UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
FORM 10-Q
_________________________________
(Mark One) | |||
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the quarterly period ended March 31, OR | |||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the transition period from to | |||
Commission File Number: 001-33440
INTERACTIVE BROKERS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware | 30-0390693 |
One Pickwick Plaza
Greenwich, Connecticut 06830
(Address of principal executive office)
(203) 618-5800
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xþ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes xþ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No xþ
Title of each class | Name of the exchange on which registered | Trading Symbol |
Common Stock, par value $.01 per share | The Nasdaq Global Select Market | IBKR |
As of May 7, 2020,6, 2021, there were 76,753,00590,815,527 shares of the issuer’s Class A common stock, par value $0.01 per share, outstanding and 100 shares of the issuer’s Class B common stock, par value $0.01 per share, outstanding.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 20202021
Table of Contents
PART I | FINANCIAL INFORMATION | ||
ITEM 1. | Financial Statements (Unaudited) | ||
2 | |||
3 | |||
4 | |||
5 | |||
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ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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ITEM 3. | 57 | ||
ITEM 4. | 61 | ||
PART II. | OTHER INFORMATION | ||
ITEM 1. | 62 | ||
ITEM 1A. | 62 | ||
ITEM 2. | 62 | ||
ITEM 3. | 62 | ||
ITEM 5. | 62 | ||
ITEM 6. | 63 | ||
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PART 1.I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Interactive BrokersBrokers Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Financial Condition
(Unaudited)
March 31, | December 31, | March 31, | December 31, | |||||||||
(in millions, except share amounts) | 2020 | 2019 | 2021 | 2020 | ||||||||
Assets | ||||||||||||
Cash and cash equivalents | $ | 3,101 | $ | 2,882 | $ | 2,627 | $ | 4,292 | ||||
Cash - segregated for regulatory purposes | 14,272 | 9,400 | 21,204 | 15,903 | ||||||||
Securities - segregated for regulatory purposes | 30,187 | 17,824 | 25,069 | 27,821 | ||||||||
Securities borrowed | 3,970 | 3,916 | 5,708 | 4,956 | ||||||||
Securities purchased under agreements to resell | 910 | 3,111 | 1,692 | 792 | ||||||||
Financial instruments owned, at fair value | ||||||||||||
Financial instruments owned | 1,117 | 1,755 | 588 | 544 | ||||||||
Financial instruments owned and pledged as collateral | 85 | 161 | 52 | 86 | ||||||||
Total financial instruments owned, at fair value | 1,202 | 1,916 | 640 | 630 | ||||||||
Receivables | ||||||||||||
Customers, less allowance for credit losses of $93 and $86 as of March 31, 2020 and December 31, 2019 | 20,092 | 31,304 | ||||||||||
Customers, less allowance for credit losses of $14 and $17 as of March 31, 2021 and December 31, 2020 | 42,645 | 39,333 | ||||||||||
Brokers, dealers and clearing organizations | 1,535 | 685 | 3,368 | 1,254 | ||||||||
Interest | 113 | 158 | 116 | 104 | ||||||||
Total receivables | 21,740 | 32,147 | 46,129 | 40,691 | ||||||||
Other assets | 467 | 480 | 695 | 594 | ||||||||
Total assets | $ | 75,849 | $ | 71,676 | $ | 103,764 | $ | 95,679 | ||||
Liabilities and equity | ||||||||||||
Short-term borrowings | $ | 14 | $ | 16 | $ | 212 | $ | 118 | ||||
Securities loaned | 4,044 | 4,410 | 11,867 | 9,838 | ||||||||
Securities sold under agreements to repurchase | — | 1,909 | ||||||||||
Financial instruments sold, but not yet purchased, at fair value | 161 | 457 | 191 | 153 | ||||||||
Payables | ||||||||||||
Customers | 62,739 | 56,248 | 81,204 | 75,882 | ||||||||
Brokers, dealers and clearing organizations | 268 | 220 | 310 | 182 | ||||||||
Affiliate | 139 | 152 | 199 | 199 | ||||||||
Accounts payable, accrued expenses and other liabilities | 323 | 295 | 331 | 298 | ||||||||
Interest | 14 | 29 | 13 | 6 | ||||||||
Total payables | 63,483 | 56,944 | 82,057 | 76,567 | ||||||||
Total liabilities | 67,702 | 63,736 | 94,327 | 86,676 | ||||||||
Commitments, contingencies and guarantees (see Note 13) |
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| ||||||||
Equity | ||||||||||||
Stockholders’ equity | ||||||||||||
Common stock, $0.01 par value per share | ||||||||||||
Class A – Authorized - 1,000,000,000, Issued - 76,889,351 and 76,889,040 shares, Outstanding – 76,752,269 and 76,750,110 shares as of March 31, 2020 and December 31, 2019 | 1 | 1 | ||||||||||
Class B – Authorized, Issued and Outstanding – 100 shares as of March 31, 2020 and December 31, 2019 | — | — | ||||||||||
Class A – Authorized - 1,000,000,000, Issued - 90,959,889 and 90,909,889 shares, Outstanding – 90,807,181 and 90,773,105 shares as of March 31, 2021 and December 31, 2020 | 1 | 1 | ||||||||||
Class B – Authorized, Issued and Outstanding – 100 shares as of March 31, 2021 and December 31, 2020 | — | — | ||||||||||
Additional paid-in capital | 937 | 934 | 1,249 | 1,244 | ||||||||
Retained earnings | 558 | 520 | 781 | 683 | ||||||||
Accumulated other comprehensive income, net of income taxes of $0 and $0 as of March 31, 2020 and December 31, 2019 | (7) | — | ||||||||||
Treasury stock, at cost, 137,082 and 138,930 shares as of March 31, 2020 and December 31, 2019 | (3) | (3) | ||||||||||
Accumulated other comprehensive income, net of income taxes of $0 and $0 as of March 31, 2021 and December 31, 2020 | 9 | 26 | ||||||||||
Treasury stock, at cost, 152,708 and 136,784 shares as of March 31, 2021 and December 31, 2020 | (4) | (3) | ||||||||||
Total stockholders’ equity | 1,486 | 1,452 | 2,036 | 1,951 | ||||||||
Noncontrolling interests | 6,661 | 6,488 | 7,401 | 7,052 | ||||||||
Total equity | 8,147 | 7,940 | 9,437 | 9,003 | ||||||||
Total liabilities and equity | $ | 75,849 | $ | 71,676 | $ | 103,764 | $ | 95,679 | ||||
See accompanying notes to the condensed consolidated financial statements.
Interactive Brokers Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||
(in millions, except share or per share amounts) | 2020 | 2019 | 2021 | 2020 | ||||||||
Revenues | ||||||||||||
Commissions | $ | 269 | $ | 173 | $ | 412 | $ | 269 | ||||
Other fees and services | 38 | 35 | 56 | 38 | ||||||||
Other income (loss) | (31) | 104 | 120 | (31) | ||||||||
Total non-interest income | 276 | 312 | 588 | 276 | ||||||||
Interest income | 369 | 408 | 390 | 369 | ||||||||
Interest expense | (113) | (162) | (85) | (113) | ||||||||
Total net interest income | 256 | 246 | 305 | 256 | ||||||||
Total net revenues | 532 | 558 | 893 | 532 | ||||||||
Non-interest expenses | ||||||||||||
Execution, clearing and distribution fees | 77 | 61 | 68 | 77 | ||||||||
Employee compensation and benefits | 80 | 71 | 97 | 80 | ||||||||
Occupancy, depreciation and amortization | 17 | 14 | 20 | 17 | ||||||||
Communications | 6 | 6 | 8 | 6 | ||||||||
General and administrative | 37 | 24 | 59 | 37 | ||||||||
Customer bad debt | 7 | 43 | 2 | 7 | ||||||||
Total non-interest expenses | 224 | 219 | 254 | 224 | ||||||||
Income before income taxes | 308 | 339 | 639 | 308 | ||||||||
Income tax expense | 18 | 15 | 53 | 18 | ||||||||
Net income | 290 | 324 | 586 | 290 | ||||||||
Less net income attributable to noncontrolling interests | 244 | 275 | 479 | 244 | ||||||||
Net income available for common stockholders | $ | 46 | $ | 49 | $ | 107 | $ | 46 | ||||
Earnings per share | ||||||||||||
Basic | $ | 0.60 | $ | 0.65 | $ | 1.18 | $ | 0.60 | ||||
Diluted | $ | 0.60 | $ | 0.64 | $ | 1.16 | $ | 0.60 | ||||
Weighted average common shares outstanding | ||||||||||||
Basic | 76,751,168 | 75,101,062 | 90,789,321 | 76,751,168 | ||||||||
Diluted | 77,568,464 | 75,977,511 | 91,766,142 | 77,568,464 | ||||||||
Comprehensive income | ||||||||||||
Net income available for common stockholders | $ | 46 | $ | 49 | $ | 107 | $ | 46 | ||||
Other comprehensive income | ||||||||||||
Cumulative translation adjustment, before income taxes | (7) | (1) | (17) | (7) | ||||||||
Income taxes related to items of other comprehensive income | — | — | — | — | ||||||||
Other comprehensive income (loss), net of tax | (7) | (1) | ||||||||||
Other comprehensive loss, net of tax | (17) | (7) | ||||||||||
Comprehensive income available for common stockholders | $ | 39 | $ | 48 | $ | 90 | $ | 39 | ||||
Comprehensive income attributable to noncontrolling interests | ||||||||||||
Net income attributable to noncontrolling interests | $ | 244 | $ | 275 | $ | 479 | $ | 244 | ||||
Other comprehensive income - cumulative translation adjustment | (31) | (1) | (59) | (31) | ||||||||
Comprehensive income attributable to noncontrolling interests | $ | 213 | $ | 274 | $ | 420 | $ | 213 | ||||
See accompanying notes to the condensed consolidated financial statements.
Interactive Brokers Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||
(in millions) | 2020 | 2019 | 2021 | 2020 | ||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 290 | $ | 324 | $ | 586 | $ | 290 | ||||
Adjustments to reconcile net income to net cash from operating activities | ||||||||||||
Deferred income taxes | 5 | 9 | 15 | 5 | ||||||||
Depreciation and amortization | 10 | 7 | 13 | 10 | ||||||||
Amortization of right-of-use assets | 5 | 5 | 5 | 5 | ||||||||
Employee stock plan compensation | 16 | 16 | 17 | 16 | ||||||||
Unrealized (gain) loss on other investments, net | 19 | (106) | (108) | 19 | ||||||||
Bad debt expense | 7 | 43 | 2 | 7 | ||||||||
Shares distributed to customers under IBKR Promotions | 2 | — | ||||||||||
Change in operating assets and liabilities | ||||||||||||
Securities - segregated for regulatory purposes | (12,363) | (2,937) | 2,752 | (12,363) | ||||||||
Securities borrowed | (54) | (865) | (752) | (54) | ||||||||
Securities purchased under agreements to resell | 2,201 | (338) | (900) | 2,201 | ||||||||
Financial instruments owned, at fair value | 704 | 803 | (4) | 704 | ||||||||
Receivables from customers | 11,205 | 1,106 | (3,314) | 11,205 | ||||||||
Other receivables | (805) | (31) | (2,126) | (805) | ||||||||
Other assets | (4) | (140) | (6) | (4) | ||||||||
Securities loaned | (366) | 213 | 2,029 | (366) | ||||||||
Securities sold under agreement to repurchase | (1,909) | — | — | (1,909) | ||||||||
Financial instruments sold, but not yet purchased, at fair value | (296) | (426) | 38 | (296) | ||||||||
Payable to customers | 6,491 | 2,749 | 5,322 | 6,491 | ||||||||
Other payables | 47 | 171 | 163 | 47 | ||||||||
Net cash provided by operating activities | 5,203 | 603 | 3,734 | 5,203 | ||||||||
Cash flows from investing activities | ||||||||||||
Purchases of other investments | — | (16) | (1) | — | ||||||||
Distributions received and proceeds from sales of other investments | 1 | — | 1 | 1 | ||||||||
Purchase of property, equipment and intangible assets | (12) | (26) | (21) | (12) | ||||||||
Net cash used in investing activities | (11) | (42) | (21) | (11) | ||||||||
Cash flows from financing activities | ||||||||||||
Short-term borrowings, net | (2) | (2) | (10) | (2) | ||||||||
Dividends paid to stockholders | (8) | (8) | (9) | (8) | ||||||||
Distributions from IBG LLC to noncontrolling interests | (53) | (60) | (86) | (53) | ||||||||
Issuances of senior notes | 602 | — | ||||||||||
Redemptions of senior notes | (498) | — | ||||||||||
Net cash used in financing activities | (63) | (70) | (1) | (63) | ||||||||
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (38) | (2) | (76) | (38) | ||||||||
Net increase in cash, cash equivalents, and restricted cash | 5,091 | 489 | 3,636 | 5,091 | ||||||||
Cash, cash equivalents, and restricted cash at beginning of period | 12,282 | 10,100 | 20,195 | 12,282 | ||||||||
Cash, cash equivalents, and restricted cash at end of period | $ | 17,373 | $ | 10,589 | $ | 23,831 | $ | 17,373 | ||||
Cash, cash equivalents, and restricted cash | ||||||||||||
Cash and cash equivalents | 3,101 | 2,546 | 2,627 | 3,101 | ||||||||
Cash segregated for regulatory purposes | 14,272 | 8,043 | 21,204 | 14,272 | ||||||||
Cash, cash equivalents, and restricted cash at end of period | $ | 17,373 | $ | 10,589 | $ | 23,831 | $ | 17,373 | ||||
Supplemental disclosures of cash flow information | ||||||||||||
Cash paid for interest | $ | 129 | $ | 158 | $ | 79 | $ | 129 | ||||
Cash paid for taxes, net | $ | 15 | $ | 12 | $ | 24 | $ | 15 | ||||
Cash paid for amounts included in lease liabilities | $ | 5 | $ | 5 | $ | 6 | $ | 5 | ||||
Non-cash financing activities | ||||||||||||
Adjustments to additional paid-in capital for changes in proportionate ownership in IBG LLC | $ | 1 | $ | — | ||||||||
Adjustments to noncontrolling interests for changes in proportionate ownership in IBG LLC | $ | (1) | $ | — | ||||||||
See accompanying notes to the condensed consolidated financial statements.
Interactive Brokers Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Equity
Three Months Ended March 31, 20202021
(Unaudited)
Class A Common Stock | Accumulated | |||||||||||||||||||||||||
Additional | Other | Total | Non- | |||||||||||||||||||||||
Issued | Par | Paid-In | Treasury | Retained | Comprehensive | Stockholders' | controlling | Total | ||||||||||||||||||
(in millions, except share amounts) | Shares | Value | Capital | Stock | Earnings | Income | Equity | Interests | Equity | |||||||||||||||||
Balance, December 31, 2020 | 90,909,889 | $ | 1 | $ | 1,244 | $ | (3) | $ | 683 | $ | 26 | $ | 1,951 | $ | 7,052 | $ | 9,003 | |||||||||
Issuance of common stock - IBKR Promotion | 50,000 | (3) | (3) | 3 | — | |||||||||||||||||||||
Net distribution of common stock - IBKR Promotion | 2 | 2 | 2 | |||||||||||||||||||||||
Compensation for stock grants vesting in the future | 4 | 4 | 13 | 17 | ||||||||||||||||||||||
Dividends paid to stockholders | (9) | (9) | (9) | |||||||||||||||||||||||
Distributions from IBG LLC to noncontrolling interests | — | (86) | (86) | |||||||||||||||||||||||
Adjustments for changes in proportionate ownership in IBG LLC | 1 | 1 | (1) | — | ||||||||||||||||||||||
Comprehensive income | 107 | (17) | 90 | 420 | 510 | |||||||||||||||||||||
Balance, March 31, 2021 | 90,959,889 | $ | 1 | $ | 1,249 | $ | (4) | $ | 781 | $ | 9 | $ | 2,036 | $ | 7,401 | $ | 9,437 | |||||||||
Interactive Brokers Group, Inc. and 2019Subsidiaries
Condensed Consolidated Statements of Changes in Equity
Three Months Ended March 31, 2020
(Unaudited)
Class A Common Stock | Accumulated | |||||||||||||||||||||||||
Additional | Other | Total | Non- | |||||||||||||||||||||||
Issued | Par | Paid-In | Treasury | Retained | Comprehensive | Stockholders' | controlling | Total | ||||||||||||||||||
(in millions, except share amounts) | Shares | Value | Capital | Stock | Earnings | Income | Equity | Interests | Equity | |||||||||||||||||
Balance, January 1, 2020 | 76,889,040 | $ | 1 | $ | 934 | $ | (3) | $ | 520 | $ | — | $ | 1,452 | $ | 6,488 | $ | 7,940 | |||||||||
Common stock distributed pursuant to stock incentive plans | 311 | — | — | |||||||||||||||||||||||
Compensation for stock grants vesting in the future | 3 | 3 | 13 | 16 | ||||||||||||||||||||||
Dividends paid to stockholders | (8) | (8) | (8) | |||||||||||||||||||||||
Distributions from IBG LLC to noncontrolling interests | — | (53) | (53) | |||||||||||||||||||||||
Comprehensive income | 46 | (7) | 39 | 213 | 252 | |||||||||||||||||||||
Balance, March 31, 2020 | 76,889,351 | $ | 1 | $ | 937 | $ | (3) | $ | 558 | $ | (7) | $ | 1,486 | $ | 6,661 | $ | 8,147 | |||||||||
Class A Common Stock | Accumulated | |||||||||||||||||||||||||
Additional | Other | Total | Non- | |||||||||||||||||||||||
Issued | Par | Paid-In | Treasury | Retained | Comprehensive | Stockholders' | controlling | Total | ||||||||||||||||||
(in millions, except share amounts) | Shares | Value | Capital | Stock | Earnings | Income | Equity | Interests | Equity | |||||||||||||||||
Balance, January 1, 2019 | 75,230,400 | $ | 1 | $ | 898 | $ | (3) | $ | 390 | $ | (4) | $ | 1,282 | $ | 5,874 | $ | 7,156 | |||||||||
Common stock distributed pursuant to stock incentive plans | 905 | — | — | |||||||||||||||||||||||
Compensation for stock grants vesting in the future | 3 | 3 | 13 | 16 | ||||||||||||||||||||||
Dividends paid to stockholders | (8) | (8) | (8) | |||||||||||||||||||||||
Distributions from IBG LLC to noncontrolling interests | — | (60) | (60) | |||||||||||||||||||||||
Comprehensive income | 49 | (1) | 48 | 274 | 322 | |||||||||||||||||||||
Balance, March 31, 2019 | 75,231,305 | $ | 1 | $ | 901 | $ | (3) | $ | 431 | $ | (5) | $ | 1,325 | $ | 6,101 | $ | 7,426 | |||||||||
See accompanying notes to the condensed consolidated financial statements.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization of Business
Interactive Brokers Group, Inc. (“IBG, Inc.”) is a Delaware holding company whose primary asset is its ownership of approximately 18.5%21.8% of the membership interests of IBG LLC, which, in turn, owns operating subsidiaries (collectively, “IBG LLC”). IBG, Inc. together with IBG LLC and its consolidated subsidiaries (collectively, “the Company”), is an automated global electronic broker specializing in executing and clearing trades in stocks, options, futures, foreign exchange instruments, bonds, mutual funds and exchange traded funds (“ETFs”) on more than 135 electronic exchanges and market centers around the world and offering custody, prime brokerage, securities and margin lending services to customers. In the United States of America (“U.S.”), the Company conducts its business primarily from its headquarters in Greenwich, Connecticut and from Chicago, Illinois. Abroad, the Company conducts its business through offices located in Canada, the United Kingdom, Ireland, Luxembourg, Switzerland, Hungary, India, China (Hong Kong and Shanghai), Japan, Singapore, and Australia. As of March 31, 2020,2021, the Company had 1,7022,187 employees worldwide.
IBG LLC is a Connecticut limited liability company that conducts its business through its significant operating subsidiaries: Interactive Brokers LLC (“IB LLC”); Interactive Brokers Canada Inc. (“IBC”); Interactive Brokers (U.K.) Limited (“IBUK”); Interactive Brokers Ireland Limited (“IBIE”); Interactive Brokers Luxembourg SARL (“IBLUX”); IBKR Financial Services AG (“IBKRFS”); Interactive Brokers Central Europe Zrt. (“IBCE”); Interactive Brokers (India) Private Limited (“IBI”), Interactive Brokers Hong Kong Limited (“IBHK”), Interactive Brokers Securities Japan, Inc. (“IBSJ”), Interactive Brokers Singapore Private Limited ("IBSG"), and Interactive Brokers Australia Pty Limited (“IBA”).
Certain of the operating subsidiaries are members of various securities and commodities exchanges in North America, Europe and the Asia/Pacific region and are subject to regulatory capital and other requirements (see Note 15). IB LLC, IBC, IBUK, IBIE, IBLUX, IBCE, IBI, IBHK, IBSJ, IBSG, and IBA carry securities accounts for customers or perform custodial functions relating to customer securities.
2. Significant Accounting Policies
Basis of Presentation
These condensed consolidated financial statements are presented in U.S. dollars and have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding financial reporting with respect to Form 10-Q.
These condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 20192020 Annual Report on Form 10-K for the year ended December 31, 2019,2020, which was filed with the SEC on February 28, 2020.March 1, 2021. The condensed consolidated financial information as of December 31, 20192020 has been derived from the audited financial statements not included herein.
These condensed consolidated financial statements include the accounts of the Company and its consolidated subsidiaries and reflect all adjustments of a normal and recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the periods presented. The operating results for interim periods are not necessarily indicative of the operating results for the entire year.
In March 2020, the World Health Organization recognized the outbreak of the Coronavirus Disease 2019 (“COVID-19”) caused by a novel strain of the coronavirus as a pandemic. The pandemic affects all countries in which the Company operates. The response of governments and societies to the COVID-19 pandemic, which includes temporary closures of certain businesses; social distancing; travel restrictions, “shelter in place” and other governmental regulations; and reduced consumer spending due to job losses, has significantly impacted volatility in the financial, commodities and energy markets, and general economic conditions.
The effects of the COVID-19 pandemic on the Company’s financial results for the three months ended March 31, 2021 can be summarized as follows: (1) higher commission revenue due to increased trading activity and a higher rate of customer accounts opened and (2) lower net interest income resulting from lower benchmark interest rates.
The impact of the COVID-19 pandemic on the Company’s future financial results remains uncertain and currently cannot be quantified, as it will depend on numerous evolving factors that currently cannot be accurately predicted, including, but not limited to the duration and spread of the pandemic; its impact on the Company’s customers, employees and vendors; governmental actions in response to the pandemic; and the overall impact of the pandemic in the economy and society; among other factors. Any of these events could have significant accounting and financial reporting implications (i.e., reassessing accounting estimates related to credit
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
losses, valuation of certain investments, deferred tax assets and contingency reserves). The Company has reviewed its assumptions related to the above estimates and have not made any adjustments.
Principles of Consolidation, including Noncontrolling Interests
These condensed consolidated financial statements include the accounts of IBG, Inc. and its majority and wholly owned subsidiaries. As sole managing member of IBG LLC, IBG, Inc. exerts control over IBG LLC’s operations. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” the Company consolidates IBG LLC’s financial statements and records the interests in IBG LLC that it does not own as noncontrolling interests.
The Company’s policy is to consolidate all other entities in which it owns more than 50% unless it does not have control. All inter-company balances and transactions have been eliminated.
Condensed Consolidated Statements of Comprehensive Income and Operating Business Segment Presentation Changes
As previously disclosed in the Company’s 10-Q for the quarter ended March 31, 2017 and in subsequent filings, the Company intended to eliminate the reporting of separate operating business segments upon its determination that the continued wind-down of the Company’s market making activity rendered it no longer reportable as a business segment. Pursuant to the requirements of FASB ASC Topic 280, “Segment Reporting,” the Company performed a quantitative and a qualitative assessment of its business and determined that its remaining market making activity no longer supports the Company’s reporting of separate business segments. Accordingly, effective this quarter the Company is discontinuing the reporting of separate business segments. Since the Company’s
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
decision to wind down its market making activities, management has continued to shift its focus to growing and strengthening the Company’s electronic brokerage business. The Company believes the elimination of segment reporting aligns its financial reporting with its business strategy and management’s focus on the electronic brokerage business. For each of the past eight quarters, the market making segment’s contribution to the Company’s consolidated net revenues, income before income taxes, and total assets has not exceeded 7%, 4%, and 6%, respectively. As a result, effective this quarter, the Company has modified the presentation of its segment financial information with retrospective application to all prior periods presented.
In addition, effective this quarter, the Company has changed the presentation of its condensed consolidated statements of comprehensive income to better align with its business strategy. As a result, the Company made the following reclassifications to amounts reported in its condensed consolidated statement of comprehensive income for the three months ended March 31, 2019:
Other fees and services – reclassified $35 million previously reported as other income to other fees and services, which includes market data fees, account activity fees, risk exposure fees, order flow income from options exchange-mandated programs, and revenues from other fees and services. These items have been historically reported as a component of other income.
Other income – reclassified $7 million previously reported as trading gains to other income as a component of “principal transactions.” Other income includes gains (losses) from principal transactions; the impact of the currency diversification strategy; gains (losses) from equity method investments; and other revenues not directly attributable to the Company’s core business offerings.
Previously reported amounts in the condensed consolidated statements of comprehensive income and notes to the condensed consolidated financial statements have been adjusted to conform to the current presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in these condensed consolidated financial statements and accompanying notes. These estimates and assumptions are based on judgment and the best available information at the time. Therefore, actual results could differ materially from those estimates. Such estimates include the allowance for credit losses, valuation of certain investments, compensation accruals, current and deferred income taxes, and contingency reserves.
Fair Value
Substantially all of the Company’s assets and liabilities, including financial instruments, are carried at fair value based on published market prices and are marked to market, or are assets and liabilities which are short-term in nature and are carried at amounts that approximate fair value.
The Company applies the fair value hierarchy in accordance with FASB ASC Topic 820, “Fair Value Measurement” (“ASC Topic 820”), to prioritize the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy are:
Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
Level 2 | Quoted prices for similar assets in an active market, quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly. |
Level 3 | Prices or valuations that require inputs that are both significant to fair value measurement and unobservable. |
Financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value are generally classified as Level 1 of the fair value hierarchy. The Company’s Level 1 financial instruments, which are valued using quoted market prices as published by exchanges and clearing houses or otherwise broadly distributed in active markets, include active listed stocks, options, warrants, and U.S. and foreign government securities. The Company does not adjust quoted prices for financial instruments classified as Level 1 of the fair value hierarchy, even in the event that the Company may hold a large position whereby a purchase or sale could reasonably impact quoted prices.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Currency forward contracts are valued using broadly distributed bank and broker prices, and are classified as Level 2 of the fair value hierarchy since inputs to their valuation can be generally corroborated by market data.Precious metals are valued using an internal model, which incorporates the exchange-traded futures price of the underlying instruments, benchmark interest rates and estimated storage costs, and are classified as Level 2 of the fair value hierarchy since the significant inputs to their valuation are observable. Other securities that are not traded in active markets are also classified as Level 2 of the fair value hierarchy. Level 3 financial instruments are comprised of securities that have been delisted or otherwise are no longer tradable in active markets and have been valued by the Company based on internal estimates.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Earnings per Share
Earnings per share (“EPS”) is computed in accordance with FASB ASC Topic 260, “Earnings per Share.” Basic EPS is computed by dividing the net income available for common stockholders by the weighted average number of shares outstanding for that period. Diluted EPS is calculated by dividing the net income available for common stockholders by the diluted weighted average shares outstanding for that period. Diluted EPS includes the determinants of basic EPS and, in addition, reflects the dilutive effect of shares of common stock estimated to be distributed in the future under the Company’s stock-based compensation plans, with no adjustments to net income available for common stockholders for potentially dilutive common shares.
Current Expected Credit Losses
On January 1, 2020, the
The Company adoptedfollows FASB ASC Topic 326 – “Financial Instruments – Credit Losses” (“ASC Topic 326”) which replaces the incurred loss methodology with the current expected credit loss (“CECL”) methodology. The new guidance applies to financial assets measured at amortized cost, held-to-maturity debt securities and off-balance sheet credit exposures. For on-balance sheet assets, an allowance must be recognized at the origination or purchase of in-scope assets and represents the expected credit losses over the contractual life of those assets. Expected credit losses on off-balance sheet credit exposures must be estimated over the contractual period the Company is exposed to credit risk as a result of a present obligation to extend credit.
The Company adopted ASC Topic 326 using the modified retrospective approach for all in-scope assets. Results for reporting periods beginning after January 1, 2020 are presented under ASC Topic 326 while prior periods continue to be reported in accordance with previously applicable U.S. GAAP. The impact to the current period is not material since the Company’s in-scope assets are primarily subject to collateral maintenance provisions for which the Company elected to apply the practical expedient of reporting the difference between the fair value of collateral and the amortized cost for the in-scope assets as the allowance for current expected credit losses.
Cash and Cash Equivalents
Cash and cash equivalents consist of deposits with banks and all highly liquid investments, with maturities of three months or less, that are not segregated and deposited for regulatory purposes or to meet margin requirements at clearing houses and clearing banks.
Cash and Securities -– Segregated for Regulatory Purposes
As a result of customer activities, certain operating subsidiaries are obligated by rules mandated by their primary regulators to segregate or set aside cash or qualified securities to satisfy such regulations, which have been promulgated to protect customer assets. Restricted cash represents cash and cash equivalents that are subject to withdrawal or usage restrictions. Cash segregated for regulatory purposes meets the definition of restricted cash and is included in “cash, cash equivalents, and restricted cash” in the condensed consolidated statements of cash flows.
The table below presents the composition of the Company’s securities segregated for regulatory purposes for the periods indicated.
March 31, | December 31, | March 31, | December 31, | |||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
(in billions) | (in millions) | |||||||||||
U.S. government securities | $ | 3.2 | $ | 3.8 | $ | 3,925 | $ | 4,750 | ||||
Securities purchased under agreements to resell 1 | 27.0 | 14.0 | 21,144 | 23,071 | ||||||||
$ | 30.2 | $ | 17.8 | $ | 25,069 | $ | 27,821 | |||||
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(1)These balances are collateralized by U.S. government securities.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Securities Borrowed and Securities Loaned
Securities borrowed and securities loaned are recorded at the amount of the cash collateral advanced or received. Securities borrowed transactions require the Company to provide counterparties with collateral, which may be in the form of cash, letters of credit or other securities. With respect to securities loaned, the Company receives collateral, which may be in the form of cash or other securities in an amount generally in excess of the fair value of the securities loaned. The Company monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as permitted contractually. The Company’s policy is to net, in the condensed consolidated statements of financial condition, securities borrowed and securities loaned entered into with the same counterparty that meet the offsetting requirements prescribed in FASB ASC Topic 210-20, “Balance Sheet – Offsetting” (“ASC Topic 210-20”).
Securities lending fees received and paid by the Company are included in interest income and interest expense, respectively, in the condensed consolidated statements of comprehensive income.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase
Securities purchased under agreements to resell and securities sold under agreements to repurchase, which are reported as collateralized financing transactions, are recorded at contract value, which approximates fair value. To ensure that the fair value of the underlying collateral remains sufficient, the collateral is valued daily with additional collateral obtained or excess collateral returned, as permitted under contractual provisions. The Company’s policy is to net, in the condensed consolidated statements of financial condition, securities purchased under agreements to resell transactions and securities sold under agreements to repurchase transactions entered into with the same counterparty that meet the offsetting requirements prescribed in ASC Topic 210-20.
Financial Instruments Owned and Financial Instruments Sold, But Not Yet Purchased, at Fair Value
Financial instrument transactions are accounted for on a trade date basis. Financial instruments owned and financial instruments sold, but not yet purchased are stated at fair value based upon quoted market prices, or if not available, are valued by the Company based on internal estimates (see Fair Value above). The Company’s financial instruments pledged to counterparties where the counterparty has the right, by contract or custom, to sell or repledge the financial instruments are reported as financial instruments owned and pledged as collateral in the condensed consolidated statements of financial condition.
Customer Receivables and Payables
Customer securities transactions are recorded on a settlement date basis and customer commodities transactions are recorded on a trade date basis. Receivables from and payables to customers include amounts due on cash and margin transactions, including futures contracts transacted on behalf of customers. Securities owned by customers, including those that collateralize margin loans or other similar transactions, are not reported in the condensed consolidated statements of financial condition. Amounts receivable from customers that are determined by management to be uncollectible are recorded as customer bad debt expense in the condensed consolidated statements of comprehensive income.
Receivables from and Payables to Brokers, Dealers and Clearing Organizations
Receivables from and payables to brokers, dealers and clearing organizations include net receivables and payables from unsettled trades, including amounts related to futures and options on futures contracts executed on behalf of customers, amounts receivable for securities not delivered by the Company to the purchaser by the settlement date (“fails to deliver”) and cash deposits. Payables to brokers, dealers and clearing organizations also include amounts payable for securities not received by the Company from a seller by the settlement date (“fails to receive”).
Investments
The Company makes certain strategic investments related to its business which are included in other assets in the condensed consolidated statements of financial condition. The Company accounts for these investments as follows:
Under the equity method of accounting as required under FASB ASC Topic 323, “Investments -– Equity Method and Joint Ventures.” These investments, including where the investee is a limited partnership or limited liability company, are recorded at the fair value amount of the Company’s initial investment and are adjusted each period for the Company’s share of the investee’s income or loss. Contributions paid to and distributions received from equity method investees are recorded as additions or reductions, respectively, to the respective investment balance.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
At fair value if the investment in equity securities has a readily determinable fair value.
At adjusted cost if the investment does not have a readily determinable fair value. Adjusted cost represents the historical cost, less impairment, if any. If the Company identifies observable price changes in orderly transactions for the identical or a similar investment of the same issuer, the Company measures the equity security at fair value as of the date that the observable transaction occurred in accordance with FASB ASC Topic 321, “Investments in Equity Securities.”
A judgmental aspect of accounting for investments is evaluating whether a decline in the value of an investment has occurred. The evaluation of an impairment is dependent on specific quantitative and qualitative factors and circumstances surrounding an investment, including recurring operating losses, credit defaults and subsequent rounds of financing. Most of the Company’s equity investments do not have readily determinable market values. All investments are reviewed for changes in circumstances or occurrence of events that suggest the Company’s investment may not be recoverable. An impairment loss, if any, is recognized in the period the determination is made.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The table below presents the composition of the Company’s investments for the periods indicated.
March 31, | December 31, | March 31, | December 31, | |||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
(in millions) | (in millions) | |||||||||||
Equity method investments1 | $ | 21 | $ | 22 | $ | 12 | $ | 11 | ||||
Investments in equity securities at adjusted cost2 | 5 | 5 | 10 | 10 | ||||||||
Investments in equity securities at fair value2 | 28 | 36 | 179 | 80 | ||||||||
Investments in exchange memberships and equity securities of certain exchanges2 | 3 | 3 | 3 | 3 | ||||||||
$ | 57 | $ | 66 | $ | 204 | $ | 104 | |||||
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(1)The Company’s share of income or losses is included in other income in the condensed consolidated statements of comprehensive income.
(2)These investments do not qualify for equity method of accounting and the dividends received are included in other income in the condensed consolidated statements of comprehensive income.
Property, Equipment, and Intangible Assets
Property, equipment, and intangible assets, which are included in other assets in the condensed consolidated statements of financial condition, consist of leasehold improvements, computer equipment, software developed for the Company’s internal use, office furniture and equipment.
Property and equipment are recorded at historical cost, less accumulated depreciation and amortization. Additions and improvements that extend the lives of assets are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Depreciation and amortization are computed using the straight-line method. Equipment is depreciated over the estimated useful lives of the assets, while leasehold improvements are amortized over the lesser of the estimated economic useful life of the asset or the term of the lease. Computer equipment is depreciated over three to five years and office furniture and equipment are depreciated over five to seven years. Intangible assets with a finite life are amortized on a straight-line basis over their estimated useful lives of three years, and tested for recoverability whenever events indicate that the carrying amounts may not be recoverable. Qualifying costs for internally developed software are capitalized and amortized over the expected useful life of the developed software, not to exceed three years. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the condensed consolidated statements of financial condition and any resulting gain or loss is recorded in other income in the condensed consolidated statements of comprehensive income. Fully depreciated (or amortized) assets are retired periodically throughout the year.
Leases
The Company reviews all relevant contracts to determine if the contract contains a lease at its inception date. A contract contains a lease if the contract conveys to the company the right to control the use of an underlying asset for a period of time in exchange for consideration. If the Company determines that a contract contains a lease, it recognizes, in the condensed consolidated statements of
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
financial condition, a lease liability and a corresponding right-of-use asset on the commencement date of the lease. The lease liability is initially measured at the present value of the future lease payments over the lease term using the rate implicit in the lease or, if not readily determinable, the Company’s secured incremental borrowing rate. An operating lease right-of-use asset is initially measured at the value of the lease liability minus any lease incentives and initial direct costs incurred plus any prepaid rent.
The Company’s leases are classified as operating leases and consist of real estate leases for office space, data centers and other facilities. Each lease liability is measured using the Company’s secured incremental borrowing rate, which is based on an internally developed yield curve using interest rates of third parties’ corporate debt issued with a similar risk profile as the Company and a duration similar to the lease term. The Company’s leases have remaining terms of one to twelve years, some of which include options to extend the lease term, and some of which include options to terminate the lease upon notice. The Company considers these options when determining the lease term used to calculate the right-of-use asset and the lease liability when the Company is reasonably certain it will exercise such option.
The Company’s operating leases contain both lease components and non-lease components. Non-lease components are distinct elements of a contract that are not related to securing the use of the underlying assets, such as common area maintenance and other management costs. The Company elected to measure the lease liability by combining the lease and non-lease components as a single lease component.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
As such, the Company includes the fixed payments and any payments that depend on a rate or index that relate to the lease and non-lease components in the measurement of the lease liability. Some of the non-lease components are variable in nature and not based on an index or rate, and as a result, are not included in the measurement of the right-of-use asset or lease liability.
Operating lease expense is recognized on a straight-line basis over the lease term and is included in occupancy, depreciation and amortization, expense in the Company’s condensed consolidated statements of comprehensive income.
Comprehensive Income and Foreign Currency Translation
The Company’s operating results are reported in the condensed consolidated statements of comprehensive income pursuant to FASB ASC Topic 220, “Comprehensive Income.”
Comprehensive income consists of two components: net income and other comprehensive income (“OCI”). The Company’s OCI is comprised of gains and losses resulting from translating foreign currency financial statements of non-U.S. subsidiaries, net of related income taxes, where applicable. In general, the practice and intention of the Company is to reinvest the earnings of its non-U.S. subsidiaries in those operations, therefore tax is usually not accrued on OCI.
The Company’s non-U.S. domiciled subsidiaries have a functional currency that is other than the U.S. dollar. Such subsidiaries’ assets and liabilities are translated into U.S. dollars at period-end exchange rates, and revenues and expenses are translated at average exchange rates prevailing during the period. Adjustments that result from translating amounts from a subsidiary’s functional currency to the U.S. dollar (as described above) are reported net of tax, where applicable, in accumulated OCI in the condensed consolidated statements of financial condition.
Revenue Recognition
Commissions
Commissions earned for executing and/or clearing transactions are accrued on a trade date basis and are reported as commissions in the condensed consolidated statements of comprehensive income. Commissions also include payments for order flow income related toreceived from IBKR LiteSM customers.liquidity providers. The Company’s IBKR LiteSM offering provides commission-free trades on U.S. exchange-listed stocks and ETFs and generates no commission revenues from customers on these trades. See Note 8 for further information on revenue from contracts with customers.
Other feesFees and servicesServices
The Company earns fee income on services provided to customers, which includes market data fees, risk exposure fees, payments for order flow from exchange-mandated programs, minimum activity fees, and other fees and services charged to customers. Fee income is recognized either daily or monthly. See Note 8 for further information on revenue from contracts with customers.
Interest Income and Expense
The Company earns interest income and incurs interest expense primarily in connection with its electronic brokerage customer business and its securities lending activities, which are recorded on an accrual basis and are included in interest income and interest expense, respectively, in the condensed consolidated statements of comprehensive income.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Principal Transactions
Principal transactions include gains and losses as a result of changes in the fair value of financial instruments owned, at fair value, financial instruments sold, but not yet purchased, at fair value, and other investments measured at fair value (i.e., unrealized gains and losses) and realized gains and losses related to the Company’s principal transactions. Included are net gains and losses on stocks, options, U.S. and foreign government securities, futures, foreign exchange, precious metals, and other derivative instruments. Dividends are integral to the valuation of stocks. Accordingly, dividends income and expense attributable to financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value, are reported on a net basis in other income in the condensed consolidated statements of comprehensive income.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Foreign Currency Gains and Losses
Foreign currency balances are assets and liabilities in currencies other than the Company’s functional currency. At every reporting date, the Company revalues its foreign currency balances to its functional currency at the spot exchange rate and records the associated foreign currency gains and losses. These foreign currency gains and losses are reported in the condensed consolidated statements of comprehensive income, as follows: (a) foreign currency gains and losses related to the Company’s currency diversification strategy are reported in other income; (b) foreign currency gains and losses arising from currency swap transactions are reported in interest income or interest expense; and (c) all other foreign currency gains and losses are reported in other income.
Rebates
Rebates consist of volume discounts, credits or payments received from exchanges or other market centers related to the placement and/or removal of liquidity from the marketplace and are recorded on an accrual basis. Rebates are recorded net within execution, clearing and distribution fees in the condensed consolidated statements of comprehensive income. Rebates received for trades executed on behalf of customers that elect tiered pricing are passed, in whole or part, to these customers; and such pass-through amounts are recorded net within commissions in the condensed consolidated statements of comprehensive income.
Stock-Based Compensation
The Company follows FASB ASC Topic 718, “Compensation - Stock Compensation” (“ASC Topic 718”), to account for its stock-based compensation plans. ASC Topic 718 requires all share-based payments to employees to be recognized in the consolidated financial statements using a fair value-based method. Grants, which are denominated in U.S. dollars, are communicated to employees in the year of grant, thereby establishing the fair value of each grant. The fair value of awards granted to employees are generally expensed as follows: 50% in the year of grant in recognition of the plans’ post-employment provisions (as described below) and the remaining 50% over the related vesting period utilizing the “graded vesting” method permitted under ASC Topic 718. In the case of “retirement eligible” employees (those employees older than 59), 100% of awards are expensed when granted.
Awards granted under stock-based compensation plans are subject to the plans’ post-employment provisions in the event an employee ceases employment with the Company. The plans provide that employees who discontinue employment with the Company without cause and continue to meet the terms of the plans’ post-employment provisions will be eligible to earn 50% of previously granted but not yet earned awards, unless the employee is over the age of 59, in which case the employee would be eligible to receive 100% of previously granted but not yet earned awards.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income Taxes” (“ASC Topic 740”). The Company’s income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits are based on enacted tax laws (see Note 11) and reflect management’s best assessment of estimated future taxes to be paid. The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. Determining income tax expense requires significant judgment and estimates.
Deferred income tax assets and liabilities arise from temporary differences between the tax and financial statement recognition of underlying assets and liabilities. In evaluating the ability to recover deferred tax assets within the jurisdictions from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, historical results are adjusted for changes in accounting policies and incorporate assumptions including the amount of future state, federal and foreign pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax-planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company is using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, three years of cumulative operating income (loss) are considered. Deferred income taxes have not been provided for
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
U.S. tax liabilities or for additional foreign taxes on the unremitted earnings of foreign subsidiaries that have been indefinitely reinvested.
The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across the Company’s global operations. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future.
The Company records tax liabilities in accordance with ASC Topic 740 and adjusts these liabilities when management’s judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in payments that are different from the current estimates of these tax liabilities. These
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
differences will be reflected as increases or decreases to income tax expense in the period in which new information becomes available.
The Company recognizes a tax benefit from an uncertain tax position only when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. A tax position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement.
The Company recognizes interest related to income tax matters as interest income or interest expense and penalties related to income tax matters as income tax expense in the condensed consolidated statements of comprehensive income.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
FASB Standards Adopted During 2020
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FASB Standards issued but not adopted as of March 31, 2020
2021
Standard | Summary of guidance | Effect on financial statements | ||
Income Taxes (Topic 740) | Simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. | The | ||
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
3. Trading Activities and Related Risks
Trading activities expose the Company to market and credit risks. These risks are managed in accordance with established risk management policies and procedures. To accomplish this, management has established a risk management process that includes:
a regular review of the risk management process by executive management as part of its oversight role;
defined risk management policies and procedures supported by a rigorous analytic framework; and
articulated risk tolerance levels as defined by executive management that are regularly reviewed to ensure that the Company’s risk-taking is consistent with its business strategy, its capital structure, and current and anticipated market conditions.
Market Risk
The Company is exposed to various market risks. Exposures to market risks arise from equity price risk, foreign currency exchange rate fluctuations and changes in interest rates. The Company seeks to mitigate market risk associated with trading inventories by employing hedging strategies that correlate rate, price and spread movements of trading inventories and related financing and hedging activities. The Company uses a combination of cash instruments and exchange traded derivatives to hedge its market exposures. The Company does not apply hedge accounting. The following discussion describes the types of market risk faced:
Equity Price Risk
Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the value of equity securities and other instruments that derive their value from a particular stock, a defined basket of stocks, or a stock index. The Company is subject to equity price risk primarily in financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value. The Company attempts to limit such risks by continuously reevaluating prices and by diversifying its portfolio across many different options, futures and underlying securities and avoiding concentrations of positions based on the same underlying security.
Interest Rate Risk
Interest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments. The Company is exposed to interest rate risk on cash and margin balances, positions carried in equity and fixed income securities, options, futures and on its borrowings. These risks are managed through investment policies and by entering into interest rate futures contracts.
Currency Risk
Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact the value of financial instruments. The Company manages this risk using spot (i.e., cash) currency transactions, currency futures contracts and currency forward contracts. The Company actively manages its currency exposure using a currency diversification strategy that is based on a defined basket of 14 currencies internally referred to as the “GLOBAL.” These strategies minimize the fluctuation of the Company’s net worth as expressed in GLOBALs, thereby diversifying its risk in alignment with these global currencies, weighted by the Company’s view of their importance. As the Company’s financial results are reported in U.S. dollars, the change in the value of the GLOBAL as expressed in U.S. dollars affects the Company’s earnings. The impact of this currency diversification strategy in the Company’s earnings is included in other income in the condensed consolidated statements of comprehensive income.
Interest Rate RiskAs a result of a periodic assessment, effective as of the close of business on June 30, 2020, the Company reduced the number of currencies in the GLOBAL from 14 to 10 and realigned the relative weights of each component to better reflect the global diversification of its business going forward. The Company removed the Danish krone (DKK), the Mexican peso (MXN), the Norwegian krone (NOK) and the Swedish krona (SEK).
Interest rate risk arises from the possibility that changes in interest rates will affect the value
Table of financial instruments. The Company is exposedContents
Interactive Brokers Group, Inc. and Subsidiaries
Notes to interest rate risk on cash and margin balances, positions carried in equity and fixed income securities, options, futures and on its borrowings. These risks are managed through investment policies and by entering into interest rate futures contracts.Unaudited Condensed Consolidated Financial Statements
Credit Risk
The Company is exposed to risk of loss if a customer, counterparty or issuer fails to perform its obligations under contractual terms (“default risk”). Both cash instruments and derivatives expose the Company to default risk. The Company has established policies and procedures for mitigating credit risk on principal transactions, including reviewing and establishing limits for credit exposure, maintaining collateral, and continually assessing the creditworthiness of counterparties.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The Company’s credit risk is limited as contracts entered into are settled directly at securities and commodities clearing houses or are settled through member firms and banks with substantial financial and operational resources. Over-the-counter transactions, such as securities lending and contracts for differences (“CFDs”), are marked to market daily and are conducted with counterparties that have undergone a thorough credit review. The Company seeks to control the risks associated with its customer margin activities by requiring customers to maintain collateral in compliance with regulatory and internal guidelines.
In the normal course of business, the Company executes, settles, and finances various customer securities transactions. Execution of these transactions includes the purchase and sale of securities which exposes the Company to default risk arising from the potential that customers or counterparties may fail to satisfy their obligations. In these situations, the Company may be required to purchase or sell financial instruments at unfavorable market prices to satisfy obligations to customers or counterparties. Liabilities to other brokers and dealers related to unsettled transactions (i.e., securities fails to receive) are recorded at the amount for which the securities were purchased, and are paid upon receipt of the securities from other brokers or dealers. In the case of aged securities fails to receive, the Company may purchase the underlying security in the market and seek reimbursement for any losses from the counterparty.
For cash management purposes, the Company enters into short-term securities purchased under agreements to resell and securities sold under agreements to repurchase transactions (“repos”) in addition to securities borrowing and lending arrangements, all of which may result in credit exposure in the event the counterparty to a transaction is unable to fulfill its contractual obligations. Repos are collateralized by securities with a market value in excess of the obligation under the contract. Similarly, securities lending agreements are collateralized by deposits of cash or securities. The Company attempts to minimize credit risk associated with these activities by monitoring collateral values on a daily basis and requiring additional collateral to be deposited with or returned to the Company as permitted under contractual provisions.
Concentrations of Credit Risk
The Company’s exposure to credit risk associated with its trading and other activities is measured on an individual counterparty basis, as well as by groups of counterparties that share similar attributes. Concentrations of credit risk can be affected by changes in political, industry, or economic factors. To reduce the potential for risk concentration, credit limits are established and exposure is monitored in light of changing counterparty and market conditions. As of March 31, 2020,2021, the Company did not have any material concentrations of credit risk outside the ordinary course of business.
Off-Balance Sheet Risks
The Company may be exposed to a risk of loss not reflected in the condensed consolidated financial statements to settle futures and certain over-the-counter contracts at contracted prices, which may require repurchase or sale of the underlying products in the market at prevailing prices. Accordingly, these transactions result in off-balance sheet risk as the Company’s cost to liquidate such contracts may exceed the amounts reported in the Company’s condensed consolidated statements of financial condition.
4. Equity and Earnings per Share
In connection with IBG, Inc.’s initial public offering of Class A common stock (“IPO”) in May 2007, it purchased 10.0% of the membership interests in IBG LLC from IBG Holdings LLC (“Holdings”), became the sole managing member of IBG LLC and began to consolidate IBG LLC’s financial results into its financial statements. Holdings owns all of IBG, Inc.’s Class B common stock, which has voting rights in proportion to its ownership interests in IBG LLC. The table below presents the amount of IBG LLC membership interests held by IBG, Inc. and Holdings as of March 31, 2020.2021.
IBG, Inc. | Holdings | Total | ||||
Ownership % | 18.5% | 81.5% | 100.0% | |||
Membership interests | 76,759,906 | 338,670,642 | 415,430,548 |
IBG, Inc. | Holdings | Total | ||||
Ownership % | 21.8% | 78.2% | 100.0% | |||
Membership interests | 90,830,444 | 325,960,034 | 416,790,478 |
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
These condensed consolidated financial statements reflect the results of operations and financial position of IBG, Inc., including consolidation of its investment in IBG LLC and its subsidiaries. The noncontrolling interests in IBG LLC attributable to Holdings are reported as a component of total equity in the condensed consolidated statements of financial condition.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Recapitalization and Post-IPO Capital Structure
Immediately prior to and immediately following the consummation of the IPO, IBG, Inc., Holdings, IBG LLC and the members of IBG LLC consummated a series of transactions collectively referred to herein as the “Recapitalization.” In connection with the Recapitalization, IBG, Inc., Holdings and the historical members of IBG LLC entered into an exchange agreement, dated as of May 3, 2007 (the “Exchange Agreement”), pursuant to which the historical members of IBG LLC received membership interests in Holdings in exchange for their membership interests in IBG LLC. Additionally, IBG, Inc. became the sole managing member of IBG LLC.
In connection with the consummation of the IPO, Holdings used the net proceeds to redeem 10.0% of members’ interests in Holdings in proportion to their interests. Immediately following the Recapitalization and IPO, Holdings owned approximately 90% of IBG LLC and 100% of IBG, Inc.’s Class B common stock.
Since consummation of the IPO and Recapitalization, IBG, Inc.’s equity capital structure has been comprised of Class A and Class B common stock. All shares of common stock have a par value of $0.01 per share and have identical rights to earnings and dividends and in liquidation. As of March 31, 20202021 and December 31, 2019,2020, 1,000,000,000 shares of Class A common stock were authorized, of which 76,889,35190,959,889 and 76,889,04090,909,889 shares have been issued; and 76,752,26990,807,181 and 76,750,11090,773,105 shares were outstanding, respectively. Class B common stock is comprised of 100 authorized shares, of which 100 shares were issued and outstanding as of March 31, 20202021 and December 31, 2019,2020, respectively. In addition, 10,000 shares of preferred stock have been authorized, of which 0 shares are issued or outstanding as of March 31, 20202021 and December 31, 2019,2020, respectively.
As a result of a federal income tax election made by IBG LLC applicable to the acquisition of IBG LLC member interests by IBG, Inc., the income tax basis of the assets of IBG LLC acquired by IBG, Inc. have been adjusted based on the amount paid for such interests. Deferred tax assets were recorded as of the IPO date and in connection with subsequent redemptions of Holdings member interests in exchange for common stock. These deferred tax assets are included in other assets in the Company’s condensed consolidated statements of financial condition and are being amortized as additional deferred income tax expense over 15 years from the IPO date and from the additional redemption dates, respectively, as allowable under current tax law. As of March 31, 20202021 and December 31, 2019,2020, the unamortized balance of these deferred tax assets was $110$183 million and $116$190 million, respectively.
IBG, Inc. also entered into an agreement (the “Tax Receivable Agreement”) with Holdings to pay Holdings (for the benefit of the former members of IBG LLC) 85% of the tax savings that IBG, Inc. actually realizes as the result of tax basis increases. These payables to Holdings are reported as payable to affiliate in the Company’s condensed consolidated statements of financial condition. The remaining 15% is accounted for as a permanent increase to additional paid-in capital in the Company’s condensed consolidated statements of financial condition.
The cumulative amounts of deferred tax assets, payables to Holdings and additional paid-in capital arising from stock offerings from the date of the IPO through March 31, 20202021 were $499$585 million, $424$497 million, and $75$88 million, respectively. Amounts payable under the Tax Receivable Agreement are payable to Holdings annually following the filing of IBG, Inc.’s federal income tax return. The Company has paid Holdings a cumulative total of $188$205 million through March 31, 20202021 pursuant to the terms of the Tax Receivable Agreement.
The Exchange Agreement, as amended, provides for future redemptions of member interests and for the purchase of member interests in IBG LLC by IBG, Inc. from Holdings, which could result in IBG, Inc. acquiring the remaining member interests in IBG LLC that it does not own. On an annual basis, members of Holdings are able to request redemption of their interests.
At the time of IBG, Inc.’s IPO in 2007, three hundred sixty (360) million shares of authorized common stock were reserved for future sales and redemptions. From 2008 through 2010, Holdings redeemed 5,013,259 IBG LLC interests with a total value of $114 million, which redemptions were funded using cash on hand at IBG LLC. Upon cash redemption these IBG LLC interests were retired. From 2011 through 2019,2020, IBG, Inc. issued 15,417,15728,127,765 shares of common stock (with a fair value of $506 million)$1.1 billion) directly to Holdings in exchange for an equivalent number of member interests in IBG LLC.
As a consequence of these redemption transactions, and distribution of shares to employees (see Note 10), IBG, Inc.’s interest in IBG LLC has increased to approximately 18.5%, with Holdings owning the remaining 81.5% as of March 31, 2020. The redemptions also resulted in an increase in the Holdings interest held by Mr. Thomas Peterffy and his affiliates from approximately 84.6% at the IPO to approximately 89.6% as of March 31, 2020.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
On July 27, 2020, the Company filed a Prospectus Supplement on Form 424B (File Number 333-240121) with the SEC to register up to 990,000 shares of common stock, offering the opportunity for eligible persons to receive awards in the form of an offer to receive such shares by participating in one or more promotions that are designed to attract new customers to the Company’s brokerage platform, increase assets held with the Company’s brokerage business and enhance customer loyalty. During the quarter ended March 31, 2021, the Company issued 50,000 shares to IBG LLC for distribution to eligible customers of certain of its subsidiaries.
As a consequence of these redemption transactions, and distribution of shares to employees (see Note 10), IBG, Inc.’s interest in IBG LLC has increased to approximately 21.8%, with Holdings owning the remaining 78.2% as of March 31, 2021. The redemptions also resulted in an increase in the Holdings interest held by Mr. Thomas Peterffy and his affiliates from approximately 84.6% at the IPO to approximately 89.6% as of March 31, 2021.
Earnings per Share
Basic earnings per share is calculated utilizing net income available for common stockholders divided by the weighted average number of shares of Class A and Class B common stock outstanding for that period.
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
(in millions, except share or per share amounts) | (in millions, except share or per share amounts) | |||||||||||
Basic earnings per share | ||||||||||||
Net income available for common stockholders | $ | 46 | $ | 49 | $ | 107 | $ | 46 | ||||
Weighted average shares of common stock outstanding | ||||||||||||
Class A | 76,751,068 | 75,100,962 | 90,789,221 | 76,751,068 | ||||||||
Class B | 100 | 100 | 100 | 100 | ||||||||
76,751,168 | 75,101,062 | 90,789,321 | 76,751,168 | |||||||||
Basic earnings per share | $ | 0.60 | $ | 0.65 | $ | 1.18 | $ | 0.60 | ||||
Diluted earnings per share are calculated utilizing the Company’s basic net income available for common stockholders divided by diluted weighted average shares outstanding with no adjustments to net income available to common stockholders for potentially dilutive common shares.
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
(in millions, except share or per share amounts) | (in millions, except share or per share amounts) | |||||||||||
Diluted earnings per share | ||||||||||||
Net income available for common stockholders | $ | 46 | $ | 49 | $ | 107 | $ | 46 | ||||
Weighted average shares of common stock outstanding | ||||||||||||
Class A | ||||||||||||
Issued and outstanding | 76,751,068 | 75,100,962 | 90,789,221 | 76,751,068 | ||||||||
Potentially dilutive common shares | ||||||||||||
Issuable pursuant to employee stock incentive plans | 817,296 | 876,449 | 976,821 | 817,296 | ||||||||
Class B | 100 | 100 | 100 | 100 | ||||||||
77,568,464 | 75,977,511 | 91,766,142 | 77,568,464 | |||||||||
Diluted earnings per share | $ | 0.60 | $ | 0.64 | $ | 1.16 | $ | 0.60 | ||||
Member Distributions and Stockholder Dividends
During the three months ended March 31, 2020,2021, IBG LLC made distributions totaling $65$110 million, to its members, of which IBG, Inc.’s proportionate share was $12$24 million. For the three months endedIn March 31, 2020,2021, the Company paid quarterly cash dividends of $0.10 per share of common stock, totaling $8$9 million.
On April 21, 2020,20, 2021, the Company declared a cash dividend of $0.10 per common share, payable on June 12, 202014, 2021 to stockholders of record as of June 1, 2020.2021.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
5. Comprehensive Income
The table below presents comprehensive income and earnings per share on comprehensive income for the periods indicated.
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
(in millions, except share or per share amounts) | (in millions, except share or per share amounts) | |||||||||||
Comprehensive income available for common stockholders | $ | 39 | $ | 48 | $ | 90 | $ | 39 | ||||
Earnings per share on comprehensive income | ||||||||||||
Basic | $ | 0.51 | $ | 0.65 | $ | 0.99 | $ | 0.51 | ||||
Diluted | $ | 0.51 | $ | 0.64 | $ | 0.98 | $ | 0.51 | ||||
Weighted average common shares outstanding | ||||||||||||
Basic | 76,751,168 | 75,101,062 | 90,789,321 | 76,751,168 | ||||||||
Diluted | 77,568,464 | 75,977,511 | 91,766,142 | 77,568,464 | ||||||||
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
6. Financial Assets and Financial Liabilities
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The tables below present, by level within the fair value hierarchy (see Note 2), financial assets and liabilities, measured at fair value on a recurring basis for the periods indicated. As required by ASC Topic 820, financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the respective fair value measurement.
Financial Assets at Fair Value as of March 31, 2020 | Financial Assets at Fair Value as of March 31, 2021 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Securities segregated for regulatory purposes | $ | 3,229 | $ | — | $ | — | $ | 3,229 | $ | 3,925 | $ | — | $ | — | $ | 3,925 | ||||||||
Financial instruments owned, at fair value | ||||||||||||||||||||||||
Stocks | 254 | — | — | 254 | 545 | — | — | 545 | ||||||||||||||||
Options | 814 | — | — | 814 | 30 | — | — | 30 | ||||||||||||||||
Warrants | — | — | — | — | ||||||||||||||||||||
U.S. and foreign government securities | 28 | — | — | 28 | 55 | — | — | 55 | ||||||||||||||||
Corporate bonds | — | — | 3 | 3 | — | — | 1 | 1 | ||||||||||||||||
Currency forward contracts | — | 103 | — | 103 | ||||||||||||||||||||
Precious metals | — | 9 | — | 9 | ||||||||||||||||||||
Total financial instruments owned, at fair value | 1,096 | 103 | 3 | 1,202 | 630 | 9 | 1 | 640 | ||||||||||||||||
Other assets - other investments at fair value | 28 | — | — | 28 | 179 | — | — | 179 | ||||||||||||||||
Total financial assets at fair value | $ | 4,353 | $ | 103 | $ | 3 | $ | 4,459 | $ | 4,734 | $ | 9 | $ | 1 | $ | 4,744 | ||||||||
Financial Liabilities at Fair Value as of March 31, 2020 | Financial Liabilities at Fair Value as of March 31, 2021 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Financial instruments sold, but not yet purchased, at fair value | ||||||||||||||||||||||||
Stocks | $ | 107 | $ | — | $ | — | $ | 107 | $ | 143 | $ | — | $ | — | $ | 143 | ||||||||
Options | 52 | — | — | 52 | 30 | — | — | 30 | ||||||||||||||||
Currency forward contracts | — | 2 | — | 2 | — | 18 | — | 18 | ||||||||||||||||
Total financial instruments sold, but not yet purchased, at fair value | 159 | 2 | — | 161 | 173 | 18 | — | 191 | ||||||||||||||||
Total financial liabilities at fair value | $ | 159 | $ | 2 | $ | — | $ | 161 | $ | 173 | $ | 18 | $ | — | $ | 191 | ||||||||
Financial Assets at Fair Value as of December 31, 2019 | Financial Assets at Fair Value as of December 31, 2020 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Securities segregated for regulatory purposes | $ | 3,797 | $ | — | $ | — | $ | 3,797 | $ | 4,750 | $ | — | $ | — | $ | 4,750 | ||||||||
Financial instruments owned, at fair value | ||||||||||||||||||||||||
Stocks | 540 | — | — | 540 | 558 | — | 1 | 559 | ||||||||||||||||
Options | 1,333 | — | — | 1,333 | 28 | — | — | 28 | ||||||||||||||||
Warrants | — | — | — | — | ||||||||||||||||||||
U.S. and foreign government securities | 34 | — | — | 34 | 33 | — | — | 33 | ||||||||||||||||
Corporate bonds | — | — | 3 | 3 | — | — | 1 | 1 | ||||||||||||||||
Currency forward contracts | — | 6 | — | 6 | — | 9 | — | 9 | ||||||||||||||||
Total financial instruments owned, at fair value | 1,907 | 6 | 3 | 1,916 | 619 | 9 | 2 | 630 | ||||||||||||||||
Other assets - other investments at fair value | 36 | — | — | 36 | 80 | — | — | 80 | ||||||||||||||||
Total financial assets at fair value | $ | 5,740 | $ | 6 | $ | 3 | $ | 5,749 | $ | 5,449 | $ | 9 | $ | 2 | $ | 5,460 | ||||||||
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Financial Liabilities at Fair Value as of December 31, 2019 | Financial Liabilities at Fair Value as of December 31, 2020 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Financial instruments sold, but not yet purchased, at fair value | ||||||||||||||||||||||||
Stocks | $ | 183 | $ | — | $ | — | $ | 183 | $ | 120 | $ | — | $ | — | $ | 120 | ||||||||
Options | 273 | — | — | 273 | 26 | — | — | 26 | ||||||||||||||||
Currency forward contracts | — | 1 | — | 1 | — | 7 | — | 7 | ||||||||||||||||
Total financial instruments sold, but not yet purchased, at fair value | 456 | 1 | — | 457 | 146 | 7 | — | 153 | ||||||||||||||||
Total financial liabilities at fair value | $ | 456 | $ | 1 | $ | — | $ | 457 | $ | 146 | $ | 7 | $ | — | $ | 153 | ||||||||
Level 3 Financial Assets and Financial Liabilities
The Company’s Level 3 financial assets are comprised of delisted and illiquid securities reported within financial instruments owned, at fair value in the condensed consolidated statements of financial condition. As of March 31, 20202021, Level 3 financial assets included $3$1 million in corporate bonds which were not traded in active markets and were valued by the Company based on internal estimates.
Financial Assets and Liabilities Not Measured at Fair Value
The tables below represent the carrying value, fair value, and fair value hierarchy category of certain financial assets and liabilities that are not recorded at fair value in the Company's condensed consolidated statements of financial condition for the periods indicated. The tables below exclude certain financial instruments such as equity investments and all non-financial assets and liabilities.
March 31, 2020 | March 31, 2021 | |||||||||||||||||||||||||||||
Carrying | Fair | Level 1 | Level 2 | Level 3 | Carrying | Fair | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||
Financial assets, not measured at fair value | ||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 3,101 | $ | 3,101 | $ | 3,101 | $ | — | $ | — | $ | 2,627 | $ | 2,627 | $ | 2,627 | $ | — | $ | — | ||||||||||
Cash - segregated for regulatory purposes | 14,272 | 14,272 | 14,272 | — | — | 21,204 | 21,204 | 21,204 | — | — | ||||||||||||||||||||
Securities - segregated for regulatory purposes | 26,958 | 26,958 | — | 26,958 | — | 21,144 | 21,144 | — | 21,144 | — | ||||||||||||||||||||
Securities borrowed | 3,970 | 3,970 | — | 3,970 | — | 5,708 | 5,708 | — | 5,708 | — | ||||||||||||||||||||
Securities purchased under agreements to resell | 910 | 910 | — | 910 | — | 1,692 | 1,692 | — | 1,692 | — | ||||||||||||||||||||
Receivables from customer | 20,092 | 20,092 | — | 20,092 | — | 42,645 | 42,645 | — | 42,645 | — | ||||||||||||||||||||
Receivables from broker, dealers, and clearing organizations | 1,535 | 1,535 | — | 1,535 | — | 3,368 | 3,368 | — | 3,368 | — | ||||||||||||||||||||
Interest receivable | 113 | 113 | — | 113 | — | 116 | 116 | — | 116 | — | ||||||||||||||||||||
Other assets | 8 | 8 | — | 2 | 6 | 13 | 13 | — | 2 | 11 | ||||||||||||||||||||
Total financial assets, not measured at fair value | $ | 70,959 | $ | 70,959 | $ | 17,373 | $ | 53,580 | $ | 6 | $ | 98,517 | $ | 98,517 | $ | 23,831 | $ | 74,675 | $ | 11 | ||||||||||
Financial liabilities, not measured at fair value | ||||||||||||||||||||||||||||||
Short-term borrowings | $ | 14 | $ | 14 | $ | — | $ | 14 | $ | — | $ | 212 | $ | 212 | $ | — | $ | 212 | $ | — | ||||||||||
Securities loaned | 4,044 | 4,044 | — | 4,044 | — | 11,867 | 11,867 | — | 11,867 | — | ||||||||||||||||||||
Payables to customer | 62,739 | 62,739 | — | 62,739 | — | 81,204 | 81,204 | — | 81,204 | — | ||||||||||||||||||||
Payables to brokers, dealers and clearing organizations | 268 | 268 | — | 268 | — | 310 | 310 | — | 310 | — | ||||||||||||||||||||
Interest payable | 14 | 14 | — | 14 | — | 13 | 13 | — | 13 | — | ||||||||||||||||||||
Total financial liabilities, not measured at fair value | $ | 67,079 | $ | 67,079 | $ | — | $ | 67,079 | $ | — | $ | 93,606 | $ | 93,606 | $ | — | $ | 93,606 | $ | — | ||||||||||
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019 | December 31, 2020 | |||||||||||||||||||||||||||||
Carrying | Fair | Level 1 | Level 2 | Level 3 | Carrying | Fair | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||
Financial assets, not measured at fair value | ||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 2,882 | $ | 2,882 | $ | 2,882 | $ | — | $ | — | $ | 4,292 | $ | 4,292 | $ | 4,292 | $ | — | $ | — | ||||||||||
Cash - segregated for regulatory purposes | 9,400 | 9,400 | 9,400 | — | — | 15,903 | 15,903 | 15,903 | — | — | ||||||||||||||||||||
Securities - segregated for regulatory purposes | 14,027 | 14,027 | — | 14,027 | — | 23,071 | 23,071 | — | 23,071 | — | ||||||||||||||||||||
Securities borrowed | 3,916 | 3,916 | — | 3,916 | — | 4,956 | 4,956 | — | 4,956 | — | ||||||||||||||||||||
Securities purchased under agreements to resell | 3,111 | 3,111 | — | 3,111 | — | 792 | 792 | — | 792 | — | ||||||||||||||||||||
Receivables from customer | 31,304 | 31,304 | — | 31,304 | — | 39,333 | 39,333 | — | 39,333 | — | ||||||||||||||||||||
Receivables from broker, dealers, and clearing organizations | 685 | 685 | — | 685 | — | 1,254 | 1,254 | — | 1,254 | — | ||||||||||||||||||||
Interest receivable | 158 | 158 | — | 158 | — | 104 | 104 | — | 104 | — | ||||||||||||||||||||
Other assets | 9 | 9 | — | 3 | 6 | 13 | 13 | — | 2 | 11 | ||||||||||||||||||||
Total financial assets, not measured at fair value | $ | 65,492 | $ | 65,492 | $ | 12,282 | $ | 53,204 | $ | 6 | $ | 89,718 | $ | 89,718 | $ | 20,195 | $ | 69,512 | $ | 11 | ||||||||||
Financial liabilities, not measured at fair value | ||||||||||||||||||||||||||||||
Short-term borrowings | $ | 16 | $ | 16 | $ | — | $ | 16 | $ | — | $ | 118 | $ | 118 | $ | — | $ | 118 | $ | — | ||||||||||
Securities loaned | 4,410 | 4,410 | — | 4,410 | — | 9,838 | 9,838 | — | 9,838 | — | ||||||||||||||||||||
Securities sold under agreements to repurchase | 1,909 | 1,909 | — | 1,909 | — | |||||||||||||||||||||||||
Payables to customer | 56,248 | 56,248 | — | 56,248 | — | 75,882 | 75,882 | — | 75,882 | — | ||||||||||||||||||||
Payables to brokers, dealers and clearing organizations | 220 | 220 | — | 220 | — | 182 | 182 | — | 182 | — | ||||||||||||||||||||
Interest payable | 29 | 29 | — | 29 | — | 6 | 6 | — | 6 | — | ||||||||||||||||||||
Total financial liabilities, not measured at fair value | $ | 62,832 | $ | 62,832 | $ | — | $ | 62,832 | $ | — | $ | 86,026 | $ | 86,026 | $ | — | $ | 86,026 | $ | — | ||||||||||
Netting of Financial Assets and Financial Liabilities
The Company’s policy is to net securities borrowed and securities loaned, and securities purchased under agreements to resell and securities sold under agreements to repurchase that meet the offsetting requirements prescribed in ASC Topic 210-20. In the tables below, the amounts of financial instruments that are not offset in the condensed consolidated statements of financial condition, but could be netted against cash or financial instruments with specific counterparties under master netting agreements, according to the terms of the agreements, including clearing houses (exchange traded options, warrants and discount certificates) or over the counter currency forward contract counterparties, are presented to provide financial statement readers with the Company’s net payable or receivable with counterparties for these financial instruments.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The tables below present the netting of financial assets and of financial liabilities for the periods indicated.
March 31, 2020 | March 31, 2021 | |||||||||||||||||||||||||||||||||
Gross | Amounts | Net Amounts | Amounts Not Offset | Gross | Amounts | Net Amounts | Amounts Not Offset | |||||||||||||||||||||||||||
Amounts | Offset in the | Presented in | in the Condensed | Amounts | Offset in the | Presented in | in the Condensed | |||||||||||||||||||||||||||
of Financial | Condensed | the Condensed | Consolidated Statement | of Financial | Condensed | the Condensed | Consolidated Statements | |||||||||||||||||||||||||||
Assets and | Consolidated | Consolidated | of Financial Condition | Assets and | Consolidated | Consolidated | of Financial Condition | |||||||||||||||||||||||||||
Liabilities | Statement of | Statement of | Cash or Financial | Liabilities | Statements of | Statements of | Cash or Financial | |||||||||||||||||||||||||||
Recognized | Financial Condition | 2 | Financial Condition | Instruments | Net Amount | Recognized | Financial Condition | 2 | Financial Condition | Instruments | Net Amount | |||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||||
Offsetting of financial assets | ||||||||||||||||||||||||||||||||||
Securities segregated for regulatory purposes - purchased under agreements to resell | $ | 26,958 | 1 | $ | — | $ | 26,958 | $ | (26,958) | $ | — | $ | 21,144 | 1 | $ | — | $ | 21,144 | $ | (21,144) | $ | — | ||||||||||||
Securities borrowed | 3,970 | — | 3,970 | (3,820) | 150 | 5,708 | — | 5,708 | (5,510) | 198 | ||||||||||||||||||||||||
Securities purchased under agreements to resell | 910 | — | 910 | (910) | — | 1,692 | — | 1,692 | (1,692) | — | ||||||||||||||||||||||||
Financial instruments owned, at fair value | ||||||||||||||||||||||||||||||||||
Options | 814 | — | 814 | (52) | 762 | 30 | — | 30 | (28) | 2 | ||||||||||||||||||||||||
Currency forward contracts | 103 | — | 103 | — | 103 | |||||||||||||||||||||||||||||
Total | $ | 32,755 | $ | — | $ | 32,755 | $ | (31,740) | $ | 1,015 | $ | 28,574 | $ | — | $ | 28,574 | $ | (28,374) | $ | 200 | ||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||||
Offsetting of financial liabilities | ||||||||||||||||||||||||||||||||||
Securities loaned | $ | 4,044 | $ | — | $ | 4,044 | $ | (3,665) | $ | 379 | $ | 11,867 | $ | — | $ | 11,867 | $ | (11,476) | $ | 391 | ||||||||||||||
Financial instruments sold, but not yet purchased, at fair value | ||||||||||||||||||||||||||||||||||
Options | 52 | — | 52 | (52) | — | 30 | — | 30 | (28) | 2 | ||||||||||||||||||||||||
Currency forward contracts | 2 | — | 2 | — | 2 | 18 | — | 18 | — | 18 | ||||||||||||||||||||||||
Total | $ | 4,098 | $ | — | $ | 4,098 | $ | (3,717) | $ | 381 | $ | 11,915 | $ | — | $ | 11,915 | $ | (11,504) | $ | 411 | ||||||||||||||
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019 | December 31, 2020 | |||||||||||||||||||||||||||||||||
Gross | Amounts | Net Amounts | Amounts Not Offset | Gross | Amounts | Net Amounts | Amounts Not Offset | |||||||||||||||||||||||||||
Amounts | Offset in the | Presented in | in the Condensed | Amounts | Offset in the | Presented in | in the Condensed | |||||||||||||||||||||||||||
of Financial | Condensed | the Condensed | Consolidated Statement | of Financial | Condensed | the Condensed | Consolidated Statements | |||||||||||||||||||||||||||
Assets and | Consolidated | Consolidated | of Financial Condition | Assets and | Consolidated | Consolidated | of Financial Condition | |||||||||||||||||||||||||||
Liabilities | Statement of | Statement of | Cash or Financial | Liabilities | Statements of | Statements of | Cash or Financial | |||||||||||||||||||||||||||
Recognized | Financial Condition | 2 | Financial Condition | Instruments | Net Amount | Recognized | Financial Condition | 2 | Financial Condition | Instruments | Net Amount | |||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||||
Offsetting of financial assets | ||||||||||||||||||||||||||||||||||
Securities segregated for regulatory purposes - purchased under agreements to resell | $ | 14,027 | 1 | $ | — | $ | 14,027 | $ | (14,027) | $ | — | $ | 23,071 | 1 | $ | — | $ | 23,071 | $ | (23,071) | $ | — | ||||||||||||
Securities borrowed | 3,916 | — | 3,916 | (3,765) | 151 | 4,956 | — | 4,956 | (4,716) | 240 | ||||||||||||||||||||||||
Securities purchased under agreements to resell | 3,111 | — | 3,111 | (3,111) | — | 792 | — | 792 | (792) | — | ||||||||||||||||||||||||
Financial instruments owned, at fair value | ||||||||||||||||||||||||||||||||||
Options | 1,333 | — | 1,333 | (267) | 1,066 | 28 | — | 28 | (25) | 3 | ||||||||||||||||||||||||
Currency forward contracts | 6 | — | 6 | — | 6 | 9 | — | 9 | — | 9 | ||||||||||||||||||||||||
Total | $ | 22,393 | $ | — | $ | 22,393 | $ | (21,170) | $ | 1,223 | $ | 28,856 | $ | — | $ | 28,856 | $ | (28,604) | $ | 252 | ||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||||
Offsetting of financial liabilities | ||||||||||||||||||||||||||||||||||
Securities loaned | $ | 4,410 | $ | — | $ | 4,410 | $ | (4,186) | $ | 224 | $ | 9,838 | $ | — | $ | 9,838 | $ | (9,246) | $ | 592 | ||||||||||||||
Securities sold under agreements to repurchase | 1,909 | — | 1,909 | (1,909) | — | |||||||||||||||||||||||||||||
Financial instruments sold, but not yet purchased, at fair value | ||||||||||||||||||||||||||||||||||
Options | 273 | — | 273 | (267) | 6 | 26 | — | 26 | (25) | 1 | ||||||||||||||||||||||||
Currency forward contracts | 1 | — | 1 | — | 1 | 7 | — | 7 | — | 7 | ||||||||||||||||||||||||
Total | $ | 6,593 | $ | — | $ | 6,593 | $ | (6,362) | $ | 231 | $ | 9,871 | $ | — | $ | 9,871 | $ | (9,271) | $ | 600 | ||||||||||||||
________________________
(1)As of March 31, 20202021 and December 31, 2019,2020, the Company had $27.0$21.1 billion and $14.0$23.1 billion, respectively, of securities purchased under agreements to resell that were segregated to satisfy regulatory requirements. These securities are included in “Securities - segregated for regulatory purposes” in the condensed consolidated statements of financial condition.
(2)The Company did not have any balances eligible for netting in accordance with ASC Topic 210-20 at March 31, 20202021 and December 31, 2019.2020.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Secured Financing Transactions – Maturities and Collateral Pledged
The tables below present gross obligations for securities loaned transactions by remaining contractual maturity and class of collateral pledged for the periods indicated.
March 31, 2020 | |||||||||||||||
Remaining Contractual Maturity | |||||||||||||||
Overnight | Less than | 30 – 90 | Over 90 | ||||||||||||
and Open | 30 days | days | days | Total | |||||||||||
(in millions) | |||||||||||||||
Securities loaned | |||||||||||||||
Stocks | $ | 3,991 | $ | — | $ | — | $ | — | $ | 3,991 | |||||
Corporate bonds | 53 | — | — | — | 53 | ||||||||||
Total | $ | 4,044 | $ | — | $ | — | $ | — | $ | 4,044 | |||||
December 31, 2019 | March 31, 2021 | |||||||||||||||||||||||||||||
Remaining Contractual Maturity | Remaining Contractual Maturity | |||||||||||||||||||||||||||||
Overnight | Less than | 30 – 90 | Over 90 | Overnight | Less than | 30 – 90 | Over 90 | |||||||||||||||||||||||
and Open | 30 days | days | days | Total | and Open | 30 days | days | days | Total | |||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||
Securities loaned | ||||||||||||||||||||||||||||||
Stocks | $ | 4,356 | $ | — | $ | — | $ | — | $ | 4,356 | $ | 11,831 | $ | — | $ | — | $ | — | $ | 11,831 | ||||||||||
Corporate bonds | 54 | — | — | — | 54 | 36 | — | — | — | 36 | ||||||||||||||||||||
Total securities loaned | 4,410 | — | — | — | 4,410 | $ | 11,867 | $ | — | $ | — | $ | — | $ | 11,867 | |||||||||||||||
Securities sold under agreements to repurchase | ||||||||||||||||||||||||||||||
U.S. government securities | 1,909 | — | — | — | 1,909 | |||||||||||||||||||||||||
Total | $ | 6,319 | $ | — | $ | — | $ | — | $ | 6,319 | ||||||||||||||||||||
December 31, 2020 | |||||||||||||||
Remaining Contractual Maturity | |||||||||||||||
Overnight | Less than | 30 – 90 | Over 90 | ||||||||||||
and Open | 30 days | days | days | Total | |||||||||||
(in millions) | |||||||||||||||
Securities loaned | |||||||||||||||
Stocks | $ | 9,811 | $ | — | $ | — | $ | — | $ | 9,811 | |||||
Corporate bonds | 27 | — | — | — | 27 | ||||||||||
Total securities loaned | $ | 9,838 | $ | — | $ | — | $ | — | $ | 9,838 | |||||
7. Collateralized Transactions
The Company enters into securities borrowing and lending transactions and agreements to repurchase and resell securities to finance trading inventory, to obtain securities for settlement and to earn residual interest rate spreads. In addition, the Company’s customers pledge their securities owned to collateralize margin loans. Under these transactions, the Company either receives or provides collateral, including equity, corporate debt and U.S. government securities. Under typical agreements, the Company is permitted to sell or repledge securities received as collateral and use these securities to secure securities purchased under agreements to resell, enter into securities lending transactions or deliver these securities to counterparties to cover short positions.
The Company also engages in securities financing transactions with and for customers through margin lending. Customer receivables generated from margin lending activity are collateralized by customer-owned securities held by the Company. Customers’ required margin levels and established credit limits are monitored continuously by risk management staff using automated systems. Pursuant to the Company’s policy and as enforced by such systems, customers are required to deposit additional collateral or reduce positions, when necessary, to avoid automatic liquidation of their positions.
Margin loans are extended to customers on a demand basis and are not committed facilities. Factors considered in the acceptance or rejection of margin loans are the amount of the loan, the degree of leverage being employed in the customer account and an overall evaluation of the customer’s portfolio to ensure proper diversification or, in the case of concentrated positions, appropriate liquidity of the underlying collateral. Additionally, transactions relating to concentrated or restricted positions are limited or prohibited by raising the level of required margin collateral (to 100% in the extreme case). Underlying collateral for margin loans is evaluated with respect to the liquidity of the collateral positions, valuation of securities, volatility analysis and an evaluation of industry concentrations. Adherence to the Company’s collateral policies significantly limits the Company’s credit exposure to margin loans in the event of a customer’s default. Under margin lending agreements, the Company may request additional margin collateral from customers and may sell securities that have not been paid for or purchase securities sold but not delivered from customers, if necessary. As of March 31, 20202021 and December 31, 2019,2020, approximately $20.1$42.6 billion and $31.3$39.3 billion, respectively, of customer margin loans were outstanding.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The table below presents a summary of the amounts related to collateralized transactions for the periods indicated.
March 31, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | |||||||||||||||||||||
Permitted | Sold or | Permitted | Sold or | Permitted | Sold or | Permitted | Sold or | |||||||||||||||||
to Repledge | Repledged | to Repledge | Repledged | to Repledge | Repledged | to Repledge | Repledged | |||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Securities lending transactions | $ | 26,764 | $ | 3,636 | $ | 31,994 | $ | 3,944 | $ | 79,831 | $ | 5,547 | $ | 64,436 | $ | 4,859 | ||||||||
Securities purchased under agreements to resell transactions 1 | 27,886 | 27,886 | 17,185 | 16,627 | 22,809 | 22,721 | 23,859 | 23,832 | ||||||||||||||||
Customer margin assets | 20,989 | 6,531 | 34,156 | 11,189 | 52,453 | 15,194 | 47,609 | 14,182 | ||||||||||||||||
$ | 75,639 | $ | 38,053 | $ | 83,335 | $ | 31,760 | $ | 155,093 | $ | 43,462 | $ | 135,904 | $ | 42,873 | |||||||||
________________________
(1)As of March 31, 2020, $27.02021, $21.1 billion or 97%93% (as of December 31, 2019, $14.02020, $23.1 billion or 84%97%) of securities acquired through agreements to resell that are shown as repledged have been deposited in a separate bank account for the exclusive benefit of customers in accordance with SEC Rule 15c3-3.
In the normal course of business, the Company pledges qualified securities with clearing organizations to satisfy daily margin and clearing fund requirements. As of March 31, 20202021 and December 31, 2019,2020, the majority of the Company’s U.S. and foreign government securities owned were pledged to clearing organizations.
The table below presents financial instruments owned and pledged as collateral, including amounts pledged to affiliates, where the counterparty has the right to repledge, for the periods indicated.
March 31, | December 31, | March 31, | December 31, | |||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
(in millions) | (in millions) | |||||||||||
Stocks | $ | 57 | $ | 128 | $ | 17 | $ | 53 | ||||
U.S. and foreign government securities | 28 | 33 | 35 | 33 | ||||||||
$ | 85 | $ | 161 | $ | 52 | $ | 86 | |||||
8. Revenues from Contracts with Customers
Revenue from contracts with customers is recognized when, or as, the Company satisfies its performance obligations by transferring the promised services to the customers. A service is transferred to a customer when, or as, the customer obtains control of that service. A performance obligation may be satisfied at a point in time or over time. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that the Company determines the customer obtains control over the promised service. Revenue from a performance obligation satisfied over time is recognized by measuring the Company’s progress in satisfying the performance obligation in a manner that depicts the transfer of the services to the customer. The amount of revenue recognized reflects the consideration the Company expects to receive in exchange for those promised services (i.e., the “transaction price”). In determining the transaction price, the Company considers multiple factors, including the effects of variable consideration, if any.
The Company’s revenues from contracts with customers are recognized when the performance obligations are satisfied at an amount that reflects the consideration expected to be received in exchange for such services. The majority of the Company’s performance obligations are satisfied at a point in time and are typically collected from customers by debiting their brokerage account with the Company.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Nature of Services
The Company’s main sources of revenues from contracts with customers are as follows:
-Commissions are charged to customers for order execution services and trade clearing and settlement services. These services represent a single performance obligation as the services are not separately identifiable in the context of the contract. The Company recognizes revenue at a point in time at the execution of the order (i.e., trade date). Commissions are generally collected from cleared customers on trade date and from non-cleared customers monthly. Commissions also include payments for order flow received from IBKR LiteSM liquidity providers.
-Market data fees are charged to customers for market data services to which they subscribe that the Company delivers. The Company recognizes revenue monthly as the performance obligation is satisfied over time by continually providing market data for the period. Market data fees are collected monthly, generally in advance.
-Risk exposure fees are charged to customers who carry positions with market risk that exceeds defined thresholds. The Company recognizes revenue daily as the performance obligation is satisfied at a point in time by the Company taking on additional risk of account liquidation and potential losses due to insufficient margin. Risk exposure fees are collected daily.
-Payments for order flow are earned from various options exchanges based upon options trading volume originated by the Company that meets certain criteria. The Company recognizes revenue daily as the performance obligation is satisfied at a point in time on customer orders that qualify for payments subject to exchange-mandated programs. Payments for order flow are collected monthly, in arrears.
-Minimum activity fees are charged to customers that do not generate the required minimum monthly commission. The Company recognizes revenue monthly as the performance obligation is satisfied at a point in time by servicing customer accounts that do not generate the required minimum monthly commissions. Minimum activity fees are collected monthly, in arrears.
The Company also earns revenues from other services, including order cancelation or modification fees, position transfer fees, telecommunications fees, withdrawal fees, and bank sweep program fees, among others.
Disaggregation of Revenue
The tables below present revenue from contracts with customers by geographic location, and major types of services for the periods indicated.
Three Months Ended March 31 | |||||||
2020 | 2019 | ||||||
(in millions) | |||||||
Geographic location 1 | |||||||
United States | $ | 197 | $ | 148 | |||
International | 110 | 60 | |||||
$ | 307 | $ | 208 | ||||
Major types of services | |||||||
Commissions | $ | 269 | $ | 173 | |||
Market data fees 2 | 13 | 12 | |||||
Risk exposure fees 2 | 4 | 4 | |||||
Payments for order flow 2 | 7 | 5 | |||||
Minimum activity fees 2 | 6 | 7 | |||||
Other 2 | 8 | 7 | |||||
$ | 307 | $ | 208 | ||||
_____________________________
(1)
Based on the location of the subsidiaries in which the revenues are recorded.
(2)Included in other fees and services in the condensed consolidated statements of comprehensive income.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Disaggregation of Revenue
The tables below present revenue from contracts with customers by geographic location, and major types of services for the periods indicated.
Three Months Ended March 31, | ||||||
2021 | 2020 | |||||
(in millions) | ||||||
Geographic location 1 | ||||||
United States | $ | 285 | $ | 197 | ||
International | 183 | 110 | ||||
$ | 468 | $ | 307 | |||
Major types of services | ||||||
Commissions | $ | 412 | $ | 269 | ||
Market data fees 2 | 19 | 13 | ||||
Risk exposure fees 2 | 5 | 4 | ||||
Payments for order flow 2 | 10 | 7 | ||||
Minimum activity fees 2 | 7 | 6 | ||||
Other 2 | 15 | 8 | ||||
$ | 468 | $ | 307 | |||
_____________________________
(1)Based on the location of the subsidiaries in which the revenues are recorded.
(2)Included in other fees and services in the condensed consolidated statements of comprehensive income.
Receivables and Contract Balances
Receivables arise when the Company has an unconditional right to receive payment under a contract with a customer and are derecognized when the cash is received. Receivables of $11$16 million and $10$13 million, as of March 31, 20202021 and December 31, 2019,2020, respectively, are reported in other assets in the condensed consolidated statements of financial condition.
Contract assets arise when the revenue associated with the contract is recognized prior to the Company’s unconditional right to receive payment under a contract with a customer (i.e., unbilled receivable) and are derecognized when either it becomes a receivable or the cash is received. Contract assets are reported in other assets in the condensed consolidated statements of financial condition. As of March 31, 20202021 and December 31, 2019,2020, contract asset balances were not material.
Contract liabilities arise when customers remit contractual cash payments in advance of the Company satisfying its performance obligations under the contract and are derecognized when the revenue associated with the contract is recognized either when a milestone is met triggering the contractual right to bill the customer or when the performance obligation is satisfied. Contract liabilities are reported in accounts payable, accrued expenses and other liabilities in the condensed consolidated statements of financial condition. As of March 31, 20202021 and December 31, 2019,2020, contract liability balances were not material.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
9. Other Income
The table below presents the components of other income for the periods indicated.
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
(in millions) | (in millions) | |||||||||||
Principal transactions | $ | 10 | $ | 123 | $ | 120 | $ | 10 | ||||
Gains (losses) from currency diversification strategy, net | (49) | (19) | (2) | (49) | ||||||||
Other, net | 8 | — | 2 | 8 | ||||||||
$ | (31) | $ | 104 | $ | 120 | $ | (31) | |||||
Principal transactions include (1) trading gains and losses from the Company’s remaining market making activities; (2) realized and unrealized gains and losses on financial instruments that (a) are held for purposes other than the Company’s market making activities, (b) are subject to restrictions, or (c) are accounted for under the equity method; and (3) dividends on investments accounted at cost less impairment.
10. Employee Incentive Plans
Defined Contribution Plan
The Company offers substantially all employees of U.S.-based operating subsidiaries who have met minimum service requirements the opportunity to participate in defined contribution retirement plans qualifying under the provisions of Section 401(k) of the Internal Revenue Code. The general purpose of this plan is to provide employees with an incentive to make regular savings in order to provide additional financial security during retirement. This plan provides for the Company to match 50% of the employees’ pre-tax contribution, up to a maximum of 10% of eligible earnings. The employee is vested in the matching contribution incrementally over six years of service. Included in employee compensation and benefits expenses in the condensed consolidated statements of comprehensive income werewas $1 million of plan contributions for each of the three months ended March 31, 20202021 and 2019.2020.
2007 Stock Incentive Plan
Under the Company’s Stock Incentive Plan, up to 30 million shares of the Company’s Class A common stock may be issued to satisfy vested restricted stock units granted to directors, officers, employees, contractors and consultants of the Company. The purpose of the Stock Incentive Plan is to promote the Company’s long-term financial success by attracting, retaining and rewarding eligible participants.
As a result of the Company’s organizational structure, a description of which can be found in “Business – Our Organizational Structure” in Part I, Item 1 of the Company’s Annual Report on Form 10-K, there is no material dilutive effect upon ownership of common stockholders of issuing shares under the Stock Incentive Plan. The issuances do not dilute the book value of the ownership of common stockholders since the restricted stock units are granted at market value, and upon their vesting and the related issuance of shares of
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
common stock, the ownership of IBG, Inc. in IBG LLC, increases proportionately to the shares issued. As a result of such proportionate increase in share ownership, the dilution upon issuance of common stock is borne by IBG LLC’s majority member (i.e., noncontrolling interest), Holdings, and not by IBG, Inc. or its common stockholders. Additionally, dilution of earnings that may take place after issuance of common stock is reflected in EPS reported in the Company’s financial statements. The EPS dilution can be neither estimated nor projected, but historically it has not been material.
The Stock Incentive Plan is administered by the Compensation Committee of the Company’s Board of Directors. The Compensation Committee has discretionary authority to determine the eligibility to participate in the Stock Incentive Plan and establishes the terms and conditions of the awards, including the number of awards granted to each participant and all other terms and conditions applicable to such awards in individual grant agreements. Awards are expected to be made primarily through grants of restricted stock units. Stock Incentive Plan awards are subject to issuance over time. All previously granted but not yet earned awards may be cancelled by the Company upon the participant’s termination of employment or violation of certain applicable covenants prior to issuance, unless determined otherwise by the Compensation Committee.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The Stock Incentive Plan provides that, upon a change in control, the Compensation Committee may, at its discretion, fully vest any granted but not yet earned awards under the Stock Incentive Plan, or provide that any such granted but not yet earned awards will be honored or assumed, or new rights substituted by the new employer on a substantially similar basis and on terms and conditions substantially comparable to those of the Stock Incentive Plan.
The Company expects to continue to grant awards on or about December 31 of each year to eligible participants as part of an overall plan of equity compensation. Restricted stock units vest and become distributable to participants in accordance with the following schedule:
•10% on the first vesting date, which is on or about May 9 of each year; and
•an additional 15% on each of the following six anniversaries of the first vesting, assuming continued employment with the Company and compliance with non-competition and other applicable covenants.
Awards granted to external directors vest, and are distributed, over a five-year period (20% per year) commencing one year after the date of grant. A total of 27,24529,709 restricted stock units have been granted to the external directors cumulatively since the plan’s inception.
The table below presents Stock Incentive Plan awards granted and the related fair values since the plan’s inception.
Fair Value at | Fair Value at | |||||||||
Date of Grant | Date of Grant | |||||||||
Units | ($ millions) | Units | ($ millions) | |||||||
Prior periods (since inception) | 23,551,137 | $ | 504 | 24,497,626 | $ | 561 | ||||
December 31, 2017 | 946,489 | 57 | ||||||||
December 31, 2018 | 1,146,267 | 62 | 1,146,267 | 62 | ||||||
December 31, 2019 | 1,374,217 | 1 | 65 | 1,374,217 | 65 | |||||
December 31, 2020 | 1,227,433 | 1 | 70 | |||||||
27,018,110 | $ | 688 | 28,245,543 | $ | 758 | |||||
______________________________
(1)Stock Incentive Plan number of granted restricted stock units related to 20192020 was adjusted by 3435,290 additional restricted stock units during the three months ended March 31, 2020.2021.
Estimated future grants under the Stock Incentive Plan are accrued for ratably during each year (see Note 2). In accordance with the vesting schedule, outstanding awards vest and are distributed to participants yearly on or about May 9 of each year. At the end of each year, no vested awards remain undistributed.
Compensation expense related to the Stock Incentive Plan recognized in the condensed consolidated statements of comprehensive income was $17 million and $16 million for both the three months ended March 31, 20202021 and 2019,2020, respectively. Estimated future compensation costs for unvested awards, net of credits for cancelled awards, as of March 31, 20202021 are $36$37 million.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The table below summarizes the Stock Incentive Plan activity for the periods indicated.
Stock | |||
Incentive Plan | |||
Units | |||
Balance, December 31, |
| ||
Granted | — | ||
Cancelled |
| ||
Distributed |
| ||
Balance, March 31, |
|
_____________________________
(1)Stock Incentive Plan number of granted restricted stock units related to 20192020 was adjusted by 3435,290 additional restricted stock units during the three months ended March 31, 2020.2021.
Awards previously granted but not yet earned under the stock plans are subject to the plans’ post-employment provisions in the event a participant ceases employment with the Company. Through March 31, 2020,2021, a total of 978,2151,067,719 restricted stock units have been distributed under these post-employment provisions. These distributions are included in the table above.
11. Income Taxes
Income tax expense for the three months ended March 31, 20202021 and 20192020 differs from the U.S. federal statutory rate primarily due to the taxation treatment of income attributable to noncontrolling interests in IBG LLC. These noncontrolling interests are held directly through a U.S. partnership. Accordingly, the income attributable to these noncontrolling interests is reported in the condensed consolidated statements of comprehensive income, but the related U.S. income tax expense attributable to these noncontrolling interests is not reported by the Company as it is generally the obligation of the noncontrolling interests. Income tax expense is also affected by the differing effective tax rates in foreign, state and local jurisdictions where certain of the Company’s subsidiaries are subject to corporate taxation.
Deferred income taxes arise primarily due to the amortization of the deferred tax assets recognized in connection with the common stock offerings (see Note 4), differences in the valuation of financial assets and liabilities, and for other temporary differences arising from the deductibility of compensation and depreciation expenses in different time periods for accounting and income tax return purposes.
As of and for the three months ended March 31, 20202021 and 2019,2020, the Company had no material valuation allowances on deferred tax assets.
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. As of March 31, 2020,2021, the Company is no longer subject to U.S. Federal and State income tax examinations for tax years prior to 2014,2015, and to non-U.S. income tax examinations for tax years prior to 2009.2011.
As of March 31, 2020, accumulated earnings held by non-U.S. subsidiaries totaled $1.3 billion (as of December 31, 2019 $1.3 billion). Of this amount, approximately $0.2 billion (as of December 31, 2019 $0.2 billion) is attributable to earnings of the Company’s foreign subsidiaries that are considered “pass-through” entities for U.S. income tax purposes. Since the Company accounts for U.S. income taxes on these earnings on a current basis, no additional U.S. tax consequences would result from the repatriation of these earnings other than that which would be due arising from currency fluctuations between the time the earnings are reported for U.S. tax purposes and when they are remitted. With respect to certain of these subsidiaries’ accumulated earnings, approximately $0.2 billion and $0.2 billion as of March 31, 2020 and December 31, 2019, respectively, would result in additional foreign taxes in the form of dividend withholding tax imposed on the recipient of the distribution or dividend distribution tax imposed on the payor of the distribution upon repatriation. The Company has not provided for its proportionate share of additional foreign taxes or deferred U.S. tax on cumulative translation adjustments associated with certain foreign pass-through entities as it does not intend to repatriate these earnings in the foreseeable future.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
12. Leases
All of the Company’s leases are classified as operating leases and primarily consist of real estate leases for corporate offices, data centers, and other facilities. As of March 31, 2020,2021, the weighted-average remaining lease term on these leases is approximately 8 years and the weighted-average discount rate used to measure the lease liabilities is approximately 4.10%4.03%. For the three months ended March 31, 2020,2021, right-of-use assets obtained under new operating leases were $1$2 million. The Company’s lease agreements do not contain any residual value guarantees, restrictions or covenants.
The table below presents balances reported in the condensed consolidated statements of financial condition related to the Company’s leases for the period indicated.
March 31, | December 31, | ||||||||||||
March 31, 2020 | December 31, 2019 | 2021 | 2020 | ||||||||||
(in millions) | (in millions) | ||||||||||||
Right-of-use assets1 | $ | 114 | $ | 118 | $ | 98 | $ | 101 | |||||
Lease liabilities1 | $ | 121 | $ | 124 | $ | 116 | $ | 120 | |||||
__________________________
(1)Right-of-use assets are included in other assets and lease liabilities are included in accounts payable, accrued expenses and other liabilities in the Company’s condensed consolidated statements of financial condition.
The table below presents balances reported in the condensed consolidated statements of comprehensive income related to the Company’s leases for the period indicated.
Three Months Ended March 31, | Three Months Ended March 31, | ||||||||||||
2020 | 2019 | 2021 | 2020 | ||||||||||
(in millions) | (in millions) | ||||||||||||
Operating lease cost | $ | 6 | $ | 6 | $ | 7 | $ | 6 | |||||
Variable lease cost | 1 | 1 | 1 | 1 | |||||||||
Total lease cost | $ | 7 | $ | 7 | $ | 8 | $ | 7 | |||||
The tablestable below reconcilereconciles the undiscounted cash flows of the Company’s leases to the present value of its operating lease payments for the periods indicated.
March 31, 2020 | March 31, 2021 | |||||
(in millions) | (in millions) | |||||
2020 (remaining) | $ | 15 | ||||
2021 | 17 | |||||
2021 (remaining) | $ | 17 | ||||
2022 | 17 | 20 | ||||
2023 | 15 | 17 | ||||
2024 | 13 | 14 | ||||
2025 | 13 | 14 | ||||
2026 | 14 | |||||
Thereafter | 56 | 41 | ||||
Total undiscounted operating lease payments | 146 | 137 | ||||
Less: imputed interest | (25) | (21) | ||||
Present value of operating lease liabilities | $ | 121 | $ | 116 | ||
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019 | |||
Year | (in millions) | ||
2020 | $ | 19 | |
2021 | 17 | ||
2022 | 17 | ||
2023 | 15 | ||
2024 | 13 | ||
Thereafter | 69 | ||
Total undiscounted operating lease payments | 150 | ||
Less: imputed interest | (26) | ||
Present value of operating lease liabilities | $ | 124 | |
13. Commitments, Contingencies and Guarantees
Claims Against Customers
Over an extended period in 2018, a small number of the Company’s customers had taken relatively large positions in a security listed on a major U.S. exchange. The Company extended margin loans against the security at a conservatively high collateral requirement. In December 2018, within a very short timeframe, this security lost a substantial amount of its value. During the quarter ended March 31, 2019, subsequent price declines in the stock have caused these accounts to fall into deficits, despite the Company’s efforts to liquidate the customers’ positions. For the quarter endedAs of March 31, 2020,2021, the Company has recognized an aggregate loss of approximately $42$44 million. The maximum aggregate loss, which would occur if the security’s price fell to zero and none of the debts were collected, would be approximately $50 million. The Company continues to evaluate pursuing the collection of the debts, although debt collection efforts are inherently difficult and uncertain. The ultimate effect of this incident on the Company’s results will depend upon market conditions and the outcome of the Company’s debt collection efforts.
LitigationLegal, Regulatory and Governmental Matters
The Company is subject to certain pending and threatened legal, regulatory and governmental actions and proceedings that arise out of the normal course of business. Litigation is inherently unpredictable,Given the inherent difficulty of predicting the outcome of such matters, particularly in proceedings where claimants seek substantial or indeterminate damages, or which are in their early stages. Thestages, the Company has is generally
not been able to quantify the actual loss or range of loss related to such legal proceedings, the manner in which they will be resolved, the timing of their final resolution or the ultimate settlement. Management believes that the resolution of these actionsmatters will not have a material effect, if any, on the Company’s business or financial condition, but may have a material impact on the results of operations for a given period.
The Company accounts for potential losses related to litigation in accordance with FASB ASC Topic 450, “Contingencies.” As of March 31, 2021 and 2020, and 2019, reserves providedaccruals for potential losses related to litigationlegal, regulatory and governmental actions, and proceedings matters were not material.
Trading Technologies Matter
On February 3, 2010, Trading Technologies International, Inc. (“Trading Technologies”) filed a complaint in the U.S. District Court for the Northern District of Illinois, Eastern Division, against IBG LLC and IB LLC (“Defendants”). The complaint, as amended, alleges that the Defendants have infringed and continue to infringe twelve U.S. patents held by Trading Technologies. Trading Technologies is seeking, among other things, unspecified damages and injunctive relief. The Defendants filed an answer to Trading Technologies’ amended complaint, as well as related counterclaims. The Defendants deny Trading Technologies’ claims, assert that the asserted patents are not infringed and are invalid, and assert several other defenses as well.
The asserted patents were the subject of petitions before the United States Patent and Trademark Office (“USPTO”) seeking Covered Business Method Review (“CBM Review”). The USPTO Patent Trial Appeal Board (“PTAB”) found all claims of ten of the twelve asserted patents to be invalid. Of the remaining two patents, 53 of the 56 claims of one patent were held invalid and the other patent survived CBM Review proceedings. Appeals were filed by either Defendants or Trading Technologies on all PTAB determinations.
The United States Court of Appeals for the Federal Circuit vacated the CBM Review determinations of invalidity for four patents, concluding that these patents were not eligible for CBM Review. The District Court trial with respect to these four patents is scheduled for November 2020.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
August 2, 2021.
While it is difficult to predict the outcome of the matter, the Company believes it has meritorious defenses to the allegations made in the complaint and intends to defend itself vigorously against them. However, litigation is inherently uncertain and there can be no guarantee that the Company will prevail or that the litigation can be settled on favorable terms.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Class Action Matter
On December 18, 2015, a former individual customer filed a purported class action complaint against IB LLC, IBG, Inc., and Thomas Frank, PhD,Ph.D., the Company’s Executive Vice President and Chief Information Officer, in the U.S. District Court for the District of Connecticut. The complaint alleges that the purported class of IB LLC’s customers were harmed by alleged “flaws” in the computerized system used to close out (i.e., liquidate) positions in customer brokerage accounts that have margin deficiencies. The complaint seeks, among other things, undefined compensatory damages and declaratory and injunctive relief.
On September 28, 2016, the District Court issued an order granting the Company’s motion to dismiss the complaint in its entirety, and without providing plaintiff leave to amend. On September 28, 2017, plaintiff appealed to the United States Court of Appeals for the Second Circuit. On September 26, 2018, the Court of Appeals affirmed the dismissal of plaintiff’s claims of breach of contract and commercially unreasonable liquidation but vacated and remanded back to the District Court plaintiff’s claims for negligence. On November 30, 2018, the plaintiff filed a second amended complaint. The Company filed a motion to dismiss the new complaint on January 15, 2019, which was denied on September 30, 2019. On December 9, 2019, the Company filed a motion requesting that the District Court certify to the Connecticut Supreme Court two questions of Connecticut law directly relevant to the motion to dismiss. The District Court has not yet ruleddenied the Company’s motion to certify on the motion.May 15, 2020. Currently, Plaintiff’s motion for class certification is due on November 1, 2021. Regardless of the outcome of this motion, the Company does not believe that a purported class action is appropriate given the great differences in portfolios, markets and many other circumstances surrounding the liquidation of any particular customer’s margin-deficient account. IB LLC and the related defendants intend to continue to defend themselves vigorously against the case and, consistent with past practice in connection with this type of unwarranted action, any potential claims for counsel fees and expenses incurred in defending the case may be fully pursued against the plaintiff.
“Short Squeeze” Antitrust Litigation
Since late January 2021, more than three dozen federal class action lawsuits have been filed in different jurisdictions against various brokers and other market participants claiming that the defendants acted improperly in restricting trading in the shares of and options on GameStop Corp. and other companies that were subject to unusual trading in January 2021 in what has been referred to as the “Reddit-related short-squeeze”. Most of these cases assert federal antitrust claims, including alleging an illegal antitrust conspiracy among the defendants, as well as various state and federal securities-related claims. IB LLC and its affiliates have been named as defendants in nine of these class action lawsuits. These cases have been consolidated into a multidistrict litigation (“MDL”), and were transferred to the Southern District of Florida on April 1, 2021 for pre-trial proceedings. All discovery has been stayed until amended complaints are filed, and issues regarding the timing of amended complaints and responses to the allegations therein will be addressed by the MDL court at a future date. The time for IB LLC and its affiliates to respond to the allegations will likely be stayed during the pendency of the Judicial Panel on Multidistrict Litigation proceedings. The Company believes that the claims asserted against IB LLC and its affiliates lack merit on their face and the Company intends to file, at the appropriate time, a motion to dismiss any class action that might name IB LLC and its affiliates as defendants.
Regulatory Matters
The Company has provided informationis subject to regulatory oversight and examination by numerous governmental and self-regulatory authorities. As announced on August 10, 2020, the Financial Industry Regulatory Authority, the SEC, and the Commodities and Futures Trading Commission (“CFTC”) concerningCompany agreed to settle certain matters related to its historical anti-money laundering and Bank Secrecy Act practices and procedures with FINRA, the SEC and these agencies have indicated that they believe that these historical practices and procedures were inadequate. The Company periodically reviews these practices and procedures to make them more robust and to respond to changing regulatory standards; and it has been enhancing and augmenting them, including hiring additional personnel, over the past several years.
The Company is in discussions with these agencies to settle matters arising from their reviews, and while no agreements have been finalized,CFTC. As part of the settlements, the Company believes that such settlements will entail monetary paymentsagreed to pay penalties of $15 million to FINRA, $11.5 million to the SEC and $11.5 million to the CFTC, plus approximately $700,000 in disgorgement. In addition, the Company agreed to continue the retention of an independent consultant to review the implementation of the Company’sits enhanced compliance practices and procedures. The Company has established a reserve that it deems adequate for such settlements. The Company is also cooperating with a United States Department of Justice inquiry concerning these matters, and while its outcome cannot be predicted, the Company does not believe that the resolution of this inquiry is likely to have a materially adverse effect on the Company’sits financial results.
Guarantees
Certain of the operating subsidiaries provide guarantees to securities and commodities clearing houses and exchanges which meet the accounting definition of a guarantee under FASB ASC Topic 460, “Guarantees.” Under standard membership agreements, clearing house and exchange members are required to guarantee collectively the performance of other members. Under the agreements, if a member becomes unable to satisfy its obligations, other members would be required to meet shortfalls. In the opinion of management, the operating subsidiaries’ liability under these arrangements is not quantifiable and could exceed the cash and securities they have posted as collateral. However, the potential for these operating subsidiaries to be required to make payments under these arrangements is remote. Accordingly, 0 contingent liability is carried in the condensed consolidated statements of financial condition for these arrangements.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
In connection with its retail brokerage business, IB LLC or other electronic brokerage operating subsidiaries perform securities and commodities execution, clearance and settlement on behalf of their customers for whom they commit to settle trades submitted by such customers with the respective clearing houses. If a customer fails to fulfill its settlement obligations, the respective operating subsidiary must fulfill those settlement obligations. NaN contingent liability is carried on the condensed consolidated statements of financial condition for such customer obligations.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Other Commitments
Certain clearing houses, clearing banks and firms used by certain operating subsidiaries are given a security interest in certain assets of those operating subsidiaries held by those clearing organizations. These assets may be applied to satisfy the obligations of those operating subsidiaries to the respective clearing organizations.
14. Segment and Geographic Information
As disclosed in Note 2, effective this quarter the Company is discontinuing the reporting of separate operating business segments. See Note 2 for further information on the reporting of operating business segments.
Significant transactions and balances between the operating subsidiaries occur, primarily as a result of certain operating subsidiaries holding exchange or clearing organization memberships, which are utilized to provide execution and clearing services to subsidiaries. Intra-region income and expenses and related balances have been eliminated in this geographic information to reflect the external business conducted in each geographic region.
The Company operates its automated global business in the U.S. and international markets on more than 135 electronic exchanges and market centers. A significant portion of the Company’s net revenues is generated by subsidiaries operating outside the U.S. International operations are conducted in 32 countries in Europe, Asia/Pacific and the Americas (outside the U.S.). The following table presents total net revenues and income before income taxes by geographic area for the periods indicated.
Significant transactions and balances between the operating subsidiaries occur, primarily as a result of certain operating subsidiaries holding exchange or clearing organization memberships, which are utilized to provide execution and clearing services to subsidiaries. Intra-region income and expenses and related balances have been eliminated in this geographic information to reflect the external business conducted in each geographic region. The geographic analysis presented below is based on the location of the subsidiaries in which the transactions are recorded. This geographic information does not reflect the way the Company’s business is managed.
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
(in millions) | (in millions) | |||||||||||
Net revenues | ||||||||||||
United States | $ | 373 | $ | 461 | $ | 651 | $ | 373 | ||||
International | 159 | 97 | 242 | 159 | ||||||||
Total net revenues | $ | 532 | $ | 558 | $ | 893 | $ | 532 | ||||
Income before income taxes | ||||||||||||
United States | $ | 244 | $ | 313 | $ | 556 | $ | 244 | ||||
International | 64 | 26 | 83 | 64 | ||||||||
Total income before income taxes | $ | 308 | $ | 339 | $ | 639 | $ | 308 | ||||
15. Regulatory Requirements
As of March 31, 2020,2021, aggregate excess regulatory capital for all of the operating subsidiaries was $6.4$6.7 billion.
IB LLC, THIBKR Securities Services LLC (formerly, Timber Hill LLC) and IBInteractive Brokers Corp are subject to the Uniform Net Capital Rule (Rule 15c3-1) under the Exchange Act, IB LLC is also subject to the CFTC’s minimum financial requirements (Regulation 1.17), and IBKRFS is subject to the Swiss Financial Market Supervisory Authority eligible equity requirement. IBC is subject to the Investment Industry Regulatory Organization of Canada risk adjusted capital requirement, IBUK is subject to the United Kingdom Financial Conduct Authority Capital Requirements Directive, IBIE is subject to the Central Bank of Ireland financial resources requirement, IBLUX is subject to the Luxembourg Commission de Surveillance du Secteur Financier financial resources requirement, IBHKIBCE is subject to the Hong Kong Securities Futures Commission liquid capitalHungarian National Bank financial resource requirement, IBI is subject to the National Stock Exchange of India net capital requirements, IBHK is subject to the Hong Kong Securities Futures Commission liquid capital requirement, IBSJ is subject to the Japanese Financial Supervisory Agency capital requirements, IBSG is subject to the Monetary Authority of Singapore capital requirements, and IBA is subject to the Australian Securities Exchange liquid capital requirement.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The table below summarizes capital, capital requirements and excess regulatory capital as of March 31. 2020.31, 2021.
Net Capital/ | Net Capital/ | |||||||||||||||||
Eligible Equity | Requirement | Excess | Eligible Equity | Requirement | Excess | |||||||||||||
(in millions) | (in millions) | |||||||||||||||||
IB LLC | $ | 5,137 | $ | 343 | $ | 4,794 | $ | 5,211 | $ | 753 | $ | 4,458 | ||||||
IBKRFS | 579 | 21 | 558 | 600 | 21 | 579 | ||||||||||||
IBHK | 438 | 109 | 329 | 738 | 264 | 474 | ||||||||||||
Other regulated operating subsidiaries | 789 | 42 | 747 | 1,644 | 420 | 1,224 | ||||||||||||
$ | 6,943 | $ | 515 | $ | 6,428 | $ | 8,193 | $ | 1,458 | $ | 6,735 | |||||||
Regulatory capital requirements could restrict the operating subsidiaries from expanding their business and declaring dividends if their net capital does not meet regulatory requirements. Also, certain operating subsidiaries are subject to other regulatory restrictions and requirements.
As of March 31, 2020,2021, all of the regulated operating subsidiaries were in compliance with their respective regulatory capital requirements.
16. Related Party Transactions
Receivable from affiliate, reported in other assets in the condensed consolidated statement of financial condition, represents amounts advanced to Holdings and payable to affiliate represents amounts payable to Holdings under the Tax Receivable Agreement (see Note 4).
Included in receivables from and payables to customers in the condensed consolidated statements of financial condition as of March 31, 20202021 and December 31, 20192020 were accounts receivable from directors, officers and their affiliates of $11$438 million and $23$283 million, respectively, and payables of $762$941 million and $939$999 million, respectively. The Company may extend credit to these related parties in connection with margin and securities loans. Such loans are (i) made in the ordinary course of business, (ii) are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the company, and (iii) do not involve more than the normal risk of collectability or present other unfavorable features. Included in short-term borrowings as of March 31, 2021 and December 31, 2020 are senior notes purchased by directors, officers and their affiliates of $22 million and $16 million, respectively.
17. Senior Notes Payable
IBG LLC from time to time may offer senior notes in private placements to certain qualified customers of IB LLC at an issue price of $1 thousand dollars per note. The senior notes will mature no later than the thirtieth day following the issuance date. IBG LLC, at its option, may redeem the senior notes at any time, at a redemption price equal to 100% of the principal amount of the senior notes to be redeemed, plus accrued. The senior notes will pay a fixed rate of interest during their tenure. The interest rate is calculated by adding the benchmark rate to a rate (spread) that IBG LLC will announce from time-to-time. The benchmark rate is the effective federal funds rate as reported by the Federal Reserve Bank of New York on the morning of the date of the offering. IBG LLC intends to use the proceeds for general financing purposes when interest spread opportunities arise.
The carrying value of the senior notes approximate their fair value since they are short-term in nature. During the three months ended March 31, 2021, IBG LLC issued senior notes of $602 million and redeemed senior notes of $498 million, respectively. The senior notes carried a weighted average interest rate of 1%. As of March 31, 2021 and December 31, 2020, IBG LLC had senior notes outstanding of $200 million and $96 million, respectively, all of which carried a 1% per annum interest rate, and are included in short-term borrowings in the condensed consolidated statements of financial condition. All the outstanding senior notes at March 31, 2021 were redeemed by May 7, 2021. In addition, the Company issued and redeemed $168 million of senior notes during the period from April 1 through May 7, 2021. Interest expense on the senior notes for the three months ended March 31, 2021 was not material.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
18. Subsequent Events
As required by FASB ASC Topic 855, “Subsequent Events,” theThe Company has evaluated subsequent events for adjustment to or disclosure in its condensed consolidated financial statements through the date the condensed consolidated financial statements were issued.
On April 20, 2020 the energy markets exhibited extraordinary price activity in the New York Mercantile Exchange (“NYMEX”) West Texas Intermediate Crude Oil contract. The price of the May 2020 contract dropped to an unprecedented negative price of $37.63. This price was the basis for determining the settlement price for cash-settled contracts traded on the CME Globex and also for a separate, expiring cash-settled futures contract listed on the Intercontinental Exchange Europe (“ICE Europe”). Several of the Company’s customers held long positions in these CME and ICE Europe contracts, and as a result they incurred losses, including losses in excess of the equity in their accounts. The Company fulfilled the required variation margin settlements with the respective clearinghouses on behalf of its customers. While the Company originally recognized an aggregate provisionary loss of approximately $88 million, the Company has since determined to compensate certain affected customers in connection with their losses resulting from the contracts settling at a price below zero. As a result, the Company will recognize a revised aggregate loss of approximately $104 million. The Company does not believe that this loss will have a material effect on its financial condition.
Except as disclosed above and in Note 4, Note 13, and Note 13,17, no other recordable or disclosable events occurred.
*****
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes in Item 1, included elsewhere in this report. In addition to historical information, the following discussion also contains forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading “Risk Factors” in our Annual Report on Form 10-K filed with the Securities Exchange Commission (“SEC”) on February 28, 2020March 1, 2021 and elsewhere in this report.
When we use the terms “we,” “us,” and “our,” we mean IBG, Inc. and its subsidiaries for the periods presented.
Introduction
Interactive Brokers Group, Inc. (the “Company” or “IBG, Inc.”) is a holding company whose primary asset is its ownership of approximately 18.5%21.8% of the membership interests of IBG LLC. The remaining approximately 81.5%78.2% of IBG LLC membership interests are held by IBG Holdings LLC (“Holdings”), a holding company that is owned by our founder and Chairman, Mr. Thomas Peterffy and his affiliates, management and other employees of IBG LLC, and certain other members. The table below shows the amount of IBG LLC membership interests held by IBG, Inc. and Holdings as of March 31, 2020.2021.
IBG, Inc. | Holdings | Total | ||||
Ownership % | 18.5% | 81.5% | 100.0% | |||
Membership interests | 76,759,906 | 338,670,642 | 415,430,548 |
IBG, Inc. | Holdings | Total | ||||
Ownership % | 21.8% | 78.2% | 100.0% | |||
Membership interests | 90,830,444 | 325,960,034 | 416,790,478 |
We are an automated global electronic broker. We custody and service accounts for hedge and mutual funds, exchange traded funds (“ETFs”), registered investment advisers, proprietary trading groups, introducing brokers and individual investors. We specialize in routing orders and executing and processing trades in stocks, options, futures, forex, bonds, mutual funds and ETFs on more than 135 electronic exchanges and market centers in 33 countries and in 25 currencies seamlessly around the world. Since our inception in 1977, we have focused on developing proprietary software to automate broker-dealer functions. The proliferation of electronic exchanges over nearly the last three decades has provided us with the opportunity to integrate our software with an increasing number of exchanges and market centers into one automatically functioning, computerized platform that requires minimal human intervention.
When we use the terms “we,” “us,” and “our,” we mean IBG, Inc. and its subsidiaries for the periods presented.
As previously disclosed in our 10-Q for the quarter ended March 31, 2017 and in subsequent filings, we intended to eliminate the reporting of separate operating business segments upon our determination that the continued wind-down of our market making activity rendered it no longer reportable as a business segment. Pursuant to the requirements of Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, “Segment Reporting,” we performed a quantitative and a qualitative assessment of our business and determined that our remaining market making activity no longer supports our reporting of separate business segments. Accordingly, effective this quarter we are discontinuing the reporting of separate business segments. Since our decision to wind down our market making activities, management has continued to shift its focus to growing and strengthening our electronic brokerage business. We believe the elimination of segment reporting aligns our financial reporting with our business strategy and management’s focus on the electronic brokerage business. For each of the past eight quarters, the market making segment’s contribution to our consolidated net revenues, income before income taxes, and total assets has not exceeded 7%, 4% and 6%, respectively. Effective this quarter, the remaining activity of this type is reported as a component of “principal transactions,” which is included in other income in the consolidated statements of comprehensive income.
Effective this quarter, we also changed the presentation of our consolidated statements of comprehensive income to better align with our business strategy. Previously reported amounts have been adjusted to conform with the new presentation. See “Condensed Consolidated Statements of Comprehensive Income and Operating Business Segment Presentation Changes” in Note 2 – “Significant Accounting Policies” to the unaudited condensed consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.
As an electronic broker, we execute, clear and settle trades globally for both institutional and individual customers. Capitalizing on our proprietary technology, our systems provide our customers with the capability to monitor multiple markets around the world simultaneously and to execute trades electronically in these markets at a low cost, in multiple products and currencies from a single trading account. We offer our customers access to all classes of tradable, primarily exchange-listed products, including stocks, options, futures, forex, bonds, mutual funds and ETFs traded on more than 135 electronic exchanges and market centers in 33 countries and in 25 currencies seamlessly around the world. The emerging complexity of multiple market centers has provided us with the opportunity to build and continuallycontinuously adapt our order routing software to secure excellent execution prices.
Since our inception in 1977, we have focused on developing proprietary software to automate broker-dealer functions. The proliferation of electronic exchanges and market centers over the last three decades has allowed us to integrate our software with an increasing number of trading venues into one automatically functioning, computerized platform that requires minimal human intervention.
Our customer base is diverse with respect to geography and segments. Currently, approximately 72%74% of our customers reside outside the U.S. in over 200 countries and territories, and over 50% of new customers come from outside the U.S.Approximately 64% of our customers’ equity is in institutional accounts such as hedge funds, financial advisors, proprietary trading desks and introducing
brokers. Specialized products and services that we have developed are successfully attractingattract these accounts. For example, we offer prime brokerage services, including financing and securities lending, to hedge funds; our model portfolio technology and automated share allocation and rebalancing tools are particularly attractive to financial advisors; and our trading platform, global access and low pricing attract introducing brokers.
Our key product offerings include:
IBKR ProSM, our industry-leading trade execution service designed for sophisticated investors and active traders, offers low-cost access to stocks, options, futures, forex, bonds, mutual funds and ETFs on over 135 electronic exchanges and market centers in 33 countries. IBKR ProSM uses our IB SmartRoutingSM software, which continually scans competing markets and automatically routes orders directly to the best ECN or market center based on price, but also takes into account factors such as the availability of automatic order execution.
IBKR LiteSM is a pricing plan that provides unlimited commission-free trades on U.S. exchange-listed stocks and ETFs as well as low-cost access to global markets without required account minimums or inactivity fees to participating U.S. customers.
IBKR Integrated Investment Account - From a single point of entry in one IBKR Integrated Investment Account our customers are able to transact in 25 currencies, across multiple classes of tradable, primarily exchange-listed products traded on more than 135 electronic exchanges and market centers in 33 countries around the world seamlessly. Our offering features a suite of cash management services, including:
oInteractive Brokers Debit Mastercard®- Interactive Brokers Debit Mastercard® allows customers to spend and borrow directly against their account at lower interest rates than credit cards, personal loans and home equity lines of credit, with no monthly minimum payments and no late fees. Customers can use their card to make purchases and ATM withdrawals anywhere Debit Mastercard®1 is accepted around the world.
oBill Pay – Our Bill Pay program allows customers to make electronic or check payments to almost any company or individual in the U.S. It can be configured for one-time or recurring payments and permits customers to schedule future payments.
oDirect Deposit – Our Direct Deposit program allows customers to automatically deposit paychecks, pension distributions and other recurring payments to their (non-retirement) brokerage account with us.
Insured Bank Deposit Sweep Program - Our Insured Bank Deposit Sweep Program provides eligible customers with up to $2,500,000 of Federal Deposit Insurance Corporation (“FDIC”) insurance on their eligible cash balances in addition to the existing $250,000 Securities Investor Protection Corporation (“SIPC”) coverage for total coverage of $2,750,000. Customers can earn the same competitive interest rates currently applied to cash held in their brokerage accounts with us. We sweep each participating customer’s eligible cash balances daily to one or more banks, up to $246,500 per bank, allowing for the accrual of interest and keeping within the FDIC protected threshold. Cash balances above $2,750,000 remain subject to safeguarding under the SEC's Customer Protection Rule 15c3-3.
Investors’ MarketplaceSM - The Investors’ MarketplaceSM is an expansion of our Money Manager Marketplace and our Hedge Fund Capital Introduction program. This program is the first electronic meeting place that brings together individual investors, financial advisors, money managers, fund managers, research analysts, technology providers, business developers and administrators, allowing them to interact to form connections and conduct business.
Fractional Trading – Fractional Trading allows customers to buy and sell using a cash quantity or fractional shares, which are stock units that amount to less than one full share. This new functionality allows customers to purchase as little as $1 of almost any U.S. stock, experiment with trading and investing without committing substantial sums of money, and learn about building and rebalancing diversified portfolios.
We provide a host of analytical and business tools such as EmployeeTrackSM which is widely used by compliance officers of financial institutions to streamline the process of tracking their employees’ brokerage activities. The Probability Lab®allows our customers to analyze option strategies under various market assumptions. Risk NavigatorSM is a real-time market risk management platform that allows our customers to measure risk exposure across multiple asset classes around the globe. Portfolio BuilderSM allows our
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1 Debit Mastercard is a trademark registered to Mastercard International Incorporated Corporation, Delaware, 2000 Purchase Street, Purchase, New York 10577-2405.
customers to set up an investment strategy based on research and rankings from top research providers and fundamental data. Interactive AdvisorsSM recruits registered financial advisors, vets them, analyzes their investment track records, groups them by their risk profile, and allows retail investors to assign their accounts to be traded by one or more advisors. In addition, our Greenwich ComplianceSM affiliate offers direct expert registration and start-up compliance services, as well as answers to basic day-to-day compliance questions for experienced investors and traders looking to start their own investment advisor firms. Greenwich ComplianceSM professionals have regulatory and industry experience, and they can help investment advisors trading on our electronic brokerage platform meet their registration and compliance needs.
COVID-19 Pandemic
In March 2020, the World Health Organization recognized the outbreak of the Coronavirus Disease 2019 (“COVID-19”) caused by a novel strain of the coronavirus as a pandemic. The pandemic affects all countries in which we operate. The response of governments and societies to the COVID-19 pandemic, which includes temporary closures of certain businesses; social distancing; travel restrictions, “shelter in place” and other governmental regulations; and reduced consumer spending due to job losses, has significantly impacted market volatility in the financial, commodities and energy markets, and general economic conditions.
The COVID-19 pandemic has precipitated unprecedented market conditions with equally unprecedented social and community challenges. Amid these challenges:
The Company is committed to ensuring the highest levels of service to its customers so they can effectively manage their assets, portfolios and risks. The Company’s technical infrastructure has withstood the challenges presented by the extraordinary volatility and increased market volume.
The Company can run its business from alternate office locations and/or remotely if a Company office must temporarily close due to the spread of the COVID-19 pandemic.
As announced on April 9, 2020, the Company committed $5 million to assist efforts to provide food and support for people affected by the COVID-19 pandemic in the United States as well as to advance medical solutions.
The effects of the COVID-19 pandemic on the Company’s financial results for the first quarter of 2020ended March 31, 2021 can be summarized as follows: (1) higher commission revenue due to increased trading activity and a higher rate of customer accounts opened during this period;opened; and (2) lower net interest income resulting from lower benchmark interest rates and smaller aggregate margin loans extended to customers as they deleveraged; (3) higher valuation of U.S. Treasury securities and lower valuation of stocks; and (4) higher than typical customer bad debt expense.rates.
The impact of the COVID-19 pandemic on the Company’s future financial results could be significant butremains uncertain and currently cannot be quantified, as it will depend on numerous evolving factors that currently cannot be accurately predicted, including, but not limited to, the duration and spread of the pandemic; its impact on our customers, employees and vendors; governmental regulationsactions in response to the pandemic; and the overall impact of the pandemic onin the economy and society; among other factors. Any of these events could have a materially adverse effect on the Company’s financial results.
Business Environment
During the quarter ended March 31, 20202021 (“current quarter”), U.S. market volatility, as measured byworld equities markets were up strongly versus the average Chicago Board Options Exchange Volatility Index (“VIX®”), increased significantly versus thepandemic-impacted quarter ended March 31, 20192020 (“prior year quarter”). Over the course of the current quarter, the index increased from an average of 13.7 in the month of January, to 18.5 in February, and to 57.4 in March, including a high of 82.7 on March 16, 2020, as market uncertainty increased due to the unknown long-term economic impacts of the COVID-19 pandemic. In contrast, during the prior year quarter, the VIX ® moved in a much narrower average range of 14.5 to 20.0, reflecting a perception of a more stable outlook by the markets. The current quarter’s historic VIX ® readings corresponded with dramatically higher trading activity. Equity market indices around the globe were predominantly down in the current quarter, with the S&P 500 Index decreasing 20%, similar to decreases in nearly all European and Asia/Pacific markets.
Among our customer base, volatility is highly correlated with customer trading activity across product types. In the current quarter, higher volatility was consistent with strong increases in trading volume worldwide. Customer options, futures and stock volumes were up 64%, 59% and 24%, respectively, and foreign exchange dollar volumes were up 58%, compared to the prior year quarter. In response to the COVID-19 pandemic, many central banks reduced their benchmarkGlobal interest rates to near zero, leading to interest rate spread compression on interest-sensitive balances for banks and brokers.
U.S. interest rates, as measured by the average federal funds effective rate, decreased to 1.25% in the current quarter from 2.40% in the prior year quarter. Trends in benchmark rates of other currencies were also down. While net interest income, compared to the prior
year quarter, benefitted from higher balances in our interest earning assets, this was partially offset by a relatively flat yield curve that continues to limit our opportunities to earn more net interest income on interest-sensitive assets.
Despite a negative equity market environment that saw indices decline in markets across the globe, customer account growth was unusually robust, with total customer accounts increasing 22% from the prior year quarter to 760 thousand. The rise, which was driven by a large increase in individual accounts worldwide, may reflect that individuals who are now at home under COVID-19 related restrictions seek to use their available time productively. Customer equity increased 9% to $160.7 billion as healthy inflows from customers continued, despite the fall in securities markets which negatively impacted the value of their investments. Institutional customers, such as hedge funds, mutual funds, introducing brokers, proprietary trading groups and financial advisors, comprised approximately 48% of total accounts as of March 31, 2020, versus 51%a search for yield in the prior year quarter. Strong growth in our individual segment, which was up 29%,zero and slower, though still positive, growth in our institutional segments accounted for this difference. Customers continuenegative-interest rate environments, especially by individuals newly attracted to seek our superior technology and execution capabilities, and also our abilitythese markets, led to give them global market access.highly active trading.
The following is a summary of the key profiteconomic drivers that affect our business and how they compared to the prior year quarter:
Global trading volumes. According to industry data, compared to the prior year quarter, average daily volumes in U.S. exchange-listed equity-based options increased by 46%, in U.S. futures by 45%50%, and in U.S. listed cash equities by 38%32%, compared to the prior year quarter. As noted above, the current quarter showed awhile U.S. futures volume decreased by 19%. Many markets experienced significant increaseincreases in trading activity, even with numerous spikesmoderate volatility throughout the quarter, as a growing number of investors participated out of a desire to earn higher yields on assets than could be achieved in volatility, compared to prior year quarter, which positively affectedbank accounts in a zero or negative rate environment.
These factors boosted industry and Company transaction revenues.revenues, especially in stocks and options. Note that while options, futures and U.S. cash equities volumes represent most of our volumes and are readily comparable measures, they reflect only a portionmost but not all of the global volumes that generate our commission revenue. See “Trading Volumes and Customer Statistics” below in this Item 2 for additional details regarding our trade volumes, contract and share volumes, and customer statistics.
Volatility. Average U.S. market volatility, as measured by the average Chicago Board Options Exchange Volatility Index (“VIX®”), increased 84%fell 24% to 30.7 in the current quarter, from 16.7 in23, versus 31in the prior year quarter, spiking to 82.7 on March 16, 2020. as last year’s COVID-19 pandemic-induced spike in market volatility waned.
Higher volatility improves our performance because it generally corresponds to higher trading volumes. In the current quarter, as the VIX ® rose, industry trading activity increased, and ourcorrelates with customer trading activity rose commensurately.across product types. Customer options and stock volumes were up 72% and 411%, respectively, while futures and foreign exchange dollar volumes declined 17% and 18% respectively, compared to the prior year quarter. While our customer stock volume reflected unusually strong trading in low-priced stocks, even after removing that effect the increase in share volume was a robust 134%. Despite this quarter’s lower average volatility than the prior year quarter, investors sought to utilize their time productively by opening brokerage accounts while at home during the COVID-19 pandemic. This trend, combined with the increasing connectedness of investors to one another and to the markets, led to an influx of new accounts and strong increases in trading volume.
Interest Rates. The U.S. Federal Reserve conducted a series of reductions in theReserve’s target federal funds rate range in the current quarter ending with ratesremained at or near zero whileto 0.25%, similar to rates in many other currencies, followed suit, with the exception of countriesthose where rates were already zero orare negative. Decreases inLow benchmark rates can lead to lower net interest income and a narrower net interest margin. As
U.S. rates also continue to exhibit a relatively flat yield curve, which limits our margin balances are tiedopportunities to benchmarkearn more net interest income on interest-sensitive assets. Low rates declining interest rates reduce the interest we receive on our customer margin balances. Falling rates also reduce the interest we earn on our segregated cash, the majority of which is invested in U.S. government securities and related instruments. Lowerinstruments, as higher-yielding investments mature and are reinvested at current lower rates. Further, our margin balances are tied to benchmark rates, with a minimum charge of 0.75% in U.S. dollars, so low interest rates limit the interest we receive on margin lending to our customers. We continue to offer among the lowest rates in the industry on margin lending, and we believe our low rates are an important factor that attracts customers to our platform.
As an offset, lower rates also reduce our interest expense, asfor example in U.S. dollars we pay interest to customers only when the federal funds effective rate is above 0.50%. At near zeroIn currencies with negative rates, we collect interest on a portion of customer cash balances. And as an indirect positive effect, we believe low and negative benchmark world interest rates have been a factor leading to the active trading we continueexperienced, as investors sought to offer among the lowest ratesenter securities markets to achieve higher yields on our margin borrowings. We believe our low rates on margin borrowings are important factors that attract customers to our platform.their investments.
Net interest income increased compared to the prior year quarter as the average federal funds effective rate decreased to 0.08% from 1.25% in the prior year quarter. While the interest we pay on customer cash balances and the interest we earn on customer margin loans is based on fixed spreads aroundthat are compressed at low benchmark rates, additionalrising balances have partially compensated for this reduction in net interest income is earned on lower or non-interest-bearing customerincome. Despite the collapse in benchmark rates, a 47% increase in our average margin loan balances, e.g., on securities accounts with less than $100,000 in equity, and on rising balances. Net interest income increased compared to the prior year quarter, primarily duecontributed to rising averagea comparatively smaller 16% decline in margin loan interest from the prior year quarter. Average customer credit balances up 17% inrose 33% over the currentprior year quarter, driven by a strong inflow of new accounts worldwide, sustaining a historical trend whereby growth in our clients’ cash has been consistent and position liquidationsover time outpaces the variable growth and contraction in margin loans.
Fueled by customers towardhigher average balances and strong securities lending results, our net interest income grew 18% in the end of the quarter. This was partially offset by average customer margin loan balances rising more slowly than customer credit balances. Margin loan balances rose 6% compared tocurrent quarter over the prior year quarter, as new account growth was partly countered bythough our customers’ reduced appetite for leverage.
overall net interest margin declined from 1.45% to 1.26%, primarily due to lower yields on our segregated cash and securities and on our margin loan balances.
Currency fluctuations. As a global electronic broker trading on exchanges around the world in multiple currencies, we are exposed to foreign currency risk. We actively manage this exposure by keeping our net worth in proportion to a defined basket of 1410 currencies we call the “GLOBAL” to diversify our risk and to align our hedging strategy with the currencies that we use in our business. Because we report our financial results in U.S. dollars, the change in the value of the GLOBAL versus the U.S. dollar affects our earnings. During the current quarter the value of the GLOBAL, as measured in U.S. dollars, decreased 0.97%0.84% compared to its value as of December 31, 2019,2020, which had a negative impact on our comprehensive earnings for the current quarter.
Overall, active markets, stay-at-home conditions, and a search for higher yields in negative and zero rate environments, brought on by the COVID-19 pandemic and government responses to it, have continued to encourage people to actively engage in the markets. Customers continue to seek our superior technology, execution capabilities, and our ability to offer a broad range of products and global market access.
A discussion of our approach for managing foreign currency exposure is contained in Part I, Item 3 of this Quarterly Report on Form 10-Q entitled “Quantitative and Qualitative Disclosures about Market Risk.”
Financial Overview
In the fourth quarter of 2019, we introduced the reporting of
We report non-GAAP financial measures, which exclude certain items that may not be indicative of our core operating results and business outlook and may be useful in evaluating the operating performance of our business and provide a better comparison of our results in the current period to those in prior and future periods. See the “Non-GAAP Financial Measures” section below in this Item 2 for additional details.
First Quarter Results:Diluted earnings per share were $0.60$1.16 for the current quarter, compared to diluted earnings per share of $0.64$0.60 for the prior year quarter. Adjusted diluted earnings per share were $0.69$0.98 for the current quarter compared to adjusted diluted earnings per share of $0.55and $0.69 for the prior year quarter. The calculation of diluted earnings per share is detailed in Note 4 – “Equity and Earnings per Share” to the unaudited condensed consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
For the current quarter, our net revenues were $893 million and income before income taxes was $639 million, compared to net revenues of $532 million and income before income taxes wasof $308 million, compared to net revenues of $558 million and income before income taxes of $339 million in the prior year quarter. Adjusted net revenues were $581$796 million and adjusted income before income taxes was $357$542 million, compared to adjusted net revenues of $468$581 millionand adjusted income before income taxes of $291$357 millionin the prior year quarter.
The financial highlights for the current quarter were:
Commission revenue showed strong growth, increasing$96 $143 million, or 55%53%, from the prior year quarter on higher customer trading volume inwithin an active trading environment of high market volatility resulting from the COVID-19 pandemic.worldwide.
Net interest income increased increased $10$49 million, or 4%19%, from the prior year quarter as average customer credit balances and average customer margin loan balances increased from the prior year quarter, partially offseton strong securities lending activity, tempered by a lowerdecrease in the average federal fundsFederal Funds effective rate which decreased to 1.25%0.08% from 2.40%1.25% in the prior year quarter.quarter, which reduced earnings on segregated customer cash and margin lending.
Other income decreasedincreased $135151 million from the prior year quarterquarter. This increase was mainly comprised of (1) $111$107 millionrelated to our strategic investment in Up Fintech Holding Limited (“Tiger Brokers”), which swung to a $99 millionmark-to-market gain in the current quarter from an $8 million mark-to-market loss in the current quarter from a $103 million mark-to-market gain in the prior year quarter; and (2) $30$47 millionrelated to our currency diversification strategy, which lost $49$2 million in the current quarter compared to a loss of $49 million in the prior year quarter.
General and administrative expenses increased $22 million from the prior year quarter, led by $19 millionin additional costs for Brexit-related regulatory onboarding to bring our new brokerage operations on line in Europe.
Pretax profit margin was 72% for the current quarter, up from 58% in the prior year quarter. Adjusted pretax profit margin for the current quarter was 68%, up from 61% in the prior year quarter.
Customer bad debt expense decreased $36 million due to a $7 million expense in the current quarter, mainly from the extraordinarily volatile markets, compared to a$43 million expense in the prior year quarter related to margin lending on a particular security listed on a major U.S. exchange that lost a substantial amount of its value in a very short timeframe.
58% pretax profit margin for this quarter, down from 61% in the year-ago quarter. Adjusted pretax profit margin for this quarter was 61%, down from 62% in the year-ago quarter.
Total equity at March 31, 2021 was $8.1$9.4 billion.
Because we report our financial results in U.S. dollars, the change in the value of the GLOBAL versus the U.S. dollar affects our earnings. In connection with our currency diversification strategy (i.e., GLOBALs) as of March 31, 2020,2021, approximately 29%26% of our equity was denominated in currencies other than the U.S. dollar. In the current quarter, our currency diversification strategy decreased our comprehensive earnings by$87 $78 million (compared to a decrease of $21$87 million in the prior year quarter), as the U.S. dollar value of the GLOBAL decreased by approximately 0.97%0.84%, compared to its value as of December 31, 2019.2020. The effects of our currency diversification strategy are reported as (1) a component of other income (loss of $49$2 million) in the consolidated statement of comprehensive income and (2) other comprehensive income (“OCI”) (loss of $3876 million) in the consolidated statement of financial condition and the consolidated statement of comprehensive income. The full effect of the GLOBAL is captured in comprehensive income.
Subsequent event
On April 20, 2020 the energy markets exhibited extraordinary price activity in the New York Mercantile Exchange (“NYMEX”) West Texas Intermediate Crude Oil contract. The price of the May 2020 contract dropped to an unprecedented negative price of $37.63. This price was the basis for determining the settlement price for cash-settled contracts traded on the CME Globex and also for a separate, expiring cash-settled futures contract listed on the Intercontinental Exchange Europe (“ICE Europe”). Several of the Company’s customers held long positions in these CME and ICE Europe contracts, and as a result they incurred losses, including losses in excess of the equity in their accounts. The Company fulfilled the required variation margin settlements with the respective clearinghouses on behalf of its customers. While the Company originally recognized an aggregate provisionary loss of approximately $88 million, the Company has since determined to compensate certain affected customers in connection with their losses resulting from the contracts settling at a price below zero. As a result, the Company will recognize a revised aggregate loss of approximately $104 million. The Company does not believe that this loss will have a material effect on its financial condition.
Certain Trends and Uncertainties
We believe that our current operations may be favorably or unfavorably impacted by the following trends that may affect our financial condition and results of operations:
The COVID-19 pandemic has precipitated unprecedented market conditions with equally unprecedented social and community challenges. The impact of the COVID-19 pandemic on the Company’s future financial results could be significant but currently cannot be quantified, as it will depend on numerous evolving factors that currently cannot be accurately predicted, including, but not limited to the duration and spread of the pandemic; its impact on our customers, employees and vendors; governmental regulations in response to the pandemic; and the overall impact of the pandemic on the economy and society; among other factors.
•Retail participation in the equity markets has fluctuated over the past few years due to investor sentiment, market conditions and a variety of other factors. Retail transaction volumes may not be sustainable and are not predictable.
Additional consolidation among market centers may adversely affect the value of our IB SmartRoutingSM software.
•Benchmark interest rates have fluctuated over the past years due to economic conditions. Changes in interest rates may not be predictable.
Fiscal and/or monetary policy may change and impact the financial services business and securities markets.
Price competition among broker-dealers may continue to intensify.
•Scrutiny of equity and options market makers, hedge funds, and soft dollar and payment for order flow practices by regulatory and legislative authorities has increased. New legislation or modifications to existing regulations and rules could occur in the future.
•Our remaining market making activityactivities will continue to be impacted by market structure changes, market conditions, the level of automation of competitors, and the relationship between actual and implied volatility in the equities markets.
See “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K, filed with the SEC on February 28, 2020,March 1, 2021, and elsewhere in this report for a discussion of other risks that may affect our financial condition and results of operations.
Trading Volumes and Customer Statistics
The following tables below present historical trading volumes and customer statistics for our business. Trading volumes are the primary driver ofin our commission revenue.business. Information on our net interest income can be found elsewhere in this report.
TRADE VOLUMES:
(in 000’s,thousands, except %)
Brokerage | ||||||||||||||||||||||||||||||||||||
Cleared | Non-Cleared | Avg. Trades | Brokerage | Non | Avg. Trades | |||||||||||||||||||||||||||||||
Customer | % | Customer | % | Principal | % | Total | % | per U.S. | Cleared | % | Cleared | % | Principal | % | Total | % | per U.S. | |||||||||||||||||||
Period | Trades | Change | Trades | Change | Trades | Change | Trades | Change | Trading Day | Trades | Change | Trades | Change | Trades | Change | Trades | Change | Trading Day | ||||||||||||||||||
2017 | 265,501 | 14,835 | 31,282 | 311,618 | 1,246 | |||||||||||||||||||||||||||||||
2018 | 328,099 | 24% | 21,880 | 47% | 18,663 | (40%) | 368,642 | 18% | 1,478 | 328,099 | 21,880 | 18,663 | 368,642 | 1,478 | ||||||||||||||||||||||
2019 | 302,289 | (8%) | 26,346 | 20% | 17,136 | (8%) | 345,771 | (6%) | 1,380 | 302,289 | (8%) | 26,346 | 20% | 17,136 | (8%) | 345,771 | (6%) | 1,380 | ||||||||||||||||||
2020 | 620,405 | 105% | 56,834 | 116% | 27,039 | 58% | 704,278 | 104% | 2,795 | |||||||||||||||||||||||||||
1Q2019 | 75,935 | 6,669 | 4,342 | 86,946 | 1,425 | |||||||||||||||||||||||||||||||
1Q2020 | 128,564 | 69% | 11,373 | 71% | 4,879 | 12% | 144,816 | 67% | 2,336 | 128,564 | 11,373 | 4,879 | 144,816 | 2,336 | ||||||||||||||||||||||
1Q2021 | 273,985 | 113% | 24,079 | 112% | 8,418 | 73% | 306,482 | 112% | 5,024 | |||||||||||||||||||||||||||
4Q2019 | 73,291 | 6,284 | 4,204 | 83,779 | 1,330 | |||||||||||||||||||||||||||||||
1Q2020 | 128,564 | 75% | 11,373 | 81% | 4,879 | 16% | 144,816 | 73% | 2,336 | |||||||||||||||||||||||||||
4Q2020 | 178,614 | 17,008 | 7,455 | 203,077 | 3,223 | |||||||||||||||||||||||||||||||
1Q2021 | 273,985 | 53% | 24,079 | 42% | 8,418 | 13% | 306,482 | 51% | 5,024 | |||||||||||||||||||||||||||
CONTRACT AND SHARE VOLUMES:
(in 000’s,thousands, except %)
TOTAL
Options | % | Futures (1) | % | Stocks | % | Options | % | Futures (1) | % | Stocks | % | |||||||||||||
Period | (contracts) | Change | (contracts) | Change | (shares) | Change | (contracts) | Change | (contracts) | Change | (shares) | Change | ||||||||||||
2017 | 395,885 | 124,123 | 220,247,921 | |||||||||||||||||||||
2018 | 408,406 | 3% | 151,762 | 22% | 210,257,186 | (5%) | 408,406 | 151,762 | 210,257,186 | |||||||||||||||
2019 | 390,739 | (4%) | 128,770 | (15%) | 176,752,967 | (16%) | 390,739 | (4%) | 128,770 | (15%) | 176,752,967 | (16%) | ||||||||||||
2020 | 624,035 | 60% | 167,078 | 30% | 338,513,068 | 92% | ||||||||||||||||||
1Q2019 | 90,242 | 31,142 | 51,258,862 | |||||||||||||||||||||
1Q2020 | 138,206 | 53% | 49,204 | 58% | 62,298,036 | 22% | 138,206 | 49,204 | 62,298,036 | |||||||||||||||
1Q2021 | 231,797 | 68% | 40,868 | (17%) | 308,934,824 | 396% | ||||||||||||||||||
4Q2019 | 100,520 | 29,078 | 39,391,536 | |||||||||||||||||||||
1Q2020 | 138,206 | 37% | 49,204 | 69% | 62,298,036 | 58% | ||||||||||||||||||
4Q2020 | 170,191 | 35,295 | 121,062,599 | |||||||||||||||||||||
1Q2021 | 231,797 | 36% | 40,868 | 16% | 308,934,824 | 155% | ||||||||||||||||||
ALL CUSTOMERS
Options | % | Futures (1) | % | Stocks | % | Options | % | Futures (1) | % | Stocks | % | |||||||||||||
Period | (contracts) | Change | (contracts) | Change | (shares) | Change | (contracts) | Change | (contracts) | Change | (shares) | Change | ||||||||||||
2017 | 293,860 | 118,427 | 213,108,299 | |||||||||||||||||||||
2018 | 358,852 | 22% | 148,485 | 25% | 198,909,375 | (7%) | 358,852 | 148,485 | 198,909,375 | |||||||||||||||
2019 | 349,287 | (3%) | 126,363 | (15%) | 167,826,490 | (16%) | 349,287 | (3%) | 126,363 | (15%) | 167,826,490 | (16%) | ||||||||||||
2020 | 584,195 | 67% | 164,555 | 30% | 331,263,604 | 97% | ||||||||||||||||||
1Q2019 | 78,604 | 30,502 | 48,416,643 | |||||||||||||||||||||
1Q2020 | 128,842 | 64% | 48,437 | 59% | 59,897,045 | 24% | 128,842 | 48,437 | 59,897,045 | |||||||||||||||
1Q2021 | 221,898 | 72% | 40,361 | (17%) | 306,165,385 | 411% | ||||||||||||||||||
4Q2019 | 91,562 | 28,630 | 37,988,125 | |||||||||||||||||||||
1Q2020 | 128,842 | 41% | 48,437 | 69% | 59,897,045 | 58% | ||||||||||||||||||
4Q2020 | 160,953 | 34,851 | 119,654,910 | |||||||||||||||||||||
1Q2021 | 221,898 | 38% | 40,361 | 16% | 306,165,385 | 156% | ||||||||||||||||||
_________________________
(1)Futures contract volume includes options on futures.
CLEARED CUSTOMERS
Options | % | Futures (1) | % | Stocks | % | Options | % | Futures (1) | % | Stocks | % | |||||||||||||
Period | (contracts) | Change | (contracts) | Change | (shares) | Change | (contracts) | Change | (contracts) | Change | (shares) | Change | ||||||||||||
2017 | 253,304 | 116,858 | 209,435,662 | |||||||||||||||||||||
2018 | 313,795 | 24% | 146,806 | 26% | 194,012,882 | (7%) | 313,795 | 146,806 | 194,012,882 | |||||||||||||||
2019 | 302,068 | (4%) | 125,225 | (15%) | 163,030,500 | (16%) | 302,068 | (4%) | 125,225 | (15%) | 163,030,500 | (16%) | ||||||||||||
2020 | 518,965 | 72% | 163,101 | 30% | 320,376,365 | 97% | ||||||||||||||||||
1Q2019 | 68,237 | 30,246 | 47,082,741 | |||||||||||||||||||||
1Q2020 | 112,916 | 65% | 47,979 | 59% | 57,653,853 | 22% | 112,916 | 47,979 | 57,653,853 | |||||||||||||||
1Q2021 | 202,583 | 79% | 40,019 | (17%) | 301,675,030 | 423% | ||||||||||||||||||
4Q2019 | 81,468 | 28,307 | 36,969,492 | |||||||||||||||||||||
1Q2020 | 112,916 | 39% | 47,979 | 69% | 57,653,853 | 56% | ||||||||||||||||||
4Q2020 | 144,378 | 34,459 | 116,538,527 | |||||||||||||||||||||
1Q2021 | 202,583 | 40% | 40,019 | 16% | 301,675,030 | 159% | ||||||||||||||||||
PRINCIPAL TRANSACTIONS
Options | % | Futures (1) | % | Stocks | % | Options | % | Futures (1) | % | Stocks | % | |||||||||||||
Period | (contracts) | Change | (contracts) | Change | (shares) | Change | (contracts) | Change | (contracts) | Change | (shares) | Change | ||||||||||||
2017 | 102,025 | 5,696 | 7,139,622 | |||||||||||||||||||||
2018 | 49,554 | (51%) | 3,277 | (42%) | 11,347,811 | 59% | 49,554 | 3,277 | 11,347,811 | |||||||||||||||
2019 | 41,452 | (16%) | 2,407 | (27%) | 8,926,477 | (21%) | 41,452 | (16%) | 2,407 | (27%) | 8,926,477 | (21%) | ||||||||||||
2020 | 39,840 | (4%) | 2,523 | 5% | 7,249,464 | (19%) | ||||||||||||||||||
1Q2019 | 11,638 | 640 | 2,842,219 | |||||||||||||||||||||
1Q2020 | 9,364 | (20%) | 767 | 20% | 2,400,991 | (16%) | 9,364 | 767 | 2,400,991 | |||||||||||||||
1Q2021 | 9,899 | 6% | 507 | (34%) | 2,769,439 | 15% | ||||||||||||||||||
4Q2019 | 8,958 | 448 | 1,403,411 | |||||||||||||||||||||
1Q2020 | 9,364 | 5% | 767 | 71% | 2,400,991 | 71% | ||||||||||||||||||
4Q2020 | 9,238 | 444 | 1,407,689 | |||||||||||||||||||||
1Q2021 | 9,899 | 7% | 507 | 14% | 2,769,439 | 97% | ||||||||||||||||||
________________________
(1)Futures contract volume includes options on futures.
CUSTOMER STATISTICS:
Year over Year | 1Q2020 | 1Q2019 | % Change | |||||
Total Accounts (thousands) | 760 | 623 | 22% | |||||
Customer Equity (in billions) 1 | $ | 160.7 | $ | 147.6 | 9% | |||
Cleared DARTs (thousands) | 1,301 | 757 | 72% | |||||
Total Customer DARTs (thousands) | 1,454 | 848 | 71% | |||||
Cleared Customers | ||||||||
Commission per Cleared Commissionable Order 2 | $ | 3.30 | $ | 3.68 | (10%) | |||
Cleared Avg. DART per Account (Annualized) | 453 | 311 | 46% | |||||
Net Revenue per Avg. Account (Annualized) | $ | 3,069 | $ | 2,961 | 4% | |||
Year over Year | 1Q2021 | 1Q2020 | % Change | |||||
Total Accounts (in thousands) | 1,325 | 760 | 74% | |||||
Customer Equity (in billions) (1) | $ | 330.6 | $ | 160.7 | 106% | |||
Cleared DARTs (in thousands) (2) | 2,964 | 1,301 | 128% | |||||
Total Customer DARTs (in thousands) (2) | 3,308 | 1,454 | 128% | |||||
Cleared Customers | ||||||||
Commission per Cleared Commissionable Order (3) | $ | 2.31 | $ | 3.30 | (30%) | |||
Cleared Avg. DART per Account (Annualized) | 622 | 453 | 37% | |||||
Net Revenue per Avg. Account (Annualized) | $ | $2,610 | $ | $3,069 | (15%) | |||
Consecutive Quarters | 1Q2020 | 4Q2019 | % Change | |||||
Total Accounts (thousands) | 760 | 690 | 10% | |||||
Customer Equity (in billions) 1 | $ | 160.7 | $ | 174.1 | (8%) | |||
Cleared DARTs (thousands) | 1,301 | 719 | 81% | |||||
Total Customer DARTs (thousands) | 1,454 | 797 | 82% | |||||
Cleared Customers | ||||||||
Commission per Cleared Commissionable Order 2 | $ | 3.30 | $ | 3.63 | (9%) | |||
Cleared Avg. DART per Account (Annualized) | 453 | 266 | 70% | |||||
Net Revenue per Avg. Account (Annualized) | $ | 3,069 | $ | 2,801 | 10% | |||
Consecutive Quarters | 1Q2021 | 4Q2020 | % Change | |||||
Total Accounts (in thousands) | 1,325 | 1,073 | 23% | |||||
Customer Equity (in billions) (1) | $ | 330.6 | $ | 288.6 | 15% | |||
Cleared DARTs (in thousands) (2) | 2,964 | 1,871 | 58% | |||||
Total Customer DARTs (in thousands) (2) | 3,308 | 2,109 | 57% | |||||
Cleared Customers | ||||||||
Commission per Cleared Commissionable Order (3) | $ | 2.31 | $ | 2.46 | (6%) | |||
Cleared Avg. DART per Account (Annualized) | 622 | 459 | 36% | |||||
Net Revenue per Avg. Account (Annualized) | $ | $2,610 | $ | $2,151 | 21% | |||
________________________
(1)Excludes non-customers.
(2)Daily average revenue trades (“DARTs”) are based on customer orders.
(2)(3)Commissionable Orderorder – a customer order that generates commission revenue.
commissions.
Results of Operations
The table below table presents our consolidated results of operations for the periods indicated. The period-to-period comparisons below of financial results are not necessarily indicative of future results.
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
(in millions, except share and per share amounts) | (in millions, except share and per share amounts) | |||||||||||
Revenues | ||||||||||||
Commissions | $ | 269 | $ | 173 | $ | 412 | $ | 269 | ||||
Other fees and services1 | 38 | 35 | ||||||||||
Other income (loss)2 | (31) | 104 | ||||||||||
Other fees and services | 56 | 38 | ||||||||||
Other income (loss) | 120 | (31) | ||||||||||
Total non-interest income | 276 | 312 | 588 | 276 | ||||||||
Interest income | 369 | 408 | 390 | 369 | ||||||||
Interest expense | (113) | (162) | (85) | (113) | ||||||||
Total net interest income | 256 | 246 | 305 | 256 | ||||||||
Total net revenues | 532 | 558 | 893 | 532 | ||||||||
Non-interest expenses | ||||||||||||
Execution, clearing and distribution fees | 77 | 61 | 68 | 77 | ||||||||
Employee compensation and benefits | 80 | 71 | 97 | 80 | ||||||||
Occupancy, depreciation and amortization | 17 | 14 | 20 | 17 | ||||||||
Communications | 6 | 6 | 8 | 6 | ||||||||
General and administrative | 37 | 24 | 59 | 37 | ||||||||
Customer bad debt | 7 | 43 | 2 | 7 | ||||||||
Total non-interest expenses | 224 | 219 | 254 | 224 | ||||||||
Income before income taxes | 308 | 339 | 639 | 308 | ||||||||
Income tax expense | 18 | 15 | 53 | 18 | ||||||||
Net income | 290 | 324 | 586 | 290 | ||||||||
Less net income attributable to noncontrolling interests | 244 | 275 | 479 | 244 | ||||||||
Net income available for common stockholders | $ | 46 | $ | 49 | $ | 107 | $ | 46 | ||||
Earnings per share | ||||||||||||
Basic | $ | 0.60 | $ | 0.65 | $ | 1.18 | $ | 0.60 | ||||
Diluted | $ | 0.60 | $ | 0.64 | $ | 1.16 | $ | 0.60 | ||||
Weighted average common shares outstanding | ||||||||||||
Basic | 76,751,168 | 75,101,062 | 90,789,321 | 76,751,168 | ||||||||
Diluted | 77,568,464 | 75,977,511 | 91,766,142 | 77,568,464 | ||||||||
Comprehensive income | ||||||||||||
Net income available for common stockholders | $ | 46 | $ | 49 | $ | 107 | $ | 46 | ||||
Other comprehensive income | ||||||||||||
Cumulative translation adjustment, before income taxes | (7) | (1) | (17) | (7) | ||||||||
Income taxes related to items of other comprehensive income | - | - | - | - | ||||||||
Other comprehensive income (loss), net of tax | (7) | (1) | ||||||||||
Other comprehensive loss, net of tax | (17) | (7) | ||||||||||
Comprehensive income available for common stockholders | $ | 39 | $ | 48 | $ | 90 | $ | 39 | ||||
Comprehensive income attributable to noncontrolling interests | ||||||||||||
Net income attributable to noncontrolling interests | $ | 244 | $ | 275 | $ | 479 | $ | 244 | ||||
Other comprehensive income - cumulative translation adjustment | (31) | (1) | (59) | (31) | ||||||||
Comprehensive income attributable to noncontrolling interests | $ | 213 | $ | 274 | $ | 420 | $ | 213 | ||||
____________________________
(1)Includes market data fees, account activity fees, risk exposure fees, order flow income from options exchange-mandated programs, and revenues from other fees and services.
(2)Includes gains (losses) from principal transactions; the impact of our currency diversification strategy; gains (losses) from our equity method investments, and other revenues not directly attributable to our core business offerings.
Three Months Ended March 31, 20202021 (“current quarter”) compared to the Three Months Ended March 31, 20192020 (“prior year quarter”)
Net Revenues
Total net revenues, for the current quarter, decreased $26increased $361 million, or 5%68%, compared to the prior year quarter, to $532$893 million. The decreaseincrease in net revenues was primarily due to lowerhigher commissions, other income, partially offset by higher commissions, net interest income and other fees and services.services, and net interest income.
Commissions
We earn commissions from our cleared customers for whom we act as an executing and clearing broker and from our non-cleared customers for whom we act as an execution-only broker. We have a commission structure that allows customers to choose between an all-inclusive fixed, or “bundled”, rate and a tiered, or “unbundled”, rate that offers lower commissions for high volume customers. For “unbundled” commissions, we pass through regulatory and exchange fees separately from our commissions, adding transparency to our fee structure. Commissions also include payments for order flow income received from IBKR LiteSM liquidity providers. (Our IBKR LiteSM offering provides commission-free trades on U.S. exchange-listed stocks and ETFs and generates no commission revenues from customers on these trades.) Our commissions are geographically diversified.
Commissions, for the current quarter, increased $96$143 million, or 55%53%, compared to the prior year quarter, to $269$412 million, driven by significantly higher customer trading volumes, particularly in options, futuresstocks and stocks.options. Total customer options and futures contractcontracts and stock share volumes increased 64%, 59%72% and 24%411%, respectively, while futures contracts decreased 17% compared to the prior year quarter. The increaseRemoving the effect of trading in customer trading volumes across all product types was in line with higher volatility associated withlow-priced stocks, the COVID-19 pandemic in the current quarter as compared to the prior year quarter.stock share volume rose 134%. Total DARTs for cleared and execution-only customers, for the current quarter, increased 71%128% to 1.453.3 million, compared to 848 thousand1.5 million for the prior year quarter. DARTs for cleared customers, i.e., customers for whom we execute trades, as well as clear and carry positions, for the current quarter, increased 72%128% to 1.303.0 million, compared to 757 thousand1.3 million for the prior year quarter. Average commission per commissionable order for cleared customers, for the current quarter, decreased 10%30% to $3.30,$2.31, compared to $3.68 $3.30for the prior year quarter, reflecting smaller average order sizes in stocks,options, futures and foreign exchange andas well as higher in options.exchange rebates passed through to our customers.
Other Fees and Services
We earn fee income on services provided to our customers, which includes market data fees, risk exposure fees, minimum activity fees, payments for order flow from exchange-mandated programs, and other fees and services charged to customers.
Other fees and services, for the current quarter, increased $3$18 million, or 9%47%, compared to the prior year quarter, to $38$56 million, driven by a $2$7 million increase in IPO-related fee income, a $6million increase in market data fee income, and a $3 million increase in payments for order flow income from options exchange-mandated programs, and increases of $1 million in each of market data fee income and FDIC sweep fee income,programs; partially offset by a $1$2 million decrease in account activityFDIC Insured Bank Deposit Sweep Program fee income.
Other Income
Other income for the current quarter, decreased $135 million compared to the prior year quarter, to a lossconsists of $31 million, mainly comprised of (1) $111 million related to our strategic investment in Tiger Brokers, which swung to an $8 million mark-to-market loss in the current quarterforeign exchange gains (losses) from a $103 million mark-to-market gain in the prior year quarter; and (2) $30 million related to our currency diversification strategy, which lost $49 million in the current quarter comparedgains (losses) from principal transactions, gains (losses) from our equity method investments, and other revenue not directly attributable to a loss of $19 million in the prior year quarter; partially offset by (3) $6 million related our U.S. government securities portfolio, on which we recorded an $11 million net mark-to-market gain in the current quarter compared to a $5 million net mark-to-market gain in the prior year quarter.
core business offerings. A discussion of our approach to managing foreign currency exposure is contained in Part I, Item 3 of this Quarterly Report on Form 10-Q entitled “Quantitative and Qualitative Disclosures about Market Risk.”
Other income, for the current quarter, increased $151 million, compared to the prior year quarter, to $120 million. This increase was mainly comprised of $107 million related to our strategic investment in Tiger Brokers, which swung to a $99 million mark-to-market gain in the current quarter from an $8 million mark-to-market loss in the prior year quarter and $47 million related to our currency diversification strategy, which lost $2 million in the current quarter compared to a loss of $49 million in the prior year quarter.
Interest Income and Interest Expense
We earn interest on margin lending to customers secured by marketable securities these customers hold with us; from our investments in U.S. and foreign government securities; from borrowing and lending securities; and on deposits (in positive interest rate currencies) with banks. We pay interest on cash balances (in sufficiently positive interest rate currencies) customers hold with us; for borrowing and lending securities; and on our borrowings.
Net interest income (interest income less interest expense), for the current quarter, increased $10$49 million, or 4%19%,compared to the prior year quarter, to $256$305 million. The increase in net interest income was driven by higherstrong securities lending activity, tempered by a decrease in the average Federal Funds effective rate, which reduced earnings on segregated customer credit balancescash and higher average customer margin loan balances, partially offset by lower benchmark interest rates.lending.
Net interest income on customer balances, for the current quarter, increased $3decreased $48 million, compared to the prior year quarter, driven by an $8.6 billion increase in average customer credit balances, a portion of which was invested in interest-bearing U.S. government securities, and a $1.4 billion increase in average customer margin loans, mostly offset by a 1.15% decrease in the average federal funds effective rate to 1.25%0.08% from 2.40%1.25% in the prior year quarter. See the “Business Environment” section above in this Item 2 for a further discussion about the change in interest rates in the current quarter.
We earn income on securities loaned and borrowed to support customer long and short stock holdings in margin accounts. In addition, our Stock Yield Enhancement Program provides an opportunity for customers with fully-paid stock to allow us to lend it out. We pay customers a rebate on the cash collateral generally equal to 50% of the income we earn from lending the shares. We placeAt March 31, 2021, we placed cash and/or U.S. Treasury securities as collateral securing the loans in the customer’s account.account, held in segregated accounts or at an affiliate acting as collateral agent for the benefit of the customer.
In the current quarter, average securities borrowed increased 1%34%, to $3.8$5.1 billion and average securities loaned increased 20%145%, to $4.5$11.1 billion, compared to the prior year quarter. Net interest earned from securities lending is affected by the level of demand for securities positions held by our customers.customers that investors were looking to sell short. During the current quarter, net interest earned from securities lending transactions increased $10$113 million, or 19%182%, compared to the prior year quarter, as we satisfied thewere able to satisfy investor demand for more of the hard-to-borrow securities that investors were lookingthey sought to sell short. It should be noted that securities lending transactions entered into to support customer activity may produce interest income (expense) that is offset by interest expense (income) related to customer balances.
The Company measures return on interest-earning assets using net interest margin (“NIM”). NIM is computed by dividing the annualized net interest income by the average interest-earning assets for the period. Interest-earning assets consist of cash and securities segregated for regulatory purposes (including U.S. government securities and securities purchased under agreements to resell), customer margin loans, securities borrowed, other interest-earning assets (solely firm assets), and customer cash balances swept into FDIC insured banks as part of our Insured Bank Deposit Sweep Program. Interest-bearing liabilities consist of customer credit balances, securities loaned, and other interest-bearing liabilities.
Yields are generally a reflection of benchmark interest rates in each currency in which the Company and its customers hold cash balances. Because a substantial portion of customer cash and margin loans are denominated in currencies other than the U.S. dollar, changes in U.S. benchmark interest rates do not impact the total amount of segregated cash and securities, customer margin loans and customer credit balances. Furthermore, because interest, when benchmark rates are at higher levels, is paid only on eligible cash credit balances (i.e., balances over $10 thousand or equivalent, in securities accounts with over $100 thousand in equity, and in smaller accounts at reduced rates), changes in benchmark interest rates are not passed through to the total amount of customer credit balances. Finally, the Company’s policies with respect to currencies with negative interest rates impact the yields on segregated cash and customer credit balances as effective interest rates in those currencies fluctuate.
Generally, as benchmark interest rates rise, a larger portion of the interest earned on securities lending transactions is reported as net interest income on “Segregated cash and securities, net” instead of “Securities borrowed and loaned, net” because interest earned on cash collateral held in specially designated bank accounts for the benefit of customers, in accordance with the U.S. customer protection rules, increases.
The table below presents net interest income information corresponding to interest-earning assets and interest-bearing liabilities for the periods indicated.
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
(in millions) | (in millions) | |||||||||||
Average interest-earning assets | ||||||||||||
Segregated cash and securities | $ | 33,864 | $ | 25,621 | $ | 46,726 | $ | 33,864 | ||||
Customer margin loans | 27,096 | 25,660 | 39,964 | 27,096 | ||||||||
Securities borrowed | 3,816 | 3,779 | 5,108 | 3,816 | ||||||||
Other interest-earning assets | 5,668 | 5,049 | 5,416 | 5,668 | ||||||||
FDIC sweeps 1 | 2,532 | 1,839 | 2,817 | 2,532 | ||||||||
$ | 72,976 | $ | 61,948 | $ | 100,031 | $ | 72,976 | |||||
Average interest-bearing liabilities | ||||||||||||
Customer credit balances | $ | 58,499 | $ | 49,875 | $ | 77,887 | $ | 58,499 | ||||
Securities loaned | 4,529 | 3,779 | 11,117 | 4,529 | ||||||||
Other interest-bearing liabilities | 618 | 12 | 138 | 618 | ||||||||
$ | 63,646 | $ | 53,666 | $ | 89,142 | $ | 63,646 | |||||
Net Interest income | ||||||||||||
Segregated cash and securities, net | $ | 106 | $ | 136 | $ | 2 | $ | 106 | ||||
Customer margin loans 2 | 139 | 174 | 117 | 139 | ||||||||
Securities borrowed and loaned, net | 62 | 52 | 175 | 62 | ||||||||
Customer credit balances, net 2 | (69) | (137) | 9 | (69) | ||||||||
Other net interest income 1/3 | 26 | 30 | ||||||||||
Other net interest income 1,3 | 9 | 26 | ||||||||||
Net interest income 3 | $ | 264 | $ | 255 | $ | 312 | $ | 264 | ||||
Net interest margin ("NIM") | 1.45% | 1.67% | 1.26% | 1.45% | ||||||||
Annualized Yields | ||||||||||||
Segregated cash and securities | 1.26% | 2.15% | 0.02% | 1.26% | ||||||||
Customer margin loans | 2.06% | 2.75% | 1.19% | 2.06% | ||||||||
Customer credit balances | 0.47% | 1.11% | -0.05% | 0.47% | ||||||||
______________________________
(1)Represents the average amount of customer cash swept into FDIC-insured banks as part of our Insured Bank Deposit Sweep Program. This item is not recorded in the Company's condensed consolidated statements of financial condition. Income derived from program deposits is reported in other net interest income in the table above.
(2)Interest income and interest expense on customer margin loans and customer credit balances, respectively, are calculated on daily cash balances within each customer’s account on a net basis, which may result in an offset of balances across multiple account segments (e.g., between securities and commodities segments).
(3)Includes income from financial instruments that has the same characteristics as interest, but is reported in other fees and services and other income in the Company’s condensed consolidated statements of comprehensive income. For the three months ended March 31, 2021 and 2020, and 2019, $4$8 million and $3$4 million were reported in other fees and services, respectively, and $4-$1 million and $6$4 million were reported in other income, respectively.
Non-Interest Expenses
Non-interest expenses, for the current quarter, increased $5$30 million, or 2%13%, compared to the prior year quarter, to $224$254 million, mainly due to a $16 million increase in execution, clearing and distribution fees; a $13$22 million increase in general and administrative expenses;expenses, a $9$17 million increase in employee compensation and benefits; andbenefits, a $3 million increase in occupancy expenses;expenses, and a $2 million increase in communications expense; partially offset by a $36$9 million decrease in execution, clearing and distribution fees, and a $5 million decrease in customer bad debt expense. As a percentage of total net revenues, non-interest expenses were 42%28% for the current quarter and 39%42% for the prior year quarter.
Execution, Clearing and Distribution Fees
Execution, clearing and distribution fees include the costs of executing and clearing trades, net of liquidity rebates received from various exchanges and market centers, as well as regulatory fees and market data fees. Execution fees are paid primarily to electronic exchanges and market centers on which we trade. Clearing fees are paid to clearing houses and clearing agents. Market data fees are paid to third parties to receive streaming price quotes and related information.
Execution, clearing and distribution fees, for the current quarter, increased $16decreased $9 million, or 26%12%,compared to the prior year quarter, to $77$68 million, driven by a $32 million decrease in exchange fees, due to higher trade volumes, as total customer optionsoffsetting volume-related liquidity rebates received from certain exchanges; partially offset by an $11 million increase in regulatory transaction fees; a $6 million increase in clearing and futures contractdepository fees; and stock share volumes increased 64%, 59% and 24%, respectively, compared to the prior year quarter.a $5 million increase in market data fees.
Employee Compensation and Benefits
Employee compensation and benefits include salaries, bonuses and other incentive compensation plans, group insurance, contributions to benefit programs and other related employee costs.
Employee compensation and benefits expenses, for the current quarter, increased $9$17 million, or 13%21%,compared to the prior year quarter, to $80$97 million, associated with a 17%26% increase in the average number of employees to 1,673,2,110 for the current quarter, compared to 1,4361,673 for the prior year quarter. We continued to add staff in customer service, legal and compliance, and software development. As we continue to grow, our focus on automation has allowed us to maintain a relatively small staff. As a percentage of total net revenues, employee compensation and benefits expenses were 15%11% for the current quarter and 13%15% for the prior year quarter.
Occupancy, Depreciation and Amortization
Occupancy expenses consist primarily of rental payments on office and data center leases and related occupancy costs, such as utilities. Depreciation and amortization expenses result from the depreciation of fixed assets, such as computing and communications hardware, as well as amortization of leasehold improvements and capitalized in-house software development.
Occupancy, depreciation and amortization expenses, for the current quarter, increased $3 million, or 21%18%,compared to the prior year quarter, to $17$20 million, mainly due to higher costs related to the expansion of our physical space for both offices and data centers. As a percentage of total net revenues, occupancy, depreciation and amortization expenses were 3%2% for both the current quarter and 3% for the prior year quarter.
Communications
Communications expenses consist primarily of the cost of voice and data telecommunications lines supporting our business, including connectivity to exchanges and market centers around the world.
Communications expenses, for the current quarter, were unchanged,increased $2 million compared to the prior year quarter, at $6to $8 million.
General and Administrative
General and administrative expenses consist primarily of advertising; professional services expenses, such as legal and audit work; legal and regulatory matters; and other operating expenses.
General and administrative expenses, for the current quarter, increased $13$22 million, or 54%59%, compared to the prior year quarter, to $37$59 million, mainlyprimarily due to higher professional services fees and expenses related $19 million in additional costs for Brexit-related regulatory onboarding to legal and regulatory matters.bring our new brokerage operations on line in Europe. As a percentage of total net revenues, general and administrative expenses were 7% for both the current quarter and 4% for the prior year quarter.
Customer Bad Debt
Customer bad debt expense consists primarily of losses incurred by customers in excess of their assets with us, net of amounts recovered by us.
Customer bad debt expense, for the current quarter, decreased $36$5 million, compared to the prior year quarter, to $7 million, due to the unusually volatile markets, compared to $43 million in the prior year quarter related to margin lending on a particular security listed on a major U.S. exchange that lost a substantial amount of its value in a very short timeframe, as described in Note 13 - “Commitments, Contingencies, and Guarantees” to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.$2 million.
Income Tax Expense
We pay U.S. federal, state and local income taxes on our taxable income, which is proportional to the percentage we own of IBG LLC. Also, our operating subsidiaries are subject to income tax in the respective jurisdictions in which they operate.
Income tax expense, for the current quarter, increased $3$35 million, or 20%194%, to $18 million, compared to the prior year quarter, to $53 million, primarily due to (1) higher income tax expense attributable to our operating subsidiaries outside the United States (“U.S.”), driven by higher income before taxes at someand an additional $6 million expense related to the consolidation of our foreign subsidiaries.European operations in the aftermath of Brexit; and (2) higher U.S. income tax expense driven by higher income before taxes and IBG, Inc.’s higher ownership percentage of IBG LLC which rose from 18.5% to 21.8%.
The table below presents information about our income tax expense for the periods indicated.
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||
2020 | 2019 | 2021 | 2020 | |||||||
(in millions, except %) | (in millions, except %) | |||||||||
Consolidated | ||||||||||
Consolidated income before income taxes | $ | 308 | $ | 339 | $ | 639 | $ | 308 | ||
IBG, Inc. stand-alone income before income taxes | - | - | - | - | ||||||
Operating subsidiaries income before income taxes | $ | 308 | $ | 339 | $ | 639 | $ | 308 | ||
Operating Subsidiaries | ||||||||||
Operating subsidiaries | ||||||||||
Income before income taxes | $ | 308 | $ | 339 | $ | 639 | $ | 308 | ||
Income tax expense | 9 | 3 | 26 | 9 | ||||||
Net income available to members | $ | 299 | $ | 336 | $ | 613 | $ | 299 | ||
IBG, Inc. | ||||||||||
Average ownership percentage in IBG LLC | 18.5% | 18.1% | 21.8% | 18.5% | ||||||
Net income available to IBG, Inc. from operating subsidiaries | $ | 55 | $ | 61 | $ | 134 | $ | 55 | ||
IBG, Inc. stand-alone income before income taxes | - | - | - | - | ||||||
Income before income taxes | 55 | 61 | 134 | 55 | ||||||
Income tax expense | 9 | 12 | 27 | 9 | ||||||
Net income available to common stockholders | $ | 46 | $ | 49 | $ | 107 | $ | 46 | ||
Consolidated income tax expense | ||||||||||
Income tax expense attributable to operating subsidiaries | $ | 9 | $ | 3 | $ | 26 | $ | 9 | ||
Income tax expense attributable to IBG, Inc. | 9 | 12 | 27 | 9 | ||||||
Consolidated income tax expense | $ | 18 | $ | 15 | $ | 53 | $ | 18 | ||
Operating Results
Income before income taxes, for the current quarter, decreased $31increased $331 million, or 9%107%, to $308$639 million, compared to the prior year quarter. Pretax profit margin was 58%72% for the current quarter and 61%58% for the prior year quarter.
Comparing our operating results for the current quarter to the prior year quarter, excluding the effects of our currency diversification strategy, our net mark-to-market on investments and unusual bad debt expense:using non-GAAP financial measures described below, adjusted net revenues were $581$796 million, up 24%37%; adjusted income before income taxes was $357$542 million, up 23%52%;and adjusted pre-tax profit margin was 61%68% for the current quarter and 62%61% for the prior year quarter. See the “Non-GAAP Financial Measures” section below in this Item 2 for additional details.
Non-GAAP Financial Measures
We use certain non-GAAP financial measures as additional measures to enhance the understanding of our financial results. These non-GAAP financial measures include adjusted net revenues, adjusted income before income taxes, adjusted net income available for common stockholders and adjusted diluted earnings per share (“EPS”). We believe that these non-GAAP financial measures are important measures of our financial performance because they exclude certain items that may not be indicative of our core operating results and business outlook. We believe these non-GAAP financial measures may be useful to investors and analysts in evaluating the operating performance of the business and facilitating a meaningful comparison of our results in the current period to those in prior and future periods.
Adjusted net revenues, adjusted income before income taxes, adjusted net income available for common stockholders and adjusted EPS are non-GAAP financial measures as defined by SEC Regulation G.
•We define adjusted net revenues as net revenues adjusted to remove the effect of our currency diversification strategy and net mark-to-market gains (losses) on investments.
•We define adjusted income before income taxes as income before income taxes adjusted to remove the effect of our currency diversification strategy and net mark-to-market gains (losses) on investments.
•We define adjusted net income available to common stockholders as net income available for common stockholders adjusted to remove the after-tax effects attributable to IBG, Inc. of our currency diversification strategy and net mark-to-market gains (losses) on investments.
Mark-to-market on investments represents the net mark-to-market gains (losses) on our U.S. government securities portfolio, which are typically held to maturity, investments in equity securities that do not qualify for equity method accounting which are measured at fair value, and equity securities taken over by the Company from customers related to losses on margin loans described below.
The effect of our currency diversification strategy and net mark-to-market gains (losses) on investments are excluded because management does not believe they are indicative of our underlying core business performance.
These non-GAAP financial measures should be considered in addition to, rather than as a substitute for, measures of financial performance prepared in accordance with GAAP(1).
__________________________
(1) Refers to generally accepted accounting principles in the United States.
The tables below present a reconciliation of consolidated GAAP to non-GAAP financial measures for the periods indicated.
Three Months Ended March 31, | ||||||
2021 | 2020 | |||||
(in millions) | ||||||
Adjusted net revenues | ||||||
Net revenues - GAAP | $ | 893 | $ | 532 | ||
Non-GAAP adjustments | ||||||
Currency diversification strategy, net | 2 | 49 | ||||
Mark-to-market on investments | (99) | - | ||||
Total non-GAAP adjustments | (97) | 49 | ||||
Adjusted net revenues | $ | 796 | $ | 581 | ||
Three Months Ended March 31, | ||||||
2021 | 2020 | |||||
(in millions) | ||||||
Adjusted income before income taxes | ||||||
Income before income taxes - GAAP | $ | 639 | $ | 308 | ||
Non-GAAP adjustments | ||||||
Currency diversification strategy, net | 2 | 49 | ||||
Mark-to-market on investments | (99) | - | ||||
Total non-GAAP adjustments | (97) | 49 | ||||
Adjusted income before income taxes | $ | 542 | $ | 357 | ||
Adjusted pre-tax profit margin | 68% | 61% | ||||
Three Months Ended March 31, | ||||||
2021 | 2020 | |||||
(in millions) | ||||||
Adjusted net income available for common stockholders | ||||||
Net income available for common stockholders - GAAP | $ | 107 | $ | 46 | ||
Non-GAAP adjustments | ||||||
Currency diversification strategy, net | 0 | 9 | ||||
Mark-to-market on investments | (22) | - | ||||
Income tax effect of above adjustments1 | 4 | (2) | ||||
Total non-GAAP adjustments | (17) | 7 | ||||
Adjusted net income available for common stockholders | $ | 90 | $ | 54 | ||
Note: Amounts may not add due to rounding.
Three Months Ended March 31, | ||||||
2021 | 2020 | |||||
(in dollars, except share amounts) | ||||||
Adjusted diluted EPS | ||||||
Diluted EPS - GAAP | $ | 1.16 | $ | 0.60 | ||
Non-GAAP adjustments | ||||||
Currency diversification strategy, net | 0.00 | 0.12 | ||||
Mark-to-market on investments | (0.24) | 0.00 | ||||
Income tax effect of above adjustments1 | 0.05 | (0.02) | ||||
Total non-GAAP adjustments | (0.19) | 0.09 | ||||
Adjusted diluted EPS | $ | 0.98 | $ | 0.69 | ||
Diluted weighted average common shares outstanding | 91,766,142 | 77,568,464 | ||||
Note: Amounts may not add due to rounding.
______________________________
(1)The income tax effect is estimated using the corporate income tax rates applicable to the Company.
Liquidity and Capital Resources
We maintain a highly liquid balance sheet. The majority of our assets consist of investments of customer funds, collateralized receivables arising from customer-related and proprietary securities transactions, and exchange-listed marketable securities, which are marked-to-market daily. Collateralized receivables consist primarily of customer margin loans, securities borrowed and securities purchased under agreements to resell. As of March 31, 2020,2021, total assets were $75.8$103.8 billion of which approximately $75.2$102.8 billion, or 99.2%99.0%, were considered liquid.
Decisions on the allocation of capital are based upon, among other things, prudent risk management guidelines, potential liquidity and cash flow needs for current and future business activities, regulatory capital requirements, and projected profitability. Our Treasury department, Market Risk Committee and other management control groups assist in evaluating, monitoring and controlling the impact that our business activities have on our financial condition, liquidity and capital structure. The objective of these policies is to support our business strategies while ensuring ongoing and sufficient liquidity. Our significant excess regulatory capital comprises an aggregate across our many regulated subsidiaries, and we believe this financial strength provides our customers with a source of comfort.
Daily monitoring of liquidity needs and available collateral levels is undertaken to help ensure that an appropriate liquidity cushion, in the form of cash and unpledged collateral, is maintained at all times. We actively manage our excess liquidity and we maintain significant borrowing facilities through the securities lending markets and with banks. As a general practice, we maintain sufficient levels of cash on hand to provide us with a buffer should we need immediately available funds for any reason. In addition, pursuant to our liquidity management plan we perform periodic liquidity stress tests, which are designed to identify and reserve liquid assets that would be available under market or idiosyncratic stress events. Based on our current level of operations, we believe our cash flows from operations, available cash and available borrowings will be adequate to meet our future liquidity needs for more than the next twelve months. In light of the increase in trading activity and volatility during the current quarter, management exercised its investment discretion over our liquidity management plan to expand our conservative base of immediately available liquidity.
As of March 31, 2020,2021, liability balances in connection with securities loaned and short-term borrowings were lower than their respectivethe average monthly balancesbalance during the current quarter, and our payablessecurities loaned and payable to customers were higher than thetheir average monthly balance during the current quarter.
Cash and cash equivalents held by our non-U.S. operating subsidiaries as of March 31, 20202021 were $1,324$966 million ($1,1211,560 million as of December 31, 2019)2020). These funds are primarily intended to finance each individual operating subsidiary’s local operations, and thus would not be available to fund U.S. domestic operations unless repatriated through payment of dividends to IBG LLC. As of March 31, 2020,2021, we had no intention to repatriate furtherany amounts from non-U.S.non-U.S. operating subsidiaries except for Timber Hill Canada Company, which discontinued its market making activity in Canada in 2019.subsidiaries. With the enactment of the U.S. Tax Cuts and Jobs Act on December 22, 2017, we recognized a liability for the one-time transition tax on deemed repatriation of earnings of some of our foreign subsidiaries for the year ended December 31, 2017. As a result, in the event dividends were to be paid to the Company in the future by a non-U.S. operating subsidiaries, the Company would not be required to accrue and pay income taxes on such dividends, except for foreign taxes in the form of dividend withholding tax, if any, imposed on the recipient of the distribution or dividend distribution tax imposed on the payor of the distribution.
Historically, our consolidated equity has consisted primarily of accumulated retained earnings, which to date have been sufficient to fund our operations and growth. Our consolidated equity increased 10%16% to $9.4 billion as of March 31, 2021 from $8.1 billion as of March 31, 2020 from $7.4 billion as of March 31, 2019.2020. This increase is attributable to total comprehensive income, partially offset by distributions and dividends paid during the last four quarters.
Cash Flows
The table below presents our cash flows from operating activities, investing activities and financing activities for the periods indicated.
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
(in millions) | (in millions) | |||||||||||
Net cash provided by operating activities | $ | 5,203 | $ | 603 | $ | 3,734 | $ | 5,203 | ||||
Net cash used in investing activities | (11) | (42) | (21) | (11) | ||||||||
Net cash used in financing activities | (63) | (70) | (1) | (63) | ||||||||
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (38) | (2) | (76) | (38) | ||||||||
Increase in cash, cash equivalents, and restricted cash | $ | 5,091 | $ | 489 | $ | 3,636 | $ | 5,091 | ||||
Our cash flows from operating activities are largely a reflection of the changes in customer credit and margin loan balances. Our cash flows from investing activities are primarily related to other investments, capitalized internal software development, purchases and sales of memberships, trading rights and shares at exchanges where we trade, and strategic investments where such investments may enable us to offer better execution alternatives to our current and prospective customers, allow us to influence exchanges to provide competing products at better prices using sophisticated technology, or enable us to acquire either technology or customers faster than we could develop them on our own. Our cash flows from financing activities are comprised of short-term borrowings, issuances and redemptions of short-term senior notes, capital transactions, and payments made to Holdings under the Tax Receivable Agreement. Short-term borrowings from banks, and through our senior notes program are part of our daily cash management in support of operating activities. Capital transactions consist primarily of quarterly dividends paid to common stockholders and related distributions paid to Holdings.
Three Monthsmonths Ended March 31, 2020:2021: Our cash, cash equivalents, and restricted cash (i.e., cash and cash equivalents that are subject to withdrawal or usage restrictions) increased by $5,091$3,636 million to $17.4$23.8 billion for the three months ended March 31, 2020.2021. We raised $5,203$3,734 million in net cash from operating activities mainly driven by customer margin loans which decreased by $11.2 billion as customers deleveraged due to the COVID-19 pandemic; and customer credit balances which increased by $6.5$5.3 billion; partially offset by a $12.4 billion increase in our investments in securities segregated for regulatory purposes securities.which decreased $2.8 billion; partially offset by customer margin loans which increased by $3.3 billion. We used net cash of $74$22 million in our investing and financing activities, primarily for distributions to noncontrolling interests, and dividends paid to our common stockholders.stockholders, and issuances and redemptions of short-term senior notes. Investing activities mainly consisted of purchases of other investments and property, equipment and intangible assets.
Three Monthsmonths Ended March 31, 2019:2020: For a discussion of changes in cash flows for the three months ended March 31, 20192020 refer to our Quarterly Report on Form 10-Q filed with the SEC on May 9, 2019.11, 2020.
Senior Notes
During 2020, IBG LLC initiated a program to offer senior notes in private placements to certain qualified customers of IB LLC. IBG LLC intends to use the proceeds for general financing purposes when interest spread opportunities arise. The senior notes are offered at an issue price of $1 thousand dollars per note at an interest rate calculated by adding the benchmark rate to a rate (spread) that IBG LLC announces from time-to-time. The benchmark rate is the effective federal funds rate as reported by the Federal Reserve Bank of New York on the morning of the date of the offering. The senior notes mature no later than the thirtieth day following the issuance date, and IBG LLC, at its option, may redeem the senior notes at any time, at a redemption price equal to 100% of the principal amount of the senior notes to be redeemed, plus accrued and unpaid interest.
During the three months ended March 31, 2021 IBG LLC issued senior notes of $602 million and redeemed senior notes of $498 million, respectively. The senior notes carried a weighted average interest rate of 1%. As of March 31, 2021, IBG LLC had $200 million of senior notes outstanding, all of which carry a 1% per annum interest rate, and are included in short-term borrowings in the condensed consolidated statements of financial condition.
Regulatory Capital Requirements
Our principal operating subsidiaries are subject to separate regulation and capital requirements in the U.S. and other jurisdictions. IB LLC, TH LLC and IB Corp are subject to the Uniform Net Capital Rule (Rule 15c3-1) under the Exchange Act, IB LLC is also subject to the CFTC’s minimum financial requirements (Regulation 1.17). IBC is subject to the Investment Industry Regulatory Organization of Canada risk adjusted capital requirement, IBUK is subject to the United Kingdom Financial Conduct Authority Capital Requirements Directive, IBLUX is subject to the Luxembourg Commission de Surveillance du Secteur Financier financial resources requirement, IBKRFS is subject to the Swiss Financial Market Supervisory Authority eligible equity requirement, IBI is subject to the National Stock Exchange of India net capital requirements, IBHK is subject to the Hong Kong Securities Futures Commission liquid capital requirement, IBSJ is subject to the Japanese Financial Supervisory Agency capital requirements and IBA is subject to the Australian Securities Exchange liquid capital requirement.
As of March 31, 2020, aggregate excess regulatory capital for2021, all our operating subsidiaries was $6.4 billion, and allof the operating subsidiaries were in compliance with their respective regulatory capital requirements.
The table below summarizes the capital, For additional information regarding our regulatory capital requirements and excess regulatory capital assee Note 15 – ‘‘Regulatory Requirements’’ to the unaudited condensed consolidated financial statements in Part I, Item 1 of March 31, 2020.
Net Capital/ | |||||||||
Eligible Equity | Requirement | Excess | |||||||
(in millions) | |||||||||
IB LLC | $ | 5,137 | $ | 343 | $ | 4,794 | |||
IBKRFS | 579 | 21 | 558 | ||||||
IBHK | 438 | 109 | 329 | ||||||
Other regulated operating subsidiaries | 789 | 42 | 747 | ||||||
$ | 6,943 | $ | 515 | $ | 6,428 | ||||
this Quarterly Report on Form 10-Q.
Capital Expenditures
Our capital expenditures are comprised of compensation costs of our software engineering staff for development of software for internal use and expenditures for computer, networking and communications hardware, and leasehold improvements. These expenditure items are reported as property, equipment, and intangible assets. Capital expenditures for property, equipment, and intangible assets were approximately $12$21 million and $26$12 million for the three months ended March 31, 20202021 and 2019,2020, respectively. In the future, we plan to meet capital expenditure needs with cash from operations and cash on hand, as we continue our focus on technology infrastructure initiatives to further enhance our competitive position. In response to changing economic conditions, we believe we have the flexibility to modify our capital expenditures by adjusting them (either upward or downward) to match our actual performance. If we pursue any additional strategic acquisitions, we may incur additional capital expenditures.
Seasonality
Our businesses are subject to seasonal fluctuations, reflecting varying numbers of market participants at times during the year, varying numbers of trading days from quarter-to-quarter, and declines in trading activity due to holidays. Typical seasonal trends may be superseded by market or world events, which can have a significant impact on prices and trading volume.
Inflation
Although we cannot accurately anticipate the effects of inflation on our operations, we believe that, for the three most recent years, inflation has not had a material impact on our results of operations and will not likely have a material impact in the foreseeable future.
Investments in U.S. Government Securities
We invest in U.S. government securities for the purpose of satisfying U.S. regulatory requirements. As a broker-dealer, unlike banks, we are required to mark these investments to market even though we intend to hold them to maturity. Sudden increases (decreases) in interest rates will cause mark-to-market losses (gains) on these securities, which are recovered (eliminated) if we hold them to maturity, as currently intended. The impact of changes in interest rates is further described in Part I, Item 3 of this Quarterly Report on Form 10-Q entitled “Quantitative and Qualitative Disclosures about Market Risk.”
Strategic Investments and Acquisitions
We regularly evaluate potential strategic investments and acquisitions. We hold strategic investments in certain electronic trading exchanges, including BOX Options Exchange, LLC and OneChicago LLC. In addition, in June 2018, we madeWe also hold a strategic investment in Tiger Brokers, an online stock brokerage established for Chinese retail and institutional customers. On March 20, 2019, Tiger Brokers priced its initial public offering (“IPO”) of American Depositary Shares listed on Nasdaq Global Select market and, concurrently with the IPO,customers, in which we purchased unregistered ordinary shares in Tiger Brokers through a private placement offering which transactions resulted inhave a beneficial ownership interest of 7.6%.
We intend to continue making acquisitions on an opportunistic basis, generally only when the acquisition candidate will, in our opinion, enable us to offer better execution alternatives to our current and prospective customers, allow us to influence exchanges to provide competing products at better prices using sophisticated technology, or enable us to acquire either technology or customers faster than we could develop them on our own.
As announced on December 4, 2020, we signed an agreement with Folio Investments Inc. to acquire its self-directed retail brokerage segment. The transaction closed in January 2021 and resulted in the acquisition of approximately 57,000 customer accounts.
As of March 31, 2020,2021, other than the transaction disclosed above there were no other definitive agreements with respect to any material acquisition.
Certain Information Concerning Off-Balance-Sheet Arrangements
We may be exposed to a risk of loss not reflected in our condensed consolidated financial statements for futures products, which represent our obligations to settle at contracted prices, and which may require us to repurchase or sell in the market at prevailing prices. Accordingly, these transactions result in off-balance sheet risk, as our cost to liquidate such futures contracts may exceed the amounts reported in our condensed consolidated statements of financial condition.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements and accompanying notes. These estimates and assumptions are based on judgment and the best available information at the time. Therefore, actual results could differ materially from those estimates. We believe that the critical policies listed below represent the most significant estimates used in the preparation of our consolidated financial statements. See Note 2 – “Significant Accounting Policies” to the unaudited condensed consolidated financial statements for a summary of our significant accounting policies in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Contingencies
Our policy is to estimate and accrue for potential losses that may arise out of litigation and regulatory proceedings, to the extent that such losses are probable and can be estimated. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different. Our total liability accrued with respect to litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses based on, among other factors, the progress of each case, our experience with and industry experience with similar cases and the opinions and views of internal and external legal counsel. Given the inherent difficulty of predicting the outcome of our litigation and regulatory matters, particularly in cases or proceedings in which substantial or indeterminate damages or fines are sought, or where cases or proceedings are in the early stages, we cannot estimate losses or ranges of losses for cases or proceedings where there is only a reasonable possibility that a loss may be incurred.
Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits are based on enacted tax laws and reflect management’s best assessment of estimated future taxes to be paid. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Determining income tax expense requires significant judgment and estimates.
Deferred income tax assets and liabilities arise from temporary differences between the tax and financial statement recognition of the underlying assets and liabilities. In evaluating our ability to recover our deferred tax assets within the jurisdictions from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, historical results are adjusted for changes in accounting policies and incorporate assumptions including the amount of future state, federal and foreign pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax-planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, three years of cumulative operating income (loss) are considered. Deferred income taxes have not been provided for U.S. tax liabilities or for additional foreign taxes on the unremitted earnings of foreign subsidiaries that have been indefinitely reinvested.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. We record tax liabilities in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 740 and adjust these liabilities when management’s judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in payments that are different from the current estimates of these tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information becomes available.
We recognize that a tax benefit from an uncertain tax position may be recognized only when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. A tax position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement.
Accounting Pronouncements Issued But Not Yet Adopted
For additional information regarding FASB Accounting Standards Updates (“ASU”s) that have been issued but not yet adopted and that may impact the Company, refer to Note 2 – “Significant Accounting Policies” to the unaudited condensed consolidated financial statements in Part I, Item 1 of this quarterlyQuarterly Report on form 10-Q. As of March 31, 2021, there were no accounting pronouncements issued but not adopted that were relevant to the Company.
Non-GAAP Financial Measures
We use certain non-GAAP financial measures as additional measures to enhance the understanding of our financial results. These non-GAAP financial measures include adjusted net revenues, adjusted income before income taxes, adjusted net income available for common stockholders and adjusted diluted earnings per share (“EPS”). We believe that these non-GAAP financial measures are important measures of our financial performance because they exclude certain items that may not be indicative of our core operating results and business outlook and may be useful to investors and analysts in evaluating the operating performance of the business and facilitating a meaningful comparison of our results in the current period to those in prior and future periods.
Adjusted net revenues, adjusted income before income taxes, adjusted net income available for common stockholders and adjusted EPS are non-GAAP financial measures as defined by SEC Regulation G.
•We define adjusted net revenues as net revenues adjusted to remove the effect of our currency diversification strategy and net mark-to-market on investments.
•We define adjusted income before income taxes as income before income taxes adjusted to remove the effect of our currency diversification strategy, net mark-to-market on investmentsand unusual bad debt expense.
•We define adjusted net income available to common stockholders as net income available for common stockholders adjusted to remove the after-tax effects of our currency diversification strategy, net mark-to-market on investments, and unusual bad debt expense attributable to IBG, Inc.
Mark-to-market on investments represents the net mark-to-market gains (losses) on our U.S. government securities portfolio, which are typically held to maturity, investments in equity securities that do not qualify for equity method accounting which are measured at fair value, and equity securities taken over by the Company from customers related to losses on margin loans described below.
Unusual bad debt expense includes material losses on margin loans resulting from unusual events that occur in the marketplace. For the three months ending March 31, 2019, unusual bad debt expense reflects losses recognized on margin lending to a small number of our brokerage customers that had taken relatively large positions in a security listed on a major U.S. exchange, which lost a substantial amount of its value in a very short timeframe. (See Note 13 – “Commitments, Contingencies and Guarantees” to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly report on Form10-Q.)
The effect of our currency diversification strategy, net mark-to-market on investments and unusual bad debt expense are excluded because management does not believe they are indicative of our underlying core business performance.
These non-GAAP measures should be considered in addition to, rather than as a substitute for, measures of financial performance prepared in accordance with GAAP2.
__________________________
2 Refers to generally accepted accounting principles in the United States.
The table below presents a reconciliation of consolidated GAAP to non-GAAP financial measures for the periods indicated.
Three Months Ended March 31, | ||||||
2020 | 2019 | |||||
(in millions, except share and per share amounts) | ||||||
Adjusted net revenues | ||||||
Net revenues - GAAP | $ | 532 | $ | 558 | ||
Non-GAAP adjustments | ||||||
Currency diversification strategy, net | 49 | 19 | ||||
Mark-to-market on investments | - | (109) | ||||
Total non-GAAP adjustments | 49 | (90) | ||||
Adjusted net revenues | $ | 581 | $ | 468 | ||
Adjusted income before income taxes | ||||||
Income before income taxes - GAAP | $ | 308 | $ | 339 | ||
Non-GAAP adjustments | ||||||
Currency diversification strategy, net | 49 | 19 | ||||
Mark-to-market on investments | - | (109) | ||||
Unusual bad debt expense | - | 42 | ||||
Total non-GAAP adjustments | 49 | (48) | ||||
Adjusted income before income taxes | $ | 357 | $ | 291 | ||
Adjusted pre-tax profit margin | 61% | 62% | ||||
Adjusted net income available for common stockholders | ||||||
Net income available for common stockholders - GAAP | $ | 46 | $ | 49 | ||
Non-GAAP adjustments | ||||||
Currency diversification strategy, net | 9 | 3 | ||||
Mark-to-market on investments | - | (20) | ||||
Unusual bad debt expense | - | 8 | ||||
Income tax effect of above adjustments1 | (2) | 2 | ||||
Total non-GAAP adjustments | 7 | (7) | ||||
Adjusted net income available for common stockholders | $ | 54 | $ | 42 | ||
Adjusted diluted EPS | ||||||
Diluted EPS - GAAP | $ | 0.60 | $ | 0.64 | ||
Non-GAAP adjustments | ||||||
Currency diversification strategy, net | 0.12 | 0.04 | ||||
Mark-to-market on investments | 0.00 | (0.26) | ||||
Unusual bad debt expense | 0.00 | 0.10 | ||||
Income tax effect of above adjustments1 | (0.02) | 0.03 | ||||
Total non-GAAP adjustments | 0.09 | (0.09) | ||||
Adjusted diluted EPS | $ | 0.69 | $ | 0.55 | ||
Diluted weighted average common shares outstanding | 77,568,464 | 75,977,511 | ||||
Note: Amounts may not add due to rounding. | ||||||
______________________________
(1) The income tax effect is estimated using the corporate income tax rates applicable to the Company
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks. Our exposures to market risks arise from assumptions built into our pricing models, equity price risk, foreign currency exchange rate fluctuations related to our international operations, changes in interest rates and risks relating to the extension of margin credit to our customers.
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, implied volatilities (the price volatility of the underlying instrument imputed from option prices), correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio. Generally, we incur trading-related market risk as a result of our remaining market making activity,activities, where the substantial majority of our Value-at-Risk (“VaR”) for market risk exposures is generated. In addition, we incur non-trading-related market risk primarily from investment activities and from foreign currency exposure held in the equity of our foreign subsidiaries, i.e., our non-U.S. brokerage subsidiaries and information technology subsidiaries, and held to meet target balances in our currency diversification strategy.
We use various risk management tools in managing our market risk, which are embedded in our real-time market making systems. We employ certain hedging and risk management techniques to protect us from a severe market dislocation. Our risk management policies are developed and implemented by our Chairman and our steering committee, which is chaired by our Chief Executive Officer and comprised of senior executives of our various companies.operating subsidiaries. The strategy of our remaining market making activityactivities is to calculate quotes a few seconds ahead of the market and execute small trades at a tiny but favorable differential as a result. This strategy is made possible by our proprietary pricing model, which evaluates and monitors the risks inherent in our portfolio, assimilates external market data and reevaluates the outstanding quotes in our portfolio many times per second. Our model automatically rebalances our positions throughout each trading day to manage risk exposures on our options and futures positions and the underlying securities, and will price the increased risk that a position would add to the overall portfolio into the bid and offer prices we post. Under risk management policies implemented and monitored primarily through our computer systems, reports to management, including risk profiles, profit and loss analysis and trading performance, are prepared on a real-time basis as well as daily and periodical bases. Although our remaining market making activity isactivities are completely automated, the trading process and our risk are monitored by a team of individuals who, in real time, observe various risk parameters of our consolidated positions. Our assets and liabilities are marked-to-market daily for financial reporting purposes and re-valued continuously throughout the trading day for risk management and asset/liability management purposes.
We use a covariant VaR methodology to measure, monitor and review the market risk of our market making portfolios, with the exception of fixed income products, and our currency exposures. The risk of fixed income products, which comprise primarily U.S. government securities, is measured using a stress test.
Pricing Model Exposure
As described above, our proprietary pricing model, which continuously evaluates and monitors the risks inherent in our portfolio, assimilates external market data and reevaluates the outstanding quotes in our entire portfolio many times per second. Certain aspects of the model rely on historical prices of securities. If the behavior of price movements of individual securities diverges substantially from what their historical behavior would predict, we might incur trading losses. We attempt to limit such risks by diversifying our portfolio across many different options, futures and underlying securities and avoiding concentrations of positions based on the same underlying security. Historically, our losses from these events have been immaterial in comparison to our annual trading profits.
Foreign Currency Exposure
As a result of our international activities and accumulated earnings in our foreign subsidiaries, our income and net worth is exposed to fluctuations in foreign exchange rates. For example, our European operations and some of our Asian operations are conducted by our Swiss subsidiary, IBKRFS. IBKRFS is regulated by the Swiss Financial Market Supervisory Authority as a securities dealer and its financial statements are presented in Swiss francs. Accordingly, IBKRFS is exposed to certain foreign exchange risks as described below:
IBKRFS buys and sells securities denominated in various currencies and carries bank balances and borrows and lends such currencies in its regular course of business. At the end of each accounting period, IBKRFS’ assets and liabilities are revalued into Swiss francs for presentation in its financial statements. The resulting foreign currency gains or losses are reported in IBKRFS’ income statement and, as translated into U.S. dollars for U.S. GAAP purposes, in our condensed consolidated statementstatements of comprehensive income, as a component of other income.
IBKRFS’ financial statements are presented in Swiss francs (i.e., its functional currency) as noted above. At the end of each accounting period, IBKRFS’ net worth is translated at the then prevailing exchange rate into U.S. dollars and the resulting translation gain or loss is reported as OCI in our condensed consolidated statementstatements of financial condition and condensed consolidated statementstatements of comprehensive income. OCI is also produced by our other non-U.S. subsidiaries.
Historically, we have taken the approach of not hedging the above exposures, based on the notion that the cost of constantly hedging over the years would amount to more than the random impact of rate changes on our non-U.S. dollar balances. For instance, an increase in the value of the Swiss franc would be unfavorable to the earnings of IBKRFS but would be counterbalanced to some extent by the fact that the translation gain or loss into U.S. dollars is likely to move in the opposite direction.
Our risk management systems incorporate cash forex to hedge our currency exposure at little or no cost throughout each day on a continuous basis.cost. The majority of currency spot positions held as part of our currency diversification strategy are regularly transferred to the parent holding company, IBG LLC, where they are held. In connection with the development of our currency diversification strategy, we determined to base our net worth in GLOBALs, a basket of currencies.
Because we conduct business in many countries and many currencies and because we consider ourselves a global enterprise based in a diversified basket of currencies rather than a U.S. dollar based company, we actively manage our global currency exposure by maintaining our equity in GLOBALs. The U.S. dollar value of the GLOBAL decreased from $ 0.965 to $ 0.957, or 0.83%increased 1.57%, as of March 31, 20202021 compared to March 31, 2019.2020. As of March 31, 2020,2021, approximately 29%26% of our equity was denominated in currencies other than the U.S. dollar.
The table below presents a comparison of the U.S. dollar equivalent of the GLOBAL for the periods indicated.
As of 3/31/2019 | As of 3/31/2020 | As of 3/31/2020 | As of 3/31/2021 | ||||||||||||||||||||||||||||||||||||||||||||||
GLOBAL in | % of | Net Equity | GLOBAL in | % of | Net Equity | CHANGE in | GLOBAL in | % of | Net Equity | New | GLOBAL in | % of | Net Equity | CHANGE in | |||||||||||||||||||||||||||||||||||
Currency | Composition | FX Rate | USD Equiv. | Comp. | (in USD millions) | FX Rate | USD Equiv. | Comp. | (in USD millions) | % of Comp. | Composition | FX Rate | USD Equiv. | Comp. | (in USD millions) | Composition | FX Rate | USD Equiv. | Comp. | (in USD millions) | % of Comp. | ||||||||||||||||||||||||||||
USD | 0.68 | 1.0000 | 0.680 | 70.4% | $ | 5,231 | 1.0000 | 0.680 | 71.0% | $ | 5,787 | 0.6% | 0.68 | 1.0000 | 0.680 | 71.0% | $ | 5,787 | 0.72 | 1.0000 | 0.720 | 74.0% | $ | 6,988 | 3.0% | ||||||||||||||||||||||||
EUR | 0.09 | 1.1220 | 0.101 | 10.5% | 777 | 1.1036 | 0.099 | 10.4% | 845 | -0.1% | 0.09 | 1.1036 | 0.099 | 10.4% | 845 | 0.09 | 1.1730 | 0.106 | 10.9% | 1,025 | 0.5% | ||||||||||||||||||||||||||||
JPY | 4.41 | 0.0090 | 0.040 | 4.1% | 306 | 0.0093 | 0.041 | 4.3% | 349 | 0.2% | 4.41 | 0.0093 | 0.041 | 4.3% | 349 | 3.91 | 0.0090 | 0.035 | 3.6% | 343 | -0.7% | ||||||||||||||||||||||||||||
GBP | 0.02 | 1.3035 | 0.026 | 2.7% | 201 | 1.2416 | 0.025 | 2.6% | 211 | -0.1% | 0.02 | 1.2416 | 0.025 | 2.6% | 211 | 0.02 | 1.3784 | 0.028 | 2.8% | 267 | 0.2% | ||||||||||||||||||||||||||||
CHF | 0.02 | 1.0405 | 0.021 | 2.2% | 177 | 0.02 | 1.0597 | 0.021 | 2.2% | 206 | 0.0% | ||||||||||||||||||||||||||||||||||||||
CNH | 0.10 | 0.1410 | 0.014 | 1.5% | 120 | 0.13 | 0.1524 | 0.020 | 2.0% | 192 | 0.6% | ||||||||||||||||||||||||||||||||||||||
INR | 1.10 | 0.0133 | 0.015 | 1.5% | 124 | 1.10 | 0.0137 | 0.015 | 1.5% | 146 | 0.0% | ||||||||||||||||||||||||||||||||||||||
CAD | 0.02 | 0.7111 | 0.014 | 1.5% | 121 | 0.02 | 0.7961 | 0.012 | 1.2% | 116 | -0.3% | ||||||||||||||||||||||||||||||||||||||
AUD | 0.02 | 0.6137 | 0.012 | 1.3% | 105 | 0.02 | 0.7596 | 0.011 | 1.2% | 110 | -0.1% | ||||||||||||||||||||||||||||||||||||||
HKD | 0.14 | 0.1274 | 0.018 | 1.8% | 137 | 0.1290 | 0.018 | 1.9% | 154 | 0.0% | 0.14 | 0.1290 | 0.018 | 1.9% | 154 | 0.04 | 0.1286 | 0.005 | 0.5% | 44 | -1.4% | ||||||||||||||||||||||||||||
INR | 1.10 | 0.0145 | 0.016 | 1.6% | 122 | 0.0133 | 0.015 | 1.5% | 124 | -0.1% | |||||||||||||||||||||||||||||||||||||||
CHF | 0.02 | 1.0047 | 0.020 | 2.1% | 155 | 1.0405 | 0.021 | 2.2% | 177 | 0.1% | |||||||||||||||||||||||||||||||||||||||
CAD | 0.02 | 0.7491 | 0.015 | 1.6% | 115 | 0.7111 | 0.014 | 1.5% | 121 | -0.1% | |||||||||||||||||||||||||||||||||||||||
CNH | 0.10 | 0.1487 | 0.015 | 1.5% | 115 | 0.1410 | 0.014 | 1.5% | 120 | -0.1% | |||||||||||||||||||||||||||||||||||||||
AUD | 0.02 | 0.7097 | 0.014 | 1.5% | 109 | 0.6137 | 0.012 | 1.3% | 105 | -0.2% | |||||||||||||||||||||||||||||||||||||||
MXN | 0.17 | 0.0515 | 0.009 | 0.9% | 67 | 0.0422 | 0.007 | 0.7% | 61 | -0.2% | 0.17 | 0.0422 | 0.007 | 0.7% | 61 | - | - | - | 0.0% | - | -0.7% | ||||||||||||||||||||||||||||
SEK | 0.05 | 0.1076 | 0.005 | 0.6% | 41 | 0.1010 | 0.005 | 0.5% | 43 | 0.0% | 0.05 | 0.1010 | 0.005 | 0.5% | 43 | - | - | - | 0.0% | - | -0.5% | ||||||||||||||||||||||||||||
NOK | 0.03 | 0.1159 | 0.003 | 0.4% | 27 | 0.0961 | 0.003 | 0.3% | 25 | -0.1% | 0.03 | 0.0961 | 0.003 | 0.3% | 25 | - | - | - | 0.0% | - | -0.3% | ||||||||||||||||||||||||||||
DKK | 0.02 | 0.1503 | 0.003 | 0.3% | 23 | 0.1478 | 0.003 | 0.3% | 25 | 0.0% | 0.02 | 0.1478 | 0.003 | 0.3% | 25 | - | - | - | 0.0% | - | -0.3% | ||||||||||||||||||||||||||||
0.965 | 100.0% | $ | 7,426 | 0.957 | 100.0% | $ | 8,147 | 0.0% | 0.957 | 100.0% | $ | 8,147 | 0.972 | 100.0% | $ | 9,437 | 0.0% | ||||||||||||||||||||||||||||||||
The effects of our currency diversification strategy appear in two places in the condensed consolidated financial statements: (1) as a component of other income in the condensed consolidated statementstatements of comprehensive income and (2) as OCI in the condensed consolidated statementstatements of financial condition and the condensed consolidated statementstatements of comprehensive income. The full effect of the GLOBAL is captured in the condensed consolidated statementstatements of comprehensive income.
Reported results on a comprehensive basis reflect the U.S. GAAP convention that requires the reporting of currency translation results contained in OCI as part of reportable earnings.
Change in the Composition of the “GLOBAL”
As a result of a periodic assessment, we decided to reduce the number of currencies in the GLOBAL and realign the relative weights of each component to better reflect the global diversification of our business going forward. We removed the Danish krone (DKK), the Mexican peso (MXN), the Norwegian krone (NOK) and the Swedish krona (SEK). The new composition contains 10 currencies, down from 14 in the prior composition. The new composition took effect as of the close of business on June 30, 2020 and the conversion to the new targeted currency holdings took place shortly thereafter.
Interest Rate Risk
We had no variable-rate debt outstanding as of March 31, 2020.2021.
We pay our customers interest based on benchmark overnight interest rates in various currencies, when interest rates are above a benchmark rate plus a small spread, on cash balances above $10 thousand (or equivalent) in securities accounts holding more than $100 thousand and at lower, tiered rates for accounts holding less than $100 thousand (or equivalent) net asset value. In a normal rate environment, we typically invest a portion of these funds in U.S. government securities with maturities of up to two years. If interest rates were to increase rapidly and substantially, our net interest income would not increase proportionally with the interest rates for the portion of the funds invested in the U.S. government securities with fixed yields. In addition, the mark-to-market changes in the value
of these fixed rate securities will be reflected in other income, instead of net interest income. Based on customer balances and investments outstanding as of March 31, 2020,2021, and assuming reinvestment of maturing instruments in instruments of short-term duration, an unexpected increase of 0.25% over current U.S. dollar interest rate levels would increase our net interest income by approximately$79 $105 million over the first year and $94$110 million on an annualized basis, assuming the full effect of reinvestment at higher rates. Our interest rate sensitivity estimate contains separate assumptions for U.S. dollar rates from other currencies’ rates and it isolates the effects of a rate increase on reinvestments. We do not approximate mark-to-market impact from interest rate changes; if U.S. government securities whose prices were to fall under these scenarios were held to maturity, as intended, then the reduction in other income would be temporary, as the securities would mature at par value.
We also face the potential for reduced net interest income from customer deposits due to interest rate spread compression in a low rate environment. Based on customer balances and investments outstanding as of March 31, 2020,2021, and assuming reinvestment of maturing instruments in instruments of short-term duration, an unexpected decrease in U.S. dollar interest rates of 0.25% would decrease our net interest income by approximately $92$37 million over the first year and $89$38 million on an annualized basis, assuming the full effect of reinvestment at lower rates.
We also face interest rate risk due to positions carried for our remaining market making activityactivities to the extent that long or short stock positions may have been established for future or forward dates on options or futures contracts and the value of such positions are impacted by interest rates. The amount of such risk cannot be quantified, however, the reduction of market making positions has substantially reduced this exposure.
Dividend Risk
We face dividend risk in our remaining market making activityactivities as we derive revenues and incur expenses in the form of dividend income and expense, respectively, from our inventory of equity securities, and must make payments in lieu of dividends on short positions in equity securities within our portfolio. Projected future dividends are an important component of pricing equity options and other derivatives, and incorrect projections may lead to trading losses. The amount of such risk cannot be quantified, however, the reduction of market making positions has substantially reduced this exposure.
Margin Loans
We extend margin loans to our customers, which are subject to various regulatory requirements. Margin loans are collateralized by cash and securities in the customers’ accounts. The risks associated with margin credit increase during periods of fast market movements or in cases where collateral is concentrated and market movements occur. During such times, customers who utilize margin loans and who have collateralized their obligations with securities may find that the securities have a rapidly depreciating value and may not be sufficient to cover their obligations in the event of a liquidation. We are also exposed to credit risk when our customers execute transactions, such as short sales of options and equities that can expose them to risk beyond their invested capital.
We expect this kind of exposure to increase with the growth of our overall business. Because we indemnify and hold harmless our clearing houses and counterparties from certain liabilities or claims, the use of margin loans and short sales may expose us to significant off-balance-sheet risk in the event that collateral requirements are not sufficient to fully cover losses that customers may incur and those customers fail to satisfy their obligations. As of March 31, 2020,2021, we had $20.1$42.6 billion in margin loans extended to our customers. The amount of risk to which we are exposed from the margin loans we extend to our customers and from short sale transactions by our customers is unlimited and not quantifiable as the risk is dependent upon analysis of a potential significant and undeterminable rise or fall in stock prices. Our account level margin requirements meet or exceed those required by Regulation T of the Board of Governors of the Federal Reserve and FINRA portfolio margin rules, as applicable. As a matter of practice, we enforce real-time margin compliance monitoring and liquidate customers’ positions if their equity falls below required margin requirements.
We have a comprehensive policy implemented in accordance with regulatory standards to assess and monitor the suitability of investors to engage in various trading activities. To mitigate our risk, we also continuously monitor customer accounts to detect excessive concentration, large orders or positions, patterns of day trading and other activities that indicate increased risk to us.
Our credit exposure is to a great extent mitigated by our policy ofreal-time margining system, which automatically evaluatingevaluates each account throughout the trading day and closingcloses out positions automatically for accounts that are found to be under-margined. While this methodology is effective in most situations, it may not be effective in situations where no liquid market exists for the relevant securities or commodities or where, for any reason, automatic liquidation for certain accounts has been disabled. Our Risk Management Committee continually monitors and evaluates our risk management policies, including the implementation of policies and procedures to enhance the detection and prevention of potential events to mitigate margin loan losses.
Value-at-Risk
We estimate VaR using an historical approach, which uses the historical daily price returns of underlying assets as well as estimates of the end of day implied volatility for options. Our one-day VaR is defined as the unrealized loss in portfolio value that, based on historically observed market risk factors, would have been exceeded with a frequency of one percent, based on a calculation with a confidence interval of 99%.
Our VaR model generally takes into account exposures to equity and commodity price risk and foreign exchange rates.
We use VaR as one of a range of risk management tools. Among their benefits, VaR models permit estimation of a portfolio’s aggregate market risk exposure, incorporating a range of varied market risks and portfolio assets. One key element of the VaR model is that it reflects risk reduction due to portfolio diversification or hedging activities. However, VaR has various strengths and limitations, which include, but are not limited to: use of historical changes in market risk factors, which may not be accurate predictors of future market conditions, and may not fully incorporate the risk of extreme market events that are outsized relative to observed historical market behavior or reflect the historical distribution of results beyond the confidence interval; and reporting of losses in a single day, which does not reflect the risk of positions that cannot be liquidated or hedged in one day. A small proportion of market risk generated by trading positions is not included in VaR. The modeling of the risk characteristics of some positions relies on approximations that, under certain circumstances, could produce significantly different results from those produced using more precise measures. VaR is most appropriate as a risk measure for trading positions in liquid financial markets and will understate the risk associated with severe events, such as periods of extreme illiquidity.
The VaR calculation simulates the performance of the portfolio based on several years of daily price changes of the underlying assets and determines the VaR as the calculated loss that occurs at the 99th percentile.
Since the reported VaR statistics are estimates based on historical data, VaR should not be viewed as predictive of our future revenues or financial performance or of our ability to monitor and manage risk. There can be no assurance that our actual losses on a particular day will not exceed the indicated VaR or that such losses will not occur more than one time in 100 trading days. VaR does not predict the magnitude of losses which, should they occur, may be significantly greater than the VaR amount.
Stress Test
We estimate the market risk of our fixed income portfolio using a risk analysis model provided by a leading external vendor. For corporate bonds, this stress test is configured to calculate the change in value of each fixed income security in the portfolio over one day in seven scenarios, each of which represents a parallel shift of the U.S. Treasury yield curve. The scenarios are shifts of +/−100, +/−200 and +/−300 basis points. For U.S. government securities, the stress test is configured to calculate the change in value of each fixed income security in the portfolio over one day in three scenarios each of which represents a parallel shift of the U.S. Treasury yield curve. The scenarios are shifts of +/−25 basis points.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are effective, in all material respects, to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the period covered by this report quarter that has materially affected, or is likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting related to our employees working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation to minimize any impact on the design and operating effectiveness of our internal controls.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes to the legal proceedings disclosed under Part 1, Item 3 of our Annual Report on Form 10-K filed with the SEC on February 28, 2020March 1, 2021 except as updated in Note 13 - “Commitments, Contingencies, and Guarantees” to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.2021.
ITEM 1A. RISK FACTORS
Except as listed below, thereThere have been no material changes to the risk factors disclosed in under Part 1, Item 1A of our Annual Report on Form 10-K filed with the SEC on February 28, 2020.
The impact of the COVID-19 pandemic and the measures implemented to contain the spread of the virus may have a material adverse impact on our business and results of operations.
In March 2020, the World Health Organization recognized the outbreak of COVID-19 caused by a novel strain of the coronavirus as a pandemic. The pandemic affects all countries in which we operate. The response of governments and societies to the COVID-19 pandemic, which includes temporary closures of businesses; social distancing; travel restrictions, “shelter in place” and other governmental regulations; and reduced consumer spending due to job losses, has significantly impacted volatility in the financial, commodities and energy markets, and general economic conditions. These measures have negatively impacted businesses, market participants, our counterparties and customers, and the global economy and could continue to do so for a prolonged period of time.
Our net interest income and profitability could be negatively affected by lower benchmark interest rates caused by central banks lowering target benchmark rates in an attempt to buffer their economies from the uncertainties around the COVID-19 pandemic.
A substantial portion of our employees have been impacted by local COVID-19 restrictions and have been working remotely. As a result, any disruption to our information technology systems, including from cyber incidents, could have a material adverse effect on our business. We have taken measures to maintain the health and safety of our employees, but widespread illness could negatively affect staffing levels within certain functions or locations. In addition, our ability to recruit, hire and onboard employees could be negatively impacted by COVID-19 restrictions.
The impact of the COVID-19 pandemic on our future financial results could be significant but currently cannot be quantified, as it will depend on numerous evolving factors that cannot be accurately predicted, including, but not limited to, the duration and spread of the pandemic; its impact on our customers, employees and vendors; governmental regulations in response to the pandemic; and the overall impact of the pandemic on the economy and society, among other factors. Any of these events, alone or in combination with others, could exacerbate many of the risk factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019 and could have a material adverse effect on our business, financial condition and results of operations.
1, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
On July 27, 2020, the Company filed a Prospectus Supplement on Form 424B (File Number 333-240121) with the SEC to register up to 990,000 shares of common stock, offering the opportunity for eligible persons to receive awards in the form of such shares by participating in one or more promotions that are designed to attract new customers to the Company’s brokerage platform, increase assets held with the Company’s brokerage subsidiaries and enhance customer loyalty. During the quarter ended March 31, 2021, the Company issued 50,000 shares to IBG LLC for distribution to eligible customers of certain of its subsidiaries.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. Exhibits
Exhibit | Description |
3.1 | |
3.2 | |
4.1 | |
10.1 | |
10.2 | |
10.3 | |
10.4 | |
10.5 | |
10.6 | |
10.7 | |
10.8 | |
10.9 | |
31.1 | Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 | Certification of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | XBRL Instance Document* |
101.SCH | XBRL Extension Schema* |
101.CAL | XBRL Extension Calculation Linkbase* |
101.DEF | XBRL Extension Definition Linkbase* |
101.LAB | XBRL Extension Label Linkbase* |
101.PRE | XBRL Extension Presentation Linkbase* |
104 | Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL document. |
** Previously filed; incorporated herein by reference.
+ These exhibits relate to management contracts or compensatory plans or arrangements.
* Attached as Exhibit 101 to this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020,2021, are the following materials formatted in XBRL (ExtensibleiXBRL (Inline eXtensible Business Reporting Language) (i) the Condensed Consolidated Statements of Financial Condition, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statement of Changes in Stockholders’ Equity and (v) Notes to the Condensed Consolidated Financial Statements tagged in detail levels 1-4.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INTERACTIVE BROKERS GROUP, INC. | ||
/s/ Paul J. Brody | ||
Name: | Paul J. Brody | |
Title: | Chief Financial Officer, Treasurer and Secretary | |
(Signing both in his capacity as a duly authorized officer and as principal financial officer of the registrant) | ||
Date: May 11, 202010, 2021