax benefits. Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In addition, the ASU provides guidance on accounting for certain revenue-related costs including when to capitalize costs associated with obtaining and fulfilling a
contract. ASU 2014-09 provides companies with two implementation methods. Companies can choose to apply the standard retrospectively to each prior reporting period presented (full retrospective application) or retrospectively with the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings of the annual reporting period that includes the date of initial application (modified retrospective application). This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The FASB deferred the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. Early adoption of the standard is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods. Based on our evaluation of the standard, we do not expect a material impact on our revenue recognition practices. A significant portionpart of our revenue is generated from fees associated primarily with the execution of a trade, transaction feesclearing firms, Morgan Stanley or Wedbush. Morgan Stanley and regulatory fees, and revenue is recognized onWedbush guarantee trades until one day after the trade date, after which time NSCC provides a guarantee. Thus, Cboe Trading is potentially exposed to credit risk to the counterparty to a trade routed to another market center between the trade date and one day after the trade date in the event that Morgan Stanley or Wedbush fails. We believe that any potential requirement for us to make payments under these guarantees is remote and accordingly, have not recorded any liability in the consolidated financial statements for these guarantees.Historically, we have not incurred any liability due to a customer’s failure to satisfy its contractual obligations as counterparty to a system trade. Credit difficulties or insolvency, or the perceived possibility of credit difficulties or insolvency, of one or more larger or more visible market participants could also result in market-wide credit difficulties or other market disruptions. We do not have counterparty credit risk with respect to institutional spot FX trades occurring on our performance obligation would be complete. The revenue componentsplatform because Cboe FX is not a counterparty to any FX transactions. All transactions occurring on our platform occur bilaterally between two banks or prime brokers as counterparties to the trade. While Cboe FX does not have direct counterparty risk, Cboe FX may suffer a decrease in transaction volume if a bank or prime broker experiences an event that causes other prime brokers to decrease or revoke the credit available to the prime broker experiencing the event. Therefore, Cboe FX may have risk that is related to the credit of the banks and prime brokers that trade FX on the Cboe FX platform. We also have credit risk related to transaction fees that are not primarily associated withbilled in arrears to customers on a monthly basis. Our potential exposure to credit losses on these transactions is represented by the execution of a trade, market data fees and exchange service and other fees,receivable balances in our balance sheet. Our customers are also not expectedfinancial institutions whose ability to satisfy their contractual obligations may be impacted by volatile securities markets. On a regular basis, we review and evaluate changes in the adoptionstatus of our counterparties’ creditworthiness. Credit losses such as those described above could adversely affect our consolidated financial position and results of operations. Any such effects to date have been minimal. Interest Rate Risk We have exposure to market risk for changes in interest rates relating to our cash and cash equivalents, financial investments, and indebtedness. As of December 31, 2019 and 2018, our cash and cash equivalents and financial investments were $300.3 million and $310.8 million, respectively, of which $85.1 million and $72.9 million is held outside of the new standard. In most cases, our performance obligation is fulfilled on a monthly basisUnited States in various foreign subsidiaries in 2019 and does not require any additional requirements that would require performance beyond a monthly basis. Therefore we2018, respectively. The remaining cash and cash equivalents and financial investments are denominated in U.S. dollars. We do not expect ause our investment portfolio for trading or other speculative purposes. Due to the nature of these investments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates, assuming no change in the amount or composition of our cash and cash equivalents and financial investments. As of December 31, 2019, we had $875.0 million in outstanding debt, of which $650.0 million relates to our Senior Notes, which bear interest at fixed interest rates. Changes in interest rates will have no impact on the interest we pay on fixed-rate obligations. The remaining amount outstanding of $225.0 million relates to the Term Loan Agreement, which bears interest at fluctuating rates and, therefore, subjects us to interest rate risk. A hypothetical 100 basis point increase in interest rates relating to the amounts outstanding under the Term Loan Agreement as of December 31, 2019 would decrease annual pre-tax earnings by $2.3 million, assuming no change in the composition of our revenue recognition policiesoutstanding indebtedness. We are also exposed to changes in interest rates as a result of the adoptionborrowings under our Revolving Credit Agreement, as this facility bears interest at fluctuating rates. As of the new standard which the Company is considering early adoption priorDecember 31, 2019, there were no outstanding borrowings under our Revolving Credit Agreement. See Note 13 (“Debt”) to the effective date.consolidated financial statements for a discussion of debt agreements. In February 2016,
Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the FASB issued ASU 2016-02, Leases. This update requires a lessee to recognizeStockholders and the Board of Directors of Cboe Global Markets, Inc. Opinion on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The guidance also requires certain qualitative and quantitative disclosures aboutFinancial Statements We have audited the amount, timing and uncertainty of cash flows arising from leases. This update is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company is in the process of evaluating this guidance, though we do not expect it will materially impact ouraccompanying consolidated balance sheets of Cboe Global Markets, Inc. and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements ofincome, comprehensive income, orstockholders' equity, and cash flows.
In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation. This standard simplifies several aspectsflows, for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting for stock-based payment transactions, includingprinciples generally accepted in the recognitionUnited States of excess tax benefitsAmerica. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and deficiencies, the classification of those excess tax benefitsour report dated February 21, 2020, expressed an unqualified opinion on the statementCompany's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of cash flows,the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting policy election for forfeitures,firm registered with the amount an employer can withholdPCAOB and are required to cover income taxes and still qualify for equity classificationbe independent with respect to the Company in accordance with the U.S. federal securities laws and the classificationapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those taxes paidrisks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the statement of cash flows. This update is effective for annualfinancial statements, taken as a whole, and interim periods beginning after December 15, 2016 and can be applied either prospectively, retrospectively or usingwe are not, by communicating the critical audit matter below, providing a modified retrospective transition method, dependingseparate opinion on the area covered in this update. Early adoption is permitted.critical audit matter or on the accounts or disclosures to which it relates. Goodwill — US Equities, European Equities, and Global FX Reporting Units—and Indefinite-lived Intangible Assets — Refer to Notes 2 and 11 to the financial statements Critical Audit Matter Description The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company’s evaluation of indefinite-lived intangibles (i.e., trading registrations and licenses) for impairment involves the comparison of the aggregate fair value to carrying value. The Company is indetermines the processfair value of evaluating this guidance, though we do not expect it will materially impact our consolidatedits reporting units using both income and market approaches, and the fair value of indefinite-lived intangibles using an income approach. The determination of fair value using an income approach requires management to make significant estimates and assumptions related to future revenues. The goodwill balance sheets, statementswas $2.68 billion as of income, comprehensive income or cash flows.
In September 2016,December 31, 2019, of which $1,740.4 million, $435.1 million, and $267.2 million was allocated to the FASB issued ASU 2016-15, StatementUS Equities, European Equities, and Global FX reporting units, respectively. The indefinite-lived intangibles balance was $850.4 million as of Cash Flows (Topic 230) — Classification of Certain Cash Receipts and Cash Payments (a consensusDecember 31, 2019. The fair values of the FASB Emerging Issues Task Force). This standard addresses stakeholders’ concerns regarding diversity in practice in how certain cash receiptsUS Equities, European Equities, and cash payments are presentedGlobal FX reporting units, and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. In particular, ASU No. 2016-15 addresses eight specific cash flow issues in an effort to reduce this diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. For public business entities that are SEC filers, the amendments are effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Note that early adoption is permitted for all entities, including adoption during an interim period. The Company is in the process of evaluating this guidance, though we do not expect it will materially impact our consolidated balance sheets, statements of income, comprehensive income or cash flows.
In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes:Intra-Entity Transfers of Assets other than Inventory. The standard requires that the income tax impact of intra-entity sales and transfers of property, except for inventory, be recognized when the transfer occurs. This update is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The new standard should be applied by making a cumulative effect adjustment directly to retained earningsindefinite-lived intangibles exceeded their carrying values as of the beginningmeasurement date and, therefore, no impairment was recognized.Given the significant judgments made by management to estimate future revenues, auditing the future revenue assumptions for the US Equities, European Equities, and Global FX reporting units and indefinite-lived intangibles required a high degree of periodauditor judgment and an increased extent of adoption.The Company iseffort, including the need to involve our fair value specialists, given the difference between the carrying value and the fair value for each. How the Critical Audit Matter Was Addressed in the processAudit Our audit procedures related to the future revenue assumptions for the US Equities, European Equities, and Global FX reporting units and indefinite-lived intangibles included the following, among others: | ● | We tested the effectiveness of controls over goodwill and indefinite-lived intangibles, including those over the future revenue assumptions. |
| ● | We evaluated management’s ability to accurately forecast future revenues by comparing actual revenues to management’s historical forecasts. |
| ● | We evaluated the reasonableness of management’s future revenue assumptions by: |
| o | Comparing management’s forecasts with: |
| ◾ | Internal communications to management and the Board of Directors. |
| ◾ | Forecasted information included in Company press releases, as well as analyst and industry reports of the Company and companies in its peer group. |
| o | Evaluated the impact of changes in the regulatory environment for exchanges and of industry developments on management’s forecasts. |
| o | Evaluated the impact of changes in management’s forecasts subsequent to October 1, 2019, the annual assessment date. |
| o | Performed sensitivity analyses to identify potential bias in the determination of the future revenue assumptions. |
| ● | With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodologies and (2) long-term revenue growth rates by: |
| o | Testing the underlying source information and the mathematical accuracy of the calculations |
| o | Developing a range of independent estimates and comparing those to the long-term revenue growth rates selected by management. |
/s/ DELOITTE & TOUCHE LLP Chicago, Illinois
February 21, 2020 We have served as the Company’s auditor since 1973. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and considering early adoption, though we do not expect it will materially impact our consolidated balance sheets, statementsthe Board of income, comprehensive income or cash flows.
ResultsDirectors of Operations
Year ended Cboe Global Markets, Inc.Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Cboe Global Markets, Inc. and subsidiaries (the “Company”) as of December 31, 2016 compared to2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the year ended Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015Consolidated Results
The following summarizes financial performance for the year ended December 31, 2016 compared to 2015. | | | | | | | | | | | | | | | | | | 2016 | | 2015 | | Inc./(Dec.) | | Percent Change | | | (in millions, except per share amounts) | | | | Total operating revenues | $ | 656.9 |
| | $ | 634.5 |
| | $ | 22.4 |
| | 3.5 | % | | Total operating expenses | 358.7 |
| | 314.6 |
| | 44.1 |
| | 14.0 | % | | Operating income | 298.2 |
| | 319.9 |
| | (21.7 | ) | | (6.8 | )% | | Total other income/(expense) | 8.4 |
| | 4.1 |
| | 4.3 |
| | 105.2 | % | | Income before income taxes | 306.6 |
| | 324.0 |
| | (17.4 | ) | | (5.4 | )% | | Income tax provision | 120.9 |
| | 119.0 |
| | 1.9 |
| | 1.6 | % | | Net income | $ | 185.7 |
| | $ | 205.0 |
| | $ | (19.3 | ) | | (9.4 | )% | | Net income allocated to common stockholders | $ | 184.9 |
| | $ | 204.1 |
| | $ | (19.2 | ) | | (9.4 | )% | | Operating income percentage | 45.4 | % | | 50.4 | % | | |
| | |
| | Net income percentage | 28.3 | % | | 32.3 | % | | |
| | |
| | Diluted—net income per share allocated to common stockholders | $ | 2.27 |
| | $ | 2.46 |
| | |
| | |
|
The increase in total operating revenues was primarily driven by higher transaction fees, exchange services and other fees, market data fees and regulatory fees, partially offset by lower access fees and other revenue.
The increase in total operating expenses was primarily driven by higher compensation and benefits, professional fees and outside services, travel and promotional expense and royalty fees. The increase in professional fees and outside services was mainly due to acquisition-related costs, which resulted in a lower operating margin for the year.
The increase in total other income/(expense) was primarily driven by proceeds from the settlement of litigation.
Operating Revenues
Total operating revenues for the year ended December 31, 2016increased $22.4 million, or 3.5%, to $656.9 million from $634.5 million in the prior year. The following summarizes changes in total operating revenues for the year ended December 31, 2016 compared to 2015.
| | | | | | | | | | | | | | | | | | 2016 | | 2015 | | Inc./(Dec.) | | Percent Change | | | (in millions) | | | | Transaction fees | $ | 463.3 |
| | $ | 456.0 |
| | $ | 7.3 |
| | 1.6 | % | | Access fees | 52.3 |
| | 53.3 |
| | (1.0 | ) | | (1.8 | )% | | Exchange services and other fees | 46.3 |
| | 42.2 |
| | 4.1 |
| | 9.6 | % | | Market data fees | 33.2 |
| | 30.0 |
| | 3.2 |
| | 10.4 | % | | Regulatory fees | 48.3 |
| | 33.5 |
| | 14.8 |
| | 44.3 | % | | Other revenue | 13.5 |
| | 19.5 |
| | (6.0 | ) | | (30.5 | )% | | Total operating revenues | $ | 656.9 |
| | $ | 634.5 |
| | $ | 22.4 |
| | 3.5 | % |
Transaction Fees
Transaction fees increased1.6% to $463.3 million for the year ended December 31, 2016, representing 70.5% of total operating revenues, compared with $456.0 million for the prior year period, or 71.9% of total operating revenues. This increase was largely driven by a 0.9% increase in trading volume and a 0.8% increase in the average revenue per contract.
Average revenue per contract, discussed in more detail below, is impacted by our fee structure, which includes volume based incentive programs, mix of products traded, the account type (customer, firm, market-maker, etc.) and the manner in which a trade is executed. The implementation of fee changes, which may increase or decrease our average revenue per contract, is primarily to ensure that we are competitive in the options marketplace and to ultimately improve and continue to drive order flow to our exchanges. We cannot predict the trading patterns of exchange participants, which may be2019, based on factors outside our control, but we can attempt to price our products at levels that are competitivecriteria established in our market.
Trading volume is impactedInternal Control — Integrated Framework (2013) issued by many factors, including: macroeconomic events, market volatility, regulatory actions or considerations, availabilityCOSO.We have also audited, in accordance with the standards of capital, competitionthe Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and pricing. The following summarizes transaction fees by product category for 2016 compared to 2015.
| | | | | | | | | | | | | | | | | | 2016 | | 2015 | | Inc./(Dec.) | | Percent Change | | | (in millions) | | | | Equities | $ | 23.4 |
| | $ | 36.4 |
| | $ | (13.0 | ) | | (35.7 | )% | | Indexes | 307.7 |
| | 290.3 |
| | 17.4 |
| | 6.0 | % | | Exchange-traded products | 31.1 |
| | 41.8 |
| | (10.7 | ) | | (25.6 | )% | | Total options transaction fees | 362.2 |
| | 368.5 |
| | (6.3 | ) | | (1.7 | )% | | Futures | 101.1 |
| | 87.5 |
| | 13.6 |
| | 15.6 | % | | Total transaction fees | $ | 463.3 |
| | $ | 456.0 |
| | $ | 7.3 |
| | 1.6 | % |
Trading Volume
Our average daily trading volume ("ADV") was 4.70 million contracts in 2016, up 0.9% compared with 4.66 million for 2015. Total trading days in 2016 and 2015 were two hundred fifty-two.
The following summarizes changes in total trading volume and ADV by product category for 2016 compared to 2015.
| | | | | | | | | | | | | | | | | | | | | 2016 | | 2015 | | Volume Percent Change | | ADV Percent Change | | | Volume | | ADV | | Volume | | ADV | | | | (in millions) | | | | | | Equities | 364.3 |
| | 1.44 |
| | 393.0 |
| | 1.56 |
| | (7.3 | )% | | (7.3 | )% | | Indexes | 433.3 |
| | 1.72 |
| | 408.3 |
| | 1.62 |
| | 6.1 | % | | 6.1 | % | | Exchange-traded products | 326.7 |
| | 1.30 |
| | 321.0 |
| | 1.27 |
| | 1.8 | % | | 1.8 | % | | Total options contracts | 1,124.3 |
| | 4.46 |
| | 1,122.3 |
| | 4.45 |
| | 0.2 | % | | 0.2 | % | | Futures contracts | 60.2 |
| | 0.24 |
| | 51.7 |
| | 0.21 |
| | 16.5 | % | | 16.5 | % | | Total contracts | 1,184.5 |
| | 4.70 |
| | 1,174.0 |
| | 4.66 |
| | 0.9 | % | | 0.9 | % |
The following provides the percentage of volume by product category for the years ended December 31, 2016 and 2015.
| | | | | | | | | | | 2016 | | 2015 | | Equities | | 30.8 | % | | 33.5 | % | | Indexes | | 36.6 | % | | 34.8 | % | | Exchange-traded products | | 27.5 | % | | 27.3 | % | | Futures | | 5.1 | % | | 4.4 | % | | Total | | 100.0 | % | | 100.0 | % |
Average revenue per contract
The average revenue per contract was $0.391 in 2016, an increase of 0.8% compared with $0.388 in 2015. Average revenue per contract represents transaction fees divided by total contracts.
The following summarizes average revenue per contract by product category for 2016 compared to 2015.
| | | | | | | | | | | | | | 2016 | | 2015 | | Percent Change | | Equities | $ | 0.064 |
| | $ | 0.093 |
| | (31.2 | )% | | Indexes | 0.710 |
| | 0.711 |
| | (0.1 | )% | | Exchange-traded products | 0.095 |
| | 0.130 |
| | (26.9 | )% | | Total options average revenue per contract | 0.322 |
| | 0.328 |
| | (1.8 | )% | | Futures | 1.681 |
| | 1.694 |
| | (0.8 | )% | | Total average revenue per contract | $ | 0.391 |
| | $ | 0.388 |
| | 0.8 | % |
Factors contributing to the change in total average revenue per contract for the year ended December 31, 2016 compared to the same period in 2015 included:
Product mix—We experienced a shift in overall product mix. As a percentage of total volume, equities decreased to 30.8% from 33.5%, indexes increased to 36.6% from 34.8% and futures increased to 5.1% from 4.4%. Equities represent our lowest average revenue per contract, while index options and futures generate our highest options average revenue per contract and our highest total average revenue per contract, respectively.
Exchange Services and Other Fees
Exchange services and other fees for the year ended December 31, 2016increased9.6% to $46.3 million from $42.2 million in the comparable period in the prior year. The increase was primarily a result of higher fees for technology services and revenue generated from Livevol, which was acquired on August 7, 2015.
Market Data Fees
Market data fees increased 10.4% to $33.2 million for the year ended December 31, 2016 from $30.0 million2019, of the Company and our report dated February 21, 2020, expressed an unqualified opinion on those financial statements.Basis for Opinion 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 prior year. accompanying Management���s Annual 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. 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. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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. /s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 21, 2020 Cboe Global Markets, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2019 and 2018 (In millions, except share and per share data) | | | | | | | | | | December 31, | | December 31, | | | | 2019 | | 2018 | | Assets | | | | | | | Current Assets: | | | | | | | | Cash and cash equivalents | | $ | 229.3 | | $ | 275.1 | | Financial investments | | | 71.0 | | | 35.7 | | Accounts receivables, net | | | 234.7 | | | 287.3 | | Income taxes receivable | | | 56.8 | | | 70.4 | | Other current assets | | | 15.8 | | | 15.2 | | Total Current Assets | | | 607.6 | | | 683.7 | | Investments | | | 61.2 | | | 86.2 | | Land | | | — | | | 4.9 | | Property and equipment, net | | | 47.0 | | | 71.7 | | Property held for sale | | | 21.1 | | | — | | Operating lease right of use assets | | | 53.4 | | | — | | Goodwill | | | 2,682.1 | | | 2,691.4 | | Intangible assets, net | | | 1,589.9 | | | 1,720.2 | | Other assets, net | | | 51.6 | | | 62.9 | | Total Assets | | $ | 5,113.9 | | $ | 5,321.0 | | Liabilities, Redeemable Noncontrolling Interest and Stockholders' Equity | | | | | | | | Current Liabilities: | | | | | | | | Accounts payable and accrued liabilities | | $ | 171.9 | | $ | 198.5 | | Section 31 fees payable | | | 99.0 | | | 81.1 | | Deferred revenue | | | 4.5 | | | 8.5 | | Income taxes payable | | | 4.0 | | | 4.1 | | Current portion of long-term debt | | | — | | | 299.8 | | Contingent consideration liability | | | 2.2 | | | 3.9 | | Total Current Liabilities | | | 281.6 | | | 595.9 | | Long-term debt | | | 867.6 | | | 915.6 | | Income tax liability | | | 135.9 | | | 114.9 | | Deferred income taxes | | | 399.7 | | | 436.8 | | Non-current operating lease liabilities | | | 46.7 | | | — | | Other non-current liabilities | | | 26.8 | | | 7.4 | | Total Liabilities | | $ | 1,758.3 | | $ | 2,070.6 | | Commitments and Contingencies | | | | | | | | | | | | | | | | Redeemable Noncontrolling Interest | | | — | | | 9.4 | | | | | | | | | | Stockholders’ Equity: | | | | | | | | Preferred stock, $0.01 par value: 20,000,000 shares authorized, 0 shares issued and outstanding at December 31, 2019 and December 31, 2018 | | | — | | | — | | Common stock, $0.01 par value: 325,000,000 shares authorized, 125,701,889 and 110,656,892 shares issued and outstanding, respectively at December 31, 2019 and 125,080,496 and 111,601,976 shares issued and outstanding, respectively at December 31, 2018 | | | 1.2 | | | 1.2 | | Common stock in treasury, at cost, 15,044,997 shares at December 31, 2019 and 13,478,520 shares at December 31, 2018 | | | (887.1) | | | (720.1) | | Additional paid-in capital | | | 2,691.3 | | | 2,660.2 | | Retained earnings | | | 1,512.6 | | | 1,288.2 | | Accumulated other comprehensive income, net | | | 37.6 | | | 11.5 | | Total Stockholders’ Equity | | | 3,355.6 | | | 3,241.0 | | Total Liabilities, Redeemable Noncontrolling Interest, and Stockholders’ Equity | | $ | 5,113.9 | | $ | 5,321.0 | |
See accompanying notes to consolidated financial statements. Cboe Global Markets, Inc. and Subsidiaries Consolidated Statements of Income Years ended December 31, 2019, 2018 and 2017 (In millions, except per share data) | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | Revenues: | | | | | | | | | | | Transaction fees | | $ | 1,716.2 | | $ | 1,986.9 | | $ | 1,564.9 | | Access and capacity fees | | | 221.9 | | | 211.0 | | | 181.6 | | Market data fees | | | 213.5 | | | 204.0 | | | 164.5 | | Regulatory fees | | | 311.7 | | | 333.9 | | | 291.5 | | Other revenue | | | 32.8 | | | 33.0 | | | 26.6 | | Total revenues | | | 2,496.1 | | | 2,768.8 | | | 2,229.1 | | Cost of revenues: | | | | | | | | | | | Liquidity payments | | | 964.7 | | | 1,113.0 | | | 849.7 | | Routing and clearing | | | 35.8 | | | 39.1 | | | 37.6 | | Section 31 fees | | | 271.4 | | | 302.4 | | | 260.0 | | Royalty fees | | | 86.8 | | | 97.4 | | | 86.2 | | Other | | | 0.5 | | | — | | | — | | Total cost of revenues | | | 1,359.2 | | | 1,551.9 | | | 1,233.5 | | Revenues less cost of revenues | | | 1,136.9 | | | 1,216.9 | | | 995.6 | | Operating expenses: | | | | | | | | | | | Compensation and benefits | | | 199.0 | | | 228.8 | | | 201.4 | | Depreciation and amortization | | | 176.6 | | | 204.0 | | | 192.2 | | Technology support services | | | 46.2 | | | 47.9 | | | 42.1 | | Professional fees and outside services | | | 68.3 | | | 68.3 | | | 66.0 | | Travel and promotional expenses | | | 11.9 | | | 13.0 | | | 17.2 | | Facilities costs | | | 11.0 | | | 11.5 | | | 10.3 | | Acquisition-related costs | | | 48.5 | | | 30.0 | | | 84.4 | | Other expenses | | | 38.2 | | | 14.0 | | | 10.1 | | Total operating expenses | | | 599.7 | | | 617.5 | | | 623.7 | | Operating income | | | 537.2 | | | 599.4 | | | 371.9 | | Non-operating (expenses) income: | | | | | | | | | | | Interest expense, net | | | (35.9) | | | (38.2) | | | (41.3) | | Other income, net | | | 0.1 | | | 10.0 | | | 3.8 | | Income before income tax provision (benefit) | | | 501.4 | | | 571.2 | | | 334.4 | | Income tax provision (benefit) | | | 130.6 | | | 146.0 | | | (66.2) | | Net income | | | 370.8 | | | 425.2 | | | 400.6 | | Net loss attributable to noncontrolling interest | | | 4.1 | | | 1.3 | | | 1.1 | | Net income excluding noncontrolling interest | | | 374.9 | | | 426.5 | | | 401.7 | | Change in redemption value of noncontrolling interest | | | (0.5) | | | (1.3) | | | (1.1) | | Net income allocated to participating securities | | | (1.7) | | | (3.1) | | | (3.9) | | Net income allocated to common stockholders | | $ | 372.7 | | $ | 422.1 | | $ | 396.7 | | Basic earnings per share | | $ | 3.35 | | $ | 3.78 | | $ | 3.70 | | Diluted earnings per share | | $ | 3.34 | | $ | 3.76 | | $ | 3.69 | | | | | | | | | | | | | Basic weighted average shares outstanding | | | 111.4 | | | 111.8 | | | 107.2 | | Diluted weighted average shares outstanding | | | 111.8 | | | 112.2 | | | 107.5 | |
See accompanying notes to consolidated financial statements. Cboe Global Markets, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income Years ended December 31, 2019, 2018 and 2017 (In millions) | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | Net income | | $ | 370.8 | | $ | 425.2 | | $ | 400.6 | | Other comprehensive income (loss), net of tax: | | | | | | | | | | | Foreign currency translation adjustments | | | 26.1 | | | (39.2) | | | 51.3 | | Unrealized holding gains on available-for-sale investments | | | — | | | — | | | 0.2 | | Comprehensive income | | | 396.9 | | | 386.0 | | | 452.1 | | Comprehensive loss attributable to noncontrolling interest | | | 4.1 | | | 1.3 | | | 1.1 | | Comprehensive income excluding noncontrolling interest | | | 401.0 | | | 387.3 | | | 453.2 | | Change in redemption value of noncontrolling interest | | | (0.5) | | | (1.3) | | | (1.1) | | Comprehensive income allocated to participating securities | | | (1.7) | | | (3.1) | | | (3.9) | | Comprehensive income allocated to common stockholders, net of tax | | $ | 398.8 | | $ | 382.9 | | $ | 448.2 | |
See accompanying notes to consolidated financial statements. Cboe Global Markets, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity Years ended December 31, 2019, 2018 and 2017 (In millions) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | Additional | | | | other | | Total | | Redeemable | | | | Preferred | | Common | | Treasury | | paid-in | | Retained | | comprehensive | | stockholders’ | | Noncontrolling | | | | Stock | | Stock | | Stock | | capital | | earnings | | income (loss), net | | equity | | Interest | | Balance at December 31, 2016 | | $ | — | | $ | 0.9 | | $ | (532.2) | | $ | 139.2 | | $ | 710.8 | | $ | (0.8) | | $ | 317.9 | | $ | 12.6 | | Cash dividends on common stock of $1.04 per share | | | — | | | — | | | — | | | — | | | (118.1) | | | — | | | (118.1) | | | — | | Stock-based compensation | | | — | | | — | | | — | | | 52.6 | | | — | | | — | | | 52.6 | | | — | | Exercise of common stock options | | | — | | | — | | | — | | | 4.0 | | | — | | | — | | | 4.0 | | | — | | Issuance of vested restricted stock granted to employees | | | — | | | — | | | — | | | 0.3 | | | — | | | — | | | 0.3 | | | — | | Issuance of stock for acquisition of Bats Global Markets, Inc. | | | — | | | 0.3 | | | — | | | 2,424.4 | | | — | | | — | | | 2,424.7 | | | — | | Common stock issued from employee stock plans | | | — | | | — | | | (26.1) | | | — | | | — | | | — | | | (26.1) | | | — | | Net income excluding noncontrolling interest | | | — | | | — | | | — | | | — | | | 401.7 | | | — | | | 401.7 | | | — | | Purchase of additional equity interest from noncontrolling interest | | | — | | | — | | | — | | | 3.2 | | | — | | | — | | | 3.2 | | | (3.2) | | Other comprehensive income | | | — | | | — | | | — | | | — | | | — | | | 51.5 | | | 51.5 | | | — | | Net loss attributable to redeemable noncontrolling interest | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1.1) | | Redemption value adjustment of redeemable noncontrolling interest | | | — | | | — | | | — | | | — | | | (1.1) | | | — | | | (1.1) | | | 1.1 | | Balance at December 31, 2017 | | $ | — | | $ | 1.2 | | $ | (558.3) | | $ | 2,623.7 | | $ | 993.3 | | $ | 50.7 | | $ | 3,110.6 | | $ | 9.4 | | Cash dividends on common stock of $1.16 per share | | | — | | | — | | | — | | | — | | | (130.3) | | | — | | | (130.3) | | | — | | Stock-based compensation | | | — | | | — | | | — | | | 35.1 | | | — | | | — | | | 35.1 | | | — | | Common stock repurchased from employee stock plans | | | — | | | — | | | (20.9) | | | 1.4 | | | — | | | — | | | (19.5) | | | — | | Purchase of common stock | | | — | | | — | | | (140.9) | | | — | | | — | | | — | | | (140.9) | | | — | | Net income excluding noncontrolling interest | | | — | | | — | | | — | | | — | | | 426.5 | | | — | | | 426.5 | | | — | | Other comprehensive loss | | | — | | | — | | | — | | | — | | | — | | | (39.2) | | | (39.2) | | | — | | Net loss attributable to redeemable noncontrolling interest | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1.3) | | Redemption value adjustment of redeemable noncontrolling interest | | | — | | | — | | | — | | | — | | | (1.3) | | | — | | | (1.3) | | | 1.3 | | Balance at December 31, 2018 | | $ | — | | $ | 1.2 | | $ | (720.1) | | $ | 2,660.2 | | $ | 1,288.2 | | $ | 11.5 | | $ | 3,241.0 | | $ | 9.4 | | Cash dividends on common stock of $1.34 per share | | | — | | | — | | | — | | | — | | | (150.0) | | | — | | | (150.0) | | | — | | Stock-based compensation | | | — | | | — | | | — | | | 21.8 | | | — | | | — | | | 21.8 | | | — | | Exercise of common stock options | | | — | | | — | | | — | | | 9.3 | | | — | | | — | | | 9.3 | | | — | | Common stock repurchased from employee stock plans | | | — | | | — | | | (11.0) | | | — | | | — | | | — | | | (11.0) | | | — | | Purchase of common stock | | | — | | | — | | | (156.9) | | | — | | | — | | | — | | | (156.9) | | | — | | Shares issued under employee stock purchase plan | | | — | | | — | | | 0.9 | | | — | | | — | | | — | | | 0.9 | | | — | | Net income excluding noncontrolling interest | | | — | | | — | | | — | | | — | | | 374.9 | | | — | | | 374.9 | | | — | | Other comprehensive income | | | — | | | — | | | — | | | — | | | — | | | 26.1 | | | 26.1 | | | — | | Net loss attributable to redeemable noncontrolling interest | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4.1) | | Redemption value adjustment of redeemable noncontrolling interest | | | — | | | — | | | — | | | — | | | (0.5) | | | — | | | (0.5) | | | 0.5 | | Deconsolidation of former subsidiary with noncontrolling interest | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (5.8) | | Balance at December 31, 2019 | | $ | — | | $ | 1.2 | | $ | (887.1) | | $ | 2,691.3 | | $ | 1,512.6 | | $ | 37.6 | | $ | 3,355.6 | | $ | — | |
See accompanying notes to consolidated financial statements. Cboe Global Markets, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years ended December 31, 2019, 2018 and 2017 (In millions) | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | Cash Flows from Operating Activities: | | | | | | | | | | | Net income | | $ | 370.8 | | $ | 425.2 | | $ | 400.6 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | Depreciation and amortization | | | 176.6 | | | 204.0 | | | 192.2 | | Amortization of debt issuance cost | | | 2.2 | | | 2.5 | | | 3.6 | | Change in fair value of contingent consideration | | | 2.6 | | | 3.9 | | | 1.0 | | Realized gain on available-for-sale securities | | | (1.3) | | | (1.4) | | | (0.4) | | Provision for uncollectable accounts receivable | | | 1.0 | | | — | | | — | | Provision for uncollectable convertible notes receivable | | | — | | | — | | | 3.8 | | Provision for deferred income taxes | | | (37.2) | | | (47.7) | | | (238.4) | | Stock-based compensation expense | | | 21.8 | | | 35.1 | | | 52.6 | | Loss on disposition of property | | | 4.4 | | | 1.0 | | | — | | Impairment of assets held for sale | | | 6.1 | | | — | | | — | | Loss related to deconsolidation of former subsidiary | | | 2.0 | | | — | | | — | | Impairment of goodwill | | | 10.5 | | | — | | | — | | Provision for uncollectable notes receivable | | | 23.4 | | | — | | | — | | Impairment of data processing software | | | — | | | — | | | 14.9 | | Equity in investments | | | (2.2) | | | (1.1) | | | (1.4) | | Changes in assets and liabilities: | | | | | | | | | | | Accounts receivable | | | 50.3 | | | (70.3) | | | (20.6) | | Income taxes receivable | | | 13.5 | | | (53.2) | | | 42.0 | | Other prepaid expenses | | | (16.9) | | | (15.8) | | | (7.3) | | Accounts payable and accrued liabilities | | | (25.7) | | | 46.8 | | | 10.3 | | Section 31 fees payable | | | 17.9 | | | (24.5) | | | (42.4) | | Deferred revenue | | | (4.1) | | | (7.0) | | | 7.8 | | Income taxes payable | | | 0.1 | | | 0.4 | | | (50.5) | | Income tax liability | | | 21.0 | | | 36.1 | | | 6.3 | | Other liabilities | | | (4.0) | | | 0.7 | | | 0.3 | | Net Cash Flows provided by Operating Activities | | | 632.8 | | | 534.7 | | | 374.4 | | Cash Flows from Investing Activities: | | | | | | | | | | | Acquisitions, net of cash acquired | | | — | | | — | | | (1,414.1) | | Purchases of available-for-sale financial investments | | | (108.8) | | | (166.2) | | | (136.0) | | Proceeds from maturities of available-for-sale financial investments | | | 98.0 | | | 178.7 | | | 155.1 | | Return of capital from investments | | | 30.0 | | | — | | | — | | Purchases of investments | | | — | | | (1.8) | | | (4.0) | | Purchases of property and equipment | | | (35.1) | | | (36.3) | | | (37.5) | | Net Cash Flows used in Investing Activities | | | (15.9) | | | (25.6) | | | (1,436.5) | | Cash Flows from Financing Activities: | | | | | | | | | | | Proceeds from long-term debt | | | — | | | 300.0 | | | 1,943.9 | | Principal payments of long term debt | | | (350.0) | | | (325.0) | | | (700.0) | | Proceeds from credit facility | | | — | | | 39.0 | | | — | | Payments of credit facility | | | — | | | (39.0) | | | — | | Debt issuance costs | | | — | | | — | | | (2.0) | | Dividends paid | | | (150.0) | | | (130.3) | | | (118.1) | | Purchase of unrestricted stock from employees | | | (11.0) | | | (20.9) | | | (26.1) | | Proceeds from exercise of stock-based compensation | | | 9.3 | | | 2.1 | | | 2.0 | | Payment of contingent consideration in conjunction with acquisition of a business | | | (4.3) | | | (56.6) | | | — | | Purchase of common stock under announced program | | | (156.9) | | | (140.9) | | | — | | Net Cash Flows (used in) provided by Financing Activities | | | (662.9) | | | (371.6) | | | 1,099.7 | | Effect of Foreign Currency Exchange Rate Changes on Cash and Cash equivalents | | | 0.2 | | | (5.9) | | | 8.6 | | (Decrease) Increase in Cash and Cash Equivalents | | | (45.8) | | | 131.6 | | | 46.2 | | Cash and Cash Equivalents: | | | | | | | | | | | Beginning of Period | | | 275.1 | | | 143.5 | | | 97.3 | | End of Period | | $ | 229.3 | | $ | 275.1 | | $ | 143.5 | | Supplemental disclosure of cash transactions: | | | | | | | | | | | Cash paid for income taxes | | $ | 134.9 | | $ | 213.4 | | $ | 177.4 | | Interest paid | | | 32.7 | | | 38.7 | | | 27.0 | | Supplemental disclosure of noncash transactions: | | | | | | | | | | | Forfeiture of common stock for payment of exercise of stock options | | | — | | | — | | | 3.7 | | Supplemental disclosure of noncash investing activities: | | | | | | | | | | | Accounts receivable acquired | | | — | | | — | | | 117.8 | | Financial investments acquired | | | — | | | — | | | 66.0 | | Property and equipment acquired | | | — | | | — | | | 21.8 | | Goodwill acquired | | | — | | | — | | | 2,653.3 | | Intangible assets acquired | | | — | | | — | | | 2,000.0 | | Other assets acquired | | | — | | | — | | | 32.8 | | Accounts payable and accrued expenses assumed | | | — | | | — | | | (59.9) | | Section 31 fees payable acquired | | | — | | | — | | | (143.6) | | Deferred tax liability acquired | | | — | | | — | | | (722.6) | | Other liabilities assumed | | | — | | | — | | | (135.5) | | Issuance of common stock related to acquisition | | | — | | | — | | | (2,424.7) | | Note receivable issued in connection with deconsolidation of former subsidiary | | | 3.7 | | | — | | | — | | Investment recognized in connection with deconsolidation of former subsidiary | | | 2.9 | | | — | | | — | | Net assets of former subsidiary deconsolidated | | | 14.5 | | | — | | | — | |
Seeaccompanying notes to consolidated financial statements Cboe Global Markets, Inc. and Subsidiaries Notes to Consolidated Financial Statements As of December 31, 2019 and 2018 and for the
Years ended December 31, 2019, 2018 and 2017 1. NATURE OF OPERATIONS Cboe Global Markets, Inc. (“Cboe” or “the Company”) is one of the world’s largest exchange holding companies, offering cutting-edge trading and investment solutions to investors around the world. The Company is committed to defining markets to benefit its participants and drive the global marketplace forward through product innovation, leading edge technology and seamless trading solutions. Cboe offers trading across a diverse range of products in multiple asset classes and geographies, including options, futures, U.S. and European equities, exchange-traded products (“ETPs”), global foreign exchange (“FX”) and multi-asset volatility products based on the VIX Index, recognized as the world’s premier gauge of U.S. equity market volatility. Cboe’s subsidiaries include the largest options exchange and the third largest stock exchange operator in the U.S. In addition, the Company operates one of the largest equities stock exchanges by value traded in Europe and is a leading market globally for ETP listings and trading. The Company is headquartered in Chicago with offices in Kansas City, New York, London, San Francisco, Amsterdam, Singapore, Hong Kong, and Ecuador. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) | Principles of Accounting |
These consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) as established by FASB. The accompanying financial statements are presented on a consolidated basis to include the accounts and transactions of Cboe Global Markets, Inc. and its majority owned subsidiaries and all significant intercompany accounts and transactions have been eliminated. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, valuation of redeemable noncontrolling interest and reported amounts of revenues and expenses. On an ongoing basis, management evaluates its estimates based upon historical experience, observance of trends, information available from outside sources and various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from these estimates under different conditions or assumptions. For those consolidated subsidiaries in which the Company’s ownership is less than 100% and for which the Company has control over the assets and liabilities and the management of the entity, the outside stockholders’ interests are shown as non-controlling interest. Segment information The Company has 5 business segments: Options, U.S. Equities, Futures, European Equities, and Global FX, which is reflective of how the Company’s chief operating decision-maker reviews and operates the business. See Note 17 (“Segment Reporting”) for more information. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as disclosure of the amounts of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the valuation of goodwill, indefinite-lived intangible assets, and unrecognized tax benefits. (d) | Cash and Cash Equivalents |
The Company’s cash and cash equivalents are exposed to concentrations of credit risk. The Company maintains cash at various financial institutions and brokerage firms which, at times, may be in excess of the federal depository insurance limit. The Company’s management regularly monitors these institutions and believes that the potential for future loss is remote. The Company considers all liquid investments with original or acquired maturities of three months or less to be cash equivalents. Financial investments are classified as trading or available-for-sale. Trading financial investments represent financial investments held by the Company’s broker-dealer subsidiary that retain the industry-specific accounting classification required for broker-dealers and marketable securities held in a rabbi trust for the Company’s non-qualified retirement and benefit plans. The investments held by the broker-dealer subsidiary are recorded at fair value with changes in unrealized gains and losses reflected within interest expense, net in the consolidated statements of income. The investments held in a rabbi trust are recorded at fair value with changes in unrealized gains or losses recorded within other income (expense) and the equal and offsetting charges in the related liability are recorded in compensation and benefits expense in the consolidated statements of income. Available-for-sale financial investments are comprised of the financial investments not held by the broker-dealer subsidiary, including highly liquid U.S. Treasury securities. Unrealized gains and losses, net of income taxes, are included as a component of accumulated other comprehensive income in the accompanying consolidated balance sheets. Interest on financial investments, including amortization of premiums and accretion of discounts, is recognized as income when earned. Realized gains and losses on financial investments are calculated using the specific identification method and are included in interest expense, net in the accompanying consolidated statements of income. A decline in the fair value of any available-for-sale investment below carrying amount that is deemed to be other-than-temporary results in an impairment to reduce the carrying amount to realizable value. To determine whether an impairment is other-than-temporary, the Company considers all available information relevant to the collectability of the investment, including past events, current conditions, and reasonable and supportable forecasts when developing estimate of cash flows expected to be collected. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end, forecasted performance of the investee, and the general market condition in the geographic area or industry in which the investee operates. (f) | Accounts Receivable, Net |
Accounts receivable are concentrated with the Company’s member firms and market data distributors and are carried at cost. The Company nets transaction fees and liquidity payments for each member firm on a monthly basis and recognizes the total owed from a member firm as an asset and the total owed to a member firm as a liability. On a periodic basis, management evaluates the Company’s receivables and determines an appropriate allowance for uncollectible accounts receivable based on anticipated collections. In circumstances where a specific customer’s inability to meet its financial obligations is probable, the Company records a specific provision for uncollectible accounts against amounts due to reduce the receivable to the amount the Company estimates will be collected. Once the Company determines an allowance for an uncollectible account is necessary, interest on the receivable ceases to be accrued. (g) | Property and Equipment, Net |
Property and equipment, net is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated lives of the assets, generally ranging from three to seven years. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation of leasehold improvements is calculated using the straight-line method over the shorter of the related lease term or the estimated useful life of the assets. Long-lived assets to be held and used are reviewed to determine whether any events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. The Company bases this evaluation on such impairment indicators as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. If such impairment indicators are present that would indicate that the carrying amount of any asset may not be recoverable, the Company determines whether an impairment has occurred through the use of an undiscounted cash flow analysis of the asset at the lowest level for which identifiable cash flows exist. In the event of impairment, the Company recognizes a loss for the difference between the carrying amount and the estimated value of the asset as measured using quoted market prices or, in the absence of quoted market prices, a discounted cash flow analysis. The Company expenses software development costs as incurred during the preliminary project stage, while capitalizing costs incurred during the application development stage, which includes design, coding, installation and testing activities. (h) | Goodwill and Intangible Assets, Net |
Goodwill represents the excess of purchase price over the value assigned to the net tangible and identifiable intangible assets of a business acquired. Goodwill is allocated to the Company’s reporting units based on the assignment of the fair values of each reporting unit of the acquired company. The Company tests goodwill for impairment at the reporting unit level annually, or in interim periods if certain events occur indicating that the carrying value may be impaired. The impairment test is performed during the fourth quarter using October 1st carrying values, and if the fair value of the reporting unit is found to be less than the carrying value, an impairment loss is recorded. The Company performed its 2019 annual goodwill impairment test and determined that no impairment existed. Intangible assets, net, primarily include acquired trademarks and trade names, customer relationships, strategic alliance agreements, licenses and registrations and non-compete agreements. Intangible assets with finite lives are amortized based on the discounted cash flow method applied over the estimated useful lives of the intangible assets and are tested for impairment if certain events occur indicating that the carry value may be impaired. Intangible assets deemed to have indefinite useful lives are not amortized, but instead are tested for impairment at least annually, usually concurrently with goodwill. Impairment exists if the fair value of the asset is less than the carrying amount, and in that case, an impairment loss is recorded. The Company performed its 2019 annual intangible assets impairment test using October 1, 2019 carrying values and determined that 0 impairment existed. The financial statements of foreign subsidiaries where the functional currency is not the U.S. dollar are translated into U.S. dollars using the exchange rate in effect as of each balance sheet date. Statements of income and cash flow amounts are translated using the average exchange rate during the period. The cumulative effects of translating the balance sheet accounts from the functional currency into the U.S. dollar at the applicable exchange rates are included in accumulated other comprehensive income (loss), net in the balance sheet. Foreign currency gains and losses are recorded as other income, net in the consolidated statements of income. The Company’s operations in the United Kingdom, Singapore, and Hong Kong are recorded in Pounds sterling, Singapore dollars, and Hong Kong dollars, respectively. Deferred taxes are recorded on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based upon the technical merits of the position. The tax benefit recognized in the consolidated financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Also, interest and penalties expense is recognized on the full amount of deferred benefits for uncertain tax positions. The Company’s policy is to include interest and penalties related to unrecognized tax benefits in the income tax provision within the consolidated statements of income. We have elected to account for global intangible low-taxed income (“GILTI”) in the period in which it is incurred, and therefore, have not provided any deferred tax impacts of GILTI in our consolidated financial statements. For further discussion related to revenue recognition of fees, such as transaction fees and liquidity payments, access and capacity fees, market data fees, and regulation transaction and Section 31 fees, see Note 4 (“Revenue Recognition”). Concentrations of Revenue and Liquidity Payments For the years ended December 31, 20162019, 2018, and 2015, income derived from our market data services totaled $17.5 million2017, 2 members accounted for 18%, 23%, and $16.0 million, respectively. Revenue generated from our market data services, which provide current17%, respectively, of the Company’s transaction fees. NaN member accounted for more than 15% of the Company’s total revenue during the years ended December 31, 2019, 2018, and historical options and futures data, increased $1.5 million, resulting primarily from an increase in subscribers and fees for certain market data services.2017. For the years ended December 31, 20162019, 2018, and 2015, OPRA income totaled $15.7 million and $14.0 million, respectively. Income derived from OPRA is allocated based on each exchange's share of total cleared options transactions. The Company's share of total cleared options transactions for the year ended December 31, 2016 increased to 24.4% from 23.3% for the same period in 2015 and total distributable OPRA income increased compared to the prior year ended 2015. Regulatory Fees
Regulatory fees increased44.3% for the year ended 2016 to $48.3 million from $33.5 million in the same period in the prior year. The increase in regulatory fees is primarily the result of an increase in our options regulatory fees resulting from increased costs associated with the regulation of CBOE and C2 and other self-regulatory organization commitments.
Regulatory fees are primarily generated by the options regulatory fee that we charge on all Trading Permit Holder customer volume industry-wide. Under the rules of each of our options exchanges, as required by the SEC, any revenue derived from regulatory fees and fines cannot be used for non-regulatory purposes.
Other Revenue
Other revenue decreased $6.0 million for the year ended 2016 to $13.5 million from $19.5 million in the same period in the prior year. The decrease in other revenue was primarily due to lower revenue from fines assessed for rule violations and, in 2015, the recognition of revenue to adjust for incorrect coding of transactions by an exchange participant related to prior periods.
Concentration of Revenue
All contracts traded on our exchanges must be cleared through clearing members of OCC. At December 31, 2016, there were one hundred one Trading Permit Holders that are clearing members of OCC. Two clearing members accounted for 42% of transaction and other fees collected through OCC in 2016. The next largest clearing2017, 0 member accounted for approximately 14% of transaction and other fees collected through OCC. No one Trading Permit Holder using the clearing servicesmore than 15% of the top two clearingCompany’s liquidity payments.No member firms represented more than 21%is contractually or otherwise obligated to continue to use the Company’s services. The loss of, transactionor a significant reduction of, participation by these members may have a material adverse effect on the Company’s business, financial position, results of operations and other fees collected through OCC, for the respective clearing member, in 2016. Should a clearing member withdraw from CBOE, we believe the Trading Permit Holder portion of that clearing member's trading activity would likely transfer to another clearing member.cash flows. The two2 largest clearing members mentioned above clear the majority of the market-maker sides of transactions at CBOE, C2 and at all of the Company’s U.S. options exchanges. If either of these clearing members were to withdraw from the business of market-maker clearing and market-makers were unable to transfer to another clearing member, this could create significant disruption to the U.S. options markets, including ours. Operating Expenses
Total operating expenses increased$44.1 million, or 14.0%, to $358.7 millionThe computation of basic earnings per share is calculated by reducing net income for the year ended 2016 from $314.6 million in the year ago period resulting from higher compensationby dividends paid or declared and benefits, professional fees and outside services, travel and promotional expense and royalty fees. Expenses increased to 54.7% of total operating revenues in the year ended 2016 compared with 49.6% in the same period in 2015.The following summarizes changes in operating expensesundistributed net income for the year ended December 31, 2016 comparedperiod that are allocated to 2015.
| | | | | | | | | | | | | | | | | | 2016 | | 2015 | | Inc./(Dec.) | | Percent Change | | | (in millions) | | | | Compensation and benefits | $ | 113.2 |
| | $ | 105.9 |
| | $ | 7.3 |
| | 6.8 | % | | Depreciation and amortization | 44.4 |
| | 46.3 |
| | (1.9 | ) | | (4.1 | )% | | Technology support services | 22.4 |
| | 20.7 |
| | 1.7 |
| | 8.7 | % | | Professional fees and outside services | 78.5 |
| | 50.1 |
| | 28.4 |
| | 56.9 | % | | Royalty fees | 77.9 |
| | 70.6 |
| | 7.3 |
| | 10.5 | % | | Order routing | 0.9 |
| | 2.3 |
| | (1.4 | ) | | (60.8 | )% | | Travel and promotional expenses | 11.0 |
| | 8.9 |
| | 2.1 |
| | 22.1 | % | | Facilities costs | 5.7 |
| | 5.0 |
| | 0.7 |
| | 13.9 | % | | Other expenses | 4.7 |
| | 4.8 |
| | (0.1 | ) | | (3.2 | )% | | Total operating expenses | $ | 358.7 |
| | $ | 314.6 |
| | $ | 44.1 |
| | 14.0 | % |
Compensation and Benefits
For the year ended December 31, 2016, compensation and benefits were $113.2 million, or 17.2% of total operating revenues, compared with $105.9 million, or 16.7% of total operating revenues, in the same period in 2015. This represented an increase of $7.3 million, or 6.8%, which primarily resulted from increased staffing levels, higher stock-based compensation, including accelerated stock-based compensation expense, and annual incentive compensation, which is aligned with our financial performance relativeparticipating securities to our targets. The year ended December 31, 2016 included $0.9 million of accelerated stock-based compensation expense, respectively, for certain officers and employees as a result of attaining certain age and service based requirements in our long-term incentive plan and award agreements.
Stock-based compensation expense, included in compensation and benefits expense, is expected to be approximately
$27.5 million for 2017. This includes $13.0 million in accelerated stock-based compensation, approximately $12.0 million of which is expected to be recognized in the first quarter of 2017. The increase in accelerated stock-based compensation versus 2016, reflects a planned change in the retirement vesting schedule for equity award grants.
Depreciation and Amortization
Depreciation and amortization decreased by $1.9 million to $44.4 million for the year ended December 31, 2016 compared with $46.3 million for the same period in 2015. The decrease was primarily due to the the acceleration of depreciation for certain assets that have a shorter than expected useful life through June 30, 2016, partially offset by the amortization of intangible assets related to the acquisitions of Livevol and Vest.
Professional Fees and Outside Services
Expenses related to professional fees and outside services increased to $78.5 million for the year ended December 31, 2016 from $50.1 million in the prior-year period, an increase of $28.4 million, which primarily resulted from higher legal and professional fees, primarily Bats acquisition-related costs totaling $13.7 million, and higher contract services related to certain regulatory services provided by FINRA and other self-regulatory organization commitments for CBOE and C2. In connection with the anticipated merger with Bats and the planned migration to the Bats trading platform and the suspension of CBOE Vector, our investment of $15.0 million related to the development of Vector, in 2017, could become obsolete or result in a shorter than expected useful life.
Royalty Fees
Royalty fees for the year ended December 31, 2016 were $77.9 million compared with $70.6 million for the prior year period, an increase of $7.3 million, which primarily resulted from higher trading volume in licensed products.
Travel and promotional expenses
Travel and promotional expenses for the year ended December 31, 2016 were $11.0 million compared with $8.9 million for the prior year period. The increase is primarily due to higher advertising expenses.
Operating Income
As a result of the items above, operating income in 2016 was $298.2 million compared to $319.9 million in 2015, a decrease of $21.7 million.
Other Income
Other income totaled $8.4 million for the year ended December 31, 2016 compared with $4.1 million for the same period in the prior year. The increase in other income in 2016 primarily resulted from higher projected dividend income from OCC, proceeds from the settlement of litigation and a gain on settlement of contingent consideration related to the acquisition of Livevol, partially offset by the amortization of expenses for the bridge loan facility related to the proposed acquisition of Bats.
Income before Income Taxes
As a result of the items above, income before income taxes in 2016 was $306.6 million compared to $324.0 million in 2015, a decrease of $17.4 million.
Income Tax Provision
For the year ended December 31, 2016, the income tax provision was $120.9 million compared with $119.0 million for the same period in 2015. The effective tax rate was 39.4% and 36.7% for the years ended December 31, 2016 and 2015, respectively. The lower effective tax rate in 2015 was primarily due to a 2015 decrease in unrecognized tax benefits for tax positions taken in prior years as a result of the expiration of applicable statutes of limitation and the effective settlement of uncertain tax positions.
Net Income
As a result of the items above,arrive at net income allocated to common stockholders. Net income allocated to common stockholders in 2016 was $184.9 million comparedis divided by the weighted average number of common shares outstanding during the period to $204.1 million in 2015, a decrease of $19.2 million. Basic and diluteddetermine net income per share allocated to common stockholders.The computation of diluted earnings per share is calculated by dividing net income allocated to common stockholders by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. The dilutive effect is calculated using the more dilutive of the two-class or treasury stock method. (m) | Stock-Based Compensation |
The Company grants stock-based compensation to its employees through awards of restricted stock units. In connection with the acquisition of Bats, Bats previously awarded stock options and restricted stock awards. The Company records stock-based compensation expense for all stock-based compensation granted based on the grant-date fair value. The Company recognizes stock-based compensation expense related to stock-based compensation awards with graded vesting that have a service condition on a straight-line basis over the requisite service period of the entire award. In connection with the acquisition of Bats, as discussed in Note 20 (“Stock-Based Compensation’) in further detail, each outstanding Bats stock option granted under any of the Bats Plans that was outstanding immediately prior to the effective time of the acquisition of Bats was converted into an option to purchase our common stock, on the same terms and conditions (including vesting schedule) as were $2.27applicable to such Bats stock option. All stock options are currently vested. In addition, each award of Bats restricted shares granted under any of the Bats Plans that was unvested immediately prior to the effective time of the acquisition of Bats was assumed by the Company and $2.46converted into an award of restricted shares of our common stock, subject to the same terms and conditions (including vesting schedule) that applied to the applicable Bats restricted shares. The amount of stock-based compensation expense related to awards of restricted stock and restricted stock units is based on the fair value of Cboe Global Markets, Inc. common stock at the date of grant. The fair value is based on a current market-based transaction of the Company’s common stock. If a market-based transaction of the Company’s common stock is not available, then the fair value is based on an independent third-party valuation using equal weighting of two valuation analysis techniques, discounted cash flows and valuation multiples observed from publicly traded companies in a similar industry. The Company records identifiable assets, liabilities and goodwill acquired in a business combination at fair value at the acquisition date. Additionally, transaction-related costs are expensed in the period incurred. All costs incurred to issue debt are capitalized as a contra-liability and amortized over the life of the loan using the interest method. (p) | Cost and Equity Method Investments |
The Company uses the cost method to account for a non-marketable equity investment in an entity that it does not control and for which it does not have the ability to exercise significant influence over an entity’s operating and financial policies. When it does not have a controlling financial interest in an entity but can exercise significant influence over the entity's operating and financial policies, such investment is accounted for using the equity method. The Company recognizes dividend income when declared. In general, the equity method of accounting is used when the Company owns 20% to 50% of the outstanding voting stock of a company and when it is able to exercise significant influence over the operating and financial policies of a company. The Company has an investment where it has significant influence and as such accounts for the years ended investments under the equity method of accounting. For equity method investments, the Company records the pro-rata share of earnings or losses each period and records any dividends received as a reduction in the investment balance. The equity method investment is evaluated for other-than-temporary declines in value by considering a variety of factors such as the earnings capacity of the investment and the fair value of the investment compared to its carrying amount. If the estimated fair value of the investment is less than the carrying amount and the decline in value is considered to be other than temporary, the excess of the carrying amount over the estimated fair value is recognized in the financial statements as an impairment. The Company determines if an arrangement contains a lease at inception. For arrangements where the Company is the lessee, operating leases are included in operating lease right of use (“ROU”) assets, accrued liabilities, and non-current operating lease liabilities on the balance sheet as of December 31, 20162019. The Company does not have any finance leases as of December 31, 2019. ROU assets and 2015, respectively.operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. The Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the lease liabilities, as the rate implicit in the Company’s leases are generally not reasonably determinable. Lease terms may include options to extend or terminate when the Company is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term. The Company also has lease arrangements with lease and non-lease components. The Company elected the practical expedient not to separate non-lease components from lease components for the Company’s leases. The Company elected to apply the short-term lease measurement and recognition exemption in which ROU assets and lease liabilities are not recognized for short-term leases. For short-term operating leases, lease expense is recognized on a straight-line basis over the lease term. 3. RECENT ACCOUNTING PRONOUNCEMENTS Recent Accounting Pronouncements – Adopted In February 2016, the FASB issued ASU 2016-02, Leases. This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding ROU asset. The guidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases ASU 2018-11, Leases (Topic 842) Targeted Improvements, ASU 2018-20, Leases (Topic 842) Narrow-Scope Improvements for Lessors, and ASU 2019-01, Leases (Topic 842) Codification Improvements, to clarify the implementation guidance. This updated guidance provides an optional transition method, which allows for the initial application of the new accounting standard at the adoption date and the recognition of a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the period of adoption. These updates are effective for annual and interim periods beginning after December 15, 2018. The Company adopted the new ASUs on January 1, 2019, using the alternative transition approach and will not restate comparative periods. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to not reassess contracts to determine if they contain leases, lease classification and initial direct costs. The Company’s application of the new standard resulted in changes to the balance sheet but did not have an impact on our consolidated income statements and statements of cash flows. See Note 25 (“Leases”) for more information. Recent Accounting Pronouncements - Issued, not yet Adopted In June 2016, the FASB issued ASU 2016-13, Credit Losses. This update replaces the incurred loss impairment methodology in current GAAP with a methodology that requires management to estimate an expected lifetime credit loss on financial assets. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees, and net investments in leases, as well as trade receivables. The update also amends the impairment model for available-for-sale debt securities. The forward-looking expected lifetime credit loss model generally will result in the earlier recognition of allowances for losses. For public entities, the update is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company adopted the new ASU on January 1, 2020 using the modified retrospective approach and will not restate comparative periods. Upon the adoption of the standard, the Company expects to recognize an immaterial cumulative-effect adjustment to retained earnings for the expected lifetime credit loss on the financial instruments within the scope of the standard, including accounts receivable, net. Based on the Company’s high turnover and collectability of accounts receivable, as well as the monthly billing process for the majority of revenue, the Company does not expect a significant variance in the recognized loss between the incurred loss impairment methodology under the prior standard and the expected lifetime credit loss model under the update. The financial instruments other than accounts receivable, net that are within the scope of the standard are not materially impacted by the standard. The impact to the consolidated balance sheets is expected to be immaterial in nature and there is no expected impact on the consolidated income statements and statements of cash flows. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For public entities, the update is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. The Company will adopt the update for the financial statements issued for the first quarter of 2020 and does not anticipate a material impact to the consolidated financial statements. 4. REVENUE RECOGNITION The Company’s main types of revenue contracts are: | ● | Transaction fees - Transaction fees represent fees charged by the Company for the performance obligation of executing a trade on its markets. These fees can be variable based on trade volume tiered discounts, however, as all tiered discounts are calculated monthly, the actual discount is recorded on a monthly basis. Transaction fees, as well as any tiered volume discounts, are calculated and billed monthly in accordance with the Company’s published fee schedules. Transaction fees are recognized across all segments. The Company also pays liquidity payments to customers based on its published fee schedules. The Company uses these payments to improve the liquidity on its markets and therefore recognizes those payments as a cost of revenue. |
| ● | Access and capacity fees - Access and capacity fees represent fees assessed for the opportunity to trade, including fees for trading-related functionality across all segments, terminal and other equipment rights, maintenance services, trading floor space and telecommunications services. These fees are billed monthly in accordance with the Company’s published fee schedules and recognized on a monthly basis when the performance obligation is met. Facilities, systems services and other fees are generally monthly fee-based, although certain services are influenced by trading volume or other defined metrics, while others are based solely on demand. All fees associated with the trading floor are recognized over time in the Options segment. There is no remaining performance obligation after revenue is recognized. This caption is a combination of the previous captions “access fees” and “exchange services and other fees” as the Company migrated all Exchanges to the Company’s current platform. The prior periods presented have been updated to conform to the current period presentation. |
| ● | Market data fees - Market data fees represent the fees received by the Company from the U.S. tape plans and fees charged to customers for proprietary market data. Fees from the U.S. tape plans are collected monthly based on published fee schedules and distributed quarterly to the U.S. exchanges based on a known formula. A contract for proprietary market data is entered into and charged on a monthly basis in accordance with the Company’s published fee schedules as the service is provided. Both types of market data are satisfied over time, and revenue is recognized on a monthly basis as the customer receives and consumes the benefit as the Company provides the data. U.S. tape plan market data is recognized in the U.S. Equities and Options segments. Proprietary market data fees are recognized across all segments. |
| ● | Regulatory fees- There are 2 types of regulatory fees that the Company recognizes. The first type represents fees collected by the Company to cover the Section 31 fees charged to the Exchanges by the SEC. The fees charged to customers are based on the fee set by the SEC per notional value of the transaction executed on the |
| | Company’s U.S. securities markets. These fees are calculated and billed monthly and are recognized in the U.S. Equities and Options segments. As the Exchanges are responsible for the ultimate payment to the SEC, the exchanges are considered the principal in these transactions. Regulatory fees also include the options regulatory fee (“ORF”) which supports the Company’s regulatory oversight function in the Options segment and other miscellaneous regulatory fees and cannot be used for non-regulatory purposes. |
| ● | Other revenue - Other revenueprimarily includes revenue from various licensing agreements, all fees related to the trade reporting facility operated in the European Equities segment, and revenue associated with advertisements through the Company’s website. |
All revenue recognized in the income statement is considered to be revenue from contracts with customers. The following table depicts the disaggregation of revenue according to product line and segment (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Corporate | | | | | | | | | | | | | | | European | | | | | items and | | | | | | Options | | U.S. Equities | | Futures | | Equities | | Global FX | | eliminations | | Total | Year Ended December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | Transaction fees | | $ | 742.9 | | $ | 744.6 | | $ | 110.2 | | $ | 73.1 | | $ | 45.4 | | $ | — | | $ | 1,716.2 | Access and capacity fees | | | 104.1 | | | 78.9 | | | 15.6 | | | 16.5 | | | 6.8 | | | — | | | 221.9 | Market data fees | | | 55.7 | | | 138.1 | | | 6.5 | | | 12.6 | | | 0.6 | | | — | | | 213.5 | Regulatory fees | | | 64.0 | | | 247.0 | | | 0.7 | | | — | | | — | | | — | | | 311.7 | Other revenue | | | 16.4 | | | 4.5 | | | 2.9 | | | 8.6 | | | 0.2 | | | 0.2 | | | 32.8 | | | | 983.1 | | | 1,213.1 | | | 135.9 | | | 110.8 | | | 53.0 | | | 0.2 | | | 2,496.1 | Timing of revenue recognition | | | | | | | | | | | | | | | | | | | | | | Services transferred at a point in time | | $ | 823.3 | | $ | 996.1 | | $ | 113.8 | | $ | 81.7 | | $ | 45.6 | | $ | 0.2 | | $ | 2,060.7 | Services transferred over time | | | 159.8 | | | 217.0 | | | 22.1 | | | 29.1 | | | 7.4 | | | — | | | 435.4 | | | | 983.1 | | | 1,213.1 | | | 135.9 | | | 110.8 | | | 53.0 | | | 0.2 | | | 2,496.1 | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | Transaction fees | | $ | 835.5 | | $ | 876.4 | | $ | 128.0 | | $ | 97.4 | | $ | 49.6 | | $ | — | | $ | 1,986.9 | Access and capacity fees | | | 99.4 | | | 75.6 | | | 15.1 | | | 14.7 | | | 6.2 | | | — | | | 211.0 | Market data fees | | | 42.9 | | | 140.9 | | | 6.6 | | | 13.1 | | | 0.5 | | | — | | | 204.0 | Regulatory fees | | | 60.0 | | | 273.8 | | | 0.1 | | | — | | | — | | | — | | | 333.9 | Other revenue | | | 19.7 | | | 6.4 | | | — | | | 6.4 | | | 0.1 | | | 0.4 | | | 33.0 | | | | 1,057.5 | | | 1,373.1 | | | 149.8 | | | 131.6 | | | 56.4 | | | 0.4 | | | 2,768.8 | Timing of revenue recognition | | | | | | | | | | | | | | | | | | | | | | Services transferred at a point in time | | $ | 915.2 | | $ | 1,156.6 | | $ | 128.1 | | $ | 103.8 | | $ | 49.7 | | $ | 0.4 | | $ | 2,353.8 | Services transferred over time | | | 142.3 | | | 216.5 | | | 21.7 | | | 27.8 | | | 6.7 | | | — | | | 415.0 | | | | 1,057.5 | | | 1,373.1 | | | 149.8 | | | 131.6 | | | 56.4 | | | 0.4 | | | 2,768.8 | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | Transaction fees | | $ | 673.8 | | $ | 659.4 | | $ | 131.7 | | $ | 66.2 | | $ | 33.8 | | $ | — | | $ | 1,564.9 | Access and capacity fees | | | 97.3 | | | 60.5 | | | 9.1 | | | 10.6 | | | 4.1 | | | — | | | 181.6 | Market data fees | | | 41.1 | | | 111.0 | | | 2.5 | | | 9.6 | | | 0.3 | | | — | | | 164.5 | Regulatory fees | | | 55.4 | | | 236.1 | | | — | | | — | | | — | | | — | | | 291.5 | Other revenue | | | 15.9 | | | 5.5 | | | 1.3 | | | 3.2 | | | — | | | 0.7 | | | 26.6 | | | | 883.5 | | | 1,072.5 | | | 144.6 | | | 89.6 | | | 38.2 | | | 0.7 | | | 2,229.1 | Timing of revenue recognition | | | | | | | | | | | | | | | | | | | | | | Services transferred at a point in time | | $ | 745.1 | | $ | 901.0 | | $ | 133.0 | | $ | 69.4 | | $ | 33.8 | | $ | 0.7 | | $ | 1,883.0 | Services transferred over time | | | 138.4 | | | 171.5 | | | 11.6 | | | 20.2 | | | 4.4 | | | — | | | 346.1 | | | | 883.5 | | | 1,072.5 | | | 144.6 | | | 89.6 | | | 38.2 | | | 0.7 | | | 2,229.1 |
Contract liabilities as of December 31, 2015 compared2019 primarily represent prepayments of transaction fees and certain access and capacity and market data fees to the Exchanges. The revenue recognized from contract liabilities and the remaining balance is shown below (in millions): | | | | | | | | | | | | | | | Balance at January 1, 2019 | | | Cash Additions | | | Revenue Recognized | | | Balance at December 31, 2019 | Liquidity provider sliding scale (1) | | $ | — | | $ | 9.6 | | $ | (9.6) | | $ | — | Other, net | | | 8.5 | | | 31.7 | | | (35.7) | | | 4.5 | Total deferred revenue | | $ | 8.5 | | $ | 41.3 | | $ | (45.3) | | $ | 4.5 |
| (1) | Liquidity providers are eligible to participate in the sliding scale program, which involves prepayment of transaction fees, and to receive reduced fees based on the achievement of certain volume thresholds within a calendar month. These transaction fees are amortized and recorded ratably as the transactions occur over the period. |
5. ACQUISITIONS Bats Global Markets, Inc. On February 28, 2017, pursuant to the Agreement and Plan of Merger, dated as of September 25, 2016 (the “Merger Agreement”), by and among Cboe, Bats, CBOE Corporation, a Delaware corporation and a wholly-owned subsidiary of Cboe (“Merger Sub”), and Cboe Bats, LLC (formerly CBOE V, LLC), a Delaware limited liability company and a wholly-owned subsidiary of Cboe (“Merger LLC”), Cboe completed the merger of Merger Sub with and into Bats and the subsequent merger of Bats with and into Merger LLC. As a result of the Merger, Bats became a wholly-owned subsidiary of Cboe. Other Acquisitions In January 2016, the Company, through its subsidiary Cboe Vest, LLC (“Cboe Vest”), acquired a majority of the outstanding equity of Vest, an asset investment manager focused on Target Outcome Investment strategies. The purchase price consisted of $18.9 million in cash, reflecting payments of $14.9 million to former stockholders and $4.0 million to Vest for newly issued shares, and represented an ownership interest of 60% resulting in the consolidation of Vest operations. The remaining 40% noncontrolling interest was held by the remaining Vest stockholders. The remaining Vest stockholders had a put option that could have been exercised to Vest and Vest had a call option that could have been exercised to the remaining stockholders. The put and call options could have been exercised after five years though they could have been accelerated by certain employment-related actions. The combination of the noncontrolling interest and a redemption feature resulted in a redeemable noncontrolling interest, which was classified outside of permanent equity on the consolidated balance sheet. The Company’s ownership interest decreased in August 2019 which resulted in the deconsolidation of Vest operations and the elimination of the redeemable noncontrolling interest. See Note 7 (“Investments”) for further information on the deconsolidation and Note 16 (“Redeemable Noncontrolling Interest”) for further information on the redeemable noncontrolling interest. In November 2017, the Company completed the acquisition of assets of Silexx Financial Systems, LLC (Silexx) for $9.0 million in cash. Silexx is a developer and operator of a multi-asset order and execution management system. Of the purchase price, $6.7 million was allocated to goodwill, $2.1 million was allocated to intangible assets, and $0.2 million was allocated to working capital. Silexx is included in the Options segment. The Company expensed $48.5 million of acquisition-related costs during the year ended December 31, 20142019 that included $19.3 million of compensation-related costs, $10.5 million of impairment of goodwill charges, $6.1 million of impairment of facilities charges, $4.5 million loss on disposal of data processing software, $3.9 million of professional fees, $2.2 million of termination fees related to an assigned lease agreement, and $2.0 million of general and administrative expenses. These expenses relate to Bats and other acquisitions, and are included in acquisition-related costs in the consolidated statements of income. The Company expensed $30.0 million of acquisition-related costs during the year ended December 31, 2018 that included $23.6 million of compensation-related costs, $2.7 million of stock based compensation, $3.0 million of professional fees, and $0.6 million of general and administrative expenses. These expenses relate to Bats and other acquisitions, and are included in acquisition-related costs in the consolidated statements of income. The Company expensed $84.4 million of acquisition-related costs during the year ended December 31, 2017 that included $44.2 million of compensation-related costs, $24.4 million of professional fees, $14.9 million of an impairment of capitalized data processing software, and $0.9 million of facilities expenses. These expenses relate to Bats and other acquisitions, and are included in acquisition-related costs in the consolidated statements of income. 6. SEVERANCE Subsequent to the Bats acquisition, the Company determined that certain employees' positions were redundant. As such, the Company communicated employee termination benefits to these employees. The following summarizes financial performanceis a summary of the employee termination benefits recognized within compensation and benefits in the consolidated statements of income (in millions): | | | | | | | Employee Termination Benefits | | Balance at December 31, 2018 | | $ | 6.1 | | Termination benefits accrued | | | 10.7 | | Termination payments made | | | (10.1) | | Balance at December 31, 2019 | | $ | 6.7 | |
7. INVESTMENTS As of December 31, 2019 and 2018, the Company's investments were comprised of the following (in millions): | | | | | | | | | As of December 31, | | | 2019 | | 2018 | Equity method investments: | | | | | | | Investment in Signal Trading Systems, LLC | | $ | 12.6 | | $ | 12.4 | Investment in EuroCCP | | | 10.3 | | | 9.3 | Total equity method investments | | | 22.9 | | | 21.7 | | | | | | | | Cost method investments: | | | | | | | Investment in OCC | | | 0.3 | | | 30.3 | Investment in Eris Exchange Holdings, LLC | | | 20.8 | | | 20.0 | Investment in American Financial Exchange, LLC | | | 8.6 | | | 5.9 | Investment in Cboe Vest Financial Group, Inc. | | | 2.9 | | | — | Other cost method investments | | | 5.7 | | | 8.3 | Total cost method investments | | | 38.3 | | | 64.5 | | | | | | | | Total investments | | $ | 61.2 | | $ | 86.2 |
Equity Method Investments Equity method investments include investments in Signal Trading Systems, LLC, a 50% joint venture with FlexTrade System, Inc. to develop and market a multi-asset front-end order entry system, and EuroCCP, a Dutch domiciled clearing house. EuroCCP is one of 3 interoperable central counterparties, or CCPs, used to clear trades conducted on Cboe Europe Limited’s and Cboe Europe NL’s markets. Cboe Europe Limited owns 20% of EuroCCP and can exercise significant influence over the entity as an equal shareholder with 4 other investors. Cost Method Investments The carrying amount of cost method investments totaled $38.3 million and $64.5 million as of December 31, 2019 and 2018, respectively, and is included in investments in the consolidated balance sheets. The Company accounts for these investments using the measurement alternative primarily as a result of the Company's inability to exercise significant influence as the Company is a smaller shareholder of these investments and the lack of readily determinable fair values. As of December 31, 2019, cost method investments primarily reflect a 20% investment in OCC and minority investments in American Financial Exchange, LLC, CurveGlobal, Vest, and Eris Exchange Holdings, LLC. In December 2014, OCC announced a newly-formed capital plan, under which each of OCC's existing exchange stockholders agreed to contribute its pro-rata share, based on ownership percentage, of $150 million in equity capital, which would increase OCC's shareholders' equity, and to provide its pro rata share in replenishment capital, up to a maximum of $40 million per exchange stockholder, if certain capital thresholds were to be breached. OCC also adopted policies under the plan with respect to fees, customer refunds, and stockholder dividends, which envisioned an annual dividend payment to the exchange stockholders. On March 3, 2015, in accordance with the plan, Cboe Options contributed $30 million to OCC. That contribution was recorded under investments in the consolidated balance sheets as of December 31, 2018. In 2019, OCC did not disburse annual dividends under the capital plan. In 2018 and 2017, OCC disbursed annual dividends under the capital plan and the Company, via its ownership interests, received $6.0 million in 2018 and $5.0 million in 2017. The SEC initially issued a notice of no objection to OCC’s advance notice filing regarding the capital plan and subsequently approved OCC’s proposed rule filing for the capital plan, but certain petitioners appealed the SEC approval order to the U.S. Court of Appeals for the D.C. Circuit. The court ultimately remanded the matter to the SEC, and on February 13, 2019, the SEC issued an order disapproving the proposed rule change implementing OCC’s capital plan. In an effort to achieve compliance with its target capital requirements in the absence of an approved capital plan, OCC has (i) retained funds that otherwise would have been paid to stockholders as dividends and to clearing members as refunds with respect to 2018, and (ii) raised its clearing fees. In connection with the disapproval of the capital plan, OCC returned the capital that had been contributed by its shareholders under the disapproved plan (equal to $30.0 million for Cboe Options) to the respective shareholders in 2019, of which $22.0 million was returned to Cboe Options in the first quarter of 2019 and $8.0 million in the fourth quarter of 2019. With each return of capital described in this paragraph, the Company also incurred a tax expense. OCC agreed to reimburse the Company for part of that tax liability and paid the Company $1.1 million in the third quarter and $0.4 million in the fourth quarter of 2019. OCC did not pay its shareholders any dividend or other return on the retained portion of their capital contributions. As such, the Company reversed the $8.8 million OCC dividend declared in 2018, which was to be paid in 2019, in other income in the consolidated statement of income for the year ended December 31, 2015 compared2019. The remaining contributed capital has been recorded under investments in the consolidated balance sheet as of December 31, 2019. On January 24, 2020, upon receipt of SEC approval, OCC established a new capital management policy intended to 2014. | | | | | | | | | | | | | | | | | | 2015 | | 2014 | | Inc./(Dec.) | | Percent Change | | | (in millions, except per share amounts) | | | | Total operating revenues | $ | 634.5 |
| | $ | 617.2 |
| | $ | 17.3 |
| | 2.8 | % | | Total operating expenses | 314.6 |
| | 303.4 |
| | 11.2 |
| | 3.7 | % | | Operating income | 319.9 |
| | 313.8 |
| | 6.1 |
| | 1.9 | % | | Total other income/(expense) | 4.1 |
| | (4.1 | ) | | 8.2 |
| | 199.8 | % | | Income before income taxes | 324.0 |
| | 309.7 |
| | 14.3 |
| | 4.6 | % | | Income tax provision | 119.0 |
| | 120.0 |
| | (1.0 | ) | | (0.8 | )% | | Net income | $ | 205.0 |
| | $ | 189.7 |
| | $ | 15.3 |
| | 8.1 | % | | Net income allocated to common stockholders | $ | 204.1 |
| | $ | 188.4 |
| | $ | 15.7 |
| | 8.4 | % | | Operating income percentage | 50.4 | % | | 50.8 | % | | |
| | |
| | Net income percentage | 32.3 | % | | 30.7 | % | | |
| | |
| | Diluted—net income per share allocated to common stockholders | $ | 2.46 |
| | $ | 2.21 |
| | |
| | |
|
replace the disapproved capital plan. The increasenew capital management policy provides that, if OCC’s equity capital falls below certain defined thresholds, OCC can access additional capital through an operational loss fee charged to clearing members. None of OCC’s shareholders (including Cboe Options) has any obligation to contribute capital to OCC under the new capital management policy, nor does any shareholder have the right to receive dividends from OCC under such policy.In August 2019, the Company’s ownership in total operating revenuesVest was primarily driven by higher transaction fees, exchange servicesrestructured, including a partial sale of its interest to a third-party. As a result of the restructuring, the Company’s ownership and voting interests decreased to less than 20% and less than 5%, respectively, and the Company deconsolidated Vest and changed the accounting methodology of the investment to the cost method. The deconsolidation resulted in a reduction of net assets of $14.5 million and noncontrolling interest of $5.8 million, as well as recognition of $2.9 million investment for the Company’s remaining ownership. The Company recorded an interest-bearing note receivable of $3.7 million for the consideration received from the third-party, which was recognized in other fees and other revenue, partially offset by lower access fees and regulatory fees. The increaseassets, net in total operating expensesthe consolidated balance sheet as of December 31, 2019. Additionally, a loss on the sale of $2.0 million was primarily driven by higher depreciation and amortization, technology support services, professional fees and outside services and royalty fees, partially offset by lower compensation and benefits.
The increaserecognized in total other income/(expense) was primarily driven byacquisition-related costs in the dividend declared by OCC in December 2015. The prior year included an impairment charge related to our investment in IPXI Holdings, LLC ("IPXI").
Operating Revenues
Total operating revenuesconsolidated statement of income for the year ended December 31, 2015 increased $17.3 million, or 2.8%,2019. See Note 11 (“Goodwill and Intangibles, Net”) for further discussion of the Vest restructuring.
In the third quarter of 2019, the Company fulfilled a contractual obligation to $634.5 million from $617.2 millionAmerican Financial Exchange, LLC to launch AMERIBOR futures. As a result of the fulfillment, an additional 5% ownership of American Financial Exchange, LLC was earned by the Company for an additional investment of $2.7 million. The additional revenue was recorded in the prior year. Futures segment and increased the Company’s investment in American Financial Exchange, LLC. 8. FINANCIAL INVESTMENTS The Company’s financial investments with original or acquired maturities longer than three months, but that mature in less than one year from the balance sheet date and any money market funds that are considered cash and cash equivalents are classified as current assets. The Company’s marketable securities are also classified as current assets within financial investments. The Company’s financial investments are summarized as follows (in millions): | | | | | | | | | | | | | | | December 31, 2019 | | | Cost basis | | Unrealized gains | | Unrealized losses | | Fair Value | Available-for-sale securities: | | | | | | | | | | | | | U.S. Treasury securities | | $ | 47.6 | | $ | — | | $ | — | | $ | 47.6 | Trading securities: | | | | | | | | | | | | | Marketable securities (1) | | $ | 23.4 | | $ | — | | $ | — | | $ | 23.4 | Total financial investments | | $ | 71.0 | | $ | — | | $ | — | | $ | 71.0 |
| | | | | | | | | | | | | | | December 31, 2018 | | | Cost basis | | Unrealized gains | | Unrealized losses | | Fair Value | Available-for-sale securities: | | | | | | | | | | | | | U.S. Treasury securities | | $ | 35.7 | | $ | — | | $ | — | | $ | 35.7 | Total financial investments | | $ | 35.7 | | $ | — | | $ | — | | $ | 35.7 |
| (1) | The marketable securities are primarily mutual funds maintained for non-qualified retirement and benefit plans, also referred to as deferred compensation plan assets. See Note 18 (“Employee Benefit Plan”) for more information. |
9. PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following summarizes changes in total operating revenues for the year endedas of December 31, 2015 compared to 2014. | | | | | | | | | | | | | | | | | | 2015 | | 2014 | | Inc./(Dec.) | | Percent Change | | | (in millions) | | | | Transaction fees | $ | 456.0 |
| | $ | 437.8 |
| | $ | 18.2 |
| | 4.2 | % | | Access fees | 53.3 |
| | 59.3 |
| | (6.0 | ) | | (10.2 | )% | | Exchange services and other fees | 42.2 |
| | 38.0 |
| | 4.2 |
| | 11.0 | % | | Market data fees | 30.0 |
| | 30.4 |
| | (0.4 | ) | | (1.4 | )% | | Regulatory fees | 33.5 |
| | 37.1 |
| | (3.6 | ) | | (9.7 | )% | | Other revenue | 19.5 |
| | 14.6 |
| | 4.9 |
| | 34.0 | % | | Total operating revenues | $ | 634.5 |
| | $ | 617.2 |
| | $ | 17.3 |
| | 2.8 | % |
Transaction Fees
Transaction fees increased 4.2% to $456.02019 and 2018 (in millions): | | | | | | | | | | December 31, | | December 31, | | | | 2019 | | 2018 | | Construction in progress | | $ | 1.2 | | $ | 0.1 | | Building | | | — | | | 81.7 | | Furniture and equipment | | | 164.4 | | | 161.6 | | Total property and equipment | | | 165.6 | | | 243.4 | | Less accumulated depreciation | | | (118.6) | | | (171.7) | | Property and equipment, net | | $ | 47.0 | | $ | 71.7 | |
Depreciation expense using the straight-line method was $24.5 million, for the year ended December 31, 2015, representing 71.9% of total operating revenues, compared with $437.8$25.1 million for the prior year period, or 70.9% of total operating revenues. This increase was largely driven by a 17.6% increase in the average revenue per contract, partially offset by an 11.4% decrease in trading volume. The increase in average revenue per contract resulted primarily from a shift in volume mix of products traded, fee changes implemented in 2015 and lower volume discounts and incentives. As a percent of total trading volume, index options and futures contracts, which generate our highest options and overall average revenue per contract, respectively, accounted for 39.2% of trading volume for the year ended December 31, 2015, up from 34.5% during the same period in 2014.
The following summarizes transaction fees by product category for 2015 compared to 2014.
| | | | | | | | | | | | | | | | | | 2015 | | 2014 | | Inc./(Dec.) | | Percent Change | | | (in millions) | | | | Equities | $ | 36.4 |
| | $ | 37.2 |
| | $ | (0.8 | ) | | (2.1 | )% | | Indexes | 290.3 |
| | 276.0 |
| | 14.3 |
| | 5.2 | % | | Exchange-traded products | 41.8 |
| | 42.4 |
| | (0.6 | ) | | (1.5 | )% | | Total options transaction fees | 368.5 |
| | 355.6 |
| | 12.9 |
| | 3.6 | % | | Futures | 87.5 |
| | 82.2 |
| | 5.3 |
| | 6.5 | % | | Total transaction fees | $ | 456.0 |
| | $ | 437.8 |
| | $ | 18.2 |
| | 4.2 | % |
Trading Volume
Our average daily trading volume ("ADV") was 4.66$31.3 million contracts in 2015, down 11.4% compared with 5.26 million for 2014. Total trading days in 2015 and 2014 were two hundred fifty-two.
The following summarizes changes in total trading volume and ADV by product category for 2015 compared to 2014.
| | | | | | | | | | | | | | | | | | | | | 2015 | | 2014 | | Volume Percent Change | | ADV Percent Change | | | Volume | | ADV | | Volume | | ADV | | | | (in millions) | | | | | | Equities | 393.0 |
| | 1.56 |
| | 488.6 |
| | 1.94 |
| | (19.6 | )% | | (19.6 | )% | | Indexes | 408.3 |
| | 1.62 |
| | 406.5 |
| | 1.61 |
| | 0.4 | % | | 0.4 | % | | Exchange-traded products | 321.0 |
| | 1.27 |
| | 379.7 |
| | 1.51 |
| | (15.5 | )% | | (15.5 | )% | | Total options contracts | 1,122.3 |
| | 4.45 |
| | 1,274.8 |
| | 5.06 |
| | (12.0 | )% | | (12.0 | )% | | Futures contracts | 51.7 |
| | 0.21 |
| | 50.6 |
| | 0.20 |
| | 2.1 | % | | 2.1 | % | | Total contracts | 1,174.0 |
| | 4.66 |
| | 1,325.4 |
| | 5.26 |
| | (11.4 | )% | | (11.4 | )% |
The following provides the percentage of volume by product category for the years ended December 31, 20152019, 2018 and 2014.2017, respectively.As a result of the Merger, there is a reduction in employee workspace needed in Chicago, which led to the decision to market for sale the headquarters location. The Company classified the associated land, building, and certain furniture and equipment of the headquarters location as held for sale, performed an impairment assessment, and ceased depreciation effective May 1, 2019, as the Company anticipates selling the property held for sale in less than twelve months. As of December 31, 2019, the total value of the property classified as property held for sale on the consolidated balance sheet was $21.1 million. The impact of ceasing depreciation of the property held for sale did not result in a material impact to the consolidated financial statements. As a result of the impairment assessment, an impairment charge of $6.1 million was recorded in acquisition-related costs within the Options segment in the accompanying consolidated statements of income. 10. OTHER ASSETS, NET Other assets, net consisted of the following as of December 31, 2019 and 2018 (in millions): | | | | | | | | | December 31, | | December 31, | | | 2019 | | 2018 | Software development work in progress | | $ | 2.6 | | $ | 8.7 | Data processing software (1) | | | 84.3 | | | 219.0 | Less accumulated depreciation and amortization | | | (57.2) | | | (193.2) | Data processing software, net | | | 29.7 | | | 34.5 | Other assets (2) | | | 21.9 | | | 28.4 | Data processing software and other assets, net | | $ | 51.6 | | $ | 62.9 |
| | | | | | | | | | | 2015 | | 2014 | | Equities | | 33.5 | % | | 36.9 | % | | Indexes | | 34.8 | % | | 30.7 | % | | Exchange-traded products | | 27.3 | % | | 28.6 | % | | Futures | | 4.4 | % | | 3.8 | % | | Total | | 100.0 | % | | 100.0 | % |
Average Revenue Per Contract
The average revenue per contract| (1) | During the fourth quarter of 2019, the Company disposed of data processing software for the technology platform known as Cboe Command, as Cboe Options was migrated to the Company’s current platform on October 7, 2019. As a result of the disposal, a loss on disposal of $4.5 million was recorded in acquisition-related costs within the Options segment in the accompanying consolidated statements of income. |
| (2) | At December 31, 2019 and December 31, 2018, the majority of the balance included long-term prepaid assets and notes receivable. The notes receivable included within other assets, net on the consolidated balance sheets relate to the consolidated audit trail (“CAT”), which involves the creation of a comprehensive audit trail that strives to enhance regulators’ ability to monitor trading activity in the U.S. markets through a phased implementation. While the funding of the CAT is ultimately expected to be provided by both SROs (which includes the Exchanges) and industry members, until fee filings associated with the funding model are effective with or approved by the SEC, the funding to date has solely been provided by the SROs. The funding by the SROs has been done in exchange for promissory notes, which are expected to be repaid once such industry member fees are collected. Until the fee filings associated with the funding model are effective with or approved by the SEC, the SROs may continue to incur additional significant costs. Due to circumstances associated with the development of the CAT in the fourth quarter of 2019, the Company estimated a loss associated with the uncollectibility of the promissory notes, and recorded a provision for the notes receivable of $23.4 million. As of December 31, 2019 and December 31, 2018, the notes receivable, net balance was $9.2 million and $20.3 million, respectively. |
Amortization expense related to data processing software was $0.388 in 2015, an increase of 17.6% compared with $0.330 in 2014. Average revenue per contract represents transaction fees divided by total contracts.
$13.5 million, $18.9 million, and $17.9 million for the years ended December 31, 2019, 2018, and 2017.11. GOODWILL AND INTANGIBLE ASSETS, NET The following summarizes average revenue per contracttable presents the details of goodwill by product categorysegment (in millions): | | | | | | | | | | | | | | | | | | | | | | | | U.S. | | European | | | | | Corporate | | | | | | | Options | | Equities | | Equities | | Global FX | | and Other | | Total | | Balance as of December 31, 2017 | | $ | 239.4 | | $ | 1,740.4 | | $ | 441.6 | | $ | 267.2 | | $ | 18.8 | | $ | 2,707.4 | | Additions | | | — | | | — | | | — | | | — | | | — | | | — | | Dispositions | | | — | | | — | | | — | | | — | | | — | | | — | | Changes in foreign currency exchange rates | | | — | | | — | | | (16.0) | | | — | | | — | | | (16.0) | | Balance as of December 31, 2018 | | $ | 239.4 | | $ | 1,740.4 | | $ | 425.6 | | $ | 267.2 | | $ | 18.8 | | $ | 2,691.4 | | Additions | | | — | | | — | | | — | | | — | | | — | | | — | | Dispositions | | | — | | | — | | | — | | | — | | | (8.3) | | | (8.3) | | Impairment | | | — | | | — | | | — | | | — | | | (10.5) | | | (10.5) | | Changes in foreign currency exchange rates | | | — | | | — | | | 9.5 | | | — | | | — | | | 9.5 | | Balance as of December 31, 2019 | | $ | 239.4 | | $ | 1,740.4 | | $ | 435.1 | | $ | 267.2 | | $ | — | | $ | 2,682.1 | |
Goodwill has been allocated to specific reporting units for 2015 comparedpurposes of impairment testing - Options, U.S. Equities, European Equities and Global FX. NaN goodwill has been allocated to 2014. | | | | | | | | | | | | | | 2015 | | 2014 | | Percent Change | | Equities | $ | 0.093 |
| | $ | 0.076 |
| | 22.4 | % | | Indexes | 0.711 |
| | 0.679 |
| | 4.7 | % | | Exchange-traded products | 0.130 |
| | 0.112 |
| | 16.1 | % | | Total options revenue per contract | 0.328 |
| | 0.279 |
| | 17.6 | % | | Futures | 1.694 |
| | 1.623 |
| | 4.4 | % | | Total average revenue per contract | $ | 0.388 |
| | $ | 0.330 |
| | 17.6 | % |
Factors contributingFutures. Goodwill impairment testing is performed annually in the fiscal fourth quarter or more frequently if conditions exist that indicate that the asset may be impaired.Based on the restructuring of the ownership of Vest during the second quarter of 2019, an impairment test was performed over the carrying value of the goodwill related to the changeentity as there was an indication that the carrying value after the restructuring would be less than the fair value. The impairment test indicated that the fair value of the Company’s ownership of the acquired entity was less than the carrying value, which resulted in total average revenue per contract foran impairment charge of $10.5 million within the Corporate and Other segment related to Vest in the year ended December 31, 2015 compared to the same period in 2014 included: Product mix—We experienced a shift in overall product mix.2019. As a percentage of total volume, equities decreased to 33.5% from 36.9%, indexes increased to 34.8% from 30.7% and futures increased to 4.4% from 3.8%. Equities represent our lowest average revenue per contract, while index options and futures generate our highest options average revenue per contract and our highest total average revenue per contract, respectively.
Rate structure— Our rate structure includes sliding scales, volume discounts, volume incentive programs and caps on fees as part of our effort to increase liquidity and market share in multiply-listed options. The increase in average revenue per contract across all product categories was primarily a result of fee changes implemented in 2015 and lower volume discounts and incentives.
Access Fees
Access fees forthe deconsolidation of Vest during the year ended December 31, 2015 decreased to $53.3 million from $59.3 million in2019, the comparable prior year period. The decrease in access feesremaining goodwill was primarily due to a reduction indisposed of within the number of trading permits.
Exchange ServicesCorporate and Other Fees
Exchange services and other fees for the year endedsegment at December 31, 2015 increased 11.0% to $42.2 million from $38.0 million in2019.The following table presents the comparable period indetails of the prior year. The increase was primarily a result of higher fees for technology services and revenue generated from Livevol, which was acquired on August 7, 2015. Market Data Fees
Market data fees decreased 1.4% to $30.0 million for the year ended December 31, 2015 from $30.4 million in the prior year. intangible assets (in millions): | | | | | | | | | | | | | | | | | | | | | | | | U.S. | | European | | | | | Corporate | | | | | | | Options | | Equities | | Equities | | Global FX | | and Other | | Total | | Balance as of December 31, 2017 | | $ | 198.7 | | $ | 1,071.8 | | $ | 427.0 | | $ | 199.6 | | $ | 5.5 | | $ | 1,902.6 | | Additions | | | — | | | — | | | — | | | — | | | — | | | — | | Dispositions | | | — | | | — | | | — | | | — | | | — | | | — | | Amortization | | | (16.8) | | | (81.5) | | | (27.7) | | | (32.7) | | | (1.3) | | | (160.0) | | Changes in foreign currency exchange rates | | | — | | | — | | | (22.4) | | | — | | | — | | | (22.4) | | Balance as of December 31, 2018 | | $ | 181.9 | | $ | 990.3 | | $ | 376.9 | | $ | 166.9 | | $ | 4.2 | | $ | 1,720.2 | | Additions | | | — | | | — | | | — | | | — | | | — | | | — | | Dispositions | | | — | | | — | | | — | | | — | | | (3.3) | | | (3.3) | | Amortization | | | (15.3) | | | (68.9) | | | (24.8) | | | (28.7) | | | (0.9) | | | (138.6) | | Changes in foreign currency exchange rates | | | — | | | — | | | 11.6 | | | — | | | — | | | 11.6 | | Balance as of December 31, 2019 | | $ | 166.6 | | $ | 921.4 | | $ | 363.7 | | $ | 138.2 | | $ | — | | $ | 1,589.9 | |
For the years ended December 31, 20152019, 2018 and 2014, income derived from our market data services totaled $16.02017, amortization expense was $138.6 million, $160.0 million and $15.4 million, respectively, and OPRA income totaled $14.0 million and $15.0$142.9 million, respectively. Revenue generated from our market data services increased $0.6The estimated future amortization expense is $121.6 million resulting primarily from an increase in subscribersfor 2020, $106.9 million for 2021, $94.4 million for 2022, $83.5 million for 2023 and fees$63.0 million for certain market data services. 2024. The Company's sharefollowing tables present the categories of total cleared options transactions for the period endedintangible assets at December 31, 2015 decreased to 23.3% from 24.9% for2019 and 2018 (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted | | | December 31, 2019 | | Average | | | | | U.S. | | European | | | | | Corporate | | Amortization | | | Options | | Equities | | Equities | | Global FX | | and Other | | Period (in years) | Trading registrations and licenses | | $ | 95.5 | | $ | 572.7 | | $ | 182.2 | | $ | — | | $ | — | | Indefinite | Customer relationships | | | 38.8 | | | 222.9 | | | 169.7 | | | 140.0 | | | — | | 17 | Market data customer relationships | | | 53.6 | | | 322.0 | | | 63.6 | | | 64.4 | | | — | | 12 | Technology | | | 24.8 | | | 22.5 | | | 23.9 | | | 22.5 | | | — | | 4 | Trademarks and tradenames | | | 1.7 | | | 6.0 | | | 1.9 | | | 1.2 | | | — | | 6 | Accumulated amortization | | | (47.8) | | | (224.7) | | | (77.6) | | | (89.9) | | | — | | | | | $ | 166.6 | | $ | 921.4 | | $ | 363.7 | | $ | 138.2 | | $ | — | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted | | | December 31, 2018 | | Average | | | | | U.S. | | European | | | | | Corporate | | Amortization | | | Options | | Equities | | Equities | | Global FX | | and Other | | Period (in years) | Trading registrations and licenses | | $ | 95.5 | | $ | 572.7 | | $ | 176.0 | | $ | — | | $ | — | | Indefinite | Customer relationships | | | 38.8 | | | 222.9 | | | 163.9 | | | 140.0 | | | 3.0 | | 18 | Market data customer relationships | | | 53.6 | | | 322.0 | | | 61.5 | | | 64.4 | | | — | | 13 | Technology | | | 24.8 | | | 22.5 | | | 23.1 | | | 22.5 | | | 4.0 | | 5 | Trademarks and tradenames | | | 1.7 | | | 6.0 | | | 1.8 | | | 1.2 | | | 1.0 | | 2 | Accumulated amortization | | | (32.5) | | | (155.8) | | | (49.4) | | | (61.2) | | | (3.8) | | | | | $ | 181.9 | | $ | 990.3 | | $ | 376.9 | | $ | 166.9 | | $ | 4.2 | | |
12. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consisted of the same period in 2014 and total distributable OPRA income decreased compared to the prior year period resulting in lower revenue for the period endedfollowing as of December 31, 2015 compared to2019 and 2018 (in millions): | | | | | | | | | | December 31, 2019 | | December 31, 2018 | | Compensation and benefit related liabilities | | $ | 35.2 | | $ | 52.4 | | Termination benefits | | | 6.7 | | | 6.1 | | Royalties | | | 18.6 | | | 25.0 | | Accrued liabilities | | | 77.8 | | | 91.8 | | Marketing fee payable | | | 12.6 | | | 10.4 | | Accounts payable | | | 21.0 | | | 12.8 | | Total accounts payable and accrued liabilities | | $ | 171.9 | | $ | 198.5 | |
13. DEBT The Company’s debt consisted of the same period in 2014. Regulatory Fees
Regulatory fees decreased 9.7% for the year ended 2015 to $33.5 million from $37.1 million in the same period in the prior year. The decrease in regulatory fees was primarily the resultfollowing as of lower options regulatory fees and a decrease in regulatory fees received for other regulatory services.
Other Revenue
Other revenue increased $4.9 million for the year ended 2015 to $19.5 million from $14.6 million in the same period in the prior year. The increase in other revenue was primarily due to higher regulatory fines assessed for disciplinary actions and the recognition of revenue to adjust for incorrect coding of transactions by an exchange participant related to prior periods.
Operating Expenses
Total operating expenses increased $11.2 million, or 3.7%, to $314.6 million for the year ended 2015 from $303.4 million in the year ago period, resulting from higher depreciation and amortization, technology support services, professional fees and outside services and royalty fees, partially offset by lower compensation and benefits. Expenses increased to 49.6% of total operating revenues in the year ended 2015 compared with 49.2% in the same period in 2014.
The following summarizes changes in operating expenses for the year ended December 31, 2015 compared to 2014.
| | | | | | | | | | | | | | | | | | 2015 | | 2014 | | Inc./(Dec.) | | Percent Change | | | (in millions) | | | | Compensation and benefits | $ | 105.9 |
| | $ | 121.7 |
| | $ | (15.8 | ) | | (13.0 | )% | | Depreciation and amortization | 46.3 |
| | 39.9 |
| | 6.4 |
| | 15.9 | % | | Technology support services | 20.7 |
| | 19.2 |
| | 1.5 |
| | 7.7 | % | | Professional fees and outside services | 50.1 |
| | 32.0 |
| | 18.1 |
| | 56.6 | % | | Royalty fees | 70.6 |
| | 66.1 |
| | 4.5 |
| | 6.8 | % | | Order routing | 2.3 |
| | 4.1 |
| | (1.8 | ) | | (43.8 | )% | | Travel and promotional expenses | 8.9 |
| | 9.0 |
| | (0.1 | ) | | (0.7 | )% | | Facilities costs | 5.0 |
| | 5.7 |
| | (0.7 | ) | | (12.6 | )% | | Other expenses | 4.8 |
| | 5.7 |
| | (0.9 | ) | | (14.3 | )% | | Total operating expenses | $ | 314.6 |
| | $ | 303.4 |
| | $ | 11.2 |
| | 3.7 | % |
Compensation2019 and Benefits
For the year ended December 31, 2015, compensation and benefits were $105.9 million, or 16.7% of total operating revenues, compared with $121.7 million, or 19.7% of total operating revenues, in the same period in 2014. This represented a decrease of $15.8 million, or 13.0%, which primarily resulted from lower stock-based compensation, a reduction in headcount and lower severance expense. The reduction in headcount and severance was primarily due to the transition of certain regulatory functions to FINRA which occurred in December 2014. The twelve months ended December 31, 2014 included $2.5 million of accelerated stock-based compensation expense for certain executives due to provisions contained in their employment arrangements.
Depreciation and Amortization
Depreciation and amortization increased by $6.4 million to $46.3 million for the year ended December 31, 2015 compared with $39.9 million for the same period in 2014. The increase in depreciation and amortization primarily resulted from capital spending to develop and enhance our trading platform and operations and the acceleration of depreciation for certain assets that have a shorter than expected useful life.
Professional Fees and Outside Services
Expenses related to professional fees and outside services increased to $50.1 million for the year ended December 31, 2015 from $32.0 million in the prior-year period, an increase of $18.1 million, which primarily resulted from higher contract services related to the transition of certain regulatory services for CBOE and C2 to FINRA which occurred in December 2014.
Royalty Fees
Royalty fees for the year ended December 31, 2015 were $70.6 million compared with $66.1 million for the prior year period, an increase of $4.5 million, which primarily resulted from higher trading volume in licensed products.
Operating Income
As a result of the items above, operating income in 2015 was $319.9 million compared to $313.8 million in 2014, an increase of $6.1 million.
Other Income/(Expense)
Other income/(expense) reflected income of $4.1 million for the year ended December 31, 2015 compared with a loss of $4.1 million for the same period in the prior year. The income in 2015 primarily included the Company's share of equity earnings of Signal Trading Systems, LLC ("Signal") and the $3.4 million of dividend income declared by the OCC in December 2015. In 2014, the expense primarily included the Company's share of the operating losses of Signal and the impairment of our investment in IPXI, which totaled $3.0 million.
Income before Income Taxes
As a result of the items above, income before income taxes in 2015 was $324.0 million compared to $309.7 million in 2014, an increase of $14.3 million.
Income Tax Provision
For the year ended December 31, 2015, the income tax provision was $119.0 million compared with $120.0 million for the same period in 2014. The effective tax rate was 36.7% and 38.7% for the years ended December 31, 2015 and 2014, respectively. The lower effective tax rate was primarily due to the recognition of a tax benefit associated with the release and expiration of uncertain tax positions.
Net Income
As a result of the items above, net income allocated to common stockholders in 2015 was $204.1 million compared to $188.4 million in 2014, an increase of $15.7 million. Basic and diluted net income per share allocated to common stockholders were $2.46 and $2.21 for the years ended December 31, 2015 and 2014, respectively.
Liquidity and Capital Resources
Our cash requirements principally consist of funding operating expenses, capital expenditures, actual and anticipated quarterly and special dividend payments and common stock repurchases under the previously announced program. In addition, we will require significant capital in order to complete our proposed acquisition of Bats. In connection with the anticipated Merger, we have entered into several indebtedness arrangements in September 2016, December 2016 and in January 2017 to finance the Merger and fund our ongoing cash needs in 2017 and the combined company following the Merger, as further described below.
Short-Term Debt Facilities
In connection with entering into the Merger Agreement, the Company entered into a commitment letter with Bank of America, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (or any of its designated affiliates) (Bank of America, N.A., and other such financial institutions that accede as lender to such debt commitment letter in accordance with its terms are referred to herein as the “Lenders”), which provides that, subject to the satisfaction and waiver of certain conditions which are usual and customary for financing of this type, the Lenders are committed to provide debt financing for the purposes of funding (i) the cash consideration to be paid in the transactions contemplated by the Merger Agreement, (ii) the refinancing of certain existing indebtedness of Bats and its subsidiaries and (iii) related fees and expenses, which debt financing consists of a senior unsecured 364-day bridge loan facility in an aggregate principal amount of up to $1.65 billion to the extent the Company fails to generate gross cash proceeds in an aggregate principal amount of up to $1.65 billion from permanent financing including in the form of a senior unsecured term loan facility and the issuance of senior unsecured notes on or prior to the consummation of the transaction contemplated by the Merger Agreement. In lieu of entering into the bridge loan facility, the Company entered into a term loan agreement and completed a notes offering, as described below, securing $1.65 billion to finance the cash portion of its pending acquisition of Bats as well as the repayment of Bats' existing indebtedness.
2018 (in millions): | | | | | | | | | | | | | | | | | | December 31, 2019 | | December 31, 2018 | | $300 million Term Loan Agreement due December 2021, floating rate | | $ | 222.4 | | $ | 271.1 | | $650 million fixed rate Senior Notes due January 2027, stated rate of 3.650% | | | 645.2 | | | 644.5 | | $300 million fixed rate Senior Notes due June 2019, stated rate of 1.950% | | | — | | | 299.8 | | Revolving Credit Agreement | | | — | | | — | | Total Debt | | $ | 867.6 | | $ | 1,215.4 | |
Term Loan Agreement On December 15, 2016,March 22, 2018, the Company, as borrower, entered into a new Term Loan Credit Agreement (the “Term Loan Agreement”) with Bank of America, N.A. (“Bank of America”), as administrative agent certain lenders named therein (the “Term Lenders”), Merrill Lynch, Pierce, Fenner & Smith Incorporated,and initial lender, and the several banks and other financial institutions from time to time party thereto as lenders. Bank of America also acted as sole lead arranger and sole bookrunner Morgan Stanley MUFGwith respect to the Term Loan Partners, LLC, as syndication agent, and Citibank, N.A., PNC Bank, National Association and JPMorgan Chase Bank, N.A., as co-documentation agents. Agreement. The Term Loan Agreement provides for a senior unsecured delayed draw term loan facility (the “Term Loan Facility”) in an aggregate principal amount of $1.0 billion. We may also, subject to the agreement$300 million. The proceeds of the applicable Term Lenders, increase the commitmentsloan under the Term Loan Agreement by up to $500 million for a total of $1.5 billion. Proceeds from the Term
Loan Facility, if drawn, may bewere used to financerepay the Merger and to fund working capital needs and for other general corporate purposes. The availability$300 million of the commitmentsoutstanding indebtedness under the Term Loan Agreement is conditioned upon, among other things, confirmation that the Merger has been consummated, or will be consummated substantially concurrently with the extension of the loans under the Term Loan Agreement. As ofprior term loan agreement entered into on December 31, 2016, we had not drawn upon the commitments in the Term Loan Agreement.
Commitments under the Term Loan Agreement will expire on the earlier of (i) the consummation of the Merger (after giving effect to the funding of the committed loans in accordance with and subject to the terms of the Term Loan Agreement), (ii) July 25, 2017 (or if the outside date is extended pursuant to the terms of the Merger Agreement, October 23, 2017), (iii) the closing of the Merger without using the loans under the Term Loan Agreement and (iv) the termination of the Merger Agreement in accordance with the terms thereof. 15, 2016.Loans under the Term Loan Agreement if drawn, will mature five years following the closing date of the Merger. The Term Loan Facility is unsecured and is not expected to be guaranteed by any subsidiary. Loans under the Term Loan Agreement will bear interest, at our option, at either (i) the London Interbank Offered Rate (“LIBOR”) periodically fixed for an interest period (as selected by us) of one, two, three or six months plus a margin (based on our public debt ratings) ranging from 1.00 percent per annum to 1.751.50 percent per annum or (ii) a daily floating
rate based on the agent’s prime rate (subject to certain minimums based upon the federal funds effective rate or LIBOR) plus a margin (based on our public debt ratings) ranging from zero0 percent per annum to 0.750.50 percent per annum. We will beThe Company was required to pay a tickingan up-front fee of 0.05 percent to the agent for the account of the Term Lenders which will initially accrue at a rate (based on our public debt ratings) ranging from 0.10 percent per annum to 0.30 percent per annum multiplied by the undrawn aggregate commitments of the Term Lenders in respect ofentry into the Term Loan Facility, accruing during the period commencingAgreement. The Term Loan Agreement, which matures on December 15, 2016 and ending on the earlier of (i) the date on which the loans are drawn and (ii) the termination of the commitments under the Term Loan Agreement in accordance with the terms thereof. The Term Loan Agreement2021, contains customary representations, warranties and affirmative and negative covenants for facilities of its type, including financial covenants, events of default and indemnification provisions in favor of the Term Lenders.lenders thereunder. The negative covenants include restrictions regarding the incurrence of liens, the incurrence of indebtedness by the our subsidiaries and fundamental changes, subject to certain exceptions in each case. The financial covenants require us to meet a quarterly financial test with respect to a minimum consolidated interest coverage ratio of not less than 4.00 to 1.00 and a maximum consolidated leverage ratio of not greater than 3.50 to 1.00. As ofAt December 31, 2016, we had not drawn upon2018, the commitmentsCompany was in compliance with these covenants.The Company repaid $50 million of the outstanding indebtedness of the Term Loan Agreement.Agreement with cash on hand during the year ended December 31, 2019. Senior Notes On January 12, 2017, the Company entered into an indenture (the “Indenture”), by and between the Company and Wells Fargo Bank, National Association, as trustee, in connection with the issuance of $650 million aggregate principal amount of the Company’s 3.650% Senior Notes due 2027 ("3.650% Senior Notes" or the “Senior Notes”, as the context so requires). The form and terms of the 3.650% Senior Notes were established pursuant to an Officer’s Certificate, dated as of January 12, 2017, supplementing the Indenture. The Company used a portion of the net proceeds from the 3.650% Senior Notes to fund, in part, the Merger, including the payment of related fees and expenses and the repayment of Bats’ existing indebtedness, and the remainder for general corporate purposes. The 3.650% Senior Notes mature on January 12, 2027 and bear interest at the rate of 3.650% per annum, payable semi-annually in arrears on January 12 and July 12 of each year, commencing July 12, 2017. On June 29, 2017, the Company issued $300 million aggregate principal amount of 1.950% Senior Notes due 2019 (“1.950% Senior Notes” and, together with the 3.650% Senior Notes, the “Senior Notes”), which bear interest at the rate of 1.950% per annum, payable semi-annually in arrears on June 28 and December 28 of each year, commencing December 28, 2017. The Senior Notes are unsecured obligations of the Company and rank equally with all of the Company’s other existing and future unsecured, senior indebtedness, but are effectively junior to the Company’s secured indebtedness, to the extent of the value of the assets securing such indebtedness, and will be structurally subordinated to the secured and unsecured indebtedness of the Company’s subsidiaries. The Company has the option to redeem some or all of the Senior Notes, at any time in whole or from time to time in part, at the redemption prices set forth in the applicable Officer’s Certificate. The Company may also be required to offer to repurchase the Senior Notes upon the occurrence of a Change of Control Triggering Event (as such term is defined in the applicable Officer’s Certificate) at a repurchase price equal to 101% of the aggregate principal amount of Senior Notes to be repurchased. The Company repaid the aggregate principal amount of the 1.950% Senior Notes in full with cash on hand upon their maturity on June 28, 2019. Indenture Under the Indenture, the Company may issue debt securities, which includes the Senior Notes, at any time and from time to time, in one or more series without limitation on the aggregate principal amount. The Indenture governing the Senior Notes contains customary restrictions, including a limitation that restricts our ability and the ability of certain of our subsidiaries to create or incur secured debt. Such Indenture also limits certain sale and leaseback transactions and contains customary events of default. At December 31, 2019, the Company was in compliance with these covenants. Revolving Credit Agreement On December 15, 2016, the Company, as borrower, entered into a syndicated Credit Agreement (the “Revolving Credit Agreement”) with Bank of America, N.A., as administrative agent and as swing line lender, certain lenders named therein (the “Revolving Lenders”), Merrill Lynch, Pierce, Fenner & Smith Incorporated, as sole lead arranger and sole bookrunner, Morgan Stanley MUFG Loan Partners, LLC, as syndication agent, and Citibank, N.A., PNC Bank, National Association and JPMorgan Chase Bank, N.A., as co-documentation agents. .The Revolving Credit Agreement provides for a senior unsecured $150 million five-year revolving credit facility (the “Revolving Credit Facility”) that includes a $25 million swing line sub-facility. WeThe Company may also, subject to the agreement of the applicable lenders, increase the commitments under the Revolving Credit Facility by up to $100 million, for a total of $250 million. Subject to specified conditions, wethe Company may designate one1 or more of ourits subsidiaries as additional borrowers under the Revolving Credit Agreement provided that we guaranteethe Company guarantees all borrowings and other obligations of any such subsidiaries. As of December 31, 2016, no2019, 0 subsidiaries were designated as additional borrowers. Funds borrowed under the Revolving Credit Agreement may be used to fund working capital and for other general corporate purposes. As of December 31, 2016, no2019, 0 borrowings were outstanding under the Revolving Credit Agreement. Accordingly, at December 31, 2016,2019, $150 million of borrowing capacity was available for the purposes permitted by the Revolving Credit Agreement. Loans under the Revolving Credit Agreement will bear interest, at our option, at either (i) LIBOR periodically fixed for an interest period (as selected by us) of one, two, three or six months plus a margin (based on our public debt ratings) ranging from 1.00 percent per annum to 1.75 percent per annum or (ii) a daily floating rate based on our prime rate (subject to certain minimums based upon the federal funds effective rate or LIBOR) plus a margin (based on our public debt ratings) ranging from zero0 percent per annum to 0.75 percent per annum.
Subject to certain conditions stated in the Revolving Credit Agreement, wethe Company may borrow, prepay and reborrow amounts under the Revolving Credit Facility at any time during the term of the Revolving Credit Agreement. The Revolving Credit Agreement will terminate and all amounts owing thereunder will be due and payable on December 15, 2021, unless the commitments are terminated earlier, either at our request or, if an event of default occurs, by the Revolving Lenders (or automatically in the case of certain bankruptcy-related events). The Revolving Credit Agreement contains customary representations, warranties and affirmative and negative covenants for facilities of its type, including financial covenants, events of default and indemnification provisions in favor of the Revolving Lenders. The negative covenants include restrictions regarding the incurrence of liens, the incurrence of indebtedness by our subsidiaries and fundamental changes, subject to certain exceptions in each case. The financial covenants require us to meet a quarterly financial test with respect to a minimum consolidated interest coverage ratio of not less than 4.00 to 1.00 and a maximum consolidated leverage ratio of not greater than 3.50 to 1.00. AsAt December 31, 2019, the Company was in compliance with these covenants. Loan and Notes Payments and Contractual Interest The future expected loan repayments related to the Term Loan Agreement and the 3.650% Senior Notes as of December 31, 2016, we had not drawn upon2019 are as follows (in millions): | | | 2020 | $ | — | 2021 | | 225.0 | 2022 | | — | 2023 | | — | Thereafter | | 650.0 | Principal amounts repayable | | 875.0 | Debt issuance costs | | (3.3) | Unamortized discounts on notes | | (4.1) | Total debt outstanding | $ | 867.6 |
Interest expense recognized on the Revolving Credit Agreement.
3.650%Term Loan Agreement and the Senior Notes due 2027
On January 12, 2017, the Company entered into an indenture (the “Indenture”), by and between the Company and Wells Fargo Bank, National Association, as trustee (the “Trustee”),is included in connection with the issuance of $650 million aggregate principal amount of the Company’s 3.650% Senior Notes due 2027 (the “Notes”). The form and terms of the Notes were established pursuant to an Officer’s Certificate, dated as of January 12, 2017 (the “Officer’s Certificate”), supplementing the Indenture.
The Company intends to use a portion of theinterest expense, net proceeds from the Notes to fund, in part, the Merger, including the payment of related fees and expenses and the repayment of Bats’ existing indebtedness, and the remainder for general corporate purposes. The Notes mature on January 12, 2027 and bear interest at the rate of 3.650% per annum, payable semi-annually in arrears on January 12 and July 12 of each year, commencing July 12, 2017. The Notes are unsecured obligations of the Company and rank equally with all of the Company’s other existing and future unsecured, senior indebtedness, but are effectively junior to the Company’s secured indebtedness, to the extent of the value of the assets securing such indebtedness, and will not be the obligations of any of the Company’s subsidiaries.
The Company has the option to redeem some or all of the Notes, at any time in whole or from time to time in part, at the redemption prices set forth in the Officer’s Certificate. The Notes will be subject to a special mandatory redemption in the event that the Merger is not consummated on or prior to October 23, 2017 or, if prior to October 23, 2017, the Merger Agreement is terminated other than in connection with the consummationconsolidated statements of the Merger and is not otherwise amended or replaced. In such an event, the Notes will be redeemed at a price equal to 101% of the aggregate principal amount thereof. The Company may also be required to offer to repurchase the Notes upon the occurrence of a Change of Control Triggering Event (as such term is defined in the Officer’s Certificate) at a repurchase price equal to 101% of the aggregate principal amount of Notes to be repurchased.
Cash Flows
Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015
Operating Activities
Net cash provided by operating activities was $229.6 million and $245.3 million for the years ended December 31, 2016 and 2015, respectively. The decrease in net cash flows provided by operating activities was primarily due to lower net income.
Net cash provided by operating activities was $43.8 million higher than net income, for the fiscal year ended December 31, 2016. The difference was mainly a result of $44.4 million in depreciation and amortization and the recognition of stock-based compensation totaling $14.5 million, accounts payable and accrued liabilities of $19.8 million, partially offset by increases in accounts receivable of $7.4 million and income taxes receivable of $25.8 million.
Investing Activities
Net cash flows used in investing activities totaled $84.4 million and $79.4 million for the years ended December 31, 2016 and 2015, respectively. Expenditures for capital and other assets totaled $44.4 million and $39.3 million for the years ended December 31, 2016 and 2015, respectively, primarily representing purchases of systems hardware and development of software to develop and enhance our trading platform and operations. In 2016, investing activities primarily represented our majority investment in Vest, which totaled $14.3 million, and other investments totaling $23.3 million, which primarily includes our investments in CurveGlobal and Eris.
In 2015, we also acquired a business, Livevol, which totaled $3.0 million and made investments totaling $35.4 million, which primarily reflects our $30.0 million contribution to OCC, as part of the capital plan and other minority investments.
Our future expenditures for capital and other assets are expected to be primarily driven by spending to enhance the company's systems, as well as ongoing investments in systems hardware and software that enhance trading technology. In connection with the anticipated merger with Bats and the planned migration to the Bats trading platform and the suspension of CBOE Vector, our investment of $15.0 million related to the development of Vector, in 2017, could become obsolete or result in a shorter than expected useful life.
Financing Activities
Net cash flows used in financing activities totaled $150.1 million and $211.5 million for the years ended December 31, 20162019, 2018 and 2015, respectively. The $61.4 million decrease in net cash flows used in financing activities resulted primarily from lower repurchases of common stock in 2016.
For the year ended December 31, 2016, net cash flows used in financing activities consisted of $60.5 million in common stock purchases under the Company's share repurchase program, $78.5 million for the payment of quarterly dividends, $4.1 million for other share repurchases, which consisted of common stock surrendered to satisfy employees' tax obligations upon the vesting of restricted stock and payments of financing fees in conjunction with the pending acquisition of Bats totaling $8.1 million.
Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
Operating Activities
Net cash provided by operating activities was $245.3 million and $262.7 million for the years ended December 31, 2015 and 2014, respectively. The decrease in net cash flows provided by operating activities was primarily due to lower deferred income taxes, income tax liability and stock-based compensation, higher accounts receivable and income taxes receivable, partially offset by higher net income and higher depreciation and amortization.
Net cash provided by operating activities was $40.3 million higher than net income for the fiscal year ended December 31, 2015. The difference was mainly a result of $46.3 million in depreciation and amortization and the recognition of stock-based compensation totaling $12.2 million, partially offset by increases in accounts receivable of $4.8 million and income taxes receivable of $6.4 million.
Investing Activities
Net cash flows used in investing activities totaled $79.4 million and $52.1 million for the years ended December 31, 2015 and 2014, respectively. Expenditures for capital and other assets totaled $39.3 million and $50.2 million for the years ended December 31, 2015 and 2014, respectively, primarily representing purchases of systems hardware and development of software to develop and enhance our trading platform and operations. We also acquired a business, Livevol, which totaled $3.0 million. Additionally, investments totaled $35.4 million in 2015, which primarily reflects our $30 million contribution to OCC, as part of the capital plan discussed below, and other minority investments.
Financing Activities
Net cash flows used in financing activities totaled $211.5 million and $283.9 million for the years ended December 31, 2015 and 2014, respectively. The $72.4 million decrease in net cash flows used in financing activities resulted primarily from a special dividend paid in 2014 totaling $43.8 million and lower repurchases of common stock in 2015.
For the year ended December 31, 2015, net cash flows used in financing activities consisted of $132.2 million in common stock purchases under the Company's share repurchase program, $73.4 million for the payment of quarterly dividends, $3.2 million for other share repurchases, which consisted of common stock surrendered to satisfy employees' tax obligations upon the vesting of restricted stock and the payment of outstanding debt in conjunction with the acquisition of Livevol totaling $4.0 million.
Dividends
The Company’s expectation is to continue to pay dividends. The decision to pay a dividend, however, remains within the discretion of the Company's board of directors and may be affected by various factors, including our earnings, financial condition, capital requirements, level of indebtedness and other considerations our board of directors deems relevant. Future debt obligations and statutory provisions, among other things, may limit, or in some cases prohibit, our ability to pay dividends.
Share Repurchase Program
In 2011, the Company's board of directors approved an initial authorization for the Company to repurchase shares of its outstanding common stock of $100 million and approved additional authorizations of $100 million in each of 2012, 2013, 2014, 2015, and February 2016 for a total authorization of $600 million. The program permits the Company to purchase shares through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. It does not obligate the Company to make any repurchases at any specific time or situation.
For the year ended December 31, 2016, the Company purchased 947,786 shares of common stock at an average cost per share of $63.83, totaling $60.5 million in purchases under the program.
Since inception of the program, the Company purchased 10,947,401 shares of common stock at an average cost per share of $45.95, totaling $503.0 million in purchases under the program.
As of December 31, 2016, the Company had $97 million of availability remaining under its existing share repurchase authorizations.
OCC Capital Plan
In December 2014, OCC announced a newly-formed capital plan. The OCC capital plan was designed to strengthen OCC's capital base and facilitate its compliance with proposed SEC regulations for Systemically Important Financial Market Utilities ("SIFMUs") as well as international standards applicable to financial market infrastructures. On February 26, 2015, the SEC issued a notice of no objection to OCC's advance notice filing regarding the capital plan, and OCC and OCC’s existing exchange stockholders, which include CBOE, subsequently executed agreements effecting the capital plan. Under the plan, each of OCC's existing exchange stockholders agreed to contribute its pro-rata share, based on ownership percentage, of $150 million in equity capital, which would increase OCC's shareholders' equity, and to provide its pro rata share in replenishment capital, up to a maximum of $40 million per exchange stockholder, if certain capital thresholds2017 are breached. OCC also adopted policies under the plan with respect to fees, customer refunds, and stockholder dividends, which envision an annual dividend payment to the exchange stockholders equal to the portion of OCC’s after-tax income that exceeds OCC’s capital requirements after payment of refunds to OCC’s clearing members (with such customer refunds generally to constitute 50% of the portion of OCC’s pre-tax income that exceeds OCC’s capital requirements).On March 3, 2015, in accordance with the plan, CBOE contributed $30 million to OCC. On March 6, 2015, OCC informed CBOE that the SEC, acting though delegated authority, had approved OCC's proposed rule filing for the capital plan. The SEC approval order was stayed on March 13, 2015 automatically as a result of the initiation of petitions to review the order. On September 10, 2015, the SEC issued orders that discontinued the automatic stay of the approval order and granted the petitions for the SEC to review the approval order. On September 15, 2015, the petitioners filed motions to reinstitute the automatic stay. On February 11, 2016, based on a de novo review of the entire record, the SEC approved the proposed rule change implementing OCC's capital plan and dismissed the petitions for review and the petitioners' motions. Certain petitioners subsequently appealed the SEC approval order for the OCC capital plan to the U.S. Court of Appeals for the D.C. Circuit and moved to stay the SEC approval order. On February 23, 2016, the Court denied the petitioners’ motion to stay. The appeal of the SEC approval order remains pending. CBOE's contribution has been recorded under Investments in the balance sheet at December 31, 2016.
Off-Balance Sheet Arrangements
We currently do not have any relationships with unconsolidated entities or financial partnerships, often referred to as structured finance or special purpose entities, that have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Lease and Contractual Obligations
The Company currently leases additional office space, a data center and remote network operations center, with lease terms remaining from 3 months to 103 months as of December 31, 2016. In December 2014, we entered into an agreement with FINRA to provide certain regulatory services to the CBOE and C2 options markets. The agreement included the assignment of the office space CBOE leased for regulatory operations.
Total rent expense related to current and former lease obligations for the years ended December 31, 2016, 2015 and 2014 totaled $4.4 million, $4.1 million and $3.8 million, respectively. Future minimum payments under our operating leases and contractual obligations were as follows at December 31, 2016 (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | Total(1) | | Less than 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years | | Operating leases | $ | 3,247 |
| | $ | 1,182 |
| | $ | 749 |
| | $ | 406 |
| | $ | 910 |
| | Contractual obligations (2) | 201,274 |
| | 34,306 |
| | 62,329 |
| | 43,135 |
| | 61,504 |
| | Total | $ | 204,521 |
| | $ | 35,488 |
| | $ | 63,078 |
| | $ | 43,541 |
| | $ | 62,414 |
|
(1) Gross unrecognized income tax liabilities, excluding interest and penalties, of $41.9 million are not included in the table due to uncertainty about the date of their settlement.
(2) Contractual obligations means an agreement to purchase goods or services that is enforceable and legally binding
and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable
price provisions; and the approximate timing of the transaction.
On January 12, 2017, the Company entered into an indenture, by and between the Company and Wells Fargo Bank, National Association, as trustee, in connection with the issuance of $650 million aggregate principal amount of the Company’s 3.650% Senior Notes due 2027. | | | | | | | | | | | | | Year Ended | | Year Ended | | Year Ended | | | | December 31, | | December 31, | | December 31, | | | | 2019 | | 2018 | | 2017 | | Components of interest expense: | | | | | | | | | | | Contractual interest | | $ | 35.6 | | $ | 38.0 | | $ | 39.0 | | Amortization of debt discount | | | 0.6 | | | 0.7 | | | 0.6 | | Amortization of debt issuance costs | | | 1.6 | | | 1.8 | | | 3.0 | | Interest expense | | $ | 37.8 | | $ | 40.5 | | $ | 42.6 | | Interest income | | | (1.9) | | | (2.3) | | | (1.3) | | Interest expense, net | | $ | 35.9 | | $ | 38.2 | | $ | 41.3 | |
14. ACCUMULATED OTHER COMPREHENSIVE INCOME, NET The Notes will be subject to a special mandatory redemption infollowing represents the event that the Merger is not consummated on or prior to October 23, 2017 or, if prior to October 23, 2017, the Merger Agreement is terminated other than in connection with the consummation of the Merger and is not otherwise amended or replaced. In such an event, the Notes will be redeemed at a price equal to 101% of the aggregate principal amount thereof.
If the Merger Agreement is terminated under certain specified circumstances, CBOE Holdings may be required to pay
Bats a termination fee of $110 million and/or reimburse Bats’ expenses up to $10 million under the Merger Agreement.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to market risk in the ordinary course of business. This market risk consists primarily of interest rate risk associated with our cash and cash equivalents. The Company does not trade options for its own account.
Interest Rate Risk
We have exposure to market risk for changes in interest rates relating to our cash and cash equivalents. As of December 31, 2016 and 2015, our cash and cash equivalents were $97.3 million and $102.3 million, respectively. We invest available cash in highly liquid, short-term investments, such as money market funds and U.S. Treasury securities. Our investment policy is to preserve capital and liquidity. A hypothetical three basis point decrease in short-term interest rates would decrease annual earnings by less than $75,000, assuming no change in the amount or composition of our cash and cash equivalents.
As of December 31, 2016, we had no long-term indebtedness. However, as discussed above, we intend to incur significant indebtedness in connection with the Merger, a portion of which is expected to be incurred at variable rates of interest. Accordingly, following the Merger, we expect to be exposed to the risk of increased interest rates unless we enter into offsetting hedging transactions.
Impact of Inflation
We have not been adversely affected by inflation as technological advances and competition have generally caused prices for hardware and software that we use for our electronic platforms to remain constant or decline. Since transactions on our exchanges are not governed by long-term contracts, we believe that any increases in inflation are unlikely to have a material adverse effect on us.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | Page | CBOE Holdings, Inc. and Subsidiaries: | | | | | | | | | | | | | | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
CBOE Holdings, Inc. and Subsidiaries
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of CBOE Holdings, Inc. (the “Company”) as of
December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. 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 CBOE Holdings, Inc. as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, 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, 2016, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2017 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 21, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
CBOE Holdings, Inc. and Subsidiaries
Chicago, Illinois
We have audited the internal control over financial reporting of CBOE Holdings, Inc. (the “Company”) as of
December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) 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 Annual 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, 2016, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2016 of the Company and our report dated
February 21, 2017 expressed an unqualified opinion on those financial statements.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 21, 2017
CBOE Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2016 and December 31, 2015
| | | | | | | | | | (in thousands, except share amounts) | December 31, 2016 | | December 31, 2015 | | Assets | | | | | Current Assets: | | | | | Cash and cash equivalents | $ | 97,298 |
| | $ | 102,253 |
| | Accounts receivable—net allowances of 2016 - $127 and 2015 - $150 | 69,902 |
| | 62,535 |
| | Marketing fee receivable | 6,685 |
| | 5,682 |
| | Income taxes receivable | 53,708 |
| | 27,901 |
| | Other prepaid expenses | 5,360 |
| | 5,122 |
| | Deferred financing costs | 1,958 |
| | — |
| | Other current assets | 134 |
| | 625 |
| | Total Current Assets | 235,045 |
| | 204,118 |
| | Investments | 72,923 |
| | 48,430 |
| | Land | 4,914 |
| | 4,914 |
| | Property and Equipment: | | | | | Construction in progress | 173 |
| | 885 |
| | Building | 77,026 |
| | 70,531 |
| | Furniture and equipment | 138,837 |
| | 144,597 |
| | Less accumulated depreciation and amortization | (160,101 | ) | | (155,653 | ) | | Total Property and Equipment—Net | 55,935 |
| | 60,360 |
| | Goodwill | 26,468 |
| | 7,655 |
| | Other Assets: | | | | | Intangible assets (less accumulated amortization --2016 - $1,894 and 2015 - $182) | 8,666 |
| | 2,378 |
| | Software development work in progress | 12,305 |
| | 13,836 |
| | Data processing software and other assets (less accumulated amortization of 2016 - $171,950; 2015 - $164,152) | 50,675 |
| | 43,097 |
| | Deferred tax asset | 3,494 |
| | — |
| | Deferred financing long-term | 6,190 |
| | — |
| | Total Other Assets—Net | 81,330 |
| | 59,311 |
| | Total | $ | 476,615 |
| | $ | 384,788 |
| | Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity | | | | | Current Liabilities: | | | | | Accounts payable and accrued expenses | $ | 79,400 |
| | $ | 60,104 |
| | Marketing fee payable | 7,218 |
| | 6,141 |
| | Deferred revenue and other liabilities | 3,107 |
| | 4,019 |
| | Post-retirement benefit obligation - current | 100 |
| | 100 |
| | Contingent consideration - current | — |
| | 2,000 |
| | Income taxes payable | 18 |
| | 1,633 |
| | Total Current Liabilities | 89,843 |
| | 73,997 |
| | Long-term Liabilities: | | | | | Post-retirement benefit obligation - long-term | 1,843 |
| | 1,896 |
| | Contingent consideration - long-term | — |
| | 1,379 |
| | Income taxes liability | 52,100 |
| | 39,679 |
| | Other long-term liabilities | 2,283 |
| | 2,883 |
| | Deferred income taxes | — |
| | 5,309 |
| | Total Long-term Liabilities | 56,226 |
| | 51,146 |
| | Commitments and Contingencies |
| |
| | Total Liabilities | 146,069 |
| | 125,143 |
| | | | | | | Redeemable Noncontrolling Interests | 12,600 |
| | — |
| | | | | | | Stockholders' Equity: | | | | | Preferred stock, $0.01 par value: 20,000,000 shares authorized, no shares issued and outstanding at December 31, 2016 or 2015 | — |
| | — |
| | Common stock, $0.01 par value: 325,000,000 shares authorized; 92,950,065 issued and 81,285,307 outstanding at December 31, 2016; 92,738,803 issued and 82,088,549 outstanding at December 31, 2015 | 929 |
| | 927 |
| | Additional paid-in-capital | 139,249 |
| | 123,577 |
| | Retained earnings | 710,779 |
| | 603,597 |
| | Treasury stock at cost – 11,664,758 shares at December 31, 2016 and 10,650,254 shares at December 31, 2015 | (532,249 | ) | | (467,632 | ) | | Accumulated other comprehensive loss | (762 | ) | | (824 | ) | | Total Stockholders' Equity | 317,946 |
| | 259,645 |
| | Total | $ | 476,615 |
| | $ | 384,788 |
|
See notes to consolidated financial statements
CBOE Holdings, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2016, 2015 and 2014
| | | | | | | | | | | | | | | Year Ended | | Year Ended | | Year Ended | | (in thousands, except per share amounts) | December 31, 2016 | | December 31, 2015 | | December 31, 2014 | | Operating Revenues: | | | | | | | Transaction fees | $ | 463,294 |
| | $ | 456,016 |
| | $ | 437,764 |
| | Access fees | 52,358 |
| | 53,295 |
| | 59,332 |
| | Exchange services and other fees | 46,261 |
| | 42,209 |
| | 38,042 |
| | Market data fees | 33,159 |
| | 30,034 |
| | 30,447 |
| | Regulatory fees | 48,321 |
| | 33,489 |
| | 37,083 |
| | Other revenue | 13,553 |
| | 19,502 |
| | 14,557 |
| | Total Operating Revenues | 656,946 |
| | 634,545 |
| | 617,225 |
| | Operating Expenses: | | | | | | | Compensation and benefits | 113,152 |
| | 105,925 |
| | 121,734 |
| | Depreciation and amortization | 44,377 |
| | 46,274 |
| | 39,913 |
| | Technology support services | 22,465 |
| | 20,662 |
| | 19,189 |
| | Professional fees and outside services | 78,543 |
| | 50,060 |
| | 31,976 |
| | Royalty fees | 77,953 |
| | 70,574 |
| | 66,110 |
| | Order routing | 900 |
| | 2,293 |
| | 4,080 |
| | Travel and promotional expenses | 10,971 |
| | 8,982 |
| | 9,046 |
| | Facilities costs | 5,693 |
| | 4,998 |
| | 5,721 |
| | Other expenses | 4,692 |
| | 4,849 |
| | 5,655 |
| | Total Operating Expenses | 358,746 |
| | 314,617 |
| | 303,424 |
| | Operating Income | 298,200 |
| | 319,928 |
| | 313,801 |
| | Other Income/(Expense): | | | | | | | Investment and other income | 12,984 |
| | 3,692 |
| | 113 |
| | Net income/(loss) from investments | 1,167 |
| | 447 |
| | (4,217 | ) | | Interest and other borrowing costs | (5,747 | ) | | (43 | ) | | — |
| | Total Other Income/(Expense) | 8,404 |
| | 4,096 |
| | (4,104 | ) | | Income Before Income Taxes | 306,604 |
| | 324,024 |
| | 309,697 |
| | Income tax provision | 120,884 |
| | 119,001 |
| | 119,983 |
| | Net Income | 185,720 |
| | 205,023 |
| | 189,714 |
| | Net loss attributable to noncontrolling interests | 1,100 |
| | — |
| | — |
| | Net Income Excluding Noncontrolling Interests | 186,820 |
| | 205,023 |
| | 189,714 |
| | Change in redemption value of noncontrolling interests | (1,100 | ) | | — |
| | — |
| | Net Income allocated to participating securities | (775 | ) | | (898 | ) | | (1,322 | ) | | Net Income Allocated to Common Stockholders | $ | 184,945 |
| | $ | 204,125 |
| | $ | 188,392 |
| | Net Income Per Share Allocated to Common Stockholders: | | | | | | | Basic | $ | 2.27 |
| | $ | 2.46 |
| | $ | 2.21 |
| | Diluted | 2.27 |
| | 2.46 |
| | 2.21 |
| | Weighted average shares used in computing income per share: | | | | | | | Basic | 81,432 |
| | 83,081 |
| | 85,406 |
| | Diluted | 81,432 |
| | 83,081 |
| | 85,406 |
|
See notes to consolidated financial statements
CBOE Holdings, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2016, 2015 and 2014
| | | | | | | | | | | | | | | Year Ended | | Year Ended | | Year Ended | | (in thousands) | December 31, 2016 | | December 31, 2015 | | December 31, 2014 | | | | | | | | | Net Income | $ | 185,720 |
| | $ | 205,023 |
| | $ | 189,714 |
| | | | | | | | | Other Comprehensive Income (Loss) - net of tax: | | | | | | | Post retirement benefit obligation | 62 |
| | (135 | ) | | 361 |
| | Comprehensive Income | 185,782 |
| | 204,888 |
| | 190,075 |
| | | | | | | | | Comprehensive loss attributable to noncontrolling interests | 1,100 |
| | — |
| | — |
| | Comprehensive Income Excluding noncontrolling interests | 186,882 |
| | 204,888 |
| | 190,075 |
| | | | | | | | | Change in redemption value of noncontrolling interests | (1,100 | ) | | — |
| | — |
| | Comprehensive income allocated to participating securities | (775 | ) | | (898 | ) | | (1,322 | ) | | Comprehensive Income Allocated to Common Stockholders | $ | 185,007 |
| | $ | 203,990 |
| | $ | 188,753 |
|
See notes to consolidated financial statements
CBOE Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2016, 2015 and 2014
| | | | | | | | | | | | | | | Year Ended | | Year Ended | | Year Ended | | (in thousands) | December 31, 2016 | | December 31, 2015 | | December 31, 2014 | | Cash Flows from Operating Activities: | | | | | | | Net Income | $ | 185,720 |
| | $ | 205,023 |
| | $ | 189,714 |
| | Adjustments to reconcile net income to net cash flows from operating activities: | | | | | | | Depreciation and amortization | 44,377 |
| | 46,274 |
| | 39,913 |
| | Other amortization | 78 |
| | 81 |
| | 87 |
| | Provision for deferred income taxes | (8,845 | ) | | (8,282 | ) | | (290 | ) | | Gain on settlement of contingent consideration | (1,399 | ) | | — |
| | — |
| | Stock-based compensation | 14,503 |
| | 12,181 |
| | 15,577 |
| | Loss on disposition of property | 9 |
| | 617 |
| | 662 |
| | Equity (gain)/loss in investments | (1,167 | ) | | (811 | ) | | 1,217 |
| | Impairment of investment and other assets | — |
| | 118 |
| | 3,000 |
| | Changes in assets and liabilities: | | | | | | | Accounts receivable | (7,367 | ) | | (4,847 | ) | | (8,498 | ) | | Marketing fee receivable | (1,003 | ) | | 5,015 |
| | (1,828 | ) | | Income taxes receivable | (25,807 | ) | | (6,398 | ) | �� | 536 |
| | Prepaid expenses | (213 | ) | | (500 | ) | | (615 | ) | | Other current assets | 491 |
| | 799 |
| | 1,745 |
| | Accounts payable and accrued expenses | 19,841 |
| | 1,550 |
| | 5,888 |
| | Marketing fee payable | 1,077 |
| | (5,095 | ) | | 1,794 |
| | Deferred revenue and other liabilities | (1,512 | ) | | 717 |
| | 1,229 |
| | Post-retirement benefit obligations | (26 | ) | | (19 | ) | | (28 | ) | | Income tax liability | 12,421 |
| | (1,004 | ) | | 10,780 |
| | Income tax payable | (1,615 | ) | | (141 | ) | | 1,774 |
| | Net Cash Flows Provided by Operating Activities | 229,563 |
| | 245,278 |
| | 262,657 |
| | Cash Flows from Investing Activities: | | | | | | | Capital and other assets expenditures | (44,402 | ) | | (39,340 | ) | | (50,154 | ) | | Acquisition of a majority interest in a business, net of cash received | (14,257 | ) | | (2,960 | ) | | — |
| | Payment of contingent consideration from acquisition | (1,980 | ) | | — |
| | — |
| | Investments | (23,326 | ) | | (35,386 | ) | | (1,987 | ) | | Other | (421 | ) | | (1,735 | ) | | 3 |
| | Net Cash Flows Used in Investing Activities | (84,386 | ) | | (79,421 | ) | | (52,138 | ) | | Cash Flows from Financing Activities: | | | | | | | Payment of quarterly dividends | (78,538 | ) | | (73,431 | ) | | (66,999 | ) | | Payment of special dividend | — |
| | — |
| | (43,831 | ) | | Deferred financing costs | (8,148 | ) | | — |
| | — |
| | Excess tax benefit from stock-based compensation | 1,171 |
| | 1,285 |
| | 3,557 |
| | Purchase of common stock from employees | (4,119 | ) | | (3,178 | ) | | (8,332 | ) | | Payment of outstanding debt in conjunction with acquisition of a business | — |
| | (4,040 | ) | | — |
| | Purchase of common stock under announced program | (60,498 | ) | | (132,167 | ) | | (168,328 | ) | | Net Cash Flows Used in Financing Activities | (150,132 | ) | | (211,531 | ) | | (283,933 | ) | | Net Decrease in Cash and Cash Equivalents | (4,955 | ) | | (45,674 | ) | | (73,414 | ) | | Cash and Cash Equivalents at Beginning of Period | 102,253 |
| | 147,927 |
| | 221,341 |
| | Cash and Cash Equivalents at End of Period | $ | 97,298 |
| | $ | 102,253 |
| | $ | 147,927 |
| | Supplemental Disclosure of Cash Flow Information | | | | | | | Cash paid for income taxes | $ | 142,056 |
| | $ | 133,460 |
| | $ | 103,976 |
| | Non-cash activities: | | | | | | | Change in post-retirement benefit obligation | (104 | ) | | 220 |
| | (583 | ) | | Unpaid liability to acquire equipment and software | — |
| | 2,756 |
| | 2,769 |
| | Contingent consideration - current | — |
| | 2,000 |
| | — |
| | Contingent consideration - long-term | — |
| | 1,379 |
| | — |
|
See notes to consolidated financial statements
CBOE Holdings, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2016, 2015 and 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands) | Preferred Stock | |
Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity | | Redeemable Noncontrolling Interests | | Balance-January 1, 2014 | — |
| | $ | 919 |
| | $ | 90,985 |
| | $ | 349,290 |
| | $ | (155,627 | ) | | $ | (1,050 | ) | | $ | 284,517 |
| | | | Cash dividends on common stock of $0.78 per share | | | | | | | (66,999 | ) | | | | | | (66,999 | ) | | | | Stock-based compensation | | | | | 15,577 |
| | | | | | | | 15,577 |
| | | | Issuance of vested restricted stock granted to employees | | | 7 |
| | (7 | ) | | | | | | | | — |
| | | | Excess tax benefits from stock-based compensation plan | | | | | 3,557 |
| | | | | | | | 3,557 |
| | | | Purchase of common stock | | | | | | | | | (176,660 | ) | | | | (176,660 | ) | | | | Net income | | | | | | | 189,714 |
| | | | | | 189,714 |
| | | | Post-retirement benefit obligation adjustment—net of tax expense of $222 | | | | | | | | | | | 361 |
| | 361 |
| | | | Balance-December 31, 2014 | — |
| | 926 |
| | 110,112 |
| | 472,005 |
| | (332,287 | ) | | (689 | ) | | 250,067 |
| | — |
| | Cash dividends on common stock of $0.88 per share | | | | | | | (73,431 | ) | | | | | | (73,431 | ) | | | | Stock-based compensation | | | | | 12,181 |
| | | | | | | | 12,181 |
| | | | Issuance of vested restricted stock granted to employees | | | 1 |
| | (1 | ) | | | | | | | | — |
| | | | Excess tax benefits from stock-based compensation plan | | | | | 1,285 |
| | | | | | | | 1,285 |
| | | | Purchase of common stock | | | | | | | | | (135,345 | ) | | | | (135,345 | ) | | | | Net income | | | | | | | 205,023 |
| | | | | | 205,023 |
| | | | Post-retirement benefit obligation adjustment—net of tax benefit of $86 | | | | | | | | | | | (135 | ) | | (135 | ) | | | | Balance-December 31, 2015 | — |
| | 927 |
| | 123,577 |
| | 603,597 |
| | (467,632 | ) | | (824 | ) | | 259,645 |
| | — |
| | Cash dividends on common stock of $0.96 per share | | | | | | | (78,538 | ) | | | | | | (78,538 | ) | | | | Stock-based compensation | | | | | 14,503 |
| | | | | | | | 14,503 |
| | | | Issuance of vested restricted stock granted to employees | | | 2 |
| | (2 | ) | | | | | | | | — |
| | | | Excess tax benefits from stock-based compensation plan | | | | | 1,171 |
| | | | | | | | 1,171 |
| | | | Purchase of common stock | | | | | | | | | (64,617 | ) | | | | (64,617 | ) | | | | Net Income excluding noncontrolling interests | | | | | | | 186,820 |
| | | | | | 186,820 |
| | | | Increase due to acquiring majority of outstanding equity of Vest | | | | | | | | | | | | | — |
| | 12,600 |
| | Net loss attributable to redeemable noncontrolling interest | | | | | | | | | | | | | — |
| | (1,100 | ) | | Redemption value adjustment | | | | | | | (1,100 | ) | | | | | | (1,100 | ) | | 1,100 |
| | Post-retirement benefit obligation adjustment—net of tax expense of $42 | | | | | | | | | | | $ | 62 |
| | 62 |
| | | | Balance-December 31, 2016 | $ | — |
| | $ | 929 |
| | $ | 139,249 |
| | $ | 710,779 |
| | $ | (532,249 | ) | | $ | (762 | ) | | $ | 317,946 |
| | $ | 12,600 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See notes to consolidated financial statements.
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016, 2015 and 2014
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business—CBOE Holdings, Inc. ("CBOE Holdings" or the "Company") is the holding company of registered securities exchanges, subject to oversight by the Securities and Exchange Commission ("SEC"), and a designated contract market under the jurisdiction of the Commodity Futures Trading Commission ("CFTC"). The Company's principal business is operating markets that offer for trading exclusive options on various market indexes (index options) and futures contracts, as well as on non-exclusive "multiply-listed" options, such as options on the stocks of individual corporations (equity options) and options on other exchange-traded products (ETP options), such as exchange-traded funds (ETF options) and exchange-traded notes (ETN options), and certain other index options.
Basis of Presentation—The consolidated financial statements include the accounts and results of operations of CBOE Holdings and its wholly-owned subsidiaries, including: Chicago Board Options Exchange, Incorporated ("CBOE"), CBOE Futures Exchange, LLC ("CFE"), C2 Options Exchange, Incorporated ("C2"), Market Data Express, LLC and Chicago Options Exchange Building Corporation. Inter-company balances and transactions have been eliminated in consolidation. The Company reports the results of its operations in one reporting segment.
Use of Estimates—The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities and reported amounts of revenues and expenses. On an ongoing basis, management evaluates its estimates based upon historical experience, observance of trends, information available from outside sources and various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different conditions or assumptions.
Cash and Cash Equivalents—Cash and cash equivalents include highly liquid investments with maturities of three months or less from the date of purchase. The Company places its cash and cash equivalents with highly-rated financial institutions, limits the amount of credit exposure with any one financial institution and conducts ongoing evaluations of the creditworthiness of the financial institutions with which it does business; therefore concentrations of credit risk are limited. There are no redemption restrictions on the Company's invested cash balances.
Accounts Receivable—Accounts receivable consists primarily of transaction and regulatory fees from The Options Clearing Corporation ("OCC") and the Company's share of distributable revenue receivable from Options Price Reporting Authority ("OPRA"). Accounts receivable are primarily collected through OCC, and are with large, highly-rated clearing firms; therefore concentrations of credit risk are limited. The Company has no financing-related receivables.
Prepaid Expenses—Prepaid expenses primarily consist of prepaid software maintenance and licensing expenses which are amortized over the respective periods.
Investments - Cost and Equity Method—We use the cost method to account for a non-marketable equity investment in an entity that we do not control and for which we do not have the ability to exercise significant influence over an entity’s operating and financial policies. When we do not have a controlling financial interest in an entity but exercise significant influence over the entity's operating and financial policies, such investment is accounted for using the equity method. We recognize dividend income when declared.
Investments are periodically reviewed to determine whether any events or changes in circumstances indicate that the investments may be other than temporarily impaired. In the event of impairment, the Company would recognize a loss for the difference between the carrying amount and the estimated fair value of the investment.
Property and Equipment—Property and equipment are carried at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method, generally over five to forty years. Leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining term of the applicable leases.
Construction in progress is capitalized and carried at cost. Upon completion, the projects are placed in service and amortized over the appropriate useful lives, using the straight-line method commencing with the date the asset is placed in service.
Software Development Work in Progress and Data Processing Software and Other Assets—The Company expenses software development costs as incurred during the preliminary project stage, while capitalizing costs incurred during the
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2016, 2015 and 2014
application development stage, which includes design, coding, installation and testing activities. Estimated useful lives are generally three to ten years for internally developed and other data processing software and generally are five years or less for other assets.
Goodwill and Intangible Assets—Goodwill represents the excess of the purchase price of our acquisitions over the fair value of identifiable net assets acquired, including other identified intangible assets (See Note 2). We recognize specifically identifiable intangibles when a specific right or contract is acquired. Goodwill has been allocated to specific reporting units for purposes of impairment testing - core CBOE and CBOE Vest. Goodwill impairment testing is performed annually in the fiscal fourth quarter or more frequently if conditions exist that indicate that the asset may be impaired.
We also evaluate intangible assets for impairment annually in the fiscal fourth quarter or more frequently if conditions exist that indicate that the asset may be impaired. Such evaluation includes determining the fair value of the asset and comparing the fair value of the asset with its carrying value. If the fair value of the indefinite-lived intangible asset is less than its carrying value, an impairment loss is recognized in an amount equal to the difference.
For both goodwill and indefinite-lived impairment testing, we have the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying amount. If we conclude that this is the case, we must perform additional testing of the asset or reporting unit. Otherwise, no further testing is necessary.
As of December 31, 2016, we had not identified any factors that would result in an impairment charge related to goodwill or intangible assets.
Employee Benefit Plans—The funded status of a post retirement benefit plan is recognized in the Consolidated Balance Sheet and changes in that funded status are recognized in the year of change in other comprehensive income (loss). Plan assets and obligations are measured at year end. The Company recognizes changes in actuarial gains and losses and prior service costs in the year in which the changes occur through accumulated other comprehensive loss.
Business Combinations —The Company accounts for business combinations using the acquisition method. The method requires the acquirer to recognize the assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. The Company may use independent valuation services to assist in determining the estimated fair values.
Commitments and Contingencies—Litigation—The Company accrues loss contingencies when the loss is both probable and estimable. All legal costs incurred in connection with loss contingencies are expensed as service is provided.
Revenue Recognition—Revenue recognition policies for specific sources of revenue are discussed below:
Transaction Fees: Transaction fees are a function of three variables: (1) exchange fee rates; (2) trading volume; and (3) transaction mix between contract type. Transaction fees are assessed on a per contract basis and are considered earned upon the execution of a trade and are recognized on a trade date basis. Transaction fees are presented net of applicable volume discounts. In the event liquidity providers prepay for transaction fees, revenue is recognized based on the attainment of volume thresholds resulting in the amortization of the prepayment over the calendar year.
Access Fees: Access fees represent fees assessed to Trading Permit Holders and Trading Privilege Holders for the opportunity to trade and use other related functions of CBOE, C2 and CFE. Access fees are recognized during the period the service is provided.
Exchange Services and Other Fees: Exchange services and other fees include system services, trading floor charges and application revenue. Exchange services and other fees are recognized during the period the service is provided.
Market Data Fees: Market data fees include OPRA income and fees generated from the Company's market data services. OPRA is a limited liability company consisting of representatives of the member exchanges and is authorized by the SEC to provide consolidated options information. The Company's market data services are provided through CBOE Streaming Markets ("CSM") and other services. OPRA income is allocated based upon the individual exchange's relative volume of total cleared options transactions. The Company receives monthly estimates of OPRA's distributable revenue (See Note 9) and income is distributed on a quarterly basis. Company market data fees represent charges for current and historical options and futures data provided directly by the Company. Market data services are recognized in the period the data is provided.
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2016, 2015 and 2014
Regulatory Fees: Regulatory fees are primarily based on the number of customer contracts traded on all U.S. options exchanges by Trading Permit Holders and are primarily recognized on a trade-date basis. Under the rules of each of our options exchanges, as required by the SEC, any revenue derived from regulatory fees and fines cannot be used for non-regulatory purposes.
Concentration of Revenue: All contracts traded on our exchanges must be cleared through clearing members of OCC. At December 31, 2016, there were one hundred one Trading Permit Holders that are clearing members of OCC. Two clearing members accounted for 42% of transaction and other fees collected through OCC in 2016. The next largest clearing member accounted for approximately 14% of transaction and other fees collected through the OCC. No one Trading Permit Holder using the clearing services of the top two clearing member firms represented more than 21% of transaction and other fees collected through OCC, for the respective clearing member, in 2016. Should a clearing member withdraw from CBOE, we believe the Trading Permit Holder portion of that clearing member's trading activity would likely transfer to another clearing member.
The two largest clearing members mentioned above clear the majority of the market-maker sides of transactions at CBOE, C2 and at all of the U.S. options exchanges. If either of these clearing members were to withdraw from the business of market-maker clearing and market-makers were unable to transfer to another clearing member, this could create significant disruption to the U.S. options markets, including ours.
Advertising Costs—Advertising costs, including print advertising and production costs, product promotion campaigns and seminar, conference convention costs related to trade shows and other industry events and, in prior years, sponsorships with local professional sports organizations, are expensed as incurred or amortized over the respective period. The Company incurred advertising costs of $6.0 million, $4.7 million and $4.3 million for the years ended December 31, 2016, 2015 and 2014, respectively. Advertising costs are included in travel and promotional expenses in the consolidated statements of income.
Stock-Based Compensation—Stock-based compensation is based on the fair value of the award on the grant date and recognized over the related service period, net of estimated forfeitures. For performance based units, we use the Monte Carlo valuation model method to estimate the fair value of the award.
Income Taxes—Deferred income taxes arise from temporary differences between the tax basis and book basis of assets and liabilities. A valuation allowance is recognized if it is anticipated that some or all of a deferred tax asset may not be realized.
The Company accounts for uncertainty in income taxes recognized in its consolidated financial statements by using a more-likely-than-not recognition threshold based solely on the technical merits of the position taken or expected to be taken. Interest and penalties are recorded within the provision for income taxes in the Company's consolidated statements of income and are classified on the consolidated balance sheets with the related liability for unrecognized tax benefits. See Note 12 for further discussion of the Company's income taxes.Recent Accounting Pronouncements—In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In addition, the ASU provides guidance on accounting for certain revenue-related costs including when to capitalize costs associated with obtaining and fulfilling a contract. ASU 2014-09 provides companies with two implementation methods. Companies can choose to apply the standard retrospectively to each prior reporting period presented (full retrospective application) or retrospectively with the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings of the annual reporting period that includes the date of initial application (modified retrospective application). This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The FASB deferred the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. Early adoption of the standard is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods. Based on our evaluation of the standard, we do not expect a material impact on our revenue recognition practices. A significant portion of our revenue is generated from fees associated primarily with the execution of a trade, transaction fees and regulatory fees, and revenue is recognized on the trade date as our performance obligation would be complete. The revenue components that are not primarily associated with the execution of a trade, market data fees and exchange service and other fees, are also not expected to be impacted by the adoption of the new standard. In most cases, our performance obligation is fulfilled on a monthly basis and does not require any additional requirements that would require performance beyond a monthly basis. Therefore we do not expect a material impact on our revenue recognition policies as a result of the adoption of the new standard which the Company is considering early adoption prior to the effective date.
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2016, 2015 and 2014
In February 2016, the FASB issued ASU 2016-02, Leases. This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The guidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. This update is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company is in the process of evaluating this guidance, though we do not expect it will materially impact our consolidated balance sheets, statements of income, comprehensive income or cash flows.
In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation. This standard simplifies several aspects of the accounting for stock-based payment transactions, including the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. This update is effective for annual and interim periods beginning after December 15, 2016 and can be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. Early adoption is permitted. The Company is in the process of evaluating this guidance, though we do not expect it will materially impact our consolidated balance sheets, statements of income, comprehensive income or cash flows.
In September 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) — Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force). This standard addresses stakeholders’ concerns regarding diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. In particular, ASU No. 2016-15 addresses eight specific cash flow issues in an effort to reduce this diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. For public business entities that are SEC filers, the amendments are effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Note that early adoption is permitted for all entities, including adoption during an interim period. The Company is in the process of evaluating this guidance, though we do not expect it will materially impact our consolidated balance sheets, statements of income, comprehensive income or cash flows.
In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes:Intra-Entity Transfers of Assets other than Inventory. The standard requires that the income tax impact of intra-entity sales and transfers of property, except for inventory, be recognized when the transfer occurs. This update is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The new standard should be applied by making a cumulative effect adjustment directly to retained earnings as of the beginning of period of adoption.The Company is in the process of evaluating this guidance, and considering early adoption, though we do not expect it will materially impact our consolidated balance sheets, statements of income, comprehensive income or cash flows.
2. ACQUISITION - GOODWILL AND INTANGIBLE ASSETS
CBOE Vest Financial Group Inc.
In January 2016, the Company, through its subsidiary CBOE Vest, LLC, acquired a majority of the outstanding equity of Vest, an asset management firm that provides options-based investments through structured protective strategies and innovative technology solutions which allows for enhanced integration of our proprietary products, strategy indexes and options expertise. The purchase price consisted of $18.9 million in cash, reflecting payments of $14.9 million to former stockholders and $4.0 million to Vest for newly issued shares, and represented an ownership interest of 60% resulting in the consolidation of Vest operations. The purchase price was allocated to the assets acquired based on their fair values at the acquisition date. The allocation is identified below:
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2016, 2015 and 2014
| | | | | | | (amounts in thousands) | | | | Purchase Price | $ | 18,900 |
| | | | | | | Fair Value of Assets Acquired: | | | | Cash | $ | 4,700 |
| | | Intangible assets | 8,000 |
| | | Goodwill | 18,800 |
| | | Total Assets Acquired | $ | 31,500 |
| | | Redeemable noncontrolling interests | 12,600 |
| | | Net Assets Acquired | $ | 18,900 |
| | | | | |
The remaining 40% noncontrolling interest is held by the remaining Vest stockholders. The remaining Vest stockholders have a put option that can be exercised to Vest and Vest has a call option that can be exercised to the remaining stockholders. The put and call options can be exercised after five years though they could be accelerated by certain employment-related actions. The combination of the noncontrolling interest and a redemption feature resulted in a redeemable noncontrolling interest, which is classified outside of permanent equity on the consolidated balance sheet.
In addition to the tangible and intangible assets, goodwill totaling $18.8 million was recorded in connection with the acquisition. Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents potential future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill is not expected to be deductible for tax purposes.
Vest - Intangible Assets
Intangible assets totaling $8.0 million were recorded in 2016 in connection with the acquisition of Vest and include: customer relationships, trade names, and technology. Intangible assets and related accumulated amortization consisted of the following as of December 31, 2016component (in thousands)millions):
| | | | | | | | As of December 31, 2016 | Estimated Useful Lives | | Customer relationships | $ | 3,000 |
| 9 years | | Trade names | 1,000 |
| 7 years | | Technology | 4,000 |
| 5 years | | Total Intangible Assets Acquired | 8,000 |
| | | Less accumulated amortization | 1,276 |
| | | Total Intangibles, net | $ | 6,724 |
| |
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2016, 2015 and 2014
For the year ended December 31, 2016, amortization of Vest intangible assets was $1.3 million. The remaining weighted average useful lives of the intangible assets is 5.8 years as of December 31, 2016. The future expected amortization expense from the intangible assets related to the Vest acquisition as of December 31, 2016 is as follows (in thousands):
| | | | | | | Year | | Amortization expense | | 2017 | | $ | 1,276 |
| | 2018 | | 1,276 |
| | 2019 | | 1,276 |
| | 2020 | | 1,276 |
| | 2021 | | 476 |
| | Total | | $ | 5,580 |
| | | | |
Livevol - Intangible Assets
Intangible assets totaling $2.6 million recorded in 2015 in connection with the acquisition of Livevol included: customer relationships, trade names, existing technology, non-compete agreements and leasehold rights. Intangible assets and related accumulated amortization consisted of the following as of December 31, 2016 (in thousands):
| | | | | | | | As of December 31, 2016 | Estimated Useful Lives | | Customer relationships | $ | 910 |
| 13 years | | Trade names | 370 |
| 10 years | | Technology | 1,130 |
| 2-5 years | | Other | 150 |
| 1-4 years | | Total | 2,560 |
| | | Less accumulated amortization | 617 |
| | | Total Intangibles, net | $ | 1,943 |
| | | | | |
For the twelve months ended December 31, 2016, amortization of Livevol intangible assets was $0.4 million. The remaining weighted average useful lives of the intangible assets is 7.6 years as of December 31, 2016. The future expected amortization expense from the intangible assets related to the Livevol acquisition as of December 31, 2016 is as follows (in thousands):
| | | | | | | Year | | Amortization expense | | 2017 | | 379 |
| | 2018 | | 349 |
| | 2019 | | 309 |
| | 2020 | | 206 |
| | 2021 | | 107 |
| | Total | | $ | 1,350 |
| | | | |
3. INVESTMENTS
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2016, 2015 and 2014
At December 31, 2016 and 2015, the Company's investments were comprised of the following (in thousands):
| | | | | | | | | | | December 31, 2016 | | December 31, 2015 | | Equity Method | | | | | Investment in Signal Trading Systems, LLC | $ | 12,409 |
| | $ | 12,185 |
| | Investment in CBOE Stock Exchange, LLC | — |
| | — |
| | Total equity method investments | 12,409 |
| | 12,185 |
| | | | | | | Cost Method | | | | | Investment in OCC | 30,333 |
| | 30,333 |
| | Other cost method investments | 30,181 |
| | 5,912 |
| | Total cost method investments | 60,514 |
| | 36,245 |
| | | | | | | Total Investments | $ | 72,923 |
| | $ | 48,430 |
|
Equity Method
The carrying amount of our equity method investments totaled $12.4 million and $12.2 million as of December 31, 2016 and 2015, respectively, and is included in Investments in our Consolidated Balance Sheet. Our equity method investments include our in investments in Signal Trading Systems, LLC ("Signal") and CBOE Stock Exchange, LLC ("CBSX").
In May 2010, CBOE acquired a 50% interest in Signal from FlexTrade Systems, Inc. ("FlexTrade"). The joint venture develops and markets a multi-asset front-end order entry system, known as "Pulse," which has a particular emphasis on options trading. The Company assists in the development of the terminals and provides marketing services to the joint venture, which is accounted for under the equity method. We account for the investment in Signal under the equity method due to the substantive participating rights provided to the other limited liability company member, FlexTrade. In the twelve months ended December 31, 2016, the Company recorded contributions to Signal of $2.0 million and equity earnings in Signal of $1.2 million. Additionally, the Company received distributions from Signal of $2.9 million which reduced the carrying value of our investment.
The Company currently holds a 49.96% equity interest in CBSX in return for non-cash property contributions. CBSX ceased trading operations on April 30, 2014. CBOE is responsible for the compliance and regulation of the CBSX marketplace. In addition, the Company has a services agreement under which it provides financial, accounting and technology support.
Cost method
The carrying amount of our cost method investments totaled $60.5 million and $36.2 million as of December 31, 2016 and 2015, respectively, and is included in Investments in our Consolidated Balance Sheet. We account for our cost-method investments primarily as a result of our inability to exercise significant influence over these investments. As of December 31, 2016, our cost method investments primarily reflect our 20% investment in OCC and minority investments in American Financial Exchange ("AFX"), CurveGlobal and Eris Exchange Holdings, LLC ("Eris").
In December 2014, OCC announced a newly-formed capital plan. The OCC capital plan was designed to strengthen OCC's capital base and facilitate its compliance with proposed SEC regulations for Systemically Important Financial Market Utilities ("SIFMUs") as well as international standards applicable to financial market infrastructures. On February 26, 2015, the SEC issued a notice of no objection to OCC's advance notice filing regarding the capital plan, and OCC and OCC’s existing exchange stockholders, which include CBOE, subsequently executed agreements effecting the capital plan. Under the plan, each of OCC's existing exchange stockholders agreed to contribute its pro-rata share, based on ownership percentage, of $150 million in equity capital, which would increase OCC's shareholders' equity, and to provide its pro rata share in replenishment capital, up to a maximum of $40 million per exchange stockholder, if certain capital thresholds are breached. OCC also adopted policies under the plan with respect to fees, customer refunds, and stockholder dividends, which envision an annual dividend payment to the exchange stockholders equal to the portion of OCC’s after-tax income that exceeds OCC’s capital requirements after payment of refunds to OCC’s clearing members (with such customer refunds generally to constitute 50% of the portion of
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2016, 2015 and 2014
OCC’s pre-tax income that exceeds OCC’s capital requirements).On March 3, 2015, in accordance with the plan, CBOE contributed $30 million to OCC. On March 6, 2015, OCC informed CBOE that the SEC, acting though delegated authority, had approved OCC's proposed rule filing for the capital plan. The SEC approval order was stayed on March 13, 2015 automatically as a result of the initiation of petitions to review the order. On September 10, 2015, the SEC issued orders that discontinued the automatic stay of the approval order and granted the petitions for the SEC to review the approval order. On September 15, 2015, the petitioners filed motions to reinstitute the automatic stay. On February 11, 2016, based on a de novo review of the entire record, the SEC approved the proposed rule change implementing OCC's capital plan and dismissed the petitions for review and the petitioners' motions. Certain petitioners subsequently appealed the SEC approval order for the OCC capital plan to the U.S. Court of Appeals for the D.C. Circuit and moved to stay the SEC approval order. On February 23, 2016, the Court denied the petitioners’ motion to stay. The appeal of the SEC approval order remains pending. CBOE's contribution has been recorded under Investments in the balance sheet at December 31, 2016.
In 2015, CBOE Holdings, through its subsidiary Loan Markets, LLC, acquired a minority interest in AFX, an electronic marketplace for small and mid-sized banks to lend and borrow short-term funds.
In January 2016, CBOE Holdings, through its subsidiary CBOE III, LLC, acquired a minority interest in CurveGlobal, an interest rate derivatives venture.
In May 2016, CBOE Holdings, through its subsidiary CBOE III, LLC, acquired a minority interest in Eris Exchange Holdings, LLC (“Eris”), the parent of a U.S. based futures exchange group.
4. DEBT
CBOE Holdings and Bats Global Markets, Inc. (“Bats”) entered into an Agreement and Plan of Merger, dated as of September 25, 2016 (the “Merger Agreement”), providing, among other things, that, upon the terms and subject to the conditions set forth in the Merger Agreement, a wholly-owned subsidiary of CBOE Holdings will merge with and into Bats, with Bats surviving as a wholly-owned subsidiary of CBOE Holdings (the “Merger”). The Merger Agreement also provides that, immediately following the effective time of the Merger, Bats, as the surviving corporation from the Merger, will merge with and into CBOE V, LLC (“Merger LLC”), a wholly-owned subsidiary of CBOE Holdings, Inc. (the “Subsequent Merger”), with Merger LLC surviving the Subsequent Merger as a wholly-owned subsidiary of CBOE Holdings. The following outlines the steps the Company has taken regarding short and long-term financing related to the Merger and acquiring funding available for general corporate purposes.
Bridge Facility
In connection with entering into the Merger Agreement, the Company entered into a commitment letter with Bank of America, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (or any of its designated affiliates) (Bank of America, N.A., and other such financial institutions that accede as lender to such debt commitment letter in accordance with its terms are referred to herein as the “Lenders”), which provides that, subject to the satisfaction and waiver of certain conditions which are usual and customary for financing of this type, the Lenders are committed to provide debt financing for the purposes of funding (i) the cash consideration to be paid in the transactions contemplated by the Merger Agreement, (ii) the refinancing of certain existing indebtedness of Bats and its subsidiaries and (iii) related fees and expenses, which debt financing consists of a senior unsecured 364-day bridge loan facility in an aggregate principal amount of up to $1.65 billion to the extent the Company fails to generate gross cash proceeds in an aggregate principal amount of up to $1.65 billion from permanent financing including in the form of a senior unsecured term loan facility and the issuance of senior unsecured notes on or prior to the consummation of the transaction contemplated by the Merger Agreement. The Company paid commitment and structuring fees of $6.0 million. Through December 31, 2016, we have amortized $5.7 million of these fees as a result of the Company entering into more permanent debt arrangements. In lieu of entering into the bridge loan facility, the Company entered into a term loan agreement and completed a notes offering, as described below, securing $1.65 billion to finance the cash portion of its pending acquisition of Bats as well as the repayment of Bats' existing indebtedness.
Term Loan Agreement
On December 15, 2016, the Company, as borrower, entered into a Term Loan Credit Agreement (the “Term Loan Agreement”) with Bank of America, N.A., as administrative agent, certain lenders named therein (the “Term Lenders”), Merrill Lynch, Pierce, Fenner & Smith Incorporated, as sole lead arranger and sole bookrunner, Morgan Stanley MUFG Loan Partners,
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2016, 2015 and 2014
LLC, as syndication agent, and Citibank, N.A., PNC Bank, National Association and JPMorgan Chase Bank, N.A., as co-documentation agents.
The Term Loan Agreement provides for a senior unsecured delayed draw term loan facility (the “Term Loan Facility”) in an aggregate principal amount of $1.0 billion. We may also, subject to the agreement of the applicable Term Lenders, increase the commitments under the Term Loan Agreement by up to $500 million for a total of $1.5 billion. Proceeds from the Term Loan Facility, if drawn, may be used to finance the Merger and to fund working capital needs and for other general corporate purposes. The availability of the commitments under the Term Loan Agreement is conditioned upon, among other things, confirmation that the Merger has been consummated, or will be consummated substantially concurrently with the extension of the loans under the Term Loan Agreement.
Commitments under the Term Loan Agreement will expire on the earlier of (i) the consummation of the Merger (after giving effect to the funding of the committed loans in accordance with and subject to the terms of the Term Loan Agreement), (ii) July 25, 2017 (or if the outside date is extended pursuant to the terms of the Merger Agreement, October 23, 2017), (iii) the closing of the Merger without using the loans under the Term Loan Agreement and (iv) the termination of the Merger Agreement in accordance with the terms thereof. Loans under the Term Loan Agreement, if drawn, will mature five years following the closing date of the Merger. The Term Loan Facility is unsecured and is not expected to be guaranteed by any subsidiary.
Loans under the Term Loan Agreement will bear interest, at our option, at either (i) the London Interbank Offered Rate (“LIBOR”) periodically fixed for an interest period (as selected by us) of one, two, three or six months plus a margin (based on our public debt ratings) ranging from 1.00 percent per annum to 1.75 percent per annum or (ii) a daily floating rate based on the agent’s prime rate (subject to certain minimums based upon the federal funds effective rate or LIBOR) plus a margin (based on our public debt ratings) ranging from zero percent per annum to 0.75 percent per annum. We will be required to pay a ticking fee to the agent for the account of the Term Lenders which will initially accrue at a rate (based on our public debt ratings) ranging from 0.10 percent per annum to 0.30 percent per annum multiplied by the undrawn aggregate commitments of the Term Lenders in respect of the Term Loan Facility, accruing during the period commencing on December 15, 2016 and ending on the earlier of (i) the date on which the loans are drawn and (ii) the termination of the commitments under the Term Loan Agreement in accordance with the terms thereof.
The Term Loan Agreement contains customary representations, warranties and affirmative and negative covenants for facilities of its type, including financial covenants, events of default and indemnification provisions in favor of the Term Lenders. The negative covenants include restrictions regarding the incurrence of liens, the incurrence of indebtedness by the our subsidiaries and fundamental changes, subject to certain exceptions in each case. The financial covenants require us to meet a quarterly financial test with respect to a minimum consolidated interest coverage ratio of not less than 4.00 to 1.00 and a maximum consolidated leverage ratio of not greater than 3.50 to 1.00. As of December 31, 2016, we had not drawn upon the commitments in the Term Loan Agreement.
Revolving Credit Agreement
On December 15, 2016, the Company, as borrower, entered into a Credit Agreement (the “Revolving Credit Agreement”) with Bank of America, N.A., as administrative agent and as swing line lender, certain lenders named therein (the “Revolving Lenders”), Merrill Lynch, Pierce, Fenner & Smith Incorporated, as sole lead arranger and sole bookrunner, Morgan Stanley MUFG Loan Partners, LLC, as syndication agent, and Citibank, N.A., PNC Bank, National Association and JPMorgan Chase Bank, N.A., as co-documentation agents.
The Revolving Credit Agreement provides for a senior unsecured $150 million five-year revolving credit facility (the “Revolving Credit Facility”) that includes a $25 million swing line sub-facility. We may also, subject to the agreement of the applicable lenders, increase the commitments under the Revolving Credit Facility by up to $100 million, for a total of $250 million. Subject to specified conditions, we may designate one or more of our subsidiaries as additional borrowers under the Revolving Credit Agreement provided that we guarantee all borrowings and other obligations of any such subsidiaries. As of December 31, 2016, no subsidiaries were designated as additional borrowers.
Funds borrowed under the Revolving Credit Agreement may be used to fund working capital and for other general corporate purposes. As of December 31, 2016, no borrowings were outstanding under the Revolving Credit Agreement.
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2016, 2015 and 2014
Accordingly, at December 31, 2016, $150 million of borrowing capacity was available for the purposes permitted by the Revolving Credit Agreement.
Loans under the Revolving Credit Agreement will bear interest, at our option, at either (i) LIBOR periodically fixed for an interest period (as selected by us) of one, two, three or six months plus a margin (based on our public debt ratings) ranging from 1.00 percent per annum to 1.75 percent per annum or (ii) a daily floating rate based on our prime rate (subject to certain minimums based upon the federal funds effective rate or LIBOR) plus a margin (based on our public debt ratings) ranging from zero percent per annum to 0.75 percent per annum.
Subject to certain conditions stated in the Revolving Credit Agreement, we may borrow, prepay and reborrow amounts under the Revolving Credit Facility at any time during the term of the Revolving Credit Agreement. The Revolving Credit Agreement will terminate and all amounts owing thereunder will be due and payable on December 15, 2021, unless the commitments are terminated earlier, either at our request or, if an event of default occurs, by the Revolving Lenders (or automatically in the case of certain bankruptcy-related events). The Revolving Credit Agreement contains customary representations, warranties and affirmative and negative covenants for facilities of its type, including financial covenants, events of default and indemnification provisions in favor of the Revolving Lenders. The negative covenants include restrictions regarding the incurrence of liens, the incurrence of indebtedness by our subsidiaries and fundamental changes, subject to certain exceptions in each case. The financial covenants require us to meet a quarterly financial test with respect to a minimum consolidated interest coverage ratio of not less than 4.00 to 1.00 and a maximum consolidated leverage ratio of not greater than 3.50 to 1.00. As of December 31, 2016, we had not drawn upon the Revolving Credit Agreement.
3.650% Senior Notes due 2027
On January 12, 2017, the Company entered into an indenture (the “Indenture”), by and between the Company and Wells Fargo Bank, National Association, as trustee (the “Trustee”), in connection with the issuance of $650 million aggregate principal amount of the Company’s 3.650% Senior Notes due 2027 (the “Notes”). The form and terms of the Notes were established pursuant to an Officer’s Certificate, dated as of January 12, 2017 (the “Officer’s Certificate”), supplementing the Indenture.
The Company intends to use a portion of the net proceeds from the Notes to fund, in part, the Merger, including the payment of related fees and expenses and the repayment of Bats’ existing indebtedness, and the remainder for general corporate purposes. The Notes mature on January 12, 2027 and bear interest at the rate of 3.650% per annum, payable semi-annually in arrears on January 12 and July 12 of each year, commencing July 12, 2017. The Notes are unsecured obligations of the Company and rank equally with all of the Company’s other existing and future unsecured, senior indebtedness, but are effectively junior to the Company’s secured indebtedness, to the extent of the value of the assets securing such indebtedness, and will not be the obligations of any of the Company’s subsidiaries.
The Company has the option to redeem some or all of the Notes, at any time in whole or from time to time in part, at the redemption prices set forth in the Officer’s Certificate. The Notes will be subject to a special mandatory redemption in the event that the Merger is not consummated on or prior to October 23, 2017 or, if prior to October 23, 2017, the Merger Agreement is terminated other than in connection with the consummation of the Merger and is not otherwise amended or replaced. In such an event, the Notes will be redeemed at a price equal to 101% of the aggregate principal amount thereof. The Company may also be required to offer to repurchase the Notes upon the occurrence of a Change of Control Triggering Event (as such term is defined in the Officer’s Certificate) at a repurchase price equal to 101% of the aggregate principal amount of Notes to be repurchased.
5. REDEEMABLE NONCONTROLLING INTEREST
Redeemable noncontrolling interests are reported on the consolidated balance sheets in mezzanine equity in "Redeemable Noncontrolling Interests." We recognize changes to the redemption value of redeemable noncontrolling interests as they occur and adjust the carrying value to equal the redemption value at the end of each reporting period. The resulting increases or decreases in the estimated redemption amount are affected by corresponding charges or credits against retained earnings, or in the absence of retained earnings, additional paid in capital. The redemption amounts have been estimated based
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2016, 2015 and 2014
on the fair value of the majority-owned subsidiary, determined based on a weighting of the discounted cash flow and other economic factors.
For the year ended December 31, 2016, the following reflects changes in our redeemable noncontrolling interests (in thousands):
| | | | | | | Redeemable Noncontrolling Interest | | Balance as of January 1, 2016 | $ | — |
| | Increase due to acquiring majority of outstanding equity of Vest | 12,600 |
| | Net loss attributable to redeemable noncontrolling interest | (1,100 | ) | | Redemption value adjustment | 1,100 |
| | Balance as of December 31, 2016 | $ | 12,600 |
| | | |
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
At December 31, 2016 and 2015, accounts payable and accrued liabilities consisted of the following (in thousands):
| | | | | | | | | | | 2016 | | 2015 | | Compensation and benefit related liabilities | $ | 25,505 |
| | $ | 23,304 |
| | Royalties | 17,807 |
| | 15,409 |
| | Contract services | 12,166 |
| | 6,684 |
| | Acquisition related (1) | 6,856 |
| | — |
| | Accounts payable | 6,466 |
| | 1,762 |
| | Purchase of common stock (2) | — |
| | 1,778 |
| | Facilities | 2,066 |
| | 2,099 |
| | Legal | 1,052 |
| | 1,536 |
| | Market linkage | 917 |
| | 628 |
| | Other | 6,565 |
| | 6,904 |
| | Total | $ | 79,400 |
| | $ | 60,104 |
|
(1) As of December 31, 2016, this amount reflects professional fees and outside services associated with the proposed acquisition of Bats.
(2) Reflects shares purchased at the end of the period that are not settled until three trading days after the trade occurs. We were not active in our share repurchase program during the fourth quarter of 2016.
7. MARKETING FEE
The Company facilitates the collection and payment of marketing fees assessed on certain trades taking place at CBOE. Funds resulting from the marketing fees are made available to Designated Primary Market-Makers and Preferred Market-Makers as an economic inducement to route orders to CBOE. Pursuant to ASC 605-45, Revenue Recognition—Principal Agent Considerations, the Company reflects the assessments and payments on a net basis, with no impact on revenues or expenses.
As of December 31, 2016 and 2015, amounts assessed by the Company on behalf of others included in current assets totaled $6.7 million and $5.7 million, respectively, and payments due to others included in current liabilities totaled $7.2 million and $6.1 million, respectively.
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2016, 2015 and 2014
8. DEFERRED REVENUE
The following tables summarize the activity in deferred revenue for the years ended December 31, 2016 and 2015 (in thousands):
| | | | | | | | | | | | | | | | | | | Balance at
December 31,
2015 | | Cash Additions | | Revenue Recognition | | Balance at
December 31,
2016 | | Liquidity provider sliding scale (1) | $ | — |
| | $ | 11,400 |
| | $ | (11,400 | ) | | $ | — |
| | Other, net | 4,019 |
| | 11,333 |
| | (12,245 | ) | | 3,107 |
| | Total deferred revenue | $ | 4,019 |
| | $ | 22,733 |
| | $ | (23,645 | ) | | $ | 3,107 |
|
| | | | | | | | | | | | | | | | | | | Balance at
December 31,
2014 | | Cash Additions | | Revenue Recognition | | Balance at
December 31,
2015 | | Liquidity provider sliding scale (1) | $ |
|
| | $ | 14,400 |
| | $ | (14,400 | ) | | $ | — |
| | Other, net | 1,988 |
| | 11,610 |
| | (9,579 | ) | | 4,019 |
| | Total deferred revenue | $ | 1,988 |
| | $ | 26,010 |
| | $ | (23,979 | ) | | $ | 4,019 |
|
(1) Liquidity providers are eligible to participate in the sliding scale program, which involves prepayment of transaction fees, and receive reduced fees based on the achievement of certain volume thresholds within a month. The prepayment of 2016 and 2015 transaction fees totaled $11.4 million and $14.4 million, respectively. These amounts were amortized and recorded ratably, as transaction fees over each respective year.
9. RELATED PARTIES
The Company collected transaction and other fees of $573.8 million, $596.1 million and $687.5 million in the years ended December 31, 2016, 2015 and 2014, respectively, by drawing on accounts of CBOE and C2 market participants held at OCC. The amounts collected by OCC for CBOE included $80.2 million, $95.7 million and $121.4 million of marketing fees during the years ended December 31, 2016, 2015 and 2014, respectively. Additionally, the Company collected transaction and other fees of $124.2 million, $96.1 million and $84.7 million in the years ended December 31, 2016, 2015 and 2014, respectively, by drawing on accounts of CFE market participants held at OCC. The Company had a receivable due from OCC of $59.8 million and $57.0 million at December 31, 2016 and 2015, respectively.
OPRA is a limited liability company consisting of representatives of the member exchanges and is authorized by the SEC to provide consolidated options information. This information is provided by the exchanges and is sold to market data vendors, outside news services and customers. OPRA's operating income is distributed among the exchanges based on their relative volume of total cleared options transactions. The Company's share of OPRA operating income was $15.7 million, $14.0 million and $15.1 million during the years ended December 31, 2016, 2015 and 2014, respectively. The Company had a receivable from OPRA of $4.8 million and $3.7 million at December 31, 2016 and 2015, respectively.
The Company incurred re-billable expenses on behalf of CBSX for expenses such as compensation and benefits, computer equipment and software of $0.4 million, $0.1 million and $2.4 million during the years ended December 31, 2016, 2015 and 2014, respectively. These amounts are included as a reduction of the underlying expenses. The Company had an immaterial receivable balance at December 31, 2016 and 2015 as a result of CBSX ceasing trading operations on April 30, 2014.
10. STOCK-BASED COMPENSATION
Stock-based compensation is based on the fair value of the award on the date of grant, which is recognized over the related service period, net of estimated forfeitures. The service period is the period over which the related service is performed, which is generally the same as the vesting period.
The Company's board of directors approved the amended and restated the CBOE Holdings, Inc. Long Term Incentive Plan (the "LTIP"), effective upon receiving stockholder approval, which was received at the May 19, 2016 annual meeting of
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2016, 2015 and 2014
stockholders, which increased shares issuable by 3 million. The LTIP provides that an aggregate of 7,248,497 shares of the Company's common stock are reserved for issuance to participants under the LTIP.
The Compensation Committee of the Company's board of directors administers the LTIP and may designate any of the following as a participant under the LTIP: any officer or other employee of the Company or its affiliates or individuals engaged to become an officer or employee and non-employee directors of the Company. The LTIP permits the granting of non-qualified stock options, restricted stock, restricted stock units, incentive compensation awards or any combination of the foregoing. The Compensation Committee has the authority and complete discretion to prescribe, amend and rescind rules and regulations relating to the LTIP, select participants and to determine the form and terms of any awards.
On February 19, 2016, the Company granted 170,081 restricted stock units ("RSUs"), each of which entitles the holders to one share of common stock upon vesting, to certain officers and employees at a fair value of $61.80 per share. The RSUs vest ratably over three years, with one-third vesting on each anniversary of the grant date, and vesting accelerates upon the occurrence of a change in control. Unvested RSUs will be forfeited if the officer or employee leaves the Company prior to the applicable vesting date, except in limited circumstances. The RSUs have no voting rights but entitle the holder to receive dividend equivalents.
In addition, on February 19, 2016, the Company granted 49,238 RSUs that are contingent on the achievement of performance conditions including 24,619 at a fair value of $61.80 per RSU related to earnings per share during the performance period and 24,619 RSUs at a fair value of $83.00 per RSU, related to total shareholder return during the performance period. The Company used the Monte Carlo valuation model method to estimate the fair value of the total shareholder return RSUs which incorporated the following assumptions: risk free interest rate (.90%), three-year volatility (21.1%) and three-year correlation with S&P 500 Index (0.41). Each of these performance shares has a performance condition under which the number of units ultimately awarded will vary from 0% to 200% of the original grant, with each unit representing the contingent right to receive one share of our common stock. The vesting period for the RSUs contingent on the achievement of performance is three years. For each of the performance awards, the RSUs will be settled in shares of our common stock following vesting of the RSU assuming that the participant has been continuously employed during the vesting period, subject to acceleration in the event of a change in control of the Company or in the event of a participant’s earlier death or disability. Participants shall have no voting rights with respect to RSUs until the issuance of the shares of stock. Dividends are accrued by the Company and will be paid once the RSUs contingent on the achievement of performance conditions vest.
On May 19, 2016, the Company granted 20,553 shares of restricted stock, at a fair value of $63.29 per share, to the non-employee members of the board of directors. The shares have a one-year vesting period and vesting accelerates upon the occurrence of a change in control of the Company. Unvested portions of the restricted stock will be forfeited if the director leaves the company prior to the applicable vesting date.
For the years ended December 31, 2016, 2015 and 2014, the Company recognized $14.5 million, $12.2 million and $15.6 million, respectively, of stock-based compensation expense related to restricted stock. For the year ended December 31, 2016, the Company recorded $0.9 million of accelerated stock-based compensation expense, respectively, for certain officers and employees as a result of attaining certain age and service based requirements in our long-term incentive plan and award agreements. Stock-based compensation expense is included in compensation and benefits in the condensed consolidated statements of income.
As of December 31, 2016, the Company had unrecognized stock-based compensation expense of $14.4 million. The remaining unrecognized stock-based compensation is expected to be recognized over a weighted average period of 19.7 months.
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2016, 2015 and 2014
The activity in the Company's restricted stock and restricted stock units for the year ended December 31, 2016 was as follows:
| | | | | | | | | | Number of Shares of Restricted Stock | | Weighted Average Grant-Date Fair Value | | Unvested restricted stock at January 1, 2016 | 456,570 |
| | $ | 55.70 |
| | Granted | 241,681 |
| | 64.10 |
| | Vested | (211,235 | ) | | 48.14 |
| | Forfeited | (6,421 | ) | | 64.50 |
| | Unvested restricted stock at December 31, 2016 | 480,595 |
| | $ | 63.64 |
|
11. EMPLOYEE BENEFITS
Employees are eligible to participate in the Chicago Board Options Exchange SMART Plan (“SMART Plan”). The SMART Plan is a defined contribution plan, which is qualified under Internal Revenue Code Section 401(k). In addition, eligible employees may participate in the Supplemental Employee Retirement Plan, Executive Retirement Plan and Deferred Compensation Plan. Each plan is a defined contribution plan that is non-qualified under Internal Revenue Code. Effective January 1, 2017, the Executive Retirement Plan is frozen to new executive officers and employees. The Company contributed $5.5 million, $4.7 million and $6.0 million to the defined contribution plans for each of the years ended December 31, 2016, 2015 and 2014, respectively.
The Company has a post-retirement medical plan for certain former members of senior management. The Company recorded immaterial post-retirement benefits expense for the years ended December 31, 2016, 2015 and 2014, resulting from the amortization of service costs and actuarial expense included in accumulated other comprehensive loss at December 31, 2016, 2015 and 2014.
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2016, 2015 and 2014
12. INCOME TAXES
A reconciliation of the statutory federal income tax rate to the effective income tax rate for the years ended December 31, 2016, 2015 and 2014 is as follows:
| | | | | | | | | | | | 2016 | | 2015 | | 2014 | | Statutory federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % | | State income tax rate, net of federal income tax effect | 4.5 |
| | 4.4 |
| | 3.5 |
| | Section 199 deductions | (2.6 | ) | | (1.9 | ) | | (1.7 | ) | | Other, net | 2.5 |
| | (0.8 | ) | | 1.9 |
| | Effective income tax rate | 39.4 | % | | 36.7 | % | | 38.7 | % |
The components of income tax expense for the years ended December 31, 2016, 2015 and 2014 are as follows (in thousands):
| | | | | | | | | | | | | | | 2016 | | 2015 | | 2014 | | Current | | | | | | | Federal | $ | 107,083 |
| | $ | 103,344 |
| | $ | 95,946 |
| | State | 22,646 |
| | 23,939 |
| | 24,327 |
| | Total current | 129,729 |
| | 127,283 |
| | 120,273 |
| | Deferred | | | | | | | Federal | (7,633 | ) | | (6,381 | ) | | 1,955 |
| | State | (1,212 | ) | | (1,901 | ) | | (2,245 | ) | | Total deferred | (8,845 | ) | | (8,282 | ) | | (290 | ) | | Total | $ | 120,884 |
| | $ | 119,001 |
| | $ | 119,983 |
|
At December 31, 2016 and 2015, the net deferred income tax asset/(liability) is as follows (in thousands):
| | | | | | | | | | | 2016 | | 2015 | | Deferred tax assets | $ | 38,688 |
| | $ | 33,564 |
| | Deferred tax liabilities | (35,194 | ) | | (38,873 | ) | | Net deferred income tax asset /(liability) | $ | 3,494 |
| | $ | (5,309 | ) |
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2016, 2015 and 2014
The tax effect of temporary differences giving rise to significant portions of deferred tax assets and liabilities at December 31, 2016 and 2015 are presented below (in thousands):
| | | | | | | | | | | 2016 | | 2015 | | Deferred tax assets: | | | | | Intangibles | $ | 32 |
| | $ | 38 |
| | Accrued compensation and benefits | 16,317 |
| | 15,406 |
| | Property, equipment and technology, net | 619 |
| | 645 |
| | Investment in affiliates | 4,668 |
| | 7,264 |
| | Other | 17,052 |
| | 10,211 |
| | Total deferred tax assets | 38,688 |
| | 33,564 |
| | Deferred tax liabilities: | | | | | Property, equipment and technology, net | (32,312 | ) | | (35,859 | ) | | Investment in affiliates | (1,724 | ) | | (1,707 | ) | | Prepaid | (1,145 | ) | | (1,303 | ) | | Other | (13 | ) | | (4 | ) | | Total deferred tax liabilities | (35,194 | ) | | (38,873 | ) | | Net deferred tax assets/(liabilities) | $ | 3,494 |
| | $ | (5,309 | ) |
The net deferred tax assets and deferred tax liabilities are classified as other assets and long-term liabilities in the Consolidated Balance Sheets at December 31, 2016 and 2015, respectively.
A reconciliation of the beginning and ending uncertain tax positions, excluding interest and penalties, is as follows (in thousands):
| | | | | | | | | | | | | | | 2016 | | 2015 | | 2014 | | Balance as of January 1 | $ | 31,903 |
| | $ | 35,429 |
| | $ | 26,745 |
| | Gross increases on tax positions in prior period | 8,801 |
| | 70 |
| | 2,828 |
| | Gross decreases on tax positions in prior period | (608 | ) | | (4,245 | ) | | (1,053 | ) | | Gross increases on tax positions in current period | 3,591 |
| | 1,891 |
| | 8,113 |
| | Lapse of statute of limitations | (1,816 | ) | | (1,242 | ) | | (1,204 | ) | | Balance as of December 31 | $ | 41,871 |
| | $ | 31,903 |
| | $ | 35,429 |
|
As of December 31, 2016, 2015 and 2014, the Company had $41.9 million, $31.9 million and $35.4 million, respectively, of uncertain tax positions excluding interest and penalties, which, if recognized in the future, would affect the effective income tax rate. Reductions to uncertain tax positions from the lapse of the applicable statutes of limitations during the next twelve months are estimated to be approximately $2.4 million.
Estimated interest costs and penalties are classified as part of the provision for income taxes in the Company's consolidated statements of income and were $2.5 million, $2.5 million and $2.1 million for the periods ended December 31, 2016, 2015 and 2014, respectively. Accrued interest and penalties were $10.2 million, $7.7 million and $5.3 million as of December 31, 2016, 2015 and 2014, respectively.
The Company is subject to U.S. federal tax, and state and local taxes in various jurisdictions. The Company has open tax years from 2007 on for New York, 2008 on for Federal, 2010 on for New Jersey, and generally 2013 on for all other jurisdictions. The Internal Revenue Service is currently auditing 2010 and is looking at specific line items from 2008 to 2013 due to the filing by the Company of amended returns containing the recognition of certain credits and deductions. The Illinois Department of Revenue has informed the Company it will be auditing the 2013 and 2014 tax years, the New York State Department of Taxation and Finance is currently auditing the 2007 through 2014 tax years and the New Jersey Division of Taxation is currently auditing the 2010 through 2012 tax years.
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2016, 2015 and 2014
13. | | | | | | | | | | | | | | | Foreign currency | | Unrealized | | | | Total Other | | | translation | | Investment | | Post-Retirement | | Comprehensive | | | adjustment | | Gain/Loss | | Benefits | | Income | Balance at December 31, 2017 | | $ | 51.3 | | $ | 0.2 | | $ | (0.8) | | $ | 50.7 | Other comprehensive loss | | | (39.2) | | | — | | | — | | | (39.2) | Balance at December 31, 2018 | | $ | 12.1 | | $ | 0.2 | | $ | (0.8) | | $ | 11.5 | Other comprehensive income | | | 26.1 | | | — | | | — | | | 26.1 | Balance at December 31, 2019 | | $ | 38.2 | | $ | 0.2 | | $ | (0.8) | | $ | 37.6 |
15. FAIR VALUE MEASUREMENTS MEASUREMENTFair value is the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the Company’s own credit risk. The Company applied Financial Accounting Standards Board ("FASB")FASB ASC 820, 820— Fair Value Measurement and Disclosure, which provides guidance for using fair value to measure assets and liabilities by defining fair value and establishing the framework for measuring fair value. ASC 820 applies to financial and nonfinancial instruments that are measured and reported on a fair value basis. The three-level hierarchy of fair value measurements is based on whether the inputs to those measurements are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The fair-value hierarchy requires the use of observable market data when available and consists of the following levels: | ● | Level 1—Unadjusted inputs based on quoted markets for identical assets or liabilities. |
| ● | Level 2—Observable inputs, either direct or indirect, not including Level 1, corroborated by market data or based upon quoted prices in non-active markets. |
| ● | Level 3—Unobservable inputs that reflect management’s best assumptions of what market participants would use in valuing the asset or liability. |
Level 1—Unadjusted inputs based on quoted markets for identical assets or liabilities.
Level 2—Observable inputs, either direct or indirect, not including Level 1, corroborated by market data or based upon quoted prices in non-active markets.
Level 3—Unobservable inputs that reflect management’s best assumptions of what market participants would use in valuing the asset or liability.
The Company has included a tabular disclosure for financial assets and liabilities that are measured at fair value on a recurring basis in the consolidated balance sheet as of December 31, 20162019 and 2015. 2018, respectively.Assets and Liabilities Measured at Fair Value on a Recurring Basis The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018 (in millions): | | | | | | | | | | | | | | | | December 31, 2019 | | | | Total | | Level 1 | | Level 2 | | Level 3 | | Assets: | | | | | | | | | | | | | | U.S. Treasury securities | | $ | 47.6 | | $ | 47.6 | | $ | — | | $ | — | | Marketable securities: | | | | | | | | | | | | | | Mutual funds | | | 15.7 | | | 15.7 | | | — | | | — | | Money market funds | | | 7.7 | | | 7.7 | | | — | | | — | | Total assets | | $ | 71.0 | | $ | 71.0 | | $ | — | | $ | — | | Liabilities: | | | | | | | | | | | | | | Contingent consideration liability to related party | | $ | 2.2 | | $ | — | | $ | — | | $ | 2.2 | | Total Liabilities | | $ | 2.2 | | $ | — | | $ | — | | $ | 2.2 | |
| | | | | | | | | | | | | | | | December 31, 2018 | | | | Total | | Level 1 | | Level 2 | | Level 3 | | Assets: | | | | | | | | | | | | | | U.S. Treasury securities | | $ | 35.7 | | $ | 35.7 | | $ | — | | $ | — | | Total assets | | $ | 35.7 | | $ | 35.7 | | $ | — | | $ | — | | Liabilities: | | | | | | | | | | | | | | Contingent consideration liability to related party | | $ | 3.9 | | $ | — | | $ | — | | $ | 3.9 | | Total Liabilities | | $ | 3.9 | | $ | — | | $ | — | | $ | 3.9 | |
The following is a description of the Company’s valuation methodologies used for instruments measured at fair value on a recurring basis: Financial Investments Financial investments consist of highly liquid U.S. Treasury securities and marketable securities held in a rabbi trust for the Company’s non-qualified retirement and benefit plans, also referred to as deferred compensation plan assets. The deferred compensation plan assets have an equal and offsetting deferred compensation plan liability based on the value of the deferred compensation plan assets. These securities are valued by obtaining feeds from a number of live data sources, including active market makers and inter-dealer brokers and therefore categorized as Level 1. See Note 18 (“Employee Benefit Plan”) for more information. Contingent Consideration Liability In connection with the acquisition of the assets of Silexx Financial Systems, LLC (“Silexx”), the Company holds no financial liabilities thatacquired a contingent consideration arrangement with the former owners of Silexx. The total fair value of this liability at December 31, 2019 was $2.2 million. The fair values are based on estimates of discounted future cash payments, a significant unobservable input, and are considered a Level 3 measurement. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis Certain assets, such as goodwill and intangible assets, are measured at fair value on a recurringnon-recurring basis. For goodwill, the process involves using a market approach and income approach (using discounted estimated cash flows) to determine the fair value of each reporting unit on a stand-alone basis. That fair value is compared to the carrying amount of the reporting unit, including its recorded goodwill. Impairment is considered to have occurred if the fair value of the | | | | | | | | | | | | | | | | | | (amounts in thousands) | Level 1 | | Level 2 | | Level 3 | | Total | | Assets at fair value: | | | | | | | | | Money market funds | $ | 67,500 |
| | — |
| | — |
| | $ | 67,500 |
| | Total assets at fair value at December 31, 2016 | $ | 67,500 |
| | $ | — |
| | $ | — |
| | $ | 67,500 |
|
| | | | | | | | | | | | | | | | | | (amounts in thousands) | Level 1 | | Level 2 | | Level 3 | | Total | | Assets at fair value: | | | | | | | | | Money market funds | $ | 84,000 |
| | — |
| | — |
| | $ | 84,000 |
| | Total assets at fair value at December 31, 2015 | $ | 84,000 |
| | $ | — |
| | $ | — |
| | $ | 84,000 |
|
reporting unit is lower than the carrying amount of the reporting unit. For the intangible assets, the process also involves using a discounted cash flow method to determine the fair value of each intangible asset. Impairment is considered to have occurred if the fair value of the intangible asset is lower than the carrying amount. These measurements are considered Level 3 and these assets are recognized at fair value if they are deemed to be impaired. During the year ended December 31, 2019, a goodwill impairment charge of $10.5 million was recorded within the Corporate and Other segment. As a result of the impairment and subsequent deconsolidation of Vest, the fair value of the goodwill within the Corporate and Other segment was 0 as of December 31, 2019. As of December 31, 2018, none of these assets were required to be recorded at fair value since no impairment indicators were present, see Note 11 (“Goodwill and Intangible Assets, Net”). In 2015, CBOE Holdings, through its subsidiary Loan Markets, LLC, acquired a minority interest in AFX. addition, property held for sale as of December 31, 2019 was also measured at fair value at December 31, 2019. See Note 9 (“Property and Equipment, Net”) for more information on property held for sale. Fair Value of Assets and Liabilities The investment,following table presents the Company’s fair value hierarchy for certain assets and liabilities held by the Company as of December 31, 2019 and 2018 (in millions): | | | | | | | | | | | | | | | | December 31, 2019 | | | | Total | | Level 1 | | Level 2 | | Level 3 | | Assets: | | | | | | | | | | | | | | U.S. Treasury securities | | | 47.6 | | | 47.6 | | | — | | | — | | Deferred compensation plan assets | | | 23.4 | | | 23.4 | | | — | | | — | | Total assets | | $ | 71.0 | | $ | 71.0 | | $ | — | | $ | — | | Liabilities: | | | | | | | | | | | | | | Contingent consideration liability to related party | | | 2.2 | | | — | | | — | | | 2.2 | | Deferred compensation plan liabilities | | | 23.4 | | | 23.4 | | | — | | | — | | Debt | | | 867.6 | | | — | | | 867.6 | | | — | | Total liabilities | | $ | 893.2 | | $ | 23.4 | | $ | 867.6 | | $ | 2.2 | |
| | | | | | | | | | | | | | | | December 31, 2018 | | | | Total | | Level 1 | | Level 2 | | Level 3 | | Assets: | | | | | | | | | | | | | | U.S. Treasury securities | | | 35.7 | | | 35.7 | | | — | | | — | | Total assets | | $ | 35.7 | | $ | 35.7 | | $ | — | | $ | — | | Liabilities: | | | | | | | | | | | | | | Contingent consideration liability to related party | | | 3.9 | | | — | | | — | | | 3.9 | | Debt | | | 1,215.4 | | | — | | | 1,215.4 | | | — | | Total liabilities | | $ | 1,219.3 | | $ | — | | $ | 1,215.4 | | $ | 3.9 | |
Certain financial assets and liabilities, including cash and cash equivalents, accounts receivable, income tax receivable, accounts payable and Section 31 fees payable, are not measured at fair value on a non-recurringrecurring basis, but the carrying values approximate fair value due to their liquid or short-term nature. Debt The carrying amount of debt approximates its fair value based on quoted LIBOR or using a fixed rate at December 31, 2019 and 2018 and is classified as levelconsidered a Level 2 measurement. Information on Level 3 asFinancial Liabilities The following table sets forth a summary of changes in the fair value wasof the Company’s Level 3 financial liabilities during the year ended December 31, 2019 and 2018: | | | | | | | | | | | | | | | | | | | Level 3 Financial Liabilities for the Year Ended December 31, 2019 | | | | Balance at | | Realized (gains) | | | | | | | | | | | Beginning of | | losses during | | | | | | Balance at | | | | Period | | period | | Additions | | Settlements | | End of Period | | Liabilities | | | | | | | | | | | | | | | | | Contingent consideration liabilities to related party | | $ | 3.9 | | $ | 2.6 | | $ | — | | $ | (4.3) | | $ | 2.2 | | Total Liabilities | | $ | 3.9 | | $ | 2.6 | | $ | — | | $ | (4.3) | | $ | 2.2 | |
| | | | | | | | | | | | | | | | | | | Level 3 Financial Liabilities for the Year Ended December 31, 2018 | | | | Balance at | | Realized (gains) | | | | | | | | | | | Beginning of | | losses during | | | | | | Balances at | | | | Period | | period | | Additions | | Settlements | | End of Period | | Liabilities | | | | | | | | | | | | | | | | | Contingent consideration liabilities to related parties | | $ | 56.6 | | $ | 3.9 | | $ | — | | $ | (56.6) | | $ | 3.9 | | Total Liabilities | | $ | 56.6 | | $ | 3.9 | | $ | — | | $ | (56.6) | | $ | 3.9 | |
16. REDEEMABLE NONCONTROLLING INTEREST Redeemable noncontrolling interest is reported on the consolidated balance sheets in mezzanine equity in Redeemable Noncontrolling Interest. The Company recognizes changes to the redemption value of redeemable noncontrolling interest as they occur and adjusts the carrying value to equal the redemption value at the end of each reporting period. The resulting increases or decreases in the estimated redemption amount are affected by corresponding charges or credits against retained earnings, or in the absence of retained earnings, additional paid in capital. The redemption amounts have been estimated based on both observable and unobservable inputs.
In January 2016, CBOE Holdings, through its subsidiary CBOE III, LLC, acquired a minority interest in CurveGlobal. The investment, measured at fair value on a non-recurring basis, is classified as level 3 as the fair value wasof the formerly majority-owned subsidiary Vest. See Note 7 (“Investments”) for more information on the deconsolidation of Vest.For the year ended December 31, 2019, the following reflects changes in our redeemable noncontrolling interest (in millions): | | | | | | Redeemable
Noncontrolling
Interest | Balance as of December 31, 2018 | | $ | 9.4 | Net loss attributable to redeemable noncontrolling interest | | | (4.1) | Redemption value adjustment of redeemable noncontrolling interest | | | 0.5 | Deconsolidation of former subsidiary with noncontrolling interest | | | (5.8) | Balance as of December 31, 2019 | | $ | — |
17. SEGMENT REPORTING The Company reports 5 business segments: Options, U.S. Equities, Futures, European Equities, and Global FX, which is reflective of how the Company's chief operating decision-maker reviews and operates the business, as discussed in Note 1 (“Nature of Operations”). Segment performance is primarily based on both observable and unobservable inputs.
In May 2016, CBOE Holdings, through its subsidiary CBOE III, LLC, acquired a minority interest in Eris. The investment, measured at fair value on a non-recurring basis,operating income (loss). Our chief operating decision-maker does not review total assets or statements of income below operating income by segments as key performance metrics; therefore, such information is classified as level 3 as the fair value was based on both observable and unobservable inputs.
not presented below. The Company has recorded contingent considerationaggregated all of $3.4 millionits corporate costs, as well as other business ventures, within the Corporate Items and Eliminations unit based on the decision that those activities should not be used to evaluate the segment's operating performance; however, operating expenses that relate to activities of a specific segment have been allocated to that segment. Options. Our options segment includes listed options on market indices (“index options”), mostly on an exclusive basis, as well as on non-exclusive “multi-listed” options, such as options on the stocks of individual corporations (“equity options”) and options on ETPs, such as exchange-traded funds (“ETFs”) and exchange-traded notes (“ETNs”). These options trade on Cboe Options, C2, BZX, and EDGX. Cboe Options is our primary options market and offers trading in listed options through June 30, 2016, categorizeda single system, known as level 3,our Hybrid trading model, which integrates electronic trading and traditional open outcry trading on our trading floor in Chicago. C2, BZX, and EDGX are our all-electronic options exchanges, and typically operate with different market models and fee structures than Cboe Options. The Options segment also includes applicable market data revenue generated from the U.S. tape plan, the sale of proprietary market data, index licensing, and access and capacity services. U.S. Equities. The U.S. Equities segment includes listed equities and ETP transaction services that occur on BZX, BYX, EDGX, and EDGA. This segment also includes ETP listings on BZX, the Cboe Global Markets, Inc. common stock listing, applicable market data revenue generated from the U.S. tape plans, the sale of proprietary market data, routing services, access and capacity services and advertising activity from ETF.com. Futures. Our Futures segment includes the business of our futures exchange, CFE, which includes offerings for trading VIX futures and other futures products, as well as revenue generated from the sale of proprietary market data and from access and capacity services. European Equities. The European Equities segment includes the pan-European listed equities transaction services, ETPs, exchange traded commodities, and international depository receipts that occur on MTFs operated by Cboe Europe Equities. It also includes the listings business where ETPs can be listed on RMs. Cboe Europe Equities operates lit and dark books, a periodic auctions book, and a Large-in-Scale (“LIS”) trading negotiation facility. Cboe NL, launched in October 2019, operates similar business functionality that is offered by Cboe Europe, other than LIS, and provides for trading only in European Economic Area symbols. Cboe Europe Equities also includes revenue generated from the sale of proprietary market data and from access and capacity services. Global FX. Our Global FX segment includes institutional FX trading services that occur on the Cboe FX platform, as well as non-deliverable forward FX transactions offered for execution on Cboe SEF, as well as revenue generated from the sale of proprietary market data and from access and capacity services. Summarized financial data of reportable segments was as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Corporate | | | | | | | | | | | | | | | European | | | | | items and | | | | | | | Options | | U.S. Equities | | Futures | | Equities | | Global FX | | eliminations | | Total | | Year ended December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | Revenues | | $ | 983.1 | | $ | 1,213.1 | | $ | 135.9 | | $ | 110.8 | | $ | 53.0 | | $ | 0.2 | | $ | 2,496.1 | | Operating income (loss) | | | 334.3 | | | 132.5 | | | 83.1 | | | 20.3 | | | (4.9) | | | (28.1) | | | 537.2 | | Year ended December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | | Revenues | | $ | 1,057.5 | | $ | 1,373.1 | | $ | 149.8 | | $ | 131.6 | | $ | 56.4 | | $ | 0.4 | | $ | 2,768.8 | | Operating income (loss) | | | 390.9 | | | 140.5 | | | 85.7 | | | 24.1 | | | (11.7) | | | (30.1) | | | 599.4 | | Year ended December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | Revenues | | $ | 883.5 | | $ | 1,072.5 | | $ | 144.6 | | $ | 89.6 | | $ | 38.2 | | $ | 0.7 | | $ | 2,229.1 | | Operating income (loss) | | | 252.2 | | | 103.2 | | | 126.8 | | | 8.9 | | | (12.8) | | | (106.4) | | | 371.9 | |
18. EMPLOYEE BENEFIT PLAN Cboe employees are eligible to participate in the Cboe Options SMART Plan (“SMART Plan”). The SMART Plan is a defined contribution plan, which is based on management's estimatequalified under Internal Revenue Code Section 401(k). In addition, eligible employees may participate in the Supplemental Employee Retirement Plan, Executive Retirement Plan and Deferred Compensation Plan. Effective January 1, 2017, the Executive Retirement Plan is closed to new executive officers and employees. Each plan is a defined contribution plan that is non-qualified under Internal Revenue Code. The Deferred Compensation Plan assets, held in a rabbi trust, are subject to the claims of general creditors of the achievement by LivevolCompany and totaled $23.4 million at December 31, 2019. Although the value of certain performance targets at ninethe plans are recorded as an asset in financial instruments on the consolidated balance sheets, there are equal and eighteen monthsoffsetting liabilities in other non-current liabilities. The investment
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Forresults of these plans have no impact on net income as the investment results are recorded in equal amounts to both other income (expense) and compensation and benefits expense. The Company contributed $11.3 million, $12.4 million, and $7.7 million to the defined contribution plans for the years ended December 31, 2016, 20152019, 2018, and 2014
2017, respectively. This expense is included in compensation and benefits in the consolidated statements of income.For employees of Cboe Europe Limited, the Company contributes to an employee-selected stakeholder contribution plan. The Company’s contribution amounted to $0.7 million, $0.4 million, and $0.5 million for the years ended December 31, 2019, 2018, and 2017, respectively. This expense is included in compensation and benefits in the consolidated statements of income. 19. REGULATORY CAPITAL As a broker-dealer registered with the SEC, Cboe Trading is subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital, as defined therein. The SEC’s requirement also provides that equity capital may not be withdrawn or a cash dividend paid if certain minimum net capital requirements are not met. Cboe Trading computes the net capital requirements under the basic method provided for in Rule 15c3-1. As of December 31, 2019, Cboe Trading is required to maintain net capital equal to the greater of 6.67% of aggregate indebtedness items, as defined, or $0.1 million. At December 31, 2019, Cboe Trading had net capital of $13.3 million, which was $12.8 million in excess of its required net capital of $0.5 million. As entities regulated by the FCA, Cboe Europe Limited is subject to the Financial Resource Requirement (“FRR”) and Cboe Chi-X Europe is subject to the Capital Resources Requirement (“CRR”). As a RIE, Cboe Europe Limited computes its FRR in accordance with its Financial Risk Assessment, as agreed by the FCA. This FRR was $21.8 million at December 31, 2019. At December 31, 2019, Cboe Europe Limited had capital in excess of its required FRR of $36.2 million. As a Banks, Investment firms, PRUdential (BIPRU) 50k firm, as defined by the Markets in Financial Instruments Directive of the FCA, Cboe Chi-X Europe computes its CRR as the greater of the base requirement of $0.1 million at December 31, 2019, or the summation of the credit risk, market risk and fixed overheads requirements, as defined. At December 31, 2019, Cboe Chi-X Europe had capital in excess of its required CRR of $0.5 million. Cboe Chi-X Europe Limited is currently dormant having ceased offering its routing service in November 2018. On March 8, 2019, Cboe Europe NL received approval from the acquisition date. In September 2016,Dutch Ministry of Finance to operate a RM, a MTF, and an approved publication arrangement in the Netherlands. As a RM, Cboe Europe NL is subject to minimum capital requirements, as established by the Dutch Ministry of Finance in the license of March 8, 2019. As of December 31, 2019, the minimum capital requirement calculated in accordance with the license was $1.6 million. At December 31, 2019, Cboe Europe NL had capital in excess of its requirement of $3.7 million. As a designated contract market regulated by the CFTC, CFE is required to meet two capital adequacy tests: (i) its financial resources must be equal to at least twelve months of its projected operating costs and (ii) its unencumbered, liquid financial assets which may include a line of credit, must be equal to at least six months of its projected operating costs. As of December 31, 2019, CFE had annual projected operating expenses of $56.5 million and had financial resources that exceeded this amount. Additionally, as of December 31, 2019, CFE had projected operating expenses for the upcoming six months of $28.3 million and had unencumbered, liquid financial assets, including a line of credit from Cboe, that exceeded this amount. As a swap execution facility regulated by the CFTC, Cboe SEF is required to meet two capital adequacy tests: (i) its financial resources must be equal to at least twelve months of its projected operating costs and (ii) its unencumbered, liquid financial assets must be equal to at least six months of its projected operating costs. As of December 31, 2019, Cboe SEF had annual projected operating expenses of $0.8 million and had financial resources that exceeded this amount. Additionally, as of December 31, 2019, Cboe SEF had projected operating expenses for the upcoming six months of $0.4 million and had unencumbered, liquid financial assets that exceeded this amount. 20. STOCK-BASED COMPENSATION Stock-based compensation is based on the fair value of the award on the date of grant, which is recognized over the related service period, net of actual forfeitures. The service period is the period over which the related service is performed, which is generally the same as the vesting period. Vesting may be accelerated for certain officers and employees as a result of attaining certain age and service based requirements in our long-term incentive plan and award agreements. The Company recognized stock-based compensation expense of $21.8 million, $35.1 million, and $52.6 million for the years ended December 31, 2019, 2018, and 2017 respectively. Stock-based compensation expense is included in compensation and benefits and acquisition-related costs in the consolidated statements of income. The activity in the Company's stock options and restricted stock, consisting of restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and performance-based restricted stock units (“PSUs”), was as follows: Stock Options Summary stock option activity is presented below: | | | | | | | | | | | | | | | | | | | Weighted | | | | | | | | | Weighted | | Average | | | | | | | | | Average | | Remaining | | Aggregate | | | | Number of | | Exercise | | Contractual | | Intrinsic Value | | | | Shares | | Price | | Term (years) | | (in millions) | | Outstanding, December 31, 2017 | | 442,042 | | $ | 25.36 | | | | | | | Exercised | | (72,559) | | | 20.08 | | | | | | | Outstanding, December 31, 2018 | | 369,483 | | $ | 26.40 | | | | | | | Exercised | | (358,649) | | | 26.63 | | | | | | | Outstanding and exercisable December 31, 2019 | | 10,834 | | $ | 18.59 | | 0.5 | | $ | 1.1 | |
The total intrinsic value of stock options exercised was $26.0 million and $6.4 million for the years ended December 31, 2019 and 2018, respectively. For the year ended December 31, 2019, to satisfy employee’s tax obligations and cash exercise payment due upon the election to exercise 358,649 stock options, the Company settledpurchased 6,323 shares at a cost of $0.6 million. RSAs and RSUs The following table summarizes RSA and RSU activity during the year ended December 31, 2019: | | | | | | | | | | | Weighted | | | | Number of | | average grant | | | | shares | | date fair value | | Nonvested stock at December 31, 2018 | | 631,764 | | $ | 85.85 | | Granted | | 216,891 | | | 93.45 | | Vested | | (313,856) | | | 83.25 | | Forfeited | | (98,786) | | | 85.50 | | Nonvested stock at December 31, 2019 | | 436,013 | | $ | 91.58 | |
RSAs granted to non-employee members of the board of directors have a one-year vesting period and vesting accelerates upon the occurrence of a change in control of the Company. Unvested portions of the RSAs will be forfeited if the director leaves the Company prior to the applicable vesting date. The RSAs have voting rights and entitle the holder to receive dividends. RSUs entitle the holder to 1 share of common stock upon vesting, typically vest over a three year period, and vesting accelerates upon the occurrence of a change in control or a termination of employment following a change in control. Vesting will also accelerate upon a qualified retirement. Qualified retirement eligibility occurs once satisfying 65 years of age and 5 years of service for grants awarded before 2017 and once satisfying 55 years of age and 10 years of service for grants awarded in and after 2017. Unvested RSUs will be forfeited if the officer, or employee leaves the Company prior to the applicable vesting date, except in limited circumstances. The RSUs have no voting rights but entitle the holder to receive dividend equivalents. Pursuant to the Merger Agreement, each award of restricted Bats common stock (“Bats restricted shares”) granted under any of the Bats Plans that was unvested immediately prior to the effective time of the Merger was assumed by the Company and converted into an award of restricted shares of our common stock, subject to the same terms and conditions (including vesting schedule) that applied to the applicable Bats restricted shares immediately prior to the effective time of the Merger (but taking into account any changes, including any acceleration of vesting of such Bats restricted shares, occurring by reason provided for in the Merger Agreement). In the year ended December 31, 2019, to satisfy employees’ tax obligations upon the vesting of restricted stock, the Company purchased 112,023 shares of common stock totaling $11.0 million as the result of the vesting of 313,856 shares of restricted stock. PSUs The following table summarizes restricted stock unit contingent upon achievement of performance conditions, or PSU, activity during the year ended December 31, 2019: | | | | | | | | | | Weighted | | | Number of | | Average Grant | | | Shares | | Date Fair Value | Nonvested stock at December 31, 2018 | | 151,842 | | $ | 100.81 | Granted | | 86,134 | | | 88.22 | Vested | | (69,372) | | | 74.56 | Forfeited | | (36,356) | | | 97.78 | Nonvested stock at December 31, 2019 | | 132,248 | | $ | 107.21 |
PSUs include awards related to earnings per share during the performance period as well as awards related to total shareholder return during the performance period. The Company used the Monte Carlo valuation model method to estimate the fair value of the total shareholder return PSUs which incorporated the following assumptions: risk-free interest rate (2.54)%, three-year volatility (20.5)% and three year correlation with S&P 500 Index (0.29). Each of these performance shares has a performance condition under which the number of units ultimately awarded will vary from 0% to 200% of the original grant, with each unit representing the contingent considerationright to receive 1 share of our common stock. The vesting period for $2.0the PSUs contingent on the achievement of performance conditions is three years. For each of the performance awards, the PSUs will be settled in shares of our common stock following vesting of the PSU assuming that the participant has been continuously employed during the vesting period, subject to acceleration in the event of a change in control of the Company, or a termination of employment following a change in control, or in the event of a participant’s earlier death or disability. Participants have no voting rights with respect to the PSUs until the issuance of the shares of common stock. Dividends are accrued by the Company and will be paid once the PSUs contingent on the achievement of performance conditions vest. In the year ended December 31, 2019, to satisfy employees’ tax obligations upon the vesting of performance stock, the Company purchased 27,477 shares of common stock totaling $2.6 million resultingas the result of the vesting of 69,372 shares of performance stock. As of December 31, 2019, there were $18.8 million in total unrecognized compensation costs related to restricted stock, restricted stock units, and performance stock units. These costs are expected to be recognized over a gainweighted average period of $1.41.6 years. Employee Stock Purchase Plan In May 2018, our stockholders approved our Employee Stock Purchase Plan, (“ESPP”), under which a total of 750,000 shares of our common stock will be made available for purchase to employees. The ESPP is a broad-based plan that permits our employees to contribute up to 10% of wages and base salary to purchase shares of our common stock at a discount, subject to applicable annual Internal Revenue Service limitations. Under our ESPP, a participant may not purchase more than a maximum of 312 shares of our common stock during any single offering period. No participant may accrue options to purchase shares of our common stock at a rate that exceeds $25,000 in fair market value of our common stock (determined at the time such options are granted) for each calendar year in which such rights are outstanding at any time. The exercise price per share of common stock shall be 90% (for eligible U.S. employees) or 85% (for eligible international employees) of the lesser of the fair market value of the stock on the first day of the applicable offering period or the applicable exercise date. We record compensation expense over the offering period related to the discount that is given to our employees, which totaled $0.4 million whichand $0.1 million for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, 722,648 shares were reserved for future issuance under the ESPP. 21. EQUITY Common Stock The Company’s common stock is listed on Cboe BZX under the trading symbol CBOE. As of December 31, 2019, 325,000,000 shares of our common stock were authorized, $0.01 par value, 125,701,889 and 110,656,892 shares were issued and outstanding, respectively. The holders of common stock are entitled to one vote per share. Common Stock in Treasury, at Cost We account for the purchase of treasury stock under the cost method with the shares of stock repurchased reflected as a reduction to Cboe stockholders’ equity and included in common stock in treasury, at cost in the Consolidated Balance Sheets. Shares repurchased under the Company’s share repurchase program are available to be redistributed. When treasury shares are redistributed, they are recorded at the average cost of the treasury shares acquired. We held 15,044,997 of common stock in other income. 14. SHARE REPURCHASE PROGRAM
treasury as of December 31, 2019 and 13,478,520 shares as of December 31, 2018.Share Repurchase Program In 2011, the Company's board of directors approved an initial authorization for the Company to repurchase shares of its outstanding common stock of $100 million and approved additional authorizations of $100 million in each of 2012, 2013, 2014, 2015 and 2016, $150 million in February 20162018, $100 million in August 2018, and $250 million in October 2019 for a total authorization of $600 million.$1.1 billion. The Company expects to fund repurchases primarily through the use of existing cash balances. The program permits the Company to purchase shares, through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. It does not obligate the Company to make any repurchases at any specific time or situation.
Under the program, for the year ended December 31, 2016,2019, the Company purchased 947,786repurchased 1,420,654 shares of common stock at an average cost per share of $63.83$110.42, totaling $60.5$156.9 million. Since inception of the program through December 31, 2016,2019, the Company has purchased 10,947,401repurchased 13,716,009 shares of common stock at an average cost per share of $45.95$58.38, totaling $503.0$800.8 million.
As of December 31, 2016,2019, the Company had $97$299.2 million of availability remaining under its existing share repurchase authorizations. As a result The table below shows the repurchased shares of our pending transaction with Bats, we were not active in ourcommon stock under the Company’s share repurchase program during the thirdperiods presented as follows: | | | | | | | | | | | | Average Repurchase | | | | Shares Repurchased | | Price Per Share | | Amount of Repurchases | 2019 | | | | | | | | | Fourth quarter | | 600,442 | | $ | 115.76 | | $ | 69,505,515 | Third quarter | | 453,319 | | | 115.49 | | | 52,355,492 | Second quarter | | 100 | | | 104.75 | | | 10,477 | First quarter | | 366,793 | | | 95.36 | | | 34,999,992 | Total open market common stock repurchases | | 1,420,654 | | | | | | 156,871,476 | | | | | | | | | | 2018 | | | | | | | | | Fourth quarter | | — | | $ | — | | $ | — | Third quarter | | 491,899 | | | 99.75 | | | 49,064,854 | Second quarter | | 468,913 | | | 102.92 | | | 48,258,926 | First quarter | | 387,142 | | | 112.52 | | | 43,562,504 | Total open market common stock repurchases | | 1,347,954 | | | | | | 140,886,284 | | | | | | | | | | 2017 | | | | | | | | | Fourth quarter | | — | | $ | — | | $ | — | Third quarter | | — | | | — | | | — | Second quarter | | — | | | — | | | — | First quarter | | — | | | — | | | — | Total open market common stock repurchases | | — | | | | | | — |
Purchase of Common Stock from Employees The Company purchased 143,247 shares that were not part of the publicly announced share repurchase authorization from employees for an average price paid per share of $97.22 during the year ended December 31, 2019. These shares consisted of shares retained to cover payroll withholding taxes or option costs in connection with the vesting of restricted stock awards, restricted stock units, performance share awards, and fourth quartersstock option exercises. Preferred Stock The Company has authorized the issuance of 2016.20,000,000 shares of preferred stock, par value $0.01 per share, issuable from time to time in one or more series. For the years ended December 31, 2019, and 2018, the Company had 0 shares of preferred stock issued or outstanding. Dividends During the year ended December 31, 2019, the Company declared and paid cash dividends per share of $1.34 for an aggregate payout of $150.0 million. During the year ended December 31, 2018, the Company declared and paid cash dividends per share of $1.16 for an aggregate payout of $130.3 million. Each share of common stock, including restricted stock awards and restricted stock units, is entitled to receive dividend and dividend equivalents, respectively, if, as and when declared by the board of directors of the Company. The Company’s expectation is to continue to pay dividends. The decision to pay a dividend, however, remains within the discretion of the Company’s board of directors and may be affected by various factors, including our earnings, financial condition, capital requirements, level of indebtedness and other considerations our board of directors deems relevant. Future debt obligations and statutory provisions, among other things, may limit, or in some cases prohibit, our ability to pay dividends. As a holding company, the Company’s ability to declare and continue to pay dividends in the future with respect to its common stock will also be dependent upon the ability of its subsidiaries to pay dividends to it under applicable corporate law. 22. INCOME TAXES Net deferred tax assets and liabilities consist of the following as of December 31, 2019 and 2018 (in millions): | | | | | | | | | | As of December 31, | | | | 2019 | | 2018 | | Deferred tax assets: | | | | | | | | Accrued compensation and benefits | | $ | 14.1 | | $ | 17.1 | | Property, equipment and technology, net | | | 1.9 | | | 2.6 | | Operating leases | | | 13.5 | | | — | | Other | | | 30.5 | | | 20.7 | | Subtotal | | | 60.0 | | | 40.4 | | Valuation allowance | | | (4.2) | | | (2.0) | | Total deferred tax assets | | | 55.8 | | | 38.4 | | Deferred tax liabilities: | | | | | | | | Intangibles | | | (357.6) | | | (380.2) | | Property, equipment and technology, net | | | (14.5) | | | (17.4) | | Investments | | | (68.2) | | | (75.3) | | Operating leases | | | (13.0) | | | — | | Prepaid expenses or assets | | | (2.2) | | | (2.3) | | Total deferred tax liabilities | | | (455.5) | | | (475.2) | | Net deferred tax assets/(liabilities) | | $ | (399.7) | | $ | (436.8) | |
The Company provides a valuation allowance against deferred tax assets if, based on management’s assessment of historical and projected future operating results and other available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. A valuation allowance of $4.2 million was recorded against gross deferred tax assets for certain investments, net operating and capital losses as of December 31, 2019. As of December 31, 2019, we have capital loss carryforwards of $7.9 million, which, if unused, will expire in 2024. The provision for income taxes for the years ended December 31, 2019, 2018 and 2017 consists of the following (in millions): | | | | | | | | | | | | | Year Ended December 31, | | | | 2019 | | 2018 | | 2017 | | Current tax expense: | | | | | | | | | | | Federal | | $ | 98.7 | | $ | 125.1 | | $ | 141.0 | | State | | | 61.2 | | | 58.7 | | | 25.8 | | Foreign | | | 7.9 | | | 9.9 | | | 5.4 | | Total current tax expense | | | 167.8 | | | 193.7 | | | 172.2 | | Deferred income tax expense: | | | | | | | | | | | Federal | | | (28.7) | | | (18.4) | | | (227.5) | | State | | | (3.8) | | | (23.7) | | | (6.5) | | Foreign | | | (4.7) | | | (5.6) | | | (4.4) | | Total deferred income tax expense | | | (37.2) | | | (47.7) | | | (238.4) | | Total | | $ | 130.6 | | $ | 146.0 | | $ | (66.2) | |
The Company considers a portion of its non-U.S. earnings to be indefinitely reinvested outside of the U.S. to the extent these earnings are not subject to U.S. income tax under an anti-deferral tax regime. 15. COMMITMENTS AND CONTINGENCIES
For the years ended December 31, 2019, 2018, and 2017, income before taxes consists of the following (in millions): | | | | | | | | | | | | | Year Ended December 31, | | | | 2019 | | 2018 | | 2017 | | U.S. operations | | $ | 480.0 | | $ | 548.3 | | $ | 326.7 | | Foreign operations | | | 21.4 | | | 22.9 | | | 7.7 | | | | $ | 501.4 | | $ | 571.2 | | $ | 334.4 | |
A reconciliation of the statutory federal income tax rate to the effective income tax rate for the years ended December 31, 2019, 2018, and 2017 is as follows: | | | | | | | | | | | | | | Year Ended December 31, | | | | 2019 | | 2018 | | 2017 | Statutory U.S. federal income tax rate | | | 21.0 | % | | 21.0 | % | | 35.0 | % | Impact of federal, state and local tax law & rate changes, net | | | — | % | | (3.5) | % | | (55.1) | % | State taxes, net of federal benefit | | | 5.0 | % | | 5.0 | % | | 4.3 | % | Uncertain tax positions | | | 2.6 | % | | 6.1 | % | | — | % | Deduction for Foreign-Derived Intangible Income | | | (1.2) | % | | — | | | — | | Section 199 deduction | | | — | % | | — | % | | (2.6) | % | Other, net | | | (1.4) | % | | (3.0) | % | | (1.4) | % | Effective income tax rate | | | 26.0 | % | | 25.6 | % | | (19.8) | % |
A reconciliation of the beginning and ending uncertain tax positions, excluding interest and penalties, is as follows (in thousands): | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | Balance as of January 1 | | $ | 102.3 | | $ | 67.8 | | $ | 41.9 | | Acquired unrecognized tax benefits | | | — | | | — | | | 23.2 | | Gross increases on tax positions in prior period | | | 3.1 | | | 35.0 | | | 6.2 | | Gross decreases on tax positions in prior period | | | (6.3) | | | (19.0) | | | (14.7) | | Gross increases on tax positions in current period | | | 18.5 | | | 19.0 | | | 12.7 | | Lapse of statute of limitations | | | (0.9) | | | (0.5) | | | (1.5) | | Balance as of December 31 | | $ | 116.7 | | $ | 102.3 | | $ | 67.8 | |
As of December 31, 2016,2019, 2018 and 2017, the endCompany had $114.9 million, $99.5 million, and $68.2 million, respectively, of uncertain tax positions, net of federal benefit, which, if recognized in the future, would affect the effective income tax rate. Reductions to uncertain tax positions from the lapse of the applicable statutes of limitations and potential audit settlements during the next twelve months are estimated to be approximately $2.4 million.Estimated interest costs and penalties are classified as part of the provision for income taxes in the Company's consolidated statements of income and were $6.6 million, $1.1 million, and $(1.5) million for the periods ended December 31, 2019, 2018 and 2017, respectively. Accrued interest and penalties were $19.2 million, $12.6 million and $11.1 million as of December 31, 2019, 2018 and 2017, respectively. The following table summarizes the tax years that are either currently under audit or remain open and subject to examination by the tax authorities in the most significant jurisdictions in which Cboe operates: | | | U.S. Federal | | 2008-2019 | Illinois | | 2016-2019 | New York | | 2011-2019 | New York City | | 2011-2019 | United Kingdom | | 2017-2019 |
The Company petitioned the Tax Court on January 13, 2017, May 7, 2018 and November 29, 2018 for a redetermination of IRS notices of deficiency for Cboe and certain of its subsidiaries for tax years 2011 through 2015 related to its Section 199 claims. The Company also filed a complaint on October 5, 2018 with the Court of Federal Claims for a refund of Section 199 claims related to tax years 2008 through 2010. The Company believes the aggregate amount of any additional liabilities that may result from these examinations, if any, will not have a material adverse effect on the financial position, results of operations, or cash flows of the Company. As of December 31, 2019, we have not resolved these matters, and proceedings continue in Tax Court and the Court of Federal Claims. 23. NET INCOME PER COMMON SHARE The computation of basic net income per common share is calculated by reducing net income for the period covered by this report,dividends paid or declared and undistributed net income for the period that are allocated to participating securities to arrive at net income allocated to common stockholders. Net income allocated to common stockholders is divided by the weighted average number of common shares outstanding during the period to determine net income per share allocated to common stockholders. The computation of diluted net income per share is calculated by dividing net income allocated to common stockholders by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. The dilutive effect is calculated using the more dilutive of the two-class or treasury stock method. Additionally, the change in the redemption value for the noncontrolling interest reduces net income allocated to common stockholders. The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share data): | | | | | | | | | | | | Year Ended December 31, | (in millions, except per share amounts) | | 2019 | | 2018 | | 2017 | Basic EPS Numerator: | | | | | | | | | | Net Income | | $ | 370.8 | | $ | 425.2 | | $ | 400.6 | Loss attributable to noncontrolling interest | | | 4.1 | | | 1.3 | | | 1.1 | Net Income excluding noncontrolling interest | | | 374.9 | | | 426.5 | | | 401.7 | Change in redemption value of noncontrolling interest | | | (0.5) | | | (1.3) | | | (1.1) | Earnings allocated to participating securities | | | (1.7) | | | (3.1) | | | (3.9) | Net Income allocated to common stockholders | | $ | 372.7 | | $ | 422.1 | | $ | 396.7 | Basic EPS Denominator: | | | | | | | | | | Weighted average shares outstanding | | | 111.4 | | | 111.8 | | | 107.2 | Basic Net Income Per Common Share | | $ | 3.35 | | $ | 3.78 | | $ | 3.70 | | | | | | | | | | | Diluted EPS Numerator: | | | | | | | | | | Net Income | | $ | 370.8 | | $ | 425.2 | | $ | 400.6 | Loss attributable to noncontrolling interest | | | 4.1 | | | 1.3 | | | 1.1 | Net Income excluding noncontrolling interest | | | 374.9 | | | 426.5 | | | 401.7 | Change in redemption value of noncontrolling interest | | | (0.5) | | | (1.3) | | | (1.1) | Earnings allocated to participating securities | | | (1.7) | | | (3.1) | | | (3.9) | Net Income allocated to common stockholders | | $ | 372.7 | | $ | 422.1 | | $ | 396.7 | Diluted EPS Denominator: | | | | | | | | | | Weighted average shares outstanding | | | 111.4 | | | 111.8 | | | 107.2 | Dilutive common shares issued under stock program | | | 0.4 | | | 0.4 | | | 0.3 | Total dilutive weighted average shares | | | 111.8 | | | 112.2 | | | 107.5 | Diluted Net Income Per Common Share | | $ | 3.34 | | $ | 3.76 | | $ | 3.69 |
For the periods presented, the Company did not have shares of stock-based compensation that would have an anti-dilutive effect on the computation of diluted net income per common share. 24. COMMITMENTS, CONTINGENCIES, AND GUARANTEES Legal Proceedings As of December 31, 2019, the Company was subject to the various legal proceedings and claims discussed below, as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business.
The Company reviews its legal proceedings and claims, regulatory reviews and inspections and other legal proceedings on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and we disclosethe Company discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. The Company does not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote. The Company's assessment of whether a loss is reasonably possible or probable is based on its assessment of the ultimate outcome of the matter following all appeals.
As of December 31, 2016,2019, the Company does not believe that there is a reasonable possibility that any material loss exceeding the amounts already recognized for these legal proceedings and claims, regulatory reviews, inspections or other legal proceedings, if any, has been incurred. While the consequences of certain unresolved proceedings are not presently determinable, the outcome of any litigationproceeding is inherently uncertain and an adverse outcome from certain matters could have a material effect on our earnings in any given reporting period. However,City of Providence On April 18, 2014, the City of Providence, Rhode Island filed a securities class action lawsuit in the opinionSouthern District of management, the ultimate liability is not expectedNew York against Bats and Direct Edge Holdings LLC, as well as 14 other securities exchanges. The action purports to have a material effectbe brought on our financial position, liquidity behalf of all public investors who purchased and/or capital resources.
Lanier Litigation
On May 23, 2014, Harold R. Lanier sued 14 securities exchanges, including CBOE,sold shares of stock in the United States District Court forsince April 18, 2009 on a registered public stock exchange (“Exchange Defendants”) or a U.S.-based alternate trading venue and were injured as a result of the alleged misconduct detailed in the complaint, which includes allegations that the Exchange Defendants committed fraud through a variety of business practices associated with, among other things, what is commonly referred to as high frequency trading. On May 2, 2014 and May 20, 2014, American European Insurance Company and Harel Insurance Co., Ltd. each filed substantially similar class action lawsuits against the Exchange Defendants which were ultimately consolidated with the City of Providence, Rhode Island securities class action lawsuit. On June 18, 2015, the Southern District of New York (the "Court"“Lower Court”) held oral argument on behalfthe pending Motion to Dismiss and thereafter, on August 26, 2015, the Lower Court issued an Opinion and Order granting Exchange Defendants’ Motion to Dismiss, dismissing the complaint in full. Plaintiff filed a Notice of himself and a putative class consisting of all persons in the United States who entered into contracts to receive market data through certain data plans at any time since May 19, 2008 to the present. The complaint alleged that the market data provided under the CQ Plan and CTA Plans was inferior to the data that the exchanges provided to those that directly receive other data from the exchanges, which the plaintiffs alleged is a breach of their “subscriber contracts” and a violationAppeal of the exchanges’ obligations under the CQ and CTA Plans. The plaintiffs sought monetary and injunctive relief. On May 30, 2014, Mr. Lanier filed two additional suits in the same Court, alleging substantially the same claims and requesting the same types of relief against the exchanges who participate in the UTP and the OPRA data plans. CBOE was a defendant in each of these suits, while C2 was only a defendant in the suit regarding the OPRA Plan. On April 28, 2015, the Court dismissed Lanier’s complaint with prejudice because it was preempted by the federal regulatory scheme and because the claims were precluded by the terms of the applicable subscriber agreements. Mr. Lanier appealed the orders dismissing each of his three cases and,dismissal on September 2, 2015, he filed his opening appellate briefs in those cases. The defendants’ response briefs were filed November 24, 2015 and briefingits appeal brief on the appeals has concluded. TheJanuary 7, 2016. Respondent's brief was filed on April 7, 2016 and oral argumentsargument was held on the appeals were heard on March 3,August 24, 2016. On September 23, 2016,Following oral argument, the Court of Appeals ruled in favor ofissued an order requesting that the defendantsSEC submit an amicus brief on whether the Lower Court had jurisdiction and
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For whether the years ended December 31, 2016, 2015 and 2014
affirmed the Court’s dismissal of Lanier’s complaints with prejudice. On October 7, 2016, Lanier filed a petition for rehearing onlyExchange Defendants have immunity in the action related to the OPRA Plan andclaims alleged. The SEC filed its amicus brief with the Court of Appeals ruling with respecton November 28, 2016 and Plaintiff and the Exchange Defendants filed their respective supplemental response briefs on December 12, 2016. On December 19, 2017, the Court of Appeals reversed the Lower Court’s dismissal and remanded the case back to the other two complaints is now final.Lower Court. On November 4, 2016,March 13, 2018, the Court of Appeals denied the Exchange Defendants’ motion for re-hearing. The Exchange Defendants filed their opening brief for their motion to dismiss May 18, 2018, Plaintiffs’ response was filed June 15, 2018 and the Exchange Defendants’ reply was filed June 29, 2018. On May 28, 2019, the Lower Court issued an opinion and order denying the Exchange Defendants’ motion to dismiss. On June 17, 2019, the Exchange Defendants filed a motion seeking interlocutory appeal of the May 28, 2019 dismissal order, which was denied July 16, 2019. Exchange Defendants filed their answers on July 25, 2019. Given the preliminary nature of the proceedings, the Company is unable to estimate what, if any, liability may result from this litigation. However, the Company believes that the claims are without merit and intends to litigate the matter vigorously.
SIFMA Securities Industry Financial Markets Association (“SIFMA”) has filed a number of denial of access applications with the SEC to set aside proposed rule changes to establish or modify fees for Cboe Options, C2, BZX, BYX, EDGX and EDGA (the “Exchanges”) market data products and related services (the “Challenged Fees”). The Challenged Fees were held in abeyance pending a decision, which was issued by the SEC on October 16, 2018, on a separate SIFMA denial of access application regarding fees proposed by Nasdaq and the NYSE for their respective market data products. In a second order entered on October 16, 2018, the SEC issued an order (the “Order”) that remanded the stayed Challenged Fees and ordered the Exchanges to: (i) within six months of the Order, provide notice to the SEC of developed or identified fair procedures for assessing the Challenged Fees (the “Procedures”) and (ii) within one year of the Order, apply the Procedures to the Challenged Fees and submit to the SEC a record explaining the Exchanges’ conclusions. On October 26, 2018, the Exchanges filed a motion to reconsider the Order with the SEC. On November 21, 2018, the Exchanges filed with the SEC a joinder motion to NYSE’s prior motion for stay of the Order. On December 3, 2018, SIFMA filed a response to NYSE’s motion for stay. Nasdaq withdrew its motion to reconsider the Order with the SEC on December 4, 2018, and on December 5, 2018, filed a Petition for Review with the Court of Appeals for the D.C. Circuit (the “D.C. Circuit”). On December 14, 2018, the SEC denied the motion for stay but tolled the compliance date set forth in the remand order until ruling is made on the motion to reconsider. The Exchanges and NYSE filed on January 4, 2019 a motion to intervene in the Nasdaq Petition for Review to ensure the ability to participate in the case; the motion to intervene was granted on January 25, 2019. On the same day, SIFMA filed a motion with the D.C. Circuit moving to dismiss or hold in abeyance the Petition for Review. The Exchanges and NYSE submitted on February 6, 2019 a statement of issues for consideration in connection with the Petition for Review pending before the D.C. Circuit. On March 29, 2019, the D.C. Circuit issued an order indicating that SIFMA’s motion to dismiss will be considered with the underlying merits of the Petition for Review. On May 7, 2019, the SEC denied the Exchanges and NYSE’s motion for reconsideration of the Order. The SEC also further tolled the effectiveness of the remand order subject to the resolution of the substantive SIFMA case against Nasdaq and NYSE Arca that is already before the D.C. Circuit. On June 17, 2019, the Exchanges filed a petition for rehearingreview of the May 7, 2019 SEC order denying reconsideration of the Order with the D.C. Circuit and of the Order. The Exchanges’ joint opening brief was filed on October 23, 2019. Oral arguments were held on February 18, 2020. An adverse ruling in that matter or a subsequent appeal could adversely affect exchange market data fees. However, the Company believes that the claims are without merit and intends to litigate the matter vigorously. The Company is unable to estimate what, if any, liability may result from this litigation. VIX Litigation On March 20, 2018, a putative class action complaint captioned Tomasulo v. Cboe Exchange, Inc., et al., No. 18-cv-02025 was filed in federal district court for the Northern District of Illinois alleging that the Company intentionally designed its products, operated its platforms, and formulated the method for calculating VIX and the Special Opening Quotation, (i.e., the special VIX value designed by the Company and calculated on the settlement date of VIX derivatives prior to the opening of trading), in a manner that could be collusively manipulated by a group of entities named as John Doe defendants. A number of similar putative class actions, some of which do not name the Company as a party, were filed in federal court in Illinois and New York on behalf of investors in certain volatility-related products. On June 14, 2018, the Judicial Panel on Multidistrict Litigation centralized the putative class actions in the case relatedfederal district court for the Northern District of Illinois. On September 28, 2018, plaintiffs filed a master, consolidated complaint that is a putative class action alleging various claims against the Company and John Doe defendants in the federal district court for the Northern District of Illinois. The claims asserted against the Company consist of a Securities Exchange Act fraud claim, 3 Commodity Exchange Act claims and a state law negligence claim. Plaintiffs request a judgment awarding class damages in an unspecified amount, as well as punitive or exemplary damages in an unspecified amount, prejudgment interest, costs including attorneys’ and experts’ fees and expenses and such other relief as the court may deem just and proper. On November 19, 2018, the Company filed a motion to dismiss the master consolidated complaint and the plaintiffs filed their response on January 7, 2019. The Company filed its reply on January 28, 2019. On May 29, 2019, the federal district court for the Northern District of Illinois granted the Company’s motion to dismiss plaintiffs’ entire complaint against the Company. The state law negligence claim was dismissed with prejudice and the other claims were dismissed without prejudice with leave to file an amended complaint, which plaintiffs filed on July 19, 2019. On August 28, 2019, the Company filed its second motion to dismiss the amended consolidated complaint and plaintiffs filed their response on October 8, 2019. On January 27, 2020, the federal district court for the Northern District of Illinois granted the Company’s second motion to dismiss and all counts against the Company were dismissed with prejudice. Plaintiffs have indicated to the OPRA Plan. federal district court for the Northern District of Illinois that they intend to seek leave of the court to take an immediate appeal. The Company currently believes that the claims are without merit and intends to litigate the matter vigorously. The Company is unable to estimate what, if any, liability may result from this litigation.Other As a self-regulatory organizationorganizations under the jurisdiction of the SEC, with respectCboe Options, C2, BZX, BYX, EDGX and EDGA are subject to CBOEroutine reviews and C2, and asinspections by the SEC. As a designated contract market under the jurisdiction of the CFTC, with respect to CFE we areis subject to routine reviews and inspections by the SECCFTC. Cboe SEF, LLC is a swap execution facility registered with the CFTC and subject to routine reviews and inspections by the CFTC. We Cboe Trading is subject to reviews and inspections by FINRA. The Company has from time to time received inquiries and investigative requests from the SEC’s Office of Compliance Inspections and Examinations as well as the Division of Enforcement seeking information about our compliance with our obligations as a self-regulatory organization, the federal securities laws as well as our members’ compliance with the federal securities laws. In addition, while Cboe Europe Limited and Cboe Chi-X Europe have not been the subject of any material litigation or regulatory investigation in the past, there is always the possibility of such action in the future. As both companies are domiciled in the U.K., it is likely that any action would be taken in the U.K. courts in relation to litigation or by the FCA in relation to any regulatory enforcement action.The Company is also currently a party to various other legal proceedings in addition to those already mentioned. Management does not believe that the likely outcome of any of these other reviews, inspections, investigations or other legal proceedings willis expected to have a material impact on our consolidated financial position,condition, results of operations, liquidity or cash flows. Leases and capital resources.See also Note 10 (“Other Assets, Net”) for information on promissory notes related to the CAT. See also Note 22 (“Income Taxes”). Contractual Obligations See Note 25 (“Leases”) for information on lease obligations. 25. LEASES The Company currently leases additional office space, a data centercenters and remote network operations center,centers under non-cancelable operating leases with lease terms remaining from 3 months to 103 monthsthird parties as of December 31, 2016. Total2019. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Certain leases include one or more options to renew, with renewal terms that can extend the lease term from one to five years or more, and some of which include the Company’s option to terminate the leases within one year. As the implicit rate in the Company’s leases are generally not reasonably determinable, the Company applies an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The Company applied an incremental borrowing rate as of January 1, 2019 for operating leases that commenced prior to that date. During the year ended December 31, 2019, an additional $22.1 million of right of use assets and lease liabilities were added related to new and modified operating leases. In September 2019, the Company signed a new lease to secure approximately 185,000 square feet of office space within the Old Post Office building in Chicago, Illinois, which will serve as the Company’s new global headquarters. The initial term of the lease will be 187 months from the accounting commencement date, which is expected to be in the first quarter of 2020. The Company has the option to renew the lease term for an additional 60 months. The total legally binding minimum lease payments for this lease are approximately $98.8 million. See Note 9 (“Property and Equipment, Net”) for information on the current headquarters location. Additionally, in September 2019, the Company signed a new lease to secure approximately 40,000 square feet of office space within the Chicago Board of Trade Building in Chicago, Illinois, where the Company plans to build a new trading floor and office space. The initial term of the lease will be 150 months from the accounting commencement date, which is expected to be in the second quarter of 2020. The Company has the option to renew the lease term for an additional 60 months. The total legally binding minimum lease payments for this lease are approximately $17.1 million. The following table presents the supplemental balance sheet information related to leases for the year ended December 31, 2019 (in millions): | | | | December 31, | | 2019 | Operating lease right of use assets | $ | 53.4 | Total leased assets | $ | 53.4 | | | | Accrued liabilities | $ | 8.7 | Non-current operating lease liabilities | | 46.7 | Total leased liabilities | $ | 55.4 |
The following table presents operating lease costs and other information as of and for the year ended December 31, 2019 (in millions, except as stated): | | | | | | | Year Ended December 31, | | | 2019 | Operating lease costs (1) | | $ | 12.4 | | | | | | | Lease term and discount rate information: | | | | | Weighted average remaining lease term (years) | | | 9.2 | | Weighted average discount rate | | | 3.5 | % | | | | | | Supplemental cash flow information and non-cash activity: | | | | | Cash paid for amounts included in the measurement of lease liabilities | | $ | 11.2 | | Right-of-use assets obtained in exchange for lease liabilities (2) | | | 22.1 | |
| (1) | Includes short-term lease and variable lease costs, which are immaterial. |
| (2) | Excludes right-of-use assets and lease liabilities recognized upon adoption of $40.3 million and $42.8 million, respectively. |
The total rent expense related to these lease obligations, reflected in technology support services and facilities costs line items on the Consolidated Statementsconsolidated statements of Income,income, for the years ended December 31, 2016, 20152019, 2018, and 20142017 were $4.4$12.4 million, $4.1$10.1 million, and $3.8$7.6 million, respectively. Future minimum payments for our operating leases, contractual obligations and other The maturities of the lease liabilities are as follows atas of December 31, 20162019 (in thousands)millions): | | | | | | December 31, | | | 2019 | 2020 | | $ | 10.4 | 2021 | | | 10.0 | 2022 | | | 9.3 | 2023 | | | 7.8 | 2024 | | | 3.5 | After 2024 (1) | | | 24.2 | Total lease payments | | $ | 65.2 | Less: Interest | | | (9.8) | Present value of lease liabilities | | $ | 55.4 |
| | | | | | | | | | | | Year | Operating Leases | Contractual Obligations | Total | | 2017 | $ | 1,182 |
| $ | 34,306 |
| $ | 35,488 |
| | 2018 | 541 |
| 31,158 |
| 31,699 |
| | 2019 | 208 |
| 31,171 |
| 31,379 |
| | 2020 | 200 |
| 22,935 |
| 23,135 |
| | 2021 | 206 |
| 20,200 |
| 20,406 |
| | Total | $ | 2,337 |
| $ | 139,770 |
| $ | 142,107 |
|
16. NET INCOME PER COMMON SHARE
The computation of basic net income allocated(1) Total lease payments include $20.4 million related to common stockholders is calculated by reducing net income for the period by dividends paid or declared and undistributed net income for the periodoptions to extend lease terms that are allocated to participating securities to arrive at net income allocated to common stockholders. Net income allocated to common stockholders is divided by the weighted average numberreasonably certain of common shares outstanding during the period to determine net income per share allocated to common stockholders. The computationbeing exercised and exclude $115.9 million of diluted earnings per share is calculated by dividing net income allocated to common stockholders by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. The dilutive effect is calculated using the more dilutive of the two-class or treasury stock method.
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years endedlegally binding lease payments for leases signed but will commence after December 31, 2016, 2015 and 2014
The following table reconciles net income allocated to common stockholders and the number of shares used to calculate the basic and diluted net income per common share for the years ended December 31, 2016, 2015 and 2014:
| | | | | | | | | | | | | | (in thousands, except per share amounts) | 2016 | | 2015 | | 2014 | | Basic EPS Numerator: | | | | | | | Net Income | $ | 185,720 |
| | $ | 205,023 |
| | $ | 189,714 |
| | Loss attributable to noncontrolling interests | 1,100 |
| | — |
| | — |
| | Net Income excluding noncontrolling interests | 186,820 |
| | 205,023 |
| | 189,714 |
| | Change in redemption value of noncontrolling interests | (1,100 | ) | | — |
| | — |
| | Earnings allocated to participating securities | (775 | ) | | (898 | ) | | (1,322 | ) | | Net Income allocated to common stockholders | $ | 184,945 |
| | $ | 204,125 |
| | $ | 188,392 |
| | Basic EPS Denominator: | | | | | | | Weighted average shares outstanding | 81,432 |
| | 83,081 |
| | 85,406 |
| | Basic Net Income Per Common Share | $ | 2.27 |
| | $ | 2.46 |
| | $ | 2.21 |
| | | | | | | | | Diluted EPS Numerator: | | | | | | | Net Income | $ | 185,720 |
| | $ | 205,023 |
| | $ | 189,714 |
| | Loss attributable to noncontrolling interests | 1,100 |
| | — |
| | — |
| | Net Income excluding noncontrolling interests | 186,820 |
| | 205,023 |
| | 189,714 |
| | Change in redemption value of noncontrolling interests | (1,100 | ) | | — |
| | — |
| | Earnings allocated to participating securities | (775 | ) | | (898 | ) | | (1,322 | ) | | Net Income allocated to common stockholders | $ | 184,945 |
| | $ | 204,125 |
| | $ | 188,392 |
| | Diluted EPS Denominator: | | | | | | | Weighted average shares outstanding | 81,432 |
| | 83,081 |
| | 85,406 |
| | Dilutive common shares issued under stock program | — |
| | — |
| | — |
| | Diluted Net Income Per Common Share | $ | 2.27 |
| | $ | 2.46 |
| | $ | 2.21 |
|
For the periods presented, the Company did not have shares of restricted stock or restricted stock units that would have an anti-dilutive effect on the computation of diluted net income per common share.
In order to complete the Company's proposed acquisition of Bats, shares of CBOE Holdings common stock are to be issued upon conversion of shares of Bats common stock in the Merger. Based on the number of shares of our common stock and Bats common stock outstanding on September 23, 2016, immediately following the completion of the Merger, our pre-existing stockholders and former Bats stockholders would own approximately 72% and 28% of the outstanding shares of our common stock, respectively. The Merger will have no effect on the number of shares of our common stock owned by our existing stockholders.
17.26. QUARTERLY DATA (unaudited) | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, 2016 (in thousands) | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Year | | Operating revenues | $ | 162,330 |
| | $ | 163,329 |
| | $ | 156,207 |
| | $ | 175,080 |
| | $ | 656,946 |
| | Operating expenses | 82,849 |
| | 85,362 |
| | 90,557 |
| | 99,978 |
| | 358,746 |
| | Operating income | 79,481 |
| | 77,967 |
| | 65,650 |
| | 75,102 |
| | 298,200 |
| | Net income | $ | 49,176 |
| | $ | 50,931 |
| | $ | 40,451 |
| | $ | 45,162 |
| | $ | 185,720 |
| | Net income allocated to common stockholders | $ | 49,198 |
| | $ | 50,719 |
| | $ | 40,280 |
| | $ | 44,748 |
| | $ | 184,945 |
| | Diluted—net income per share to common stockholders | $ | 0.60 |
| | $ | 0.62 |
| | $ | 0.50 |
| | $ | 0.55 |
| | $ | 2.27 |
|
CBOE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2016, 2015 and 2014
| | | | | | | | | | | | | | | | | | | | | | Year ended December 31, 2015 (in thousands) | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Year | | Operating revenues | $ | 142,839 |
| | $ | 148,725 |
| | $ | 187,035 |
| | $ | 155,946 |
| | $ | 634,545 |
| | Operating expenses | 73,286 |
| | 75,355 |
| | 85,925 |
| | 80,051 |
| | 314,617 |
| | Operating income | 69,553 |
| | 73,370 |
| | 101,110 |
| | 75,895 |
| | 319,928 |
| | Net income | $ | 42,259 |
| | $ | 44,845 |
| | $ | 67,516 |
| | $ | 50,403 |
| | $ | 205,023 |
| | Net income allocated to common stockholders | $ | 42,079 |
| | $ | 44,646 |
| | $ | 67,219 |
| | $ | 50,181 |
| | $ | 204,125 |
| | Diluted—net income per share to common stockholders | $ | 0.50 |
| | $ | 0.54 |
| | $ | 0.81 |
| | $ | 0.61 |
| | $ | 2.46 |
|
In the third and fourth quarters of 2016, the Company recognized $8.6 million and $4.2 million, respectively, in professional fees and outside services related to the planned acquisition of Bats.
In the fourth quarter of 2016, the Company recorded amortization of $5.5 million for expenses associated with a bridge loan facility related to the proposed acquisition of Bats.
In the third quarter of 2016, the Company recognized $1.4 million gain on settlement of contingent consideration.
In the second quarter of 2016, the Company recognized $5.5 million in investment and other income for a settlement of attorney fees and expenses relating to a litigation matter.
In the fourth quarter of 2015, the Company recognized $2.0 million of revenue to adjust for incorrect coding of transactions by an exchange participant related to prior periods.
In the third quarter of 2015, the Company recorded a $4.3 million tax benefit from the release of an uncertain tax provision related to research and development credits, which were effectively settled.
18.(UNAUDITED) | | | | | | | | | | | | | | | | First | | Second | | Third | | Fourth | | Year ended December 31, 2019 (in millions, except per share data) | | Quarter | | Quarter | | Quarter | | Quarter | | Revenue less cost of revenues | | $ | 279.4 | | $ | 283.2 | | $ | 294.0 | | $ | 280.3 | | Operating income | | | 145.4 | | | 125.2 | | | 147.4 | | | 119.2 | | Net income | | | 94.1 | | | 84.5 | | | 105.9 | | | 86.3 | | Net income allocated to common stockholders | | | 93.5 | | | 87.6 | | | 105.5 | | | 86.1 | | Basic earnings per share | | $ | 0.84 | | $ | 0.79 | | $ | 0.95 | | $ | 0.78 | | Diluted earnings per share | | $ | 0.84 | | $ | 0.78 | | $ | 0.94 | | $ | 0.77 | | | | | | | | | | | | | | | | | | First | | Second | | Third | | Fourth | | Year ended December 31, 2018 (in millions, except per share data) | | Quarter | | Quarter | | Quarter | | Quarter | | Revenue less cost of revenues | | $ | 328.5 | | $ | 283.5 | | $ | 270.5 | | $ | 334.4 | | Operating income | | | 167.7 | | | 129.1 | | | 126.1 | | | 176.5 | | Net income | | | 118.1 | | | 83.0 | | | 85.7 | | | 138.4 | | Net income allocated to common stockholders | | | 117.3 | | | 82.4 | | | 85.0 | | | 137.4 | | Basic earnings per share | | $ | 1.04 | | $ | 0.74 | | $ | 0.76 | | $ | 1.23 | | Diluted earnings per share | | $ | 1.04 | | $ | 0.73 | | $ | 0.76 | | $ | 1.23 | |
27. SUBSEQUENT EVENTS On January 12, 2017, the Company issued $650 million aggregate principal amount of 3.650% Senior Notes due 2027. See Note (4) Debt for more information.On January 17, 2017, Bats stockholders adopted the Merger Agreement and CBOE Holdings stockholders approved the issuance of CBOE Holdings common stock pursuant to the Merger Agreement.
CBOE Holdings received regulatory approvals from the Dutch Central Bank and the United Kingdom's Financial Conduct Authority on February 2, 2017 and February 9, 2017, respectively.
On February 16, 2017,11, 2020, the Company's board of directors declared a quarterly cash dividend of $0.25$0.36 per share. The dividend is payable on March 24, 201713, 2020 to stockholders of record at the close of business on March 3, 2017. On February 16, 2017, the Company announced that the Merger is expected to close on February 28, 2017.
2, 2020.On February 19, 2017,2020, the Company granted 292,775163,261 RSUs and 42,173 PSUs to certain officers and employees at a fair value of $80.40$120.44 per share, the closing price of the Company'sCompany’s stock on the grant date. The shares have a three year vesting period based on achievement of certain service, performance and/or market conditions and vesting accelerates upon the occurrence of a termination of employment following a change in control of the Company or in the event of earlier death, disability or qualified retirement.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and Procedures(a) Evaluation of Disclosure Controls and Procedures The Company's management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective. b)(b) Management's Annual Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting. OurThe Company’s internal control system has been designed to provide reasonable assurance to management and the board of directors regarding the preparation and fair presentation of published financial statements. Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2016.2019. Management based its assessment on criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's assessment included evaluating the design of our internal control over financial reporting and testing the operational effectiveness of our internal control over financial reporting. The results of its assessment were reviewed with the audit committee of the board of directors.No changes occurred in the Company’s internal control over financial reporting during fourth quarter 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on thisits assessment of the Company’s internal control over financial reporting, management believes that, as of December 31, 2016, our2019, internal control over financial reporting is effective.The effectiveness of ourthe Company’s internal control over financial reporting as of December 31, 20162019 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report on page 85.67.Item 9B. Other Information Not applicable. There were no changes in the Company's internal control over financial reporting that occurred during the three months ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.126 Item 9B. Other Information
Not applicable
Item 10. Directors, Executive Officers and Corporate GovernanceInformation relating to our executive officers is included on pages 18 of this Annual Report on Form 10-K. Information relating to our directors, including our audit committee and audit committee financial experts and the procedures by which stockholders can recommend director nominees, and our executive officers will be in our definitive Proxy Statement for our 20172020 Annual Meeting of Stockholders planned to be held on May 18, 2017,12, 2020, which will be filed within 120 days of the end of our fiscal year ended December 31, 2016 ("20172019 (“2020 Proxy Statement"Statement”) and is incorporated herein by reference. Information relating to our executive officers is included on pages 23 and 24 of this Annual Report on Form 10-K.Code of Ethics We have adopted a Code of Business Conduct and Ethics that applies to our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as well as all other employees and directors. Our Code of Business Conduct and Ethics is available on our website at http://ir.cboe.com/governance.cfm. We will also provide a copy of the Code of Business Conduct and Ethics to stockholders at no charge upon written request. Item 11. Executive CompensationInformation relating to our executive officer and director compensation and the compensation committee of our board of directors will be in the 20172020 Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersInformation relating to security ownership of certain beneficial owners of our common stock and information relating to the security ownership of our management will be in the 20172020 Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director IndependenceInformation regarding certain relationships and related transactions and director independence will be in the 20172020 Proxy Statement and is incorporated herein by reference. Item 14. Principal Accountant Fees and ServicesInformation regarding principal accountant fees and services will be in the 20172020 Proxy Statement and is incorporated herein by reference. PART IV
PART IV Item 15. Exhibits, Financial Statement Schedules | | | (a) | Documents filed as part of this report |
(1) Financial Statements
Our consolidated financial statements and the related reports of management and our independent registered public accounting firm which are required to be filed as part of this report are included in this Annual Report on Form 10-K beginning at page 65.83. These consolidated financial statements are as follows: | ● | Consolidated Balance Sheets as of December 31, 2019 and 2018 |
| ● | Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017 |
| ● | Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017 |
| ● | Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017 |
| ● | Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017 |
| ● | Notes to Consolidated Financial Statements |
| (2) | Financial Statement Schedules |
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
The Company has not included any financial statement schedules because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. (3) List of Exhibits
| | | | | Exhibit
No.
| | Description of Exhibit | 2.1 |
| | Agreement and Plan of Merger, dated as of September 25, 2016, by and among Cboe Global Markets, Inc. (f/k/a CBOE Holdings, Inc.), CBOE Corporation, CBOE V, LLC and Bats Global Markets, Inc., incorporated by reference to Exhibit 10.12.1 to the Company’s Current Report on Form 8-K (File No. 001-34774), filed on September 28, 2016.** | 3.1 |
| | SecondThird Amended and Restated Certificate of Incorporation, of CBOE Holdings, Inc., incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2015 (File No. 001-34774) filed on February 19, 2016. | 3.2 |
| | Third Amended and Restated Bylaws of CBOE Holdings, Inc., incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K (File No. 001-34774) filed on November 25, 2015.October 17, 2017. | 4.13.2 |
| | Fifth Amended and Restated Bylaws, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-34774) filed on February 14, 2019. | 4.1 | | | Indenture, dated as of January 12, 2017, by and between the Cboe Global Markets, Inc. (f/k/a CBOE Holdings, Inc.) and Wells Fargo Bank National Association, as trustee, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 001-34774), filed on January 12, 2017. | 4.2 |
| | Officer’s Certificate, dated as of January 12, 2017, establishing the 3.650% Senior Notes due 2027 of Cboe Global Markets, Inc. (f/k/a CBOE Holdings, Inc.), incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K (File No. 001-34774), filed on January 12, 2017. |
4.3 |
| | Form of 3.650% Senior Notes due 2027 (included in Exhibit 4.2 hereto). | 10.14.4 |
| | Restated License Agreement,Officer’s Certificate, dated November 1, 1994, by and between Standard & Poor's Financial Services LLC (as successor-in-interest to Standard & Poor's, as of June 29, 2017, establishing the 1.950% Senior Notes due 2019 of Cboe Global Markets, Inc. (f/k/a division of McGraw-Hill,CBOE Holdings, Inc.) and the Chicago Board Options Exchange, Incorporated (the "S&P License Agreement"), incorporated by reference to Exhibit 10.1 to Amendment No. 64.1 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ | 10.2 |
| | Amendment No. 1 to the S&P License Agreement, dated January 15, 1995, incorporated by reference to Exhibit 10.2 to Amendment No. 6 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ | 10.3 |
| | Amendment No. 2 to the S&P License Agreement, dated April 1, 1998, incorporated by reference to Exhibit 10.3 to Amendment No. 6 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ | 10.4 |
| | Amendment No. 3 to the S&P License Agreement, dated July 28, 2000, incorporated by reference to Exhibit 10.4 to Amendment No. 6 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ | 10.5 |
| | Amendment No. 4 to the S&P License Agreement, dated October 27, 2000, incorporated by reference to Exhibit 10.5 to Amendment No. 6 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ | 10.6 |
| | Amendment No. 5 to the S&P License Agreement, dated March 1, 2003, incorporated by reference to Exhibit 10.6 to Amendment No. 6 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ | 10.7 |
| | Amended and Restated Amendment No. 6 to the S&P License Agreement, dated February 24, 2009, incorporated by reference to Exhibit 10.7 to Amendment No. 6 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ | 10.8 |
| | Amended and Restated Amendment No. 7 to the S&P License Agreement, dated February 24, 2009, incorporated by reference to Exhibit 10.8 to Amendment No. 6 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ | 10.9 |
| | Amendment No. 8 to the S&P License Agreement, dated January 9, 2005, incorporated by reference to Exhibit 10.9 to Amendment No. 6 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ | 10.10 |
| | Amendment No. 10 to the S&P License Agreement, dated June 19, 2009, incorporated by reference to Exhibit 10.10 to Amendment No. 6 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ | 10.11 |
| | Amendment No. 11 to the S&P License Agreement, dated as of April 29, 2010, incorporated by reference to Exhibit 10 to the Company'sCompany’s Current Report on Form 8-K (File No. 001-34774) filed on May 11, 2010.+June 29, 2017. | 10.124.5 |
| | Chicago Board Options Exchange, Incorporated Executive Retirement Plan, incorporated by reference toForm of 1.950% Senior Notes due 2019 (included in Exhibit 10.13 to Amendment No. 4 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on August 14, 2009.*4.4 hereto). | 10.134.6 |
| | AmendmentsDescription of Securities Registered Pursuant to Section 12 of the Chicago Board OptionsSecurities Exchange Incorporated Executive Retirement Plan (FiledAct of 1934 (filed herewith).* |
| 10.1 | | | | Exhibit
No.
| | DescriptionTerm Loan Credit Agreement, dated as of Exhibit | 10.14 |
| | Chicago Board Options Exchange, Incorporated Supplemental Retirement Plan, incorporatedMarch 22, 2018, by reference to Exhibit 10.14 to Amendment No. 4 toand among Cboe Global Markets, Inc., Bank of America, N.A., as administrative agent, and the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on August 14, 2009.* | 10.15 |
| | Chicago Board Options Exchange, Incorporated Deferred Compensation Plan for Officers, incorporated by reference to Exhibit 10.15 to Amendment No. 4 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on August 14, 2009.* | 10.16 |
| | Amendments to the Chicago Board Options Exchange, Incorporated Deferred Compensation Plan for Officers (Filed herewith).* | 10.17 |
| | Amendment No. 1 to the Chicago Board Options Exchange, Incorporated Supplemental Retirement Plan, incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 (File No. 001-34774) filed on November 12, 2010.* | 10.18 |
| | Amendments to the Chicago Board Options Exchange, Incorporated Supplemental Retirement Plan (Filed herewith).* | 10.19 |
| | Amended and Restated CBOE Holdings, Inc. Long-Term Incentive Plan, incorporated by reference to Exhibit 10.20 to Amendment No. 4 to the Company's Registration Statement on Form S-1 (File No. 333-165393) filed on June 11, 2010.* | 10.20 |
| | Form of Restricted Stock Award Agreement (for Executive Officers), incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (File No. 001-34774) filed on June 11, 2010.* | 10.21 |
| | Form of Restricted Stock Award Agreement (for Non-employee Directors), incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (File No. 001-34774) filed on June 11, 2010.* | 10.22 |
| | Amended and Restated CBOE Holdings, Inc. Executive Severance Plan, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 (File No. 001-34774) filed on May 6, 2015.* | 10.23 |
| | Form of Director Indemnification Agreement, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-34774) filed on December 20, 2010. | 10.24 |
| | Second Amended and Restated CBOE Holdings, Inc. Long-Term Incentive Plan,lender parties thereto, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-34774), filed on May 24, 2016.*March 23, 2018. | 10.2510.2 |
| | Amendment No. 1, dated August 22, 2011, to the Amended and Restated License Agreement, dated September 29, 2006, by and between CME Group Index Services LLC (as successor-in-interest to Dow Jones & Company, Inc.) and the Chicago Board Options Exchange, Incorporated, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 (File No. 001-34774) filed on November 9, 2011.+ | 10.26 |
| | Amended and Restated Employment Agreement, by and among CBOE Holdings, Inc., Chicago Board Options Exchange, Incorporated and Edward T. Tilly, dated December 11, 2012, incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 001-34774) filed on December 12, 2012.* | 10.27 |
| | Amendment No. 12, to the S&P License Agreement, dated March 9, 2013, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q (File no. 001-34774) filed on May 7, 2013. + | 10.28 |
| | Form of Restricted Stock Unit Award Agreement (for Executive Officers) under the Amended and Restated CBOE Holdings, Inc. Long-term Incentive Plan, incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 001-34774) filed on February 21, 2014.* | 10.29 |
| | Form of Restricted Stock Unit Award Agreement (relative total shareholder return) under the Amended and Restated CBOE Holdings, Inc. Long-term Incentive Plan, incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 001-34774) filed on February 21, 2014.* | 10.30 |
| | Form of Restricted Stock Unit Award Agreement (earnings per share) under the Amended and Restated CBOE Holdings, Inc. Long-term Incentive Plan, incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 001-34774) filed on February 21, 2014.* | 10.31 |
| | Form of 2016 Restricted Stock Unit Award Agreement (for Executive Officers) under the Amended and Restated CBOE Holdings, Inc. Long-term Incentive Plan, incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended December 31, 2015 (File No. 001-34774) filed on February 19, 2016.* | 10.32 |
| | Form of 2016 Restricted Stock Unit Award Agreement (relative total shareholder return) under the Amended and Restated CBOE Holdings, Inc. Long-term Incentive Plan, incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 2015 (File No. 001-34774) filed on February 19, 2016.* |
| | | | | Exhibit
No.
| | Description of Exhibit | 10.33 |
| | Form of 2016 Restricted Stock Unit Award Agreement (earnings per share) under the Amended and Restated CBOE Holdings, Inc. Long-term Incentive Plan, incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 2015 (File No. 001-34774) filed on February 19, 2016.* | 10.34 |
| | Form of 2017 Restricted Stock Unit Award Agreement (for Executive Officers) under the Second Amended and Restated CBOE Holdings, Inc. Long-term Incentive Plan (filed herewith).* | 10.35 |
| | Form of 2017 Restricted Stock Unit Award Agreement (relative total shareholder return) under the Second Amended and Restated CBOE Holdings, Inc. Long-term Incentive Plan (filed herewith).* | 10.36 |
| | Form of Restricted Stock Unit Award Agreement (3 Year Cliff Vest) under the Second Amended and Restated CBOE Holdings, Inc. Long-term Incentive Plan (filed herewith).* | 10.37 |
| | Debt Commitment Letter, dated as of September 25, 2016, by and among CBOE Holdings, Inc., Bank of America, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No. 001-34774), filed on November 8, 2016. | 10.38 |
| | Form of Voting and Support Agreement between CBOE Holdings, Inc. and the directors and executive officers of Bats Global Markets, Inc., incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-34774), filed on September 28, 2016. | 10.39 |
| | Form of Voting and Support Agreement between Bats Global Markets, Inc. and the directors and executive officers of CBOE Holdings, Inc., incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 001-34774), filed on September 28, 2016. | 10.40 |
| | Term Loan Credit Agreement, dated as of December 15, 2016, by and among Cboe Global Markets, Inc. (f/k/a CBOE Holdings, Inc., Bank of America, N.A., as Administrative Agent, certain lenders named therein, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Sole Lead Arranger and Sole Bookrunner, Morgan Stanley MUFG Loan Partners, LLC, as Syndication Agent, and Citibank, N.A., PNC Bank, National Association and JPMorgan Chase Bank, N.A., as Co-Documentation Agents, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-34774), filed on December 20, 2016. | 10.41 |
| | Credit Agreement, dated as of December 15, 2016, by and among CBOE Holdings, Inc.), Bank of America, N.A., as Administrative Agent and as Swing Line Lender, certain lenders named therein, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Sole Lead Arranger and Sole Bookrunner, Morgan Stanley MUFG Loan Partners, LLC, as Syndication Agent, and Citibank, N.A., PNC Bank, National Association and JPMorgan Chase Bank, N.A., as Co-Documentation Agents, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-34774), filed on December 20, 2016. | 21.110.3 |
| | SubsidiariesRestated License Agreement, dated November 1, 1994, by and between Standard & Poor's Financial Services LLC (as successor-in-interest to Standard & Poor's, a division of McGraw-Hill, Inc.) and Cboe Exchange, Inc. (f/k/a Chicago Board Options Exchange, Incorporated) (the "S&P License Agreement"), incorporated by reference to Exhibit 10.1 to Amendment No. 6 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ | 10.4 | | | Amendment No. 1 to the S&P License Agreement, dated January 15, 1995, incorporated by reference to Exhibit 10.2 to Amendment No. 6 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ | 10.5 | | | Amendment No. 2 to the S&P License Agreement, dated April 1, 1998, incorporated by reference to Exhibit 10.3 to Amendment No. 6 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ | 10.6 | | | Amendment No. 3 to the S&P License Agreement, dated July 28, 2000, incorporated by reference to Exhibit 10.4 to Amendment No. 6 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ | 10.7 | | | Amendment No. 4 to the S&P License Agreement, dated October 27, 2000, incorporated by reference to Exhibit 10.5 to Amendment No. 6 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ | 10.8 | | | Amendment No. 5 to the S&P License Agreement, dated March 1, 2003, incorporated by reference to Exhibit 10.6 to Amendment No. 6 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ | 10.9 | | | Amended and Restated Amendment No. 6 to the S&P License Agreement, dated February 24, 2009, incorporated by reference to Exhibit 10.7 to Amendment No. 6 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ | 10.10 | | | Amended and Restated Amendment No. 7 to the S&P License Agreement, dated February 24, 2009, incorporated by reference to Exhibit 10.8 to Amendment No. 6 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ | 10.11 | | | Amendment No. 8 to the S&P License Agreement, dated January 9, 2005, incorporated by reference to Exhibit 10.9 to Amendment No. 6 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ |
10.12 | | | Amendment No. 10 to the S&P License Agreement, dated June 19, 2009, incorporated by reference to Exhibit 10.10 to Amendment No. 6 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on April 12, 2010.+ | 10.13 | | | Amendment No. 11 to the S&P License Agreement, dated as of April 29, 2010, incorporated by reference to Exhibit 10 to the Company's Current Report on Form 8-K (File No. 001-34774) filed on May 11, 2010. | 10.14 | | | Amendment No. 12 to the S&P License Agreement, dated March 9, 2013, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q (File No. 001-34774) filed on May 7, 2013. + | 10.15 | | | Amendment No. 13 to the S&P License Agreement, dated as of December 21, 2017, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-34774) filed on December 22, 2017.+ | 10.16 | | | Amendment No. 14 to the S&P License Agreement, dated December 20, 2018, incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (File No. 001-34774) filed on February 22, 2019. | 10.17 | | | Amendment No. 15 to the S&P License Agreement, dated January 25, 2019, incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (File No. 001-34774) filed on February 22, 2019. | 10.18 | | | Form of Amended and Restated Director Indemnification Agreement, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 (File No. 001-34774) filed on August 4, 2017. | 10.19 | | | Employment Agreement, by and among Cboe Global Markets, Inc. (f/k/a CBOE Holdings, Inc.), Cboe Exchange, Inc. (f/k/a Chicago Board Options Exchange, Incorporated), Cboe C2 Exchange, Inc. (f/k/a C2 Options Exchange, Incorporated) and Edward Tilly, dated February 27, 2017, incorporated by reference to Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (File No. 001-34774) filed on May 11, 2017.* | 10.20 | | | Employment Agreement, by and between Cboe Global Markets, Inc. and Edward Tilly, dated May 16, 2019, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-34774) filed on May 17, 2019.* | 10.21 | | | Employment Agreement, by and between Cboe Global Markets, Inc. and Edward Tilly, dated February 11, 2020, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-34774) filed on February 14, 2020.* | 10.22 | | | Employment Agreement, by and among Cboe Global Markets, Inc. (f/k/a CBOE Holdings, Inc.), Cboe Exchange, Inc. (f/k/a Chicago Board Options Exchange, Incorporated), Cboe C2 Exchange, Inc. (f/k/a C2 Options Exchange, Incorporated) and Christopher Concannon, dated February 27, 2017, incorporated by reference to Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (File No. 001-34774) filed on May 11, 2017.* | 10.23 | | | Offer Letter Agreement, by and between Cboe Global Markets, Inc. (f/k/a CBOE Holdings, Inc.) and Christopher Isaacson, dated September 25, 2016, incorporated by reference to Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (File No. 001-34774) filed on May 11, 2017.* | 10.24 | | | Offer Letter Agreement, by and between Cboe Global Markets, Inc. (f/k/a CBOE Holdings, Inc.) and Mark Hemsley, dated September 25, 2016, incorporated by reference to Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (File No. 001-34774) filed on May 11, 2017.* | 10.25 | | | Offer Letter Agreement, by and between Cboe Global Markets, Inc. (f/k/a CBOE Holdings, Inc.) and Brian N. Schell, dated February 27, 2017, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-34774) filed on November 7, 2017.* |
10.26 | | | Offer Letter Agreement, by and between Cboe Global Markets, Inc. (f/k/a CBOE Holdings, Inc.) and Bryan Harkins, dated February 27, 2017 (filed herewith).* | 23.110.27 |
| | Mark S. Hemsley resignation letter dated October 30, 2019, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-34774) filed on November 1, 2019.* | 10.28 | | | Offer Letter Agreement for David Howson, dated December 19, 2019 (filed herewith).* | 10.29 | | | Form of U.S. Executive Employment Agreement between Bats Global Markets, Inc. and certain executive officers, incorporated by reference to Exhibit 10.15 to Amendment No. 3 to Bats Global Markets, Inc.’s Registration Statement on Form S-1 (File No. 333-208565) filed on April 4, 2016.* | 10.30 | | | Form of U.K. Executive Employment Agreement between Bats Global Markets, Inc. and certain executive officers, incorporated by reference to Exhibit 10.16 to Amendment No. 3 to Bats Global Markets, Inc.’s Registration Statement on Form S-1 (File No. 333-208565) filed on April 4, 2016.* | 10.31 | | | Cboe Exchange, Inc. (f/k/a Chicago Board Options Exchange, Incorporated) Executive Retirement Plan, incorporated by reference to Exhibit 10.13 to Amendment No. 4 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on August 14, 2009.* | 10.32 | | | Amendments to the Cboe Exchange, Inc. (f/k/a Chicago Board Options Exchange, Incorporated) Executive Retirement Plan, incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 001-34774) filed on February 22, 2017.* | 10.33 | | | Cboe Exchange, Inc. (f/k/a Chicago Board Options Exchange, Incorporated) Supplemental Retirement Plan, incorporated by reference to Exhibit 10.14 to Amendment No. 4 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on August 14, 2009.* | 10.34 | | | Amendment No. 1 to the Cboe Exchange, Inc. (f/k/a Chicago Board Options Exchange, Incorporated) Supplemental Retirement Plan, incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 (File No. 001-34774) filed on November 12, 2010.* | 10.35 | | | Amendments to the Cboe Exchange, Inc. (f/k/a Chicago Board Options Exchange, Incorporated) Supplemental Retirement Plan, incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 001-34774) filed on February 22, 2017.* | 10.36 | | | Cboe Exchange, Inc. (f/k/a Chicago Board Options Exchange, Incorporated) Deferred Compensation Plan for Officers, incorporated by reference to Exhibit 10.15 to Amendment No. 4 to the Company's Registration Statement on Form S-4 (File No. 333-140574) filed on August 14, 2009.* | 10.37 | | | Amendments to the Cboe Exchange, Inc. (f/k/a Chicago Board Options Exchange, Incorporated) Deferred Compensation Plan for Officers, incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 001-34774) filed on February 22, 2017.* | 10.38 | | | Cboe Global Markets, Inc. Executive Severance Plan, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-34774) filed on August 2, 2018.* | 10.39 | | | Bats Global Markets, Inc. 2009 Stock Option Plan, incorporated by reference to Exhibit 10.1 to Bats Global Markets, Inc.’s Registration Statement on Form S-1 (File No. 333-208565) filed on December 16, 2015.* | 10.40 | | | Bats Global Markets, Inc. Third Amended and Restated 2012 Equity Incentive Plan, incorporated by reference to Exhibit 10.2 to Bats Global Markets, Inc.’s Registration Statement on Form S-1 (File No. 333-208565) filed on December 16, 2015.* | 10.41 | | | Form of Stock Option Award Agreement pursuant to the Bats Global Markets, Inc. 2009 Stock Option Plan, incorporated by reference to Exhibit 10.3 to Bats Global Markets, Inc.’s Registration Statement on Form S-1 (File No. 333-208565) filed on December 16, 2015.* | 10.42 | | | Form of Stock Option Award Agreement pursuant to the Bats Global Markets, Inc. Third Amended and Restated 2012 Equity Incentive Plan, incorporated by reference to Exhibit 10.4 to Bats Global Markets, Inc.’s Registration Statement on Form S-1 (File No. 333-208565) filed on December 16, 2015.* |
10.43 | | | Form of Restricted Stock Award Agreement pursuant to the Bats Global Markets, Inc. Third Amended and Restated 2012 Equity Incentive Plan, incorporated by reference to Exhibit 10.5 to Bats Global Markets, Inc.’s Registration Statement on Form S-1 (File No. 333-208565) filed on December 16, 2015.* | 10.44 | | | Bats Global Markets, Inc. 2016 Omnibus Incentive Plan, incorporated by reference to Exhibit 99.3 to Bats Global Markets, Inc.’s Registration Statement on Form S-8 (File No. 333-210841) filed on April 20, 2016.* | 10.45 | | | Form of Restricted Stock Award Agreement under Bats Global Markets, Inc. 2016 Omnibus Incentive Plan, incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (File No. 001-34774) filed on May 11, 2017.* | 10.46 | | | Cboe Global Markets, Inc. Employee Stock Purchase Plan, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-34774) filed on May 18, 2018.* | 10.47 | | | Second Amended and Restated Cboe Global Markets, Inc. (f/k/a CBOE Holdings, Inc.) Long-Term Incentive Plan, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-34774) filed on May 24, 2016.* | 10.48 | | | Form of Restricted Stock Award Agreement (for Non-employee Directors), incorporated by reference to Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (File No. 001-34774) filed on May 11, 2017.* | 10.49 | | | Form of Restricted Stock Award Agreement (for Non-employee CDN Directors), incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-34774) filed on August 2, 2019. | 10.50 | | | Form of 2016 Restricted Stock Unit Award Agreement (for Executive Officers), incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended December 31, 2015 (File No. 001-34774) filed on February 19, 2016.* | 10.51 | | | Form of 2016 Restricted Stock Unit Award Agreement (relative total shareholder return), incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 2015 (File No. 001-34774) filed on February 19, 2016.* | 10.52 | | | Form of 2016 Restricted Stock Unit Award Agreement (earnings per share), incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 2015 (File No. 001-34774) filed on February 19, 2016.* | 10.53 | | | Form of 2017 Restricted Stock Unit Award Agreement (for Executive Officers), incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 001-34774) filed on February 22, 2017.* | 10.54 | | | Form of 2017 Restricted Stock Unit Award Agreement (relative total shareholder return), incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 001-34774) filed on February 22, 2017.* | 10.55 | | | Form of Restricted Stock Unit Award Agreement (3 Year Cliff Vest), incorporated by reference to Exhibit 10.36 to the Company's Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 001-34774) filed on February 22, 2017.* | 10.56 | | | Form of 2018 Restricted Stock Unit Award Agreement (for Executive Officers), incorporated by reference to Exhibit 10.58 to the Company's Annual Report on Form 10-K for the year ended December 31, 2017 (File No. 001-34774) filed on February 22, 2018.* | 10.57 | | | Form of 2018 Restricted Stock Unit Award Agreement (relative total shareholder return), incorporated by reference to Exhibit 10.59 to the Company's Annual Report on Form 10-K for the year ended December 31, 2017 (File No. 001-34774) filed on February 22, 2018.* | 10.58 | | | Form of 2018 Restricted Stock Unit Award Agreement (earnings per share), incorporated by reference to Exhibit 10.60 to the Company's Annual Report on Form 10-K for the year ended December 31, 2017 (File No. 001-34774) filed on February 22, 2018.* |
10.59 | | | Form of Restricted Stock Unit Award Agreement (3 Year Cliff Vest), incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-34774) filed on May 18, 2018.* | 10.60 | | | Form of 2019 Restricted Stock Unit Award Agreement (for Executive Officers), incorporated by reference to Exhibit 10.64 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (File No. 001-34774) filed on February 22, 2019.* | 10.61 | | | Form of 2019 Restricted Stock Unit Award Agreement (relative total shareholder return), incorporated by reference to Exhibit 10.65 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (File No. 001-34774) filed on February 22, 2019. * | 10.62 | | | Form of 2019 Restricted Stock Unit Award Agreement (earnings per share), incorporated by reference to Exhibit 10.66 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (File No. 001-34774) filed on February 22, 2019.* | 10.63 | | | Form of 2019 Restricted Stock Unit Award Agreement (3 Year Cliff Vest), incorporated by reference to Exhibit 10.67 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (File No. 001-34774) filed on February 22, 2019.* | 10.64 | | | Form of 2020 Edward Tilly Restricted Stock Unit Award Agreement (relative total shareholder return), incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-34774) filed on February 14, 2020.* | 10.65 | | | Form of 2020 Edward Tilly Restricted Stock Unit Award Agreement (earnings per share), incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 001-34774) filed on February 14, 2020.* | 10.66 | | | Form of 2020 Restricted Stock Unit Award Agreement (for Executive Officers) (filed herewith).* | 10.67 | | | Form of 2020 Restricted Stock Unit Award Agreement (relative total shareholder return) (filed herewith).* | 10.68 | | | Form of 2020 Restricted Stock Unit Award Agreement (earnings per share) (filed herewith).* | 10.69 | | | Form of 2020 Restricted Stock Unit Award Agreement (3 Year Cliff Vest) (filed herewith).* | 21.1 | | | Subsidiaries of Cboe Global Markets, Inc. (filed herewith). | 23.1 | | | Consent of Independent Registered Public Accounting Firm (filed herewith). | 24.1 |
| | Powers of Attorney (incorporated by reference to the signature page of this Annual Report on Form 10-K). | 31.1 |
| | Certification of Chief Executive Officer pursuant to Rule 13a-14 (filed herewith). | 31.2 |
| | Certification of Chief Financial Officer pursuant to Rule 13a-14 (filed herewith). | 32.1 |
| | Certificate of Chief Executive Officer pursuant to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (filed herewith). | 32.2 |
| | Certificate of Chief Financial Officer pursuant to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (filed herewith). | 101.INS |
| | XBRLiXBRL Instance Document (filed herewith). | | | | | 101.SCH |
| | XBRLiXBRL Taxonomy Extension Schema Document (filed herewith). | | | | | 101.CAL |
| | XBRLiXBRL Taxonomy Extension Calculation Linkbase Document (filed herewith). | | | | | 101.DEF |
| | XBRLiXBRL Taxonomy Extension Definition Linkbase (filed herewith). | | | | | 101.LAB |
| | XBRLiXBRL Taxonomy Extension Label Linkbase Document (filed herewith). | | | | | 101.PRE |
| | XBRLiXBRL Taxonomy Extension Presentation Linkbase Document (filed herewith). | | | | |
104 | | | Cover Page Interactive Data File (embedded as Inline XBRL document). | | | | |
*Indicates Management Compensatory Plan, Contract or Arrangement.
**Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule will be furnished supplementally to the Securities and Exchange Commission upon request. +Confidential treatment has been previously requested or granted to portions of these exhibits by the SEC. Item 16. Form 10-K Summary None.
SIGNATURESSIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this Annual Report on Form 10-Kreport to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | Cboe Global Markets, Inc. | CBOE HOLDINGS, INC.
| | (Registrant) | By: | | /s/ EDWARD T. TILLY | Date: February 21, 2020 | | Edward T. Tilly
| /s/ Brian N. Schell | | | Name: | Brian N. Schell | | | Title: | Executive Vice President and Chief Executive Financial | | | | Officer (Principal Financial Officer) |
Date: February 21, 2017
ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Edward T. Tilly, as attorney-in-fact and agent, with full power of substitution and re-substitution, to sign on his or her behalf, individually and in any and all capacities, including the capacities stated below, any and all amendments to this Annual Report on Form 10-K for the year ended December 31, 20162019 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the dates indicated. | | | | | | | | | | SIGNATURE | | TITLE | | DATE | | | | | | | | Chairman, President, and Chief Executive Officer and Director | | | | | (Principal Executive Officer) | | | | | | | | /s/ ALAN J. DEANBRIAN N. SCHELL | | Executive Vice President, Chief Financial Officer and Treasurer | | | Alan J. Dean | | (Principal Financial Officer) | | | | | | | | /s/ DAVID S. REYNOLDSJILL M. GRIEBENOW | | Senior Vice President and Chief Accounting Officer | | | David S. Reynolds | | (Principal Accounting Officer) | | | | | | | | | | | | | /s/ WILLIAM J. BRODSKY | | Chairman | | February 21, 2017 | William J. Brodsky | | | | | | | | | | /s/ JAMES R. BORIS | | Director | | February 21, 2017 | James R. Boris | | | | | | | | | | /s/ FRANK E. ENGLISH, JR. | | | | | | | | | | | | | | | /s/ WILLIAM M. FARROW III | | | | | | | | | | | | | | | /s/ EDWARD J. FITZPATRICK | | | | | | | | | |
| | | | | | | | | | SIGNATURE | | TITLE | | DATE | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Director | | February 21, 2017 | R. Eden Martin | | | | | | | | | | /s/ RODERICK A. PALMORE | | | | | | | | | | | | | | | /s/ SUSAN M. PHILLIPSJAMES E. PARISI | | | | | Susan M. Phillips | | | | | | | | | | /s/ SAMUEL K. SKINNERJOSEPH P. RATTERMAN | | | | | Samuel K. Skinner | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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