Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is provided as a supplement to, and should be read in conjunction with, the accompanying unaudited consolidated financial statements and notes in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022.

References in this discussion and analysis to “we” and “our” are to CME Group Inc. (CME Group) and its consolidated subsidiaries, collectively. References to “exchange” are to Chicago Mercantile Exchange Inc. (CME), the Board of Trade of the City of Chicago, Inc. (CBOT), New York Mercantile Exchange, Inc. (NYMEX), and Commodity Exchange, Inc. (COMEX), collectively, unless otherwise noted.

RESULTS OF OPERATIONS

Financial Highlights

The following summarizes significant changes in our financial performance for the periods presented.


	Quarter Ended March 31,
(dollars in millions, except per share data)		2022			2021			Change
Total revenues		$	1,346.6		$	1,253.3		7	%
Total expenses		487.5			528.2			(8)
Operating margin		63.8		%	57.9		%
Non-operating income (expense)		$	57.2		$	27.2		110
Effective tax rate		22.4		%	23.6		%
Net income attributable to CME Group		$	711.0		$	574.4		24
Diluted earnings per common share attributable to CME Group		1.95			1.60			22
Cash flows from operating activities		799.1			602.7			33

Revenues


	Quarter Ended March 31,
(dollars in millions)		2022		2021		Change
Clearing and transaction fees		$	1,138.1	$	1,007.0	13	%
Market data and information services		151.7		144.2		5
Other		56.8		102.1		(44)
Total Revenues		$	1,346.6	$	1,253.3	7

Clearing and Transaction Fees

Futures and Options Contracts

The following table summarizes our total contract volume, revenue and average rate per contract for futures and options. Total contract volume includes contracts that are traded on our exchange and cleared through our clearing house and certain cleared-only contracts. Volume is measured in round turns, which is considered a completed transaction that involves a purchase and an offsetting sale of a contract. Average rate per contract is determined by dividing total clearing and transaction fees by total contract volume. Contract volume and average rate per contract disclosures exclude trading volume for the cash markets business and interest rate swaps volume.


	Quarter Ended March 31,
		2022		2021		Change
Total contract volume (in millions)		1,607.1		1,331.5		21	%
Clearing and transaction fees (in millions)		$	1,034.3	$	875.6	18
Average rate per contract		$	0.644	$	0.658	(2)

We estimate the following net changes in clearing and transaction fees based on a change in total contract volume and a change in average rate per contract for futures and options during the first quarter of 2022 when compared with the same period in 2021.


(in millions)	Quarter Ended
Increase due to changes in total contract volume	$	177.4
Decrease due to changes in average rate per contract	(18.7)
Net increase in clearing and transaction fees	$	158.7

Average rate per contract is impacted by our rate structure, including volume-based incentives; product mix; trading venue, and the percentage of volume executed by customers who are members compared with non-member customers. Due to the relationship between average rate per contract and contract volume, the change in clearing and transaction fees attributable to changes in each is only an approximation.

Contract Volume

The following table summarizes average daily contract volume. Contract volume can be influenced by many factors, including political and economic conditions, the regulatory environment and market competition.


	Quarter Ended March 31,
(amounts in thousands)		2022	2021		Change
Average Daily Volume by Product Line:
Interest rates		12,484	10,349		21	%
Equity indexes		7,950	6,117		30
Foreign exchange		904	852		6
Agricultural commodities		1,474	1,471		—
Energy		2,515	2,363		6
Metals		593	675		(12)
Aggregate average daily volume		25,920	21,827		19
Average Daily Volume by Venue:
CME Globex		24,060	20,436		18
Open outcry		1,030	678		52
Privately negotiated		830	713		16
Aggregate average daily volume		25,920	21,827		19
Electronic Volume as a Percentage of Total Volume		93%	94	%

Overall market volatility increased throughout the first quarter of 2022 following lower overall volatility in the first quarter of 2021. During the first quarter of 2022, the Federal Reserve's indication of multiple rate increases in 2022 as well as its decision to taper bond purchases resulted in higher volatility within the interest rate market. In addition, equity and energy contract volume increased in the first quarter 2022 when compared with the same period in 2021, largely due to the rising tension and geopolitical uncertainty with Russia and Ukraine. We believe these factors led to the changes in contract volume during the first quarter of 2022, when compared with the same period in 2021.

Interest Rate Products

The following table summarizes average daily contract volume for our key interest rate products.


	Quarter Ended March 31,
(amounts in thousands)		2022	2021	Change
Eurodollar futures and options:
Futures expiring within two years		1,869	1,262	48	%
Options		1,489	1,106	35
Futures expiring beyond two years		811	1,414	(43)	%
SOFR futures and options:
Futures expiring within two years		1,043	102	n.m.
Futures expiring beyond two years		156	10	n.m.
Options		39	—	n.m.
U.S. Treasury futures and options:
10-Year (1)		2,855	2,941	(3)
5-Year (1)		1,742	1,480	18
2-Year (1)		711	502	41
Treasury Bond (1)		557	688	(19)
Federal Funds futures and options		414	100	n.m.

(1) U.S. Treasury futures and options now include respective weekly treasury options that were previously separated under a unique product category. Prior period amounts have been revised to conform to the current period presentation.

n.m. not meaningful

In the first quarter of 2022, overall interest rate contract volume increased when compared with the same period in 2021. We believe this increase in volume resulted from higher interest rate volatility as a result of a change in market expectations regarding the Federal Reserve's interest rate policy, following indication that it is planning multiple rate increases in 2022 as well as its decision to taper bond purchases. The increase in Secured Overnight Financing Rate contract (SOFR) volume is due to more market participants transitioning to the new reference rate.

Equity Index Products

The following table summarizes average daily contract volume for our key equity index products.


	Quarter Ended March 31,
(amounts in thousands)		2022	2021	Change
E-mini S&P 500 futures and options (1)		4,477	3,490	28	%
E-mini Nasdaq 100 futures and options (1)		2,381	1,725	38
E-mini Russell 2000 futures and options (1)		452	416	9

(1) E-mini S&P 500 and Nasdaq 100 futures and options now include respective weekly Micro E-mini options that were previously separated under a unique product category. Prior period amounts have been revised to conform to the current period presentation.

In the first quarter of 2022, equity index contract volume increased when compared with the same period in 2021. Volatility within the broad-based indexes increased as a result of the rising tensions and geopolitical uncertainty with Russia and Ukraine as well as the Federal Reserve's proposed interest rate policy changes for 2022. In addition, a market repricing of certain technology-based stocks contributed to the increase in the E-mini Nasdaq 100 contract volume. We believe these factors led to the overall increase in equity contract volume.

Foreign Exchange Products

The following table summarizes average daily contract volume for our key foreign exchange products.


	Quarter Ended March 31,
(amounts in thousands)		2022	2021	Change
Euro		249	229	8	%
Japanese Yen		134	112	20
British Pound		118	100	18
Australian dollar		102	120	(15)

Overall foreign exchange contract volume increased in the first quarter of 2022 when compared with the same period in 2021. Market volatility increased in early 2022 following low foreign exchange volatility in 2021 as a result of the rising tension and geopolitical uncertainty with Russia and Ukraine as well as the Federal Reserve's proposed policy changes for 2022. We believe these factors led to the overall increase in foreign exchange contract volume.

Agricultural Commodity Products

The following table summarizes average daily contract volume for our key agricultural commodity products.


	Quarter Ended March 31,
(amounts in thousands)		2022	2021	Change
Corn		487	511	(5)	%
Soybean		323	328	(1)
Wheat		224	197	14

Overall commodity contract volume was flat in the first quarter of 2022 when compared with the same period in 2021. Corn and soybean contract volumes decreased due to lower volatility as a result of stable prices and demand. However, wheat volume increased due to higher volatility due to uncertainty around wheat exports out of the Ukrainian region following the rising tension and geopolitical uncertainty within that region.

Energy Products

The following table summarizes average daily contract volume for our key energy products.


	Quarter Ended March 31,
(amounts in thousands)		2022	2021	Change
WTI crude oil		1,438	1,265	14	%
Natural gas		542	569	(5)
Refined products		408	382	7

Overall energy contract volume increased in the first quarter of 2022 when compared with the same period in 2021, largely due to an increase in volatility within the crude oil market. We believe the crude oil market exhibited higher volatility as a result of rising crude oil prices due to rising tensions and geopolitical uncertainty with Russia and Ukraine. This was partially offset by a decrease in natural gas volume due to lower volatility as a result of stabilized prices and market equilibrium. We believe these factors led to the overall increase in energy contract volume.

Metal Products

The following table summarizes average daily volume for our key metal products.


	Quarter Ended March 31,
(amounts in thousands)		2022	2021	Change
Gold		390	404	(3)	%
Copper		89	120	(25)
Silver		86	128	(33)

In the first quarter of 2022, metal contract volume decreased when compared with the same period in 2021. We believe the decrease is attributed to lower overall market volatility within the gold and silver markets. Volatility was higher in 2021, as investors were using gold and other precious metals as safe-haven investments following the COVID-19 pandemic.

Average Rate per Contract

The average rate per contract decreased in the first quarter of 2022 when compared with the same period in 2021. The decrease in the average rate per contract was primarily due to a change in product mix. Interest rate and equity index contract volume increased by 3 percentage points as a percent of total volume, while all other products collectively decreased by 3 percentage points. In general, interest rate and equity index products have a lower rate per contract compared with the remaining contracts. In addition, the average rate per contract decreased due to higher volume-based incentives and discounts on our contracts.

Cash Markets Business

Total clearing and transaction fees revenues in the first quarter of 2022 included $86.7 million of transaction fees attributable to the cash markets business, compared with $115.1 million in the first quarter of 2021. This revenue primarily includes BrokerTec Americas LLC's fixed income volume and EBS's foreign exchange volume. In September 2021, we contributed the net assets of our optimization business to OSTTRA, our new joint venture with IHS Markit, which contributed to a $24.3 million decrease in transaction fees in the first quarter of 2022 when compared with the same period in 2021.


	Quarter Ended March 31,
(amounts in millions)	2022		2021		Change
BrokerTec fixed income transaction fees	$	44.4	$	45.5	(2)	%
EBS foreign exchange transaction fees	42.3		45.3		(7)	%
Optimization transaction fees	—		24.3		n.m.

The related average daily notional value for the first quarter of 2022 were as follows:


	Quarter Ended March 31,
(amounts in billions)		2022		2021		Change
European Repo (in euros)		$	320.8	$	287.3	12	%
U.S. Treasury		147.4		136.0		8
Spot FX		68.1		72.7		(6)

Overall average daily notional value for the cash markets business increased in the first quarter of 2022 compared with the same period in 2021. The increase in European Repo and U.S. Treasury transactions was largely due to increased volatility as a result of rising tensions and geopolitical conflicts in Russia and Ukraine as well as the Federal Reserve's indication of multiple rate increases in 2022. We believe these factors led to the overall increase in cash market average daily notional value. Despite the increase in average daily notional value, transaction revenue decreased slightly due to the tiered pricing structure and incentive rate programs.

Concentration of Revenue

We bill a substantial portion of our clearing and transaction fees directly to our clearing firms. The majority of clearing and transaction fees received from clearing firms represent charges for trades executed and cleared on behalf of their customers. One individual firm represented approximately 11% of our clearing and transaction fees in the first quarter of 2022. Should a clearing firm withdraw, we believe that the customer portion of the firm’s trading activity would likely transfer to another clearing firm of the exchange. Therefore, we do not believe we are exposed to significant risk from the ongoing loss of revenue received from or through a particular clearing firm.

Other Sources of Revenue

During the first quarter of 2022, overall market data and information services revenues increased when compared with the same period in 2021, largely due to a price increase for certain products and an increase in certain device counts.

The two largest resellers of our market data represented approximately 33% of our market data and information services revenue in the first quarter of 2022. Despite this concentration, we consider exposure to significant risk of revenue loss to be minimal. In the event that one of these vendors no longer subscribes to our market data, we believe the majority of that vendor’s customers would likely subscribe to our market data through another reseller. Additionally, several of our largest institutional customers that utilize services from our two largest resellers report usage and remit payment of their fees directly to us.

In the first quarter of 2022, the decrease in other revenue when compared with the same period in 2021 was largely attributable to the deconsolidation of the optimization business in September 2021 as part of the contribution of the business's net assets to OSTTRA, our joint venture with IHS Markit. In the first quarter of 2021, the optimization business generated $42.5 million of other revenue. The decrease is also due to a decline in custody fees on non-cash collateral.

Expenses


	Quarter Ended March 31,
(dollars in millions)		2022		2021		Change
Compensation and benefits		$	185.2	$	225.0	(18)	%
Technology		45.9		48.2		(5)
Professional fees and outside services		31.8		37.4		(15)
Amortization of purchased intangibles		58.4		60.6		(4)
Depreciation and amortization		33.5		37.6		(11)
Licensing and other fee agreements		80.9		64.7		25
Other		51.8		54.7		(5)
Total Expenses		$	487.5	$	528.2	(8)

Operating expenses decreased by $40.7 million in the first quarter of 2022 when compared with the same period in 2021. The following table shows the estimated impacts of key factors resulting in the change in operating expenses:


	Quarter Ended, March 31, 2022
		Amount of Change		Change as a Percentage of Total Expenses
(dollars in millions)
Salaries, benefits and employer taxes		$	(25.0)	(5)	%
Employee separation and retention costs		(9.5)		(2)
Non-qualified deferred compensation		(8.3)		(2)
Foreign currency exchange rate fluctuation		(6.7)		(1)
Professional fees and outside services		(5.6)		(1)
Bonus		4.6		1
Licensing and other fee agreements		16.2		3
Other expenses, net		(6.4)		(1)
Total decrease		$	(40.7)	(8)	%

Decreases in operating expenses in the first quarter of 2022 when compared with the same period in 2021 were as follows:

Salaries, benefits and employer taxes were lower during the first quarter of 2022 when compared to the same period in 2021 due to a net decrease in headcount since March 31, 2022, including the contribution of employees from CME Group's optimization businesses to the new joint venture with IHS Markit in September 2021.
Employee separation and retention costs were lower during the first quarter of 2022 due to a lower reduction in workforce compared to the same period in 2021.
A decrease in our non-qualified deferred compensation liability during the first quarter of 2022, the impact of which does not affect net income because of an equal and offsetting change in investment income, contributed to a decrease in compensation and benefits expense.
In the first quarter of 2022, we recognized a net gain of $4.3 million, compared with a net loss of $2.4 million in the same period in 2021, due to currency exchange rate fluctuations. Gains and losses from exchange rate fluctuations are recognized in the consolidated statements of net income when subsidiaries with a U.S. dollar functional currency hold certain monetary assets and liabilities denominated in foreign currencies.
Professional fees and outside services expenses decreased due to a greater reliance on consultants for platform integrations, information security and systems enhancements in the first quarter of 2021 as well as a reduction in legal fees related to our business activities and product offerings. The decrease in professional fees was partially offset by an increase in Google-related consulting fees that occurred as a result of CME Group's partnership with Google Cloud, which began in November 2021.

Increases in operating expenses in the first quarter of 2022 when compared with the same period in 2021 were as follows:

Bonus expense increased in the first quarter of 2022 largely due to performance relative to our 2022 cash earnings target when compared with our first quarter of 2021 performance relative to our 2021 cash earnings target.
An increase in licensing and other fee agreements expense was due to higher volumes for certain equity products in the first quarter of 2022 compared to the same period in 2021.

Non-Operating Income (Expense)


	Quarter Ended March 31,
(dollars in millions)		2022		2021		Change
Investment income		$	73.1	$	30.9	136	%
Interest and other borrowing costs		(42.5)		(41.5)		2
Equity in net earnings of unconsolidated subsidiaries		73.3		56.2		30
Other non-operating income (expense)		(46.7)		(18.4)		155
Total Non-Operating		$	57.2	$	27.2	110

Investment income. In the first quarter of 2022 when compared with the same period in 2021, there was an increase in earnings from cash performance bond and guaranty fund contributions that are reinvested due to higher reinvestment balances as well as higher rates of interest earned in the cash account at the Federal Reserve Bank of Chicago following an interest rate hike in early 2022.

Equity in net earnings (losses) of unconsolidated subsidiaries. In the first quarter of 2022, we recognized our share of net earnings on our investment in OSTTRA, our new joint venture with IHS Markit that was formed in September 2021. Higher income generated from our S&P/Dow Jones Indices LLC (S&P/DJI) business venture also contributed to an increase in equity in net earnings of unconsolidated subsidiaries in the first quarter of 2022 when compared with the same period in 2021.

Other income (e**xpense). In the first quarter of 2022 when compared with the same period in 2021, we recognized higher expense related to the distribution of interest earned on performance bond collateral reinvestments to the clearing firms caused by higher interest income earned on our reinvestment during the period due to a higher Federal Funds rate in early 2022.

Income Tax Provision

The following table summarizes the effective tax rates for the periods presented:


	2022		2021

Quarter ended March 31	22.4	%	23.6	%

The overall effective tax rate decreased in the first quarter of 2022 when compared with the same period in 2021. The effective tax rate was lower in the first quarter of 2022 due to a benefit recognized for the settlement of various tax audits.

Liquidity and Capital Resources

Sources and Uses of Cash*.* Net cash provided by operating activities increased in the first quarter of 2022 when compared with the same period in 2021 largely due to an increase in trading volume and revenue. Net cash used in investing activities was lower during the first quarter of 2022 when compared with the same period in 2021 largely due to payments made in early 2021 to purchase non-controlling interests as well as a decrease in purchases of property in the first quarter of 2022. Cash provided by financing activities was lower during the first quarter of 2022 when compared with the same period in 2021 due to a smaller increase in cash performance bonds and guaranty fund contributions.

Debt Instruments*.* The following table summarizes our debt outstanding at March 31, 2022:


(in millions)	Par Value
Fixed rate notes due May 2023, stated rate of 4.30%	€	15.0
Fixed rate notes due March 2025, stated rate of 3.00% (1)	$	750.0
Fixed rate notes due June 2028, stated rate of 3.75%	$	500.0
Fixed rate notes due March 2032, stated rate of 2.65%	$	750.0
Fixed rate notes due September 2043, stated rate of 5.30% (2)	$	750.0
Fixed rate notes due June 2048, stated rate of 4.15%	$	700.0

(1)We maintained a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable on the notes effectively became fixed at a rate of 3.11%.

(2)We maintained a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable effectively became fixed at a rate of 4.73%.

We maintain a $2.3 billion multi-currency revolving senior credit facility with various financial institutions, which matures in November 2026. The proceeds from this facility can be used for general corporate purposes, which includes providing liquidity for our clearing house in certain circumstances at CME Group's discretion and, if necessary, for maturities of commercial paper. As long as we are not in default under this facility, we have the option to increase it up to $3.3 billion with the consent of the agent and lenders providing the additional funds. This facility is voluntarily pre-payable from time to time without premium or penalty. Under this facility, we are required to remain in compliance with a consolidated net worth test, which is defined as our consolidated shareholders' equity at September 30, 2021, giving effect to share repurchases made and special dividends paid during the term of the agreements (and in no event greater than $2.0 billion in aggregate), multiplied by 0.65. We currently do not have any borrowings outstanding under this facility, but any commercial paper balance if or when outstanding can be backstopped against this facility.

We maintain a 364-day multi-currency revolving secured credit facility with a consortium of domestic and international banks to be used in certain situations by the clearing house. The facility provides for borrowings of up to $7.0 billion. We may use the proceeds to provide temporary liquidity in the unlikely event a clearing firm fails to promptly discharge an obligation to CME Clearing, in the event of a liquidity constraint or default by a depositary (custodian for our collateral), in the event of a temporary disruption with the domestic payments system that would delay payment of settlement variation between us and our clearing firms, or in other cases as provided by the CME rulebook. Clearing firm guaranty fund contributions received in the form of cash or U.S. Treasury securities as well as the performance bond assets (pursuant to the CME rulebook) can be used to collateralize the facility. At March 31, 2022, guaranty fund contributions available to collateralize the facility totaled $8.6 billion. We have the option to request an increase in the line from $7.0 billion to $10.0 billion. Our 364-day facility contains a requirement that CME remain in compliance with a consolidated tangible net worth test, defined as CME consolidated shareholder's equity less intangible assets (as defined in the agreement), of not less than $800.0 million. We currently do not have any borrowings outstanding under this facility.

The indentures governing our fixed rate notes, our $2.3 billion multi-currency revolving senior credit facility and our 364-day multi-currency revolving secured credit facility for $7.0 billion do not contain specific covenants that restrict the ability to pay dividends. These documents, however, do contain other customary financial and operating covenants that place restrictions on the operations of the company that could indirectly affect the ability to pay dividends.

At March 31, 2022, we have excess borrowing capacity for general corporate purposes of approximately $2.3 billion under our multi-currency revolving senior credit facility.

At March 31, 2022, we were in compliance with the various covenant requirements of all our debt facilities.

CME Group, as a holding company, has no operations of its own. Instead, it relies on dividends declared and paid to it by its subsidiaries in order to provide the funds which it uses to pay dividends to its shareholders.

To satisfy our performance bond obligation with Singapore Exchange Limited, we may pledge irrevocable standby letters of credit. At March 31, 2022, the letters of credit totaled $330.0 million. We also maintain a $350.0 million line of credit to meet our obligations under this agreement.

The following table summarizes our credit ratings at March 31, 2022:


	Short-Term	Long-Term
Rating Agency	Debt Rating	Debt Rating	Outlook
Standard & Poor’s Global Ratings	A1+	AA-	Stable
Moody’s Investors Service, Inc.	P1	Aa3	Stable

Given our cash flow generation, our ability to pay down debt levels and our ability to refinance existing debt facilities if necessary, we expect to maintain an investment grade rating. If our ratings are downgraded below investment grade within certain specified time periods due to a change of control, we are required to make an offer to repurchase our fixed rate notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest. No report of any rating agency is incorporated by reference herein.

Liquidity and Cash Management. Cash and cash equivalents totaled $2.0 billion and $2.8 billion at March 31, 2022 and December 31, 2021, respectively. The balance retained in cash and cash equivalents is a function of anticipated or possible short-term cash needs, prevailing interest rates, our corporate investment policy and alternative investment choices. A majority of our cash and cash equivalents balance is invested in money market mutual funds that invest only in U.S. Treasury securities, U.S. government agency securities and U.S. Treasury security reverse repurchase agreements and short-term bank deposits. Our exposure to credit and liquidity risk is minimal given the nature of the investments. Cash that is not available for general corporate purposes because of regulatory requirements or other restrictions is classified as restricted cash and is included in other current assets or other assets in the consolidated balance sheets.

On May 4, 2022, the board of directors declared a regular quarterly dividend of $1.00 per share for all outstanding common and preferred shares. The dividend will be payable on June 27, 2022 to shareholders of record on June 10, 2022. Assuming no changes in the number of shares outstanding, the second quarter dividend payment will total approximately $363.0 million.

Regulatory Requirements*.* CME is regulated by the CFTC as a Derivatives Clearing Organization (DCO). DCOs are required to maintain capital, as defined by the CFTC, in an amount at least equal to one year of projected operating expenses as well as cash, liquid securities, or a line of credit at least equal to six months of projected operating expenses. CME was designated by the Financial Stability Oversight Council as a systemically important financial market utility under Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. As a result, CME must comply with CFTC regulations applicable to a systemically important DCO for financial resources and liquidity resources. CME is in compliance with all DCO financial requirements.

CME, CBOT, NYMEX and COMEX are regulated by the CFTC as Designated Contract Markets (DCM). DCMs are required to maintain capital, as defined by the CFTC, in an amount at least equal to one year of projected operating expenses as well as cash, liquid securities or a line of credit at least equal to six months of projected operating expenses. Our DCMs are in compliance with all DCM financial requirements.

BrokerTec Americas LLC is required to maintain sufficient net capital under Securities Exchange Act of 1934, as amended (Exchange Act), Rule 15c3-1 (the Net Capital Rule). The Net Capital Rule focuses on liquidity and is designed to protect securities customers, counterparties, and creditors by requiring that broker-dealers have sufficient liquid resources on hand at all times to satisfy claims promptly. Rule 15c3-3, or the customer protection rule, which complements Rule 15c3-1, is designed to ensure that customer property (securities and funds) in the custody of broker-dealers is adequately safeguarded. By law, both of these rules apply to the activities of registered broker-dealers, but not to unregistered affiliates. The firm began operating as a (k)(2)(i) broker dealer in November 2017 following notification to the Financial Industry Regulatory Authority and the SEC. A company operating under the (k)(2)(i) exemption is not required to lock up customer funds as would otherwise be required under Exchange Act Rule 15c3-3.

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